10. Stock-Based Compensation Expense

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. For public business entities, the amendments in this standard are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company implemented the standard on January 1, 2017 and the standard did not have a material impact on the Company’s financial statements as:

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The Company, as of December 31, 2016, had not recognized $11.6 million of excess tax benefits related to windfalls. As a result of adoption, it will now recognize these benefits as deferred tax assets. However, after assessment for realizability, the Company has also recorded a full valuation allowance against the deferred tax assets. This resulted in a zero cumulative effect adjustment to accumulated deficit as a result of the adoption. All shortfalls related to non-qualified options and restricted stock units are now recorded as an income tax expense for the period, offset by a full valuation allowance.

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Due to the full valuation allowance for the Company’s deferred tax assets, the excess income tax benefits have never been recorded in additional paid-in-capital. The Company does not contemplate any impact going forward as any amounts to be recorded in the condensed consolidated statements of operations would be fully offset by the valuation allowance nor result in a related classification in cash flows for operating activities.

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The Company will continue to recognize forfeitures through estimates consistent with our past practices as opposed to when they occur.

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The Company already classifies cash paid to taxing authorities arising from the withholding of shares from employees in cash flows from financing activities.

Total stock-based compensation expense recognized in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Stock-based compensation		1,247	$	1,502		3,763	$	4,130

During the three months ended September 30, 2017, the Company issued 34,720 restricted units to certain employees which vest over a four-year period. The grant date fair value of the restricted stock units was $0.05 million with a weighted average grant date fair value per share of $1.47.

During the three months ended September 30, 2017, the Company granted certain employees stock options to purchase an aggregate of 400,300 shares of common stock at a weighted average exercise price of $1.47 per share of which 360,200 of these awards vest in four equal tranches upon the achievement of certain product sales targets. The remaining 40,100 options vest over a four year period. The grant date fair value of these awards is $0.4 million with a weighted average grant date fair value of $1.06 per share, as determined using a Black-Scholes option pricing model.

As of September 30, 2017, there was $3.5 million, $3.9 million and $3.2 million of unrecognized compensation expense related to restricted stock units, options with performance conditions and options that vest over the vesting period. The Company evaluates stock awards with performance conditions as the probability that the performance conditions will be met and uses that information to estimate the date at which those performance conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period.

On a periodic basis and as of September 30, 2017, the Company reviewed the probability of achieving the performance conditions for each of the four vesting tranches of the performance-based stock options that were granted during 2017 and in prior years and determined that it was probable that the Company would achieve the first vesting tranche in December 2017. Therefore, the Company recorded compensation expense related to performance-based stock options of $0.2 million and $0.9 million during the three and nine months ended September 30, 2017, respectively. The Company further determined that no compensation costs would be recognized for the second, third and fourth vesting tranches as the probability of achieving those performance conditions has not been determined.