Note 9—Stock-Based Compensation

Stock Options

The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period, with the exception of options granted subject to a consulting agreement, whereby the option vesting period and the service period are defined pursuant to the terms of the consulting agreement. Stock-based compensation expense for awards granted during the three- and nine- month periods ended April 30, 2016 and 2015, were based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. Share-based compensation expense related to stock option grants to consultants, in which the grant was not entirely vested at the grant date, are generally re-valued each month. The Company’s expected volatility is derived from the historical daily change in the market price of its common stock since it exited shell status and became available for trading, as well as the historical daily changes in the market price for the peer group as determined by the Company. The Company uses the simplified method to calculate the expected term of options issued to employees and directors. The Company’s estimation of the expected term for stock options granted to parties other than employees or directors is the contractual term of the option award. The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield in effect at the time of grant, commensurate with the expected term. Stock-based compensation expense recognized in the Company’s condensed statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. Authoritative guidance requires forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Because the Company records stock-based compensation monthly and utilizes cliff vesting and/or monthly vesting, the Company has estimated the forfeiture rate of its outstanding stock options as zero since the Company can adjust stock-based compensation due to terminations in the month of termination. The Company has never paid any dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable future.

During the three months ended April 30, 2016, the Company granted options to purchase 637,000 shares of the Company’s common stock, of which 589,500 and 37,500 options were to employees and directors, respectively, and 10,000 options were to a consultant under the 2011 Plan. The options issued to employees and directors have a ten-year term, vest over a range of one to three years, and have exercise prices ranging from $1.64 to $2.35. The options issued to a consultant have ten-year terms, vest in accordance with the terms of the applicable agreement, and have an exercise price of $2.02 per share.

During the three months ended April 30, 2015, the Company granted options to purchase 184,750 shares of the Company’s common stock to employees under the 2011 Plan. The options issued have a ten-year term, vest over three years, and have exercise prices ranging from $6.60 to $7.60.

During the nine months ended April 30, 2016, the Company granted options to purchase 2,689,250 shares of the Company’s common stock, of which 1,955,750 and 655,500 options were to employees and directors, respectively, and 78,000 options were to consultants under the 2011 Plan. The options issued to employees and directors have a ten-year term, vest over a range of one to three years, and have exercise prices ranging from $1.64 to $6.21. The options issued to consultants have terms ranging from three to ten years, vest in accordance with the terms of the applicable agreement, and have an exercise price ranging from $2.02 to $6.21 per share.

During the nine months ended April 30, 2015, the Company granted options to purchase 338,500 and 30,000 shares of the Company’s common stock to employees and consultants under the 2011 Plan, respectively. The options issued to employees within the 2011 Plan have a ten-year term, vest over a range of one to three years, and have exercise prices ranging from $7.30 to $10.60. The options issued to consultants have one- to three-year terms, vest in accordance with the terms of the applicable consulting agreement, and have exercise prices ranging from $6.60 to $8.60.

The following assumptions were used to calculate the fair value of stock-based compensation during the three months ended April 30, 2016 and 2015:

The following assumptions were used to calculate the fair value of stock-based compensation during the nine months ended April 30, 2016 and 2015:

Stock-based compensation expense recorded in the Company’s condensed statement of operations for the three- and nine- month periods ended April 30, 2016 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $1.6 million and $4.6 million, respectively. Of this balance, $0.3 million and $0.8 million was recorded to research and development, respectively, and $1.3 million and $3.8 million, respectively, was recorded in general and administrative in the Company’s condensed statement of operations for the period ended April 30, 2016.

Stock-based compensation expense recorded in the Company’s condensed statement of operations for the three- and nine-month periods ended April 30, 2015 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $0.6 million and $1.7 million , respectively. Of this balance, $0.3 million and $0.8 million were recorded in research and development, respectively, and $0.3 million and $0.9 million, respectively, were recorded in general and administrative in the Company’s condensed statement of operations for the periods ended April 30, 2015.

The weighted-average grant date fair value of stock options granted during the three- and nine- month periods ended April 30, 2016 and 2015 were $1.44 and $3.49, respectively, and $6.20 and $6.60, respectively.

Restricted Stock Units

On March 4, 2016, under the 2011 Plan, the Compensation Committee of the Board of Directors approved the issuance of a total of 680,000 restricted stock units (“RSUs”), each of which is equivalent to one share of stock, to certain employees and a consultant. The RSUs have three (3)-year cliff vesting and are intended to be treated as equity, and, thus, will only allow for settlement in shares. Stock-based compensation expense is measured at the grant date quoted market price of the underlying stock, recognized ratably over the vesting period and adjusted for actual forfeitures. Stock-based compensation expense recorded in the Company’s condensed statement of operations for the three- and nine- month periods ended April 30, 2016 was approximately $76,000.

Employee Stock Purchase Program

Pursuant to the Company’s December 2015 Annual Shareholders Meeting, the Company’s shareholders approved the Company’s 2015 Employee Stock Purchase Plan (“2015 ESPP”). The 2015 ESPP provides an incentive to attract, retain and reward eligible employees to contribute to the growth and profitability of the Company through the opportunity to acquire Company stock at a discount. The ESPP allows for the purchase of Company stock at not less than 85% of the lesser of (a) the fair market value of a share of stock on the offering date of the offering period or (b) the fair market value of a share of stock on the purchase date of the offering period, subject to a share and dollar limit as defined in the 2015 ESPP and subject to the requirements of IRS code section 423. The first 2015 ESPP offering period commenced on February 7, 2016 and it will last approximately six (6) months, with the first purchase date on July 31, 2016.

Under FASB issued ASC 718 Compensation –Stock Compensation, the Company’s 2015 ESPP would be considered a Type B plan because the number of shares a participant is permitted to purchase is not fixed based on the stock price at the beginning of the offering period and the expected withholdings. The 2015 ESPP enables the participant to “buy-up” to the plan’s share limit, if the stock price is lower on the purchase date.

Because the 2015 ESPP is considered a Type B plan, the fair value of the award would be calculated at the beginning of the offering period as the sum of:

15% of the share price of a nonvested share at the beginning of the offering period, 

85% of the fair market value of a six (6)-month call on the nonvested share aforementioned, and 

15% of the fair market value of a six (6)-month put on the nonvested share aforementioned.

The fair market value of the 6-month call and 6-month put are based on the Black-Scholes option pricing model, using the following assumptions: six (6) month maturity, 0.45% risk free interest, 81.06% volatility, 0% forfeitures and $0 dividends.

Stock-based compensation expense recorded in the Company’s condensed statement of operations for the three- and nine- month periods ended April 30, 2016 was approximately $20,000, adjusting for withdrawals and terminations.