10. Stock Based Compensation

The Company may grant qualified and non-qualified stock options, common stock, PSUs and other stock-based awards under various plans to directors, officers, employees and other individuals. Stock options are granted at exercise prices of not less than the fair market value of the Company’s common stock on the date of grant. Additionally, the Company has an ESPP that allows employees to purchase Company shares at a purchase price equal to 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period.

Stock Options and Other Benefit Plans

2010 Plan Stock Options

Stock options issued under the 2010 Plan generally vest monthly over three years for employees and one year for directors. Stock options held by employees who qualify for retirement age (defined as employees that are a minimum of 55 years of age and the sum of their age plus years of full-time employment with the Company exceeds 70 years) vest on the earlier of scheduled vest date or the date of retirement.

Fair Value Assumptions of 2010 Plan Stock Options

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The fair value of the stock options granted under the 2010 Plan during the three and nine months ended September 30, 2023 and 2022, was estimated based on the following weighted average assumptions:

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The weighted-average grant-date fair value per share of the options granted under the 2010 Plan during the nine months ended September 30, 2023 and 2022 was $13.46 and $12.21, respectively.

Stock Option Inducement Awards

On December 30, 2022, the Board appointed Owen Hughes as Executive Chairman of the Board and Interim Chief Executive Officer (principal executive officer) and Bradley Sitko as the Company’s Chief Investment Officer, effective as of January 1, 2023. Pursuant to the terms of their respective employment agreements, Mr. Hughes and Mr. Sitko were each granted two separate awards of non-qualified stock options on January 3, 2023 (collectively, the “Stock

Option Inducement Awards”) when the Company’s stock price was $18.66 per share. The Stock Option Inducement Awards were granted to Mr. Hughes and Mr. Sitko outside the 2010 Plan as an inducement material to entering into their respective employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4) but are subject to the terms and conditions of the 2010 Plan.

On January 3, 2023, the Company granted Mr. Hughes two separate non-qualified stock options to purchase: (i) 100,000 shares of the Company’s common stock at a fair market value exercise price of $18.66 per share that will vest in a series of four equal installments on March 31, 2023, June 30, 2023, September 30, 2023 and December 31, 2023 and (ii) 75,000 shares of the Company’s common stock at an above fair market value exercise price of $30.00 per share that will vest in a series of 36 successive equal monthly installments measured from January 1, 2023.

On January 3, 2023, the Company granted Mr. Sitko two separate non-qualified stock options to purchase: (i) 300,000 shares of the Company’s common stock at a fair market value exercise price of $18.66 per share and (ii) 250,000 shares of the Company’s common stock at an above fair market value exercise price of $30.00 per share. Twenty-five percent of the shares subject to Mr. Sitko’s option grants will vest and become exercisable on January 3, 2024, and the balance of the shares will vest and become exercisable in a series of 36 successive equal monthly installments thereafter.

Fair Value Assumptions of Stock Option Inducement Awards

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The fair value of the stock options granted to Mr. Hughes and Mr. Sitko at an exercise price of $18.66 per share during the nine months ended September 30, 2023, was estimated based on the following weighted average assumptions:

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The weighted-average grant-date fair value per share of options granted to Mr. Hughes and Mr. Sitko at an exercise price of $18.66 per share during the first quarter of 2023 was $11.91.

The fair value of the stock options granted to Mr. Hughes and Mr. Sitko at an exercise price of $30.00 per share during the first quarter of 2023 was estimated based on the following weighted average assumptions:

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The weighted-average grant-date fair value per share of options granted to Mr. Hughes and Mr. Sitko at an exercise price of $30.00 per share during the first quarter of 2023 was $14.68.

The activity for all stock options for the nine months ended September 30, 2023, was as follows:

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The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2023 and 2022 was $18,000 and $2.8 million, respectively.

As of September 30, 2023, $9.4 million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 2.61 years.

Performance Stock Unit Awards

In May 2023, the Company granted employees 430,400 PSUs in the aggregate under the 2010 Plan.

