14. Equity Incentive Plan

 

On July 12, 2013, the Company’s stockholders approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”) and the reservation of 2,500,000 shares of the Company’s common stock for issuance under the 2013 Plan. The 2013 Plan is intended to promote the interests of the Company and its stockholders by providing the Company’s employees, directors and consultants with incentives and rewards to encourage them to continue in the Company’s service and with a proprietary interest in pursuing the Company’s long-term growth, profitability and financial success. Equity awards available under the 2013 Plan include stock options, stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units, share-denominated performance units and cash awards. The 2013 Plan is administered by the compensation committee of the board of directors of the Company, which has the authority to designate the employees, consultants and members of the board of directors who will be granted awards under the 2013 Plan, to designate the amount, type and other terms and conditions of such awards and to interpret any and all provisions of the 2013 Plan and the terms of any awards under the 2013 Plan. The 2013 Plan will terminate on the tenth anniversary of its effective date.

 

There were no new equity awards granted during the year ended December 31, 2015. On April 11, 2016, the Company cancelled the 850,000 vested options which were granted on August 13, 2013 and held by the Company’s chairman of the board. In addition, on April 11, 2016, the Company granted new equity awards under the Company’s 2013 Equity Incentive Plan to senior executives in two tranches, tranche A and tranche B.  The 960,000 tranche A stock options have a vesting base date of the employee’s start date, while the 740,000 tranche B stock options have a vesting base date of April 11, 2016. All the new options have an exercise price of $1.00 and a three year service requirement with 1/3 of the options vesting on the anniversary of the vesting base date, except in the case of the tranche A options granted to the Company’s chief executive officer, which vest monthly over a 36-month period beginning on July 22, 2014. In addition, all the new stock options have a 10-year term and the Black-Scholes model was used to measure the fair value of the stock-based compensation awards. Also on April 11, 2016, the Company cancelled the 500,000 vested and unvested options that were granted on July 22, 2014 to the Company’s CEO in connection with the issuance of the CEO’s new tranche A and tranche B options. For accounting purposes, the transaction was treated as a modification of the original options resulting in $23 thousand of amortization expense for the catch-up adjustment on the modification date.

 

The amortization expense associated with stock options during the years ended December 31, 2016 and 2015 were $0.9 million and $1.6 million, respectively.  The unamortized cost of the options at December 31, 2016 was $0.7 million, to be recognized over a weighted-average remaining life of 1.5 years. At the years ended December 31, 2016 and 2015, 960,000 and 1,166,128 shares of the options were exercisable. In addition, there was no intrinsic value associated with the options as of December 31, 2016. The weighted-average remaining contractual life of the options outstanding is 7.2 years.

 

A summary of the changes in outstanding stock options under all equity incentive plans is as follows:

 

 

Following is a summary of compensation expense recognized for the issuance of stock options and restricted stock grants for the years ended December 31, 2016 and 2015:

 

 

The Company computed the estimated fair values of stock options using the Black-Scholes model. These values were calculated using the following assumptions:

 

 

Expected Term:     The Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment behavior, so we estimate the expected term of awards granted by taking the average of the vesting term and the contractual term of the awards, referred to as the simplified method.

 

Volatility:     The expected volatility being used is based on a blend of comparable small- to mid-size public companies serving similar markets.

 

Risk Free Interest Rate:     The risk free interest rate is based on the U.S. Treasury’s zero coupon issues with remaining terms similar to the expected term on the award.

 

Dividend Yield:     The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

 

Forfeitures:     As we do not have sufficient historical information to develop reasonable expectations about forfeitures, we currently apply actual forfeitures.