Note 11. Share-based Compensation

Share-based Compensation Plans

In July 2015, the Company adopted the Neos Therapeutics, Inc. 2015 Stock Option and Incentive Plan (“2015 Plan”) which became effective immediately prior to the closing of the IPO and initially had 767,330 shares of common stock reserved for issuance. On January 1, 2016 and each January 1 thereafter, the number of shares of common stock reserved and available for issuance under the 2015 Plan shall be cumulatively increased by five percent of the number of shares of stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares determined by the administrator of the 2015 Plan. Accordingly, on January 1, 2019 and 2018, the Company added 2,483,815 shares and 1,449,847 shares, respectively, to the option pool. The 2015 Plan superseded the Neos Therapeutics, Inc. 2009 Equity Plan (“2009 Plan”), originally adopted in November 2009 and which had 1,375,037 shares reserved and available for issuance. Effective upon closing of the IPO, the Company’s Board of Directors determined not to grant any further awards under the 2009 Plan.

The shares of common stock underlying any awards that are forfeited, canceled, reacquired by the Company prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) under the 2009 Plan will be added to the shares of common stock available under the 2015 Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The 2015 Plan is administered by the Company’s Compensation Committee, which has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants and to determine the specific terms and conditions of each award, subject to the provisions of the 2015 Plan. The Company’s Compensation Committee may delegate authority to grant certain awards to the Company’s chief executive officer. Through September 30, 2019, the Company has granted options, restricted stock and RSUs under the 2015 Plan. The exercise price per share for the stock covered by a stock award granted shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value on the date of grant. Unexercised stock awards under the 2015 Plan expire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment.

The 2009 Plan allowed the Company to grant options to purchase shares of the Company’s common stock and to grant restricted stock awards to members of its management and selected members of the Company’s board of directors. Restricted stock awards are recorded as deferred compensation and amortized into compensation expense, on a straight-line basis over a defined vesting period ranging from 1 to 48 months. Options were granted to officers, employees, nonemployee directors and consultants, and independent contractors of the Company. The Company also granted performance-based awards to selected management. The performance options vested over a three-year period based on achieving certain operational milestones and the remaining options vested in equal increments over periods ranging from two to four years. Unexercised options under the 2009 Plan expire after the earlier of 10 years or termination of employment, except in the case of any unexercised vested options, which generally expire 90 days after termination of employment. All terminated options are available for reissuance under the 2015 Plan. Since the inception of the 2015 Plan through December 31, 2018, 82,635 shares related to forfeited 2009 Plan options were added to the shares available under the 2015 Plan. During the nine months ended September 30, 2019, 350,396 shares related to forfeited 2009 Plan options were added to the shares available under the 2015 Plan. As of September 30, 2019, 3,140,768 shares of common stock remain available for grant under the 2015 Plan.

In June 2018, the Company adopted the Neos Therapeutics, Inc. 2018 Inducement Plan (the “Inducement Plan”) which had 800,000 shares of common stock reserved and available for issuance. The Inducement Plan allows the Company to grant equity awards to induce highly-qualified prospective officers and employees who are not currently employed by the Company to accept employment and provide them with a proprietary interest in the Company. The Inducement Plan is administered by the Company’s compensation committee. The exercise price per share for the stock covered by a stock award granted pursuant to the Inducement Plan shall be determined by the administrator at the time of grant but shall not be less than 100 percent of the fair market value on the date of grant. Unexercised stock awards under the Inducement Plan expire after 10 years following the grant date. Under the Company’s employment agreement dated June 27, 2018 with Gerald McLaughlin, the Company’s Chief Executive Officer, the Company granted Mr. McLaughlin, under the Inducement Plan, an option to purchase 600,000 shares of the Company’s common stock, which vests in equal annual installments over four years from Mr. McLaughlin’s start date. In addition, on July 30, 2018, the Company granted Mr. McLaughlin, under the Inducement Plan, an option to purchase 200,000 shares of the Company’s common stock. The shares underlying this option shall vest subject to certain performance metrics to be evaluated for the fiscal year ending December 31, 2019. As of September 30, 2019, no shares of common stock remain available for grant under the Inducement Plan.

Share-based Compensation Expense

The Company has reported share-based compensation expense for the three and nine months ended September 30, 2019 and 2018, respectively, in its condensed consolidated statements of operations as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	(in thousands)
Cost of goods sold	$	139	$	138	$	426	$	380
Research and development		94		129		299		328
Selling and marketing		61		273		272		836
General and administrative		342		309		1,535		1,358
	$	636	$	849	$	2,532	$	2,902

The total share-based compensation expense included in the table above is attributable to stock options and RSUs of $601,000 and $35,000 for the three months ended September 30, 2019, respectively, and $2.4 million and $130,000 for the nine months ended September 30, 2019, respectively. The total share based compensation expense included in the table above is attributable to stock options and RSUs of $719,000 and $129,000 for the three months ended September 30, 2018, respectively, and $2.6 million and $266,000 for the nine months ended September 30, 2018, respectively.

