9.	Stock-Based Compensation

Summary of Stock-Based Compensation Plans

At December 31, 2011, the Company had three stock-based compensation plans where the Company’s common stock has been made available for equity-based incentive grants as part of the Company’s compensation programs (the “Incentive Plans”) as follows:

2001 Stock Incentive Plan. In October 2001, the Company’s Board of Directors adopted the Pro-Pharmaceuticals, Inc. 2001 Stock Incentive Plan (the “Incentive Plan”), which permits awards of incentive and nonqualified stock options and other forms of incentive compensation to employees and non-employees such as directors and consultants. The Board has 833,334 shares of common stock for issuance upon exercise of grants made under the Incentive Plan. Options granted under the Incentive Plan vest either immediately or over a period of up to three years, and expire 3 years to 10 years from the grant date. At December 31, 2011, 94,985 shares were available for future grant under the Incentive Plan.

2003 Non-Employee Director Stock Option Plan. In 2003, the stockholders approved the Pro-Pharmaceuticals, Inc. 2003 Non-Employee Director Stock Option Plan (the “Director Plan”), which permits awards of stock options to non-employee directors. The stockholders reserved 166,667 shares of common stock for issuance upon exercise of grants made under the Director Plan. At December 31, 2011, 139,160 shares were available for future grant under the Director Plan.

2009 Incentive Compensation Plan. In February 2009, the Company adopted the 2009 Incentive Compensation Plan (the “2009 Plan”) which provides for the issuance of up to 3,333,334 shares of the Company’s common stock in the form of options, stock appreciation rights, restricted stock and other stock-based awards to employees, officers, directors, consultants and other eligible persons. At December 31, 2011, 1,687,980 shares were available for future grant under the 2009 Plan.

In addition, the Company has awarded 1,477,379 non-plan stock option grants to employees and non-employees. These non-plan grants have vesting periods and expiration dates similar to those options granted under the Incentive Plans. At December 31, 2011, 1,444,045 non-plan grants were outstanding.

Stock-Based Compensation

Following is the stock-based compensation expense related to common stock options, restricted common stock and common stock warrants:


	Year Ended December 31,
	2011		2010
Research and development	$	1,558	$	297
General and administrative		1,687		1,645

Total stock-based compensation expense	$	3,245	$	1,942

Included in stock-based compensation for the year ended December 31, 2010 was $70,000 of research and development expenses and $295,000 of general and administrative expenses which were accrued for as bonuses as of December 31, 2009 and which were paid with the issuance of options in 2010.

The fair value of the options granted is determined using the Black-Scholes option-pricing model. The following weighted average assumptions were used:


	2011			2010			Cumulative Period from Inception (July 10, 2000) to December 31, 2011
Risk-free interest rate		1.90	%		2.38	%		2.23	%
Expected life of the options		5.13 years			5 years			5.05 years
Expected volatility of the underlying stock		131	%		126	%		120	%
Expected dividend rate		0	%		0	%		0	%

As noted above, the fair value of stock options is determined by using the Black-Scholes option pricing model. For all options granted since January 1, 2006 the Company has generally used option terms of between 5 to 7 years, with 5 years representing the estimated life of options granted. The volatility of the common stock is estimated using historical volatility over a period equal to the expected life at the date of grant. The risk-free interest rate used in the Black-Scholes option pricing model is determined by reference to historical U.S. Treasury constant maturity rates with terms equal to the expected terms of the awards. An expected dividend yield of zero is used in the option valuation model, because the Company does not expect to pay any cash dividends in the foreseeable future. At December 31, 2011, the Company does not anticipate any awards will be forfeited in the calculation of compensation expense due to the limited number of employees that receive stock option grants and the Company’s historical employee turnover.

Of the options granted during 2011, 166,668 vest only upon the achievement of certain market conditions (83,334 and 83,334 upon the Company achieving a market capitalization of $5 billion and $10 billion, respectively). These market condition stock option awards were valued at $1,006,000 using a Monte Carlo model and will be recognized over a weighted average period of 5.5 years. Assumptions used to value these options included the following: annualized volatility of 110%, annualized drift/risk-free interest rate of 3.5% and a forecast horizon/life of 10 years.

