Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly owned subsidiaries, Anika Securities, Inc. (a Massachusetts Securities Corporation), and Anika Therapeutics S.r.l. All intercompany balances and transactions have been eliminated in consolidation.

Foreign Currency Translation

The functional currency of the Company’s foreign subsidiary is the Euro. Assets and liabilities of the foreign subsidiary are translated using the exchange rate existing on each respective balance sheet date. Revenues and expenses are translated using the average exchange rates for the period. The translation adjustments resulting from this process are included in stockholders’ equity as a component of accumulated other comprehensive loss which resulted in a gain (loss) from foreign currency translation of

$2.5

million, (

$0.7

) million, and (

$2.2

) million for the years ended

December 31, 2017,

2016,

and

2015,

respectively.

The Company recognized a gain (loss) from foreign currency transactions of

$0.7

million, (

$0.3

) million, and (

$0.4

) million during the years ended

December 31, 2017,

2016,

and

2015,

respectively.

Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance. The accounting standard establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that

may

be used to measure fair value are:

•

Level

– Valuation is based upon quoted prices for identical instruments traded in active markets. Level

instruments include securities traded on active exchange markets, such as the New York Stock Exchange.

•

Level

– Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are

not

active and model-based valuation techniques for which all significant assumptions are directly observable in the market.

•

Level

– Valuation is generated from model-based techniques that use significant assumptions

not

observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions market participants would use in pricing the instrument.

The Company’s financial assets have been classified as Levels

and

The Company’s financial assets (which include cash equivalents and investments) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing

third

party pricing services or other market observable data.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic conditions, accounts receivable aging trends, and changes in the Company’s customer payment terms. A summary of activity in the allowance for doubtful accounts is as follows:

	December 31,
	2017			2016			2015
Balance, beginning of the year	$	194		$	167		$	147
Amounts provided		1,609			52			38
Amounts written off		(6	)		(16	)		(3	)
Translation adjustments		117			(9	)		(15	)
Balance, end of the year	$	1,914		$	194		$	167

Revenue Recognition - General

The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, risk of loss has passed or services have been rendered, the seller's price to the buyer is fixed or determinable, and collection from the customer is reasonably assured.

Product Revenue

Revenues from product sales are recognized when title and risk of loss have passed to the customer, which is typically upon shipment to the customer. Amounts billed or collected prior to recognition of revenue are classified as deferred revenue. When determining whether risk of loss has transferred to customers on product sales, or if the sales price is fixed or determinable, the Company evaluates both the contractual terms and conditions of its distribution and supply agreements as well as its business practices.

Product revenue also includes royalties. Royalty revenue is based on distributors’ sales and is recognized in the same period distributors record their sale of products manufactured by the Company. On a quarterly basis the Company records royalty revenue based upon sales provided to it by its distributor customers.

Pursuant to the Health Care and Education Reconciliation Act of

2010,

in conjunction with the Patient Protection and Affordable Care Act, a medical device excise tax (“MDET”) became effective on

January 1, 2013

for sales of certain medical devices. Some of the Company’s product sales are subject to the provisions of the MDET. The Company elected to recognize any amounts related to the MDET under the gross method as allowed under ASC

605

45.

Amounts included in revenues and costs of goods sold for the MDET in

2015

were immaterial. There were

amounts reported for

2016

and

2017

as the

2.3%

MDET has been suspended by Congress from

January 1, 2016

through

2020.

Licensing, Milestone and Contract Revenue

Licensing, milestone and contract revenue consists of revenue recognized on initial and milestone payments, as well as contractual amounts received from partners. The Company’s business strategy includes entering into collaborative license, development, and/or supply agreements with partners for the development and commercialization of the Company’s products. Under the milestone method, the Company recognizes a consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:

The consideration is commensurate with either the entity’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone;

The consideration relates solely to past performance; and

The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.

A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the Company. Non substantive milestones are recognized when there are

further obligations by the Company.

