Anika Therapeutics, Inc. (ANIK) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to differ materially from anticipated results, performance, or achievement, expressed or implied in such forward-looking statements. These statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks and uncertainties at the beginning of this Annual Report on Form 10-K and under the sections captioned “Business” and “Risk Factors.” The following discussion should also be read in conjunction with the consolidated financial statements and the Notes thereto appearing elsewhere in this Annual Report on Form 10-K.

Management Overview

We are a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care. Based on our collaborations with clinicians to understand what they need most to treat their patients, we develop minimally invasive products that restore active living for people around the world. We are committed to leading in high opportunity spaces within orthopedics, including osteoarthritis (“OA”) Pain Management and Regenerative Solutions.

We have thirty years of global expertise developing, manufacturing and commercializing products based on our hyaluronic (“HA”) technology platform. HA is a naturally occurring polymer found throughout the body that is vital for proper joint health and tissue function. Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to multiple uses, including enabling longer residence time to support OA Pain Management and creating a solid form of HA called Hyaff, which is a platform utilized in our regenerative solutions portfolio.

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In early 2020, we expanded our overall technology platform, product portfolio, and significantly expanded our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, LLC, a sports medicine and instrumentation solutions provider, and Arthrosurface Incorporated, a company specializing in bone preserving partial and total joint replacement solutions. These acquisitions augmented our HA-based OA Pain Management and regenerative products with a broad suite of products and capabilities focused on early intervention joint preservation primarily in upper and lower extremities such as shoulder, foot/ankle, knee and hand/wrist.

In October 2024, we announced a strategic shift to concentrate on OA Pain Management and our Regenerative Solutions products. This strategic decision involved the sale of Arthrosurface Incorporated in October 2024 and the divestiture of Parcus Medical, LLC, in March 2025.

As we look towards the future, our business is positioned to capture value within our target market of OA Pain Management and Regenerative Solutions product portfolios. We believe our success will be driven by our:

For additional information regarding our business, please refer to “Item 1. Business” of this Annual Report on Form 10-K.

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Products

OA Pain Management

Our OA Pain Management product family consists of Monovisc and Orthovisc, our injectable, HA-based OA Pain Management offerings that are indicated to provide pain relief from osteoarthritis conditions; and Cingal, our novel, next-generation, single-injection OA Pain Management product consisting of our proprietary cross-linked HA material combined with a fast-acting steroid. Cingal is our next generation fast-acting, long-lasting, non-opioid, clinically proven osteoarthritis pain product which is designed to provide both short- and long-term pain relief, through at least six months.  It is currently sold outside the United States in over 35 countries.  In 2022, we completed a third Phase III clinical trial for Cingal, which achieved its primary endpoint. Cingal is currently not approved for commercial use in the United States. We have been actively engaging with the U.S. Food and Drug Administration (“FDA”) on next steps for U.S. regulatory approval. We acquired the Aristospan New Drug Application (“NDA”) regulatory approval in the United States in September 2024 to assist with our Cingal regulatory filing with the FDA.

Regenerative Solutions

Our Regenerative Solutions product family consists of: (a) our portfolio of orthopedic regenerative solutions products utilizing HA, including Integrity, our new arthroscopic patch system for rotator cuff repair and other tendon procedures, Tactoset to facilitate bone regeneration, and Hyalofast, sold outside of the United States in over 30 countries, for cartilage repair.

For additional information with respect to our products, including information related to how they are sold and new product development initiatives, please see the sections captioned “Products,” “Sales Channels,” and “Research and Development” contained within “Part I. Item I. Business” of this Annual Report on Form 10-K.

