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Equity Incentive Plan

12 Months Ended

Jun. 30, 2020

9. Equity Incentive Plan

On December 15, 2016 (the “Effective Date”), the Company’s stockholders approved the 2016 Incentive Award Plan (the “Plan”). The Plan is designed to attract, retain and motivate employees who make important contributions to the Company by providing such individuals with equity ownership opportunities. Awards granted under the Plan may include stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards. Under the Plan, the following types of shares go back into the pool of shares available for issuance:

●

unissued shares related to forfeited or cancelled restricted stock and stock options from Plan awards and Prior Plan awards (that were outstanding as of the Effective Date), and;

●

shares tendered to satisfy the tax withholding obligation related to the vesting of restricted stock (but not stock options).

Unlike the Company’s 2007 Equity Incentive Award Plan (the “Prior Plan”), the Plan has no evergreen provision to increase the shares available for issuance; any new shares would require stockholder approval. The Prior Plan expired in October 2017, and the Company no longer awards equity from the Prior Plan. At June 30, 2020, the remaining aggregate number of shares of the Company’s common stock authorized for future issuance under the Plan was 1,260,352. At June 30, 2020, there were 5,127,245 shares of the Company’s common stock that remain outstanding or nonvested under the Plan and Prior Plan.

Compensation expense for all equity-based compensation awards is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”). The Company recognizes these compensation costs on a straight-line basis over the requisite service period, which is generally the vesting period of the award. Stock-based compensation expense is recorded within selling, general, and administrative expenses on the consolidated statements of operations.

Stock Options

Each stock option is exercisable pursuant to the vesting schedule set forth in the stock option agreement granting such stock option, generally over four years. No stock option shall be exercisable after the expiration of its option term. The Company has granted stock options under the Prior Plan and the Company has also granted stock options to executive officers under stand-alone agreements outside the Prior Plan.

Stock option activity including stand-alone agreements during the years ended June 30, 2020, 2019 and 2018 was as follows:


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Life (Years)	Value
Outstanding, June 30, 2017	1,356,528	$	20.19	4.46	$	1,481,585
Granted	—		—
Exercised	(14,600)		13.45
Forfeited or canceled	(142,621)		22.71
Outstanding, June 30, 2018	1,199,307	$	19.97	3.55	$	788,277
Granted	—		—
Exercised	(150,290)		20.16
Forfeited or canceled	(13,000)		29.82
Outstanding, June 30, 2019	1,036,017	$	19.82	2.64	$	11,312,871
Granted	—		—
Exercised	(4,000)		16.07
Forfeited or canceled	(10,500)		30.92
Outstanding and exercisable, June 30, 2020	1,021,517	$	19.73	1.65	$	8,325,869

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last day of the year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2020. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the years ended June 30, 2020, 2019 and 2018 was $0.0 million, $1.2 million, and $0.0 million, respectively.

As of June 30, 2020, there was no unrecognized compensation expense related to nonvested stock options granted. During the years ended June 30, 2020, 2019 and 2018, the Company recognized $0.1 million, $0.6 million and $1.2 million, respectively, of stock-based compensation expense related to stock options.

Restricted Stock Awards

The Company has approved grants of restricted stock awards (“RSA”) pursuant to the Plan and Prior Plan. Under the Plan and Prior Plan, employees, outside directors and independent contractors are able to participate in the Company’s future performance through the awards of restricted stock. Each RSA vests pursuant to the vesting schedule set forth in the restricted stock agreement granting such RSAs, generally over three years. Under the Plan and Prior Plan, there have been no awards of restricted stock to independent contractors.

Restricted stock award activity during the years ended June 30, 2020, 2019 and 2018 was as follows:


		Weighted
		Average
		Grant-Date
	Shares	Fair Value
Nonvested, June 30, 2017	2,141,047	$	12.34
Granted	1,210,502		16.68
Vested	(1,339,492)		12.29
Canceled	(335,150)		14.31
Nonvested, June 30, 2018	1,676,907	$	15.12
Granted	828,833		18.44
Vested	(947,703)		14.72
Canceled	(235,485)		17.40
Nonvested, June 30, 2019	1,322,552	$	17.08
Granted	1,126,227		26.84
Vested	(750,634)		16.93
Canceled	(79,541)		21.48
Nonvested, June 30, 2020	1,618,604	$	23.73

Performance-Based Restricted Stock Awards (included above)

During the year ended June 30, 2020, 499,818 new performance-based restricted stock awards were granted and 559,089 remain nonvested at June 30, 2020. During the year ended June 30, 2020, 210,467 performance-based restricted stock awards vested. Vesting of the performance-based restricted stock awards is contingent on the achievement of certain financial performance goals and service vesting conditions.

