ENGN

What is the total compensation expense expected from these inducement awards and how will it be reflected in upcoming financial statements?

Created August 06, 2025 at 07:50 PM

What the press release tells us

Award type – “non‑qualified stock options” (NSOs).
Number of options – 93,200 shares.
Exercise price – $3.79 per share, which is the same as the closing market price on the grant date (July 31 2025).
Grant date – July 31 2025.
Recipients – three newly‑hired employees (the release does not state any vesting schedule, but most inducement NSOs vest either immediately or over a short service period, e.g., 12 months).

Because the exercise price equals the market price, the intrinsic value of the options at grant is zero. However, under U.S. GAAP (ASC 718 – Compensation‑Cost) the company must still record a compensation expense based on the fair‑value of the options on the grant date, not on the intrinsic value.

1. How the total compensation expense is calculated

Component	Explanation
Fair‑value per option	Determined using an option‑pricing model (e.g., Black‑Scholes or a Monte‑Carlo simulation). The model incorporates: • Expected term (usually the contractual life of the option, e.g., 5–10 years) • Expected volatility of ENGN’s stock (historical or implied) • Expected dividend yield (generally zero for a growth‑stage biotech) • Risk‑free rate (U.S. Treasury rate) • Expected forfeiture rate (often assumed 0 % for employee‑specific inducements)
Number of options	93,200
Total compensation expense	Fair‑value per option × 93,200

Because the press release does not disclose the fair‑value per option, the exact dollar amount cannot be derived from the information provided.

In practice, for a newly‑listed biotech with a $3.79 share price and a typical 5‑year term, a Black‑Scholes fair‑value often falls in the range of $0.08 – $0.15 per option (depending on the volatility assumption). Using the mid‑point of $0.12 as an illustration:

[
\text{Total expense} = 93,200 \times \$0.12 = \$11,184
]

If the company used a different volatility assumption, the expense could be higher or lower. The actual figure will be disclosed in the next SEC filing (Form 10‑Q or Form 10‑K).

2. Timing of expense recognition

Vesting period – Most inducement NSOs vest either immediately or over a short service period (e.g., 12 months).
Expense recognition – The total fair‑value is amortized straight‑line over the vesting period (ASC 718).
- If vesting is immediate: the entire expense is recognized in the period containing the grant date (i.e., the quarter ending 30 Sep 2025).
- If vesting is over 12 months: the expense will be spread equally over the 12‑month service period, beginning on the grant date and ending on the vesting date (e.g., 31 Jul 2026).

Thus, the upcoming financial statements will reflect the expense as follows:

Financial‑statement line	Anticipated impact
Income statement – “Compensation expense” (usually shown within R&D expense for a biotech)	Reduces net income by the portion of the total fair‑value recognized in the period.
Balance sheet – “Additional paid‑in capital (APIC)”	The cumulative amount of expense recognized is recorded as a credit to APIC, offsetting the debit to compensation expense.
Cash‑flow statement – “Operating activities”	No cash outflow is recorded when the expense is recognized (NSOs are a non‑cash expense). A later cash outflow may occur when the options are exercised, but that is separate from the compensation‑expense recognition.
Footnotes / MD&A – “Stock‑based compensation”	The company will disclose the number of NSOs granted, the fair‑value per option, the total expense recognized to date, and the remaining unrecognized expense (if any).

3. How it will appear in the next SEC filing

Form 10‑Q (Quarterly) – if the vesting is immediate or the first quarter of a longer vesting schedule
- Statement of Operations: a line item titled “Stock‑based compensation expense” (or “Compensation expense – stock‑based”) will show the amount recognized for the 93,200 NSOs.
- Statement of Changes in Stockholders’ Equity: the same amount will be added to “Additional paid‑in capital – stock‑based compensation.”
Form 10‑K (Annual) – if the vesting period spans more than one quarter
- The expense will be broken out by quarter in the “Statement of Operations” and summed for the year.
- The footnote on “Stock‑Based Compensation” will present a table similar to:

Year‑ended	Options granted	Fair‑value per option	Total fair‑value	Expense recognized to date	Unrecognized expense (remaining)
2025	93,200	$0.12 (example)	$11,184	$X (e.g., $5,592 if 6‑month vest)	$Y (remaining)

MD&A discussion – Management will likely comment that the expense is “non‑cash, related to employee inducement NSOs granted to newly‑hired staff” and that it is being recognized over the vesting period, with no impact on cash until (and unless) the options are exercised.

4. Bottom‑line take‑aways for investors

Impact	Reason
Dilution	When exercised, the 93,200 shares will increase the share count (≈ 0.03 % of a ~300 M‑share float).
EPS	The expense will reduce net income, slightly depressing diluted EPS for the period(s) in which it is recognized.
Cash‑flow	No immediate cash effect; cash impact only occurs if/when the options are exercised (i.e., the company receives $3.79 × 93,200 ≈ $352,000).
Tax	Because the options are non‑qualified, there is no tax deduction for the company when the expense is recognized, nor a tax benefit when the options are exercised (the employee may have ordinary‑income tax on the spread).

5. Summary answer to the question

Total compensation expense: It equals the fair‑value of the 93,200 non‑qualified stock options at the grant date. The exact dollar amount is not disclosed in the press release; it will be calculated using an option‑pricing model and will likely fall in the low‑‑$‑10‑k range (e.g., $11 k if the fair‑value per option is $0.12).
Reflection in upcoming financial statements:
- The expense will be recorded in the income statement as “stock‑based compensation expense” (typically within R&D), reducing net income for the period.
- A corresponding credit to “Additional paid‑in capital – stock‑based compensation” will appear on the balance sheet.
- The expense will be amortized over the vesting period (immediate or up to 12 months).
- The next SEC filing (Form 10‑Q or Form 10‑K) will disclose the number of options, the fair‑value per option, the total expense recognized to date, and any remaining unrecognized expense in the footnotes and MD&A.

Thus, while the intrinsic value of the awards is zero because the exercise price matches the market price, enGene will still recognize a non‑cash compensation expense equal to the fair‑value of the options, and that expense will be reflected in the upcoming quarterly or annual financial statements as described above.