Note 6— Stock-Based Compensation

Stock Options

The Company adopted, effective as of July 31, 2013, the 2013 Stock Option and Incentive Plan (the “Plan”). There are 678,532 shares of the Company’s Class B common stock reserved for the grant of awards under the Plan.

In connection with the Spin-Off, each holder of an option to purchase IDT Class B common stock received a ratable share in a pool of options to purchase 32,155 shares of the Company’s Class B common stock (which was based on 10% of the outstanding options to purchase 641,567 shares of IDT Class B common stock issued by IDT and the 1 for 2 distribution ratio of the Spin-Off). The exercise price of the Company’s options is $5.67 per share which is equal to the closing price of the Company’s Class B common stock on the first trading day following the consummation of the Spin-Off. The expiration date of the Company’s options is equal to the later of (i) the expiration of the IDT option held by such option holder and (ii) a date on or about the first anniversary of the Spin-Off when the Company’s insiders will be free to trade in shares of the Company under the Company’s insider trading policy. The options to purchase shares of the Company were issued under the Company’s Plan. The adjustment to the exercise price of the options to purchase IDT shares and the issuance of the 32,155 options to purchase the Company’s shares were accounted for as a modification. No incremental charge was required as a result of the modification.

The following table summarizes all stock option activity during Fiscal 2014 and Fiscal 2013:

The total intrinsic value of options exercised during fiscal 2014 was $12,104.  The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $9.87 as of July 31, 2014 which would have been received by the option holders had all option holders exercised their options as of that date.  All of the options are in the money as of July 31, 2014.

Common Stock

In May 2011, Straight Path IP Group entered into an employment agreement with its then Chief Executive Officer (the “Former SPIP CEO”), pursuant to which Straight Path IP Group committed to grant options to the Former SPIP CEO to purchase shares of Straight Path IP Group’s common stock representing 5.0% of Straight Path IP Group’s outstanding equity, at an exercise price of approximately $0.4 million. The options vested monthly from May 2011 through April 2015. The estimated value of this grant was $0.2 million which Straight Path IP Group was recognizing using the straight-line method over the vesting period. The fair value of the options was estimated using a Black-Scholes valuation model and the following assumptions: (1) expected volatility of 49% based on the historical volatility of a comparable company and other factors, (2) a discount rate of 2.2% and (3) an expected term of six years. The fair value of the underlying Straight Path IP Group shares was determined using the income approach. The Company recorded stock-based compensation expense related to this grant of $13,000 and $52,000 in fiscal 2013 and fiscal 2012, respectively. The Company ceased recording stock-based compensation upon the termination of the Former SPIP CEO, and such options are now subject to dispute by us, as discussed in Note 7.

On September 24, 2012, IDT’s Board of Directors approved a grant of 10% of the equity of Straight Path IP Group to Howard Jonas, Chairman and Chief Executive Officer of IDT. These Straight Path IP Group shares vested immediately. The Company recorded stock-based compensation expense of approximately $662,000 in fiscal 2013 for the grant of these shares, based on the estimated fair value of the shares on the grant date. The estimated fair value of the Straight Path IP Group shares was determined using the income approach based on expected future royalties.

On April 15, 2013, a consultant was granted a stock option to purchase up to 0.5% of the outstanding shares of common stock of Straight Path IP Group. The option vests 33.2% immediately, 33.4% on May 31, 2013 and 33.4% on May 31, 2014. The estimated value of this grant was $13,318 which Straight Path IP Group recognized using the straight-line method over the vesting period. The fair value of the options was estimated using a Black-Scholes valuation model and the following assumptions: (1) expected volatility of 51% based on the historical volatility of comparable companies and other factors, (2) a discount rate of 0.8% and (3) an expected term of four years. The estimated fair value of the underlying Straight Path IP Group shares was determined using the income approach based on expected future royalties.

On August 2, 2013, the Company granted its non-employee directors a total of 3,750 shares of the Company’s Class B common stock with an aggregate fair value of $21,263. These shares vested immediately upon grant. In addition, on August 2, 2013, the Company granted Davidi Jonas, the Company’s Chief Executive Officer and President, 229,608 restricted shares of Class B Common Stock, and Jonathan Rand, the Company’s Chief Financial Officer and Treasurer, 38,268 restricted shares of Class B Common Stock. Both grants of restricted shares vest as to one-third of the granted shares on each of August 2, 2014, 2015 and 2016, unless otherwise determined by the Compensation Committee of the Company’s Board of Directors. The aggregate fair value of the grant was $1.5 million which is being charged to expense on a straight-line basis over the vesting period.

On August 6, 2013, the Company granted various consultants an aggregate of 10,100 restricted shares of its Class B common stock.These restricted shares vest as to one-third of the granted shares in each of August 2014, 2015 and 2016, unless otherwise determined by the Compensation Committee of the Company’s Board of Directors. The aggregate grant date fair value of the grant was $50,000, which is being charged to expense on a straight-line basis over the vesting period.

In January 2014, the Company granted its non-employee directors an aggregate of 24,000 shares of the Company’s Class B common stock with an aggregate fair value on the date of grant of $197,000.  These shares vested immediately upon grant.

On July 31, 2014, the Company granted a consultant 5,500 restricted shares of its Class B common stock.  These restricted shares will vest as to one-half of the granted shares on each of January 31, 2015 and July 31, 2015, unless otherwise determined by the Compensation Committee of the Company’s Board of Directors. The aggregate grant date fair value of the grant was approximately $54,000, which will being charged to expense on a straight-line basis over the vesting period.

On August 1, 2014, subject to stockholder approval, the Company granted Davidi Jonas 71,000 restricted shares of Class B Common Stock and Jonathan Rand 52,000 restricted shares of Class B Common Stock. Both grants of restricted shares will vest as to approximately one-third of the granted shares on each of February 1, 2015, 2016 and 2017, unless otherwise determined by the Compensation Committee of the Company’s Board of Directors. The aggregate fair value of the grant was $1.2 million which will be charged to expense on a straight-line basis over the vesting period.

On August 1, 2014, the Company also granted Jerry Pi, its Chief Technology Officer, 60,000 restricted shares of Class B Common Stock. These restricted shares will vest as to one-third of the granted shares on each of September 1, 2015, 2016 and 2017, unless otherwise determined by the Compensation Committee of the Company’s Board of Directors. The aggregate fair value of the grant was $573,000 which will be charged to expense on a straight-line basis over the vesting period.