Share-Based Compensation

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

Non-Qualified Stock Option Plan

On January 2, 2019, the Company issued and adopted the 2019 Non-Qualified Stock Option Plan (the “2019 Plan”) to incentivize directors, consultants, advisors, and other key employees of the Company and its subsidiaries to continue their association by providing opportunities to participate in the ownership and further growth of the Company. The 2019 Plan provides for the grant of options (the “Stock Options”) to acquire common shares of the Company.

Stock Options are exercised from the pool of shares designated by the appropriate Committee of the Board of Directors. The grant-date fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The grant date fair value of the service vesting and the performance vesting options is recognized as an expense over the requisite service period or vesting period and upon the achievement of the performance condition deemed probable of being achieved, respectively. The exercise price of each Stock Option shall be determined by the Committee and may not be less than the fair market value of the common stock on the date of grant. Stock Options have 10-year terms, after which they expire and are no longer exercisable.

The total number of shares of common stock for which Stock Options may be granted under the 2019 Plan shall not exceed 13,640. The 2019 Plan was amended on November 6, 2020, pursuant to which the total number of common shares for which Stock Options may be granted under the 2019 Plan shall not exceed 15,640.

Stock Options become vested upon fulfillment of either service vesting conditions, performance vesting conditions, or both, as determined by the award agreement entered into by the Company and optionee. The service vesting requirement states that: (i) 25% of the service vesting options shall vest on the first anniversary of the grant date and (ii) the remaining 75% shall vest on an equal monthly-basis, so long as the optionee has remained continuously employed by the Company from the date of the award through the fourth anniversary of the grant date. The performance vesting requirement states that Stock Options shall vest upon sale of the Company only if the optionee has been continuously employed by the Company or its subsidiaries from the grant date through the date of such sale of the Company. For the awards vesting based on service conditions only and that have a graded vesting schedule, the Company recognizes compensation expense for vested awards in earnings, net of actual forfeitures in the period they occur, on a straight-line basis over the requisite service period.

Conversion of the Stock Options

In conjunction with the Business Combination, the Company amended and fully restated the 2019 Plan through the establishment of the 2021 Incentive Plan (“2021 Plan”). Pursuant to the 2021 Plan, each remaining legacy Stock Option from the 2019 Plan that was outstanding immediately prior to the Business Combination, whether vested or unvested, was converted into an option to purchase a number of shares of common stock (each such option, an “Exchanged Option”) equal to the product (rounded down to the nearest whole number) of (i) the number of shares of Legacy TOI stockholders subject to such Stock Option immediately prior to the Business Combination, and (ii) an exercise price per share equal to (A) the exercise price per share of such Stock Option immediately prior to the consummation of the Business Combination, divided by (B) the Common Stock Exchange Ratio ("Stock Option Exchange Ratio"). Following the Business Combination, each Exchanged Option that was previously subject to time vesting only, will continue to be governed by the same terms and conditions (including vesting and exercisability terms) as were applicable to the corresponding former old Stock Option immediately prior to the consummation of the Business Combination. Each Exchanged Option that was previously subject to performance vesting, will no longer be subject to the sale of the Company, and was modified to include service requirements only, under which, the Exchange Options will vest on a monthly-basis, so long as the optionee has remained continuously employed by the Company from the date of the Business Combination through the third anniversary of the Closing Date. The Company treated the Exchanged Options that were previously subject to performance conditions as a new award granted at the Closing Date. The Exchanged Options that were previously subject to service vesting only were not modified as a result of the Business Combination. All stock option activity was retroactively restated to reflect the Exchanged Options.

As of the Closing Date, the 11,850 Stock Options outstanding under the 2019 Plan were converted into 6,925,219 Exchanged Options after effect of the Common Stock Exchange Ratio. This effect of the Common Stock Exchange Ratio has been retroactively adjusted throughout the Company's consolidated financial statements.

As of December 31, 2022, the total number of shares of common stock remaining available for future awards (e.g., non-qualified stock options, incentive stock options, restricted stock units, restricted stock awards) under the 2021 Plan is 8,808,435.

The weighted average assumptions used in the Black-Scholes-Merton option-pricing model for the units granted during the years ended December 31, 2022 and 2021 Stock Options are provided in the following table:


	December 31, 2022	December 31, 2021
Valuation assumptions:
Expected dividend yield	—%	—%
Expected volatility	35.0% to 60.0%	35.00% to 40.20%
Risk-free interest rate	2.33% to 3.87%	0.76% to 1.30%
Expected term (years)	5.75 to 6.65	7.00

The Company used the simplified method to calculate the expected term of stock option grants because sufficient historical exercise data was not available to provide a reasonable basis for the expected term. Under the simplified method, the expected term is estimated to be the mid-point between the vesting date and the contractual term of the option.

