Share-Based Compensation

Description of Equity Plans

The 2011 Equity Incentive Plan (the “2011 Plan”) was adopted by the Company’s Board of Directors on April 28, 2011 and approved by the Company’s stockholders on June 15, 2011. The 2011 Plan serves as the successor to the Company’s 2006 Stock Option Plan (the “2006 Plan”). Since the effective date of the 2011 Plan, all future equity awards were made from the 2011 Plan, and no additional awards will be granted under the 2006 plan. Under the 2011 Plan, 3,000,000 shares of the Company’s common stock have been initially reserved for issuance pursuant to a variety of share-based compensation awards, plus any shares available for issuance under the 2006 Plan or are subject to awards under the 2006 Plan which are forfeited or lapse unexercised and which following the effective date are not issued under the 2006 Plan. In accordance with the provisions of the 2011 Plan, the board of directors approved an increase of 1,500,000 shares to the plan on January 1, 2019.

As of March 31, 2019, the Company had 4,541,890 stock options outstanding and an additional 1,647,211 shares of common stock available for grant under the 2011 Plan. As of December 31, 2018, there were 3,552,890 stock options outstanding and 1,136,211 shares of common stock available for grant under the 2011 Plan.

Stock Options

Options are granted to purchase common stock at prices that are equal to the fair value of the common shares on the date the option is granted. Vesting is determined by the Board of Directors at the time of grant. The term of any stock option awards under the Company’s 2011 Plan is no more than ten years except for options granted to the CEO (five years) and certain contractors (two years).

The grant-date fair value of each option grant is estimated using the Black-Scholes option pricing model and amortized on a straight-line basis over the requisite service period, which is generally the vesting period, for each separately vesting portion of the award as if the award was, in substance, multiple awards. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including the following:

Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury rates with securities approximating the expected lives of options at the date of grant.

Expected dividend yield. The expected dividend yield is zero, as the Company has never paid dividends to common shareholders and does not currently anticipate paying any in the foreseeable future.

Expected stock price volatility. The expected stock price volatility was calculated based on the Company’s own volatility since the DuPont Transaction. The Company reviews its volatility assumption on an annual basis and determined to use the Company’s historical volatilities since 2016, as the DuPont Transaction had significant changes in the Company’s business and capital structure.

Expected life of option. The expected life of option was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The Company determined to use the weighted average vesting period and contractual term of the option as the best estimate of the expected life of a new option (except for the option granted to the CEO (5 years) and certain contractor (2 years).

Discount for lack of marketability. The Company applies a discount to reflect the lack of marketability due to the holding period restriction of its shares under Rule 144.

The assumptions used in the Black-Scholes option pricing model for stock options granted for the three months ended March 31, 2019 are as follows:



Risk-Free interest rate	2.46% - 2.50%
Expected dividend yield	0	%
Expected stock price volatility	28.590	%
Expected life of options	2 - 6.25 Years
Discount for lack of marketability	8.480	%

The following table summarizes the stock option activity for the three months ended March 31, 2019:



	Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2018	3,552,890	$1.57	5.06	$1,149,461
Granted⁽¹⁾	989,000	1.89
Exercised	—	—
Expired	—	—
Canceled	—	—
Outstanding at March 31, 2019	4,541,890	$1.64	5.53	$7,320,547

Exercisable at March 31, 2019	2,936,759	$1.59	4.55	$4,860,859

_________________

Notes:

(1) Represents the following stock options granted:

•

Annual share-based compensation awards on January 2, 2019, including: (a) 600,000 stock options with an exercise price of $1.87 granted to executives and key personnel, vesting upon grant, or one year anniversary, or vest annually in equal installments over four years, (b) 300,000 stock options with an exercise price of $1.87 granted to Board of Directors, vesting 25% upon grant and the remaining 75% will vest annually in equal installments over four years, and (c) 24,000 stock options with an exercise price of $1.87 granted to employees, vesting annually in equal installments over four years.


•	One-time award on January 2, 2019 of 50,000 stock options with an exercise price of $1.87 to a contractor, vesting upon one year anniversary.


•	One-time award on March 7, 2019 of 15,000 stock options with an exercise price of $3.00 to a contractor, vesting upon one year anniversary.

Compensation Expenses

We recognize all share-based payments to employees and our board of directors, as non-cash compensation expense, in research and development expenses or general and administrative expenses in the consolidated statement of operations, and these charges had no impact on the Company’s reported cash flows. Stock-based compensation expense is calculated on the grant date fair values of such awards, and recognized each period based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Forfeitures are recorded as they occur.

Total non-cash stock option compensation expense was allocated among the following expense categories:



	Three Months Ended March 31,
	2019		2018
	(Unaudited)		(Unaudited)
General and administrative	$	233,214	$	249,242
Research and development	76,349		20,354
Total	$	309,563	$	269,596