Equity Incentive Plan | 9 Months Ended |
Sep. 30, 2014 |
Equity Incentive Plan | ' |
6. Equity Incentive Plan |
The Company’s board of directors has adopted and the shareholders have approved the Nanosphere, Inc. 2000 Equity Incentive Plan (the “2000 Plan”), the Nanosphere, Inc. 2007 Long-Term Incentive Plan (the “2007 Plan”) and the Nanosphere, Inc. 2014 Long-Term Incentive Plan (the “2014 Plan,” and together with the 2000 Plan and the 2007 Plan, the “Plans”). Upon adoption of the 2014 Plan at the Company’s annual meeting of shareholders on May 28, 2014, the 2000 Plan and 2007 Plan were terminated. The Plans authorize the compensation committee to grant stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares, incentive stock options, deferred share units and performance awards. Option awards are generally granted with an exercise price equal to or above the fair value of the Company’s common stock at the date of grant with ten year contractual terms. Certain options vest ratably over four years of service, while other options cliff vest after seven years of service but provide for accelerated vesting contingent upon the achievement of various company-wide performance goals, such as decreasing time to market for new products and entering into corporate collaborations (as defined in the option grant agreements). For these “accelerated vesting” options, 20-25% of the granted option shares will vest upon the achievement of each of four or five milestones as defined in the option grant agreements, with any remaining unvested options vesting on the seven year anniversary of the option grant dates. Approximately 15% of the options granted and outstanding contain “accelerated vesting” provisions. The fair values of the Company’s option awards granted during the nine month period ended September 30, 2014 were estimated at the dates of grant using the Black-Scholes option pricing model with the following assumptions: |
|
| | | | | | | | | | | | | | | | |
Expected dividend yield | | | 0 | % | | | | | | | | | | | | |
Expected volatility | | | 78 | % | | | | | | | | | | | | |
Risk free interest rate | | | 1.78 | % | | | | | | | | | | | | |
Weighted-average expected option life in years | | | 5.51 | | | | | | | | | | | | | |
Estimated weighted-average fair value on the date of grant based on the above assumptions | | $ | 0.88 | | | | | | | | | | | | | |
Estimated forfeiture rate for unvested options | | | 0 | % | | | | | | | | | | | | |
The expected volatility for option awards granted in 2014 was based on the Company’s actual historical volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grants for periods consistent with the expected life of the option. The expected life of options that vest ratably over four years of service is derived from the average of the vesting period and the term of the option as defined in the Plans, following the guidance in Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Nos. 107 and 110. The Company estimates the expected life of options with accelerated vesting terms giving consideration to the dates that the Company expects to achieve key milestones under the option agreements and the term of the option. |
Total compensation cost recognized for all stock option awards was $0.8 million and $2.6 million in the three and nine month periods ended September 30, 2014, respectively, and $0.4 million and $1.1 million for the three and nine month periods ended September 30, 2013, respectively. |
As of September 30, 2014, the total compensation cost not yet recognized related to the non-vested stock option awards is approximately $2.0 million, which is expected to be recognized over the next three years, with a weighted average term of 1.7 years. Certain milestone events are deemed probable of achievement prior to their seven year vesting term, and the acceleration of vesting resulting from the achievement of such milestone events has been factored into the weighted average vesting term. While the Company does not have a formally established policy, as a practice, the Company has delivered newly issued shares of its common stock upon the exercise of stock options. |
|
A summary of option activity under the plans as of September 30, 2014, and for the nine month period then ended is presented below: |
|
| | | | | | | | | | | | | | | | |
Options | | Number of | | | Weighted | | | Weighted | | | Aggregate | |
Shares | Average | Average | Intrinsic |
| Exercise | Remaining | Value of |
| Price | Contractual | Options |
| | Term | |
Outstanding — January 1, 2014 | | | 5,963,478 | | | $ | 3.66 | | | | | | | | | |
Granted | | | 707,816 | | | $ | 1.35 | | | | | | | | | |
Exercised | | | (467,500 | ) | | $ | 1.45 | | | | | | | | | |
Expired | | | (812,110 | ) | | $ | 5.3 | | | | | | | | | |
Forfeited | | | (29,250 | ) | | $ | 3.73 | | | | | | | | | |
Outstanding — September 30, 2014 | | | 5,362,434 | | | $ | 3.31 | | | | 6.34 | | | $ | 165,433 | |
Exercisable — September 30, 2014 | | | 3,138,140 | | | $ | 4.01 | | | | 4.92 | | | $ | 18,017 | |
Vested and Expected to Vest—September 30, 2014 | | | 5,260,116 | | | $ | 3.33 | | | | 6.3 | | | $ | 158,652 | |
There were 467,500 options exercised in the nine month period ended September 30, 2014 and 106,265 in the nine month period ended September 30, 2013. |
Included in the number of options outstanding at September 30, 2014 are 794,186 options with a weighted average exercise price of $5.24 per share and accelerated vesting provisions based on the criteria mentioned above. The total fair value of shares vested during the three and nine month periods ended September 30, 2014 was $0.1 million and $1.9 million, respectively, and was $0.7 million and $0.8 million, respectively, for the three and nine month periods ended September 30, 2013. |
As of January 1, 2014, there were 807,000 shares of restricted stock outstanding under the Plans and during the nine month period ended September 30, 2014, 51,000 shares were forfeited and 256,000 additional shares of restricted stock were granted. The restricted shares vest on various dates between August 15, 2014 and October 29, 2017 and are subject to forfeiture until vested. There were 420,000 shares that vested during the nine month period ended September 30, 2014. The Company recognized $0.5 million and $1.7 million in restricted stock compensation expense during the three and nine month periods ended September 30, 2014, respectively, and recognized $0.3 million and $0.6 million during the three and nine month periods ended September 30, 2013, respectively. As of September 30, 2014, the total compensation cost not yet recognized related to the non-vested restricted stock awards was approximately $0.4 million; this amount is expected to be recognized over a weighted average term of less than one year. |