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Results of Operations

Year ended December 31, 2024 compared to year ended December 31, 2023

Statement of Operations Detail

Revenue

During the year ended December 31, 2024, we changed our classification of revenue. We previously disclosed revenue in three categories: OA Pain Management, Joint Preservation and Restoration and Non-Orthopedic. As a result of a change in strategic focus announced by us in 2024, revenue classification was delineated to provide the investment community a clear view to our value drivers. Revenue has been split between the Commercial Channel and the Original Equipment Manufacturer (“OEM”) Channel. In the Commercial Channel, we have full responsibility for sales, marketing, and pricing of products through our commercial leaders, direct sales representatives, and independent distributors. Revenue from our Regenerative Solutions and international OA Pain Management businesses is included in the Commercial Channel. In the OEM Channel, we are responsible for development and manufacturing of products sold to our OEM partners governed by long-term agreements, but we do not control sales, marketing, or pricing with end users. Revenue from our U.S. OA Pain Management business and the Non-Orthopedic business is now included in the OEM Channel. All other revenue is reported in the Commercial Channel.

The following table presents revenue by product family for fiscal years 2024 and 2023 (dollars in thousands):

Revenue for the year ended December 31, 2024 was $119.9 million, a decrease of $0.9 million, or 1%, compared to the prior year. The decrease in revenue was driven by lower sales activity with our OEM channel partners, primarily J&J MedTech and the discontinuation of certain non-orthopedic products.

Revenue from our OEM Channel product family decreased 8% for the year ended December 31, 2024, as compared to prior year, due to lower J&J MedTech revenue, mostly related to Orthovisc and the discontinuation of certain non-orthopedic products.

Revenue from our Commercial Channel product family increased 17% for the year ended December 31, 2024, as compared to prior year, due to an international sales growth on all our main OA Pain Management products (Monovisc, Cingal and Orthovisc). We also launched a full market release of Integrity in the U.S. in 2024.

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Gross Profit and Margin

Gross profit for the year ended December 31, 2024 was $76.0 million, or gross margin of 63%, as compared with $82.5 million, or gross margin of 68%, for the year ended December 31, 2023. The decrease in gross profit for the year ended December 31, 2024, primarily resulted from lower revenue, primarily related to OA Pain Management products in the U.S., product channel mix and higher inventory product rationalization charges.

Research and Development

Research and development expenses for the year ended December 31, 2024 were $25.5 million, an increase of $3.7 million, or 17%, as compared to the prior year, primarily due to increased costs to ensure compliance with growing regulatory requirements globally, such as EU MDR, as well as regulatory, clinical and product development costs associated with our research and development pipeline, led by Hyalofast, in which we submitted the first part of our modular PMA application with the FDA in October 2024.

For additional information on our research and development activities, please see the section captioned “Part I. Item 1. Business—Research and Development” in this Annual Report on Form 10-K.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2024 were $55.6 million, a decrease of $4.4 million, or 7%, as compared to the prior year. The decrease in SG&A expenses for the year ended December 31, 2023 was primarily due to lower headcount and reduced shareholder activism costs.

Income (Loss) from Operations

For the year ended December 31, 2024, the loss from operations was $5.1 million, compared to income from operations of $0.8 million for the prior year. The $5.9 million decrease in income from operations was due to lower gross profit and higher research and development costs.

Income Taxes

The provision for income taxes was $6.1 million for the year ended December 31, 2024, resulting in an effective tax rate of (219.4%). The provision from income taxes was $6.6 million for the year ended December 31, 2023, resulting in an effective tax rate of 209.0%. The decrease in our effective rate for the year ended December 31, 2024 as compared to the year ended December 31, 2023 is primarily due to a lower valuation allowance being recorded on U.S. deferred tax assets in 2024.

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Non-GAAP Financial Measures

We present certain information with respect to adjusted gross profit and adjusted gross margin, adjusted Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”), adjusted net income, adjusted diluted earnings per share or adjusted Earnings Per Share (“EPS”), which are financial measures not based on any standardized methodology prescribed by accounting principles generally accepted in the United States (“GAAP”), and is not necessarily comparable to similarly titled measures presented by other companies.

We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. We believe that the exclusion of these items in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects and allowing for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making.

Adjusted Gross Profit and Adjusted Gross Margin

We define adjusted gross profit as our gross profit excluding certain product rationalization charges. We define adjusted gross margin as adjusted gross profit divided by total revenue.