The following table summarizes the stock option activity in the stock based compensation plans:


	Shares			Exercise Price Per Share		Weighted Average Exercise Price
Outstanding, January 1, 2010		1,710,082		$	0.72 – 24.30	$	7.20
Granted		363,334			1.80		1.80
Forfeited/Cancelled		(10,334	)		15.66 – 16.20		16.14
Exercised		(97,334	)		0.72 – 2.64		1.32

Outstanding, December 31, 2010		1,965,748		$	0.72 – 24.30	$	7.20
Granted		1,676,712			4.92 – 7.02		7.02
Forfeited/Cancelled		(334,543	)		7.08 – 22.50		8.93
Exercised		(216,443	)		0.72 – 2.64		1.21

Outstanding, December 31, 2011		3,091,474		$	0.72 – 24.30	$	6.83

The following tables summarize information about stock options outstanding at December 31, 2011:


Options Outstanding							Options Exercisable
Exercise Price	Number of Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
$0.72 – $1.80		574,007		2.75	$	1.57		574,007	$	1.57
$2.28 – $04.20		460,093		2.58		2.91		460,093		2.91
$5.82 – $8.10		1,754,160		8.59		6.98		436,677		6.85
$11.40 – $24.30		303,214		1.66		21.88		303,214		21.88

		3,091,474		5.93	$	6.83		1,773,991	$	6.69

The weighted-average grant-date fair values of options granted during 2011 and 2010 were $6.07 and $1.56, respectively. As of December 31, 2011 there were unvested options to purchase 1,317,480 shares of common stock. Total expected unrecognized compensation cost related to such unvested options is $7,074,000, which is expected to be recognized over a weighted–average period of 3.3 years. As of December 31, 2011, the aggregate intrinsic value of outstanding options was $3,713,000 and the aggregate intrinsic value of exercisable options was $3,713,000, based the Company’s closing common stock price of $5.76 (given effect for the six-for-one reverse split).

During 2011, 216,440 options were exercised valued at $253,000. During 2010, 97,334 options were exercised valued at $104,000. During the years ended December 31, 2011 and 2010, the Company received $234,000 and $128,000, respectively, for the exercise of stock options. During 2011, 83,334 options were exercised cashlessly resulting in the issuance of 64,273 shares. No cash was received from the exercise of employee stock options during the cumulative period from inception to December 31, 2009. The intrinsic value of options exercised during the years ended December 31, 2011 and 2010 and from the period from inception to December 31, 2011 was $1,174,000, $290,000 and $1,562,000, respectively.

The total fair value of options vested during the years ended December 31, 2011, 2010 and the cumulative period from inception to December 31, 2011 was $2,153,000, $1,098,000 and $10,609,000, respectively.

Other Stock Based Compensation Transactions

During 2001, the Company entered into a consulting agreement with a non-employee, who was also a Board member and former member of the Audit Committee, pursuant to which the Company granted 33,334 options to purchase common stock at an exercise price of $21.00 in consideration for services to be performed. At the time of issuance, these options were valued at $239,000 based on a deemed fair market value of the Company’s common stock of $13.68 per share. Total expense for the years ended December 31, 2003, 2002 and 2001 related to these options was $71,000, $64,000 and $147,000, respectively.

In March 2002, the Company entered into a second agreement with the same non-employee, by which the Company granted 334 options a month to purchase common stock at an exercise price of $21.00 in consideration for monthly consulting services. On November 11, 2002 such agreement was superseded by an amendment, which was effective retroactively to the date of the original agreement, March 1, 2002. Under the amended agreement, the Company granted 4,000 options on March 1, 2002, which vest at a rate of 334 options per month, as services are performed. These options were valued at $11,000 using the Black-Scholes option-pricing model, based on a grant date fair value of the Company’s common stock of $12.96 per share. During 2002, the Company recorded a $41,000 charge to stock compensation expense related to the 3,334 options that vested during the year. As of December 31, 2002, the Company had deferred compensation of $11,000 that related to the remaining unvested options, which was recognized in 2003.

