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Note 15 - Share-based Compensation

9 Months Ended

Jun. 30, 2023

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

15. SHARE-BASED COMPENSATION

Stock option plans

The Amended and Restated 2015 Equity Incentive Plan (“2015 Equity Plan”) was adopted by the Company’s Board of Directors on December 6, 2016, and approved by the Company’s stockholders on March 14, 2017. The 2015 Equity Plan was amended by the Company’s Board of Directors on December 8, 2020, to increase the number of shares authorized for issuance from 5,000,000 to 10,000,000. On March 16, 2021, the Company’s stockholders approved the plan amendment. The 2015 Equity Plan authorizes the issuance of stock options, restricted stock, stock appreciation rights, restricted stock units (“RSUs”) and performance awards, to an aggregate of 10,000,000 new shares of common stock to employees, directors, advisors or consultants. As of June 30, 2023, there were options and restricted stock units outstanding covering 3,673,201 shares of common stock under the 2015 Equity Plan, respectively, and 2,821,827 shares of common stock available for grant, for a total of 6,495,028 shares of common stock authorized and unissued under the two equity plans.

Share-based compensation

The Company’s employee stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity.

Share-based compensation is accounted for in accordance with ASC Topic 718: Compensation - Stock Compensation. Total compensation expense for all share-based awards is based on the estimated fair market value of the equity instrument issued on the grant date. For share-based awards that vest based solely on a service condition, compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award. For share-based awards that vest based on a market condition, compensation expense is recognized on a straight-line basis over the requisite service period of each separately vesting tranche. For share-based awards that vest based on a performance condition, compensation expense is recognized for the number of awards that are expected to vest based on the probable outcome of the performance condition. Compensation cost for these awards will be adjusted to reflect the number of awards that ultimately vest.

There were 1,849,500 stock options granted during the nine months ended June 30, 2023, of which 225,000 vest based on a market condition. There were 322,000 stock options granted during the nine months ended June 30, 2022, none of which vest based on a market condition.

Stock options that do not contain market-based vesting conditions are valued using the Black-Scholes option pricing model. The weighted average estimated fair value of employee stock options granted, that vest without a market condition, during the nine months ended June 30, 2023 and 2022, was calculated with the following weighted average assumptions (annualized percentages):

		Nine months ended
		June 30,
		2023				2022
Volatility			52.1	%			48.1	%
Risk-free interest rate			4.0	%			1.5	%
Dividend yield			0.0	%			0.0	%
Expected term in years			5.8				6.8

Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected term of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The contractual term of the options was seven years. The expected term is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates. Such revision adjustments to expense will be recorded as a cumulative adjustment in the period in which the estimate is changed. The Company has not paid a dividend in fiscal 2023 and did not pay a dividend in fiscal 2022.

For stock options that contain market-based vesting conditions, the fair value of these options was determined using a Monte Carlo valuation approach and calculated by an independent valuation specialist.

As of June 30, 2023, there was approximately $1,804 of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of 2.2 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.

Performance-based stock options

On October 4, 2019, the Company awarded a performance-based stock option (PVO) to purchase 800,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2022 and 2023 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. During the year ended September 30, 2022, the Company modified the performance criteria for these PVOs to exclude certain strategic growth initiatives that were not planned at the time of grant. The Company recorded $209 in stock-based compensation expense related to these options in the year ended September 30, 2022. The Company did not record compensation expense related to the 2023 performance-based stock options during the nine months ended June 30, 2023.

On October 8, 2022, the Company awarded additional performance-based stock options to purchase 800,000 shares of the Company’s common stock to the same key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2025 and 2026 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. The Company did not record compensation expense related to these options for the nine months ended June 30, 2023.

On August 10, 2022, the Company granted PVOs to purchase up to 750,000 shares of the Company’s common stock to a key member of management, with a contractual term of seven years. During the three months ended June 30, 2023, these options were forfeited due to a voluntary termination of employment. The Company did not record compensation expense related to these options for the nine months ended June 30, 2022.

On March 20, 2023, the Company granted PVOs to purchase up to 450,000 shares of the Company’s stock to a key member of management with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of the first three twelve-month periods following the employee’s start date, including targets related to growth in the institutional ownership of the Company’s common stock and growth in the trading volume of the Company’s common stock during such periods. Additionally, vesting is subject to the employee being employed by the Company on each of the first three anniversaries of the employee’s start date. 225,000 of these options contain a market-based vesting condition and accounting principles do not require the market condition to be achieved in order for compensation expense to be recognized. The Company recorded $3 of compensation expense related to these options during the three months ended June 30, 2021 and $4 of compensation expense during the nine months ended June 30, 2023.

