3.	Business Combinations

Parcus Medical, LLC

January 24, 2020, (

the “Parcus Medical Closing Date”), Anika Therapeutics, Inc. completed the acquisition of Parcus Medical pursuant to the terms of the Agreement and Plan of Merger, dated as of

January 4, 2020 (

the “Parcus Medical Merger Agreement”), by and among the Company, Parcus Medical, and Sunshine Merger Sub LLC, a Wisconsin limited liability company and a wholly-owned subsidiary of the Company. At the closing date, Parcus Medical became a wholly-owned subsidiary of the Company. Parcus Medical is a sports medicine implant and instrumentation solutions provider focused on surgical repair and reconstruction of ligaments and tendons.

The acquisition of Parcus Medical has been accounted for as a business combination under ASC

805.

Under ASC

805,

assets acquired and liabilities assumed in a business combination must be recorded at their

fair value as of the acquisition date.

Recorded fair valuation of assets acquired and liabilities assumed related to the acquisition of Parcus Medical is preliminary and will be completed as soon as practicable, but

later than

one

year after the consummation of the transaction. Anika’s consolidated financial statements as of and for the

three

months ended

March 31, 2020,

include results of operations for Parcus Medical from

January 24, 2020

through

March 31, 2020.

Consideration Transferred

Pursuant to the Parcus Medical Merger Agreement, the Company acquired all outstanding

equity of Parcus Medical for estimated total purchase consideration of

$75.1

million, which consists of

$32.8

million of cash consideration,

$1.6

million of deferred consideration and

$40.7

million for the estimated fair value of contingent consideration.

The total preliminary purchase consideration is as follows:

Cash consideration	$	32,794
Deferred consideration		1,642
Estimated fair value of contingent consideration		40,700
Estimated total purchase consideration	$	75,136

The deferred consideration is related to certain purchase price holdbacks which will be resolved within

one

year of the acquisition date and are recorded in accounts payable as of

March 31, 2020.

The Company

may

additionally be required to make future payments of up to

$60.0

million depending on the level of net sales generated in

2020

through

2022.

The fair value of contingent consideration related to net sales was determined based on a Monte Carlo simulation model in an option pricing framework at the acquisition date, whereby a range of possible scenarios were simulated. The liability for contingent and deferred consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved.

Acquisition related costs are

not

included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately

$1.9

million in transaction costs related to the Parcus Medical acquisition during the

first

quarter of

2020.

The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.

Fair Value of Net Assets Acquired

The preliminary estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were

not

limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results

may

hose estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to

one

year from the acquisition date)

. The most significant open items necessary to complete are related to intangible assets and tax related matters.

The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary estimates of fair value as of

January 24, 2020,

and is as follows:

Recognized identifiable assets acquired and liabilities assumed:
Cash and cash equivalents	$	196
Accounts receivable		2,029
Inventories		9,088
Prepaid expenses and other current assets		364
Property and equipment, net		1,099
Right-of-use assets		944
Intangible assets		44,000
Accounts payable, accrued expenses and other current liabilities		(2,763	)
Other long-term liabilities		(594	)
Lease liabilities		(735	)
Net assets acquired		53,628
Excess purchase price over fair value of net assets acquired		21,508
Estimated total purchase consideration	$	75,136

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will

not

be amortized and is expected to be deductible for income tax purposes as the acquisition of the limited liability company is an asset purchase for tax purposes. The acquired intangible assets based on preliminary estimates of fair value as of

January 24, 2020

are as follows:

Intangible assets acquired consist of:
Developed Technology	$	41,100
Trade Name		1,800
Customer Relationships		1,100
Total Intangible Assets	$	44,000

The preliminary fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The preliminary fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The preliminary fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.

The final fair value determination of the identified intangible assets

may

differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately

$44.0

million represents the fair value of identifiable intangible assets. Approximately

$41.1

million represents the fair value of developed technology that will be amortized over a useful life of

years,

$1.1

million represents the fair value of customer relationships that will be amortized over a useful life of

years, and

$1.8

million represents the fair value of trade names that will be amortized over a useful life of

years.

Revenue, Net Loss and Pro Forma Presentation

The Company recorded revenue from Parcus Medical of

$2.6

million and a net loss of

$0.9

million in the period from

January 24, 2020

through

March 31, 2020.

The unaudited pro forma information for the

three

months ended

March 31, 2020

and

2019

was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. The pro forma financial information presents the combined results of operations of Anika Therapeutics, Inc and Parcus Medical as if the acquisition had occurred on

January 1, 2019

after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are factually supportable and directly attributable to the Parcus Medical acquisition.

These pro forma adjustments include: (i) a net increase in amortization expense to record amortization expense for the

$44.0

million of acquired identifiable intangible assets, (ii) a net decrease in interest expense as a result of eliminating interest expense and interest income related to Parcus Medical’s line of credit which was settled in accordance with the Parcus Medical Merger Agreement, (iii) an adjustment of rent expense associated with Parcus Medical’s finance and operating leases as a result of the adoption of ASC

842,

Leases

, and (iv) an adjustment to record the acquisition related transaction costs in the period required. The pro forma information does

not

purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.

The following table presents unaudited supplemental pro forma information:

	For the Three Months Ended March 31,
	2020		2019
Total revenue	$	32,103	$	27,934
Net income		5,510		3,105
Earnings per share:
Basic	$	0.39	$	0.22
Diluted		0.38		0.22

Arthrosurface Incorporated

February 3, 2020, (

the “Arthrosurface Closing Date”), Anika Therapeutics, Inc. completed the acquisition of Arthrosurface Incorporated pursuant to the terms of the Agreement and Plan of Merger, dated as of

January 4, 2020 (

the “Arthrosurface Merger Agreement”), by and among the Company, Arthrosurface, and Button Merger Sub, a Delaware corporation and a wholly-owned subsidiary of the Company. At the closing date, Arthrosurface became a wholly-owned subsidiary of the Company. Arthrosurface is a joint preservation technology company specializing in less invasive, bone preserving partial and total joint replacement solutions.

