Note 9 – Stock Based Compensation

PetIQ, Inc. Omnibus Incentive Plan

The PetIQ, Inc. Omnibus Incentive Plan, as amended (the “Plan”) provides for the grant of various equity-based incentive awards to directors of the Company, employees, and consultants. The types of equity-based awards that may be granted under the Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. The Company has 3,914 thousand authorized shares under the Plan. As of March 31, 2020, 1,299 thousand shares were available for issuance under the Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.

PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees

The PetIQ, Inc. 2018 Inducement and Retention Stock Plan for CVC Employees (the “Inducement Plan”) provided for the grant of stock options to employees hired in connection with the VIP Acquisition as employment inducement awards pursuant to NASDAQ Listing Rule 5635(c)(4). The Inducement Plan reserved 800 thousand shares of Class A Common Stock of the Company. As of March 31, 2020, no shares were available for issuance under the Inducement Plan. All awards issued under the Plan may only be settled in shares of Class A common stock.

Stock Options

The Company awards stock options to certain employees and directors under the Plan and previously issued stock options under the Inducement Plan, which are subject to time-based vesting conditions, typically 25% on each anniversary of the grant date until fully vested. Upon a termination of service relationship by the Company, all unvested options will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The maximum contractual term for stock options is 10 years.

The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $2.2 million for the three months ended March 31, 2020, and $1.4 million for the three months ended March 31, 2019. All stock based compensation expense is included in general and administrative expenses based on the role of recipients. The fair value of the stock option awards was determined on the grant dates using the Black-Scholes valuation model based on the following weighted-average assumptions for the periods ended March 31, 2020 and 2019:


	March 31, 2020			March 31, 2019
Expected term (years) (1)		6.25			6.25
Expected volatility (2)		33.91	%		35.00	%
Risk-free interest rate (3)		0.72	%		2.74	%
Dividend yield (4)		0.00	%		0.00	%

⁽¹⁾

The Company utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

⁽²⁾

The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period consistent with the expected option term.

⁽³⁾

The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds to the expected term of the stock options.

⁽⁴⁾

The Company has not paid and does not anticipate paying a cash dividend on our common stock.

The weighted average grant date fair value of stock options granted during the period ended March 31, 2020 was $6.70 per option. At March 31, 2020, total unrecognized compensation cost related to unvested stock options was $13.2 million and is expected to be recognized over a weighted-average period of 2.7 years.


							Weighted
							Average
			Weighted		Aggregate		Remaining
	Stock		Average		Intrinsic		Contractual
	Options		Exercise		Value		Life
	(in 000's)		Price		(in 000's)		(years)
Outstanding at January 1, 2019		1,945	$	23.45	$	5,527		9.1
Granted		423		27.54
Exercised		(119)		19.51
Forfeited		(168)		21.92
Cancelled/Expired		(9)		25.70
Outstanding at December 31, 2019		2,072	$	24.63	$	6,266		8.0
Granted		478		19.49
Exercised		(46)		21.65
Forfeited		(13)		22.98
Outstanding at March 31, 2020		2,491	$	23.70	$	5,974		7.9
Options exercisable at March 31, 2020		870

Restricted Stock Units

The Company awards RSUs to certain employees and directors under the Plan, which are subject to time-based vesting conditions. Upon a termination of service relationship by the Company, all unvested RSUs will be forfeited and the shares of common stock underlying such awards will become available for issuance under the Plan. The fair value of RSUs are measured based on the closing fair market value of the Company’s common stock on the date of grant. At March 31, 2020, total unrecognized compensation cost related to unvested RSUs was $7.5 million and is expected to vest over a weighted average 3.5 years.

The fair value of these equity awards is amortized to equity based compensation expense over the vesting period, which totaled $0.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively. All stock based compensation expense is included in general and administrative expenses based on the role of recipients.

The following table summarizes the activity of the Company’s RSUs for the period ended March 31, 2020.


			Weighted
	Number of		Average
	Shares		Grant Date
	(in 000's)		Fair Value
Outstanding at January 1, 2019		51	$	33.16
Granted		123		27.61
Settled		(25)		30.43
Forfeited		(15)		30.58
Outstanding at December 31, 2019		133	$	28.85
Granted		243		19.49
Settled		(22)		27.56
Forfeited		(1)		32.53
Nonvested RSUs at March 31, 2020		353	$	22.48