Note 9 - Stock Based Awards

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Shareholders' Equity and Share-based Payments [Text Block]

9. Stock Based Awards

Equity Incentive Plans

The Company’s Board of Directors (the "Board") and stockholders approved the 2019 Equity Incentive Plan (the "2019 Plan") which became effective on September 12, 2019. The 2019 Plan is a successor to and continuation of all prior plans including the Company’s 2014 Equity Incentive Plan and Aravive Biologics 2017 Equity Incentive Plan and the 2010 Equity Incentive Plan, as amended (Prior Plans). As of December 31, 2021, the total number of shares of common stock available for issuance under the 2019 Plan was 1,857,990. In addition, if the shares subject to outstanding stock options or other awards under the Prior Plans: (I) terminate or expire prior to exercise or settlement; (II) are not issued because the award is settled in cash; (III) are forfeited because of failure to vest; (IV) or are reacquired or withheld (or not issued) to satisfy a tax withholding obligation or the purchase or exercise price, if any, such shares will become available for issuance under the 2019 Plan. Unless the Board provides otherwise, beginning January 1, 2020 with expiration of January 1, 2029, the total number of shares of common stock available for issuance will automatically increase annually on January 1 of each calendar year by 4.5% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year. The 2019 Plan provides for granting of equity awards to employees, directors and consultants, including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance awards.

Activity under the Company’s stock option plans is set forth below:

						Weighted
						Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Number of			Exercise		Life		Value
	Shares			Price		(in years)		(in thousands)
Balances, January 1, 2021		2,173,776		$	9.59
Options granted		1,005,628			5.26
Options cancelled		(521,088	)		31.03
Options exercised		(219,063	)		1.40
Balances, December 31, 2021		2,439,253		$	3.96		7.1	$	1,611
Outstanding and expected to vest as of December 31, 2021		2,248,136		$	3.80		6.9	$	1,611
Exercisable as of December 31, 2021		1,477,273		$	2.68		5.8	$	1,611

The intrinsic values of outstanding, vested and exercisable options were determined by multiplying the number of shares by the difference in exercise price of the options and the fair value of the common stock. The intrinsic value of stock options exercised during the years ended December 31, 2021 and 2020, was $1.0 million and $0.6 million, respectively.

Stock Options Granted to Employees

During the year ended December 31, 2021 and 2020, the Company granted stock options to officers, directors and employees to purchase shares of common stock with a weighted-average grant date fair value of $4.43 and $4.69 per share, respectively. The fair value is being expensed over the vesting period of the options, which is usually 4 years on a straight-line basis as the services are being provided. No tax benefits were realized from options and other share-based payment arrangements during the periods.

During the year ended December 31, 2020, the Company modified certain stock options and restricted stock units that were outstanding to our two former CEO’s and former directors. The modification of the terms or conditions of an equity award was treated as an exchange of the original award for a new award. The Company then recognized additional compensation for any incremental value. Incremental compensation cost was measured as the excess, if any, of the fair value of the modified award over the fair value of the original aware immediately before its terms were modified. As a result of these modifications during the year ended December 31, 2020, the Company recognized incremental compensation costs of $0.4 million.

As of December 31, 2021, total unrecognized employee stock-based compensation related to stock options granted was $3.6 million, which is expected to be recognized over the weighted-average remaining vesting period of 2.6 years.

The fair value of employee stock options was estimated using the Black-Scholes model with the following weighted-average assumptions:

	December 31,			December 31,
	2021			2020
Expected volatility		114.2	%		112.0	%
Risk-free interest rate		0.8	%		1.0	%
Dividend yield		0.0	%		0.0	%
Expected life (in years)		6.0			6.0

Determining Fair Value of Stock Options

The fair value of each grant of stock options was determined by the Company using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

Expected Volatility – The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected term of our stock options. 

Risk-Free Interest Rate – The risk-free rate assumption was based on the U.S. Treasury instruments with terms that were consistent with the expected term of the Company’s stock options.

Expected Dividend – The expected dividend assumption was based on the Company’s history and expectation of dividend payouts.

Expected Term – The expected term of stock options represents the weighted average period the stock options are expected to be outstanding. For option grants that are considered to be “plain vanilla”, the Company has opted to use the simplified method for estimating the expected term as provided by the SEC. The simplified method calculates the expected term as the average time-to-vesting and the contractual life of the options.

Forfeiture Rate – Forfeitures were estimated based on historical experience.

Fair Value of Common Stock – The fair value of the underlying common stock is based upon quoted prices on Nasdaq.

Stock-based compensation expense, net of estimated forfeitures, is reflected in the statements of operations as follows (in thousands):

	Year Ended
	December 31,
	2021		2020
Operating Expenses
Research and development	$	932	$	536
General and administrative		1,325		1,430
Total	$	2,257	$	1,966

2014 Employee Stock Purchase Plan

The board of directors adopted, and the Company’s stockholders approved, the 2014 Employee Stock Purchase Plan (the "ESPP") in March 2014. The ESPP became effective on March 20, 2014.

The maximum aggregate number of shares of common stock that may be issued under the ESPP per purchase period is 2,500 shares (which was adjusted for the reverse stock split that occurred in October 2018). Additionally, the number of shares of common stock reserved for issuance under the ESPP will increase automatically each year, beginning on January 1, 2015 and continuing through and including January 1, 2024, by the lesser of (i) 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year; and (ii) 50,000 shares of common stock (which was adjusted for the reverse stock split that occurred in October 2018). The Board may act prior to the first day of any calendar year to provide that there will be no January 1 increase or that the increase will be for a lesser number of shares than would otherwise occur. Shares subject to purchase rights granted under the ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the ESPP.

An employee may not be granted rights to purchase stock under the ESPP if such employee (i) immediately after the grant would own stock possessing 5% or more of the total combined voting power or value of the Company’s common stock, or (ii) holds rights to purchase stock under the ESPP that would accrue at a rate that exceeds $25,000 worth of our stock for each calendar year that the rights remain outstanding.

The administrator may approve offerings with a duration of not more than 27 months and may specify one or more shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of common stock will be purchased for the employees who are participating in the offering. The administrator, in its discretion, will determine the terms of offerings under the ESPP.

The ESPP permits participants to purchase shares of our common stock through payroll deductions with up to 15% of their earnings. The purchase price of the shares will be not less than 85% of the lower of the fair market value of our common stock on the first day of an offering or on the date of purchase. The fair value of the ESPP grants were immaterial for the years ended December 31, 2021 and 2020, respectively.