14. STOCKHOLDERS' EQUITY (DEFICIENCY)

12 Months Ended

Jun. 30, 2020

Stockholders' deficiency:

14. STOCKHOLDERS' EQUITY (DEFICIENCY)

Series A Convertible Preferred Stock – As of June 30, 2020, 4,030 shares of Series A Convertible Preferred Stock were outstanding. Each share of Series A Convertible Preferred Stock is convertible at any time, at the option of the holder, into the number of shares of common stock equal to $100 divided by the Series A Conversion Price. As of June 30, 2020, the Series A Conversion Price was $6.10, so each share of Series A Convertible Preferred Stock is currently convertible into approximately 16.4 shares of common stock. The Series A Conversion Price is subject to adjustment, under certain circumstances, upon the sale or issuance of common stock for consideration per share less than either (i) the Series A Conversion Price in effect on the date of such sale or issuance, or (ii) the market price of the common stock as of the date of such sale or issuance. The Series A Conversion Price is also subject to adjustment upon the occurrence of a merger, reorganization, consolidation, reclassification, stock dividend or stock split which will result in an increase or decrease in the number of shares of common stock outstanding. Shares of Series A Convertible Preferred Stock have a preference in liquidation, including certain merger transactions, of $100 per share, or $403,000 in the aggregate as of June 30, 2020. Additionally, the Company may not pay a dividend or make any distribution to holders of any class of stock unless the Company first pays a special dividend or distribution of $100 per share to holders of the Series A Convertible Preferred Stock.

Financing Transactions – On June 21, 2019 and April 20, 2018, the Company entered into equity distribution agreements with Canaccord Genuity LLC (“Canaccord”) (the “2019 Equity Distribution Agreement” and the “2018 Equity Distribution Agreement”, respectively), pursuant to which the Company may, from time to time, sell shares of the Company’s common stock at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The 2018 Equity Distribution Agreement and related prospectus was limited to sales of up to an aggregate maximum $25.0 million of shares of the Company’s common stock, and the 2019 Equity Distribution Agreement and related prospectus is limited to sales of up to an aggregate maximum $40.0 million of shares of the Company’s common stock. The Company pays Canaccord 3.0% of the gross proceeds as a commission.

Proceeds raised under the 2019 Equity Distribution Agreement are as follows:

	Year Ended June 30, 2020					Year Ended June 30, 2019					Cumulative from inception
	Shares		Proceeds			Shares		Proceeds			Shares		Proceeds
Gross proceeds		1,895,934	$	1,723,195			7,564,575		10,607,047			9,460,509	$	12,330,242
Fees		-		(51,697	)		-		(318,211	)		-		(369,908	)
Expenses		-		(90,000	)		-					-		(90,000	)
Net proceeds		1,895,934	$	1,581,498			7,564,575	$	10,288,836			9,460,509	$	11,870,334

Proceeds raised under the 2018 Equity Distribution are as follows:

	Year Ended June 30, 2019					Year Ended June 30, 2018					Cumulative from inception
	Shares		Proceeds			Shares		Proceeds			Shares		Proceeds
Gross proceeds		17,221,239		23,553,838			1,283,754		1,446,159			18,504,993	$	24,999,997
Fees		-		(706,615	)		-		(43,385	)		-		(750,000	)
Expenses		-		-			-		(145,000	)		-		(145,000	)
Net proceeds		17,221,239	$	22,847,223			1,283,754	$	1,257,774			18,504,993	$	24,104,997

As of June 30, 2019, the 2018 Equity Distribution agreement is completed.

Stock Purchase Warrants – On September 13, 2019, the Company’s Board of Directors approved a plan to offer to purchase and terminate certain outstanding common stock purchase warrants through privately negotiated transactions. The purchase and termination program has no time limit and may be suspended for periods or discontinued at any time.

During the year ended June 30, 2020, the Company entered into several warrant termination agreements to repurchase and cancel the following previously issued Series F, Series H, and Series J warrants for the following aggregate buyback prices:

	Year Ended June 30, 2020
	Warrants		Buyback price
Series F Warrants		297,352	$	62,712
Series H Warrants		1,466,432		577,373
Series J Warrants		4,774,889		1,907,381
		6,538,673	$	2,547,466

During the year ended June 30, 2020, the Company issued 26,861 shares of common stock upon the cashless exercise provisions of 666,666 Series D warrants at an exercise price of $0.75 per share.

As of June 30, 2020, the Company had outstanding warrants exercisable for shares of common stock as follows:

	Shares of Common		Exercise Price per		Latest Termination
Descripton	Stock		Share		Date
Series F warrants*		1,894,429	$	0.91	July 2, 2020**
Series G warrants		549,450		0.91	July 2, 2020**
Series H warrants *		7,974,881		0.70	August 4, 2021
Financial services warrants		25,000		0.70	August 4, 2021
Series J warrants*		4,639,614		0.80	December 6, 2021
		15,083,374

* Subject to a limitation on their exercise if the holder and its affiliates would beneficially own 9.99% of the total number of the Company's shares of common stock following such exercise.

