Annual report pursuant to Section 13 and 15(d)

Stock Option Plans and 401(k) Plan

v3.19.2
Stock Option Plans and 401(k) Plan
12 Months Ended
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Option Plans and 401(k) Plan

At March 31, 2019, we have the following share-based compensation plan.

 

Amended and Restated 2016 Stock Incentive Plan

 

Our Board unanimously approved the Company’s Amended and Restated 2016 Stock Incentive Plan, formerly titled the 2008 Stock Incentive Plan (the 2016 Plan), on July 26, 2016, and the 2016 Plan was approved by our stockholders at our 2016 Annual Meeting of Stockholders on September 26, 2016, and further amended at our 2017 Annual Meeting of Stockholders on September 15, 2017. The 2016 Plan provides for the grant of stock options, restricted shares of common stock, stock appreciation rights and dividend equivalent rights, collectively referred to as “Awards”. Stock options granted under the 2016 Plan may be either incentive stock options under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the Code), or non-qualified stock options. We may grant incentive stock options only to employees of the Company or any parent or subsidiary of the Company. Awards other than incentive stock options may be granted to employees, directors and consultants. A total of 10.0 million shares of our common stock were initially authorized for issuance under the 2016 Plan, of which approximately 9.2 million shares remain authorized and approximately 2.6 million registered shares remain available for future equity grants under the plan at March 31, 2019.

 

Description of the 2016 Plan

 

The 2016 Plan provides for the grant of stock options, restricted shares of common stock, stock appreciation rights and dividend equivalent rights, collectively referred to as “Awards”. Stock options granted under the 2016 Plan may be either incentive stock options under the provisions of Section 422 of the Code, or non-qualified stock options. We may grant incentive stock options only to employees of the Company or any parent or subsidiary of the Company. Awards other than incentive stock options may be granted to employees, directors and consultants.

 

The Compensation Committee of the Board of Directors (the Committee), administers the 2016 Plan, including selecting the Award recipients, determining the number of shares to be subject to each Award, the exercise or purchase price of each Award and the vesting and exercise periods of each Award.

 

The exercise price of all incentive stock options granted under the 2016 Plan must be at least equal to 100% of the fair market value of the shares on the date of grant. The maximum term of an incentive stock option granted to any other participant may not exceed 10 years. The Committee determines the term and exercise or purchase price of all other Awards granted under the 2016 Plan.

 

Under the 2016 Plan, incentive stock options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the participant, only by the participant. Other Awards shall be transferable:

 

by will and by the laws of descent and distribution; and

 

during the lifetime of the participant, to the extent and in the manner authorized by the Committee by gift or pursuant to a domestic relations order to members of the participant’s Immediate Family (as defined in the 2016 Plan).

 

The maximum number of shares with respect to which options and stock appreciation rights may be granted to any participant in any calendar year is 300,000 shares of common stock. In connection with a participant’s commencement of service with the Company, a participant may be granted options and/or stock appreciation rights for up to an additional 50,000 shares that will not count against the foregoing limitation. In addition, for Awards of restricted stock and restricted shares of common stock that are intended to be “performance-based compensation” (within the meaning of Section 162(m) of the Code), the maximum number of shares with respect to which such Awards may be granted to any participant in any calendar year is 300,000 shares of common stock. The limits described in this paragraph are subject to adjustment in the event of any change in our capital structure as described below.

 

The terms and conditions of Awards are determined by the Committee, including the vesting schedule and any forfeiture provisions. Awards under the 2016 Plan may vest upon the passage of time or upon the attainment of certain performance criteria. Although we do not currently have any Awards outstanding that vest upon the attainment of performance criteria, the Committee may establish criteria based on any one of, or a combination of, a number of financial measurements. 

 

Effective upon the consummation of a Corporate Transaction (as defined below), all outstanding Awards under the 2016 Plan will terminate unless the acquirer assumes or replaces such Awards. The Committee has the authority, exercisable either in advance of any actual or anticipated Corporate Transaction or Change in Control (as defined below) or at the time of an actual Corporate Transaction or Change in Control and exercisable at the time of the grant of an Award under the 2016 Plan or any time while an Award remains outstanding, to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested Awards under the 2016 Plan and the release from restrictions on transfer and repurchase or forfeiture rights of such Awards in connection with a Corporate Transaction or Change in Control, on such terms and conditions as the Committee may specify. The Committee also has the authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the service of the grantee within a specified period following the effective date of the Corporate Transaction or Change in Control. The Committee may provide that any Awards so vested or released from such limitations in connection with a Change in Control, shall remain fully exercisable until the expiration or earlier termination of the Award.

