Stock-Based Compensation Arrangements

12 Months Ended

Dec. 31, 2015

Stock-Based Compensation Arrangements

11. Stock-Based Compensation Arrangements

ASC 718 requires compensation expense associated with share-based awards to be recognized over the requisite service period, which for the Company is the period between the grant date and the date the award vests or becomes exercisable. Most of the awards granted by the Company (and still outstanding), vest ratably over three or four years, however, certain awards granted to members of the Company’s Board of Directors vest in their entirety on the one-year anniversary following the date of grant.

The Company recognizes all share-based awards under the straight-line attribution method. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company evaluates its forfeiture assumptions quarterly and the expected forfeiture rate is adjusted when necessary. Ultimately, the actual expense recognized over the vesting period is based on only those shares that vest.

Stock based compensation has been reported within expense line items on the consolidated statement of operations for 2014 and 2015 as shown in the following table (in $000s):

	Year Ended December 31, 2014			Year Ended December 31, 2015
Research and development		$	392		$	240
General and administrative			831			505
Stock-based compensation costs before income taxes		$	1,223		$	745

2015 Plan

On May 22, 2015, the Company’s stockholders approved the 2015 Plan, under which Cyclacel may make equity incentive grants to its officers, employees, directors and consultants. The Company has reserved 3,500,000 shares of its common stock under the 2015 Plan. The 2015 Plan replaces the 2006 Plan, under which there were no remaining reserved shares available for issuance as of September 30, 2015. Stock option awards granted under the Company’s equity incentive plans have a maximum life of 10 years and generally vest over a one to four-year period from the date of grant.

During 2015, the Company granted approximately 1,470,000 options to employees and directors with a grant date fair value of approximately $0.8 million. During 2014, the Company granted approximately 63,000 options to employees and directors with a grant date fair value of approximately $0.2 million. The weighted average grant-date fair values of options granted during the years ended December 31, 2014 and 2015 were $2.48 and $0.51, respectively.

As of December 31, 2015, the total remaining unrecognized compensation cost related to the non-vested stock options amounted to approximately $1.0 million, which will be amortized over the weighted-average remaining requisite service period of 2.19 years.

During the years ended December 31, 2014 and 2015, the Company did not settle any equity instruments with cash.

There were no stock option exercises during the years ended 2014 and 2015. No income tax benefits were recorded for the years ended December 2014 and 2015 because ASC 718 prohibits recognition of tax benefits for exercised stock options until such benefits are realized. The Company was not able to benefit from the deduction for exercised stock options for the years ended December 31, 2014 and 2015 because the Company incurred tax losses in each of those years.

Outstanding Options

A summary of the share option activity and related information is as follows:

	Number of Options Outstanding		Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value ($000s)
Options outstanding at December 31, 2013		949,685		$	15.02		7.38		$	152
Granted		63,000		$	3.11
Exercised		—
Cancelled/forfeited		(2,387)		$	31.08
Options outstanding at December 31, 2014		1,010,298		$	14.24		6.58		$	—
Granted		1,470,281		$	0.63
Exercised		—
Cancelled/forfeited		(5,000)		$	67.82
Options outstanding at December 31, 2015		2,475,579		$	6.05		8.09			—
Unvested at December 31, 2015		1,577,211		$	1.01		9.61		$	—
Vested and exercisable at December 31, 2015		898,368		$	14.91		5.42		$	—

The fair value of the stock options granted is calculated using the Black-Scholes option-pricing model as prescribed by ASC 718 using the following assumptions:

	Year ended December 31, 2014	Year ended December 31, 2015
Expected term (years)	6	5-6
Risk free interest rate	1.835% – 2.005%	1.520% – 1.845%
Volatility	101%	96% – 108%
Expected dividend yield over expected term	0.00%	0.00%
Resulting weighted average grant date fair value	$2.48	$0.51

The expected term assumption was estimated using past history of early exercise behavior and expectations about future behaviors. The Company relied exclusively on its historical volatility as an input to the option pricing model as management believes that this rate will be representative of future volatility over the expected term of the options.

Estimates of pre-vesting option forfeitures are based on the Company’s experience. Currently the Company uses a forfeiture rate of 0 – 30% depending on when and to whom the options are granted. The Company adjusts its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment in the period of change and may impact the amount of compensation expense to be recognized in future periods.

The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. During the years ended December 31, 2014 and 2015, the Company recognized an expense of approximately $0.5 million and $0.1 million, respectively, as a result of revised forfeiture rates.

The weighted average risk-free interest rate represents interest rate for treasury constant maturities published by the Federal Reserve Board. If the term of available treasury constant maturity instruments is not equal to the expected term of an employee option, Cyclacel uses the weighted average of the two Federal Reserve securities closest to the expected term of the employee option.

Restricted Stock Units

The Company issued 85,097 restricted stock units to employees during the year ended December 31, 2013, the vesting of which is dependent upon the fulfillment of certain clinical and financial conditions. The Company determined that the satisfaction of the clinical and financial conditions was probable at December 31, 2014 and, as a result, recorded an expense of $0.5 million related to 80,969 restricted stock units, net of forfeitures, for the year ended December 31, 2014. The restricted stock units were valued based on the fair value at the date of grant, which is equivalent to the market price of a share of the Company’s common stock. The expense was recognized entirely in the fourth quarter of 2014 as the awards became probable of vesting in that quarter. Summarized information for restricted stock unit activity for the years ended December 31, 2014 and 2015 is as follows:

	Restricted Stock Units		Weighted Average Grant Date Value Per Share
Non-vested at December 31, 2013		119,248		$	5.62
Granted		—		$	—
Vested		(29,999)		$	5.81
Forfeited		(233)		$	5.39
Non-vested at December 31, 2014		89,016		$	5.56
Vested		(89,016)		$	5.56
Non-vested at December 31, 2015		—		$	—