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. (“Anika 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 income (loss) which resulted in a gain (loss) from foreign currency translation of (

$0.7

) million,

$2.5

million, and (

$0.7

) million for the years ended

December 31, 2018,

2017,

and

2016,

respectively.

Gains and losses resulting from foreign currency transactions are recognized in the consolidated statements of operations. Recorded balances that are denominated in a currency other than the functional currency are remeasured to the functional currency using the exchange rate at the balance sheet date and gains or losses are recorded in the statements of operations. The Company recognized a gain (loss) from foreign currency transactions of (

$0.4

) million,

$0.7

million, and (

$0.3

) million during the years ended

December 31, 2018,

2017,

and

2016,

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

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,
	2018			2017			2016
Balance, beginning of the year	$	1,914		$	194		$	167
Amounts provided		57			1,609			52
Amounts recovered		(360	)		-			-
Amounts written off		-			(6	)		(16	)
Translation adjustments		(86	)		117			(9	)
Balance, end of the year	$	1,525		$	1,914		$	194

Revenue Recognition - General

The Company adopted the guidance the FASB’s Accounting Standards Codification (“ASC”)

Revenue from Contracts with Customers

(ASC

606

) using the modified retrospective method effective

January 1, 2018.

The adoption of ASC

606

was applied to all contracts

not

completed as of the date of adoption. The adoption did

not

have a material impact on the amount and timing of revenue recognized in the consolidated financial statements. The Company made

adjustments to previously reported product and total revenue, as those periods continue to be presented in accordance with historical accounting practices under Topic

605,

Revenue Recognition

Pursuant to ASC

606,

the Company recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company applies 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) the Company satisfies each performance obligation.

The Company has agreements with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc. (“Mitek”) that include the grant of certain licenses, performance of development services, and the supply of product at Mitek’s option. Revenues from the agreements with Mitek represent

73%

of total revenues for the year-ended

December 31, 2018.

The Company completed the performance obligations related to granted licenses and development services under these agreements prior to

2016.

The Company has

remaining material performance obligations under the Mitek agreements.

The Company has agreements with other customers that

may

include the delivery of a license and supply of product. The upfront payments under such agreements upon the delivery of the license have

not

been material.

The Company’s typical supply agreements represent a promise to deliver product at the customer’s discretion that are considered options. The Company assessed if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. The majority of the Company’s supply agreements do

not

provide options that are considered material rights.

Certain of the Company’s agreements include sales-based royalties and milestones. As the Company 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 the Company’s licensees complete their product sales in their territory, for which the Company is contractually entitled to a percentage-based royalty. Revenue from sales-based royalties is included in product revenues.

Product Revenue

The Company sells its products principally to a number of distributors (i.e., its customers) under legally-enforceable, executed contracts. The Company’s distributors subsequently resell the products to sub-distributors and health care providers, among others. The Company recognizes revenue from product sales when the distributor obtains control of the Company’s 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 immaterial.

The Company’s payment terms are consistent with prevailing practice in the respective markets in which the Company does business. Most of the Company’s distributors make payments based on fixed-price 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. The Company’s contracts with customers do

not

customarily provide a right of return, unless certain product quality standards are

not

met.

Some of the Company’s 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

2018,

the consideration allocated to material rights was

not

significant.

The Company receives payments from its 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 the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when its right to consideration is unconditional. As of

January 1, 2018

and

December 31, 2018

deferred revenue was

$0.

Generally, distributor contracts contain Free on Board (FOB) or Ex-Works (EXW) shipping point terms where the customer pays the shipping company directly for all shipping and handling costs. In those contracts in which the Company pays for the shipping and handling, the associated costs are generally recorded along with the product sale at the time of shipment in cost of product revenue when control over the products has transferred to the customer. The Company does

not

collect sales tax on product sales as it is

not

applicable. Value-add and other taxes collected by us concurrently with revenue-producing activities are excluded from revenue. The Company’s 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. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that the Company otherwise would have recognized is

one

year or less in accordance with the practical expedient in paragraph ASC

340

These costs are included in selling, general & administrative expenses.

Included as a component of product revenue is sales-based royalty revenue, which represents the utilization of the Company’s intellectual property licensed by its commercial partners. The Company records royalty revenues based on estimated net sales of licensed products as reported to

us by the Company’s commercial partners. 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.

Licensing, Milestone and Contract Revenue

The agreements with Mitek include variable consideration such as contingent development and regulatory milestones.

As of the date of adoption of ASC

606,

there is

one

remaining regulatory milestone related to the Mitek agreements and the Company has

performance obligation related to this milestone. In general, variable consideration is included in the transaction price only to the extent a significant reversal in the amount of cumulative revenue recognized is

not

probable to occur. Future payments for regulatory milestones will be recognized as revenue when the regulatory milestone is considered probable of being achieved.

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 U.S. treasury bills. 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 and other 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 original 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,

2018

and

2017,

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,

2018

and

2017,

Mitek represented

75%

and

68%,

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

$25.1

million, including

$3.8

million within Other long-term assets,

and

$22.0

million as of

December 31, 2018

and

2017,

respectively, is stated net of inventory reserves of approximately

$3.5

million and

$1.7

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		3-10
Furniture and fixtures		5-7
Equipment		5-20
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 In-Process Research and Development (“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, 2018

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 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. 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, 2018

and

2017

exceeded the 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

$0.7

million,

$0.8

million, and

$0.3

million related to performance-based options in

2018,

2017,

and

2016,

respectively.

See Note

13,

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 income (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 President and 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,

2018

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

February 2016,

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

No.

2016

02,

Leases (Topic

842

), which 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.

This updated guidance provided an optional transition method, which allows for the initial application of the new accounting standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. The Company adopted the new standard beginning on

January 1, 2019

and elected the optional transition method with

restatement of prior period amounts. A number of optional practical expedients

may

be elected to simplify the impact of adoption. The Company has assessed ASU

2016

and the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures. The Company expects to record, upon adoption right-of-use assets of approximately

$20.0

$23.0

million and corresponding liabilities related to its real estate leases with terms of more than

months that are

not

treated as financing leases under Topic

842.

The adoption of this standard is

not

expected to have a significant impact on the Company’s consolidated statements of operations and comprehensive income and consolidated statements of cash flows.

August 2018,

the FASB issued ASU

No.

2018

15,

Intangibles – Goodwill and Other – Internal-Use Software (Subtopic

350

), which amends ASU

No.

2015

05,

Customers Accounting for Fees in a Cloud Computing Agreement, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The most significant change will align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. Accordingly, the amendments in ASU

2018

require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic

350

to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU

2018

is effective for fiscal years and interim periods beginning after

December 15, 2019.

Early adoption is permitted, including adoption in any interim period for all entities. The Company is assessing ASU

2018

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