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Share-based compensation | 12 Months Ended
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Dec. 31, 2019
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] |
Share-based compensation |
17. | Share-based compensation
At December 31, 2019, and 2018, the Company had stock option and award plans, and a stock purchase plan. 2012 Long Term Incentive Plan The Board of Directors adopted the Amended and Restated 2012 Long-Term Incentive Plan (the “2012 LTIP”) on April 13, 2012, which was subsequently provided by shareholder ratification. The 2012 LTIP provides for the grant of options to purchase shares of the Company’s common stock, stock awards (including restricted stock, unrestricted stock, and stock units), stock appreciation rights, performance-based awards and other equity-based awards. All of the Company’s employees and the employees of the Company’s s ubsidiaries and affiliates are eligible and may receive awards under the 2012 LTIP. In addition, the Company’s non-employee directors, consultants, and advisors who perform services for the Company and its subsidiaries and affiliates may receive awards und er the 2012 LTIP. Incentive share options; however, are only available to the Company’s employees. Awards granted under the 2012 LTIP expire no later than ten years after the date of grant. At December 31, 2019, the Company reserves a total of 4,750,000 shares of common stock for issuance pursuant to the 2012 LTIP, subject to certain adjustments set forth in the 2012 LTIP. At December 31, 2019, there were 1,067,947 options outstanding under the 2012 LTIP, of which 714,180 were exercisable. In addi tion, there were 119,217 shares of unvested restricted stock outstanding and 560,844 restricted stock units outstanding, some of which contain market-based vesting conditions, under the 2012 LTIP as of December 31, 2019. 2004 Long Term Incentive Plan The 2004 Long Term Incentive Plan (the “2004 LTIP”) reserved 3.1 million shares for issuance, subject to certain adjustments set forth in the 2004 LTIP. At December 31, 2019, there were 25,500 options outstanding under the 2004 LTIP, all of which were exercisable. Inducement Plans The Inducement Plan for Spinal Kinetics Employees (the “Spinal Kinetics Inducement Plan”) reserved 51,705 shares for issuance to employees of Spinal Kinetics as an inducement to continue employment with the Company. At December 31, 2019, there were 7,156 options outstanding under the Spinal Kinetics Inducement Plan, all of which were exercisable, and 5,608 shares of unvested restricted stock outstanding. In conjunction with the Options Medical acquisition, an inducement grant of 25,478 restricted stock units, with a fair value of $1.4 million, was awarded to the Options Medical founder. The award vests in one-third annual increments beginning on the first anniversary of the grant date and is contigent upon continued employment. As of December 31, 2019, there were 25,478 shares of unvested restricted stock outstanding relating to this inducement. In August 2019, the Company appointed a new President of Global Spine, who was then subsequently promoted to President and Chief Executive Officer. As an inducement to accept employment with the Company, the individual was awarded a grant of stock options to acquire up to 50,711 shares of common stock and an award of 14,743 restricted stock units. Both awards will vest in one-fourth annual increments beginning on the first anniversary of the grant date. As of December 31, 2019, there were 50,711 options outstanding under this inducement, none of which were exercisable, and 14,743 shares of unvested restricted stock outstanding. Stock Purchase Plan The Second Amended and Restated Stock Purchase Plan, as Amended (the “Stock Purchase Plan”) provides for the issuance of shares of the Company’s common stock to eligible employees and directors of the Company and its subsidiaries that elect to participate in the plan and acquire shares of common stock through payroll deductions (including executive officers). During each purchase period, eligible employees may designate between 1% and 25% of their compensation to be deducted for the purchase of common stock under the plan (or such other percentage in order to comply with regulations applicable to Employees domiciled in or resident of a member state of the European Union). For eligible directors, the designated percentage will be applied to an amount equal to his or her director compensation paid in cash for the current plan period. The purchase price of the shares under the plan is equal to 85% of the fair market value on the first day of the plan period or, if lower, on the last day of the plan period. Due to the compensatory nature of such plan, the Company records the related share-based compensation in the consolidated statement of operations. Compensation expense is estimated using the Black-Scholes valuation model, with such value recognized as expense over the plan period. As of December 31, 2019, the aggregate number of shares reserved for issuance under the Stock Purchase Plan is 2,350,000. As of December 31, 2019, 1,827,147 shares had been issued. Share-Based Compensation Expense Share-based compensation expense is recorded in the same line of the consolidated statements of operations as the employee’s cash compensation. The following tables present the detail of share-based compensation by line item in the consolidated statements of income as well as by award type, for the years ended December 31, 2019, 2018, and 2017:
