Stock-Based Compensation

The Company has the 2012 Plan, which authorizes the granting of a variety of different types of awards including, but not limited to, non-qualified stock options, incentive stock options, Stock Appreciation Rights (“SARs”), Restricted Stock Awards (“RSAs”), deferred stock and performance units to its executive officers, employees, consultants and Directors. The 2012 Plan is administered by the Compensation Committee of the Board.

Under the 2012 Plan, 830,925 shares were initially made available for awards, with 700,000 additional shares added to the 2012 Plan in 2013. Forfeited shares are added back to the pool of shares available for future awards.

As of December 31, 2017, the Company had 567,311 shares available for issuance of future awards.

SAR Award Agreements

SAR awards entitle the recipients to receive, upon exercise, a number of shares of the 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 Common Stock on the date of exercise (determined as provided in the SAR award agreement), less (ii) the number of shares for which the SAR is being exercised multiplied by the applicable exercise price, divided by (iii) by the value of one share of the 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 Common Stock, and the value of any fractional share of Common Stock is forfeited.

For all SAR award assumptions, the Company used rates on the grant date of zero-coupon government bonds with maturities over periods covering the term of the awards, converted to continuously compounded forward rates. Volatility is measured as the amount by which a financial variable such as a share price is expected to fluctuate during a period. The Company considered the historical volatility of its stock price over a term similar to the expected life of the awards in determining expected volatility. The expected term is the period that the awards granted are expected to remain outstanding. The Company has never declared or paid a cash dividend on its Common Stock and has no plans to pay cash dividends in the foreseeable future.

2012 SAR award

In June 2012, the Company’s then Chief Operating Officer (“COO”) was granted a SAR award (“2012 SAR award”) for 543,872 shares at a strike price per share of $22.07. The 2012 SAR award was to vest and become exercisable ratably on each of the first three anniversaries of the grant date and had a ten-year contractual term. In addition, the SAR award included a market condition by which the SAR shares were not exercisable until the last of any seven Valuation Dates (as defined in the SAR award agreement) within any period of ten or fewer consecutive Valuation Dates that commenced after the grant date and prior to the expiration date on each of which the market value per share of Common Stock was at least $22.07. This market condition was met during the first quarter of 2013.

The fair value of the SAR award was determined using the Black-Scholes option valuation pricing model. This fair value would approximate a valuation under a Monte Carlo simulation model, as the derived service period is substantially shorter than the effective term used in the Black-Scholes model. The suggested value from the Black-Scholes method reflected a fully marketable security that was not affected by limited marketability. The Common Stock was not actively traded, and accordingly the valuation was discounted by 15%. The resulting fair value of the 2012 SAR award was $3.31 per share.

The assumptions used for valuing the SARs granted in 2012 included the following:



Assumptions	2012 SARs
Market closing price of the Common Stock	$	16.50
Exercise price	$	22.07
Risk-free interest rate	0.92		%
Expected volatility	55.0		%
Expected term	6 years
Dividend yield	—		%

Total compensation expense for the 2012 SAR award was initially determined to be $1.8 million. The Company recognized expense 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 (graded vesting attribution method). As the 2012 SAR award included both a market and a service condition, the Company used the longest of the periods to define its requisite service period in each separately vesting portion or tranche. Using a Monte Carlo analysis, the Company determined that 1.78 years was the likely period until the market condition would be met. As a result, compensation expense for the first tranche was computed on a straight-line basis over the derived service period of 1.78 years. The second and third tranches were computed on a straight-line basis over the explicit service periods. With the market condition being met in the first quarter of 2013, the remaining unrecognized compensation expense for the first tranche was accelerated.

In June 2015, prior to the third tranche vesting, the Company and the recipient agreed to defer the vesting of the remaining 181,290 unvested SAR shares for 30 days. In July 2015, the Company and recipient entered into a SAR and Bonus Agreement, which amended the 2012 SAR award by extending the vesting period applicable to the remaining unvested SAR shares with 100,000 vesting in June 2017 and 81,290 vesting in June 2019. The SAR and Bonus Agreement also limited the sale of any vested SAR shares to no more than $0.8 million within a six-month period without the written consent of the Company’s Compensation Committee and provided the recipient with an annual bonus of $0.3 million for each of calendar years 2019, 2018, 2017 and 2016, as long as the conditions of the 2012 SAR award agreement were met, including the service conditions, and subject to forfeiture under certain circumstances enumerated in the 2012 SAR award agreement.