The PSUs are subject to market-based vesting conditions and the number of PSUs vested will be based on the stock price of the Company’s common stock as compared to four stock price hurdles over a three-year period from the May 2023 grant date (the “performance period”). A stock price hurdle is considered attained when, at any time during the performance period, the Company’s volume-weighted average stock price equals or exceeds the hurdle stock price value for 30 consecutive calendar days. Upon attainment of a stock price hurdle, 1/3 of the earned PSUs will vest immediately upon achievement, 1/3 will vest upon the two-year anniversary of the grant date and 1/3 will vest on the three-year anniversary of the grant date. If no stock price hurdle is attained during the performance period, then no PSUs will vest.

Fair Value Assumptions of Performance Stock Unit Awards

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The fair value of the PSUs granted was estimated based on Monte Carlo valuation model which incorporates into the valuation the possibility that the stock price hurdles may not be satisfied.

The range of grant date fair values of the PSUs issued in May 2023 were estimated as follows:  

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The Company estimates that it will recognize total stock-based compensation expense of approximately $6.7 million in aggregate using the graded expense attribution method over the requisite service period of each tranche. If the stock price hurdles are met sooner than the requisite service period, the stock-based compensation expense for the respective stock price hurdle will be accelerated. Stock-based compensation expense will be recognized over the requisite service period if the grantees continue to provide service to the Company, regardless of whether the PSU stock price hurdles are achieved.

The activity for all PSUs for the nine months ended September 30, 2023, was as follows:

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The Company recorded $1.1 million and $1.7 million of stock-based compensation expense related to the PSUs during the three and nine months ended September 30, 2023, respectively. As of September 30, 2023, there was $5.1 million unrecognized stock-based compensation expense related to outstanding PSUs granted to employees, with a weighted-average remaining recognition period of 1.6 years.

Stock-based Compensation Expense

All stock-based compensation expense is recorded in G&A expense. The following table shows total stock-based compensation expense for stock options and PSUs issued under the 2010 Plan, the Stock Option Inducement Awards and ESPP in the condensed consolidated statements of operations and comprehensive loss (in thousands):

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Employee Retention Bonus

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In October 2022, the Company approved the Amended Retention Plan which provided that each of its then current employees, excluding the Chief Executive Officer, would be eligible to receive a cash retention bonus if employed through each of two periods:  (1) the three-month anniversary of November 1, 2022 (the “Initial Period”) and (2) the nine-month period immediately following the Initial Period. All other terms of the Amended Retention Plan remain consistent with the Retention Plan. The Company is accruing and recognizing the cost of the cash retention bonus as expense on a straight-line basis from November 1, 2022 through October 31, 2023.

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The Company paid $0.2 million of cash retention bonuses accrued over the Initial Period in January 2023. Pursuant to the Amended Retention Plan, as of September 30, 2023, the Company expects to pay an additional $0.5 million in cash in 2023 related to the cash retention bonuses. The Company recognized $0.1 million and $0.5 million for cash retention bonuses in operating expenses in the condensed consolidated statement of operations and comprehensive loss during the three and nine months ended September 30, 2023, respectively, and will recognize the remaining amount of $0.1 million for cash retention bonuses in operating expenses through October 31, 2023. The Company accrued cash retention bonuses in accrued and other liabilities in the condensed consolidated balance sheets of $0.5 million as of September 30, 2023 and $0.1 million as of December 31, 2022.

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James R. Neal Departure and Continuity Incentive

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James R. Neal retired as the Company’s Chief Executive Officer effective as of December 31, 2022 (the “Departure Date”) and resigned as a member of the Board and Chairman of the Board, effective as of January 1, 2023. Pursuant to Mr. Neal’s Amended and Restated Employment Agreement, dated December 15, 2021, by and between the Company and Mr. Neal, following the Departure Date, Mr. Neal is entitled to a cash payment of $1.2 million (the “Continuity Incentive”) which will be made in equal monthly installments starting in January 2023 through December 2023, less deductions and withholdings. The Company accrued the full $1.2 million Continuity Incentive in operating expenses in the consolidated statement of operations and comprehensive loss during the year ended December 31, 2022. The unpaid accrued Continuity Incentive recorded in accrued and other liabilities in the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 was $0.3 million and $1.2 million, respectively.