Equity Incentive Plan

9 Months Ended

Sep. 30, 2011

Equity Incentive Plan

5. Equity Incentive Plan

The Company estimates the fair value of stock options and stock appreciation rights using the Black-Scholes valuation model. Fair value of restricted stock is measured by the grant-date price of the Company’s shares. The fair value of each stock option and stock appreciation rights award during the three and nine months ended September 30, 2011 and 2010 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended
	September 30,
	2011	2010
Risk free interest rate	N/A	1.10%
Expected volatility	N/A	62.08%
Expected lives (years)	N/A	4
Expected dividend yield	N/A	0.00%

	Nine Months Ended
	September 30,
	2011	2010
Risk free interest rate	1.19% - 1.51%	1.79%
Expected volatility	57.60%	62.08%
Expected lives (years)	4	4
Expected dividend yield	0.00%	0.00%

The Company recorded $319,312 and $901,619 of share-based compensation expense for the three and nine months ended September 30, 2011, respectively, for equity compensation awards. The Company recorded $289,434 and $835,585 of share-based compensation expense for the three and nine months ended September 30, 2010, respectively, for equity compensation awards. The Company presents the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to the respective employees.

At the 2011 Annual Meeting of Stockholders on June 7, 2011, the shareholders of the Company approved the Anika Therapeutics, Inc. Second Amended and Restated Stock Option and Incentive Plan (the “2003 Plan”), which, among other things, increased the number of shares reserved for issuance under the Company’s predecessor stock option and incentive plan by 800,000 to 3,150,000 shares.

There were no stock options or restricted stock awards (“RSAs”) granted under the 2003 Plan (or its predecessor plan)  during the three months ended September 30, 2011, but there were 629,000 stock options granted to employees during the nine-month period ended September 30, 2011. In addition, there were 29,978 restricted stock units (“RSUs”) granted to members of the Company’s Board of Directors under the 2003 Plan (or its predecessor plan) during the same period ended September 30, 2011. The stock options and RSUs granted to employees and directors become exercisable or vest ratably over two and one half to four years from the date of grant.

On June 7, 2011 the Company granted, to certain individuals, stock options which contained performance features based on the level of growth in revenue and income from operations as compared to established targets, in addition to time-based vesting conditions. The compensation costs associated with these grants was estimated using the Black-Scholes valuation method factored for the estimated probability of achieving the performance goals which is currently projected at 100% realization.

As of September 30, 2011, there was approximately $2.7 million of total unrecognized compensation cost related to non-vested stock options, stock appreciation rights (“SARs”), and RSAs granted under the Company’s incentive plans. This cost is expected to be recognized over a weighted-average period of 2.7 years.

The total intrinsic value of stock options and SARs exercised during the nine month periods ended September 30, 2011 and 2010 was approximately $628,077 and $181,290, respectively. There was no cash received from the exercise of stock options during the three-month periods ended September 30, 2011 and 2010, respectively. The amount of cash received from the exercise of stock options for the nine-month period ended September 30, 2011 was $151,767. The amount of cash received for the nine-month period ended September 30, 2010 was $197,243.

There were approximately 2.1 million options and SARs outstanding under the Company’s incentive plans at September 30, 2011 with a weighted-average exercise price of $7.24 per share, an aggregate intrinsic value of approximately $0.9 million, and a weighted-average remaining contractual term of 6.86 years.

None of the options or SARs outstanding at September 30, 2011 or 2010, respectively, had cash-settlement features.

The Company may satisfy the awards upon exercise, or upon fulfillment of the vesting requirements for other equity-based awards, with either authorized but unissued shares or shares reacquired by the Company. Stock-based awards are granted with an exercise price equal to the market price of the Company’s stock on the date of grant. Awards contain service or performance conditions and generally become exercisable ratably over one to four years and have a ten year contractual term.