The acquisition of Arthrosurface has been accounted for as a business combination under ASC

805.

Under ASC

805,

assets acquired and liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date. The final valuation of assets acquired and liabilities assumed related to the acquisition of Arthrosurface is expected to be completed as soon as practicable, but

later than

one

year after the consummation of the transaction. Anika’s consolidated financial statements as of and for the

three

months ended

March 31, 2020,

include results of operations for Arthrosurface from

February 3, 2020

through

March 31, 2020.

Consideration Transferred

Pursuant to the Arthrosurface Merger Agreement, the Company acquired all outstanding equity of Arthrosurface for estimated total purchase consideration of

$90.3

million, which consists of

$61.9

million of cash consideration and

$28.4

million for the estimated fair value of contingent consideration.

The total preliminary purchase consideration is as follows:

Cash consideration	$	61,909
Estimated fair value of contingent consideration		28,376
Estimated total purchase consideration	$	90,285

The cash consideration includes

$0.4

million based on final amounts for certain contractually-specified post-closing items that was included in accounts payable as of

March 31, 2020.

The Company

may

be required to make future payments of up to

$40.0

million depending on the achievement of regulatory milestones and the level of net sales generated in

2020

through

2021.

The fair value of contingent consideration related to regulatory milestones was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates. The fair value of contingent consideration related to certain net sales levels from

2020

through

2021

was determined based upon a Monte Carlo simulation approach in an option pricing framework at acquisition date, whereby a range of possible scenarios were simulated. The liability for contingent consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved.

Acquisition related costs are

not

included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately

$2.2

million in transaction costs related to the Arthrosurface Acquisition. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.

Fair Value of Net Assets Acquired

The preliminary estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were

not

may

differ from these estimates. The assessment of fair value is preliminary and is based on information that was available to management at the time the condensed consolidated financial statements were prepared. Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to

one

year from the acquisition date). The most significant open items are related to intangible assets, property, plant and equipment and tax related matters.

The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary estimates of fair value as of

February 3, 2020,

as follows:

Recognized identifiable assets acquired and liabilities assumed:
Cash and cash equivalents	$	1,072
Accounts receivable		5,368
Inventories		15,652
Prepaid expenses and other current assets		535
Property, plant and equipment		3,394
Other long-term assets		7,548
Intangible assets		48,900
Accounts payable, accrued expenses and other liabilities		(3,929	)
Deferred tax liabilities		(11,147	)
Net assets acquired		67,393
Excess purchase price over fair value of net assets acquired		22,892
Estimated total purchase consideration	$	90,285

not

be amortized and is

not

expected to be deductible for income tax purposes as the acquisition of the corporation is a stock purchase for tax purposes.

Intangible assets acquired consist of:
Developed Technology	$	37,000
Trade Name		3,400
Customer Relationships		7,900
IPR&D		600
Total Intangible Assets	$	48,900

The final fair value determination of the identified intangible assets

may

differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately

$48.9

million represents the fair value of identifiable intangible assets. Approximately

$37.0

million represents the fair value of developed technology that will be amortized over an estimated useful life of

years,

$7.9

million represents the fair value of customer relationships that will be amortized over an estimated useful life of

years, and

$3.4

million represents the fair value of trade names that will be amortized over an estimated useful life of

years. The

$0.6

million represents the fair value of in-process research and development (“IPR&D”) with an indefinite useful life that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Revenue, Net Loss and Pro Forma Presentation

The Company recorded revenue from Arthrosurface of

$4.2

million and a net loss of

$4.0

million in the period from

February 3, 2020

through

March 31, 2020.

The unaudited pro forma information for the

three

months ended

March 31, 2020

and

2019

was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. The pro forma financial information presents the combined results of operations of Anika Therapeutics, Inc. and Arthrosurface as if the acquisition had occurred on

January 1, 2019

These pro forma adjustments include: (i) a net increase in amortization expense to record amortization expense for the

$48.9

million of acquired identifiable intangible assets, (ii) an adjustment to cost of product revenue based on the preliminary fair value inventory adjustment and the anticipated inventory turnover (iii) a net decrease in interest expense as a result of eliminating interest expense and interest income related to Arthrosurface’s borrowings that were settled in accordance with the Arthrosurface Merger Agreement, an adjustment to record the acquisition related transaction costs in the period required, and (v) the tax effect of the pro forma adjustments using the Company’s blended U.S. federal and state tax rate of

25%.

The effective tax rate of the combined company could be materially different from the rate presented in this unaudited pro forma condensed combined financial information. As a result of the transaction, the combined company

may

be subject to annual limitations on its ability to utilize pre-acquisition net operating loss carryforwards to offset future taxable income. The amount of the annual limitation is determined based on the value of Anika immediately prior to the ownership change. As further information becomes available, any such adjustment described above could be material to the amounts presented in the unaudited pro forma condensed combined financial statements. The pro forma information does

not

The following table presents unaudited supplemental pro forma information (in thousands, except per share amounts):

	For the Three Months Ended March 31,
	2020		2019
Total revenue	$	35,819	$	31,494
Net income		1,601		22
Earnings per share:
Basic	$	0.11	$	0.00
Diluted		0.11		0.00