The terms of the agreements typically include non-refundable license fees, funding of research and development, and payments based upon achievement of certain milestones. The Company adopted ASU

2009

13,

Revenue Recognition

January 2011,

which amended ASC Subtopic

605

25,

Multiple Element Arrangements

(“ASC

605

25”

) to require the establishment of a selling price hierarchy for determining the allocable selling price of an item. Under ASC

605

25,

as amended by ASU

2009

13,

in order to account for an element as a separate unit of accounting, the element must have objective and reliable evidence of selling price of the undelivered elements. In general, non-refundable up-front fees and milestone payments that do

not

relate to other elements are recognized as revenue over the term of the arrangement as the Company completes its performance obligations.

Cash and Cash Equivalents

The Company

considers only those investments which are highly liquid, readily convertible to cash, and that mature within

three

months from date of purchase to be cash equivalents. The Company’s cash equivalents consist of money market funds, mutual funds, and bank certificates of deposit with an original maturity of less than

days.

Investments

The Company’s investments consist of bank certificates of deposit with an original maturity of more than

days. The Company has designated all investments as available-for-sale, and therefore such investments are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of investments are recorded in interest income, net. Interest is recorded when earned. Investments with original maturities greater than approximately

three

months and remaining maturities less than

one

year are classified as short-term investments. Investments with remaining maturities greater than

one

year are classified as long-term investments. The Company considers securities with maturities of

three

months or less from the purchase date to be cash equivalents.

All of the Company’s investments are subject to a periodic impairment review. The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in determining whether a loss is temporary include the extent and length of time the investment's fair value has been lower than its cost basis, the financial condition and near-term prospects of the investee, extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security, and whether or

not

the Company will be required to sell the security prior the expected recovery of the investment's amortized cost basis. During the years ended

December

31,

2017

and

2016,

the Company did

not

record any other-than-temporary impairment charges on its available-for-sale securities because the Company does

not

intend to sell the securities and it is

not

more likely than

not

that the Company will be required to sell these securities before the recovery of their cost basis.

Concentration of Credit Risk and Significant Customers

The Company has

significant off-balance sheet risks related to foreign exchange contracts, option contracts, or other foreign hedging arrangements. The Company’s cash equivalents and investments are held with

two

major international financial institutions.

The Company, by policy, routinely assesses the financial strength of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited.

As of

December

31,

2017

and

2016,

DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc. (“Mitek”), represented

68%

and

66%,

respectively, of the Company’s accounts receivable balance,

other single customer accounted for more than

10%

of accounts receivable in either period.

Inventories

Inventories are 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. Inventory costs associated with product candidates that have

not

yet received regulatory approval are capitalized if the Company believes there is probable future commercial use and future economic benefit.

The Company’s 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 the Company’s products and market conditions. The Company regularly evaluates 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. Purchasing requirements 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. Inventory

$22.0

million

and

$16.0

million as of

December 31, 2017

and

2016,

respectively, is stated net of inventory reserves of approximately

$1.7

million and

$0.9

million, respectively. If actual demand for the Company’s products deteriorates, or if market conditions are less favorable than those projected, additional inventory write-downs

may

be required.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are typically:

Asset		Estimated useful life (in years)
Computer equipment and software		3 - 5 years
Furniture and fixtures		5 - 7 years
Equipment		5-15 years
Leasehold improvements		Shorter of useful life or term of lease

Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. Fully depreciated assets are retained in the accounts until they are

longer used and

further charge for depreciation is made in respect of these assets. When an item is sold, retired or removed from service, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognized in income.

Construction-in-process is stated at cost, which includes the cost of construction and other direct costs attributable to the construction. Construction-in-process is

not

depreciated until such time as the relevant assets are completed and put into use.

Goodwill and Acquired Intangible Assets

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. Acquired IPR&D represents the fair value assigned to research and development assets that the Company acquires that have

not

been completed at the date of acquisition or are pending regulatory approval in certain jurisdictions. The value assigned to the acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the net cash flows to present value.