In June 2003, the Company entered into a third agreement with the same non-employee, by which the Company granted 4,000 options effective retroactively to March 1, 2003, which vest at a rate of 334 options per month as services are performed. These options were valued at $33,000 using the Black-Scholes option-pricing model, based on a fair market value of the Company’s common stock of $21.00 per share. The consulting arrangement was concluded on March 1, 2004. The Company recorded fair value adjustments of ($2,000) and $21,000 related to the unvested consultant options during 2004 and 2003, respectively. Total expense for the years ended December 31, 2004 and 2003 related to these options was $17,000 and $40,000, respectively.

In January 2003, the Company granted 16,667 options at an exercise price of $21.00 to a Board member for consulting services unrelated to services performed as a director. One-third of the options vested immediately and the balance vests in equal amounts on the first and second anniversaries of the award. The options were valued at $156,000 using the Black-Scholes option-pricing model, based on a fair market value of the Company’s common stock of $16.80 per share. The consulting services were completed and the consulting arrangement was concluded as of March 31, 2004. The Company recorded fair value adjustments of $4,000 and $82,000 related to the unvested consultant options during 2004 and 2003, respectively. Total expense for the years ended December 31, 2004 and 2003 related to these options was $51,000 and $193,000, respectively.

In May 2003, the Company granted 1,667 options at an exercise price of $21.00 to a new member of the Scientific Advisory Board. One-half of the options vested immediately and the balance vests on the second anniversary. These options were valued at $16,000 using the Black-Scholes option-pricing model based on a fair market value of the Company’s common stock of $16.80 per share. The Company recorded fair value adjustments of $2,000 and $6,000 related to the unvested consultant options during 2004 and 2003, respectively. Total expense for the years ended December 31, 2004 and 2003 related to these options was $5,000 and $13,000, respectively.

In September 2003, the Company granted 4,167 options each to a Board member and to a member of the Scientific Advisory Board for consulting services. The options were exercisable immediately at $24.30 per share. These options were valued using the Black-Scholes option-pricing model based on a grant date fair value of the Company’s common stock of $14.64 per share. The Company recorded a $122,000 charge to stock compensation expense in 2003 related to these awards.

In October 2003, in connection with the resignation of its former Chief Financial Officer, the Company accelerated the vesting on 16,667 options granted to such officer in September 2003 at an exercise price of $24.30, which was equal to the fair market value of the common stock on the date of grant. As the fair market value of the common stock was $26.70 per share at the time the vesting was accelerated, the Company recorded a $40,000 charge to stock compensation expense. Also, in October 2003, such officer exercised on a cashless basis 8,334 options at an exercise price of $17.82 per share resulting in the issuance of 2,772 shares. As the fair market value of the Company’s common stock on the date of exercise was $26.70 per share, the Company recorded a charge of $74,000 to stock compensation expense in 2003 related to the exercise of these options.

In March 2004, the Company issued 4,167 options in fulfillment of a September 2003 agreement with an investor relations firm. The agreement obligated the Company to pay a monthly retainer and issue options at a rate of 834 options per month, up to a maximum of 16,667 options, exercisable at $34.80 per share as services are performed. The Company concluded the engagement in February 2004. The options were exercisable immediately and expired on March 26, 2007. Accordingly, the Company recorded $29,000 as stock compensation expense in 2003 on the 2,500 options that vested as of December 31, 2003 and an additional stock compensation expense of $23,000 in 2004 on the 10,000 options that vested in January and February 2004. The stock compensation expense was determined based on a fair market value of the options when the options were earned. These options expired unexercised in 2007.

In April 2004, the Company entered into an agreement with an investor relations firm. The agreement obligated the Company to pay a monthly retainer and issue options at a rate of 834 per month up to a maximum of 10,000 options exercisable at $30.96 per share as services are performed. During 2004, 7,500 options were earned but not issued. During 2005, 2,500 options were earned and the full 10,000 options were issued. The Company recorded $67,000 in 2004 and $14,000 in 2005 as stock compensation expense related to this agreement. The stock compensation expense was determined based on the fair market value of the options when the options were earned. The options were exercisable immediately and expired three years from the agreement date. These options expired unexercised in 2007.

