|9 Months Ended|
Sep. 30, 2021
|Stockholders’ Deficit||Stockholders’ Deficit
Equity-Based Compensation Expense
Equity-based compensation expense, consisting of service-based expense related to the equity incentive plan and expense from secondary sales of commons shares, was classified as follows in the accompanying condensed consolidated statements of operations for each of the periods presented (in thousands):
Equity Incentive Plan
During 2016, the Company adopted an equity incentive plan (herein referred to as the “EIP”) under which common stock options could be issued for employee awards. The number of common stock options authorized for employee awards was 18,713,504 and 11,679,353 as of the period ending September 30, 2021 and September 30, 2020, respectively. The Company began issuing stock options
under this plan in 2016. Most options have a four-year vesting schedule with a one-year cliff and are classified as incentive stock options (ISOs). Some options have been granted in lieu of bonuses and have expedited two- or three-year vesting schedules. All awards vest based on service conditions.
Options with accelerated vesting clauses, should there be a change in Company control, were 2,328,528 and 213,332 as of September 30, 2021 and September 30, 2020, respectively.
Equity-based compensation expense related to the equity incentive plan was as follows for each of the periods presented (in thousands):
Unrecognized equity-based compensation expense as of the periods ending September 30, 2021 and September 30, 2020 was $38.6 million and $7.5 million, respectively. Equity-based compensation expense is recognized on a straight-line basis over the remaining weighted-average vesting periods. As of the periods ending September 30, 2021 and September 30, 2020 the weighted-average vesting periods approximated 3.14 and 2.59 years, respectively.
The aggregate intrinsic value of options exercised is outlined in the table below. The intrinsic value represents the excess of the estimated fair value of the Company's common stock on the date of exercise over the exercise price of each option.
Stock option activity was as follows for the nine months ended September 30, 2021:
Equity-based compensation expense is measured at the grant date based on the estimated fair value of the award. The fair value of the awards is fixed at grant date and amortized over the remaining service period. The Company uses the Black-Scholes model to estimate the value of its stock options issued under the EIP. As the Company is not publicly traded, the common stock fair values used in the models are based on the most recent 409(a) valuation as of the option grant date. Management reviews option grants determines whether further valuation adjustments are appropriate based on recent company performance and/or changes in market conditions. The volatility assumed in the estimate was based on publicly traded companies in the same industry and considers the expected term calculated by the Company. The expected term of the options was derived from a simplified method which estimates the term based on an averaging of the vesting period and contractual term of the option grant. The risk-free rate utilized was the average of the five- and seven-year U.S. Treasury yield as the estimated expected term for options approximates 6 years. The Company has no plans to declare dividends in the foreseeable future.
Secondary Sales of Common Stock
Certain of the Company’s investors have acquired outstanding common stock from employees and certain sales of common stock by employees to new investors were facilitated by the Company. For these transactions, and where shares have been acquired at a price in excess of the estimated fair value of the Company’s common stock, the Company has recorded equity-based compensation expense of the difference between the price paid by the investors and the estimated fair value as of the date of the transactions. Equity-based compensation for these transactions has been recorded as follows (in thousands):
Repurchase of Common Shares
No share repurchases took place during the nine months ended September 30, 2021 or September 30, 2020.
Issuances of Warrants
All warrants discussed in this section were evaluated by the Company under the guidance of ASC 480-10, Distinguishing Liabilities from Equity, and were determined to be recognized under the provisions of this guidance as equity transactions.
In September 2014, the Company issued 45,000 common share warrants, with a $0.20 strike price, to a financial institution in connection with the note payable discussed in Note 8. Using the Black‑Scholes model, the Company estimated the fair value of the warrants to be $9,178 at issuance, which was recorded in equity in 2014. These warrants expire on the earlier of (1) October 13, 2025, or (2) three years after the Company’s Initial Public Offering. Should the fair value of the underlying common shares exceed the strike price at either expiration dates, the warrants will automatically be exercised via cashless net settlement. As of September 30, 2021, these warrants had not yet been exercised.
In connection with the note payable issued in September 2016, the Company issued 62,000 common share warrants, with a $0.6825 strike price, to the same financial institution. These warrants have substantially the same terms as the other warrants discussed above. Using the Black‑Scholes model, the Company estimated the fair value of the warrants to be $22,192 at issuance, which was recorded in equity in 2016. These warrants expire on March 14, 2026. Should the fair value of the underlying common shares exceed the strike price at the expiration date, the warrants will automatically be exercised via cashless net settlement. As of September 30, 2021, these warrants had not yet been exercised.
The following inputs were used in the Black‑Scholes valuation for both sets of warrants:
The Company refinanced its notes payable in January of 2019 and again in April 2020 (see Note 8). The refinances had no impact on the warrants issued with the notes payable and no additional warrants were issued as part of the refinances.
The entire disclosure for shareholders' equity comprised of portions attributable to the parent entity and noncontrolling interest, including other comprehensive income. Includes, but is not limited to, balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings, accumulated balance for each classification of other comprehensive income and amount of comprehensive income.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef