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Share-Based Compensation

3 Months Ended

Mar. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-Based Compensation

NOTE 12 – SHARE-BASED COMPENSATION

On September 19, 2014, the Board approved the Company’s 2014 Stock Option Plan. The total number of underlying shares of the Company’s Class A common stock available for grant to directors, officers, key employees, and consultants of the Company or a subsidiary of the Company under the plan is 2,390,438 shares. Grants made under this plan must be approved by the Company’s Board of Directors. As of March 31, 2018, the Company had 684,060 shares reserved for issuance under the plan. In 2018, the Board of Directors approved an increase in the number of shares available for grant by 300,000 shares to 2,690,438 shares. The increase is not finalized and subject to shareholder approval.

Stock Options

Under our stock option program, an employee receives an award that provides the opportunity in the future to purchase the Company’s shares at the market price of our stock on the date the award is granted (strike price). The options become exercisable over a range of immediate to 4-year vesting period and expire 5 years from the grant date, unless stated differently in the option agreements, if they are not exercised. Stock options have no financial statement effect on the date they are granted but rather are reflected over time through recording compensation expense and increasing shareholder’s equity. We record compensation expense based on the estimated fair value of the awards that vest and that amount is amortized as compensation expense on a straight- line basis over the vesting period. Accordingly, total expense related to the award is reduced by the fair value of options that are forfeited by employees that leave the Company prior to vesting.

Following is a summary of the option activities during the three months ended March 31, 2018:

		Number of Units				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)
Outstanding, December 31, 2017			812,574			$	3.01				5.64
Granted			927,500			$	5.10
Exercised			(29,200	)		$	0.0001
Cancelled			(4,495	)		$	7.00
Outstanding, March 31, 2018			1,706,379			$	4.19				5.10
Exercisable, March 31, 2018			573,955			$	2.26				5.73

The Company estimates the fair value of each stock option award on the date of grant using a Black- Scholes option pricing model. Outstanding stock option awards may be dilutive to earnings per share when they are in the money (i.e. the market price of the Company’s stock is greater than the strike price of the option). When an option is dilutive, it increases the number of shares used in the diluted earnings per share calculation which will decrease earnings per share. However, the effect stock options have on the number of shares added to the diluted earnings in not one-for-one. The average amount of unrecognized compensation expense (the portion of the fair value of these option awards not yet amortized) and the market price of the Company’s stock during the reporting period affect how many of these potential shares are included in the calculation. The calculation assumes that proceeds received from the exercise and the unrecognized compensation expense are used to buy back shares, which reduces the dilutive impact. As of March 31, 2018, the options had an intrinsic value of approximately $1.7 million.

On January 2, 2018, the Company granted 100,000 stock options each, 300,000 options in total, to its President, Chief Executive Officer and former Chief Financial Officer with an exercise price of $5.01 per share vesting monthly over one year. The expiration date of these options is five years from the grant date. These options had an aggregated fair value of approximately $689,000 on the grant date that was calculated using the Black-Scholes option-pricing model.

On January 2, 2018, the Company granted 200,000 stock options to its Chief Operating Officer with an exercise price of $5.01 per share vesting monthly over one year. The expiration date of these options is five years from the grant date. These options had a fair value of approximately $459,000 on the grant date that was calculated using the Black-Scholes option-pricing model.

On February 14, 2018, the Company granted an aggregate of 367,500 stock options in total to its employees with an exercise price of $5.40 per share vesting quarterly over four years. The expiration date of these options is five years from the grant date. These options had an aggregated fair value of approximately $998,000 on the grant date that was calculated using the Black-Scholes option-pricing model.

On March 19, 2018, the Company granted 35,000 stock options to its Chief Financial Officer with an exercise price of $4.00 per share vesting monthly over one year. The expiration date of these options is five years from the grant date. These options had an aggregated fair value of approximately $65,000 on the grant date that was calculated using the Black-Scholes option-pricing model.

On March 29, 2018, the Company granted 25,000 stock options to one of its Board of Directors with an exercise price of $4.06 per share vesting quarterly over one year. The expiration date of these options is five years from the grant date. These options had an aggregated fair value of approximately $47,000 on the grant date that was calculated using the Black-Scholes option-pricing model.

Variables used in the Black-Scholes option-pricing model for options granted during the three months ended March 31, 2018 include: (1) discount rate of 2.01% – 2.45% (2) expected life of 3 – 3.75 years, (3) expected volatility of 66% – 68%, and (4) zero expected dividends.

Warrants

Following is a summary of the warrants activities during the three months ended March 31, 2018:

		Number of Units				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)
Outstanding, December 31, 2017			1,070,717			$	7.57				2.12
Granted			12,000			$	7.00				1.98
Outstanding, March 31, 2018			1,082,717			$	7.56				1.88
Exercisable, March 31, 2018			1,032,717			$	7.56				1.75

During the three months ended March 31, 2018, the Company committed to grant additional 9,000 and 3,000 warrants to Dynamic Capital LLC (“Dynamic”) and Canaan Parish LLC (“Canaan”), entities associated with Adam Levin and to Michael Pope, respectively, in associated with a qualified equity event as defined in the warrants agreements. These warrants had a fair value of $24,226 on measurement date using the binomial option-pricing model and were immediately exercisable upon the issuance.

Variables used in the Black-Scholes option-pricing model for options granted during the three months ended March 31, 2018 include: (1) discount rate of 1.96% (2) expected life of 1.98 years, (3) expected volatility of 69%, and (4) zero expected dividends.

The warrants granted to Dynamic and Canaan contain net cash settlement provision and do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company concluded that the instruments are not indexed to the Company’s stock and are to be treated as derivative liabilities. See Note 17.

Stock compensation expense

For the three months ended March 31, 2018 and 2017, the Company recorded the following stock compensation expense:

		2018				2017
Stock options		$	496,688			$	47,165
Warrants			24,226				-

Total stock compensation expense		$	520,914			$	47,165

As of March 31, 2018, there was approximately $2.8 million of unrecognized compensation expense related to unvested options, which will be amortized over the remaining vesting period. Of that total, approximately $1.5 million is estimated to be recorded as compensation expense in the remaining nine-months of 2018.