** Expired unexercised on July 2, 2020.

During the year ended June 30, 2019, the Company received $225,600 and issued 282,000 shares of common stock pursuant to the exercise of warrants at an exercise price of $0.80 per share. The Company also received $583,334 and issued 833,333 shares of common stock pursuant to the exercise of warrants at an exercise price of $0.70 per share.

During the year ended June 30, 2018, the Company received $2,396,646 and $114,383, respectively, and issued 2,995,807 shares of common stock pursuant to the exercise of warrants at an exercise price of $0.80 per share and issued 11,438,356 shares of common stock pursuant to the exercise of warrants at an exercise price of $0.01 per share. The Company also issued 23,344,451 shares of common stock pursuant to the cashless exercise provisions of warrants at an exercise price of $0.01 per share. As of June 30, 2018, there were no warrants outstanding at an exercise price of $0.01 per share.

Stock Plan – The Company’s 2011 Stock Incentive Plan was approved by the Company’s stockholders at the annual meeting of stockholders held in May 2011 and amended at the annual meeting of stockholders held on June 8, 2017, June 26, 2018, and again at the annual meeting of stockholders held on June 25, 2020. The 2011 Stock Incentive Plan, as amended, provides for incentive and nonqualified stock option grants, restricted stock unit awards and other stock-based awards to employees, non-employee directors and consultants for up to 42,500,000 shares of common stock. The 2011 Stock Incentive Plan is administered under the direction of the Board of Directors, which may specify grant terms and recipients. Options granted by the Company generally expire ten years from the date of grant and generally vest over three to four years. The Company’s former 2005 Stock Plan was terminated and replaced by the 2011 Stock Incentive Plan, and shares of common stock that were available for grant under the 2005 Stock Plan became available for grant under the 2011 Stock Incentive Plan. No new awards can be granted under the 2005 Stock Plan, but awards granted under the 2005 Stock Plan remain outstanding in accordance with their terms. As of June 30, 2020, 5,552,149 shares were available for grant under the 2011 Stock Incentive Plan.

The Company has outstanding options that were granted under the 2005 Stock Plan. The Company expects to settle option exercises under any of its plans with authorized but currently unissued shares.

The following table summarizes option activity and related information for the years ended June 30, 2020, 2019, and 2018:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding - June 30, 2017		8,927,132		$	0.76		7.5		-
Granted		4,182,550			0.90
Forfeited		(39,500	)		1.70
Exercised		(208,900	)		0.77
Expired		(85,820	)		6.95
Outstanding - June 30, 2018		12,775,462			0.76		7.7
Granted		2,340,200			1.34
Forfeited		(280,362	)		0.62
Exercised		(270,500	)		0.64
Expired		(129,150	)		1.77
Outstanding - June 30, 2019		14,435,650			0.85		7.3
Granted		5,779,850			0.58
Forfeited		(235,950	)		0.86
Exercised		-			-
Expired		(77,100	)		2.72
Outstanding - June 30, 2020		19,902,450		$	0.76		7.4	$	380,514
Exercisable at June 30, 2020		10,366,100		$	0.79		5.8	$	299,137
Expected to vest at June 30, 2020		9,536,350		$	0.74		9.2	$	81,377

Stock options granted to the Company’s executive officers and employees generally vest over a 48-month period, while stock options granted to its non-employee directors vest over a 12-month period.

Included in the options outstanding above are 1,075,000 and 117,500 performance-based options granted in December 2017 to executive officers and employees, respectively, which vest during a performance period ending on December 31, 2020, if and upon either i) as to 100% of the target number of shares upon achievement of a closing price for the Company’s common stock equal to or greater than $1.50 per share for 20 consecutive trading days, which is considered a market condition; or ii) as to thirty percent (30%) of the target number of shares, upon the acceptance for filing by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is considered a performance condition; iii) as to fifty percent (50%) of the target number of shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is also considered a performance condition; iv) as to twenty percent (20%) of the target number of shares, upon entry into a licensing agreement during the performance period for the commercialization of Vyleesi for FSD in at least two of the following geographic areas (a) four or more countries in Europe, (b) Japan, (c) two or more countries in Central and/or South America, (d) two or more countries in Asia, excluding Japan and China, and (e) Australia, which is also considered a performance condition. The fair value of these options was $602,760. The Company amortized the fair value over the derived service period of 1.1 years or upon the attainment of the performance condition. Pursuant to the FDA acceptance of the NDA filing of Vyleesi, 30% of the target number of options vested in June 2018 and 50% of the target number of options vested in June 2019 upon FDA approval of Vyleesi.

