Note 11 – Share-based Compensation
We allocate share-based compensation expense to cost of sales, selling, general and administrative expense and research and development expense based on the award holder’s employment function. We recorded income tax benefits for share-based compensation expense of approximately $599,000 and $431,000 in fiscal 2020 and 2019, respectively. For fiscal 2020 and 2019, we recorded share-based compensation expenses as follows:
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2020
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2019
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Cost of sales
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$
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52,267
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$
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38,026
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Selling, general and administrative
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1,905,192
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1,471,391
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Research and development
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688,787
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396,681
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$
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2,646,246
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$
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1,906,098
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We have issued share-based awards to employees and non-executive directors under the Company’s approved equity plans. Upon the exercise of share-based awards, new shares are issued from authorized common stock.
Equity Plans
In March 2018, the Company’s stockholders approved the Company's 2018 Equity Incentive Plan (the “2018 Plan”). On March 24, 2020, the Company’s stockholders approved an increase in the number of shares that may be issued under the 2018 Plan to 11.0 million. As of September 30, 2020, 5,901,322 shares remain available for issuance under the 2018 Plan.
In July 2017, the Company’s stockholders approved the Company's 2017 Equity Incentive Plan (the “2017 Plan”). A total of 4.7 million shares are authorized for issuance under the 2017 Plan. As of September 30, 2020, 103,247 shares remain available for issuance under the 2017 Plan. The 2017 Plan replaced the Company's 2008 Stock Incentive Plan (the “2008 Plan”), and no further awards will be made under the 2008 Plan.
Stock Options
Each option grants the holder the right to purchase from us one share of our common stock at a specified price, which is generally the closing price per share of our common stock on the date the option is issued. Options generally vest on a pro-rata basis on each anniversary of the issuance date within three years of the date the option is issued. Options may be exercised after they have vested and prior to the specified expiry date provided applicable exercise conditions are met, if any. The expiry date can be for periods of up to ten years from the date the option is issued. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions established at that time. The Company accounts for forfeitures as they occur and does not estimate forfeitures as of the option grant date.
The following table outlines the weighted average assumptions for options granted during the years ended September 30, 2020 and 2019:
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2020
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2019
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Weighted Average Assumptions:
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Expected Volatility
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63.13%
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65.85%
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Expected Dividend Yield
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0.00%
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0.00%
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Risk-free Interest Rate
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1.63%
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2.36%
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Expected Term (in years)
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5.9
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5.9
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Fair Value of Options Granted
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$
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1.14
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$
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0.93
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During the years ended September 30, 2020 and 2019, the Company used historical volatility of our common stock over a period equal to the expected life of the options to estimate their fair value. The dividend yield assumption is based on the Company’s recent history and expectation of future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term.
The following table summarizes the stock options outstanding and exercisable at September 30, 2020:
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Weighted Average
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Remaining
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Aggregate
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Number of
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Exercise Price
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Contractual Term
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Intrinsic
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Shares
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Per Share
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(years)
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Value
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Outstanding at September 30, 2019
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7,027,989
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$
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1.58
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Granted
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2,228,827
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1.97
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Exercised
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(441,548)
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1.67
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Forfeited
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(216,268)
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1.59
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Outstanding at September 30, 2020
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8,599,000
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$
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1.67
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7.76
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$
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8,174,898
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Exercisable at September 30, 2020
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4,565,615
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$
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1.52
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6.93
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$
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5,036,148
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The aggregate intrinsic values in the table above are before income taxes and represent the number of in-the-money options outstanding or exercisable multiplied by the closing price per share of the Company’s common stock on the last trading day of the year ended September 30, 2020 of $2.62, less the respective weighted average exercise price per share at period end.
The total intrinsic value of options exercised was approximately $1.1 million and $274,000 during the years ended September 30, 2020 and 2019, respectively. Cash received from options exercised was $415,000 and $333,000 in the years ended September 30, 2020 and 2019, respectively. During the years ended September 30, 2020 and 2019, options to purchase 223,415 and 120,716 shares of common stock, respectively, were exercised using the cashless exercise feature available under the 2017 Plan and 2018 Plan, which resulted in the issuance of 143,958 and 36,208 shares of common stock, respectively.
As of September 30, 2020, the Company had unrecognized compensation expense of approximately $2.7 million related to unvested stock options. This expense is expected to be recognized over approximately 3 years.
During fiscal 2019, the Company modified stock options held by certain optionees upon termination of their employment by the Company, retirement from the board of directors or resignation from the board of directors. The stock options were primarily modified to accelerate vesting to the date of termination or retirement. The aggregate amount of expense recognized in connection with these modifications for the year ended September 30, 2019 was approximately $53,000.
Stock Appreciation Rights
In connection with the closing of the APP Acquisition, the Company issued stock appreciation rights based on 50,000 and 140,000 shares of the Company’s common stock to an employee and an outside director, respectively, that vested on October 31, 2018. The stock appreciation rights have a ten-year term and an exercise price per share of $0.95, which was the closing price of a share of the Company’s common stock as quoted on NASDAQ on the trading day immediately preceding the date of the completion of the APP Acquisition. Upon exercise, the stock appreciation rights will be settled in common stock issued under the 2017 Plan. During the year ended September 30, 2019, stock appreciation rights based on 140,000 shares of the Company’s common stock were exercised resulting in the issuance of 77,559 shares of common stock. As of September 30, 2020 and 2019, vested stock appreciation rights based on 50,000 shares of common stock remain outstanding.
