Annual report pursuant to Section 13 and 15(d)

Note 14 - Stock Based Compensation

v3.5.0.2
Note 14 - Stock Based Compensation
12 Months Ended
Dec. 31, 2015
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
Note 14
– Stock Based Compensation

The fair values of stock option grants during the year ended December 31, 2015 were calculated on the date of the grant using the Black-Scholes option pricing model.  There were no stock options granted during the year ended December 31, 2014.  Compensation expense is recognized over the period of service, generally the vesting period (see Note 3 - Significant and Critical Accounting Policies and Practices).  During the year ended December 31, 2015, the Company granted a total of 80,000 stock options to certain members of its Board of Directors. 

The following assumptions were used in the Black-Scholes options pricing model to estimate the fair value of stock options on the grant date:

Fair value of Company’s Stock Options Granted
 
$
292,400
 
Volatility
   
45.00
%
Exercise price
 
$
8.60
 
Estimated life
   
5.50
  years
Risk free interest rate (based on 5-year treasury rate)
   
1.38
%
Dividend
   
0.00
%

During the year ended December 31, 2015, the Company granted a total of 1,201,000 options to certain employees and officers of the Company.  The following assumptions were used in the Black-Scholes options pricing model to estimate the fair value of stock options on the grant date:

Fair value of Company’s Stock Options Granted
 
$
2,904,000
 
Volatility
   
45.00– 50.00
%
Exercise price
 
$2.63 to 11.25
 
Estimated life
   
6.50
  years
Risk free interest rate (based on 5-year treasury rate)
 
1.57 to 2.03
%
Dividend
   
0.00
%

The following table summarizes the Company’s stock option activity and related information for the period indicated:

 
 
Number of Shares
   
Weighted Average
Grant Date
Fair Value
   
Weighted Average Remaining
Contractual Term
   
Weighted Average Exercise Price
 
Outstanding at January 1, 2015
   
-
   
$
-
     
-
     
-
 
Granted
   
1,281,000
   
$
2.50
     
4.15
     
8.24
 
Exercised
   
-
   
$
-
     
-
     
-
 
Forfeited
   
(165,000
)
 
$
2.40
     
4.39
     
8.35
 
Outstanding at December 31, 2015
   
1,116,000
   
$
2.51
     
4.10
     
8.23
 
 
                               
Exercisable at December 31, 2015
   
80,000
     
3.66
     
4.10
     
8.60
 

In accordance with ASC 718, Share Based Payment (“ASC 718”), total compensation expense for stock based compensation awards was $1,424,672 for the year ended December 31, 2015.  Expenses for stock based compensation are included in the accompanying Consolidated Statements of Operations in cost of goods sold of $123,455 as well as in selling, general and administrative expense of $1,301,217 for the year ended December 31, 2015.

As of December 31, 2015 there was $1,771,728, of total unrecognized stock-based compensation cost, net of estimated forfeitures, related to stock options which is expected to be recognized over the next 4.3 years.

The Black Scholes valuation model requires the Company to estimate key assumptions such as expected volatility, expected terms, risk-free interest rates and dividend yields. The Company determined the assumptions in the Black Scholes valuation model as follows: expected volatility is a combination of the Company’s competitors’ historical volatility; expected term is calculated using the “simplified” method prescribed in ASC 718; and the risk free rate is based on the U.S. Treasury yield on 5 and 7-year instruments in effect at the time of grant. A dividend yield is not used, as the Company has never paid cash dividends and does not currently intend to pay cash dividends other than as required to settle out the dividend derivative liability. The Company periodically reviews the assumptions and modifies the assumptions accordingly.

As part of the requirements of ASC 718, the Company is required to estimate potential forfeitures of stock option and restricted stock unit grants and adjust compensation cost recorded accordingly.  The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates.  Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock based compensation expense to be recognized in future periods.  The fair values of stock option and restricted stock unit grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants.  Compensation expense recognized is shown in the operating activities section of the Consolidated Statements of Cash Flows.

During 2014 an additional $354,409 of stock compensation expense was determined to be unrecorded.  During the period from September 30, 2014 to September 30, 2015, an additional approximate $397,646 of stock compensation expense was determined to be unrecorded.  The Company has since adjusted its consolidated financial statements to include these amounts in their respective periods and has restated its consolidated financial statements accordingly.  See Note 22 – Prior Year Restatement for further information.