During fiscal year 2020, the Company granted 358,294 performance-based restricted stock awards to the Company’s CEO with a weighted average grant-date fair value of $27.91 per share. These awards were granted pursuant to the Plan and are subject to the achievement of target free cash flow metrics in each of the fiscal years 2020 through 2022. The metrics are measured at the end of each fiscal year; however, the first two-thirds of the award will not vest until fiscal year 2021. The remaining one-third will vest in fiscal year 2022, if achieved. Additionally, if either of the first two tranches are not achieved, the awards may still vest if the free cash flow metric in aggregate is met over the three-year life of the award. The Company is currently amortizing the second and third tranches over their vesting periods because it believes that it is probable that the free cash flow targets will be met each year. The free cash flow metric was not met for fiscal year 2020, however, the Company believes that it will be met in aggregate, and therefore is amortizing the first tranche over a three-year period.

During fiscal year 2020, the Company granted 141,524 performance-based restricted stock awards to the Company’s named executive officers (“NEOs”) with a weighted average grant-date fair value of $27.91 per share. These awards were granted pursuant to the Plan and are subject to the achievement of Adjusted EBITDA metrics in fiscal year 2020. If achieved, one-third of the award will vest immediately, and the remaining two-thirds will vest annually over two years. The Company is currently amortizing these awards over their vesting periods because it believes that it is probable that the Adjusted EBITDA metric will be achieved and certified by the Compensation Committee at target for fiscal year 2020.

Equity Incentive Market-Based Restricted Stock Awards (included above)

During fiscal year 2017, the Company granted equity incentive market-based restricted stock awards which were subject to the attainment of an average stock price of $14.35 for 30 consecutive days after the date of the Company’s earnings release for the fourth quarter and fiscal year ended June 30, 2017. During the year ended June 30, 2020, the remaining 6,800 equity incentive market-based restricted stock awards vested.

Service-Based Restricted Stock Awards (included above)

During the year ended June 30, 2020, 626,409 new service-based restricted stock awards were granted and 1,059,515 remain nonvested at June 30, 2020. During the year ended June 30, 2020, 533,367 service-based restricted stock awards vested.

Summary of All Restricted Stock Awards

As of June 30, 2020, there was $25.6 million of total unrecognized compensation expense related to nonvested restricted stock awards. The cost is expected to be recognized over a weighted average period of 1.6 years. The fair value of restricted stock awards granted for the years ended June 30, 2020 and 2019 was $30.2 million and $15.3 million, respectively. The total fair value of shares vested for the years ended June 30, 2020 and 2019 was $17.9 million and $20.6 million, respectively. During the years ended June 30, 2020, 2019 and 2018, the Company recognized $17.1 million, $12.3 million and $15.7 million, respectively, of stock-based compensation expense related to restricted stock awards.

Performance Share Units (“PSU”)

Certain PSUs vest upon achievement of performance criteria associated with a Board-approved Transaction Related Incentive Plan (“TRIP”) and continuation of employee service over a defined period related to employees of Galvanize. The level of performance will determine the number of PSUs earned as measured against threshold, target and outperform achievement levels of the TRIP. The TRIP is a grant of a fixed monetary amount, in which the number of shares to be granted, will be calculated at the end of the performance period based on the value of the Company’s stock. At that time, the Company will issue shares of the Company’s common stock, or at the option of the Company, an equivalent amount of cash, and is classified as a liability award in accordance with ASC 718.

Certain PSUs vest upon achievement of performance criteria associated with a Board-approved Long Term Incentive Plan (“LTIP”) and continuation of employee service over a defined period. The level of performance will determine the number of PSUs earned as measured against threshold, target and outperform achievement levels of the LTIP. Each PSU represents the right to receive one share of the Company’s common stock, or at the option of the Company, an equivalent amount of cash, and is classified as an equity award in accordance with ASC 718.

In addition to the LTIP performance conditions, there is a service vesting condition which is dependent upon continuing service by the grantee as an employee of the Company, unless the grantee is eligible for earlier vesting upon a change in control and qualifying termination, as defined by the PSU agreement. For equity performance awards, including the PSUs, subject to graduated vesting schedules for which vesting is based on achievement of a performance metric in addition to grantee service, stock-based compensation expense is recognized on an accelerated basis by treating each vesting tranche as if it was a separate grant.

Fiscal Year 2020 TRIP

During the third quarter of fiscal year 2020, the Company granted a target level of $12.3 million under the TRIP that was driven by certain revenue and EBITDA targets related to the performance of Galvanize. Seventy percent of the earned award is based on the performance of Galvanize for the calendar year 2021 (“Tranche #1”) and thirty percent of the earned award is based on the performance of Galvanize for the calendar year 2022 (“Tranche 2”), both of which are expected to vest in January following each of the calendar year ends. The revenue and EBITDA targets are split sixty percent and forty percent, respectively for both tranches. In all cases, vesting is dependent upon continuing service by the grantee as an employee of the Company. The Company determined the achievement of the performance conditions associated with all tranches are not able to be determined at this time.

