| STOCK-BASED COMPENSATION AND WARRANTS |
NOTE 6 — STOCK-BASED COMPENSATION AND WARRANTS
Stock Option Plans
The Company currently has two active stock option plans consisting of the 2016 Non-Qualified Stock Option Plan, as amended (the “2016 Plan”), and the 2019 Non Qualified Stock Option Plan (the “2019 Plan”). On July 31, 2019, the 2019 Plan was adopted by the Board of Directors and provides authority to grant non-qualified stock options for up to 15.0 million shares of the Company’s Common Stock. The Company also has stock options outstanding to purchase up to approximately 2.2 million shares of Common Stock under the 2014 Stock and Incentive Plan (the “2014 Plan”) that terminated on March 21, 2019 and approximately 4.8 million shares of Common Stock under the 2015 Stock and Incentive Plan (the "2015 Plan") that terminated on February 23, 2020. Stock options outstanding under the 2014 Plan expire pursuant to their contractual provisions on various dates in 2021. Presented below is a summary of the number of shares authorized, outstanding, and available for future grants under each of the Company’s stock option plans (in thousands):
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Termination
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Number of Shares
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Description
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Date
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Authorized
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Outstanding
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Available
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2014 Plan
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March 2019
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2,185
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2,185
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—
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2015 Plan
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February 2020
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4,755
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4,755
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—
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2016 Plan
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October 2021
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28,000
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26,215
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1,785
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2019 Plan
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July 2029
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15,000
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15,000
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—
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Total
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49,940
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48,155
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1,785
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July 2019 Grants
On July 31, 2019, the Board of Directors granted stock options for an aggregate of approximately 34.0 million shares of Common Stock to certain officers and employees at an exercise price of $0.29 per share. The closing price of the Company’s shares of Common Stock on the date of grant was approximately $0.21 per share. The option grants were designated for approximately 19.0 million shares under the 2016 Plan and 15.0 million shares under the 2019 Plan. As of July 31, 2019, the number of shares subject to stock options, the related fair value and compensation that was immediately recognized for vested options are as follows (in thousands):
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Time-Based Vesting
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Unvested
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Number of Shares
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Hybrid
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Vested
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Unvested
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Options
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Total
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Executive officers
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3,588
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(1)
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11,562
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(1)(3)
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7,550
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(2)(3)
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22,700
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Other employees
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921
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(1)
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6,629
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(1)
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3,700
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(2)
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11,250
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Total
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4,509
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18,191
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11,250
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(6)
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33,950
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Total fair value
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$
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817
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(4)
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$
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3,297
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(5)
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(1)
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Stock options are subject to time-based vesting in two tranches, whereby (i) 25% of such options are immediately exercisable for employees who have been employed by the Company for more than one year, and for employees that have been employed by the Company less than one year, 25% of such options will vest on the one year anniversary of the employee’s start date, and (ii) the remaining 75% of the stock options will vest ratably over a period of 36 months beginning on the vesting date for the initial 25% tranche.
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(2)
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Stock options that commence vesting upon the achievement of market, performance and service conditions (‘Hybrid Options”). These options will vest ratably over a period of 36 months beginning when all of the following have occurred: (i) the option recipient has been employed by the Company for at least one year, (ii) the Company’s shares of Common Stock have been listed for trading on a national stock exchange, and (iii) such date no later than July 31, 2023, when the Company’s closing stock price exceeds $0.58 per share for 20 trading days in any consecutive 30 day period.
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(3)
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In August 2019, an executive officer terminated employment which resulted in forfeiture of stock options shown in the table above with time-based vesting for 0.8 million shares and Hybrid Options for 0.4 million shares.
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(4)
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Represents the aggregate grant date fair value for stock options that were immediately vested on the grant date, which is included in stock-based compensation expense for the nine months ended March 31, 2020.
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(5)
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Represents the aggregate grant date fair value for stock options that were not immediately vested on the grant date and will be charged to expense from the grant date through the respective vesting dates through July 2023.
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(6)
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The Company has not recognized any expense related to these stock options for the three and nine months ended March 31, 2020, since it is not yet probable that the performance condition will be achieved. The Company will begin recognizing compensation expense at such time that the performance condition is probable and continuing through the end of the requisite service period. Determination of the requisite service period of the Hybrid Options will be based on the date that the performance condition is considered probable using grant date fair value.
