Stock-Based Compensation

6 Months Ended

Jul. 31, 2023

Jun. 30, 2022

Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]

Stock-Based Compensation

11: Stock-Based Compensation

ZeroFox Holdings, Inc. 2022 Incentive Equity Plan

On August 3, 2022, the Company adopted the 2022 ZeroFox Holdings, Inc. Incentive Equity Plan (the 2022 Plan). The 2022 Plan became effective on the closing of the Business Combination, which also occurred on August 3, 2022. The 2022 Plan provides for the issuance of up to 11,750,135 shares of Common Stock to employees, officers, directors, consultants, and advisors in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards (RSUs), dividend equivalents, and other stock or cash-based awards. On November 30, 2022, the Board of Directors approved an increase to the number of shares available for issuance under the 2022 plan, effective January 1, 2023. Pursuant to the terms of the 2022 Plan agreement, the shares available for issuance increased by 5% of the shares of Common Stock issued and outstanding at December 31, 2022, or 5,909,396 shares. As of July 31, 2023, there were 10,863,469 shares of Common Stock available for issuance under the 2022 Plan.

Stock-based awards are granted at exercise prices not less than 100% of the fair value of the stock at the date of grant. The Company determines fair value as the closing per share price of its Common Stock on the date the stock-based award is granted. The term of any stock-based award issued under the 2022 Plan may not exceed 10 years from the date of grant. The Company intends to issue new shares to satisfy share options upon exercise.

ZeroFox Holdings, Inc. Employee Stock Purchase Plan

On August 3, 2022, the Company adopted the ZeroFox Holdings, Inc. 2022 Employee Stock Purchase Plan (ESPP). The ESPP is designed to allow eligible employees of the Company and its subsidiaries to purchase shares of Company Common Stock with their accumulated payroll deductions. As of July 31, 2023, and through the date these financial statements were available to be issued, the Company had not implemented and made available the ESPP to its employees.

Stock Options

The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires estimates of highly subjective assumptions, which affect the fair value of each stock option. As the Company did not issue any stock options from the Closing Date of the Business Combination to July 31, 2023, this section describes how any such stock-based awards will be fair valued by the Company when they are issued. This section also describes how the Predecessor valued their stock-based awards.

Expected Volatility

As the Company does not have a significant trading history of the shares of its Common Stock to date, the expected volatility will be based on the average historical stock price volatility of comparable publicly-traded companies in its industry peer group, financial, and market capitalization data. The Predecessor utilized the same estimation approach.

Expected Term

The expected term of the Company’s options represents the period that the stock-based awards are expected to be outstanding. The Predecessor utilized the same estimation approach.

The Company will estimate the expected term of its employee awards using the SAB Topic 14 Simplified Method allowed by the FASB and SEC, for calculating expected term as it has limited historical exercise data to provide a reasonable basis upon which to otherwise estimate expected term. The Predecessor utilized the same estimation approach. Certain of the Predecessor's options began vesting prior to the grant date, in which case the Predecessor used the remaining vesting term at the grant date in the expected term calculation.

Risk-Free Interest Rate

The Company will estimate its risk-free interest rate by using the yield on actively traded non-inflation-indexed U.S. treasury securities with contract maturities equal to the expected term. The Predecessor utilized the same estimation approach.

Dividend Yield

The Company has neither declared nor paid dividends to date and does not anticipate declaring dividends. As such, the dividend yield will be estimated to be zero. The Predecessor utilized the same estimation approach.

Fair Value of Underlying Common Stock

The Company will use the closing price of its Common Stock (ZFOX) on the grant date of the stock-based award to represent the fair value of the underlying Common Stock.

