Note 5. Stock-Based Compensation

Restricted Shares

Pursuant to an agreement with a consultant for professional services, Opexa granted 50,305 restricted shares of common stock which were accounted for on March 19, 2011 pursuant to the relevant accounting rules. These shares vested immediately and were issued on April 8, 2011 and have a fair value of $87,028 based on the share price at the grant date, which was recognized as share-based compensation expense for the nine months ended September 30, 2011.

Stock Options

The 2010 Stock Incentive Plan (the “2010 Plan”) provides for the grant of equity incentive awards to employees, directors and consultants of Opexa in the form of incentive stock options or nonqualified stock options, as well as restricted stock, stock appreciation rights, restricted stock units and performance awards that may be settled in cash, stock or other property. The 2010 Plan is the successor to and continuation of Opexa’s June 2004 Compensatory Stock Option Plan (the “2004 Plan”). A total of 2,500,000 shares of common stock are authorized to be issued for awards made under the 2010 Plan through September 2020, plus (i) the number of shares subject to stock options outstanding under the 2004 Plan that are forfeited or terminate prior to exercise and would otherwise be returned to the share reserves under the 2004 Plan and (ii) any reserved shares under the 2004 Plan that were not issued or subject to outstanding grants. In addition, shares subject to awards granted under the 2010 Plan that terminate or expire before being exercised or settled will become available for grant under the 2010 Plan. As of September 30, 2011, options to purchase an aggregate of 1,739,072 shares were issued and outstanding.

Opexa accounts for share-based compensation, including options and nonvested shares, according to the provisions of FASB Accounting Standards Codification (“ASC”) 718, "Share Based Payment.” During the nine months ended September 30, 2011, Opexa recognized option expense of $385,811. Unamortized stock compensation expense as of September 30, 2011 amounted to $457,009.

Stock Option Activity

A summary of stock option activity for the nine months ended September 30, 2011 is presented below:

	Number of Shares			Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contract Term (# years)		Intrinsic Value
Outstanding at January 1, 2011		1,542,072		$	2.15
Granted		272,000			1.64
Exercised		-			-
Forfeited and canceled		(75,000	)		5.00

Outstanding at September 30, 2011		1,739,072		$	1.94		7.4	$	324,513

Exercisable at September 30, 2011		1,419,739		$	1.98		7.0	$	324,513

Option awards are granted with an exercise price equal to the market price of Opexa’s stock at the date of issuance, generally have a ten-year life, and have various vesting dates that range from no vesting or partial vesting upon date of grant to full vesting on a specified date. Opexa estimates the fair value of stock options using the Black-Scholes option-pricing model and records the compensation expense ratably over the service period.

Employee Options

During the nine months ended September 30, 2011, options to purchase an aggregate of 175,000 shares were granted to employees, based on 2010 performance objectives, at an exercise price of $1.56. These options have terms of 10 years and have a vesting schedule of three years. Fair value of $268,451 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for the options issued during the nine month period ended September 30, 2011 include (1) discount rate of 3.36%, (2) expected term of 6 years, (3) expected volatility of 192.44% and (4) zero expected dividends.

Non-Employee Options

During the nine months ended September 30, 2011, options to purchase an aggregate of 82,000 shares were granted to non-employee directors for service on Opexa’s Board at an exercise price of $1.78. Options to purchase an aggregate of 40,000 shares have terms of 10 years, with 50% of the shares vesting immediately and 50% vesting in one year from the date of grant. Options to purchase the remaining 42,000 shares will expire on the earlier of 10 years or a change in control of the Company, with 50% of the shares vesting immediately and 50% vesting on December 31, 2011. Fair value of $142,877 was calculated using the Black-Scholes option-pricing model.

During the nine months ended September 30, 2011, an option to purchase 15,000 shares was granted to a consultant at an exercise price of $1.78. This option has a term of 10 years, with 50% of the shares vesting immediately and 50% vesting on December 31, 2011. Fair value of $26,136 was calculated using the Black-Scholes option-pricing model.

Variables used in the Black-Scholes option-pricing model for the non-employee options issued during the nine months ended September 30, 2011 include (1) discount rate of 3.50%, (2) expected term of 5.3 years, (3) expected volatility of 198.22% and (4) zero expected dividends.

Warrant Activity

A summary of warrant activity for the nine months ended September 30, 2011 is presented below:

	Number of Shares			Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contract Term (# years)		Intrinsic Value
Outstanding at January 1, 2011		11,459,576		$	2.75
Granted		1,658,600			2.61
Exercised		-			-
Forfeited and canceled		(2,687,890	)		5.93

Outstanding at September 30, 2011		10,430,286		$	1.90		2.0	$	733,987

Exercisable at September 30, 2011		10,430,286		$	1.90		2.0	$	733,987

In connection with Opexa’s February 2011 public offering, as disclosed in Note 4, Opexa issued warrants to purchase an aggregate of 1,658,600 shares of common stock to the investors at an exercise price of $2.61 per share. These warrants have a term of five years and are immediately exercisable.