Annual report pursuant to Section 13 and 15(d)

Note 8 - Equity

v3.7.0.1
Note 8 - Equity
 12 Months Ended
Dec. 31, 2016
Notes to Financial Statements  
Stockholders' Equity Note Disclosure [Text Block]
Note
8:
Equity
 
 
Stock Options
 
On
May
15,
2014,
the Company adopted the
2014
Stock Plan
(“2014
Plan”). The
2014
Plan is designed to supersede and replace the
2012
Plan, effective as of the adoption date and set aside
1,513,000
shares of the Company’s common stock that
may
be granted under the
2014
Plan.
 
During the year ended
December
31,
2015,
the Company granted
240,160
stock options to employees and certain non-employee members of its board of directors with exercise prices ranging from
$5.99
-
$9.62.
 
During the year ended
December
31,
2016,
the Company granted
660,000
stock options to employees with exercise prices ranging from
$2.23
-
$4.11.
 
 
The Company’s stock trading price is the basis of fair value of its common stock used in determining the value of share based awards. To the extent the value of the Company’s share based awards involves a measure of volatility, it will rely upon the volatilities from publicly traded companies with similar business models until its common stock has accumulated enough trading history for it to utilize its own historical volatility. The expected life of the options granted is based on the average of the vesting term and the contractual term of the option. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury
10
-year yield curve in effect at the date of the grant.
 
The Company has computed the fair value of all options granted during the years ended
December
31,
2016
and
2015,
using the following assumptions:
 
    Years Ended December 31,
    2016   2015
Expected volatility  
42%
-
45%
  
44%
-
50%
Expected dividends  
 
None
 
  
 
None
 
Expected term (years)  
 
7
 
  
5.5
-
7
Risk-free rate  
1.19%
-
1.68%
  
1.54%
-
2.01%
Forfeiture rate  
 
20%
 
  
 
20%
 
 
The information below summarizes the stock options:
 
    Number of
Shares		   Weighted
Average
Exercise
Price		   Weighted
Average
Fair
Value		   Weighted
Average
Remaining
Contractual Life
Outstanding at December 31, 2014    
314,775
     $
2.23
     $
0.92
      
9.2
  
Granted at market price    
240,160
      
8.16
      
 
      
 
  
Exercised    
(445
 )    
1.20
      
 
      
 
  
Cancelled    
(77,031
 )    
7.88
      
 
      
 
  
Outstanding at December 31, 2015    
477,459
     $
4.30
     $
2.01
      
8.7
  
Granted at market price    
660,000
      
3.22
      
 
      
 
  
Exercised    
(37,824
 )    
1.88
      
 
      
 
  
Cancelled    
(146,560
 )    
4.34
      
 
      
 
  
Outstanding at December 31, 2016    
953,075
     $
3.66
     $
1.86
      
6.9
  
Exercisable at December 31, 2016    
347,272
     $
4.07
     $
2.38
      
3.9
  
 
 
The intrinsic value of the Company’s stock options outstanding was
$347,724
at
December
31,
2016.
 
For the years ended
December
31,
2016
and
2015,
stock based compensation expense for stock options was
$561,559
and
$328,772,
respectively.  Unrecognized stock-based compensation expense for stock options for the year ended
December
31,
2016
was
$733,944,
which is expected to be recognized ratably over the next
3.26
years.
 
Restricted Stock
  
During
2015,
the Company granted restricted stock to
two
employees to earn
8,000
shares of common stock. These shares vest over a
four
year period from grant date. The estimated fair market value of these shares was valued at
$9.62
per share, based on the Company’s stock trading price, totaling approximately
$76,960
to be recognized ratably as the stock is vested.
 
During
2016,
the Company granted restricted stock awards to
seven
members of the Board of Directors. The awards have been granted under The Joint Corp.
2014
Incentive Stock Plan pursuant to the Director Compensation Policy of the Company. The awards shall vest on the earlier of (i)
one
year from the Grant Date and (ii) the date of the next annual meeting of the shareholders of the Company occurring after the Grant Date, for each to earn
12,345
shares of common stock. The estimated fair market value of these shares was valued at
$3.10
per share, based on the Company’s stock trading price, totaling approximately
$268,000
to be recognized ratably as the stock is vested.
 