For the years ended June 30, 2020, 2019 and 2018, the fair value of option grants was estimated at the grant date using the Black-Scholes model or a multi-factor Monte Carlo simulation. The Company’s weighted average assumptions for the years ended June 30, 2020, 2019, and 2018 were as follows:

	Year Ended June 30,
	2020			2019			2018
Risk-free interest rate		0.5	%		1.9	%		1.8	%
Volatility factor		67.1	%		69.3	%		52.6	%
Dividend yield		0	%		0	%		0	%
Expected option life (years)		6.1			6.1			6.0
Weighted average grant date fair value	$	0.33		$	0.85		$	0.58

Expected volatilities are based on the Company’s historical volatility. The expected term of options is based upon the simplified method, which represents the average of the vesting term and the contractual term. The risk-free interest rate is based on U.S. Treasury yields for securities with terms approximating the expected term of the option.

For the years ended June 30, 2020, 2019, and 2018, the Company recorded stock-based compensation related to stock options of $1,372,931, $1,116,350, and $1,131,895, respectively. As of June 30, 2020, there was $3,958,195 of unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of 3.1 years.

During fiscal 2019, the terms of certain options were modified to accelerate vesting and extend the date to exercise the options. As a result, the Company recorded additional stock-based compensation of $111,499.

In connection with the cashless exercise of stock options during the year ended June 30, 2019, the Company withheld 37,994 shares with aggregate value of $49,771 in satisfaction of minimum tax withholding obligations.

Restricted Stock Units – The following table summarizes restricted stock award activity for the years ended June 30, 2020, 2019 and 2018:

	Year Ended June 30,
	2020			2019			2018
Outstanding at beginning of year		10,327,833			9,323,876			5,209,617
Granted		3,397,950			1,517,450			4,914,550
Forfeited		(123,438	)		(182,351	)		(5,250	)
Vested		(636,775	)		(331,142	)		(795,041	)
Outstanding at end of year		12,965,570			10,327,833			9,323,876

For the years ended June 30, 2020, 2019 and 2018 the Company recorded stock-based compensation related to restricted stock units of $1,765,533, $2,143,640, and $2,386,456, respectively.

During fiscal 2019, the terms of certain restricted stock units were modified to accelerate vesting. As a result, the Company recorded additional stock-based compensation of $110,589.

Included in outstanding restricted stock units in the table above are 7,127,362 vested shares that have not been issued as of June 30, 2020 due to a provision in the restricted stock unit agreements to delay delivery.

Time-based restricted stock units granted to the Company’s executive officers, employees and non-employee directors generally vest over 48 months, 48 months, and 12 months, respectively.

In June 2020, the Company granted 1,203,500 performance-based restricted stock units to its executive officers and 113,484 performance-based restricted stock units to other employees which vest during a performance period ending June 24, 2024. The performance-based restricted stock units vest on performance criteria relating to advancement of MC1r programs, including initiation of clinical trials and licensing of Vyleesi in additional countries or regions.

In June 2019, the Company granted 438,000 performance-based restricted stock units to its executive officers and 182,725 performance-based restricted stock units to other employees which vest during a performance period ending June 24, 2023. The performance-based restricted stock units vest on performance criteria relating to advancement of MC1r programs, including initiation of clinical trials and licensing of Vyleesi in additional countries or regions.

In December 2017, the Company granted 1,075,000 performance-based restricted stock units to its executive officers and 670,000 performance-based restricted stock units to other employees which vest during a performance period, ending on December 31, 2020, if and upon either i) as to 100% of the target number of shares upon achievement of a closing price for the Company’s common stock equal to or greater than $1.50 per share for 20 consecutive trading days, which is considered a market condition; or ii) as to thirty percent (30%) of the target number of shares, upon the acceptance for filing by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is considered a performance condition; iii) as to fifty percent (50%) of the target number of shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is also considered a performance condition; iv) as to twenty percent (20%) of the target number of shares, upon entry into a licensing agreement during the performance period for the commercialization of Vyleesi for FSD in at least two of the following geographic areas (a) four or more countries in Europe, (b) Japan, (c) two or more countries in Central and/or South America, (d) two or more countries in Asia, excluding Japan and China, and (e) Australia, which is also considered a performance condition. The fair value of these awards was $913,750 and $569,500, respectively. The Company amortized the fair value over the derived service period of 1.1 years or upon the attainment of the performance condition. Pursuant to the FDA acceptance of the NDA filing for Vyleesi, 30% of the target number of shares vested in June 2018. Pursuant to the FDA approval of Vyleesi, 50% of the target number of shares vested in June 2019.

In connection with the vesting of restricted share units during the years ended June 30, 2020, 2019, and 2018, the Company withheld 93,875, 67,038 and 27,465 shares, respectively, with aggregate values of $122,868, $65,992, and $20,786 respectively, in satisfaction of minimum tax withholding obligations.