Mezzanine and Stockholders’ Equity

Mezzanine

Pursuant to the shareholder agreements that APC has entered into with its shareholders, in the event of certain disqualifying events specified in the agreements (e.g., the shareholder's death, disability or retirement from the practice of medicine or breach of physician or other agreements with APC), APC has the option to purchase the shares of APC capital stock held by such shareholder for a purchase price specified therein. As APC's shares of capital stock are redeemable upon the occurrence of events that are not solely within APC's control, such APC shares are classified as mezzanine or temporary equity rather than as permanent equity. Accordingly, the Company recognizes noncontrolling interests in APC as mezzanine equity in the condensed consolidated financial statements. APC’s shares are not redeemable and it is not probable that the shares will become redeemable as of September 30, 2019 and December 31, 2018.

On December 18, 2018, the Company entered into a settlement agreement and mutual release with former APCN-ACO, Inc. shareholders to repurchase all the equity interests in APC previously held by these shareholders. APC paid approximately $1.7 million to repurchase 1,662,571 shares of common stock.

Stockholders’ Equity

As of the date of this Report, 480,212 holdback shares have not been issued to certain former NMM shareholders who were NMM shareholders at the time of closing of the Merger, as they have yet to submit properly completed letters of transmittal to ApolloMed in order to receive their pro rata portion of ApolloMed common stock and warrants as contemplated under the Merger Agreement. Pending such receipt, such former NMM shareholders have the right to receive, without interest, their pro rata share of dividends or distributions with a record date after the effectiveness of the Merger. The condensed consolidated financial statements have treated such shares of common stock as outstanding, given the receipt of the letter of transmittal is considered perfunctory and the Company is legally obligated to issue these shares in connection with the Merger.

See options and warrants section below for common stock issued upon exercise of stock options and stock purchase warrants.

Options

The Company’s outstanding stock options consisted of the following:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Options outstanding at January 1, 2019	647,240		$	5.62	4.13	$	9.2
Options granted	123,378		17.80		—	—
Options exercised	(203,524	)	5.77		—	2.4
Options forfeited	—		—		—	—

Options outstanding at September 30, 2019	567,094		$	8.22	3.60	$	5.4

Options exercisable at September 30, 2019	466,216		$	5.07	2.74	$	5.3

During the nine months ended September 30, 2019 and 2018, stock options were exercised for 203,524 and 366,454 shares, respectively, of the Company’s common stock, which resulted in proceeds of approximately $1.2 million and $1.5 million, respectively. The exercise price range from $1.50 to $10.00 per share for the exercises during the nine months ended September 30, 2019 and ranged from $0.01 to $10.00 per share for the exercises during the nine months ended September 30, 2018.

During the nine months ended September 30, 2018 stock options were exercised pursuant to the cashless exercise provision of the option agreement, with respect to 60,536 shares of the Company’s common stock, which resulted in the Company issuing 47,576 net shares.

During the nine months ended September 30, 2019, the Company granted 45,000 and 78,378 five year stock options to certain ApolloMed board members and executives, with exercise price of $18.11 and $17.62, respectively, which were recognized at fair value, as determined using the Black-Scholes option pricing model and the following assumptions:



September 30, 2019	Board Members			Executives
Expected Term	3.0 years			4.0 years
Expected volatility	100.27		%	91.04		%
Risk-free interest rate	2.51		%	1.55		%
Market value of common stock	$	18.11		$	17.62
Annual dividend yield	—		%	—		%
Forfeiture rate	0		%	0		%

During the three and nine months ended September 30, 2019, the Company recorded approximately $0.1 million and $0.4 million of share-based compensation expense associated with the issuance of restricted shares of common stock and vesting of stock options which is included in General and administrative expenses in the accompanying condensed consolidated statement of income, respectively.

Outstanding stock options granted to primary care physicians to purchase shares of APC’s common stock consisted of the following:



	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Options outstanding at January 1, 2019	853,800	$	0.167	0.75	$	0.5
Options granted	—	—		—	—
Options exercised	—	—		—	—
Options expired/forfeited	—	—		—	—

Options outstanding and exercisable at September 30, 2019	853,800	$	0.167	0.00	$	0.5

The aggregate intrinsic value is calculated as the difference between the exercise price and the estimated fair value of common stock as of September 30, 2019.

Share-based compensation expense related to option awards granted to primary care physicians to purchase shares of APC’s common stock, are recognized over their respective vesting periods, and consisted of the following:



	Three Months Ended September 30,
	2019		2018
Share-based compensation expense:

General and administrative	$	202,382	$	202,382

	$	202,382	$	202,382



	Nine Months Ended September 30,
	2019		2018
Share-based compensation expense:

General and administrative	$	607,146	$	607,146

	$	607,146	$	607,146

Restricted Stock Awards

During the three and nine months ended September 30, 2019, the Company granted restricted stock awards totaling 117,766 shares to certain executives which are earned based on service conditions. The grant date fair value is that day's closing market price of the Company's common stock. The grant date fair value of the restricted stock was $2.1 million to be recognized on a straight-line basis over the awards' vesting period of three years.

Warrants

The Company’s outstanding warrants consisted of the following:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Warrants outstanding at January 1, 2019	3,331,995		$	9.93	2.97	$	33.1
Warrants granted	—		—		—	—
Warrants exercised	(133,221	)	9.21		—	1.4
Warrants expired/forfeited	—		—		—	—

Warrants outstanding at September 30, 2019	3,198,774		$	9.96	2.26	$	24.5



Exercise Price Per Share		Warrants Outstanding	Weighted Average Remaining Contractual Life	Warrants Exercisable	Weighted Average Exercise Price Per Share
$	9.00	971,165	1.04	971,165	$	9.00
10.00		1,399,667	2.55	1,399,667	10.00
11.00		827,942	3.19	827,942	11.00

$ 9.00 –11.00		3,198,774	2.26	3,198,774	$	9.96

During the nine months ended September 30, 2019 and 2018, common stock warrants were exercised for 133,221 and 268,663 shares, respectively, of the Company’s common stock, which resulted in proceeds of approximately $1.2 million and $2.1 million, respectively. The exercise price ranged from $9.00 to $11.00 per share for the exercises during the nine months ended September 30, 2019 and $4.00 to $11.00 during the nine months ended September 30, 2018.

Treasury Stock

APC owned 16,790,576 and 1,682,110 shares of ApolloMed’s common stock as of September 30, 2019 and December 31, 2018, which are legally issued and outstanding but excluded from shares of common stock outstanding in the condensed consolidated financial statements, as such shares are treated as treasury shares for accounting purposes. Pursuant to the closing of the APC transaction (see Note 1) and issuance of the Holdback Shares (see Note 14), 15,015,015 of shares purchased and 93,451 shares issued to APC, respectively, are treated as treasury shares. The remaining treasury shares of 168,493 were repurchased from the former APCN-ACO, Inc. shareholders in 2018.

Dividends

During the nine months ended September 30, 2019 and 2018, APC paid dividends of $59.7 million and $2.0 million, respectively.

During the nine months ended September 30, 2019, CDSC paid dividends of $1.2 million.