NOTE 11 – Share-Based Compensation and Employee Benefit Plans

In November 2015, the Company’s stockholders approved the ARC Group Worldwide, Inc. 2015 Equity Incentive Plan (“2015 Plan”), which is administered by the Compensation Committee (“Committee”) of the Board of Directors. The 2015 Plan reserves for issuance a total of 950,000 shares of common stock, which may be in the form of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, or other types of awards as authorized under the plan. As of June 30, 2018, there were approximately 66,945 shares of common stock available to be granted under the 2015 Plan. In the case of stock options, the exercise price of the options granted may not be less than the fair market value of a share of common stock at the date of grant. The Committee determines the vesting conditions of awards; however, the performance period for an award subject to the satisfaction of performance measures may not exceed five years. The 2015 Plan will terminate ten years after its adoption, unless terminated earlier by the Company’s Board of Directors.

In November 2016, the Company’s stockholders approved the 2016 ARC Group Worldwide, Inc. Equity Incentive Plan (“2016 Plan”), which reserves for issuance a total of 950,000 shares of common stock. The 2016 Plan contains terms and conditions substantially similar to the 2015 Plan. As of June 30, 2018, there were 271,319 shares of common stock available to be granted under the 2016 Plan.

A summary of stock option activity under the 2015 Plan and 2016 Plan as of June 30, 2018 is as follows:


		Weighted		Weighted Average
		Average Exercise		Remaining Contractual
	Shares	Price		Term (in years)
Outstanding as of June 30, 2017	1,187,580	$	2.68	7.07
Granted	665,903	$	2.35
Exercised	(91,793)	$	1.51
Forfeited	(291,747)	$	2.74
Outstanding as of June 30, 2018	1,469,943	$	2.59	6.50
Vested and exercisable as of June 30, 2018	542,580	$	2.05	5.43
Vested and expected to vest as of June 30, 2018	1,455,238	$	2.59	6.50

The vesting of 301,681 shares granted under the 2016 Plan is contingent upon the achievement of a market condition. If vesting occurs, the compensation expense related to the vested awards that has not been previously amortized will be recognized upon vesting. As of June 30, 2018, the market-based condition has not been achieved.

Stock options granted during the year ended June 30, 2018 have contractual lives of seven to ten years. The weighted-average grant date fair value of stock options granted during the years ended June 30, 2018 and 2017 was $1.20 and $2.17, respectively. The total fair value of shares vested during the years ended June 30, 2018 and 2017 was $0.3 million and $0.4 million, respectively.

Determining Fair Value

The Company estimated the fair value of stock options granted under the 2015 Plan using the Black-Scholes method. The Company estimated the fair value and derived service period of stock options granted under the 2016 Plan with market-based vesting conditions on the date of grant using a Monte Carlo simulation, with assumptions comparable to those used under the Black-Scholes method. The assumptions used to determine the value of the Company’s stock options granted to employees during the years ended June 30, 2018 and 2017 were as follows:


	2018			2017
Expected term		3.57	years	3.0		-	4.75	years
Expected volatility		68.8	%	78.8	%	-	85.0	%
Expected dividend yield		-	%	-	%
Risk-free interest rate		2.72	%	1.02	%	-	2.41	%

Expected Term – The expected term represents the period of time the options are expected to be outstanding. The Company uses the simplified method, as permitted by the SEC, to calculate the expected term, as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected life in years. The simplified method is calculated as the average of the time-to-vesting and the contractual life of the options.

Expected Volatility – Expected volatility is based on the historical volatility of the Company’s common stock, which we believe will be indicative of future experience.

Expected Dividends – The Company has never paid dividends on its common stock and currently does not intend to do so in the near term, and accordingly, the dividend yield percentage is zero.

Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant with a term equal to the expected term of the stock option granted.

Share-Based Compensation Expense

Compensation expense recognized during the years ended June 30, 2018 and 2017 was $0.7 million and $0.7 million, respectively, and is included in selling, general and administrative expense. As of June 30, 2018, there was $0.8 million of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.33 years. The Company estimated expected forfeitures and is recognizing compensation expense only for those option grants expected to vest. The Company’s estimate of forfeitures may be adjusted throughout the requisite service period based on the extent to which actual forfeitures differ, or are likely to differ, from the Company’s previous estimates. At the end of the service period, compensation cost will have been recognized only for those awards for which the employee has provided the requisite service.

401(k) Plan

The Company sponsors a safe harbor 401(k) plan that covers employees in the United States. The Company matches employee contributions based upon the amount of the employees’ contributions subject to certain limitations and may make a discretionary contribution. Company matching contributions to the 401(k) plan totaled $0.2 and $0.6 million for the years ended June 30, 2018 and 2017, respectively.

Employee Stock Purchase Plan

Under the terms of the Company’s employee stock purchase plan ("ESPP"), eligible employees may authorize payroll deductions up to 10% of their base pay to purchase shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each six-month purchase period. A total of 750,000 shares were authorized under the ESPP. The purchase period began on August 1, 2016. As of June 30, 2018, there were 631,971 shares available for issuance.

During the year ended June 30, 2018, 31,702 shares were purchased under the ESPP at a price of $2.05 and a grant date fair value of $2.90 and 37,859 shares purchased under the ESPP at a price of $2.85 and a grant date fair value of $3.45. The assumptions used to value the shares under the ESPP using the Black-Scholes method were as follows:


Expected term	6 months
Expected volatility	62.50 - 77.69	%
Expected dividend yield	-	%
Risk-free interest rate	0.40 - 1.66	%