The Predecessor's common stock was not publicly traded. As a result, the Predecessor was required to estimate the fair value of their common stock. The Board of Directors of the Predecessor considered numerous objective and subjective factors to determine the fair value of the Predecessor's common stock at each meeting in which awards are approved. The factors considered included, but were not limited to: (i) the results of contemporaneous independent third-party valuations of the respective Predecessor's common stock; (ii) the prices, rights, preferences, and privileges of the respective Predecessor’s series of Preferred Stock relative to those of its common stock; (iii) the lack of marketability of the Predecessor’s common stock; (iv) actual operating and financial results of the Predecessor; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event for the Predecessor, such as an initial public offering or sale of the Predecessor, given prevailing market conditions; and (vii) precedent transactions involving the Predecessor’s shares.

The Company used the weighted-average assumptions in the table below to estimate the fair value of stock options. There are no values for the Successor as the Successor has not issued any stock options.

	Successor	Predecessor
Assumptions	July 31, 2023	July 31, 2022
Weighted-average risk-free rate	N/A		1.48	%
Weighted-average expected term of the option (in years)	N/A		6.07
Weighted-average expected volatility	N/A		38.92	%
Weighted-average dividend yield	N/A		0.00	%

A summary of option activity is as follows (Aggregate Intrinsic Value in thousands):

Successor	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding as of January 31, 2023		7,869,050		$	1.55		5.58	$	—
Granted	—			—
Exercised		(762,153	)		0.34
Cancelled		(314,546	)		4.55
Outstanding as of July 31, 2023		6,792,351			1.54		5.50		—
Vested as of July 31, 2023		5,647,324			1.14		5.06		52
Vested and expected to vest as    of July 31, 2023		6,391,591		$	1.41		5.36	$	—

Predecessor	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding as of February 1, 2022		21,715,815		$	0.44		6.29	$	51,688
Granted		1,214,500			2.39
Exercised		(392,450	)		0.27
Cancelled		(251,159	)		1.47
Outstanding as of July 31, 2022		22,286,706			0.54		6.45		50,866
Vested as of July 31, 2022		14,784,495			0.27		5.41		37,759
Vested and expected to vest as    of July 31, 2022		19,660,894		$	0.47		6.18	$	46,279

The Company did not grant any options during the three or six months ended July 31, 2023. The weighted-average grant-date fair value of options granted during the Quarter to Date Predecessor Period was $1.07. The weighted-average grant-date fair value of options granted during the Year to Date Predecessor Period was $1.00.

The total intrinsic value of options exercised during the three and six months ended July 31, 2023, was $0.1 million and $0.6 million, respectively. The total intrinsic value of options exercised during the Quarter to Date Predecessor Period was $0.3 million. The total intrinsic value of options exercised during the Year to Date Predecessor Period was $1.0 million.

RSUs

The fair value of RSUs is based on the closing price of the Company's Common Stock on the date of grant.

The Predecessor did not grant RSUs during the six months ended July 31, 2022. A summary of RSU activity is as follows:

Successor	Shares			Weighted-Average Grant Date Fair Value
Outstanding as of January 31, 2023		2,802,426		$	4.64
Granted		5,466,704			1.70
Vested		(317,926	)		4.48
Cancelled		(181,500	)		4.43
Outstanding as of July 31, 2023		7,769,704		$	2.57

RSUs granted under the Company's stock incentive plans generally vest over a period of one to four years. The Company's outstanding RSUs vest upon the satisfaction of a service-based vesting condition.

Stock-Based Compensation Expense

The Company recognized non-cash, stock-based compensation expense in the accompanying Condensed Consolidated Statements of Comprehensive Loss as follows (in thousands):

	Successor		Predecessor		Successor		Predecessor
	Three months ended July 31, 2023		Three months ended July 31, 2022		Six months ended July 31, 2023		Six months ended July 31, 2022
Cost of revenue - subscription	$	72	$	8	$	79	$	18
Cost of revenue - services		36		1		42		2
Research and development		459		56		627		111
Sales and marketing		453		130		686		215
General and administrative		1,294		283		1,979		506
Total stock-based compensation expense	$	2,314	$	478	$	3,413	$	852

Unrecognized compensation cost related to outstanding stock options totaled $2.3 million as of July 31, 2023, which is expected to be recognized over a weighted-average remaining period of 2.1 years.

