Pieris Pharmaceuticals, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock and Employee Benefit Plans

Stock and Employee Benefit Plans

12 Months Ended

Dec. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Employee, Director and Consultant Equity Incentive Plans

At the Annual Shareholder Meeting, held on July 24, 2018, the shareholders approved the 2018 Employee, Director and Consultant Equity Incentive Plan, or the 2018 Plan. Upon approval of the 2018 Plan, the 2016 Employee, Director and Consultant Equity Incentive Plan, or the 2016 Plan, was terminated and no additional awards will be made thereunder, however, all outstanding awards under the 2016 Plan will remain in effect. The 2018 Plan, similar to the 2016 Plan, provided for the grant of stock options, restricted and unrestricted stock awards, and other stock-based awards to employees of the Company, non-employee directors of the Company, and certain other consultants performing services for the Company as designated by either the Board of Directors or the compensation committee of the Board of Directors. Previously, upon approval of the 2016 Plan, the 2014 Employee, Director and Consultant Equity Incentive Plan, or the 2014 Plan, was terminated and no additional awards will be made thereunder, however, all outstanding awards under the 2014 Plan will remain in effect. The 2016 Plan, similar to the 2014 Plan, provided for the grant of stock options, restricted and unrestricted stock awards, and other stock-based awards to employees of the Company, non-employee directors of the Company, and certain other consultants performing services for the Company as designated by either the Board of Directors or the compensation committee of the Board of Directors.

There were approximately 86,000 shares remaining and available for grant under the 2016 Plan that terminated pursuant to the approval of the 2018 Plan. The 2018 Plan permits the Company to issue up to 9,975,000 shares, including 3,000,000 shares reserved for issuance pursuant to the 2018 Plan and up to 6,975,000 additional shares which may be issued if awards outstanding under the Registrant’s 2016 Plan are canceled or expire.

The Company’s stock options have a maximum term of 10 years from the date of grant. Stock options granted may be either incentive stock options or nonqualified stock options and the exercise price of stock options must be at least equal to the fair market value of the common stock on the date of grant. The Company’s general policy is to issue common shares upon the exercise of stock options.

The Company estimates the fair value of each stock award on the grant date using the Black-Scholes option-pricing model based on the following assumptions:



	Years Ended December 31,
	2018	2017
Risk free interest rate	2.40% - 3.06%	1.77% - 2.22%
Expected term (in years)	4.75 - 5.73	5.00 - 5.73
Dividend yield	—	—
Expected volatility	77.1% - 80.5%	75.1% - 78.9%

The weighted-average fair value of the 1,881,660 and 1,873,047 options granted during the years ended December 31, 2018 and 2017 was $5.04 and $2.47, respectively. As of December 31, 2018, there were 2,830,034 shares available for future grant under the 2018 Plan.

The following table summarizes stock option activity for employees and nonemployees:



	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2017	5,443,485		$	2.33		$	27,822
Granted	1,881,660		7.59			—
Exercised	(190,019	)	2.09			861
Canceled	(285,079	)	3.28			519
Outstanding, December 31, 2018	6,850,047		$	3.76	7.68 years	$	3,257
Vested or expected to vest, December 31, 2018	6,850,047		$	3.76	7.68 years	$	3,257
Exercisable, December 31, 2018	3,796,264		$	2.31	6.82 years	$	2,522

Periodically, the Company grants inducement options, which are awards outside of approved stock option plans, and which are material awards to the executive officers or other personnel entering senior leadership roles with the Company. The terms of inducement option awards were substantially the same as those issued under our 2016 Plan. These awards are excluded from the table above. The following table summarizes stock option activity for these inducement options (in thousands):



	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2017	1,531,250		$	3.62		$	6,015
Exercised	(406,250	)	$	1.45		$	2,530
Outstanding, December 31, 2018	1,125,000		$	4.41	7.75 years	$	—
Vested or expected to vest	950,000		$	4.14	7.57 years	$	—
Exercisable, December 31, 2018	590,625		$	3.94	7.26 years	$	—

The compensation expense with all inducement options was $0.7 million of which $0.4 million is included in research and development expense and $0.3 million is included in general and administration expense for the year ended December 31, 2018. The compensation expense for inducement options for the year ended December 31, 2017 was $0.8 million of which $0.3 million is included in research and development expense and $0.5 million is included in general and administration expense.

As of December 31, 2018, the total unrecognized compensation cost related to non-vested awards was $10.8 million of which $1.7 million are for inducement options. The Company expects to recognize the compensation cost over a remaining weighted-average period of 2.78 years.

Employee Stock Purchase Plans

Also at the Annual Shareholder Meeting, held on July 24, 2018, the shareholders approved the 2018 Employee Stock Purchase Plan, or the 2018 ESPP. The 2018 ESPP provides eligible employees with the opportunity, through regular payroll deductions, to purchase shares of the Company’s common stock at 85% of the lower closing market price of the common stock at the beginning date or ending date of each purchase period. The plan includes two six-month purchase periods per year in June and December. The first enrollment date into the plan was December 1, 2018 and no purchase have been made to date under the plan. The Company has reserved 500,000 shares of common stock for the administration of the 2018 ESPP. The fair value of shares expected to be purchased under the 2018 ESPP using the Black-Scholes model with the following assumptions:



	Years Ended December 31,
	2018
Risk free interest rate	2.48	%
Expected term (in years)	0.5
Dividend yield	—
Expected volatility	57.57	%

Total stock-based compensation expense is recorded in operating expenses based upon the functional responsibilities of the individuals holding the respective options as follows (in thousands):



	Years Ended December 31,
	2018		2017
Research and development	$	1,984	$	844
General and administrative	2,959		2,202
Total stock-based compensation	$	4,943	$	3,046