Stock-Based Compensation

6 Months Ended

Jun. 30, 2013

Stock-Based Compensation

Stock-Based Compensation

On August 30, 2012, the Company’s Board of Directors adopted the Xhibit Corp. 2012 Stock Option Plan (“Plan”). Under the Plan the Company may issue up to an aggregate total of 13,000,000 incentive or non-qualified options to purchase the Company’s common stock. On May 13, 2013, the Company’s Board of Directors authorized the grant of non-qualified stock options to certain of its employees and contractors to purchase 1,910,000 of its common shares under the Plan. A total of 1,895,000 options were granted with an exercise price of $4.02, which is equal to the closing price of the common stock on the grant date, and a contractual term of ten years. The options vest and become exercisable ratably over a two year period on each anniversary of the grant date. At June 30, 2013, there were 11,105,000 options available for future grants under the Plan.

In order to estimate the fair value of stock options on the date of grant, the Company applied the Black-Scholes-Merton option valuation model. Inherent in the model are certain highly subjective assumptions related to the expected term of the options, the expected volatility of the Company’s stock price, expected dividends, and a risk-free interest rate. The fair value of the stock options granted was estimated to be $2.27, based upon the following assumptions:

Expected term	5.75 years
Expected stock price volatility		62.55	%
Dividends	None
Risk free interest rate		1.30	%

These assumptions were determined based upon the following considerations:

· Company has no historical stock option experience that would serve as a basis to estimate expected term and the stock options granted have the “plain-vanilla” characteristics described in SEC Staff Accounting Bulletin No. 107 (SAB 107). Therefore, the simplified method described in SAB 107, which uses an average of the options’ contractual term and their weighted average vesting periods, has been used to calculate an estimated expected term.

· Company has a limited trading history for its common stock. Therefore, expected stock price volatility has been estimated based upon the historical stock price volatility of another public company that operates in its industry, using daily price observations over a period equivalent to the expected term of the Company’s stock options. This peer company is similar to the Company, but it is larger in size and has been publicly-traded for a longer period. Thus, it is anticipated that the historical period used to observe the peer company’s volatility will reasonably correspond with the Company’s life cycle stage during the expected term of the options.

· As the Company has paid no dividends, and has no present plans to pay dividends in the future, no dividends were assumed for purposes of the fair value estimate.

· The risk-free rate is based on the implied yield of 7-year U.S. Treasury notes as of the grant date, as this period would reasonably coincide with the expected term.

Stock-based compensation expense is recorded over the service/vesting period based on the estimated value of the options that are ultimately expected to vest. An initial estimated forfeiture rate of 3% has been assumed for this calculation, and stock-based compensation expense will be adjusted as necessary in subsequent periods to reflect actual forfeiture activity.

For the three month period ended June 30, 2013, the Company recorded $406,597 of stock-based compensation expense within the consolidated statement of operations, as follows:

Sales and marketing expenses	$	272,495
General and administrative expenses		26,820
Research and development expenses		107,282
	$	406,597

No stock-based compensation expense was recorded for any period prior to April 1, 2013.

The estimated unrecognized compensation cost related to non-vested stock option awards of $3,695,025 is expected to be recorded over the remaining weighted average vesting period of 1.36 years.

Stock option activity for the six month period ended June 30, 2013 was as follows:

	Shares Under Option			Weighted Average Exercise Price
Outstanding at beginning of period		-
Granted		1,895,000		$	4.02
Forfeited		(5,000	)	$	4.02
Exercised		-
Outstanding at end of period		1,890,000		$	4.02
Remaining contractual life	9.87 years
Options exercisable at end of period		-

The estimated number of options outstanding as of June 30, 2013 and expected to vest was 1,810,578 and their aggregate intrinsic value was calculated as $706,125.  This aggregate value is based on the positive difference between the closing price of $4.41 for the Company’s stock on June 30, 2013 and the exercise price of the options, assuming the option holders had been able to exercise as of that date.