Goodwill and IPR&D are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Factors the Company considers important, on an overall company basis, that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the Company’s use of the acquired assets or the strategy for its overall business, significant negative industry or economic trends, a significant decline in the Company’s stock price for a sustained period, or a reduction of its market capitalization relative to net book value.

To conduct impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. The Company’s annual assessment for impairment of goodwill as of

November 30, 2017

indicated that the fair value of its reporting unit exceeded the carrying value of the reporting unit.

To conduct impairment tests of IPR&D, the fair value of the IPR&D project is compared to its carrying value. If the carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of the IPR&D project exceeds its fair value. The Company estimates the fair value for IPR&D projects using discounted cash flow valuation models, which require the use of significant estimates and assumptions, including but

not

limited to, estimating the timing of and expected costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows from product sales resulting from completed projects and in-process projects, and developing appropriate discount rates.

During the

fourth

quarter of

2015,

the Company performed an impairment review of its IPR&D projects as it reassessed its research and development strategy. In

2015,

the Company recorded an impairment charge of

$0.7

million due to the decision to discontinue further development efforts needed to commercialize the Hemostatic Patch in-process development project.

The Company’s annual assessment for impairment of IPR&D indicated that the fair value of its other IPR&D assets as of

November 30, 2017

and

2016

exceeded their respective carrying values.

Long-Lived Assets

Long-lived assets primarily include property and equipment and intangible assets with finite lives. The Company’s intangible assets are comprised of purchased developed technologies, patents, and trade names. 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

five

sixteen

years. The Company reviews 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

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.

Research and Development

Research and development costs consist primarily of clinical trials, salaries and related expenses for personnel, and fees paid to outside consultants and outside service providers, including costs associated with licensing, milestone and contract revenue. Research and development costs are expensed as incurred.

Stock-Based Compensation

The Company has stock-based compensation plans under which it grants various types of equity-based awards, including restricted stock units (“RSUs”), restricted stock awards (“RSAs”), performance options, and stock options. The Company measures the compensation cost of award recipients’ services received in exchange for an award of equity instruments based on the grant date fair value of the underlying award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

For performance-based options with financial and business milestone achievement targets, the Company recognizes expense using the graded vesting methodology over the service period. Compensation cost associated with performance-based options is based on the probable outcome of the performance conditions. Changes to the probability assessment and the estimated shares expected to vest will result in adjustments to the related stock-based compensation expense that will be recorded in the period of the change. If the performance targets are

not

achieved,

compensation cost is recognized, and any previously recognized compensation cost is reversed. The Company recorded

$0.8

million,

$0.3

million, and

$0.4

million related to performance-based options in

2017,

2016,

and

2015,

respectively.

See Note

12,

Equity Incentive Plan

, to the consolidated financial statements included elsewhere in this Annual Report on Form

-K for a description of the types of stock-based awards granted, the compensation expense related to such awards, and detail of equity-based awards outstanding.

Income Taxes

The Company’s income tax expense includes U.S. and international income taxes. Certain items of income and expense are

not

reported in tax returns and financial statements in the same year. The tax effects of these timing differences are reported as deferred tax assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences, tax operating losses, and tax credit carry-forwards (including investment tax credits). Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that it is more likely than

not

that all or a portion of deferred tax assets will

not

be realized, the Company establishes a valuation allowance to reduce the deferred tax assets to the appropriate valuation. To the extent the Company establishes a valuation allowance or increases or decreases this allowance in a given period, it includes the related tax expense or tax benefit within the tax provision in the consolidated statement of operations in that period.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss), which includes foreign currency translation adjustments. For the purposes of comprehensive income disclosures, the Company does

not

record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as it intends to indefinitely reinvest undistributed earnings of its foreign subsidiary. Accumulated other comprehensive loss is reported as a component of stockholders' equity.

Segment Information

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. Based on the criteria established by ASC

280,

Segment Reportin

g, the Company has

one

operating and reportable segment.