The following is a reconciliation of adjusted gross profit to gross profit for the years ended December 31, 2024 and 2023, respectively:

Adjusted gross profit for the year ended December 31, 2024 decreased $6.7 million to $76.6 million representing 64% of revenue. Adjusted gross profit for the year ended December 31, 2023 was $83.3 million, or 69% of revenue. The decrease in adjusted gross profit for the year ended December 31, 2024 as compared to 2023, primarily resulted from slower manufacturing production, higher supply chain costs, and a higher proportion of international sales in which product margins are generally lower.

Adjusted EBITDA

We present information below with respect to adjusted EBITDA, which we define as our net loss excluding interest and other income, net, income tax benefit, depreciation and amortization, stock-based compensation, product rationalization charges, and other non-recurring expenses.

Adjusted EBITDA is not prepared in accordance with U.S. GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest U.S. GAAP equivalent. Some of these limitations are:

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The following is a reconciliation of adjusted EBITDA to net loss from operations for the years ended December 31, 2024 and 2023 respectively:

Adjusted EBITDA for year ended December 31, 2024 was $15.5 million, a decrease of $8.2 million as compared to 2023. The decrease in adjusted EBITDA was primarily due to lower adjusted gross profit and higher research and development spending in 2024 on product development and clinical activity, primarily with Integrity, Hyalofast and Cingal.

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Adjusted Net Loss and Adjusted EPS from Continuing Operations

We present information below with respect to adjusted net loss and adjusted EPS from continuing operations. We define adjusted net loss from continuing operations as our net loss from continuing operations excluding amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue, changes in the fair value of contingent consideration, as well as certain impairment charges, including impairment related to IPR&D assets and non-cash product rationalization charges, each on a tax effected basis. Acquisition-related expenses are those that we would not have incurred except as a direct result of acquisition transactions. The amortized assets contribute to revenue generation and the amortization of such assets will recur in future periods until such assets are fully amortized. These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development (“IPR&D”), developed technology, customer relationships and acquired trade names. We define adjusted EPS from continuing operations as U.S. GAAP diluted earnings per share from continuing operations excluding the above adjustments to net loss from continuing operations used in calculating adjusted net loss from continuing operations, each on a per share and tax effected basis.

The following is a reconciliation of adjusted net income from continuing operations to net loss from continuing operations for the years ended December 31, 2024 and 2023, respectively:

The following is a reconciliation of adjusted diluted income from continuing operations per share to diluted loss from continuing operations per share for the years ended December 31, 2024 and 2023, respectively (in thousands, expect per share data):

Adjusted net income from continuing operations in 2024 was $2.4 million, a decrease of $10.9 million as compared to 2023. The decrease in adjusted net income from continuing operations and adjusted diluted income from continuing operations per share for the period was primarily due to higher manufacturing expenses and research and development costs during the year.

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Results of Operations

Year ended December 31, 2023 compared to year ended December 31, 2022

Statement of Operations Detail

Revenue

The following table presents revenue by product family for fiscal years 2023 and 2022 (dollars in thousands):

Revenue for the year ended December 31, 2023 was $120.8 million, an increase of $7.0 million, or 6%, compared to the prior year. The increase in revenue was driven by growing global commercial adoption of our OA Pain Management products as well as our introduction of new products in recent years.

Revenue from our OEM channel product family increased 4% for the year ended December 31, 2023, as compared to prior year, due to domestic sales growth of our Monovisc single injection pain product and favorable ordering patterns from J&J MedTech.

Revenue from our Commercial Channel product family increased 12% for the year ended December 31, 2023, as compared to prior year, due to international sales growth of our Monovisc single injection pain product and our Cingal next generation non-opioid single injection pain product, as well as favorable ordering patterns from our distributors.

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Gross Profit and Margin

Gross profit for the year ended December 31, 2023 was $82.5 million, or gross margin of 68%, as compared with $73.2 million, or gross margin of 64%, for the year ended December 31, 2022. The increase in gross profit for the year ended December 31, 2023, primarily resulted from higher revenue growth, improved manufacturing efficiency and lower product rationalization charges. This increase was partially offset by higher costs due to inflationary pressures for raw materials and freight charges.

