Ideal Power Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock Option Plan

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Stock Option Plan

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 10 — Stock Option Plan

On May 17, 2013, the Company adopted the 2013 Equity Incentive Plan (the “Plan”) and reserved shares of common stock for issuance under the Plan not to exceed a maximum of 839,983 shares. The Plan is administered by the Compensation Committee of the Company’s Board of Directors. The persons eligible to participate in the Plan are employees (including officers), members of the Board of Directors, consultants and other independent advisors and contractors who provide services to the Company. Options issued under the Plan may have a term of up to ten years and may have variable vesting. The typical vesting schedule for stock options awarded under the Plan is a four year annual vesting schedule for employees and a one year quarterly vesting schedule for Board members.

On May 26, 2015, the stockholders approved an amendment to the Plan which increased shares available for issuance under the Plan by 1,250,000 shares. Also, on August 27, 2015, the Compensation Committee approved a restatement of the Plan in order to clarify the types of awards allowable under the plan to include restricted stock and PSUs. At December 31, 2015, there were 831,615 shares of common stock available for issuance under the Plan.

During the year ended December 31, 2015, the Company granted 182,600 and 38,502 stock options to purchase shares of common stock to employees and non-employee directors, respectively. The exercise price of the stock options issued to both employees and directors was the closing price of the Company’s stock on the date of grant. The options granted to employees vest in equal annual installments over 4 years while the options granted to directors vested in equal quarterly installments in 2015. The options granted in 2015 were valued at $974,329 using the Black-Scholes option pricing model. The compensation expense associated with these grants recognized during the year ended December 31, 2015 amounted to $231,395.

During the year ended December 31, 2015, the Company granted an employee 10,000 shares of restricted stock. The fair value of the restricted stock was $77,700 based on the closing market price of the Company’s stock on the date of grant, which will be recognized ratably over the four-year vesting period. Stock compensation expense of $7,284 related to this grant was recognized during the year ended December 31, 2015. Shares outstanding at December 31, 2015 include the 10,000 shares of unvested restricted stock.

During the year ended December 31, 2015, the Company also granted an employee 96,000 PSUs, which are subject to the satisfaction of certain market-based and continued service conditions. The market-based vesting criteria are separated into four tranches and require that the Company achieve certain stock price targets ranging from $9 per share to $15 per share during the four-year period following the grant date. With certain limited exceptions, continued employment with the Company on the fourth anniversary of the grant date is required in order for the PSUs to vest. The grant-date fair value of the PSUs was $405,997, or $4.23 per unit, using a Monte Carlo Simulation with a four-year life, 60% volatility and a risk free interest rate of 1.3%. The fair value of the PSUs is being recognized over the vesting period and $31,014 was recognized during the year ended December 31, 2015.

As permitted by SAB 107, management utilizes the simplified approach to estimate the expected term of stock options, which represents the period of time that options granted are expected to be outstanding. The risk free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield in effect at the time of grant. The volatility is estimated based on the historical volatilities of comparable companies. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

The assumptions used in the Black-Scholes model are as follows:

	For the year ended December 31,
	2015			2014
Risk-free interest rate		1.54% to 1.95	%		1.78 to 2.19	%
Expected dividend yield		0	%		0	%
Expected life		5.31 to 6.25 years			5.31 to 6.25 years
Expected volatility		60	%		60	%

A summary of the Company’s stock option activity and related information is as follows:

	2015						2014
					Weighted						Weighted
			Weighted		Average				Weighted		Average
			Average		Remaining				Average		Remaining
			Exercise		Life				Exercise		Life
	Stock Options		Price		(in years)		Stock Options		Price		(in years)
Outstanding at January 1		1,368,047	$	6.41		8.7		485,573	$	4.24		8.2
Granted		221,102	$	7.80				899,526	$	7.49
Exercised		(201,389)	$	4.47				(10,500)	$	0.10
Forfeited/Expired/Exchanged		(55,437)	$	6.13				(6,552)	$	4.53
Outstanding at December 31		1,332,323	$	6.94		8.4		1,368,047	$	6.41		8.7
Exercisable at December 31		572,623	$	6.02		7.8		467,204	$	4.65		7.3

During the year ended December 31, 2015, option holders exercised 90,609 options on a cashless basis and received 49,987 shares of common stock and 40,622 shares were used to cover the exercise price. In addition, option holders exercised 110,780 options and paid the exercise price in cash. The Company received $553,871 in net cash proceeds for the exercise of options during 2015.

The following table sets forth additional information about stock options outstanding at December 31, 2015:

			Weighted Average
	Options		Remaining Life		Weighted Average		Options
Range of Exercise Prices	Outstanding		(in years)		Exercise Price		Exercisable
$0.41 – $5.00		226,645		6.8	$	4.05		208,395
$5.01 – $7.50		477,928		8.5	$	7.00		228,203
$7.51 – $11.00		627,750		8.8	$	7.95		136,025
		1,332,323						572,623

The estimated aggregate pretax intrinsic value (the difference between the Company’s stock price on the last day of the year ended December 31, 2015 and the exercises price, multiplied by the number of vested in-the-money options) is approximately $1,136,000. This amount changes based on the fair value of the Company’s stock.

As of December 31, 2015, there was $3,082,439 of unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.8 years.