|  | Year Ended December 31, |
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |  |  | 2017 |
Cost of sales |  | $ | 715 |  |  | $ | 522 |  |  | $ | 486 |
Sales and marketing |  |  | 2,512 |  |  |  | 1,802 |  |  |  | 1,471 |
General and administrative |  |  | 16,872 |  |  |  | 15,197 |  |  |  | 9,671 |
Research and development |  |  | 1,441 |  |  |  | 1,409 |  |  |  | 929 |
Total |  | $ | 21,540 |  |  | $ | 18,930 |  |  | $ | 12,557 |
|  | Year Ended December 31, |
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |  |  | 2017 |
Stock options |  | $ | 4,054 |  |  | $ | 3,061 |  |  | $ | 2,388 |
Time-based restricted stock awards and stock units |  |  | 11,084 |  |  |  | 7,265 |  |  |  | 5,540 |
Performance-based restricted stock awards and stock units |  |  | — |  |  |  | 1,998 |  |  |  | 462 |
Market-based restricted stock units |  |  | 4,733 |  |  |  | 5,256 |  |  |  | 2,904 |
Stock purchase plan |  |  | 1,669 |  |  |  | 1,350 |  |  |  | 1,263 |
Total |  | $ | 21,540 |  |  | $ | 18,930 |  |  | $ | 12,557 |
The income tax benefit related to this expense was $3.5 million, $3.2 million, and $3.4 million for the years ended December 31, 2019, 2018, and 2017, respectively. Stock Options The fair value of time-based stock options is determined using the Black-Scholes valuation model, with such value recognized as expense over the service period, which is typically four years, net of actual forfeitures. The fair value of market-based stock options is determined at the date of the grant using the Monte Carlo valuation methodology, with such value recognized as expense over the requisite service period adjusted for forfeitures as they occur. The Monte Carlo methodology incorporates into the valuation the possibility that the market condition may not be satisfied. A summary of the Company’s assumptions used in determining the fair value of the stock options granted during the year is shown in the following table.
|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
Assumptions: |  |  |  |  |  |  |  |  |  |  |  |
Expected term (in years) |  | 5.0 |  |  | 4.5 |  |  | 4.5 |
Expected volatility |  | 29.7% – 31.0% |  |  | 28.7% – 30.1% |  |  |  | 31.2 | %
Risk free interest rate |  | 1.38% – 2.31% |  |  | 2.55% – 2.79% |  |  |  | 1.93 | %
Dividend yield |  |  | — |  |  | — |  |  | — |
Weighted average grant date fair value |  | $ | 14.64 |  |  | $ | 16.28 |  |  | $ | 13.32 |
The expected term of the options granted is estimated based on a number of factors, including the vesting and expiration terms of the award, historical employee exercise behavior for both options that are currently outstanding and options that have been exercised or are expired, and an employee’s average length of service. Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is determined based upon a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the option. Summaries of the status of the Company’s stock option plans as of December 31, 2019 and 2018 and changes during the year ended December 31, 2019 are presented below:
|  | Options |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contractual Term |
Outstanding at December 31, 2018 |  |  | 1,175,887 |  |  | $ | 41.87 |  |  |  |  |
Granted |  |  | 279,248 |  |  | $ | 49.17 |  |  |  |  |
Exercised |  |  | (74,729 | ) |  | $ | 37.20 |  |  |  |  |
Forfeited or expired |  |  | (79,092 | ) |  | $ | 54.84 |  |  |  |  |
Outstanding at December 31, 2019 |  |  | 1,301,314 |  |  | $ | 42.92 |  |  |  | 5.69 |
Vested and expected to vest at December 31, 2019 |  |  | 1,301,314 |  |  | $ | 42.92 |  |  |  | 5.69 |
Exercisable at December 31, 2019 |  |  | 896,836 |  |  | $ | 39.97 |  |  |  | 4.24 |
