Note 14 - Equity Incentive Plan

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

 14. Equity Incentive Plan

Equity Incentive Plan

The  Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”) was approved by the Company’s stockholders on June 13, 2017 and provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), performance restricted stock units (“PSUs”), restricted stock units (“RSUs”), and performance options that may be settled in cash, stock, or other property. In accordance with the 2017 Plan approved by the Company’s stockholders, each share award other than stock options or SAR’s will reduce the number of total shares available for grant by two shares. Subject to adjustment for specified types of changes in the Company’s capitalization, no more than 1.2 million shares of common stock may be issued under the 2017 Plan. On June 18, 2019, the Company’s stockholders approved an amendment to the 2017 Plan. The amendment increased the number of shares of common stock reserved under the 2017 Plan by 1.5 million shares from 1.2 million shares to 2.7 million shares. Additionally, the amendment provided greater clarity with respect to the sections governing minimum vesting and tax withholding to facilitate plan administration. No other provisions of the 2017 Plan were amended. On June 16, 2020, the Company’s stockholders approved another amendment to the 2017 Plan. The amendment increased the number of shares of common stock reserved under the 2017 Plan by 0.8 million shares from 2.7 million shares to 3.5 million shares. No other provisions of the 2017 Plan were amended. There are 1.6 million shares available for future grant at December 31, 2020.

 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 with a maximum contractual term of ten years.

The following table sets forth share information for stock-based compensation awards granted and exercised during the periods ended December 31, 2020 and 2019:

	December 31,
	2020		2019
Grants:
Stock options		546,496		254,517
RSUs		218,804		189,507
PSUs		162,297		123,500
Exercises:
Stock options		123,063		518,991
SARs		-		35,250

 Stock Options 

The combined stock options activity for the year ended December 31, 2020 is as follows:

				Weighted
				Average
				Exercise
	Number of			Price Per
	Shares			Share
Options outstanding at beginning of year		690,968		$	41.65
Granted		546,496		$	37.78
Cancelled		(112,660	)	$	50.15
Expired		(104,922	)	$	46.33
Exercised		(123,063	)	$	12.43
Options outstanding at end of year		896,819		$	41.50

During the second quarter of 2020, the initial equity grants to the Company’s current President and Chief Executive Officer contained a TSR option award at 104,638 targeted options, with market and service conditions. The actual number of options that may be earned ranges from 0% to 150% of the target number, depending on the total shareholder return of the Company relative to the peer group over the vesting period of 2.7 years. The grant-date fair value of the TSRs is recorded as stock-based compensation expense on a straight-line basis over the period from the date of grant to the settlement date. The Company recorded $0.6 million of stock-based compensation expense associated with TSRs for the year ended December 31, 2020.

All stock options outstanding at December 31, 2020 are vested or are expected to vest, with a weighted-average exercise price of $41.50 and as an aggregate intrinsic value of $5.5 million. The weighted average remaining contractual term of the vested and expected to vest stock options is 5.4 years as of December 31, 2020.

As of December 31, 2020, total unrecognized compensation costs related to non-vested stock options was approximately $8.4 million and is expected to be recognized over a weighted average period of 2.1 years.

The options exercisable at December 31, 2020 are as follows:

	Number Outstanding		Weighted Avg Exercise Price		Weighted Average Remaining Term (in years)
Incentive stock options		109,581	$	45.43		6.5
Non-qualified stock options		341,927	$	41.63		4.5
Performance awards		11,210	$	53.87		2.9

The total intrinsic value of stock options and SARs exercised was $2.8 million, $8.5 million and $8.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The 35,250 SARs exercised in 2019 resulted in the issuance of 31,541 shares of common stock. There are no remaining SARs outstanding as of December 31, 2019.

The total grant-date fair value of stock options and SARs vested during the years ended December 31, 2020, 2019 and 2018 was approximately $2.5 million, $2.7 million and $6.7 million, respectively.

