Note 9. Stock Options and Warrants

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, 2012, options to purchase an aggregate of 3,278,222 shares were issued and outstanding.

Opexa accounts for share-based compensation, including options and nonvested shares, according to the provisions of ASC 718, “Share Based Payment.” During the nine months ended September 30, 2012, Opexa recognized option expense of $542,766 which includes the related expense for the options that are expected to vest based on achievement of their related performance conditions (see below). Unamortized stock compensation expense as of September 30, 2012 amounted to $651,689.

Stock Option Activity

A summary of stock option activity for the nine months ended September 30, 2012 is presented below:

	Number of Shares			Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contract Term (# years)		Intrinsic Value
Outstanding at January 1, 2012		1,771,705		$	1.93
Granted		1,616,767			0.93
Exercised		-			-
Forfeited and canceled		(110,250	)		3.13

Outstanding at September 30, 2012		3,278,222		$	1.39		7.9	$	145,443

Exercisable at September 30, 2012		1,681,544		$	1.78		6.6	$	136,943

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.

During the nine months ended September 30, 2012, options to purchase an aggregate of 375,331 shares were granted to employees, based on 2011 performance objectives, at an exercise price of $0.95. These options have terms of ten years and have a vesting schedule of three years. Fair value of $344,309 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for these options include (1) discount rate of 1.98%, (2) expected term of 5.25 years, (3) expected volatility of 183% and (4) zero expected dividends.

During the nine months ended September 30, 2012, options to purchase an aggregate of 1,019,036 shares were granted to senior management, based on the achievement of future performance-based, strategic milestone objectives, at an exercise price of $0.95. These options have terms of ten years and have vesting schedules of three years commencing after the two specific milestone objectives have been individually met. Fair value of $964,715 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for these options include (1) discount rate of 1.98%, (2) expected term of ten years, (3) expected volatility of 183% and (4) zero expected dividends.

During the nine months ended September 30, 2012, options to purchase an aggregate of 25,000 shares were granted to recently hired employees at exercise prices ranging from $0.92 to $0.95. These options have terms of ten years and have a vesting schedule of three years commencing after the one-year anniversary of the employee’s date of hire. Fair value of $23,103 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for these options include (1) discount rate of 1.40%, (2) expected term of seven years, (3) expected volatility of 183% and (4) zero expected dividends.

During the nine months ended September 30, 2012, an option to purchase an aggregate of 75,000 shares was granted to Opexa’s Acting Chief Financial Officer at an exercise price of $0.51 in connection with his appointment. This option has a term of ten years, with one-third of the shares vesting immediately, one-third of the shares vesting on December 31, 2012 and the remaining one-third of the shares vesting at the earlier of June 30, 2013 or the appointment of a permanent chief financial officer. Fair value of $37,096 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for this option include (1) discount rate of 1.80%, (2) expected term of 5.25 years, (3) expected volatility of 185.45% and (4) zero expected dividends.

During the nine months ended September 30, 2012, options to purchase an aggregate of 122,400 shares were granted to directors for service on Opexa’s Board at an exercise price of $0.94. 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 82,400 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, 2012. Fair value of $111,428 was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model for these options include (1) discount rate of 2.03%, (2) expected term of 5.25 years, (3) expected volatility of 186% and (4) zero expected dividends.

Warrant Activity

A summary of warrant activity for the nine months ended September 30, 2012 is presented below:

	Number of Shares			Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contract Term (# years)		Intrinsic Value
Outstanding at January 1, 2012		10,430,286		$	1.90
Granted		3,829,689			1.25
Exercised		-			-
Forfeited and canceled		(1,858,336	)		1.53

Outstanding at September 30, 2012		12,401,639		$	1.72		2.4	$	120,912

Exercisable at September 30, 2012		8,571,950		$	1.93		1.3	$	120,912

In connection with Opexa’s July 25, 2012 private offering of the Notes (see Note 6), Opexa issued Series I warrants to purchase an aggregate of 3,829,689 shares of common stock at an exercise price of $1.25 per share, subject to certain limitations and adjustments. These warrants have a term of five years and are initially exercisable on January 25, 2013.