The Company measured incremental compensation cost related to the amendment by comparing the fair value of the modified award to the fair value of the original award immediately before the modification. Primarily based on differences in risk-free interest rates, it was determined that the modification resulted in incremental compensation expense of $1.84 per SAR share, or $0.3 million in aggregate.

The assumptions used for valuing the incremental compensation related to the modification included the following:



Assumptions	Pre-Modification			Post-Modification
Market closing price of the Common Stock	$	53.64		$	51.13
Exercise price	$	22.07		$	22.07
Risk-free interest rate	1.10		%	1.53		%
Expected volatility	50.0		%	50.0		%
Expected term	3.5 years			4.9 years
Dividend yield	—		%	—		%
Fair value of the Common Stock	$	31.97		$	33.81

During 2013, the first tranche of 181,291 SAR shares that vested in June 2013 was exercised. During 2014, 120,000 of the 181,291 SAR shares that vested in June 2014 were exercised.

In 2015 and 2014, the Company recognized compensation expense of $0.2 million and $0.3 million, respectively, in “Selling, general and administrative expenses” related to the 2012 SAR award.

In the second quarter of 2016, with the recipient's termination of employment with the Company, 61,291 of unexercised SAR shares expired, 181,290 of unvested shares were forfeited, and $0.1 million of previously recognized expense, related to the incremental stock compensation expense, was reversed.

2015 SAR award

In October 2015, the Company’s then Chief Financial Officer was granted a SAR award (“2015 SAR award”) for 60,000 SAR shares at a strike price per share of $24.41. The 2015 SAR award was to vest and become exercisable with respect to one-fourth of the covered shares annually beginning on the third anniversary of the grant date. The 2015 SAR award had a ten-year contractual term.

The assumptions used for valuing the SARs granted in 2015 included the following:



Assumptions	2015 SARs
Market closing price of the Common Stock	$	24.41
Exercise price	$	24.41
Risk-free interest rate	1.76		%
Expected volatility	50.0		%
Expected term	7.25 years
Dividend yield	—		%

The resulting fair value of the 2015 SAR award was $12.96 per underlying share.

In 2016, the Company recognized compensation expense of $0.1 million in “Selling, general and administrative expenses” in connection with the 2015 SAR award. In 2015, the compensation expense was immaterial. In the first quarter of 2017, as a result of the resignation of the recipient, 60,000 unvested shares were forfeited, and $0.2 million of previously recognized expense was reversed.

2016 SAR awards

In 2016, the Company granted 106,800 SAR awards to various employees. In February 2016, the Company initiated cost reduction efforts, which included salaried head count reductions, salaried wage reductions and hourly furlough programs. In connection with the cost reduction efforts, the Company granted 103,350 SAR awards as a retention incentive for certain employees impacted by these efforts (“February 2016 SAR awards”).

The assumptions used for valuing the February 2016 SAR awards included the following:



Assumptions	February 2016 SAR awards
Market closing price of the Common Stock	$	10.76
Exercise price	$	11.25
Risk-free interest rate	1.36		%
Estimated price volatility	55.0		%
Expected term	5.75 years
Dividend yield	—		%

The resulting fair value of the February 2016 SAR awards was $5.37 per underlying share. The individual SAR awards vest ratably over two years, with half of the shares becoming exercisable on each of the first two anniversaries of the grant. In 2017 and 2016, the Company recognized compensation expense of $0.2 million and $0.2 million, respectively, primarily in “Selling, general and administrative expenses” related to the February 2016 SAR award grants. The Company recognized an immaterial amount of compensation expense in 2017 and 2016, related to other 2016 SAR awards.

2017 SAR award

In 2017, the Company granted 5,000 SAR awards. The assumptions used for valuing the 2017 SARs included the following:



Assumptions	2017 SARs
Market closing price of the Common Stock	$	7.37
Exercise price	$	7.37
Risk-free interest rate	2.1		%
Estimated price volatility	58.5		%
Expected term	6.00 years
Dividend yield	—		%

The resulting fair value was $4.10 per underlying share. The SAR award vests ratably over two years, with half of the shares becoming exercisable on each of the first two anniversary of the grant. In 2017, the Company recognized an immaterial amount of compensation expense related to the 2017 SAR award.

