7. STOCK-BASED COMPENSATION

2016 Stock Incentive Plan

On April 30, 2016, the Company’s stockholders approved the Company’s 2016 Stock Incentive Plan (the “Plan”). The Plan provides for the issuance of a maximum of 12,500,000 shares of common stock to be offered to the Company’s directors, officers, employees, and consultants. On March 1, 2019, the Company’s stockholders approved an additional 7,500,000 shares to be available for issuance under the Plan. Options granted under the Plan have an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. The options expire between five and 10 years from the date of grant. Restricted stock awards granted under the Plan are subject to a vesting period determined at the date of grant.

2021 Stock Incentive Plan

In February 2021, the Company’s board of directors (the “Board”) adopted, and the stockholders approved, the Alzamend Neuro, Inc. 2021 Stock Incentive Plan (the “2021 Plan”). The 2021 Plan authorizes the grant to eligible individuals of (1) stock options (incentive and non-statutory), (2) restricted stock, (3) stock appreciation rights, or SARs, (4) restricted stock units, and (5) other stock-based compensation.

Stock Subject to the 2021 Plan. The maximum number of shares of common stock that may be issued under the 2021 Plan is 10,000,000 shares, which number will be increased to the extent that compensation granted under the 2021 Plan is forfeited, expires or is settled for cash (except as otherwise provided in the 2021 Plan). Substitute awards (awards made or shares issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, in each case by a company that the Company acquires or any subsidiary of the Company or with which the Company or any subsidiary combines) will not reduce the shares authorized for grant under the 2021 Plan, nor will shares subject to a substitute award be added to the shares available for issuance or transfer under the 2021 Plan.

Restricted Stock. In May 2021, the Company issued restricted stock awards pursuant to the 2021 Plan to one employee and four independent Board members. The restricted stock awards vest over 48 months for the employee and 12 months for the independent Board members. The awards require continued service to the Company during the vesting period. The vesting provisions of individual awards may vary as approved by the Board. Compensation expense for restricted stock is generally recorded based on its market value on the date of grant and recognized ratably over the associated service and performance period.

Stock Options. All options that the Company grants are granted at the per share fair value on the grant date. Vesting of options differs based on the terms of each option. The Company has valued the options at their date of grant utilizing the Black Scholes option pricing model. As of the date of issuance of these options, there was not an active public market for the Company’s shares. Accordingly, the fair value of the underlying options was determined based on the historical volatility data of similar companies, considering the industry, products and market capitalization of such other entities. The risk-free interest rate used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options as calculated using the simplified method. The expected life of the options used was based on the contractual life of the option granted. Stock-based compensation is a non-cash expense because the Company settles these obligations by issuing shares of common stock from its authorized shares instead of settling such obligations with cash payments. 

A summary of stock option activity for the period May 1, 2020 to April 30, 2022, is presented below: 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the estimated fair value on the respective date and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options.

Stock Options Granted to Employees and Consultants

The estimated fair value of stock options granted to employees and consultants during the years ended April 30, 2022 and 2021 were calculated using the Black-Scholes option-pricing model using the following assumptions:

Expected Term: The expected term represents the period that the options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).

Expected Volatility: The Company uses an average historical stock price volatility of comparable public companies within the biotechnology and pharmaceutical industry that were deemed to be representative of future stock price trends as the Company only has a limited trading history for its common stock. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate: The Company based the risk-free interest rate over the expected term of the options based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of the grant.

Expected Dividend: The Company has not paid and does not anticipate paying any dividends in the near future. Therefore, the expected dividend yield was zero.

Stock-based compensation related to restricted stock grants and stock options were $1.1 million and $2.9 million, respectively, for employees and directors. The Company also granted $383,000 to TammNet, a consulting retained to help manage the Company’s preclinical and clinical efforts. Total stock-based compensation to employees and consultants from the 2021 Plan for the years ended April 30, 2022 and 2021 were $4.4 million and $2.4 million, respectively.