Research and Development

Research and development expenses for the year ended December 31, 2023 were $21.8 million, an increase of $3.5 million, or 19%, as compared to the prior year, primarily due to increased costs to ensure compliance with growing regulatory requirements globally, such as EU MDR, as well as new product development associated with our research and development pipeline, led by Integrity, which received FDA clearance in August 2023 and was launched with first surgeries in rotator cuff repair and other tendon procedures in November 2023.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2023 were $59.9 million, an increase of $8.7 million, or 17%, as compared to the prior year. The increase in SG&A expenses for the year ended December 31, 2023 was primarily due to shareholder activism and related corporate costs during the year.

Income from Operations

For the year ended December 31, 2023, the loss from operations was $0.8 million, compared to income from operations of $3.7 million for the prior year. The $2.8 million decrease in income from operations was due higher operating expenses.

Income Taxes

The provision for income taxes was $6.6 million for the year ended December 31, 2023, resulting in an effective tax rate of 209.0%. The provision from income taxes was $2.1 million for the year ended December 31, 2022, resulting in an effective tax rate of 49.1%. The increase in our effective rate for the year ended December 31, 2023 as compared to the year ended December 31, 2022 is primarily due to a higher valuation allowance being recorded on U.S. deferred tax assets in 2023.

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Concentration of Risk

We have historically derived the majority of our revenue from a small number of customers, most of whom resell our products to end-users and are significantly larger companies than us. For the year ended December 31, 2024, J&J MedTech accounted for 57% of revenue, as compared to 62% in prior year. While we believe that our expanded commercial infrastructure has been and will continue to diversify our revenue base, we expect to continue to be dependent on a small number of large customers, especially J&J MedTech, for a sizeable portion of our revenues in the near-term future. The failure of these customers to purchase our products in the amounts they historically have or in amounts that we expect could materially impact our business.  We also have Notes Receivable that we have recorded as consideration related to the divestiture of the Arthrosurface asset group in which repayment will be dependent upon the cash flows from the Arthrosurface asset group.

In addition, if present and future customers terminate their purchasing arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business, financial condition, and results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreements, such renegotiations may have a material adverse effect on our business, financial condition, and/or results of operations. Furthermore, in any future negotiations we may be subject to the perceived or actual leverage that these customers may have given their relative size and importance to us. Any termination, change, reduction, or delay in orders could seriously harm our business, financial condition, and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, consequently, it could seriously harm our business, financial condition, and results of operations.

See Note 12, Revenue and Geographic Information; Geographic Information, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding significant customers.

Liquidity and Capital Resources

We require cash to fund our operating activities and to make capital expenditures and other investments in the business. We expect that our requirements for cash to fund these uses will increase as our operations expand. We believe that our operating cash flows, cash currently on our balance sheet and availability under our credit facility will be sufficient to allow us to continue to invest in our existing business, to manage our capital structure on a short and long-term basis, and to meet our anticipated operating cash needs. Cash, cash equivalents, and investments aggregated $55.6 million and $68.7 million, and working capital totaled $90.3 million and $132.3 million, at December 31, 2024 and 2023, respectively.

We entered into a Third Amendment to Credit Agreement, on November 12, 2021, with Bank of America N.A. as administrative agent, which amended our existing revolving line of credit agreement dated October 24, 2017 and provides up to $75.0 million in the form of a senior revolving line of credit. Subject to certain conditions, we may request up to an additional $75.0 million for a maximum aggregate commitment of $150.0 million. As of December 31, 2024, and 2023, there were no outstanding borrowings, and we are in compliance with the terms of the credit facility.

Summary of Cash Flows (in thousands):

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The following changes contributed to the net change in cash and cash equivalents from 2023 to 2024.

Operating Activities

Cash provided by (used in) operating activities was $5.4 million, $(1.8) million and $4.4 million for 2024, 2023 and 2022, respectively. The change in 2024 was primarily attributable to a lower net loss in 2024, compared to the same period in 2023.

