10. 2012 Incentive compensation plan

On May 30, 2012, the Board of Directors of the Company approved and adopted the Company’s 2012 Incentive Compensation Plan (the “2012 Plan”), and the 2012 Plan was approved by a majority of the Company’s stockholders at the Company’s annual meeting held on August 29, 2012. The 2012 Plan is administered by the Compensation Committee of the Board of Directors, which consists only of independent, non-employee directors.

The 2012 Plan is a broad-based plan which allows for a variety of different types of awards, including (but not limited to) non-qualified stock options, incentive stock options, SAR, restricted stock, deferred stock and performance units, to be made to the Company’s executive officers, employees, consultants and directors. The 2012 Plan is intended to assist the Company in attracting and retaining exceptionally qualified employees, consultants and directors to support the sustained progress, growth and profitability of the Company.

Of the Company’s 1,530,925 shares initially made available and reserved for awards under the 2012 Plan, 790,865 shares have been granted under various awards as described below, and as of December 31, 2015, the Company had 740,060 shares of common stock available for future issuance under the 2012 Plan.

SAR award agreements

SAR awards are accounted for as equity, in accordance with ASC 718, Compensation — Stock Compensation, which states that options or similar instruments on shares shall be classified as liabilities if either the underlying shares are classified as liabilities or the entity can be required under any circumstance to settle the option or similar instrument by transferring cash or other assets. The Company’s underlying shares are classified as equity, and under the terms of the SAR Award Agreement, the Company must settle the exercised portion of the SAR in shares of the Company’s common stock. As such, the Company has accounted for the SAR as equity.

ASC 718, Compensation — Stock Compensation, was utilized in order to estimate the fair value of the SAR. The term “fair value” has been defined in Note 7, “Fair value of financial instruments.” ASC 718 requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award as of the grant date. That cost is then recognized over the period during which an employee is required to provide service in exchange for the award. The Company has computed compensation expense by applying the guidance stated in ASC 718, on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.

The Compensation Committee of the Board of Directors approved, and the Company granted the following SAR awards:


Award Description	Grant Date	Recipient	Award	Exercise Price	Expiration
SAR I	June 6, 2012	Chief Operating Officer (“COO”)	543,872 shares	$22.07	June 6, 2022
SAR II	October 19, 2015	Chief Financial Officer (“CFO”)	60,000 shares	$24.41	October 19, 2025

SAR awards entitle the recipients to receive, upon any exercise, a number of shares of the Company’s common stock equal to (i) the number of shares for which the SAR is being exercised multiplied by the value of one share of the Company’s common stock on the date of exercise (determined as provided in the SAR Award Agreement), (ii) less the number of shares for which the SAR is being exercised multiplied by the applicable exercise price, (iii) divided by the value of one share of the Company’s common stock on the date of exercise (determined as provided in the SAR Award Agreement). The exercised SAR is to be settled only in whole shares of the Company’s common stock, and the value of any fractional share of the Company’s common stock will be forfeited.

SAR I

The assumptions used for the measurement of the expense for SAR I included an expected term of 6.0 years, a risk-free interest rate of 0.92%, an anticipated volatility factor of 55.0% and a zero dividend yield. The resulting valuation as of the SAR I grant date was discounted by 15%, reflecting an assessment of the then trading activity of the Company’s common stock (and by extension SAR I). The suggested value from the Black Scholes method reflected a fully marketable security that was not burdened by limited marketability; however, at that time, the Company’s common stock (and by extension SAR I) did not have regular trading activity. Therefore, the Company considered it necessary to incorporate a discount to reflect the limited liquidity associated the SAR I. This approach was consistent with that utilized to value the Company’s Private Placement Warrants at that time. The resulting fair value of SAR I was $3.31 per underlying share. The compensation expense for this SAR I was initially determined to approximate $1.8 million which amount was recognized from the grant date through June 6, 2015.