Performance Contingent Stock Options Granted to Employee

In November 2018, the Board granted 2,000,000 performance-based options under the Plan to the Chief Executive Officer. These options have an exercise price of $1.00 per share.

These options have two separate performance triggers for vesting based upon the therapies achieving certain FDA approval milestones within a specified timeframe. By definition, the performance condition in these options can only be achieved after the performance condition of FDA approval has been achieved. As such, the requisite service period is based on the estimated period over which the market condition can be achieved. When a performance goal is deemed to be probable of achievement, time-based vesting and recognition of stock-based compensation expense commences. In the event any of the milestones are not achieved by the specified timelines, such vesting award will terminate and no longer be exercisable with respect to that portion of the shares. The maximum potential expense associated with the performance-contingent awards is $1.2 million of general and administrative expense if all of the performance conditions are achieved as stated in the option agreement. Due to the significant risks and uncertainties associated with FDA approvals, as of April 30, 2022, the Company believes that the achievement of the requisite performance conditions is not probable and, as a result, no compensation cost has been recognized for these awards.

On November 26, 2019, the Board granted 4,250,000 performance- and market-contingent awards to certain key employees and a director. These grants were made outside of the Plan. These awards have an exercise price of $1.50 per share. These awards have multiple separate market triggers for vesting based upon either (i) the successful achievement of stepped target closing prices on a national securities exchange for 90 consecutive trading days later than 180 days after the Company’s initial public offering (“IPO”) for its common stock; or (ii) stepped target prices for a change in control transaction. The target prices range from $15 per share to $40 per share. In the event any of the stock price milestones are not achieved within three years, the unvested portion of the performance options will be reduced by 25%. Due to the significant risks and uncertainties associated with achieving the market-contingent awards, as of April 30, 2022, the Company believed that the achievement of the requisite performance conditions was not probable and, as a result, no compensation cost has been recognized for these awards.

Performance Contingent Stock Options Granted to Consultants - TAMM Net

On March 23, 2021, the Company issued performance-based stock options to certain team members at TAMM Net, Inc. to purchase an aggregate of 450,000 shares of common stock at a per share exercise price of $1.50 per share, of which 50% vest upon the completion of Phase I clinical trial for AL001 by March 31, 2022, and the remaining 50% vest upon completion of Phase I clinical trial for AL002 by December 31, 2022. The Company retained TAMM Net, Inc., a consulting firm based in Georgia for project management experienced with good manufacturing practices to lead, develop and manage the Company’s preclinical and clinical efforts, extending from the current status of each product candidate through the exit or commercialization of the technologies that the Company has licensed.

As of April 30, 2022, the Company has completed the Phase I clinical trial of AL001. The Company recognized stock-based compensation related to the completion of the Phase I clinical trial of AL001 by March 31, 2022. Due to the significant risks and uncertainties associated with achieving the completion of Phase I for AL002, as of April 30, 2022, the Company believed that the achievement of the requisite performance conditions was not probable and, as a result, no compensation cost has been recognized for these awards related to AL002.

Performance Contingent Stock Options Granted to Consultants - Other Consultants

On October 14, 2021, the Company issued performance-based stock options to two consultants to purchase an aggregate of 200,000 shares of common stock with an exercise price of $2.42 per share, of which 50,000 vest upon completion of each of the Phase II clinical trials of AL001 for a bipolar indication, AL001 for a PTSD indication, AL001 for a MDD indication and AL002 for an Alzheimer’s indication.

As of April 30, 2022, the Company believed that the achievement of the requisite performance conditions was not probable and, as a result, no compensation cost has been recognized for these awards related to Phase II of AL001 and AL002.

 Stock-Based Compensation Expense

The Company’s results of operations include expenses relating to stock-based compensation for the years ended April 30, 2022 and 2021, were comprised as follows:

As of April 30, 2022, total unamortized stock-based compensation expense related to unvested employee and non-employee awards that are expected to vest was $4.5 million. The weighted-average period over which such stock-based compensation expense will be recognized is approximately 1.8 years.