For the foreseeable future, we expect to continue to invest in research and development for new products and clinical trials related to our HA-based technology to support our growth strategy. These costs will be funded with a combination of cash on hand and cash expected to be generated from future operations.

Investing Activities

Cash used in investing activities was $8.3 million, $5.4 million and $7.5 million for 2024, 2023 and 2022, respectively. The change was primarily due to an increase in capital expenditures in 2024 to support the expansion of manufacturing capacity at our Bedford facility and a purchase of developed technology for $0.6 million.

Financing Activities

Cash used in financing activities was $12.7 million, $6.3 million and $4.9 million for 2024, 2023 and 2022, respectively. The change in 2024 was primarily due to $10.9 million used to fund the stock repurchase program we started in May 2024.

For a discussion of our liquidity and capital resources as of December 31, 2023, and our cash flow activities for the fiscal year ended December 31, 2023, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 15, 2024, which is incorporated by reference in this Report.

Contractual Obligations and Other Commercial Commitments

The table below summarizes our non-cancelable operating leases, purchase commitments, and contractual obligations related to future periods which are not reflected in our consolidated balance sheet at December 31, 2024. Purchase commitments relate primarily to non-cancellable inventory commitments and capital expenditures entered in the normal course of business:

We also have purchase orders and commitments for materials and other day-to-day business requirements in which there are no material commitments greater than one year.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

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We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue Recognition – General

Pursuant to Accounting Standards Codification (“ASC”) 606, we recognize revenue when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are capable of being distinct or distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

We generate sales principally through three types of customers: (i) commercial partnerships (ii) hospitals and ambulatory service centers, and (iii) distributors, referred to as distribution model.

For commercial partnership sales, we sell our products directly to these partners, who perform most of the downstream sales and marketing activities to customers and end-users. These arrangements may include the grant of certain licenses, performance of development services, and the supply of product. Our largest such customer, J&J MedTech, represented 57% of total revenues for the year ended December 31, 2024. We recognize revenue from product sales when the customer obtains control of our product, which typically occurs upon shipment to the customer. Commercial partnership agreements may also include sales-based royalties and milestones. As we considered the license to be the predominant item to which the royalties relate for these agreements, sales-based royalties and milestones are only recognized when the later of the underlying sale occurs or the performance obligation to which some or all of the sales-based royalty has been satisfied (or partially satisfied). This is generally in the same period that our licensees complete their product sales in their territory, for which we are contractually entitled to a percentage-based royalty. We record royalty revenues based on estimated net sales of licensed products as reported to us by our commercial partners. The differences between actual and estimated royalty revenues have not been material and are typically adjusted in the following quarter when the actual amounts are known. Revenue from sales-based royalties is included in revenues in our consolidated statement of operations.

For sales to hospitals and ambulatory service centers, which generally pairs in-house sales representatives with local or regional distributors, the inventory is generally consigned so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment, as we retain the ability to control the inventory. Revenue is recognized typically as of the date of surgical implantation of the product.

For distributor sales, we sell our products to our distributors, generally outside the United States, who subsequently resell the products to sub-distributors and health care providers, among others. We recognize revenue from product sales when the distributor obtains control of our product, which typically occurs upon shipment to the distributor, in return for agreed-upon, fixed-price consideration. Performance obligations are generally settled quickly after purchase order acceptance; therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally insignificant. We sell to a diversified base of distributors and, therefore, we believe there is no material concentration of credit risk.

Certain of our supply agreements contain terms that represent a promise to deliver product at the customer’s discretion that are considered distributor options. We assess if these options provide a material right to the licensee, and if so, they are accounted for as separate performance obligations. Our supply agreements do not provide options that are considered material rights.

Our payment terms are consistent with prevailing practice in the respective markets in which we do business. Most of our customers make payments based on contract terms, which are not affected by contingent events that could impact the transaction price. Payment terms fall within the one-year guidance for the practical expedient, which allows us to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component.

