STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2020

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

10. STOCK-BASED COMPENSATION

Employee Stock Purchase Plan

In July 2016, we commenced administration of the ANI Pharmaceuticals, Inc. 2016 Employee Stock Purchase Plan. The Board of Directors and shareholders approved a maximum of 0.2 million shares of common stock, which were reserved and made available for issuance under the ESPP. Under the ESPP, participants can purchase shares of our stock at a 15% discount. We issued 13 thousand, six thousand, and five thousand shares in the years ended December 31, 2020, 2019, and 2018, respectively.

The following table summarizes ESPP expense incurred under the 2016 Employee Stock Purchase Plan and included in our accompanying consolidated statements of operations:

(in thousands)	Years Ended December 31,
	2020		2019		2018
Cost of sales	$	21	$	18	$	11
Research and development		36		29		16
Selling, general, and administrative		123		100		75
	$	180	$	147	$	102

Stock Incentive Plan

All equity-based service awards are granted under the ANI Pharmaceuticals, Inc. Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”). As of December 31, 2020, 1.1 million shares of our common stock remained available for issuance under the 2008 Plan.

On September 8, 2020, we granted 179,643 stock options to our President and Chief Executive Officer, through an inducement grant outside of our 2008 Plan to induce him to accept employment with us (the “Inducement Grant”). The options were granted at an exercise price equal to the fair market value of a share of our common stock on the respective grant date and will be exercisable in four equal annual installments beginning on the first anniversary of the respective grant date. The grant was made pursuant to inducement grants outside of our shareholder approved equity plan as permitted under the Nasdaq Stock Market listing rules.

We measure the cost of equity-based service awards based on the grant-date fair value of the award. The cost is recognized ratably over the period during which an employee is required to provide service in exchange for the award or the requisite service period. We recognize stock-based compensation expense ratably over the vesting periods of the awards.

The following table summarizes stock-based compensation expense incurred under the 2008 Plan and Inducement Grant and included in our consolidated statements of operations:

	Years Ended December 31,
(in thousands)	2020		2019		2018
Cost of sales	$	115	$	101	$	87
Research and development		561		756		771
Selling, general, and administrative		12,080		8,213		5,822
	$	12,756	$	9,070	$	6,680

We recognized income tax benefits of $1.6 million, $1.4 million, and $1.2 million for stock-based compensation-related tax deductions in our 2020, 2019, and 2018 consolidated statements of operations, respectively.

Stock Options

Outstanding stock options granted to employees and consultants generally vest over a period of four years and have 10-year contractual terms. Outstanding stock options granted to non-employee directors generally vest over a period of one to four years and have 10-year contractual terms. Upon exercise of an option, we issue new shares of our common stock or issue shares from treasury stock.

For 2020, 2019, and 2018, the fair value of each option grant was estimated using the Black-Scholes option-pricing model, using the following assumptions:

	Years Ended December 31,
	2020	2019	2018
Expected option life (years)	5.50 - 6.25	5.50 - 6.25	5.48 - 6.25
Risk-free interest rate	0.31% - 1.63%	1.91% - 2.58%	2.64% - 2.93%
Expected stock price volatility	49.2% - 51.2%	63.1% - 66.7%	55.1% - 60.6%
Dividend yield	—	—	—

We use the simplified method to estimate the expected option life of options. The risk-free interest rate used is the yield on a U.S. Treasury note as of the grant date with a maturity equal to the estimated life of the option. We calculated an estimated volatility rate based on our historical stock price. We have not issued a cash dividend in the past nor do we have any current plans to do so in the future; therefore, an expected dividend yield of zero was used.

A summary of stock option activity under the 2008 Plan and Inducement Grant during the years ended December 31, 2020, 2019, and 2018 is presented below:

				Weighted		Weighted
				Average		Average
		Weighted		Grant-		Remaining
(in thousands, except per share and	Option	Average		date		Term	Aggregate
remaining term data)	Shares	Exercise Price		Fair Value		(years)	Intrinsic Value
Outstanding December 31, 2017	767	$	42.93			7.8	$	16,785
Granted	156		57.60	$	31.76
Exercised	(142)		19.47					5,863
Forfeited	(18)		60.17
Expired	(4)		74.53
Outstanding December 31, 2018	759	$	49.74			7.6	$	2,221
Granted	160		65.97	$	40.14
Exercised	(130)		41.99					3,335
Forfeited	(31)		56.66
Expired	(1)		54.36
Outstanding at December 31, 2019	757	$	54.21			7.2	$	6,761
Granted	231		30.29	$	14.39
Exercised	(8)		36.81					216
Forfeited	(44)		54.54
Expired	—		—
Outstanding at December 31, 2020	936	$	48.44			7.1	$	372
Exercisable at December 31, 2020	571	$	53.06			5.9	$	347