  

Under the 2016 Plan, a Corporate Transaction is generally defined as:

 

an acquisition of securities possessing more than fifty percent (50%) of the total combined voting power of our outstanding securities but excluding any such transaction or series of related transactions that the Committee determines shall not be a Corporate Transaction;

 

a reverse merger in which we remain the surviving entity but: (i) the shares of common stock outstanding immediately prior to such merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (ii) in which securities possessing more than fifty percent (50%) of the total combined voting power of our outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger;

 

a sale, transfer or other disposition of all or substantially all of the assets of the Company;

 

a merger or consolidation in which the Company is not the surviving entity; or

 

a complete liquidation or dissolution.

 

Under the 2016 Plan, a Change in Control is generally defined as: (i) the acquisition of more than 50% of the total combined voting power of our stock by any individual or entity which a majority of our Board (who have served on our board for at least 12 months) do not recommend our stockholders accept; (ii) or a change in the composition of our Board over a period of 12 months or less.

 

Unless terminated sooner, the 2016 Plan will automatically terminate in 2026. Our Board may at any time amend, suspend or terminate the 2016 Plan. To the extent necessary to comply with applicable provisions of U.S. federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to Awards granted to residents therein, we will obtain stockholder approval of any such amendment to the 2016 Plan in such a manner and to such a degree as required.

 

During our fiscal year ended March 31, 2019, we granted from the 2016 Plan:

 

options to purchase an aggregate of 860,000 shares of our common stock at an exercise price of $1.27 per share to the independent members of our Board, to all of our officers except our Chief Executive Officer, and to all non-officer employees in August 2018;

 

options to purchase an aggregate of 250,000 shares of our common stock at exercise prices ranging from $1.52 per share to $2.20 per share to various scientific, legal, investor relations, and financial and strategic advisory consultants in October 2018;

 

an option to purchase 25,000 shares of our common stock at an exercise price of $1.74 per share to a new independent member of our Board in January 2019;

 

an option to purchase 220,000 shares of our common stock at an exercise price of $1.70 per share to our Chief Executive Officer in January 2019; and

 

25,000 shares of registered common stock having a fair value of $41,500 on the date of grant to an investor relations and social media consultant. Noncash expense related to this grant is being amortized ratably over the contractual period as a component of general and administrative expense not included in stock compensation expense.

 

During our fiscal year ended March 31, 2018, we granted from the 2016 Plan:

 

options to purchase an aggregate of 880,000 shares of our common stock at an exercise price of $1.96 per share to the independent members of our Board and to our officers and all non-officer employees in April 2017;

 

options to purchase an aggregate of 770,000 shares of our common stock at an exercise price of $1.56 per share to the independent members of our Board, officers, non-officer employees and two consultants in September 2017;

 

options to purchase an aggregate of 2,000,000 shares of our common stock at an exercise price of $1.16 per share to the independent members of our Board, officers, non-officer employees and ten consultants in February 2018;

 

options to purchase 25,000 shares of our common stock at an exercise price of $1.21 per share to a legal services consultant in February 2018; and

 

an aggregate of 547,500 shares of unregistered common stock to various legal, investor relations, and financial and strategic advisory consultants in September and October 2017 pursuant to which we recognized an aggregate of $827,900 as a noncash component of general and administrative expense not included in stock compensation expense for the fiscal year.

 

The following table summarizes stock-based compensation expense related to option grants to our officers, independent directors, consultants and service providers, included in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the years ended March 31, 2019 and 2018.

 

    Fiscal Years Ended March 31,
    2019   2018
 Research and development expense:                
 Stock option grants   $ 1,259,400     $ 969,200  
      1,259,400       1,259,400  
 General and administrative expense:                
 Stock option grants     2,184,000       1,375,000  
      2,184,000       1,375,000  
 Total stock-based compensation expense   $ 3,443,400     $ 2,344,200  

 

We used the Black-Scholes Option Pricing model with the following weighted average assumptions to determine share-based compensation expense related to option grants during the fiscal years ended March 31, 2019 and 2018:

 

    Fiscal Years Ended March 31,
    2019   2018
    (weighted average)   (weighted average)
Exercise price   $ 1.45     $ 1.44  
Market price on date of grant   $ 1.45     $ 1.44  
Risk-free interest rate     2.84 %     2.39 %
Expected term (years)     6.32       6.87  
Volatility     96.58 %     90.40 %
Expected dividend yield     0.00 %     0.00 %
                 
Fair value per share at grant date   $ 1.15     $ 1.10  

 

The expected term of options represents the period that our share-based compensation awards are expected to be outstanding. We have calculated the weighted-average expected term of the options using the simplified method as prescribed by Securities and Exchange Commission Staff Accounting Bulletins No. 107 and No. 110 (SAB No. 107 and 110). The utilization of SAB No. 107 and 110 is based on the lack of relevant historical option exercises and relevant historical data due to our limited experience as a publicly traded company and the historical lack of liquidity in freely-tradable shares of our common stock. Those factors also resulted in our decision to utilize the historical volatilities of a peer group of public companies’ stock over the expected term of the option in determining our expected volatility assumptions.  The risk-free interest rate for periods related to the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is zero, as we have not paid any dividends and do not anticipate paying dividends in the near future. We recognize the effect of forfeitures as they occur.