Stock option activity during the years ended December 31, 2022 and 2021 is as follows:


Stock options	Number of shares	Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value (in thousands)
Balance at January 1, 2022	6,921,180	$	0.88
Granted	2,940,064	4.67
Exercised	(973,389)	0.90
Forfeited	(836,505)	2.35
Expired	(1,876)	0.97
Balance at December 31, 2022	8,049,474	$	2.14	7.64	$	4,081
Vested Options Exercisable at December 31, 2022	2,860,085	$	1.34	6.90	$	2,061


Stock options	Number of shares	Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value (in thousands)
Balance at January 1, 2021	8,683,952	$	0.85
Granted	1,182,218	1.08
Exercised	(2,175,986)	0.87
Forfeited	(769,004)	0.87
Expired	—	—
Balance at December 31, 2021	6,921,180	$	0.88	8.92	$	61,379
Vested Options Exercisable at December 31, 2021	1,821,909	$	0.87	7.78	$	16,185

Total share-based compensation expense during the years ended December 31, 2022 and 2021 was $11,602 and $1,775, excluding costs associated with rolled over units and new units issued or replaced in connection with the Business Combination, respectively. In addition, pursuant to the Business Combination, the Company accelerated and settled in cash 3,724 Legacy TOI Stock Options in a total cash amount of $20,597. The Company recognized compensation expense in the amount of $19,953 related to the share-based compensation units that are subject to performance vesting conditions immediately prior to the Business Combination.

In June 2021, the Company and certain participants in the Plan entered into agreements to amend the terms of the Stock Options previously issued to the participants during the first two quarters of 2021. The amendment primarily related to updating the exercise price, vesting conditions, and the number of Stock Options. The modification to the Stock Options resulted in immaterial incremental share-based compensation expense recorded in the Company's statement of operations.

At December 31, 2022 there was $22,521 of total unrecognized compensation cost related to unvested service Stock Options granted under the 2021 Plan and 2019 Plan that are expected to vest. That cost is expected to be recognized over a weighted average period of 2.67 and 2.98 years for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, the Company received $858 in cash and $2,799 in tax benefit from the stock options exercised. The total fair value of common shares vested during the years ended December 31, 2022 and 2021 was $2,951 and $1,349, respectively.

Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”)

Agajanian Holdings (“Holdings”), a holder of Series A Preferred Stock of Legacy TOI, entered into arrangements with physicians employed by the TOI PCs to issue RSAs which represent Series A Preferred Stock of Legacy TOI. The Legacy TOI RSAs only have performance vesting requirements linked to the sale of the Company so long as the grantee remains continuously and actively employed by the Company’s subsidiaries through the vesting date.

Conversion of the RSAs

Each of the Legacy TOI RSAs, from the Plan that was outstanding immediately prior to the Business Combination, whether vested or unvested, was converted into an RSU equal to the product (rounded down to the nearest whole number) of (i) the number of shares of RSAs immediately prior to the Business Combination, (ii) conversion rate of 1:10 of the Series A Preferred Stock of Legacy TOI, and (iii) the Common Stock Exchange Ratio. Following the Business Combination, each RSU is no longer subject to the sale of the Company event in order to vest, but was modified to include service requirements only. The service vesting requirement states that: (i) 16.67% of the RSUs shall vest on the sixth month anniversary of the Closing Date, and (ii) the remaining 83.33% shall vest on an equal quarterly-basis, so long as the grantee has remained continuously employed by the Company from the date of the award through the third anniversary of the grant date. The Company treated the RSUs that were previously subject to performance conditions as a new award granted at the Closing Date. All RSAs activity was retroactively restated to reflect the RSUs.

As of the Closing Date, the 2,210 RSAs outstanding under the Plan were converted into 1,291,492 RSUs upon the completion of the Business Combination after effect of the Common Stock Exchange Ratio. This effect of the Common Stock Exchange Ratio has been retroactively adjusted throughout our consolidated financial statements.

The weighted-average grant date fair values of the RSUs granted during the year ended December 31, 2022 and 2021 were determined to be $5.74 and $10.98, respectively, based on the fair value of the Company’s common shares at the grant date.

A summary of the activity for the RSUs and RSAs for the years ended December 31, 2022 and 2021, respectively, are shown in the following tables:


	Year Ended December 31,
	2022			2021
	Number of Shares	Weighted Average Grant Date Fair Value		Number of Shares	Weighted Average Grant Date Fair Value
Unvested at beginning of year	1,291,492	$	10.98	1,390,839	10.98
Granted	2,163,135	5.74		—	—
Vested	(760,973)	9.31		—	—
Forfeited	(587,114)	7.21		(99,347)	10.98
Unvested at end of year	2,106,540	$	7.25	1,291,492	$	10.98

The total share-based compensation expense during the year ended December 31, 2022 was $8,284 related to the RSUs. The total share-based compensation expense during the period between the Closing Date and December 31, 2021 was $640 related to the RSUs.

