Equity Incentive Plan

The Company estimates the fair value of stock options and stock appreciation rights (“SARs”) using the Black-Scholes valuation model. Fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) are measured by the grant-date price of the Company’s shares. The fair value of each stock option award during the

three

-month periods ended

March

31,

2017

and

2016,

respectively, was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended March 31,
	2017			2016
Risk free interest rate	1.70%	-	1.78%	1.16%	-	1.40%
Expected volatility	43.47%	-	44.30%	50.84%	-	51.61%
Expected life (years)		4.0			4.5
Expected dividend yield		0.00%			0.00%

The Company recorded

$1.2

million and

$0.8

million of share-based compensation expense for the

three

-month periods ended

March

31,

2017

and

2016,

respectively, for equity compensation awards. The Company presents the expenses related to share-based compensation awards in the same expense line items as cash compensation paid to each of its employees as follows:

	Three Months Ended March 31,
	2017		2016
Cost of product revenue	$	97	$	13
Research & development		10		102
Selling, general & administrative		1,075		702
Total share-based compensation expense	$	1,182	$	817

During the

three

-month period ended

March

31,

2017,

the Company granted under the Anika Therapeutics Second Amended and Restated

2003

Stock Option and Incentive Plan, as amended, (the “Plan”) a total of

0.4

million shares of stock options. The stock options granted to employees become exercisable or vest ratably over a

three

-year period. In addition, the Company executed it’s annual grant of RSUs to non-employee directors, and these RSUs vest over a

one

-year period.

A portion of the stock options granted during the

three

-month period ended

March

31,

2017

contained certain performance criteria in addition to time-based vesting conditions. For performance-based awards with financial achievement targets, the Company recognizes expense using the graded vesting methodology based on the number of shares expected to vest. Compensation cost associated with performance grants is estimated using the Black-Scholes valuation method multiplied by the expected number of shares to be issued, which is adjusted based on the estimated probabilities of achieving the performance goals. Changes to the probability assessment and the estimated shares expected to vest will result in adjustments to the related share-based compensation expense that will be recorded in the period of the change. If the performance targets are not achieved, no compensation cost is recognized and any previously recognized compensation cost is reversed.

In connection with the adoption of ASU

2016

09,

as of

January

2017,

the Company elected to recognize forfeitures as they occur rather than estimate forfeitures each period, which was applied on a modified retrospective basis. Accordingly, the Company recognized a cumulative adjustment to retained earnings at the beginning of period ended

March

31,

2017,

resulting in a reduction of

$0.5

million.