9.    Stock Incentive Plan

 

The Company maintains the AxoGen 2010 Stock Incentive Plan, as amended and restated (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.  Additionally, at the 2017 Annual Meeting of Shareholders held on May 24, 2017, the AxoGen Plan was amended to increase the number of shares of common stock authorized for issuance under the AxoGen Plan to 7,700,000 shares.  At the 2017 Annual Meeting of Shareholders, the shareholders approved the adoption of the AxoGen 2017 Employee Stock Purchase Plan (the “2017 ESPP”), which allows for eligible employees to acquire shares of our common stock through payroll deductions at a discount from market value.  The 2017 ESPP authorized a total of 600,000 shares of our common stock with the first offering period expected to begin January 1, 2018.

 

The options granted 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 four years. Options typically have terms ranging from seven to ten years.

 

The Company recognized stock-based compensation expense of $919,026 and $293,575 for the three months ended September 30, 2017 and 2016, respectively, and $2,491,992 and $1,046,364 for the nine months ended September 30, 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 the Black-Scholes-Merton option-pricing model that uses 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 Company’s merger with LecTec Corporation in 2011 (the “Merger”), and based on the Company’s common stock for periods subsequent to the Merger. However, for options granted on and after 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 nine months ended September 30:

 

 

The Company granted stock options to purchase 635,525 shares of its common stock pursuant to the AxoGen Plan, for the nine months ended September 30, 2017.  The weighted average fair value of options granted at market during the nine months ended September 30, 2017 and 2016 was $6.77 and $3.00 per option, respectively

 

At September 30, 2017, the total future stock compensation expense related to non-vested awards is expected to be approximately $9,086,000.