11.

Stock-Based Compensation

2016 Long Term Incentive Plan

The Company’s shareholders approved the adoption of the 2016 Incentive Plan on December 12, 2016 (the Adoption Date”), which was previously approved by the Board of Directors on October 3, 2016 and subsequently amended by the Compensation Committee of the Board of Directors on February 3, 2017 to change the name of the plan to the 2016 Long Term Incentive Plan (the “2016 Plan”). The 2016 Plan provides for the issuance of stock options and other awards to employees and directors of, and consultants and advisors to, the Company. The 2016 Plan provides for the issuance of up to 3,000,000 shares of common stock reserved for issuance under the 2016 Plan plus (i) 336,741 shares of common stock that were previously available for grant under the pSivida Corp. 2008 Incentive Plan, as amended (the “2008 Plan”) at the Adoption Date and (ii) any additional shares of common stock that would otherwise become available for grant under the 2008 Plan as a result of subsequent termination or forfeiture of awards under the 2008 Plan following the Adoption Date.

On June 27, 2017, a total of 482,000 stock options were granted to employees at an exercise price of $1.77 per share, the closing price of the Company’s common stock at that date, with ratable annual vesting over 3 years and a 10-year term. In addition, on the same date the Company issued (i) 248,500 Restricted Stock Units (“RSUs”) to employees with ratable annual vesting over 3 years and (ii) 210,000 Performance Stock Units (“PSUs”) to certain employees. The performance conditions associated with the PSU awards are as follows: (a) for one third of the PSUs, upon an FDA acceptance of the Company’s NDA submission of Durasert three-year uveitis for review on or before March 31, 2018 and (b) for two-thirds of the PSUs, upon an FDA approval of Durasert three-year uveitis on or before March 31, 2019. For each performance criteria that is achieved, 50% of the underlying stock units that are associated with that performance condition will vest at the achievement date and 50% will vest on the first anniversary of such date. No stock-based compensation was recorded in fiscal 2017 in connection with the PSUs.

The Company measures the fair value of options on their grant date using the Black-Scholes option-pricing model. Based upon limited option exercise history, the Company has generally used the “simplified” method outlined in SEC Staff Accounting Bulletin No. 110 to estimate the expected life of stock option grants. Management believes that the historical volatility of the Company’s stock price on NASDAQ best represents the expected volatility over the estimated life of the option. The risk-free interest rate is based upon published U.S. Treasury yield curve rates at the date of grant corresponding to the expected life of the stock option. An assumed dividend yield of zero reflects the fact that the Company has never paid cash dividends and has no intentions to pay dividends in the foreseeable future.

The key assumptions used to apply the option pricing model for options granted under the 2016 Plan during the year ended June 30, 2017 were as follows:


		2017
Option life (in years)		6.0
Stock volatility		70.9%
Risk-free interest rate		1.94%
Expected dividends		0.0%

The grant date fair value of the option grants was $1.13 per share. At June 30, 2017, all of the stock options granted were outstanding and had no intrinsic value.

At June 30, 2017, a total of 3,903,447 shares of common stock were authorized for issuance under the 2016 Plan, of which 2,962,947 shares were available for new awards.

2008 Incentive Plan

The 2008 Plan provides for the issuance of stock options and other stock awards to directors, employees and consultants. As of December 12, 2016, which was the effective date of the 2016 Plan, there were 336,741 shares available for grant of future awards under the 2008 Plan, which were carried over to the 2016 Plan. Effective as of such date, the Compensation Committee terminated the 2008 Plan in all respects, other than with respect to previously-granted awards, and no additional stock options and other stock awards will be issued under the 2008 Plan. Subsequent to December 12, 2016 and through June 30, 2017, an additional 566,706 stock options under the 2008 Plan were forfeited and became available for grant under the 2016 Plan.

Options to purchase a total of 1,535,000 shares were granted during fiscal 2017 at exercise prices equal to the closing market price of the Company’s common stock on NASDAQ on the respective option grant dates. Of this total, the Company granted 1,405,300 options to employees with ratable annual vesting over 4 years, 90,000 options to non-executive directors with 1-year cliff vesting and 40,000 options to a newly appointed non-executive director with ratable vesting over 3 years. All option grants have a 10-year term.