Fiscal Year 2019 LTIP

During fiscal year 2019, the Company granted 263,936 PSUs at target under a LTIP that was driven by certain revenue targets and enrollment levels, as well as students’ academic progress. These PSUs had a grant date fair value of

$7.9 million, or a weighted average grant-date fair value of $30.05 per share. During fiscal year 2020, the Company granted an additional 14,199 PSUs at target with a grant date fair value of $0.4 million, or $28.17 per share. Forty-five percent of the earned award is based on students’ academic progress (“Tranche #1”) and twenty-five percent of the earned award is based on certain enrollment levels (“Tranche 2”), both of which will vest on October 15, 2021. The remaining thirty percent of the earned award is based on certain revenue targets (“Tranche #3”) and will vest on August 15, 2022. In all cases, vesting is dependent upon continuing service by the grantee as an employee of the Company. The Company determined the achievement of the performance conditions associated with all three tranches were not probable and therefore no expense was recorded during the year ended June 30, 2020.

Fiscal Year 2019 SPP

During fiscal year 2019, the Company adopted a new long-term shareholder performance plan (“2019 SPP”) that provides for incentive award opportunities to its key senior executives. The awards were granted in the form of PSUs and will be earned based on the Company’s market capitalization growth over a completed three-year performance period. The 2019 SPP was designed to provide the executives with a percentage of shareholder value growth. No amounts will be earned if total stock price growth over the three-year period is below 25% (7.6% annualized). An amount of 6% of total value growth will be earned based on achieving total stock price growth of 33% (10% annualized) and a maximum of 7.5% of total value growth will be earned if total stock price growth equals or exceeds 95% (25% annualized).

During fiscal year 2019, the Company granted 2,108,305 PSUs at a weighted-average grant-date fair value of $8.18 per share, based on the highest level of performance. During the fourth quarter of fiscal year 2020, the Company granted an additional 66,934 PSUs at a weighted average grant-date fair value of $12.56 per share, based on the highest level of performance. The final amount of PSUs will be determined (and vesting will occur) based on the 30-day average price of the Company’s stock subsequent to seven days after the release of fiscal year 2021 results. The fair value was determined using a Monte Carlo simulation model and will be amortized on a straight-line basis over the vesting period.

Summary of All Performance Share Units

As of June 30, 2020, there was $7.9 million of total unrecognized compensation expense related to nonvested PSUs. The cost is expected to be recognized over a weighted average period of 1.2 years. During the years ended June 30, 2020, 2019 and 2018, the Company recognized $6.3 million, $3.9 million and $5.9 million, respectively, of stock-based compensation expense related to PSUs.

Performance share unit activity (excluding the fiscal year 2020 TRIP) during the years ended June 30, 2020, 2019 and 2018 was as follows:


		Weighted
		Average
		Grant-Date
	Shares	Fair Value
Nonvested, June 30, 2017	1,043,602	$	13.16
Granted	138,241		12.81
Vested	(320,340)		12.62
Canceled	(152,524)		14.00
Nonvested, June 30, 2018	708,979	$	13.15
Granted	2,372,241		10.61
Vested	(427,954)		13.24
Canceled	(281,025)		13.02
Nonvested, June 30, 2019	2,372,241	$	10.61
Granted	81,133		15.30
Vested	—		—
Canceled	(8,352)		29.93

Nonvested, June 30, 2020

2,445,022

10.70

Deferred Stock Units (“DSU”)

The DSUs vest on the grant-date anniversary and are settled in the form of shares of common stock issued to the holder upon separation from the Company.

Deferred stock unit activity during the years ended June 30, 2020 and 2019 was as follows:


		Weighted
		Average
		Grant-Date
	Shares	Fair Value
Nonvested, June 30, 2018	—	$	—
Granted	18,258		25.41
Vested	—		—
Canceled	—		—
Nonvested, June 30, 2019	18,258	$	25.41
Granted	23,844		20.13
Vested	—		—
Canceled	—		—
Nonvested, June 30, 2020	42,102	$	22.42

Summary of All Deferred Stock Units

As of June 30, 2020, there was $0.2 million of total unrecognized compensation expense related to nonvested DSUs. The cost is expected to be recognized over a weighted average period of 0.5 years. During the years ended June 30, 2020, 2019 and 2018, the Company recognized $0.5 million, $0.5 million and zero, respectively, of stock-based compensation expense related to DSUs.