As of December 31, 2022, there was $15,281 of unrecognized compensation expense related to the RSUs and RSAs that are expected to vest. That cost is expected to be recognized over a weighted average period of 2.40 years as of December 31, 2022. As of December 31, 2022, 64,331 RSU shares were net settled to cover the required withholding tax upon vesting.

RSUs granted to Medical Employees and Nonemployees

In 2022, the Company entered into arrangements with certain medical directors and supervisors of advanced practice providers employed by or engaged as independent contractors of TOI to issue RSUs of the Company (“Medical RSUs”). Vesting on each annual Medical RSU award is dependent on the participant performing a specified minimum number of service hours during the calendar year (“one-Year Term”) and further contingent upon the participant’s continued service to, or employment by, the Company through the grant date. The Company’s regular grant date for these Medical RSU awards is in the first quarter of the calendar year following the one-Year Term.

The number of Medical RSUs granted to each such participant is determined by dividing a fixed monetary value by the trailing five-day closing price per share of the Common Stock preceding the grant date. Due to the calculation, some Medical RSU awards are liability-classified whereas other Medical RSU awards have a fixed number of shares and are equity-classified.

In the fourth quarter of 2022, the Company amended the terms of Medical RSUs previously issued to approximately 21 participants during the first quarter of 2022. The amendment primarily updated the vesting period and conditions. The original terms of the Medical RSU awards were deemed improbable of vesting at the modification date whereas the amended Medical RSU awards were deemed probable of vesting at the modification date, and thus are a Type III modification under ASC 718. The modification to the Medical RSUs resulted in $187 incremental share-based compensation expense before forfeitures, $(11) after accounting for forfeitures related to participants who did not perform the minimum number of service hours specified, recorded in the Company's statement of operations.

The total fair value of the liability-classified Medical RSU awards granted in 2022 and outstanding as of December 31, 2022 was approximately $264, which represents the fixed monetary value of the awards. The weighted-average grant-date fair value, based on the Company’s share price on the modification date, was $3.56 for equity-classified Medical RSUs granted during 2022 and outstanding as of December 31, 2022

A summary of the activity for the equity-classified Medical RSUs for the year ended December 31, 2022 is shown in the following table:


			Number of Shares
Balance at January 1, 2022			—
Granted			208,881
Vested			—
Forfeited			(61,411)
Balance at December 31, 2022			147,470

Total compensation costs for Medical RSUs were $618 for the year-ended December 31, 2022. As of December 31, 2022, there was $278 of unrecognized compensation expense related to these Medical RSUs that are expected to vest. That cost is expected to be recognized over a weighted average period of 0.25 years as of December 31, 2022. As of December 31, 2022, none of the Medical RSUs have vested.

Earnout Shares granted to Employees

As described in Note 2, the Company issued Earnout Shares to Legacy TOI option holders and Legacy RSU holders (“Option-holders Earnout” and “RSU-holders Earnout”, respectively, together “Employees Earnout Shares”).

The Option-holders Earnout vests upon the Company common stock achieving the price per share as provided above, so long as the optionee has remained continuously employed by the Company at that date. The RSU-holders Earnout vests upon (a) the Company common stock achieving the price per share as provided above, and (b) the underlying RSU vested, so long as the optionee has remained continuously employed by the Company at that date.

The grant date fair value of the First Earnout Tranche and Second Earnout Tranche as of Closing Date was determined to be $8.35 and $6.76, respectively. The assumptions used in the Monte-Carlo Simulation model for the Earnout Shares granted on the Closing Date are provided in the following table:


	November 12, 2021
Valuation assumptions
Expected dividend yield	—	%
Expected volatility	35.00	%
Risk-free interest rate	0.85	%

A summary of the activity for the Employees Earnout Shares for the years ended December 31, 2022 and 2021 is shown in the following tables:


	Year Ended December 31,
	2022	2021
Outstanding at beginning of year	1,602,435	—
Granted	—	1,603,322
Forfeited	(184,803)	(887)
Outstanding at end of year	1,417,632	1,602,435

The total share-based compensation expense during the year ended December 31, 2022 was $7,911, related to the Employees Earnout Shares, respectively. The total share-based compensation expense during the period between the Closing Date and December 31, 2021 was $2,167.

As of December 31, 2022, there was $552 of unrecognized compensation expense related to the Employees Earnout Shares, that are expected to vest. That cost is expected to be recognized over a weighted average period of 0.05 years as of December 31, 2022. As of December 31, 2022, none of the Employee Earnout Shares have vested.