10. STOCK-BASED COMPENSATION

Employee Stock Purchase Plan

In July 2016, we commenced administration of the ANI Pharmaceuticals, Inc. 2016 Employee Stock Purchase Plan, which was approved by shareholders in our May 25, 2016 annual shareholder meeting. 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 six thousand, five thousand, and four thousand shares in the years ended December 31, 2019, 2018, and 2017, 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,
	2019		2018		2017
Cost of sales	$	18	$	11	$	6
Research and development		29		16		1
Selling, general, and administrative		100		75		61
	$	147	$	102	$	68

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, 2019, 0.4 million shares of our common stock remained available for issuance under the 2008 Plan.

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 included in our consolidated statements of operations:


	Years Ended December 31,
(in thousands)	2019		2018		2017
Cost of sales	$	101	$	87	$	86
Research and development		756		771		677
Selling, general, and administrative		8,213		5,822		5,259
	$	9,070	$	6,680	$	6,022

We recognized income tax benefits of $1.4 million, $1.2 million, and $0.6 million for stock-based compensation-related tax deductions in our 2019, 2018, and 2017 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 2019, 2018, and 2017, the fair value of each option grant was estimated using the Black-Scholes option-pricing model, using the following assumptions:


	Years Ended December 31,
	2019	2018	2017
Expected option life (years)	5.50 - 6.25	5.48 - 6.25	5.33 - 7.00
Risk-free interest rate	1.91% - 2.58%	2.64% - 2.93%	1.93% - 2.33%
Expected stock price volatility	63.1% - 66.7%	55.1% - 60.6%	50.3% - 57.4%
Dividend yield	—	—	—

We use the simplified method to estimate the 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 the closing prices of several competitors that manufacture similar products. 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.

In 2017, we granted options to two consultants. We used the Black-Scholes option-pricing model to determine the fair value of the option grants and the valuation of the grants were marked to market through December 31, 2018. In June 2018, the FASB issued guidance simplifying the accounting for nonemployee stock-based compensation awards (Note 1). We adopted this guidance as of January 1, 2019, therefore the nonemployee awards are measured at fair value as of the adoption date, and no longer marked to market.

A summary of stock option activity under the 2008 Plan during the years ended December 31, 2019, 2018, and 2017 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, 2016	578	$	39.28			8.2	$	12,928
Granted	207		51.66	$	27.04
Exercised	(13)		15.92					542
Forfeited	(5)		53.29
Expired	—		—
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 at 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
Exercisable at December 31, 2019	366	$	50.47			6.2	$	4,469

As of December 31, 2019, there was $8.9 million of total unrecognized compensation cost related to non-vested stock options granted under the 2008 Plan. The cost is expected to be recognized over a weighted-average period of 2.5 years. 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. During the year ended December 31, 2017, we received $0.2 million in cash from the exercise of stock options and recorded a $0.2 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, 2019, 2018, and 2017 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, 2016	63	$	45.72	2.2
Granted	50		49.51
Vested	(28)		44.49
Forfeited	—		—
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

As of December 31, 2019, there was $8.6 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 2.6 years.