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STOCKHOLDERS' EQUITY
 12 Months Ended
Dec. 31, 2012
STOCKHOLDERS' EQUITY  
STOCKHOLDERS' EQUITY

NOTE 11 - STOCKHOLDERS' EQUITY

 

On December 31, 2012, the domicile of China Pharma Holdings, Inc. was changed from the State of Delaware to the State of Nevada through a merger of the Delaware corporation with and into its newly set-up Nevada subsidiary, with the Nevada subsidiary being the surviving corporation. Each common share, warrant and stock option outstanding on the merger date was automatically converted into a common share, warrant or stock option of the Nevada corporation.

 

The Company is authorized to issue 95,000,000 shares of common shares, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. The preferred stock may be issued in series with such designations, preferences, stated values, rights, qualifications or limitations as determined solely by the Company’s board of directors.

 

Warrants

 

As of December 31, 2012, the Company had warrants outstanding and exercisable to purchase an aggregate of 150,000 shares of Company's common stock at exercise prices ranging from $3.00 to $3.80 per share, which expire May 16, 2013. At December 31, 2012, the warrants had a weighted-average exercise price of $3.40 per share, a weighted-average remaining contractual life of 0.4 years and a total intrinsic value of $0.  

 

Employee Stock Options

 

2010 Incentive Plan

 

On November 12, 2010, the Company’s Board of Directors adopted, and on December 22, 2010 its stockholders approved the 2010 Long-Term Incentive Plan (the “2010 Incentive Plan”), which gave the Company the ability to grant stock options, restricted stock, stock appreciation rights and performance units to its employees, directors and consultants, or those who will become employees, directors and consultants of the Company and/or its subsidiaries. The 2010 Incentive Plan currently allows for equity awards of up to 4,000,000 shares of common stock.  Through December 31, 2012, 125,000 shares of common stock and options to purchase an aggregate of 100,000 shares of stock options had been granted under the 2010 Incentive Plan.

 

On May 25, 2011 the Company issued two-year options to purchase a total of 100,000 shares of its common stock under the 2010 Incentive Plan to two of its executive officers as follows. The Company’s Chief Executive Officer was granted non-qualified stock options to purchase 50,000 shares of common stock at an exercise price of $2.54 per share, the closing price of the Company’s common stock on the day prior to the day of grant, expiring on May 25, 2013, of which 25,000 shares vested on May 25, 2012 and 25,000 shares were to vest on the three-month anniversary of the achievement of certain performance-based vesting criteria. The Company also granted its former Chief Financial Officer non-qualified stock options to purchase 50,000 shares of common stock at an exercise price of $2.54 per share, expiring on April 28, 2013, of which 25,000 shares vested on April 28, 2012 and 25,000 shares were to vest on the three-month anniversary of the achievement of certain performance-based vesting criteria.

 

The grant-date fair value of the options of $0.71 per share, or $70,580 in total, was based on the grant-date closing market price of $2.54 per share and on the following weighted-average assumptions: risk free interest rate of 0.54%, expected dividend yield of 0%, expected volatility of 70.4% and an expected life of 1.0 year. The share-based compensation expense relative to the fixed stock options was recognized over the period the options vested. Share-based compensation relative to the performance-based options will be recognized only if the performance criterion is met.

 

In addition, on May 25, 2011 the Company granted 125,000 shares of common stock under the 2010 Incentive Plan to two of its executive officers valued at $317,500 based on the closing market price on the date of grant of $2.54 per share. Specifically, the Company granted 75,000 shares of restricted stock to its Chief Executive Officer, of which 50,000 shares vested on May 25, 2012, and 25,000 shares were to vest on the six-month anniversary of the achievement of certain performance-based vesting criteria, and the Company granted 50,000 shares of restricted stock to its former Chief Financial Officer, of which 25,000 shares vested on April 28, 2012 and 25,000 shares were to vest on the six-month anniversary of the achievement of certain performance-based vesting criteria. The performance criterion was not met and the performance-based shares were forfeited during the year ended December 31, 2012. The share-based compensation related to the fixed share awards was recognized over the period the shares vested.

 

Effective April 28, 2012, the Company and Frank Waung, its former Chief Financial Officer, entered into an Amendment Agreement to Non-Qualified Stock Option Agreements to amend the terms of the equity awards previously granted to Mr. Waung in conjunction with the termination of his employment agreement with the Company effective April 29, 2012.  The effect of the amendment was to terminate a total of 185,000 vested but unexercised options immediately on April 28, 2012 as opposed to 90 days after the employment termination date. Effective the same date, the Company awarded 100,000 shares of common stock to Mr. Waung for his previous service to the Company.

 

Accordingly, the Company recorded a total of $55,775 of stock compensation expense based upon the excess of the fair value of the common stock issued in exchange for the options that were cancelled, i.e., 185,000 options with a fair value of $225 in exchange for 100,000 shares of common stock with a fair value of $56,000 based on the closing market price of the common stock of $0.56 per share on the date awarded. The fair value of the stock options was computed using the Black-Scholes Option Pricing Model, using the following assumptions: risk free interest rate of 0.14% to 0.19%, expected dividend yield of 0%, expected volatility of 66.7% and an expected life of 0.5 to 1.1 years.

 

On April 27 and 28, 2012 a total of 50,000 options to purchase common stock granted under the 2010 Incentive Plan with an exercise price of $2.54 per share were forfeited due to the failure to achieve the performance-based vesting criteria.

 

The Company recognized $141,720 and $196,183 of compensation expense during the years ended December 31, 2012 and 2011, respectively, as general and administrative expenses related to the awards of common shares and grants and modifications of stock options. The total income tax benefit recognized from the related stock-based compensation was $35,430 and $49,046 for the years ended December 31, 2012 and 2011, respectively.  

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes Option Pricing Model using the assumptions noted in the preceding paragraphs. Expected volatility is based on the historical volatility of the Company’s common stock prices. The Company uses historical data to estimate employee termination rates. The expected term of options granted is determined by the simplified method, which is one-half of the original contractual term. The simplified method is used due to the lack of historical share option exercise data to provide a reasonable basis upon which to estimate expected term. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

A summary of stock option activity as of December 31, 2012, and changes during the year then ended is presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

Shares

 

Price

 

Term (Years)

 

Value

Outstanding at December 31, 2011

     310,000

 

 $        3.03

 

 

 

 

Forfeited

      (50,000)

 

           2.54

 

 

 

 

Expired

    (235,000)

 

           3.19

 

 

 

 

Outstanding at December 31, 2012

       25,000

 

 $        2.54

 

                 0.40

 

 $            -  

Exercisable at December 31, 2012

       25,000

 

 $        2.54

 

                 0.40

 

 $            -  

 

 

 

 

At December 31, 2012, there was no remaining unrecognized compensation expense related to the fixed stock options. The unrecognized performance-based compensation expense related to performance-based options was $17,645, but will only be recognized if the performance criterion is met. There was no remaining unrecognized compensation expense related to restrictive stock awards at December 31, 2012.