13. Equity Incentive Plan

The Anika Therapeutics, Inc. Stock Option and Incentive Plan, as amended, (the “2003 Plan”) provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units, and SAR’s to employees, directors, officers, and consultants. The 2003 Plan was originally approved by the Board of Directors on April 4, 2003, approved by the Company’s shareholders on June 4, 2003, and reserved 1,500,000 shares of common stock for grant pursuant to its terms. There are 1,251,635 shares available for future grant at December 31, 2015.

On May 29, 2009, the Board of Directors approved changes to the 2003 Plan and adopted the Amended and Restated 2003 Stock Option and Incentive Plan (the “Amended 2003 Plan”) to increase the number of shares available to grant by 850,000. The Amended 2003 Plan was approved by the Company’s shareholders on June 5, 2009, and it resulted in a total of 2,350,000 shares of common stock being reserved for issuance under the Amended 2003 Plan.

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. Pursuant to this amendment and restatement to the 2003 Plan approved by our shareholders, each share award issued after June 7, 2011 other than options or stock appreciation rights will reduce the number of total shares available for grant by 1.9 shares.

At the 2013 Annual Meeting of Stockholders on June 18, 2013, the shareholders of the Company approved an additional amendment to the Amended 2003 Plan, which, among other things, increased the number of shares reserved for issuance under the Company’s stock option and incentive plan by 650,000 to 3,800,000 shares. Pursuant to this amendment and restatement to the 2003 Plan approved by our shareholders, each share award issued after June 18, 2013 other than options or stock appreciation rights will reduce the number of total shares available for grant by 1.5 shares

The Company may satisfy the awards upon exercise, or upon fulfillment of the vesting requirements for other equity-based awards, with either newly-issued 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 conditions or service and performance conditions, and they generally become exercisable ratably over one to four years.

The Company estimates the fair value of stock options and SAR’s using the Black-Scholes valuation model. Fair value of restricted stock is measured by the grant-date price of the Company’s shares. Key input assumptions used to estimate the fair value of stock options and SAR’s include the exercise price of the award, the expected award term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the award’s expected term, and the Company’s expected annual dividend yield.

The Company uses historical data on the exercise of stock options and other factors to evaluate and estimate the expected term of share-based awards. The Company also evaluates actual forfeiture rates periodically and adjusts the expected forfeiture rate assumption within the model accordingly. The expected volatility assumption is evaluated against the historical volatility of the Company’s common stock over a four year average, and it is adjusted if there are material swings in historical volatility. The risk-free interest rate assumption is based on U.S. Treasury interest rates at the time of grant.

The fair value of each stock option and SAR award during 2015, 2014, and 2013 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	December 31,
	2015			2014			2013
Risk free interest rate	1.15%	-	1.46%	1.16%	-	1.39%	0.61%	-	1.02%
Expected volatility	53.15%	-	54.65%	53.28%	-	57.05%	53.60%	-	57.60%
Expected life (years)		4.5			4.0			4.0
Expected dividend yield		0.00%			0.00%			0.00%

The Company recorded $2.2 million, $1.6 million, and $1.3 million of share-based compensation expense for the years ended December 31, 2015, 2014, and 2013, respectively, for stock options, SAR’s, and restricted stock awards. The Company presents the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to each of its employees.

Combined stock options and SAR’s activity under our plans is summarized as follows for the years ended December 31, 2015 and 2014, respectively:

	2015					2014
	Number of Shares			Weighted Average Exercise Price Per Share		Number of Shares			Weighted Average Exercise Price Per Share
Options and SAR's outstanding at beginning of year		851,287		$	14.85		1,513,326		$	9.14
Granted		111,625		$	39.25		179,240		$	35.62
Cancelled		(85,349	)	$	19.77		(53,325	)	$	23.73
Expired		(8,825	)	$	20.03		(24,292	)	$	9.87
Exercised		(106,478	)	$	10.96		(763,662	)	$	7.95
Options and SAR's outstanding at end of year		762,260		$	18.75		851,287		$	14.85

Of the 762,260 options and SAR’s outstanding at December 31, 2015, 734,301 are vested or are expected to vest, with a weighted-average exercise price of approximately $17.88 as well as an aggregate intrinsic value of approximately $15 million related to these awards. The weighted average remaining contractual term of the vested and expected to vest options and SAR’s was 6.7 years as of December 31, 2015.

As of December 31, 2015, total unrecognized compensation costs related to non-vested options and SAR’s was approximately $2.6 million and is expected to be recognized over a weighted average period of 2.5 years.

There were 140,023 incentive stock options exercisable at December 31, 2015 with a weighted-average exercise price of $9.52 and a weighted-average remaining contractual term of 5.6 years for these awards.

There were 225,620 non-qualified stock options exercisable at December 31, 2015 with a weighted-average exercise price of $12.27 and a weighted-average remaining contractual term of 6.3 years.

There were 56,220 SAR’s exercisable at December 31, 2015 with a weighted-average exercise price of $8.30 and a weighted-average remaining contractual term of 2.9 years for these awards.

The aggregate intrinsic value of stock options and SAR’s fully vested at December 31, 2015 and 2014 was $11.6 million and $12.0 million, respectively. The aggregate intrinsic value of stock options and SAR’s outstanding at December 31, 2015 and 2014 was $15.2 million and $21.7 million, respectively.

The total intrinsic value of options and SAR’s exercised was $3.1 million and $26.7 million for the years ended December 31, 2015 and 2014, respectively.

During the second quarter of 2014, the Company acquired, and subsequently retired, 133,774 common shares related to an employee SAR’s exercise to meet minimum statutory tax withholding requirements.

The total fair value of options and SAR’s vested during the years ended December 31, 2015 and 2014 was approximately $1.1 million for both periods.

The Company received $1.1 million and $2.1 million for exercises of stock options during the years ended December 31, 2015 and 2014, respectively.

The restricted stock activity for the years ended December 31, 2015 and 2014 is as follows:

	2015					2014
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Nonvested at Beginning of year		109,614		$	23.91		79,591		$	11.93
Granted		81,080		$	37.84		60,098		$	32.02
Cancelled		(10,635	)	$	32.02		(7,500	)	$	25.46
Expired		-		$	-		-		$	-
Vested/Released		(29,675	)	$	19.31		(22,575	)	$	10.01
Nonvested at end of year		150,384		$	34.29		109,614		$	23.91

The total fair value of restricted stock and restricted stock units vested during the year ended December 31, 2015 and 2014 was $1.2 million and $0.8 million.