Stock-Based Compensation

12 Months Ended

Dec. 31, 2021

Stock-Based Compensation

Stock-Based Compensation

Note 14 — Stock-Based Compensation

The Company has the following Stock Option Plans (“Plans”) that allow for the granting of both incentive stock options or ISOs, which can result in potentially favorable tax treatment to the participant, and non-statutory stock options. The Company’s 2014 Equity Incentive Plan (the “2014 Plan”) was approved by the stockholders of the Company on June 26, 2014. The Company no longer issues any options under its prior 2009 Plan. The 2014 Plan has an “evergreen provision”, under which the maximum number of shares of common stock that may be issued under the 2014 Plan was approved by the Company’s stockholders to increase the number of shares available for issuance thereunder to 20% of the outstanding shares of common stock. As of December 31, 2021, the authorized shares of common stock under the 2014 Plan, as amended, were 12,734,454.

The exercise price per share subject to an option is determined by the administrator, but in the case of an ISO must not be less than the fair market value of a share of our common stock on the date of grant and in the case of a non-

statutory stock option must not be less than 100% of the fair market value of a share of our common stock on the date of grant.

Under the 2014 Plan, the Company may grant stock options, stock appreciation rights, performance awards of stock and/or cash, and stock awards of restricted stock.

Options issued or outstanding under the Stock Options Plans are as follows:

	2009	2014
	Plan	Plan	Total
Outstanding as of December 31,  2019	85,498	1,298,093	1,383,591
Available for future issuance under plan	—	5,329,309	5,329,309
Total authorized by plan	85,498	6,627,402	6,712,900
Outstanding as of December 31,  2020	85,498	2,547,677	2,633,175
Available for future issuance under plan	—	6,583,033	6,583,033
Totals authorized by plan	85,498	9,130,710	9,216,208
Outstanding as of December 31,  2021	—	11,184,450	11,184,450
Available for future issuance under plan	—	1,550,004	1,550,004
Totals authorized by plan	—	12,734,454	12,734,454

The 2014 Plan gives the Board of Directors of the Company the ability to determine vesting periods for all stock incentives granted under the 2014 Plan and allows option terms to be up to ten years from the original grant date. Employees’ incentive stock options typically vest at a minimum rate of 25% per year over a four-year period, commencing on the date of grant.

The following table summarizes stock option activity related to the Company’s standard employee incentive plan, excluding options awarded under the Long-term Incentive Plan (LTIP), for the years ended December 31, 2021, 2020 and 2019:

		Weighted		Average
	Number of	Average		Remaining Life
	Options	Exercise Price		(years)
Outstanding at December 31,  2018	1,546,521	$	5.11	7.19
Granted	73,500		2.36
Exercised	—		—
Expired or Forfeited	(236,430)		6.21
Outstanding at December 31,  2019	1,383,591	$	4.77	6.25
Granted	1,481,000		1.66
Exercised	(82,083)		4.67
Expired or Forfeited	(149,333)		3.68
Outstanding at December 31, 2020	2,633,175	$	3.09	6.53
Granted	1,100,500		17.23
Exercised	(739,956)		3.36
Expired or Forfeited	(170,085)		8.58
Outstanding at December 31, 2021	2,823,634	$	7.67	7.95

As of December 31, 2021, there were 1,069,639 options that were fully vested and exercisable at a weighted average exercise price of $5.70 per share. The weighted average remaining contractual term on the vested options is 6.58 years. The unvested balance of 1,753,995 options as of December 31, 2021 are exercisable at a weighted average exercise price of $9.62 per share. The weighted average remaining contractual term on the unvested options is 8.8 years.

As of December 31, 2020, there were 1,251,241 options that were fully vested and exercisable at a weighted average exercise price of $4.17 per share. The weighted average remaining contractual term on the vested options is 4.58 years. The unvested balance of 1,381,934 options as of December 31, 2020 were exercisable at a weighted average exercise price of $2.16 per share. The weighted average remaining contractual term on the vested options was 9.3 years.

As of December 31, 2019, there were 1,015,019 options that were fully vested and exercisable at a weighted average exercise price of $4.63 per share. The weighted average remaining contractual term on the vested options is 5.4 years. The unvested balance of 368,572 options as of December 31, 2019 were exercisable at a weighted average exercise price of $5.17 per share. The weighted average remaining contractual term on the vested options was 8.5 years.

