Note 12 – Stock-Based Compensation

The Board of Directors adopted the Rockwell Medical, Inc., 2007 Long Term Incentive Plan (“2007 LTIP”) on April 11, 2007. The 2007 LTIP expired on April 11, 2017 and no equity awards were granted under the 2007 LTIP following its expiration. There were 11,500,000 common shares reserved for issuance under the 2007 LTIP. The Board of Directors adopted the 2018 Long-Term Incentive Plan (“2018 LTIP”) on January 29, 2018 as a replacement for the 2007 LTIP. There are 3,300,000 common shares reserved for issuance under the 2018 LTIP. The Compensation Committee of the Board of Directors (the “Committee”) is responsible for the administration of the 2007 LTIP and 2018 LTIP, including the grant of stock based awards and other financial incentives including performance based incentives to employees, non‑employee directors and consultants.

Our standard stock option agreement under the 2007 LTIP and 2018 LTIP allows for the payment of the exercise price of vested stock options either through cash remittance in exchange for newly issued shares, or through non‑cash exchange of previously issued shares held by the recipient for at least six months in exchange for our newly issued shares. The 2007 LTIP and 2018 LTIP also allow for the retention of shares in payment of the exercise price and income tax withholding. The latter method results in no cash being received by us, but also results in a lower number of total shares being outstanding subsequently as a direct result of this exchange of shares. Shares returned to us in this manner would be retired.

The Company recognized total stock-based compensation expense during the years ended December 31, 2018 and 2017 as follows:


	Year Ended
	2018		2017
Service based awards:
Restricted stock awards	$	1,292,125	$	3,316,093
Restricted stock units		840,477		-
Stock option awards		1,588,291		3,858,503
		3,720,893		7,174,596
Performance based awards:
Restricted stock units		505,999		-
Stock option awards		160,662		-
		666,661		-
Total	$	4,387,554	$	7,174,596

Restricted Stock Awards

A summary of the Company’s restricted stock awards during the years ended December 31, 2018 and 2017 is as follows:


			Weighted Average
			Grant-Date
	Number of Shares		Fair Value
Outstanding at December 31, 2016	850,000	$	8.23
Granted	530,000	$	5.72
Outstanding at December 31, 2017	1,380,000	$	7.27
Forfeited	(333,200)	$	5.70
Outstanding at December 31, 2018	1,046,800	$	7.77

During the year ended December 31, 2017, 530,000 restricted stock awards were granted under the 2007 LTIP. The restricted shares awarded in 2017 consisted of 480,000 performance based restricted shares and 50,000 restricted shares for consulting services. Vesting of the performance based awards is conditioned upon achievement of certain performance measures which were originally estimated to be approximately seventeen months following the grant date and may also vest based on a market performance measure. Evaluation of the expected vesting period is reviewed quarterly. The restricted stock awards are valued at the market price on the date of grant.

During the year ended December 31, 2018, forfeitures of performance based restricted stock awards totaled 333,200 related to the settlement agreement with the Company’s former CEO, CFO, and two former Directors. (see Note 14.)

The fair value of restricted stock awards are measured based on their fair value on the date of grant and amortized over the vesting period of 20 months. As of December 31, 2018, unvested restricted stock awards of 146,800 were related to performance based awards. Stock-based compensation expense of $1.3 million and $3.3 million was recognized for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, there is no unrecognized stock-based compensation expense related to restricted stock awards.

Service Based Restricted Stock Units

A summary of the Company’s service based restricted stock units during the year ended December 31, 2018 is as follows:


			Weighted Average
			Grant-Date
	Number of Shares		Fair Value
Unvested at December 31, 2017	-	$	-
Granted	571,459	$	4.38
Vested	(98,500)	$	4.70
Unvested at December 31, 2018	472,959	$	4.32

The fair value of service based restricted stock units are measured based on their fair value on the date of grant and amortized over the vesting period. The vesting periods range from 1-3 years. Stock-based compensation expense of $0.8 million was recognized during the year ended December 31, 2018. As of December 31, 2018, the unrecognized stock-based compensation expense was $1.7 million.

Performance Based Restricted Stock Units

A summary of the Company’s performance based restricted stock units during the year ended December 31, 2018 is as follows:


			Weighted Average
			Grant-Date
	Number of Shares		Fair Value
Unvested at December 31, 2017	-	$	-
Granted
Performance-based	646,875	$	4.70
Market-based	342,083	$	4.07
Unvested at December 31, 2018	988,958	$	4.48

During the year ended December 31, 2018, the Company granted 988,958 performance based restricted stock units. Each performance unit represents the right to receive one share of the Company’s common stock at a future date, based on performance against specified targets.

