9.    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 $848,589 and $182,955 for the three months ended March 31, 2017 and 2016, respectively, which consisted of compensation expense related to employee stock options, PSUs and RSUs 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 three months ended March 31:

 

 

The Company granted stock options to purchase 337,000 shares of its common stock pursuant to the AxoGen, Inc. 2010 Stock Incentive Plan, as amended, for the three months ended March 31, 2017.  The average fair value of options granted at market during the three months ended March 31, 2017 and 2016 was $10.55 and $5.13 per option, respectively

 

Total future stock compensation expense related to nonvested awards is expected to be approximately $6,824,000 at March 31, 2017.