The key assumptions used to apply the option pricing model for options granted under the 2008 Plan during the years ended June 30, 2017, 2016 and 2015 were as follows:


	2017	2016	2015
Option life (in years)	5.50 - 6.25	5.50 - 6.25	5.50 - 6.25
Stock volatility	70% - 72%	76% - 80%	79% - 93%
Risk-free interest rate	1.23% - 2.08%	1.47% - 1.97%	1.70% - 2.00%
Expected dividends	0.0%	0.0%	0.0%

The following table summarizes information about stock options under the 2008 Plan for the years ended June 30, 2017, 2016 and 2015 (in thousands except per share amounts):


	2017		2016		2015
Weighted-average grant date fair value per share	$	1.95	$	2.74	$	3.33
Total cash received from exercise of stock options		99		490		235
Total intrinsic value of stock options exercised		53		967		257

The following table provides a reconciliation of stock option activity under the 2008 Plan for fiscal 2017:


	Number of options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
						(in years)		(in thousands)
Outstanding at July 1, 2016		4,981,421		$	3.60
Granted		1,535,300			3.24
Exercised		(84,080	)		1.18
Forfeited		(868,956	)		3.95

Outstanding at June 30, 2017		5,563,685		$	3.48		4.64	$	128

Outstanding at June 30, 2017—vested or unvested and expected to vest		5,442,815		$	3.47		4.56	$	128

Exercisable at June 30, 2017		3,716,651		$	3.50		2.62	$	128

Inducement Option Grant

In connection with the September 15, 2016 hire of the Company’s President and CEO, the Company granted, as an inducement award, 850,000 options to purchase common stock with ratable annual vesting over 4 years, an exercise price of $3.63 per share and a 10-year term. Although the stock options were not awarded under the 2008 Plan, the stock options are subject to and governed by the terms and conditions of the 2008 Plan. The grant date fair value of $0.84 per share, measured at the Adoption Date, was determined based upon assumptions of an option life of 6.25 years, historical stock volatility of 70%, a risk-free interest rate of 2.13% and expected dividends of 0%.

Restricted Stock Units

During the year ended June 30, 2017, the Company issued 700,000 market-based Restricted Stock Units (“market-based RSUs”) to two employees, which included 500,000 as an inducement grant to the Company’s President and CEO and 200,000 issued under the 2008 Plan. The market-based RSUs vest based upon a relative percentile rank of the 3-year change in the closing price of the Company’s common stock compared to that of the companies that make up the NASDAQ Biotechnology Index (“NBI”). The Company estimated the fair value of the market-based RSUs using a Monte Carlo valuation model on the respective dates of grant, using the following key assumptions:


		2017
Grant date stock price		$1.91 - $3.63
Stock volatility		50% - 60%
Risk-free interest rate		0.87% - 0.98%
Expected dividends		0.0%

The weighted-average grant date fair value of the market-based RSUs was $1.35 per share.

Stock-Based Compensation Expense

The Company’s statements of comprehensive (loss) income included total compensation expense from stock-based payment awards as follows (in thousands):


	Year Ended June 30,
	2017		2016		2015
Compensation expense included in:
Research and development	$	1,109	$	702	$	676
General and administrative		1,347		1,461		1,285

	$	2,456	$	2,163	$	1,961

In connection with termination benefits provided to the Company’s former Chief Executive Officer, the vesting of certain options was accelerated in accordance with the terms of the options, the exercise period for all vested options was extended through September 14, 2017, and all remaining non-vested options were forfeited. Additionally, in connection with the U.K. restructuring, the exercise period of all vested options held by the former U.K. employees was extended through June 30, 2017 and all non-vested options were forfeited. These option modifications and forfeitures were accounted for in the quarter ended September 30, 2016, the net effect of which resulted in an approximate $274,000 increase of stock-based compensation expense included in general and administrative expense and an approximate $35,000 reduction of stock-based compensation expense included in research and development expense for the year ended June 30, 2017 in the table above.

In connection with termination benefits provided to the Company’s former Vice President, Corporate Affairs and General Counsel, the vesting of certain options was accelerated in accordance with the terms of the options, the exercise period for all vested options was extended through June 28, 2018 and all remaining non-vested options were forfeited. The option modification and forfeitures were accounted for in the quarter ended December 31, 2016, the net effect of which resulted in an approximate $104,000 reduction of stock-based compensation expense included in general and administrative expense for the year ended June 30, 2017 in the table above.

At June 30, 2017, there was approximately $4.2 million of unrecognized compensation expense related to outstanding stock options under the 2008 Plan, the inducement stock option grant to the Company’s President and CEO, the market-based RSU awards and the stock options, RSU awards and PSU awards issued under the 2016 Plan, which is expected to be recognized as expense over a weighted-average period of approximately 2.04 years.