Some of our distributor agreements have volume-based discounts with tiered pricing which are generally prospective in nature. These prospective discounts together with any free-of-charge sample units offered are evaluated as potential material rights. If the prospective discounts or free-of-charge sample units are considered material rights, these would be separate performance obligations and a portion of the sales transaction price is allocated to the material right. Revenue allocated to the material right is recognized when the additional goods are transferred to the customer or when the option expires. During 2024, the consideration allocated to material rights was not significant.

We receive payments from our customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. There was no deferred revenue as of December 31, 2024 and 2023, respectively.

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Generally, customer contracts contain Free on Board (“FOB”) or Ex-Works shipping point terms where the customer pays the shipping company directly for all shipping and handling costs. In those contracts in which we pay for the shipping and handling, the associated costs are generally recorded along with the product sale at the time of shipment in cost of revenue when control over the products has transferred to the customer. Value-add and other taxes we collected concurrently with revenue-producing activities are excluded from revenue. Our general product warranty does not extend beyond an assurance that the product or services delivered will be consistent with stated contractual specifications, which does not create a separate performance obligation. We recognize the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that we otherwise would have recognized is one year or less in accordance with the practical expedient in paragraph Code 340-40-25-4. These costs are included in selling, general and administrative expenses.

Inventories

Inventories are primarily stated at the lower of standard cost and net realizable value, with approximate cost determined using the first-in, first-out method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead. Manufacturing variances attributable to abnormally low production are expensed in the period incurred. Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if we believe there is probable future commercial use and future economic benefit.

Our policy is to write down inventory when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for our products and market conditions. We regularly evaluate the ability to realize the value of inventory based on a combination of factors including, but not limited to, historical usage rates, forecasted sales or usage, product end of life dates, and estimated current or future market values. Inventory needs and alternative usage avenues are explored within these processes to mitigate inventory exposure.

When recorded, inventory write-downs are intended to reduce the carrying value of inventory to its net realizable value. If actual demand for our products deteriorates, or if market conditions are less favorable than those projected, additional inventory write-downs may be required. Other long-term assets include inventory expected to remain on hand beyond one year.

Goodwill

Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair values of net identifiable assets on the date of acquisition. Goodwill is not amortized but is subject to impairment test annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable, utilizing either the qualitative or quantitative method.

We test goodwill for impairment at the reporting unit level on an annual basis as of November 30 or more frequently if we believe indicators of impairment exist. We have two reporting units: the legacy Anika reporting unit and a reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface. The remaining goodwill as of December 31, 2024 pertains to the legacy Anika reporting unit, as the goodwill with respect to the Parcus Medical and Arthrosurface reporting unit was fully impaired in 2020.

We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. We used the quantitative method in 2024, we considered several factors, including the following:

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Significant assumptions utilized in the impairment analysis included valuation multiple with respect to revenue and weighted-average cost of capital. Based on sensitivity analysis performed on key assumptions at November 30, 2024, a 10% decrease in valuation multiples or a 10% increase in the weighted average cost of capital assumption would not have resulted in a fair value below the reporting unit’s carrying value. Accordingly, we determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2024.

Long-Lived Assets

Long-lived assets primarily include property and equipment and intangible assets with finite lives. Our intangible assets are comprised of purchased developed technologies, patents, trade names, customer relationships and distributor relationships. These intangible assets are carried at cost, net of accumulated amortization. Amortization is recorded on a straight-line basis over the intangible assets' useful lives, which range from approximately three to sixteen years. We review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. During the years ended December 31, 2024 and 2023, we determined that certain of our intangible assets related to our Arthrosurface and Parcus reporting unit were impaired mainly due to slower than expected revenue growth from product sales that have impacted cash flows with this reporting unit.  As a result, we recorded $1.5 million and $62.2 million in impairment charges to intangible assets related to our Arthrosurface and Parcus reporting units during the years ended December 31, 2024 and 2023, respectively in discontinued operations.

In determining the useful lives of intangible assets, we consider the expected use of the assets and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology-based intangible assets, we consider the expected life cycles of products, absent unforeseen technological advances, which incorporate the corresponding technology.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 2 to the consolidated financial statements in this Annual Report on Form 10-K.