Restricted Stock

The RSA, RSU and PSU activity for the year ended December 31, 2020 is as follows:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested at beginning of year		289,098		$	34.53
Granted		381,101		$	37.66
Cancelled		(200,418	)	$	35.38
Vested/Released		(58,245	)	$	35.91
Unvested at end of year		411,536		$	36.82

 The total fair value of restricted stock-based awards (including RSAs, RSUs, and PSUs) vested during the years ended December 31, 2020, 2019 and 2018 was $2.3 million, $1.4 million and $6.8 million, respectively. The weighted-average grant date fair value of restricted stock-based awards granted during the years ended December 31, 2020, 2019 and 2018 was $37.66, $33.64 and $58.84, respectively.

As of December 31, 2020, total unrecognized compensation costs related to non-vested restricted stock-based awards (including RSAs, RSUs, and PSUs) was approximately $6.6 million and is expected to be recognized over a weighted average period of 2.0 years.

 Stock Compensation Expense

The Company estimates the fair value of stock options and SARs using the Black-Scholes valuation model. The Company estimates the fair value of TSRs using Monte-Carlo simulation model. Fair value of restricted stock is measured by the grant-date price of the Company’s shares.

The PSUs granted to employees in 2019 contained performance conditions with business and financial targets. The business target, amounting to 30% of the total performance condition awards, was measured and achieved in the 2019 fiscal year, while the financial targets, amounting to 70% of the total performance condition awards, will ultimately vest depending on the financial operating results in with respect to the Company’s operating results in the 2021 fiscal year. The PSUs granted to employees in 2020 contained performance conditions with business and financial targets. The business target, amounting to 40% of the total performance condition awards, was not achieved in the 2020 fiscal year, while the financial targets, amounting to 60% of the total performance condition awards, will ultimately vest depending on the financial operating results in with respect to the Company’s operating results in the 2021 and 2022 fiscal years.

The Company recorded $0.1 million, $1.2 million, and $0.7 million related to performance-based units and options in the years ending 2020, 2019, and 2018, respectively.

Key input assumptions used to estimate the fair value of stock options and SARs 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 expected volatility assumption is evaluated against the historical volatility of the Company’s common stock over a 4-year average, except for TSRs which is evaluated over 6.3 years, and it is adjusted if there are material changes in historical volatility. The risk free interest rate assumption is based on U.S. Treasury interest rates at the time of grant.

The weighted-average grant-date fair value per share of stock options granted in 2020, 2019 and 2018 was $16.31, $14.73 and $20.01, respectively. The fair value of each stock option during 2020, 2019, and 2018 was estimated on the grant-date using the Black-Scholes option-pricing model with the following assumptions:

	2020			2019			2018
Risk free interest rate	0.21%	-	1.59%	1.41%	-	2.54%	2.15%	-	2.82%
Expected volatility	46.48%	-	54.06%	44.27%	-	48.52%	37.12%	-	45.61%
Expected term (years)		4.0			3.5		4.0	-	4.5
Expected dividend yield		0.00%			0.00%			0.00%

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 as follows:

	2020		2019		2018
Cost of revenue	$	719	$	412	$	(160	)
Research and development		713		424		851
Selling, general and administrative		3,954		5,251		10,355
Total stock-based compensation expense	$	5,386	$	6,087	$	11,046

For the years ended December 31, 2020, 2019 and 2018, tax benefits of $0.2 million, $0.1 million and $1.5 million, respectively, are associated with the stock-based compensation expense above.

The Company’s former President and Chief Executive Officer, Joseph Darling, passed away unexpectedly in January 2020. According to the terms of Mr. Darling’s equity award grants and the 2017 Plan, the unvested portion of his stock-based compensation was forfeited upon his death, resulting in a one-time benefit of $1.8 million that was fully recognized during the three-month period ended March 31, 2020 within selling, general and administrative expenses.

The decrease in stock-based compensation expense within the cost of revenue line item for the year ended December 31, 2019 is due to forfeitures associated with unvested stock option awards from the resignation of a former executive. Upon the retirement of the Company’s former Chief Executive Officer, Charles H. Sherwood, Ph.D., on March 9, 2018, all of his outstanding stock-based compensation awards vested in full and became exercisable in accordance with their terms, resulting in a one-time expense of $6.2 million that was fully recognized during the three-month period ended March 31, 2018.