The aggregate intrinsic value of the options exercised during the year ended December 31, 2021, 2020 and 2019 was approximately $13,697,906, $869,177 and $493,500, respectively.

The aggregate intrinsic value of the options outstanding as of December 31, 2021, 2020 and 2019 was approximately $9,314,887, $16,444,695 and nil, respectively.

The Black-Scholes-Merton option pricing model was used to estimate the fair value of share-based awards under FASB ASC Topic 718. The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and share price volatility.

The expected term of options granted was estimated to be the average of the vesting term, historical exercise and forfeiture rates, and the contractual life of the option. The share price volatility at the grant date is estimated using historical stock prices based upon the expected term of the options granted. The risk-free interest rate assumption is determined using the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Therefore, the assumed expected dividend yield is zero.

The following summary table shows the assumptions used to compute the fair value of stock options granted, excluding LTIP, during 2021, 2020 and 2019 and their estimated value:

December 31,	2021			2020			2019
Assumptions for Black-Scholes:
Expected term in years		6.1 to 6.5			6.2 to 6.6			6.2 to 6.3
Expected Volatility		82.8% to 86.0	%		73.3% to 76.8	%		79.4% to 89.4	%
Risk-free interest rate		0.96% to 1.25	%		0.41% to 0.55	%		1.63% to 1.68	%
Expected annual dividends		None			None			None
Value of options granted:
Number of options granted		1,100,500			1,481,000			73,500
Weighted average fair value per share	$	12.40		$	1.08		$	1.71
Fair value of options granted	$	13,642,976		$	1,602,267		$	125,814

Under FASB ASC Topic 718, “Compensation – Stock Compensation”, the Company has elected to account for forfeitures as they occur.

Unrecognized stock-based compensation expense was $9,355,603 as of December 31, 2021, relating to a total of 1,753,995 unvested stock options under the Company’s stock option plans. This stock-based compensation expense is expected to be recognized over a weighted average period of approximately 3.2 years.

During the year ended December 31, 2021, the Company issued 68,047 shares of common stock to its independent board members as part of their annual retainer for services covering the period of July 2021 to June 2022 and for the onboarding of the 3 new directors. The fair market value on the date of award of the stock issued was $16.90, resulting in an aggregate fair value of approximately $1,150,000. The unamortized portion is included in Prepaid Expenses and Other Assets on our consolidated balance sheet. The fair market value of these awards is expensed over twelve (12) months for 59,170 shares and twenty-four (24) months for 8,877 shares beginning on July 1, 2021.

During the year ended December 31, 2021, the Company awarded 300,000 shares of restricted common stock to the new managing director of its newly established Vuzix Custom Solutions (VCS) business unit, also formerly referred to as Integrated Solutions Business Unit. This equity award was granted pursuant to Nasdaq Listing Rule 5635(c)(4) inducement grant exception as a component of Mr. Spiliotis’s employment compensation and was granted as an inducement material to his acceptance of employment with Vuzix. These restricted shares are subject to vesting, including 50,000 shares that may be earned over 3 years based upon continued employment with the Company, and 250,000 shares that are being held in escrow, and which may be earned upon achievement of revenue and EBITDA operational milestones for VCS within specified periods of time over 5 years. Any such milestone shares will be cancelled if not earned within the appropriate milestone time period. The fair market value on the date of award of the restricted stock issued was $15.58, resulting in an aggregate fair value of approximately $4,674,000, of which, $779,000 has been recorded in short-term and long-term Prepaid Expenses and Other Assets associated with the time vesting option, to be amortized over 36 months beginning October 1, 2021.  The balance of shares held in escrow related to the performance-based milestones, representing a fair market value of $3,895,000, is not being amortized until such time as the performance milestones are considered probable to be achieved or have been achieved in accordance with ASC 718.

For the years ended December 31, 2021, 2020 and 2019, the Company recorded total stock-based compensation expense, including stock awards but excluding awards under the Company’s LTIP, of $4,047,444, $2,805,842, and $1,498,357, respectively.