As of December 31, 2020, there was $6.0 million of total unrecognized compensation cost related to non-vested stock options granted under the 2008 Plan and Inducement Grant. The cost is expected to be recognized over a weighted-average period of 2.6 years. During the year ended December 31, 2020, we received $0.3 million in cash from the exercise of stock options and recorded a $43 thousand tax provision related to these exercises. During the year ended December 31, 2019, we received $5.5 million in cash from the exercise of stock options and recorded a $0.7 million tax benefit related to these exercises. During the year ended December 31, 2018, we received $2.8 million in cash from the exercise of stock options and recorded a $0.6 million tax benefit related to these exercises.

Restricted Stock Awards

Restricted stock awards (“RSAs”) granted to employees generally vest over a period of four years. RSAs granted to non-officer directors generally vest over a period of one year.

Shares of our common stock delivered to employees and directors will be unrestricted upon vesting. During the vesting period, the recipient of the restricted stock has full voting rights as a stockholder and would receive dividends, if declared, even though the restricted stock remains subject to transfer restrictions and will generally be forfeited upon termination of the officer prior to vesting. The fair value of each RSA is based on the market value of our stock on the date of grant.

A summary of RSA activity under the Plan during the years ended December 31, 2020, 2019, and 2018 is presented below:

		Weighted
		Average Grant		Weighted Average
(in thousands, except per share and		Date Fair		Remaining Term
remaining term data)	Shares	Value		(years)
Unvested at December 31, 2017	85	$	48.34	2.6
Granted	65		58.11
Vested	(33)		47.34
Forfeited	—		—
Unvested at December 31, 2018	117	$	54.04	2.1
Granted	122		66.39
Vested	(42)		54.77
Forfeited	(5)		62.63
Unvested at December 31, 2019	192	$	61.46	2.6
Granted	305		44.42
Vested	(127)		58.88
Forfeited	(18)		51.53
Unvested at December 31, 2020	352	$	48.14	2.7

As of December 31, 2020, there was $12.6 million of total unrecognized compensation cost related to non-vested RSAs granted under the Plan, which is expected to be recognized over a weighted-average period of 2.7 years.

On January 17, 2020, we entered into employment agreements with our Named Executive Officers (“NEOs”) at that time. As part of the employment agreements, the NEOs’ Non-Statutory Stock Option, Incentive Option and Restricted Stock Grant agreements (“NEO Stock Agreements”) were modified to provide for accelerated vesting of unvested non-statutory stock options and restricted stock awards in the event of a termination for any reason other than "cause" as defined in the employment agreements or by the NEOs for “good reason” as defined in the employment agreements. Additionally, any vested incentive or non-statutory stock options and unvested non-statutory stock options subject to acceleration and held unexercised by the NEOs at the time of such termination at the time will retain their contractual term, which is generally 10 years from grant date. At this time, we did not recognize any incremental stock-based compensation expense associated with these modifications, as no assumptions regarding the assumed probability of these awards' future vests were changed on this modification date.

In May 2020, our former President and Chief Executive Officer departed the Company. The departure constituted a Termination Without Good Cause as defined in his employment agreement, and he received separation payments and benefits under his employment agreement in respect of a termination without good cause, including those related to his non-statutory stock options and restricted stock awards as discussed above. This action was accounted for as a modification of the underlying awards and the full expense related to the modified awards was recognized in the second quarter 2020. As part of the benefits, 48,448 previously unvested restricted stock awards and 63,305 previously unvested non-statutory stock options vested upon the termination. Additionally, these 63,305 previously unvested non-statutory stock options that vested upon termination and 101,376 previously

vested and unexercised non-statutory stock options retained their original contractual term. Upon the Termination Without Good Cause, we recognized $3.4 million of stock-based compensation expense associated with this termination and modification of awards.