 

The following table summarizes activity for the fiscal years ended March 31, 2019 and 2018 under the 2016 Plan:

 

    Fiscal Years Ended March 31,
    2019   2018
   

 Number of

Shares

 

Weighted

Average

Exercise

Price

 

 Number of

Shares

 

Weighted

Average

Exercise

Price

                 
 Options outstanding at beginning of period     5,300,338     $ 2.43       1,659,324     $ 4.76  
 Options granted     1,355,000     $ 1.45       3,675,000     $ 1.44  
 Options exercised     (29,250 )   $ 1.50       —       $ —    
 Options forfeited     —       $ —         (12,154 )   $ 5.39  
 Options expired     —       $ —         (21,832 )   $ 9.42  
 Options outstanding at end of period     6,626,088     $ 1.48       5,300,338     $ 2.43  
 Options exercisable at end of period     4,303,972     $ 1.53       1,818,962     $ 3.31  
 Weighted average grant-date fair value of                                
 options granted during the period           $ 1.15             $ 1.10  

 

In August 2018, in accordance with the terms of the 2016 Plan, the Board approved the modification of outstanding options held by independent members of our Board, our officers and our employees that had exercise prices higher than $1.56 per share to reduce the exercise prices thereof to $1.50 per share. We calculated the fair value of such options immediately before and after the modification using the Black-Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. We immediately recognized the additional fair value attributable to vested options, $258,100, as stock compensation expense, which is included in the expense reported above. The additional fair value resulting from the modification, approximately $142,200, is being expensed over the remaining vesting period of the modified options.

 

Assumption:   Pre-modification     Post-modification  
Market price per share   $ 1.49     $ 1.49  
Exercise price per share   $ 3.57     $ 1.50  
Risk-free interest rate     2.77 %     2.77 %
Remaining expected term in years     5.08       5.08  
Volatility     94.9 %     94.9 %
Dividend rate     0.0 %     0.0 %
                 
Number of option shares     2,419,503       2,419,503  
Weighted average fair value per share   $ 0.91     $ 1.08  

 

The following table summarizes information on stock options outstanding and exercisable under the 2016 Plan as of March 31, 2019, including the results of the exercise price modification noted above:

 

        Options Outstanding     Options Exercisable  
               Weighted                    
               Average      Weighted            Weighted  
               Remaining      Average            Average  
   Exercise      Number      Years until      Exercise      Number      Exercise  
    Price       Outstanding      Expiration      Price      Exercisable      Price  
                                   
  $ 1.16       2,000,000       8.84     $ 1.16       1,312,493     $ 1.16  
  $ 1.21 to $1.27       885,000       9.34     $ 1.27       419,529     $ 1.27  
  $ 1.50       2,390,253       7.34     $ 1.50       1,699,753     $ 1.50  
  $ 1.52 to $1.99       1,215,000       8.91     $ 1.62       777,058     $ 1.59  
  $ 2.20 to $3.80       55,000       9.38     $ 2.35       14,304     $ 3.67  
  $ 8.00 to $15.00       80,835       5.86     $ 8.54       80,835     $ 8.54  
          6,626,088     8.35    1.48     4,303,972    1.53  

 

At March 31, 2019, there were 2,607,162 registered shares of our common stock remaining available for grant under the 2016 Plan.  Two officers and a member of our Board exercised outstanding stock options to purchase an aggregate of 29,250 shares of our common stock during the fiscal year ended March 31, 2019. There were no option exercises during the fiscal year ended March 31, 2018.

 

Aggregate intrinsic value is the sum of the amount by which the fair value of the underlying common stock exceeds the aggregate exercise price of the outstanding options (in-the-money-options). Based on the $1.29 per share quoted closing market price of our common stock on March 31, 2019, outstanding options to purchase an aggregate of 2,885,000 shares had aggregate intrinsic value of approximately $250,300 and exercisable options to purchase an aggregate of 1,732,022 shares had aggregate intrinsic value of approximately $162,700 at that date.

 

As of March 31, 2019, there was approximately $3,089,300 of unrecognized compensation cost related to non-vested share-based compensation awards from the 2016 Plan, which is expected to be recognized through January 2021.  

 

401(k) Plan

 

Through a third-party agent, we maintain a retirement and deferred savings plan for our employees. This plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code. The retirement and deferred savings plan provides that each participant may contribute a portion of his or her pre-tax compensation, subject to statutory limits. Under the plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee. The retirement and deferred savings plan also permits us to make discretionary contributions, subject to established limits and a vesting schedule. To date, we have not made any discretionary contributions to the retirement and deferred savings plan on behalf of participating employees.