As of December 31, 2019, the unamortized compensation expense relating to options granted and expected to be recognized was $3.7 million. This amount is expected to be recognized through December 2023 over a weighted average period of approximately 1.7 years. The total intrinsic value of options exercised was $1.4 million, $3.2 million and $2.2 million for the years ended December 31, 2019, 2018, and 2017, respectively. For the year ended December 31, 2019 we received $2.8 million in cash from stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $0.3 million.The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2019 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for options that had exercise prices lower than $46.18, the closing price of the Company’s stock on December 31, 2019. The aggregate intrinsic value of options outstanding was $7.3 million, $13.6 million, and $18.7 million for the years ended December 31, 2019, 2018, and 2017, respectively. The aggregate intrinsic value of options exercisable was $6.7 million, $11.0 million, and $12.4 million for the years ended December 31, 2019, 2018, and 2017, respectively. Time-based Restricted Stock Awards and Stock Units During the year ended December 31, 2019, the Company granted to employees and non-employee directors 319,189 shares of time- based restricted stock awards or stock units, which vest at various dates through December 2023. The compensation expense, which represents the fair value of the stock measured at the market price at the date of grant, is recognized on a straight-line basis over the vesting period, which is typically four years, net of actual forfeitures. Since 2017, the annual grant to non-employee directors has been made in the form of one-year vesting restricted stock units with deferred delivery (“DSUs”), whereby shares are not settled until after the director ceases service as a director. As of December 31, 2019, there were 47,077 DSUs outstanding that are vested but not settled. The aggregate fair value of time-based restricted stock awards and stock units that vested during the years ended December 31, 2019, 2018 and 2017 was $9.5 million, $8.0 million and $7.3 million, respectively. Unamortized compensation expense related to time-based restricted stock awards and stock units amounted to $15.3 million at December 31, 2019, and is expected to be recognized over a weighted average period of approximately 2.5 years. The aggregate intrinsic value of time-based restricted stock awards and stock units outstanding was $21.6 million, $18.8 million and $17.8 million for the years ended December 31, 2019, 2018, and 2017, respectively. Performance-based Restricted Stock Awards and Stock Units The Company’s performance-based restricted stock awards and stock units contain performance-based vesting conditions. The fair value of performance-based restricted stock awards and stock units is calculated based upon the closing stock price at the date of grant. Such value is recognized as expense over the derived requisite service period beginning in the period in which they are deemed probable to vest, net of actual forfeitures. Vesting probability is assessed based upon forecasted earnings and financial results. The Company did not grant any performance-based restricted stock awards or stock units to employees during the years ended December 31, 2019, 2018, or 2017. During the year ended December 31, 2015, the Company granted to employees 110,660 shares of performance-based restricted stock awards, which vested based upon the achievement of certain earnings or return on invested capital targets. No compensation expense was recorded for these awards in 2019 as the performance targets were obtained in prior years. Approximately $0.4 million and $0.5 million of compensation expense was recorded for the years ended December 31, 2018 and 2017, respectively, associated with these performance-based restricted stock awards. The fair value of performance-based restricted stock awards that vested during the years ended December 31, 2019, 2018, and 2017, were $3.2 million, $0.0 million, and $4.9 million, respectively. No unamortized compensation expense related to performance-based restricted stock awards remains as of December 31, 2019. The aggregate intrinsic value of performance-based restricted stock awards outstanding was $0.0 million, $2.9 million and $3.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. During the year ended December 31, 2015, the Company also granted 55,330 shares of performance-based restricted stock units to employees, which vested based upon the achievement of certain earnings or return on invested capital targets for the year ended December 31, 2018. The Company recognized compensation expense of $0.0 million, $1.6 million, and $0.0 million associated with these 2015 performance-based restricted stock units for the years ended December 31, 2019, 2018, and 2017, respectively. The fair value of performance-based restricted stock units that vested during the years ended December 31, 2019, 2018, and 2017, were $2.7 million, $0.0 million, and $0.0 million, respectively. No unamortized compensation expense remains as of December 31, 2019 related to these 2015 performance-based restricted stock units. The aggregate intrinsic value of performance-based restricted stock units outstanding was $0.0 million, $2.5 million, and $3.