Share-Based Compensation

Description of Equity Plans

The 2011 Equity Incentive Plan (the “2011 Plan”) was adopted by the Company’s Board of Directors on April 28, 2011 and approved by the Company’s stockholders on June 15, 2011. The 2011 Plan serves as the successor to the Company’s 2006 Stock Option Plan (the “2006 Plan”). Since the effective date of the 2011 Plan, all future equity awards were made from the 2011 Plan, and no additional awards will be granted under the 2006 plan. Under the 2011 Plan, 3,000,000 shares of the Company’s common stock have been initially reserved for issuance pursuant to a variety of share-based compensation awards, plus any shares available for issuance under the 2006 Plan or are subject to awards under the 2006 Plan which are forfeited or lapse unexercised and which following the effective date are not issued under the 2006 Plan.

As of December 31, 2018, the Company had 3,552,890 stock options outstanding and an additional 1,136,211 shares of common stock available for grant under the 2011 Plan. As of December 31, 2017, there were 2,712,390 stock options outstanding and 2,006,711 shares of common stock available for grant under the 2011 Plan. In accordance with the provision of the 2011 Plan, the board of directors approved an increase of 1,500,000 shares to the plan on January 1, 2019.

Stock Options

Options are granted to purchase common stock at prices that are equal to the fair value of the common shares on the date the option is granted. Vesting is determined by the Board of Directors at the time of grant. The term of any stock option awards under the Company’s 2011 Plan is no more than 10 years except for options granted to the CEO, which is five years.

The grant-date fair value of each option grant is estimated using the Black-Scholes option pricing model and amortized on a straight-line basis over the requisite service period, which is generally the vesting period, for each separately vesting portion of the award as if the award was, in substance, multiple awards. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including the following:

Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury rates with securities approximating the expected lives of options at the date of grant.

Expected dividend yield. The expected dividend yield is zero, as the Company has never paid dividends to common shareholders and does not currently anticipate paying any in the foreseeable future.

Expected stock price volatility. The expected stock price volatility was calculated based on the Company’s own volatility since the DuPont Transaction. During the Company’s annual review of its volatility assumption in 2018, the Company determined that it would be appropriate to use the Company’s historical volatilities since 2016, as the DuPont Transaction had significant changes in the Company’s business and capital structure. The change in assumption is effective January 1, 2018 and only has impact on new options granted in 2018.

Expected life of option. The expected life of option was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The Company determined to use the weighted average vesting period and contractual term of the option as the best estimate of the expected life of a new option (except for the option granted to the CEO, for which an expected life of 5 years was used).

Discount for lack of marketability. The Company applies a discount to reflect the lack of marketability due to the holding period restriction of its shares under Rule 144.

The assumptions used in the Black-Scholes option pricing model for stock options granted for the year ended December 31, 2018 are as follows:



	Years Ended December 31,
	2018	2017
Risk-Free interest rate	2.24% - 2.96%	1.87%-2.15%
Expected dividend yield	—%	—%
Expected stock price volatility	27.80% -30.36%	70.24%-71.43%
Expected life of options	5 - 6.25 Years	5-6.25 Years
Discount for lack of marketability	9.35%	17.72	%

The following table summarizes the combined stock option activity under the Company’s Equity Compensation Plans:



	Shares		Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2016	2,158,083		$1.60	6.10	$214,883
Granted	660,557		1.61
Exercised	(6,250	)	0.23
Expired	(100,000	)	1.33
Canceled	—		—
Outstanding at December 31, 2017	2,712,390		$1.62	6.09	$69,090
Granted⁽¹⁾	1,120,500		1.44
Exercised	(30,000	)	0.15
Expired	—		—
Canceled ⁽²⁾	(250,000	)	1.69
Outstanding at December 31, 2018	3,552,890		$1.57	5.06	$1,149,461

Exercisable at December 31, 2018	2,135,598		$1.57	3.82	$1,149,461

_________________

Notes:

(1) Represents the following stock options granted:

•

Annual share-based compensation awards on January 2, 2018, including: (a) 492,000 stock options with an exercise price of $1.39 granted to executives and key personnel, vesting upon grant or one year anniversary, (b) 250,000 stock options with an exercise price of $1.39 granted to Board of Directors, vesting 25% upon grant and the remaining 75% will vest annually in equal installments over four years, and (c) 87,500 stock options with an exercise price of $1.39 granted to employees, vesting annually in equal installments over four years.

•

One-time awards on March 18, 2018, including: (a) 50,000 stock options with an exercise price of $1.44 granted to key personnel, vesting upon one year anniversary, (b) a sign-on award of 50,000 stock options and a conditional award of 50,000 stock options with an exercise price of $1.44 to the Chief Accounting Officer. The sign-on options will vest annually in equal installments over four years, and the conditional award will vest once certain conditions are met.


•	One-time awards on November 16, 2018, including: (a) a conditional award of 125,000 stock options with an exercise price of $1.76 granted to the Chief Accounting Officer, vesting upon certain achievements, but not before November 28, 2019, (b) 16,000 stock options with an exercise price of $1.76 granted to employees, vesting annually in equal installments over four years.

(2) Represents the cancellation of performance-based stock options granted to the Company’s former Chief Financial Officer, who separated from the Company on March 22, 2018. In addition, the Compensation Committee approved an extension of the exercise period of his vested stock options to June 30, 2019. The incremental cost of such modification, which approximated $39,000, was recognized immediately.

The weighted average grant-date fair market value of stock options granted for the years ended December 31, 2018 and 2017 was $0.41 and $0.82 respectively, based on the Black-Scholes option pricing model. The intrinsic value of options exercised for the years ended December 31, 2018 and 2017 was $39,360 and $7,313, respectively.

As of December 31, 2018 and 2017, total unrecognized compensation cost related to non-vested stock options granted under the Company’s share option plan was $162,786, and $211,012, respectively, which is expected to be recognized over a weighted average period of 2.39 years and 2.63 years, respectively. The Company will adjust unrecognized compensation cost for actual forfeitures as they occur.

Compensation Expenses

We recognize all share-based payments to employees and our board of directors, as non-cash compensation expense, in research and development expenses or general and administrative expenses in the consolidated statement of operations, and these charges had no impact on the Company’s reported cash flows. Stock-based compensation expense is calculated on the grant date fair values of such awards, and recognized each period based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Forfeitures are recorded as they occur.

Total non-cash stock option compensation expense was allocated among the following expense categories:



	Years Ended December 31,
	2018		2017
General and administrative	$	390,854	$	510,679
Research and development	76,349		132,751
Total	$	467,203	$	643,430