The Company did not grant any PVOs during the nine months ended June 30, 2022.

Restricted stock units

In fiscal 2020, 81,270 RSUs were granted to employees that vested over three years on the anniversary date of the grant. These were issued at a market value of $258 and have been expensed on a straight-line basis over the three-year life of the grants.

During fiscal 2021, 145,950 RSUs were granted to employees that will vest over three years on the anniversary date of the grant. These were issued at a market value of $989, which have and will be expensed on a straight-line basis over the three-year life of the grants.

On March 15, 2022, each non-employee member of the Board of Directors received a grant of 30,000 RSUs that vested on the first anniversary of the grant date. These were issued at a market value of $407, and expensed on a straight-line basis through the March 15, 2023, vest date. On November 1, 2021, 10,000 RSUs were granted to a non-employee advisor that vested on the first anniversary of the grant date. These were issued at a market value of $51, which were expensed on a straight-line basis though the November 1, 2022, vest date. On November 1, 2022, 10,000 RSUs were granted to a non-employee advisor that vest on the first anniversary of the grant date. These were issued at a market value of $29, which have and will be expensed on a straight-line basis though the November 1, 2023, vest date.

On March 14, 2023, each non-employee member of the Board of Directors received a grant of 30,000 RSUs that will vest on the first anniversary of the grant date. These RSUs were granted at a market value of $417 and have and will be expensed on a straight-line basis through the March 14, 2024, vest date. On February 14, 2023, 145,600 RSUs were granted to employees that will vest over three years on the anniversary date of the grant. These RSUs were issued at a market value of $582, which have and will be expensed on a straight-line basis over the three-year life of the grants. On March 20, 2023, 20,000 RSUs were granted to an employee with immediate vesting. These were issued at a market value of $66 and were expensed immediately.

Compensation expense for RSUs was $211 and $759 for the three and nine months ended June 30, 2023, respectively. Compensation expense for RSUs was $193 and $1,216 for the three and nine months ended June 30, 2022, respectively. As of June 30, 2023, there was approximately $1,204 of total unrecognized compensation costs related to outstanding RSUs. This amount is expected to be recognized over a weighted average period of 1.6 years.

A summary of the Company’s RSUs as of June 30, 2023, is presented below:

		Number of Shares				Weighted Average Grant Date Fair Value
Outstanding September 30, 2022			342,841			$	4.11
Granted			295,600			$	3.63
Released			(253,012	)		$	3.73
Forfeited/cancelled			-			$	-
Outstanding June 30, 2023			385,429			$	3.99

Stock option summary information

A summary of the activity in options to purchase the capital stock of the Company as of June 30, 2023, is presented below:

		Number of Shares				Weighted Average Exercise Price
Outstanding September 30, 2022			3,940,899			$	3.31
Granted			1,849,500			$	2.93
Forfeited/expired			(1,480,362	)		$	3.98
Exercised			(1,022,265	)		$	1.96
Outstanding June 30, 2023			3,287,772			$	3.21
Exerciseable June 30, 2023			817,726			$	3.41

Options outstanding are exercisable at prices ranging from $1.51 to $8.03 per share and expire over the period from 2023 to 2030 with an average life of 5.16 years. The aggregate intrinsic value of options outstanding and exercisable as of June 30, 2023, was $138. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was $2.60 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the nine months ended June 30, 2023 was $762 and proceeds from these exercises was $87. The total intrinsic value of stock options exercised during the nine months ended June 30, 2022 was $191 and proceeds from these exercises was $253.

The following table summarized information about stock options outstanding as of June 30, 2023:

Range of				Number				Weighted Average Remaining Contractual				Weighted Average Exercise				Number				Weighted Average Exercise
Exercise Prices				Outstanding				Term				Price				Exercisable				Price
$1.51	-	$2.64			189,157				1.88			$	1.88				159,157			$	1.73
$2.69	-	$2.69			1,100,000				6.27			$	2.69				-			$	-
$3.09	-	$3.39			1,160,388				4.93			$	3.33				192,138			$	3.39
$3.40	-	$8.03			838,227				4.76			$	4.04				466,431			$	3.99
					3,287,772				5.16			$	3.21				817,726			$	3.41

The Company recorded $181 and $162 of stock option compensation expense for employees, directors and consultants for the three months ended June 30, 2023 and 2022, respectively. The Company recorded $566 and $434 of stock option compensation expense for employees, directors and consultants for the nine months ended June 30, 2023 and 2022, respectively.

Share-based compensation

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2023				2022				2023				2022
Cost of revenues		$	19			$	10			$	80			$	53
Selling, general and administrative			351				327				1,171				1,544
Research and development			26				18				78				53
		$	396			$	355			$	1,329			$	1,650