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, and  at the 2017 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 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 beginning January 1, 2018.

 

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. Beginning in June 2017, options to employees typically vest 50% two years after the grant and 12.5% every six months thereafter for the remaining four-year period until fully vested after five years.  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 $3.6 million, $1.4 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015, 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 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 stock awards granted during the year ended December 31:

 

 

The weighted average fair value of options granted at market during 2017 and 2016 was $8.40 and $3.84 per option, respectively.

 

The following is a summary of stock award activity:

 

 

The intrinsic value of equity awards exercised during the years ended December 31, 2017 and 2016 was approximately $7.8 million and $1.5 million, respectively. The intrinsic value of equity awards outstanding at December 31, 2017 and 2016 was approximately $96.1 million and $17.7 million, respectively. The intrinsic value of equity awards exercisable at December 31, 2017 and 2016 was approximately $56.7 million and $12.9 million, respectively.  The increase in the intrinsic values of the equity awards was primarily the result of the increase in the Company’s stock price to $28.30 per share as of the last trading day for the year ended December 31, 2017 as compared to $9.00 per share for the year ended December 31, 2016.

 

Total future compensation expense related to nonvested awards is expected to be approximately $16.8 million at December 31, 2017 which is expected to be recognized over a weighted average period of 4.00 years. The following table represents non-vested share-based payment activity:

 

 

On December 18, 2017, the Compensation Committee of the Board of Directors approved a PSU to certain Company’s officers.  The performance measure is based on achieving 2019 specified revenues and the PSUs vest one-third each February 15, 2020, 2021 and 2022. The PSUs have payout opportunities of between 0% and 150%. The performance measure is a target revenue amount for the year ended December 31, 2019. 

 

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 18, 2017 PSU awards consisted of a total target award of 114,700 shares. The amount actually awarded will be based upon achievement of the performance measure and can range from 0 to 172,050, or up to 150% of the target award.  The grant date fair value of the common stock on December 18, 2017 was $27.00.   The total unrecognized future compensation expense related to this PSU assuming achievement of 100% of the target award is $3.1 million. 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 $4.6 million  as of December 31, 2017.

 

On December 18, 2017 the Compensation Committee of the Board of Directors also approved PSU awards to certain executives related to their work on the Company’s BLA.  The PSU awards consist of a targeted total award of 200,000 shares. The number of shares are allocated to certain milestones related to the BLA submission to and approval by the FDA.  The performance measure is based upon achieving each of the specific milestones and will vest 100% upon achieving each of the milestones. 

 

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 will record compensation expense as the milestones are achieved. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense will be 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 amount actually awarded will be based upon achievement of the performance measures and can range from 0 to 200,000 shares.  The grant date fair value of the common stock on December 18, 2017 was $27.00.  The total unrecognized future compensation expense related to this PSU, assuming achievement of 100% of the target award is $5.4 million. Assuming the minimum of 0% and the maximum of 100% payout opportunity for the PSU, the range of total future compensation expense related to this PSU award is between $0 and $5.4 million as of December 31, 2017.  

 

On December 29, 2017, 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 2,500 shares.  The grant date fair value of the common stock on December 29, 2017 was $28.30.   The amount actually awarded will be based upon achievement of certain quarterly revenue targets in 2018. Assuming a minimum of 0% and a maximum of 150% payout opportunity for the PSU, the range of future compensation expense related to this PSU award is between $0 and $106,000.