10.Stock Incentive Plan

 

The Company maintains the AxoGen 2010 Stock Incentive Plan, as amended (the “AxoGen Plan”), which allows for issuance of incentive stock options, non-qualified stock options, performance stock units (PSU) and restricted stock awards (RSU) to employees, directors and consultants at exercise prices not less than the fair market value at the date of grant.  At the 2016 Annual Meeting of Shareholders the AxoGen Plan was amended to increase the number of shares of common stock authorized for issuance under the AxoGen Plan to 5,500,000 shares. 

 

Under the terms of the Company’s merger with with LecTec Corporation in 2011 (the “Merger”), options granted under the AC 2002 Stock Option Plan (the “AC Plan”) were assumed by the Company so that each stock option pursuant to the AC Plan was converted to the AxoGen Plan at a ratio of 1.00 to 0.0372734 for both the number and exercise price of each stock option.

 

The options to employees typically vest 25% one year after the grant date and 12.5% every six months thereafter for the remaining three-year period until fully vested after four years and those to directors and certain executive officers have vested 25% per quarter over one year or had no vesting period. Options issued to consultants have vesting provisions based on the engagement ranging from no vesting to vesting over the service period ranging from three to ten years. Options have terms ranging from seven to ten years.

 

The Company recognized stock-based compensation expense of $1,390,277 and $1,316,509 for the years ended December 31, 2016 and 2015, respectively, which consisted of compensation expense related to employee stock options based on the value of share-based payment awards that are ultimately expected to vest during the period. 

 

The Company estimates the fair value of each option award issued under such plans on the date of grant using a Black-Scholes-Merton option-pricing models that use the assumptions noted in the table below. The Company estimates the volatility of its common stock at the date of grant based on the volatility of comparable peer companies which are publicly traded, for the periods prior to the Merger, and based on the Company’s common stock for periods subsequent to the Merger. However for options granted on December 29, 2016 the Company began using a Multiple Point Black Scholes option-pricing model which uses a weighted average of historical volatility and peer company volatility. The Company determines the expected life giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award.

 

The Company used the following weighted-average assumptions for options granted during the year ended December 31:

 

 

 

The average fair value of options granted at market during 2016 and 2015 was $7.67 and $4.31 per option, respectively

 

The following is a summary of stock option activity:

 

 

*Includes 25,000 options granted during the year ended December 31, 2016 which are contingent upon Optionee’s re-election to the Company’s Board of Directors at the 2017 Annual Meeting of Shareholders. 

 

The intrinsic value of options exercised during the years ended December 31, 2016 and 2015 was approximately $1,496,000 and $370,000, respectively. The intrinsic value of options outstanding at December 31, 2016 and 2015 was approximately $17,729,000 and $5,167,000, respectively. The intrinsic value of options exercisable at December 31, 2016 and 2015 was approximately $12,894,000 and $4,265,000, respectively.

 

Total future compensation expense related to nonvested awards is expected to be approximately $5,800,000 at December 31, 2016 which is expected to be recognized over a weighted average period of 2.71 years. The following table represents non-vested share-based payment activity with employees for the years ended December 31, 2016 and 2015:

 

 

On December 29, 2016, the Compensation Committee of the Board of Directors approved a PSU to certain Company’s officers, excluding the Vice President of Sales who received a separate PSU award.  The performance measure is based on achieving 2018 specified revenues and the PSUs vest one-third each February 15, 2019, 2020 and 2021. The PSUs have payout opportunities of between 0% and 150%. The performance measure is a target revenue amount for the year ended December 31, 2018. 

 

The Company estimated the fair value of the PSUs based on its closing stock price at the time of grant and its estimate of achieving such performance target and records compensation expense on a graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted based upon the Company’s estimate of achieving such performance target. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable PSU award agreement. 

 

The December 29, 2016 PSU awards consisted of a total target award of 133,500 shares. The amount actually awarded will be based upon achievement of the performance measure and can range from 0 to 200,250, or up to 150% of the target award.  The grant date fair value of the common stock on December 29, 2016 was $8.95.   The total unrecognized future compensation expense related to this PSU assuming achievement of 100% of the target award is $1,194,825.  Assuming the minimum of 0% and the maximum of 150% payout opportunity for the PSU, the range of total future compensation expense related to this PSU award is between $0 and $1,792,238 as of December 31, 2016.  

 

On December 29, 2016, the Compensation Committee of the Board of Directors approved a separate PSU award to the Company’s Vice President of Sales.  This award amounted to a target payout of 28,600 shares.  The grant date fair value of the common stock on December 29, 2016 was $8.95.   The amount actually awarded will be based upon achievement of certain quarterly revenue targets in 2017.  Assuming a minimum of 0% and a maximum of 100% payout opportunity for the PSU, the range of future compensation expense related to this PSU award is between $0 and $255,970. 

 

Also on December 29, 2016, the Compensation Committee of the Board of Directors approved a RSU grant consisting of 40,000 shares to the Company’s CEO.  The shares will vest upon the CEO’s continuous employment through January 1, 2020.  The Company estimates the fair value of the RSU based on its closing stock price at the time of grant, which was $8.95.  The future compensation expense related to this RSU is $358,000 and will be recorded as compensation expense on a straight line basis over the three years ended December 31, 2019.