| STOCK-BASED COMPENSATION AND WARRANTS |
NOTE 7 — 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 300,000 shares of the Company’s Common Stock. The Company also has stock options outstanding to purchase up to approximately 44,000 shares of Common Stock under the 2014 Stock and Incentive Plan (the “2014 Plan”) that terminated on March 21, 2019 and approximately 95,000 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 and the 2015 Plan expire pursuant to their contractual provisions on various dates through 2029. 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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44
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44
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—
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2015 Plan
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February 2020
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95
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95
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—
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2016 Plan
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October 2021
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560
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524
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36
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2019 Plan
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July 2029
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300
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300
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—
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Total
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999
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963
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36
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July 2019 Grants
On July 31, 2019, the Board of Directors granted stock options for an aggregate of approximately 679,000 shares of Common Stock to certain officers and employees at an exercise price of $14.50 per share (the “July 2019 Grants”). The closing price of the Company’s Common Stock on the date of grant was approximately $10.50 per share. The July 2019 Grants were designated for approximately 379,000 shares under the 2016 Plan and 300,000 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 options that immediately vested 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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72
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(1)
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231
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(1)
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151
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(2)
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454
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Other employees
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18
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(1)
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133
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(1)
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74
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(2)
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225
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Total
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90
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364
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225
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(5)
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679
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Total fair value
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$
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817
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(3)
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$
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3,297
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(4)
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(1)
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Stock options that are subject to time-based vesting become exercisable (i) for employees who were employed by the Company for more than one year as of the grant date, 25% of such options were immediately exercisable, and for employees that were employed by the Company for less than one year as of the grant date, 25% of such options will vest on the one year anniversary of the employee's hire 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”) will vest ratably over a period of 36 months beginning on the date that 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 $29.00 per share for 20 trading days in any consecutive 30 day period.
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(3)
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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 year ended June 30, 2020.
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(4)
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Represents the aggregate grant date fair value for stock options that were not immediately vested on the grant date and are being charged to expense from the grant date through the respective vesting dates through July 2023.
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(5)
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The Company has not recognized any expense related to these stock options for the year ended June 30, 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 for the Hybrid Options will be calculated on the date that the performance condition is considered probable using grant date fair value.
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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 years ended June 30, 2020 and 2019 (shares in thousands):
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2020
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2019
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Shares
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Price (1)
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Term (2)
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Shares
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Price (1)
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Term (2)
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Outstanding, beginning of fiscal year
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277
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$
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79.88
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6.4
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388
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$
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77.50
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7.8
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Stock options granted:
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Awards with time-based vesting
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497
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14.50
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23
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26.00
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Awards with performance-based vesting
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225
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14.50
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—
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—
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Stock options forfeited:
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Awards with time-based vesting
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(25)
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24.39
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(134)
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76.50
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Awards with performance-based vesting
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(11)
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14.50
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—
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—
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Outstanding, end of fiscal year
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963
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33.06
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8.1
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277
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79.88
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6.4
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Vested, end of fiscal year
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431
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53.14
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6.9
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192
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92.50
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5.7
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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 until the stock options expire.
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For the year ended June 30, 2020, the aggregate fair value of stock options granted for approximately 497,000 shares of Common Stock that provide solely for time-based vesting, amounted to $4.2 million or approximately $8.38 per share as of the grant date. For the year ended June 30, 2020, the aggregate fair value of stock options granted for 225,000 shares of Common Stock that provide for hybrid vesting, amounted to $2.1 million or approximately $9.51 per share as of the grant date. For the year ended June 30, 2019, the aggregate fair value of stock options granted for 22,500 shares of Common Stock that provide solely for time-based vesting amounted to $0.4 million or approximately $19.79 per share as of the grant date. Fair value was computed using the BSM option-pricing model and will result in the recognition of compensation cost ratably over the expected vesting period of the stock options. For the years ended June 30, 2020 and 2019, the fair value of stock options that provide for time-based and hybrid vesting was estimated on the date of grant using the BSM option-pricing model, with the following weighted-average assumptions:
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2020
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2019
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Time-Based
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Hybrid
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Time-Based
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Market price of common stock on grant date
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$
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10.23
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$
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10.61
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$
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26.00
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Expected volatility
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118
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%
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118
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%
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84
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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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2.0
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%
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2.8
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%
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Expected term (years)
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5.7
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8.0
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7.0
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Dividend yield
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0
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%
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0
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%
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0
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%
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Stock-based compensation expense for the fiscal years ended June 30, 2020 and 2019 is included in compensation and benefits under the following captions in the consolidated statements of operations (in thousands):
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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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1,589
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$
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538
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General and administrative
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1,728
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2,098
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Total
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$
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3,317
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$
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2,636
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Unrecognized stock-based compensation expense for stock options that provide solely for time-based vesting as of June 30, 2020 was approximately $3.4 million. This amount is expected to be recognized over a remaining weighted average period of 1.9 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. Based on preliminary estimates using the BSM option-pricing model, management believes the aggregate fair value of the Hybrid Options will be approximately $2.1 million before adjusting for forfeitures. As of June 30, 2020 and 2019, there was no intrinsic value associated with any outstanding stock options.
Warrants
The Company has issued warrants to purchase shares of Common Stock in conjunction with various debt and equity financings and for services. As of June 30, 2020 and 2019, all of the warrants are vested. For the fiscal years ended June 30, 2020 and 2019, no warrants were exercised. Presented below is a summary of grants, modifications and expirations for the fiscal years ended June 30, 2020 and 2019 (shares in thousands):
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2020
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2019
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Shares
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Price (1)
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Term (2)
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Shares
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Price (1)
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Term (2)
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Outstanding, beginning of fiscal year
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920
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$
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66.80
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3.4
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913
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$
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68.29
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3.4
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Warrants issued for consulting services
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14
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(3)
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14.50
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—
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—
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Modification for debt discount to
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former member of Board of Directors:
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Replacement warrant
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—
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—
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24
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(4)
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9.00
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Canceled warrant
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—
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—
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(10)
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(4)
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25.94
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Warrant expirations
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(316)
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82.78
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(7)
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120.27
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Outstanding, end of fiscal year
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618
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57.46
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2.3
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920
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66.80
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3.4
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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 of 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 year ended June 30, 2020. Key assumptions for the valuation of these warrants included the closing price of the Company’s shares of Common Stock of $14.50 on the grant date, the exercise price of $6.50 per share, historical volatility of 119%, and an expected term of 5.0 years.
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(4)
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In January 2019, the Company agreed to modify a warrant originally issued in June 2018 for 10,000 shares that was exercisable at $25.94 per share. This warrant was originally issued in connection with one of the Fiscal 2018 Notes issued to a former member of the Board of Directors. The difference between the fair value of the modified warrant and the fair value of the canceled warrant amounted to $138,000, which was accounted for as an additional debt discount that was charged to interest expense upon repayment of the Fiscal 2018 Notes on January 30, 2019. Key assumptions for valuation of the modified warrant and the canceled warrant included the fair value of Company's Common Stock on the modification date of $11.50 per share, expected volatility of 100%, a risk-free interest rate of 2.5%, and an estimated remaining term of 4.0 years.
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