As of September 30, 2019, there was $4.6 million of compensation costs, adjusted for any estimated forfeitures, related to non-vested stock options and RSUs granted under the Company’s equity incentive plans not yet recognized in the Company’s financial statements. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.6 years for stock options and 2.2 years for RSUs. There is no unrecognized compensation cost associated with grants of restricted stock.

Stock Options

During the nine months ended September 30, 2019, the Company granted 2,082,958 options under the 2015 Plan. During the year ended December 31, 2018, the Company granted 953,539 options under the 2015 Plan. In June 2018 and July 2018, the Company granted 600,000 and 200,000 options, respectively, under the Inducement Plan to Gerald McLaughlin, the Company’s Chief Executive Officer, at an exercise price of $6.20 and $5.55 per share, respectively.

The Company estimates the fair value of all stock options on the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. Prior to the IPO, given the absence of an active market for the Company’s common stock prior to its IPO, the Company’s board of directors was required to estimate the fair value of its common stock at the time of each option grant primarily based upon valuations performed by a third-party valuation firm.

The weighted-average key assumptions used in determining the fair value of options granted during the period indicated are as follows:


	Nine Months Ended
	September 30, 2019
Estimated dividend yield		0.00	%
Expected stock price volatility		60.00	%
Weighted-average risk-free interest rate		2.50	%
Expected life of option in years		6.07
Weighted-average option fair value at grant	$	1.25

A summary of outstanding and exercisable options as of September 30, 2019 and December 31, 2018 and the activity from December 31, 2018 through September 30, 2019, is presented below:


		Weighted-
	Number of	Average		Intrinsic
	Options	Exercise Price		Value
				(in thousands)

Outstanding at December 31, 2018	3,446,885	$	8.94	$	70

Exercisable at December 31, 2018	1,643,011	$	10.63	$	70

Granted	2,082,958		2.18
Exercised	(36,040)		0.32
Expired, forfeited or cancelled	(946,006)		10.34

Outstanding at September 30, 2019	4,547,797	$	5.62	$	39

Exercisable at September 30, 2019	1,436,254	$	9.18	$	23

The weighted-average remaining contractual life of options outstanding and exercisable on September 30, 2019 was 8.4 and 7.0 years, respectively. The option exercise prices for all options granted January 1, 2019 through September 30, 2019 ranged from $1.36 per share to $3.14 per share. The weighted-average remaining contractual life of options outstanding and exercisable on December 31, 2018 was 7.9 and 6.6 years, respectively. The option exercise price for all options granted in the year ended December 31, 2018 ranged from $4.76 to $10.40 per share.

Restricted Stock Units

On May 1, 2017, the Company granted 78,750 RSUs to members of its management that vest in four equal annual installments, beginning May 1, 2018. On October 2, 2017, the Company granted 6,250 RSUs to a member of its management that vest in four equal annual installments, beginning October 2, 2018. On March 1, 2018, the Company granted 93,750 RSUs to members of its management that vest in four equal annual installments, beginning March 1, 2019.

The Company satisfies its RSUs by issuing shares of the Company’s common stock when RSUs vest and are issued. In addition, when RSUs vest and are issued, RSU recipients may elect to have the Company withhold units as consideration for the tax withholding obligation for their vested RSUs. During the nine months ended September 30, 2019, 19,688 vested RSUs were converted into an equivalent 18,765 shares of common stock. The Company withheld 923 shares of its common stock to partially satisfy tax withholding obligations upon vesting of the RSUs for the nine months ended September 30, 2019. During the year ended December 31, 2018, 33,748 vested RSUs were converted into an equivalent 26,991 shares of common stock. The Company withheld 6,757 shares of its common stock to partially satisfy tax withholding obligations upon vesting of the RSUs for the year ended December 31, 2018.

A summary of outstanding RSUs as of September 30, 2019 and December 31, 2018 and the activity from December 31, 2018 through September 30, 2019, is presented below:


		Weighted-
	Number of	Average
	RSUs	Fair Value

Outstanding at December 31, 2018	75,314	$	7.93

Granted	—		—
Vested	(19,688)		7.76
Expired, forfeited or cancelled	—		—

Outstanding at September 30, 2019	55,626	$	7.99

Restricted stock

The Company did not issue any shares of restricted stock for the nine months ended September 30, 2019, or for the year ended December 31, 2018. No vested restricted stock awards were settled during the nine months ended September 30, 2019.

The Company had no unvested restricted stock as of September 30, 2019 and December 31, 2018. For the nine months ended September 30, 2019, there were no shares of restricted stock granted or forfeited.