On June 5, 2015, the Company and the COO agreed to defer the vesting of the remaining unvested portion of the SAR I granted for 30 days until July 6, 2015 pursuant to an amendment to the initial SAR I. On July 6, 2015, the Company and COO entered into a SAR and Bonus Agreement which amended SAR I by extending the vesting period applicable to the remaining unvested portion of SAR I. The unvested portion covers 181,290 underlying shares of the Company’s common stock which, prior to the amendment, would have vested on June 6, 2015. The amendment extended the vesting of these shares to June 6, 2017 with respect to 100,000 underlying shares of the Company’s common stock and to June 6, 2019 with respect to the remaining 81,290 shares of underlying Company common stock (in each case subject to forfeiture upon termination of employment by the Company for “Cause” (as defined in the SAR and Bonus Agreement)). The SAR and Bonus Agreement also provides the COO with an annual bonus in the amount of $250,000 for each of calendar years 2016, 2017, 2018 and 2019 as long as the conditions of the SAR I agreement are met and subject to forfeiture under certain circumstances enumerated in the SAR I agreement.

The extension of the vesting period described above resulted in an additional expense attributable to the fair value of the unrecognized compensation expense of the SAR I and was estimated at $333,000 using the Black-Scholes option pricing model. The inputs of the Black-Scholes option pricing model included the fair value of the Company’s common stock, exercise price, risk-free interest rate, estimated price volatility, term and dividend yield as follows: a fair value of $51.14, an exercise price of $22.07, a risk-free interest rate of 1.53%, an expected term of 4.9 years, an anticipated volatility factor of 50.0% and a zero dividend yield. The resulting fair value of the extension was $1.54 per underlying share.

This additional expense will be recognized during the remaining vesting period through June 6, 2019. Including the amendment discussed above, the total SAR I expense is expected to be approximately $2,133,000 from initial grant through the final vesting date in 2019. As of December 31, 2015, there was approximately $259,000 of total unrecognized compensation expense related to the SAR I.

In the years ended December 31, 2015, 2014 and 2013, the Company recognized approximately $160,000, $329,000 and $907,000, respectively, of compensation expense in connection with SAR I. During the year ended December 31, 2014, a portion of the shares that vested on June 6, 2014 were exercised. During the year ended December 31, 2013, the portion of shares that vested on June 6, 2013 were fully exercised. The impact of this transaction on the Company’s issued capital is described in Note 11, “Stockholders’ equity.”

SAR II

The assumptions used for the measurement of the expense for SAR II included fair value of the Company’s common stock of $24.41, an exercise price of $24.41, an expected term of 7.25 years, a risk-free interest rate of 1.76%, an anticipated volatility factor of 50.0% and a zero dividend yield. The resulting fair value of SAR II was $12.96 per underlying share. SAR II vests ratably and becomes exercisable with respect to one-fourth of the covered shares annually beginning on the third anniversary of the SAR II grant date.

In the year ended December 31, 2015, the Company initially recognized approximately $37,000, of compensation expense in connection with SAR II, and no similar expense in 2014 or 2013. As of December 31, 2015, there was approximately $740,000 of total unrecognized compensation expense related to the SAR II granted under the 2012 Plan. As of December 31, 2015, the weighted-average period over which the unrecognized compensation cost is expected to be recognized is approximately 6.0 years.

Restricted stock awards

The Compensation Committee of the Board of Directors approved, and the Company granted, shares of Company restricted stock (“Restricted Stock”) to various employees pursuant to the 2012 Plan and subject in each case to a Restricted Stock Award Agreement (“Restricted Stock Award Agreement”). Restricted stock activity consisted of the following for the years ended December 31:


	Shares			Weighted Average Grant Date Fair Value
December 31, 2013		162,993		$	39.29
Granted		23,000			71.47
Forfeited		(12,000	)		60.44
Vested		(19,742	)		41.89

December 31, 2014		154,251		$	42.18
Granted		1,000			28.48
Forfeited		(800	)		65.51
Vested		(24,207	)		42.63

December 31, 2015		130,244		$	41.77

There was no Restricted Stock activity prior to December 31, 2013 with the exception of the initial 162,993 share grant. These shares of Restricted Stock vest in various increments and periods over a maximum of ten years from the date the stock was granted as defined under the applicable Restricted Stock Award Agreement. In the years ended December 31, 2015, 2014 and 2013, the Company recognized approximately $989,000, $925,000 and $361,000, respectively, of compensation expense in connection with the Restricted Stock granted under the 2012 Plan. The fair value of restricted stock that vested during 2015 and 2014 was approximately $1,101,000 and $1,408,000, respectively. As of December 31, 2015, there was approximately $4,882,000 of total unrecognized compensation expense related to the Restricted Stock granted under the 2012 Plan. As of December 31, 2015, the weighted-average period over which the unrecognized compensation cost is expected to be recognized is approximately 6.0 years.