Note 14 — Stock-Based Compensation and Expense

Cambium Learning Group, Inc. 2009 Equity Incentive Plan

In 2009, the Company adopted the Cambium Learning Group, Inc. 2009 Equity Incentive Plan (“Incentive Plan”). Under the Incentive Plan, 5,000,000 shares of common stock were reserved for issuance of awards which may be granted in the form of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, conversion stock options, conversion stock appreciation rights, and other stock or cash awards. The Incentive Plan is administered by the board of directors which has the authority to establish the terms and conditions of awards granted under the Incentive Plan.

Stock Option Activity

Stock option awards generally vest in equal monthly installments on the last day of each month of the four year period beginning on the first day of the month of grant. The term of each option is typically ten years from the date of grant. All outstanding options were granted at exercise prices equal to the fair market value of the Company’s common stock at the date of grant.

The following table summarizes stock option transactions under the Incentive Plan for the year ended December 31, 2015.

	Year Ended December 31, 2015
	Options			Weighted Average Exercise Price		Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2014		2,602,375		$	1.49
Granted		614,325		$	3.58
Exercised		(262,183	)	$	1.43
Cancelled/Forfeited		(72,620	)	$	1.50
Outstanding at December 31, 2015		2,881,897		$	1.93		6.3	$	8,425
Exercisable at December 31, 2015		1,585,133		$	1.54		5.4	$	5,245
Vested and Expected to Vest at December 31, 2015		2,772,410		$	1.88		6.2	$	8,242

The weighted average grant date fair value of options granted during the years ended December 31, 2015 and 2014 was $2.15 and $1.27, respectively. The aggregate intrinsic value of stock options exercised in the years ended December 31, 2015 and 2014 was $0.9 million and $25 thousand, respectively. During the years ended December 31, 2015 and 2014, 719,293 and 648,765 options vested, respectively. The total fair value of the options that vested was $0.7 million and $0.5 million, respectively.

At December 31, 2015, total future compensation costs related to unvested stock options to be recognized in the consolidated statements of operations was $1.6 million, with a weighted average period over which this cost is expected to be recognized of 2.7 years.

Stock Option Valuation Assumptions

The Company utilizes the Black-Scholes option-pricing model to determine the fair value of stock option awards on the date of grant. The following assumptions were used in the Black-Scholes option-pricing model to estimate the fair value of the awards granted during the years ended December 31, 2015 and 2014:

	Year Ended December 31,
	2015			2014
Expected stock volatility		64.00	%		64.00	%
Risk-free interest rate	1.60% – 1.88%			1.91% – 2.05%
Expected years until exercise	6.25				6.25
Dividend yield		0.00	%		0.00	%

Due to a lack of exercise history or other means to reasonably estimate future exercise behavior, the Company used the simplified method to estimate the expected years until exercise on new awards as described in applicable accounting guidance for stock-based compensation.

Restricted Stock

The following table summarizes restricted stock transactions under the Incentive Plan for the year ended December 31, 2015.

	Year Ended December 31, 2015
	Restricted Stock			Weighted Average Grant Date Fair Value
Unvested at December 31, 2014		2,750		$	2.02
Granted		—		$	—
Vested		(1,000	)	$	2.18
Cancelled/Forfeited		—		$	—
Unvested at December 31, 2015		1,750		$	1.94

The restrictions on the common stock awards lapse equally over a four year period on the anniversary of the grant date or upon a change in control of the Company. The awards were valued based on the Company’s closing stock price on the date of grant.

At December 31, 2015, total future compensation costs related to unvested restricted stock to be recognized in the consolidated statements of operations was $2 thousand, with a weighted average period over which this cost is expected to be recognized of 2.0 years.

Stock-Based Compensation and Expense

Stock-based compensation and expense for the years ended December 31, 2015 and 2014 was allocated as follows:

	Year Ended December 31,
(in thousands)	2015		2014
Cost of revenues	$	41	$	34
Research and development expense		137		103
Sales and marketing expense		160		128
General and administrative expense		349		246
Stock-based compensation and expense	$	687	$	511

The total income tax expense recognized for book purposes in the Consolidated Statements of Operations and Comprehensive Loss related to stock-based compensation was zero and $23 thousand, respectively, for the years ended December 31, 2015 and 2014. The total tax benefit realized was zero for all years presented.