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In November 2019 and January 2020, the Company granted options for an additional 2,145,000 shares to certain employees, a director and members of the scientific advisory board at an exercise price of $0.29. These options were granted under the 2015 Plan, vest ratably over periods ranging from 36 to 48 months and expire ten years after the grant date. The estimated fair value of these stock options was $0.2 million as of the grant date.
Stock Options Outstanding
The following table sets forth a summary of the combined stock option activity under all of the Company’s stock option plans for the nine months ended March 31, 2020 (shares in thousands):
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Shares
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Price (1)
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Term (2)
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Outstanding, beginning of period
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13,865
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$
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1.60
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6.4
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Stock options granted:
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Awards with time-based vesting
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24,845
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0.29
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Awards with performance-based vesting
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11,250
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0.29
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Stock options forfeited:
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Awards with time-based vesting
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(1,275)
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0.49
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Awards with performance-based vesting
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(530)
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0.29
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Outstanding, end of period
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48,155
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0.66
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8.3
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Vested, end of period
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19,522
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1.12
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7.0
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(1)
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Represents the weighted average exercise price.
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(2)
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Represents the weighted average remaining contractual term for the number of years until the stock options expire.
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Stock-based compensation expense is included in compensation and benefits under the following captions in the unaudited condensed consolidated statements of operations (in thousands):
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Three Months Ended
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Nine Months Ended
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March 31,
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March 31,
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2020
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2019
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2020
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2019
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Research and development
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$
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354
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$
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117
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$
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1,279
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$
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308
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General and administrative
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321
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578
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1,455
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2,081
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Total
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$
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675
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$
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695
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$
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2,734
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$
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2,389
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Unrecognized stock-based compensation expense related to stock options that provide solely for time-based vesting as of March 31, 2020 is approximately $4.0 million. This amount is expected to be recognized over a remaining weighted average period of 2.0 years. Unrecognized compensation cost for the Hybrid Options will be recognized beginning on the date that the performance condition becomes probable using the grant date fair value. However, based on preliminary estimates using the BSM option-pricing model, management believes the aggregate fair value will be approximately $2.1 million before adjusting for forfeitures.
For the nine months ended March 31, 2020, the aggregate fair value of stock options granted for approximately 24.8 million shares of Common Stock that provide solely for time-based vesting, amounted to $4.2 million or approximately $0.17 per share as of the grant date. Fair value was computed using the BSM option-pricing model and will result in the recognition of compensation cost ratably over the expected vesting period of the stock options. For the nine months ended March 31, 2020, the fair value of each time-based option was estimated on the date of grant using the BSM option-pricing model, with the following weighted-average assumptions:
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Valuation Inputs
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Fair value of common stock on grant date
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$
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0.21
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Exercise price of stock options
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0.29
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Expected volatility
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118
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%
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Risk free interest rate
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1.9
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%
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Expected term (years)
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5.6
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Dividend yield
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0
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%
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Warrants
The Company has issued warrants in conjunction with various debt and equity financings and for services. For the three and nine months ended March 31, 2020, no warrants were exercised. Presented below is a summary of warrant activity for the nine months ended March 31, 2020 (shares in thousands):
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Shares
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Price (1)
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Term (2)
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Outstanding, beginning of period
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45,997
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$
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1.34
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2.3
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Warrants issued for consulting services
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700
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(3)
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0.29
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Warrant expirations
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(15,782)
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1.66
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Outstanding, end of period
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30,915
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1.15
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2.5
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(1)
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Represents the weighted average exercise price.
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(2)
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Represents the weighted average remaining contractual term for the number of years until the warrants expire.
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(3)
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Represents warrants granted for consulting services in November 2019 with an expiration date in November 2024. The fair value the warrants of $67,000 was determined using the BSM model. Since the warrants were immediately vested, this entire amount is included in consulting and outside services under research and development expenses for the nine months ended March 31, 2020. Key assumptions for the valuation of these warrants included the closing price of the Company’s shares of common stock of $0.13 on the grant date, the exercise price of $0.29 per share, historical volatility of 119%, and an expected term of 5 years.
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