The information below summaries the restricted stock activity:
 
Restricted Stock Awards   Shares
Outstanding at December 31, 2014    
662,375
  
Restricted stock awards granted    
8,000
  
Awards forfeited or exercised    
-
  
Granted at December 31, 2015    
670,375
  
Awards vested    
(331,087
 )
Outstanding at December 31, 2015    
339,288
  
Awards granted    
86,415
  
Awards vested    
(162,440
 )
Awards forfeited    
(170,848
 )
Outstanding at December 31, 2016    
92,415
  
 
For the years ended
December
31,
2016
and
2015,
stock based compensation expense for restricted stock awards was
$561,922
and
$496,373,
respectively.  Unrecognized stock based compensation expense for restricted stock awards as of
December
31,
2016
was
$155,969
to be recognized ratably over
1.06
years.
  
Modifications
 
During the year ended
December
31,
2016,
the Company accelerated the vesting of all unvested stock options and restricted stock awards granted to the Company’s former chief development officer in connection with his separation from the Company. In addition, the Company modified the post-employment exercise period of the stock options previously granted, extending the exercise period to
December
31,
2017.
 
During the year ended
December
31,
2016,
the Company modified the post-employment exercise period of stock options previously granted to the Company’s former chief executive officer in connection with his separation from the Company. The modification extended the exercise period to
May
13,
2020.
In addition, the Company accelerated the vesting of
9,733
shares of the previously granted restricted stock awards that were scheduled to vest in
July
2016.
The remaining unvested restricted stock awards were forfeited upon separation.
 
These modifications resulted in an approximately
$412,000
increase in stock-based compensation for the year ended
December
31,
2016.
 
Treasury Stock
 
During the year ended
December
31,
2016,
the Company acquired approximately
13,376
shares of treasury stock to satisfy minimum tax withholding related to vesting of restricted stock awards. These shares were acquired at a total cost of
$83,391.
 
In
December,
2013,
the Company exercised its right of
first
refusal under the terms of a Stockholders Agreement dated
March
10,
2010
to repurchase
534,000
shares of the Company’s common stock. The shares were purchased for
$0.45
per share or
$240,000
in cash along with the issuance of an option to repurchase the
534,000
shares. The repurchased shares were recorded as treasury stock, at cost in the amount of
$791,638,
and were available for general corporate purposes. The option is classified in equity as it is considered indexed to the Company’s stock and meets the criteria for classification in equity.  The option was granted to the seller for a term of
8
years.  The option contained the following exercise prices:
 
Year 1   $
0.56
  
Year 2   $
0.68
  
Year 3   $
0.84
  
Year 4   $
1.03
  
Year 5   $
1.28
  
Year 6   $
1.59
  
Year 7   $
1.97
  
Year 8   $
2.45
  
 
Consideration given in the form of the option was valued using a Binomial Lattice-Based model resulting in a fair value of
$1.03
per share option for a total fair value of
$551,638.
The option was valued using the Binomial Lattice-Based valuation methodology because that model embodies all of the relevant assumptions that address the features underlying the instrument.
 
During
December,
2016,
the option holder partially exercised the call option, and purchased
250,872
shares at a total repurchase price of
$210,000.
The Company reduced the cost of treasury shares by approximately
$113,000
related to the transaction, reduced the value of the option by approximately
$259,000,
and reduced additional paid in capital by approximately $162,000.
 
Warrants
 
In conjunction with the IPO, the Company issued warrants to the underwriters for the purchase of
90,000
shares of common stock, which can be exercised between
November
10,
2015
and
November
10,
2018
at an exercise price of
$8.125
per share.  The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on
November
10,
2018
and have a remaining contractual life of
1.9
years as of
December
31,
2016.
 
The information below summarizes the warrants:
 
   
Number of
Units
  
Weighted
Average
Exercise Price
  
Weighted
Average
Remaining
Contractual Term
(in years)
  
Intrinsic
Value
                 
Outstanding at December 31, 2014    
90,000
     $
8.13
      
3.9
      
-
  
                                 
Granted    
-
      
-
      
-
      
-
  
                                 
Outstanding at December 31, 2015    
90,000
     $
8.13
      
2.9
     $
-
  
                                 
Granted    
-
      
-
      
-
      
-
  
                                 
Outstanding at December 31, 2016    
90,000
     $
8.13
      
1.9
     $
-
  
                                 
Exercisable at December 31, 2016    
90,000
     $
8.13
      
1.9
     $
-
  
 
Issuance of Common Stock for Legal Settlement
 
During
December,
2016,
the Company entered into a settlement agreement, whereby it resolved the pending litigation matter discussed in Note
11.
Under the terms of the settlement agreement, the Company agreed to a
one
-time settlement amount comprised of cash and newly issued shares of our common stock. The amounts paid by the Company in this settlement was determined by the Company not to be material. The fair value of the total consideration related to common stock was valued using the closing price of our common stock on the settlement date.