Warrant

In connection with the completion of the merger with VLCY on December 8, 2009, the Company issued to VSS-Cambium Holdings III, LLC a warrant to purchase shares of the Company’s common stock (the “Holdings Warrant”). As of December 31, 2013, the Holdings Warrant was exercisable for 755,077 shares of the Company’s common stock at an exercise price of $0.01 per share. On November 7, 2014, VSS-Cambium Holdings, III LLC exercised the warrant on a cashless basis and was issued 750,195 shares of the Company’s common stock, with the Company retaining 4,882 shares as settlement of the exercise price.

The number of shares of the Company’s common stock issuable under the Holdings Warrant was based upon the calculation of three separate amounts; the Cambium Specified Asset Recoupment Amount, the Additional Share Amount, and the Formula Amount. The 755,077 shares associated with the warrant, represented 299,847 shares originating from the Cambium Specified Asset Recoupment Amount and 455,230 shares originating from the Formula Amount, which are described more fully below.

The Cambium Specified Asset Recoupment Amount was based upon the net amount of recoveries that the Company received on and after June 1, 2009, including periods after the effective time of the mergers, with respect to an embezzlement matter that was discovered in April 2008. The Company received net recoveries of approximately $4.3 million with respect to this matter. The Cambium Specified Asset Recoupment Amount equals 0.45 multiplied by the quotient of the aggregate net recoveries divided by $6.50. Therefore 299,847 shares were available under the Holdings Warrant related to the Cambium Specified Asset Recoupment Amount. In accordance with applicable accounting guidance for distinguishing liabilities from equity, this award was recorded to equity when no other significant contingencies remained related to the Cambium Specified Asset Recoupment Amount.

The Additional Share Amount was calculated over a period commencing at the effective time of the mergers with VLCY and Cambium and ending two years thereafter. The Additional Share Amount was equal to the number of shares of VLCY common stock, if any, that were surrendered upon consummation of the VLCY merger in excess of the sum of the 29,874,145 shares that were known to be outstanding plus the number of shares of VLCY common stock that were issued upon the exercise of options known to be outstanding. Following completion of the merger with VLCY, 29,999 shares of VLCY common stock in excess of 29,874,145 shares were surrendered and, pursuant to the merger agreement, the number of shares of the Company’s common stock issuable to VSS-Cambium Holdings III, LLC was adjusted to increase the number of shares it received. At the effective time of the merger with VLCY all outstanding stock options were terminated. Thus, no Holdings Warrant was issued with respect to any shares relating to the Additional Share Amount.

The Formula Amount added shares to the Holdings Warrant only if, prior to completion of the mergers with Cambium and VLCY, equity cure payments were made under Cambium’s existing credit agreements, debt was retired under those agreements or payments were made to obtain default-related waivers under those agreements. The only applicable event was an equity cure payment of $3.0 million made in August 2009. The Formula Amount equals the equity cure payment of $3.0 million divided by $6.50, or 455,230 shares. Thus, 455,230 shares of the Company’s common stock were available under the Holdings Warrant with respect to the Formula Amount. In accordance with applicable accounting guidance for distinguishing liabilities from equity, this award was recorded to equity with the offset to the capital contribution made to affect the debt cure.

Securities Authorized for Issuance

Securities authorized for issuance under equity compensation plans at December 31, 2015 are as follows:

(in thousands, except per share amounts)
Plan Category	Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity incentive plans (a)
Equity compensation plans approved by security holders		2,882	$	1.93		1,710
Equity compensation plans not approved by security holders		—		—		—
Total		2,882	$	1.93		1,710

(a)

Excludes securities reflected in the first column, “Number of securities to be issued upon exercise of outstanding options and rights,” and issued restricted stock.