The following question was asked earlier today and I will attempt to explain it for anyone wondering the same thing (it's a fair question):

Can someone please explain why MB has to sell his stock options to use them?

Can't you just covert them to normal shares at the option price and hold them without selling?

Before I address that question though, some have also asked how anyone actually knows it is Mark Benadiba doing the options exercising. The correct answer is no one can know with 100% certainty. However, one can make reasonable, informed conclusions based on available information. There have been a significant amount of options shares exercised in July, to the tune of approximately 3.5 million shares (source: TMX). Incidentally, Mark Benadiba had 3.3M options (we know this because it says so in the management information circular, page 12). That's a lot of options, and arguably the only people to possess that many options would be upper management. If others in POET management were exercising, instead of Mark, we would be seeing insider reports filed on SEDI within 5 calendar days of the transaction, to comply with applicable securities laws (see Section 3.3); however, no such reports have been generated. Mark B. on the other hand, is no longer an insider (ceased to be an insider as of July 1st, 2014). Thus the combination of the very large options exercises, plus the lack of insider trading activity reports, leads to the very reasonable conclusion that Mark B. is the one doing the exercising.

As for why he is selling his options instead of keeping them as shares ... the amount of money rquired to keep options as shares after exercise is pretty significant, and very few people will have that kind of free capital. Let's look at Mark. B.'s specific situation. We know he has the following options:

• 2,500,000 options with a strike price of $0.23
• 500,000 options with a strike price of $0.445
• 300,000 options with a strike price of $0.49

The combined cost of purchasing all of the above options would be around $944,500. That's a significant amount of money on its own, and very few people would be in the position to have that kind of free capital available. But wait, it gets worse.

By exercising his options, Mark also generates a taxable event. That is, he is deemed to have earned employment income equal to the value of the options ... or in other words, the number of options x (market price on the day of exercise - option strike price). If he opts to sell the options, he pockets the value of options, less taxes, which are withheld at the time of exercise. That's fine and dandy, because you just made a boat-load of money ... so if the tax man takes some of that money away ... well, that's life. But what about if Mark wants to keep the shares, instead of selling them? The answer is, he is assessed the same taxable income as if he sold the shares and walked away with the profits, and Solium (the stock option plan provider) will still assess a withholding tax to Mark on behalf of Revenue Canada. The problem here is, Mark has the shares in possession now ... they are worth a lot, but he hasn't sold them yet ... but he is still required to pay the withholding tax at the time of exercise on the value of the taxable benefit (which is quite large). Therefore, this gets added to the cost of exercise.

Stock options are taxed as regular employment income. Clearly, this income would be taxed at the highest marginal rate in Ontario: 49.53%. Under Section 110(1)(d) of the Income Tax Act, a deduction of half the taxable benefit is allowed. So let's do the math. I assume a market price of $1.75 for illustrative purposes:

• 2,500,000 options x ($1.75 - $0.23) x 50% taxable x 49.53% tax rate = $941,070
• 500,000 options x ($1.75 - $0.445) x 50% taxable x 49.53% tax rate = $161,592
• 300,000 options x ($1.75 - $0.49) x 50% taxable x 49.53% tax rate = $93,612

Grand total in taxes required to be paid: $1,196,273.00. This amount is withheld at the time of exercise, whether shares are immediately sold, or whether they are kept. In the case of keeping the shares, this cost is added to the cost of purchasing the options.

Therefore, the grand total Mark B. would owe is $1,196,273 + $944,500 = $2,140,773.00 ... this is the amount of money Mark. B. would have to pay up front to keep all options as shares. Please note this represents an estimate only.

As you can see, that's a LOT of capital. Most people simply cannot afford to keep the options as shares. Much more realistic, is to sell as many options as required to have enough money left over to buy the remaining shares (and keep them). I suspect this is what Mark has done.

Hopefully the above explains why the options were not all kept as shares. The sale of options as shares should NOT lead people to believe:

• Mark B. has no confidence in the company or belief that the share price will go up in the future
• Mark B has little desire to have skin in the game (own actual shares)
• Mark B. wants to see the share price depressed by the action of the new options shares hitting the market, causing excess supply that drops the share price.

Rather, keeping all options as shares will simply be well out of reach for all but the wealthiest executives, including, I suspect, Mark Benadiba. The best most people can hope for is to sell as many shares as are required to pay the taxes and options costs, and keep the remaining shares as a future investment.

Respectfully,

BUMBLEBEE