Unrecognized compensation cost related to outstanding RSUs totaled $16.9 million as of July 31, 2023, which is expected to be recognized over a weighted-average remaining period of 3.0 years.

ID Experts Holdings, Inc. and Subsidiary [Member]

Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]

Stock-Based Compensation

7: Stock Incentive Plan

In August 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”) in which incentive equity awards were authorized to be issued to key employees, officers, directors, and consultants of the Company. Under the terms of the 2016 Plan a maximum of 6,287,732 shares of common stock are available for issuance. The Company may grant shares of common stock in the form of incentive stock options, nonqualified stock options, restricted stock grants, non-restricted stock grants or restricted stock units. Options granted under the 2016 Plan have a term of ten years and vest over a period of up to 48 months, subject to modification by the Board of Directors. The exercise price of the options may not be granted at a price less than 100% of the fair value of the common stock on the date of grant. In August 2017, the Company terminated the 2016 Plan and all shares available for issuance were rolled into the 2017 Equity Incentive Plan (the "2017 Plan"). As of June 30, 2022, there were 265,000 awards outstanding and no shares available for issuance under the 2016 Plan.

In August 2017, the Company adopted the 2017 Plan in which incentive equity awards were authorized to be issued to key employees, officers, directors, and consultants of the Company. Under the terms of the 2017 Plan a maximum of 8,785,330 shares of common stock are available for issuance and future cancellations and forfeitures from the 2016 Plan role into the available pool automatically. The Company may grant shares of common stock in the form of incentive stock options, nonqualified stock options, restricted stock grants, non-restricted stock grants or restricted stock units. Options granted under the 2017 Plan have a term of ten years and vest over a period of up to 60 months, subject to modification by the Board of Directors. The exercise price of the options may not be granted at a price less than 100% of the fair value of the common stock on the date of grant. As of June 30, 2022, there were 2,315,682 awards outstanding and 296,977 shares available for issuance under the 2017 Plan.

Stock-based compensation expense of $0.01 million for stock options was recorded in general and administrative expenses in the Condensed Consolidated Statements of Income for the three and six months ending June 30, 2022. As of June 30, 2022, there was $0.1 million of total compensation expense related to stock-based awards granted under the plans that will be recognized from the remaining quarters in 2022 through 2026. Stock-based compensation expense of $0.1 million is expected to be recognized over a weighted average period of 3.26 years.

The grant-date fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The weighted average grant date fair value of options granted during the six months ended June 30, 2022, was $1.97. The Company uses a simplified method to estimate the expected term of the options. The Company utilizes a divided yield rate of 0% as it does not expect to issue dividends. Since the Company’s shares are not publicly traded, expected volatility is estimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at the date of grant. The weighted average assumptions for the six months ended June 30, 2022, grants are as follows:

Assumptions	Six Months Ended March 31, 2022
Weighted-average risk-free rate		2.20	%
Weighted-average expected term of the option (in years)		7.0
Weighted-average expected volatility		35.00	%
Weighted-average dividend yield		0.00	%

Stock option activity during the six months ended June 30, 2022, is as follows:

(Aggregate Intrinsic Value in thousands)	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding as of January 1, 2022		2,843,372		$	0.14		7.3	$	5,768
Granted		72,500			1.97
Exercised		(272,766	)		0.04
Cancelled		(62,424	)		0.39
Outstanding as of June 30, 2022		2,580,682		$	0.20		6.5	$	12,008
Vested as of June 30, 2022		1,511,596		$	0.17		5.3	$	7,083

The weighted average grant date fair value of options exercised during the six months ended June 30, 2022, was $0.04. The intrinsic value of options exercised during the six months ended June 30, 2022, was $1.3 million. The fair value of shares vested during the six months ended June 30, 2022, was $1.0 million.