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. Market-based Restricted Stock Units The Company’s market-based restricted stock units contain market-based vesting conditions. The fair value of market-based restricted stock units is determined at the date of the grant using the Monte Carlo valuation methodology, with any discounts for post-vesting restrictions estimated using the Chaffe Model. The Monte Carlo methodology incorporates into the valuation the possibility that the market condition may not be satisfied. Such value is recognized on a straight-line basis over the vesting period, net of actual forfeitures. The awards, if the market conditions are achieved, will be settled in shares of common stock, with one share of common stock issued per restricted stock unit if targets are achieved at the 100% level. Awards may be achieved at a minimum level of 50% and a maximum of 200%. The market conditions for the awards are based on the Company’s stock achieving certain total shareholder return targets relative to specified index companies during a 3-year performance period beginning on each respective grant date. The Company recorded $4.7 million $5.3 million, and $2.9 million in compensation expense for the years ended December 31, 2019, 2018, and 2017, respectively, related to market-based restricted stock units. Unamortized compensation expense for market-based restricted stock units amounted to $3.8 million at December 31, 2019, and is expected to be recognized over a weighted average period of approximately 1.2 years. The aggregate intrinsic value of market-based restricted stock units outstanding was $11.9 million, $14.2 million, and $10.2 million for the years ended December 31, 2019, 2018, and 2017, respectively. A summary of the status of our time-based, performance-based and market-based restricted stock awards and stock units as of December 31, 2019 and 2018 and changes during the year ended December 31, 2019 are presented below:
|  | Time-based Restricted Stock Awards and Stock Units |  |  | Performance-based Restricted Stock Awards and Stock Units |  |  | Market-based Restricted Stock Units |
|  | Shares |  |  | Weighted Average Grant Date Fair Value |  |  | Shares |  |  | Weighted Average Grant Date Fair Value |  |  | Shares |  |  | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2018 |  |  | 357,592 |  |  | $ | 49.77 |  |  |  | 102,155 |  |  | $ | 33.12 |  |  |  | 271,295 |  |  | $ | 57.44 |
Granted |  |  | 319,189 |  |  | $ | 52.48 |  |  |  | — |  |  | $ | — |  |  |  | 60,722 |  |  | $ | 65.27 |
Vested and settled |  |  | (157,053 | ) |  | $ | 46.82 |  |  |  | (102,155 | ) |  | $ | 33.12 |  |  |  | — |  |  | $ | — |
Cancelled |  |  | (51,000 | ) |  | $ | 52.85 |  |  |  | — |  |  | $ | — |  |  |  | (74,855 | ) |  | $ | 15.92 |
Outstanding at December 31, 2019 |  |  | 468,728 |  |  | $ | 51.96 |  |  |  | — |  |  | $ | — |  |  |  | 257,162 |  |  | $ | 60.08 |
Retirement of the Company’s President and Chief Executive Officer On February 25, 2019, the Company entered into a Transition and Retirement Agreement (the “Retirement Agreement”) with the Company’s President and Chief Executive Officer, Brad Mason. Under the Retirement Agreement, the parties agreed that Mr. Mason would continue to serve in his role until his successor was appointed by the Board and commenced employment, which occurred on October 31, 2019 (the “Retirement Date”). The parties agreed that Mr. Mason would provide ongoing transition assistance to the Company pursuant to a consulting arrangement during the 12 months following the Retirement Date, and that Mr. Mason will be paid $40,000 per month for such transition consulting services. As part of the Retirement Agreement, certain time-based stock options and restricted stock awards were modified to vest on the Retirement Date. In addition, stock options were modified to extend the post-termination exercise period from 18 months under a standard qualified retirement to up to four years, dependent upon the remaining contractual terms terms of the options. For fiscal year 2019, in lieu of Mr. Mason’s normal annual incentive awards under the 2012 LTIP, and in recognition of the ongoing transition assistance that he agreed to provide, Mr. Mason was granted an award of RSUs on April 1, 2019, with a grant date fair market value of $2.0 million that will vest on the first anniversary of the date of grant, subject to him continuing to provide transition consulting services through his Retirement Date. The full fair value of the award was recorded as expense in 2019. The Company recognized approximately $6.5 million in share-based compensation expense during the year ended December 31, 2019 related to the Retirement Agreement, which was charged to general and administrative expense in the consolidated statements of operations and comprehensive income (loss).

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