A performance unit may be comprised of either a performance based award or a market-based award. Performance based awards vest from the grant date through the remaining service period, and the fair value is the market price of one common share on the grant date. Evaluation of the expected vesting period is reviewed quarterly. Market-based awards vest upon the achievement of the market-based performance goal, provided the continued employment of the Company’s employee. The fair value of each market-based restricted stock unit was determined through the use of the Monte Carlo simulation method. Over the performance period, the number of shares expected to be issued is adjusted upward or downward based upon probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets.

In accordance with ASC 718, Share-Based Payments, the market-based restricted stock units were assigned a fair value of $4.07 per share on the date of grant using the Monte Carlo simulation model. The following assumptions were used in the model:


	Year Ended December 31, 2018
Expected stock price volatility	70.0%
Risk-free interest rate	2.9% - 3.1%
Dividend yield rate	-
Term (years)	10.0

Stock-based compensation expense recognized for performance based restricted stock units was $0.5 million during the year ended December 31, 2018. As of December 31, 2018, the unrecognized stock-based compensation expense related to performance restricted stock units was $2.7 million.

Service Based Stock Options

The fair value of the service based stock options granted for the years ended December 31, 2018 and 2017 were based on the following assumptions:


	December 31,
	2018	2017
Exercise price	$3.17 - $5.75	$6.09
Expected stock price volatility	67.5% - 69.9%	66.3%
Risk-free interest rate	2.7% - 3.2%	2.0%
Term (years)	5.0 - 6.5	6.0

A summary of the Company’s service based stock option activity for the years ended December 31, 2018 and 2017 is as follows:


				Weighted
			Weighted	Average
	Shares		Average	Remaining		Aggregate
	Underlying		Exercise	Contractual		Intrinsic
	Options		Price	Term		Value
Outstanding at December 31, 2016	7,691,501	$	7.83	5.7	$	1,821,384
Granted	15,000	$	6.09	9.1
Exercised	(433,500)	$	6.45	-
Forfeited	(367,000)	$	7.85	-
Outstanding at December 31, 2017	6,906,001	$	7.92	5.1	$	976,335
Granted	1,447,479	$	4.55	9.3
Exercised	(267,500)	$	3.09	-
Forfeited	(229,500)	$	6.59	-
Outstanding at December 31, 2018	7,856,480	$	7.50	5.2	$	-

Exercisable at December 31, 2018	6,470,500	$	8.14	4.3	$	-

The aggregate intrinsic value in the table above is calculated as the difference between the closing price of our common stock and the exercise price of the stock options that had strike prices below the closing price.

During the year ended December 31, 2018, the service based stock options granted consisted of 1,447,479 options granted to employees. The vested options were exercisable at an average price of $8.03 per share and the unvested options were exercisable at an average price of $4.54 per share.

In accordance with the original terms of their employment agreements of the former Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) and in accordance with the terms of the Settlement Agreement (defined below), the Company accelerated the vesting of 258,334 and 71,667 unvested stock options on the termination date. As a result of this acceleration of stock options, the Company recorded additional stock-based compensation of approximately $162,000.

As of December 31, 2018 and 2017, stock-based compensation expense of $1.6 million and $3.9 million was recognized, respectively. As of December 31, 2018, total stock-based compensation expense related to unvested options not yet recognized totaled approximately $2.7 million.

Performance Based Stock Options

A summary of the performance based stock options granted for the year ended December 31, 2018, is as follows:


			Weighted Average
			Exercise
	Number of Shares		Price
Outstanding at December 31, 2017	-	$	-
Granted
Performance-based	129,375	$	4.70
Market-based	258,750	$	4.70
Outstanding at December 31, 2018	388,125	$	4.70

Exercisable at December 31, 2018	-	$	-

During the year ended December 31, 2018, the Company granted 388,125 performance based stock options to employees of the Company. Each performance option represents the right to receive one share of the Company’s common stock at a future date, based on performance against specified targets.

A performance option may be comprised of either a performance based award or a market-based award. Performance based awards start vesting on the grant date through the probability date of the measured performance, and the fair value is the market price of one common share on the grant date. Evaluation of the expected vesting period is reviewed quarterly. Market-based awards vest upon the achievement of the market-based performance goal, provided the continued employment of the Company’s employee. The fair value of each market-based stock option was determined through the use of the Monte Carlo simulation method. Over the performance period, the number of shares expected to be issued is adjusted upward or downward based upon probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets.

In accordance with ASC 718, Share-Based Payments, the market-based stock options were assigned an average fair value of $2.71 per share on the date of grant using the Monte Carlo simulation model. The following assumptions were used in the model:


	Year Ended December 31, 2018
Expected stock price volatility	70.0%
Risk-free interest rate	2.9%
Dividend yield rate	-
Term (years)	10.0

Stock-based compensation expense recognized for performance based stock options was $0.2 million during the year ended December 31, 2018. As of December 31, 2018, the unrecognized stock-based compensation expense related to performance based stock options was $0.9 million.