In November 2005, the Company issued 834 options to a member of the Scientific Advisory Board for consulting services. The options were exercisable immediately at $15.66 per share. These options were valued using the Black-Scholes option-pricing model based on a grant date fair value of the Company’s common stock of $8.10 per share which was the fair market value at the date of the grant. The Company recorded a $7,000 charge to stock compensation expense in 2005 related to this award. These options expired unexercised in 2010.

In March 2006 the Company issued 2,500 options to a consultant for consulting services, of which 834 of the options were exercisable immediately, 833 options vested in March 2008 and 833 options vested in March 2009. The options are exercisable at $22.50 per share. These options were valued using the Black-Scholes option-pricing model based on a grant date fair value of the Company’s common stock of $13.20 per share which was the fair market value at the date of the grant. The Company is recording a $33,000 charge to stock compensation expense over the vesting period of the options.

In December 2007, the Company issued 834 options to a consultant for consulting services. The options were exercisable immediately at $3.78 per share. These options were valued using the Black-Scholes option-pricing model based on a grant date fair value of the Company’s common stock of $2.76 per share which was the fair market value at the date of the grant. The Company recorded a $2,000 charge to stock compensation expense in 2007 related to this award.

In April 2008, the Company issued 8,000 options to a consultant for consulting services. The options were exercisable immediately at $2.64 per share. These options were valued using the Black-Scholes option-pricing model based on a grant date fair value of the Company’s common stock of $2.34 per share which was the fair market value at the date of the grant. The Company recorded a $15,000 charge to stock compensation expense in 2008 related to this award.

In February 2009, the Company issued 33,334 options to a consultant for consulting services. The options were exercisable immediately at $0 per share. These options were valued using the Black-Scholes option-pricing model based on a grant date fair value of the Company’s common stock of $0.72 per share which was the fair market value at the date of the grant. The Company recorded a $24,000 charge to stock compensation expense in 2009 related to this award.

Restricted Stock

During the year ended December 31, 2009, the Company granted 416,670 shares of restricted common stock to members of its Board of Directors. These shares were restricted and any unvested shares were subject to forfeiture upon termination and would revert back to the Company. Of the 416,670 shares, 390,628 were vested as of December 31, 2010, and the final 26,042 vested in 2011. The restricted shares were valued at $450,000 ($1.08 per share) at the date of grant and were recognized over the vesting period. During 2011 and 2010, the Company recognized stock-based compensation of $18,000 and $235,000, respectively, related to these restricted stock grants.

In 2010, the Company granted 16,667 shares of restricted common stock to a consultant. These shares were restricted until November 15, 2010 and any unvested shares were subject to forfeiture upon termination and would revert back to the Company. At December 31, 2010 there were no restricted shares remaining. The restricted shares were valued at $71,000 ($4.26 per share) at November 15, 2010, and the Company recognized expenses of $71,000 during 2010 related to these shares.

In 2011, the Company issued 20,834 shares of restricted common stock to a consultant. These shares were restricted until November 15, 2011 and any unvested shares were subject to forfeiture upon termination and would revert back to the Company. At December 31, 2011 there no restricted shares remaining. The restricted shares were valued at $113,000 ($5.40 per share) at November 15, 2011, and the Company recognized expense of $110,000 and $3,000 during 2011 and 2010, respectively, related to these shares.


	Number of Shares			Weighted Average Price on Grant
Unvested restricted shares outstanding, December 31, 2009		416,670		$	1.08
Restricted shares issued		16,667			2.64
Restricted shares vested		(407,295	)		1.14

Unvested restricted shares outstanding, December 31, 2010		26,042		$	1.08

Restricted shares issued		20,834			8.04
Restricted shares vested		(46,876	)		4.17

Unvested restricted shares outstanding, December 31, 2011		—		$	—