Note 10 — Stock Incentives

In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which changes the accounting for certain aspects of share-based payment to employees. ASU 2016-09 became effective for the Company on January 1, 2017. The primary impact of adoption was the recognition of excess tax benefits in the provision for income taxes rather than paid-in capital beginning in the first quarter of 2017. Upon adoption of this standard, excess tax benefits were classified along with other income tax cash flows as an operating activity on the statement of cash flows. The Company elected to adopt this portion of the standard on a prospective basis beginning in 2017; therefore, prior periods have not been adjusted. Under the standard, cash flows related to employee taxes paid for withheld shares are presented as a financing activity on the statement of cash flows on a retrospective basis. ASU 2016-09 provides an accounting policy election to account for forfeitures as they occur, and the Company opted for this election. No other aspects of ASU 2016-09 had an effect on the Company's unaudited consolidated interim financial statements or related footnote disclosures. Adoption of ASU 2016-09 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2014, the Orchids Paper Products Company 2014 Stock Incentive Plan (the “2014 Plan”) was approved. The 2014 Plan replaced the Orchids Paper Products Company 2005 Stock Incentive Plan (the “2005 Plan”) and provides for the granting of stock options and other stock based awards to employees and Board members selected by the Board’s Compensation Committee. A total of 400,000 shares may be issued pursuant to the 2014 Plan. As of September 30, 2017, there were 49,575 shares available for issuance under the 2014 Plan.

Stock Options with Time-Based Vesting Conditions

The grant date fair value of the following option grants was estimated using the Black-Scholes option valuation model. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The following table details the options granted to certain members of the Board of Directors and management that were valued using the Black-Scholes valuation model and the assumptions used in the valuation model for those grants during the nine months ended September 30, 2017 and 2016. There were 13,500 options exercised during the nine months ended September 30, 2017, with a weighted average exercise price of $9.91.

Grant	Number		Exercise		Grant Date		Risk-Free			Estimated			Dividend			Expected
Date	of Shares		Price		Fair Value		Interest Rate			Volatility			Yield			Life (years)
July 2017		76,500	$	12.22	$	2.31		1.94% - 2.08	%		33.7% - 33.9	%		5.12% - 5.15	%		5 yrs to 6 yrs
May 2017		40,000	$	19.945	$	3.40		1.81	%		32	%		5.26	%		5
September 2016		20,000	$	28.48		$4.28 - $4.83		1.21% - 1.50	%		29% - 31	%		4.92	%		5 yrs to 7 yrs
May 2016		40,000	$	31.33	$	7.57		1.74	%		40	%		4.47	%		5
January 2016		5,000	$	27.77	$	6.56		2.00	%		40	%		5.04	%		5

The Company expenses the cost of these options granted over the vesting period of the option based on the grant-date fair value of the award.

Stock Options with Market-Based Vesting Conditions

There were no options with market-based vesting conditions granted during the nine months ended September 30, 2017 or 2016. During the nine months ended September 30, 2016, 22,500 options with market-based vesting conditions vested when the Company’s stock price closed above $34.788 per share for three consecutive business days. Additionally, 1,875 options and 20,550 options with market-based vesting conditions were forfeited during the nine months ended September 30, 2017 and 2016, respectively, when employees left the Company.

The Company expenses the cost of these options granted over the implicit, or derived, service period of the option based on the grant-date fair value of the award.

Options Issued Outside of the 2014 Plan

There were no stock options granted outside of the 2014 Plan during the nine months ended September 30, 2017 or 2016. During the nine months ended September 30, 2016, 100,000 options with market-based vesting conditions vested when the Company’s stock price closed above $34.788 per share for three consecutive business days.

Total Option Expense

The Company recognized the following expenses related to all options granted under the 2005 Plan, the 2014 Plan and outside of the 2014 Plan:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(In thousands)				(In thousands)
Time-based vesting options	$	103	$	47	$	298	$	409
Market-based vesting options		(4)		22		67		191
Total compensation expense related to stock options	$	99	$	69	$	365	$	600

Restricted Stock

In February 2013, the Company granted 16,000 shares of restricted stock to certain employees under the 2005 Plan. These awards were valued at the arithmetic mean of the high and low market price of the Company’s stock on the grant date, which was $21.695 per share, and vested ratably over a three-year period beginning on the first anniversary of the grant date. The final third of unforfeited shares, or 2,000 shares, vested in February 2016. The Company expensed the cost of restricted stock granted over the vesting period of the shares based on the grant-date fair value of the award. The Company recognized expense of $4,000 for the nine months ended September 30, 2016, related to shares of restricted stock granted.