SAR activity consisted of the following:



Number of Shares under SARs	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2013	362,581		$	22.07	8.44	$	19,228
Granted	—		—			—
Exercised	(120,000	)	22.07			6,673
Forfeited	—		—			—
Expired	—		—			—
Outstanding at December 31, 2014	242,581		22.07		7.44	7,166
Exercisable at December 31, 2014	61,291		$	22.07	7.44	$	1,811



Number of Shares under SARs	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2014	242,581	$	22.07	7.44	$	7,166
Granted	60,000	24.41			—
Exercised	—	—			—
Forfeited	—	—			—
Expired	—	—			—
Outstanding at December 31, 2015	302,581	22.53		7.10	—
Exercisable at December 31, 2015	61,291	$	22.07	6.44	$	—



Number of Shares under SARs	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2015	302,581		$	22.53	7.10	$	—
Granted	106,800		11.43			—
Exercised	—		—			—
Forfeited	(195,490	)	21.28			—
Expired	(61,291	)	22.07			—
Outstanding at December 31, 2016	152,600		16.55		9.02	—
Exercisable at December 31, 2016	—		$	—		$	—



Number of Shares under SARs	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016	152,600		$	16.55	9.02	$	—
Granted	5,000		7.37			—
Exercised	—		—			—
Forfeited	(67,130	)	23.16			—
Expired	(6,750	)	12.68			—
Outstanding at December 31, 2017	83,720		11.02		8.21	1,000
Exercisable at December 31, 2017	39,360		$	11.25	8.15	$	—

Restricted Stock Awards

RSA grants represent Common Stock issued subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. RSAs are valued based on the fair value of the common stock at grant date, with compensation expense for recipients recognized over the vesting period based on the date of the award, primarily recognized in “Selling, general and administrative expenses.”

Restricted stock activity consisted of the following:



	Shares		Weighted-Average Grant Date Fair Value
Balance as of December 31, 2013	162,993		$	39.29
Granted	23,000		71.47
Forfeited	(12,000	)	60.44
Vested	(19,742	)	41.89
Balance as of December 31, 2014	154,251		42.11
Granted	1,000		28.48
Forfeited	(800	)	65.51
Vested	(24,207	)	42.63
Balance as of December 31, 2015	130,244		41.77
Granted	750		18.50
Forfeited	(4,668	)	36.00
Vested	(21,986	)	42.96
Balance as of December 31, 2016	104,340		41.61
Granted	437,472		8.13
Forfeited	(29,144	)	38.33
Vested	(16,395	)	44.19
Balance as of December 31, 2017	496,273		$	12.20

In 2017, 2016, 2015 and 2014, the Company recognized $1.4 million, $1.0 million, $1.0 million and $1.0 million, respectively, of compensation expense, net of forfeitures, in connection with the RSAs. The original grant date fair value of restricted stock that vested during 2017, 2016, 2015 and 2014 was $0.7 million, $0.9 million, $1.0 million and $0.8 million, respectively, based on the value at the vesting date. Unrecognized compensation expense related to RSAs as of December 31, 2017, 2016, 2015 and 2014 was $4.6 million, $3.5 million, $4.7 million and $5.8 million, respectively. As of December 31, 2017, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 3.04 years.

2017 Retention Program

The restricted stock information above includes retention awards granted in July 2017. As part of the Company’s efforts to retain certain employees, 379,472 RSAs with a total market value of $2.9 million were granted along with $3.3 million of cash awards. Half of the shares granted vested in March 2018, and the second half vested in March 2019. Half of the cash awards were paid in quarterly installments commencing in July 2017, with the remaining half to be paid in 2019.

Other Equity Award

In 2012, the Company entered into an employment agreement that included an award of $0.5 million of restricted stock with a put option for the recipient to have the Company repurchase the related restricted stock for $2.0 million upon vesting at December 31, 2020. The Company recognized $0.4 million, $0.3 million and $0.1 million of compensation expense related to the restricted stock award in 2016, 2015 and 2014, respectively. In the first quarter of 2017, the award was forfeited, and $1.0 million of previously recognized expense was reversed.