Contingencies

In the normal course of business, the Company is involved from time-to-time in various legal proceedings and other matters such as contractual disputes, which are complex in nature and have outcomes that are difficult to predict. The Company records accruals for loss contingencies to the extent that it concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The Company considers all relevant factors when making assessments regarding these contingencies. Although the outcomes of any potential legal proceedings are inherently difficult to predict, the Company does

not

expect the resolution of any potential legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flow.

Subsequent Events

Events occurring subsequent to

December

31,

2017

have been evaluated for potential recognition or disclosure in the consolidated financial statements. As a result of the evaluation,

subsequent events were required to be recognized or disclosed.

Recent Accounting Pronouncements

Recently Issued

May 2014,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

No.

2014

09,

Revenue from Contracts with Customers. ASU

2014

supersedes the revenue recognition requirements in “Topic

605,

Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

July 2015,

the FASB issued a

one

-year deferral making it effective for annual reporting periods by public business entities beginning on or after

December 15, 2017

while also providing for early adoption

not

to occur before the original effective date. The Company adopted the new standard on a modified retrospective basis on

January 1, 2018.

The Company developed an implementation plan to assess the impact of the new guidance on its operations, financial results, and related disclosures. To date, the Company has substantially completed its assessment of the potential areas of the balance sheet and financial statement components impacted. The Company has prepared its accounting policy memorandum and assessment of the quantitative impact of adoption, including the impact of the new guidance on its results of operations and internal controls. Based on procedures performed to date, the Company has concluded that the adoption of the new standard will

not

have a material impact on its annual revenues. The Company does

not

anticipate a material adjustment to beginning retained earnings as of the adoption on

January 1, 2018.

February 2016,

the FASB issued ASU

No.

2016

02,

Leases (Topic

842

). ASU

2016

amends existing leasing accounting requirements. The most significant change will result in the recognition of lease assets and lease liabilities by lessees for virtually all leases. The new guidance will also require significant additional disclosures about the amount, timing, and uncertainty of cash flows from leases. ASU

2016

is effective for fiscal years and interim periods beginning after

December 15, 2018.

Upon adoption, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted, and a number of optional practical expedients

may

be elected to simplify the impact of adoption. The Company is assessing ASU

2016

and the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

June 2016,

the FASB issued ASU

No.

2016

13,

Financial Instruments (Topic

326

) Credit Losses. ASU

2016

changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are

not

accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. ASU

2016

is effective as of

January 1, 2020.

Early adoption is permitted. The adoption of this standard is

not

expected to have a material impact on the Company’s consolidated financial statements or footnote disclosures.

Recently Adopted

March 2016,

the FASB issued ASU

No.

2016

09,

Compensation (Topic

718

) Stock Compensation. The ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, and certain classifications on the statement of cash flows. ASU

2016

is effective as of

January 1, 2017.

Since

January 1, 2017,

the Company has recognized excess tax benefits and tax deficiencies related to share-based payments in the Consolidated Statements of Operations and Comprehensive Income as a component of the provision for income taxes on a prospective basis. Such excess tax benefits and tax deficiencies were previously recorded in equity. The Company also began presenting tax-related cash flows resulting from share-based payments as operating activities in the Consolidated Statements of Cash Flows and retrospectively revised prior periods to reflect this provision. Accordingly, the Consolidated Statement of Cash Flows for the years ended

December 31, 2016

and

2015,

was revised by increasing net cash provided by operating activities by

$0.6

million and

$0.8

million and by decreasing net cash used in financing activities by

$0.6

million and

$0.8

million, respectively. Lastly, as of

January 1, 2017,

the Company elected to recognize forfeitures as they occur rather than estimate forfeitures each period on a modified retrospective basis. Accordingly, the Company recognized a cumulative

$0.5

million reduction to retained earnings at the beginning of

2017.

Previously, the Company used historical data on the exercise of stock options and other factors to evaluate and estimate the expected term of share-based awards to evaluate actual forfeiture rates periodically and adjusted the expected forfeiture rate assumption within the model. See Note

16,

Income Taxes

, to the consolidated financial statements included elsewhere in this Annual Report on Form

-K for additional information regarding the impacts on the consolidated financial statements.