Note 11 — Share-based compensation

 

The Company grants options over ordinary shares in Adaptimmune Therapeutics plc under the following option plans: (i) the Adaptimmune Therapeutics plc Employee Share Option Scheme (adopted on January 14, 2016), (ii) the Adaptimmune Therapeutics plc 2015 Share Option Scheme and (adopted March 16, 2015) (ii) the Adaptimmune Therapeutics plc Company Share Option Plan (adopted March 16, 2015).

 

The Adaptimmune Therapeutics plc Company Share Option Plan is a tax efficient option scheme intended to comply with the requirements of Schedule 4 to the Income Tax (Earnings and Pensions) Act 2003 of the United Kingdom, which provides for the grant of company share option plan (“CSOP”) options. Grants may not exceed the maximum value of £30,000 per participant for the shares under the option, which is a CSOP compliance requirement.

 

Generally, the vesting dates for the options granted under these plans up to December 31, 2017 are 25% on the first anniversary of the grant date and 75% in monthly installments over the following three years. However, the options granted to non-executive directors under the Adaptimmune Therapeutics plc 2015 Share Option Scheme vest and become exercisable as follows:

 

 

Options granted under these plans are not subject to performance conditions. The contractual term of options granted under these plans is ten years.

 

The maximum aggregate number of options which may be granted under these plans and any incentive plans adopted by the Company cannot exceed a scheme limit that equates to 8% of the initial fully diluted share capital of the Company immediately following its IPO plus an automatic annual increase of an amount equivalent to 4% of the issued share capital on each 30 June (or such lower number as the Board, or an appropriate committee of the Board, may determine). The automatic increase is effective from July 1, 2016.

 

Prior to December 31, 2014, the Company granted options to purchase ordinary shares in Adaptimmune Limited under three option schemes:

 

(i) The Adaptimmune Limited Share Option Scheme was adopted on May 30, 2008.  Under this scheme Enterprise Management Incentive (“EMI”) options (which are potentially tax-advantaged in the United Kingdom) have been granted (subject to the relevant conditions being met) to its employees who are eligible to receive EMI options under applicable U.K. tax law and unapproved options (which do not attract tax advantages) have been granted to its employees who are not eligible to receive EMI options, and to its Directors and consultants. In May 2014, the Company no longer qualified for EMI status and since that date, no further EMI options were granted under this scheme; however, unapproved options have been under granted under this scheme since that date.

 

(ii) The Adaptimmune Limited 2014 Share Option Scheme was adopted on April 11, 2014. EMI options were granted (subject to the relevant conditions being met) under this scheme to our employees who are eligible to receive EMI options under applicable U.K. tax law. Unapproved options were granted to its employees who are not eligible to receive EMI options and to directors.  In May 2014, the Company no longer qualified for EMI status and since that date, no further EMI options were granted under this scheme; however, unapproved options have been under granted under this scheme since that date.

 

(iii) The Adaptimmune Limited Company Share Option Plan was adopted on December 16, 2014. This scheme allowed the grant of options to our eligible employees prior to the Company’s corporate reorganization. This scheme is a tax efficient option scheme and options were granted on December 19, 2014 and on December 31, 2014 to our part-time and full-time employees.

 

As part of the corporate reorganization in connection with our IPO, the holders of options granted under these schemes over ordinary shares of Adaptimmune Limited were granted equivalent options on substantially the same terms over ordinary shares of Adaptimmune Therapeutics plc (“Replacement Options”) in exchange for the release of these options. The Company does not intend to grant any further options under these schemes.

 

Generally, the vesting dates for the Replacement Options under the Adaptimmune Limited schemes are:

 

 

The contractual life of options granted under these schemes is ten years.

 

In August 2016, the Company accelerated the vesting of 361,222 share options held by two non-executive directors, such that those options became vested and exercisable on December 30, 2016 when the non-executive directors stepped down from the Board, and the options expire on December 31, 2018.

 

The following table shows the total share-based compensation expense included in the consolidated statement of operations (thousands):

 

 

As of December 31, 2017 and December 31, 2016, there were 3,224,600 and 3,074,600 share options granted to nonemployees outstanding, respectively.  These share options are measured at the current fair values at each reporting date until the share options have vested and recognized in the consolidated statement of operations over the requisite service period.  The total share-based payment expense included in the consolidated statement of operations includes a charge of $314,000 in the year ended December 31, 2017, a benefit of $488,000 and $33,000 in the year ended December 31, 2016 and six months ended December 31, 2015, respectively, and a charge of $2,001,000 in the year ended June 30, 2015 relating to share options granted to nonemployees.

 

As of December 31, 2017, there was $10,086,000 of total unrecognized compensation cost related to stock options granted but not vested under the plans. That cost will be recognized over an expected remaining weighted-average period of 2.9 years.

 

There were 29,924,787, 19,404,373 and 21,779,577 options granted in the years ended December 31, 2017 and 2016 and June 30, 2015, respectively. No share options were granted in the six months ended December 31, 2015. The weighted average fair value of stock options granted in the years ended December 31, 2017 and 2016 and June 30, 2015 were $0.35, $0.74 and $0.64, respectively.

 

The following table summarizes all stock option activity for the year ended December 31, 2017:

 

 

The following table summarizes information about stock options outstanding as of December 31, 2017:

 

 

There were 1,142,904 and 63,192 share options exercised in the years ended December 31, 2017 and 2016, respectively. No share options were exercised in the six months ended December 31, 2015 and year ended June 30, 2015. In the years ended December 31, 2017 and 2016 the total intrinsic value of stock options exercised was $1,522,000 and $40,000, respectively and the cash received from exercise of stock options was $401,000 and $17,000, respectively.  The Company recognizes tax benefits arising on the exercise of stock options regardless of whether the benefit reduces current taxes.  The tax benefit arising on the exercise of stock options was $73,000 and $8,000 for the year ended December 31, 2017 and 2016, respectively and nil for the six months ended December 31, 2015 and the year ended June 30, 2015. The Company satisfies the exercise of stock options through newly issued shares.

 

The fair value of the stock options granted during the period was calculated using the Black-Scholes option-pricing model using the following assumptions:

 

 

The expected term of the option is based on management judgment.  Due to the Company’s lack of sufficient history as a publicly traded company, management’s estimate of expected volatility for grants prior to May 2017 are based on the average volatilities of seven public companies with similar attributes to the Company.  For grants subsequent to May 2017, there is over two years of historical data upon which to determine the volatility of the Company’s share price, which management consider is sufficient to estimate the volatility based on the Company’s historical share price. The risk free rate is based on the Bank of England’s estimates of gilt yield curve as of the respective grant dates.