Stock-Based Compensation

The Company’s

2018

Long-Term Incentive Plan (the

“2018

Plan”) was approved by stockholders in

July 2018.

In addition to stock options, the

2018

Plan provides for the granting of stock appreciation rights, stock awards, stock units, and other stock-based awards. A total of

1,600,000

shares of the Company’s common stock was initially authorized and reserved for issuance under the

2018

Plan. This reserve will automatically increase each subsequent anniversary of

January 1

through

2028,

by an amount equal to the smaller of (a)

of the number of shares of common stock issued and outstanding on the immediately preceding

December 31,

or (b) an amount determined by the Board of Directors (the “Evergreen Provision”).

January 1, 2019,

the number of shares of common stock available for issuance under the

2018

Plan automatically increased by

620,778

shares from

1,600,000

shares to

2,220,778

shares pursuant to the Evergreen Provision. On

January 1, 2020,

the number of shares of common stock available for issuance under the

2018

Plan automatically increased by

1,129,250

shares from

1,287,561

shares to

2,416,811

shares pursuant to the Evergreen Provision. The

2018

Plan provides for accelerated vesting under certain change of control transactions. As of

December 31, 2019,

there were

1,287,561

shares of common stock available for issuance under

2018

Plan.

The

2018

Plan replaced the

2016

and

2004

Plans as the Company’s primary long-term incentive program. The

2016

and

2004

Plans were discontinued following stockholder approval of the

2018

Plan, but the outstanding awards under the

2016

and

2004

Plans will continue to remain in effect in accordance with their terms. Shares that are returned under the

2016

and

2004

Plans upon cancellation, termination or otherwise of awards outstanding under the

2016

and

2004

Plans will

not

be available for grant under the

2018

Plan. As of

December 31, 2019,

the Company had reserved for issuance

733,820

shares of common stock under the

2016

Plan and

397,177

shares of common stock under the

2004

Plan representing the remaining outstanding options granted under the

2016

and

2004

Plans.

Stock-Based Compensation Valuation and Expense

The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term. The fair value of each option grant is estimated using a Black-Scholes option-pricing model.

For restricted stock units (“RSUs”), the grant-date fair value is based upon the market price of the Company’s common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.

Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures materially differ from initial estimates.

The Company recorded the following stock-based compensation expense:

	Year Ended December 31,
By Expense Category:	2019		2018
Research and development	$	1,119,382	$	649,052
General and administrative		2,256,923		1,546,023
Total	$	3,376,305	$	2,195,075

	Year Ended December 31,
By Type of Award:	2019		2018
Stock Options	$	3,240,376	$	1,881,800
Restricted Stock Units		135,929		313,275
Total	$	3,376,305	$	2,195,075

The following table summarizes the unamortized compensation expense and the remaining years over which such expense would be expected to be recognized, on a weighted-average basis, by type of award:

	As of December 31, 2019
	Unamortized Expense		Weighted Average Remaining Recognition Period (Years)
Stock Options	$	7,989,431		2.70
Restricted Stock Units	$	221,462		2.62

Stock Options

The following table summarizes the assumptions used for estimating the fair value of stock options granted under the Black-Scholes option-pricing model during:

	Year Ended
	December 31,
	2019			2018
Expected dividend yield		—%			—%
Risk-free interest rate	1.40%	-	2.40%	2.67%	-	3.01%
Expected Volatility	83%	-	88%	78%	-	99%
Expected life (years)		6.04			6.25
Weighted-average fair value per share		$8.00			$7.25

The following describes each of these assumptions and the Company’s methodology for determining each assumption:

Expected Dividend Yield

The dividend yield percentage is

zero

because the Company neither currently pays dividends nor intends to do so during the expected option term.

Risk-Free Interest Rate

The risk-free interest rate is based on the U.S. Treasury yield curve approximating the term of the expected life of the award in effect on the date of grant.

Expected Volatility

Expected stock price volatility is based on an average of several peer public companies. For purposes of identifying peer companies, the Company considered characteristics such as industry, length of trading history and similar vesting terms.

Expected Life

The expected life represents the period the awards are expected to be outstanding. The Company’s historical share option exercise experience does

not

provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method.

The following table summarizes the Company’s stock option activity during the year ended

December 31, 2019:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2018		1,658,112		$	8.76
Granted		715,108		$	11.39
Exercised		(32,325	)	$	4.37
Cancelled		(287,919	)	$	11.65
Outstanding as of December 31, 2019		2,052,976		$	9.33		7.70	$	235,669
Exercisable as of December 31, 2019		858,667		$	7.27		6.09	$	232,690
Vested and expected to vest as of December 31, 2019		1,865,715		$	9.16		7.58	$	235,533

The aggregate intrinsic value of stock options in the table above represents the difference between the

$4.28

closing price of the Company’s common stock as of

December

31,

2019

and the exercise price of outstanding, exercisable, and vested and expected to vest in-the-money stock options.

The following table summarizes information about the Company’s stock options as of

December

31,

2019:

Exercise Price or Range of Exercise Price			Options Outstanding		Weighted Average Contractual Life (Years)		Options Exercisable
$1.85	to	$5.89		530,657		5.55		411,949
$7.80	to	$9.01		32,250		9.37		425
	$9.31			637,229		7.79		312,197
$10.04	to	$21.36		852,840		8.90		134,096
				2,052,976		7.70		858,667

Additional information related to our stock options is summarized below:

	Year Ended December 31,
	2019		2018
Intrinsic value of options exercised	$	266,040	$	2,097,888
Fair value of options vested	$	4,131,982	$	512,373

During the years ended

December 31, 2019

and

2018,

32,325

and

119,793

stock options were exercised for the purchase of shares of common stock for total cash proceeds of

$141,347

and

$334,711,

respectively.

Restricted Stock Unit Awards

During the year ended

December 31, 2018,

the Board of Directors approved grants of

185,768

non-performance-based RSUs to employees. RSUs represent the right to receive shares of common stock of the Company at the end of a specified time period. The RSUs vest over a

four

-year period similar to stock options. RSUs can only be settled in shares of the Company’s common stock.

A summary of nonvested RSU awards outstanding as of

December 31. 2019

and changes during the year then ended is as follows:

	Number of RSUs			Weighted Average Grant-Date Fair Value (per RSU)
Nonvested as of December 31, 2018		185,768		$	11.04
Granted		--			--
Vested		(40,954	)		11.09
Forfeited		(137,321	)		10.05
Nonvested as of December 31, 2019		7,493		$	28.87

Employee Stock Purchase Plan

May 8, 2019,

the Company’s stockholders approved the Liquidia Technologies, Inc.

2019

Employee Stock Purchase Plan (the “ESPP”). A total of

300,000

shares of the Company’s common stock have been reserved for issuance under the ESPP. Subject to any plan limitations, the ESPP allows eligible employees to contribute through payroll deductions up to

$25,000

per year of their earnings for the purchase of the Company’s common stock at a discounted price per share. The offering periods are

six

months each and begin in

March

and

September

of each year, with the initial offering period commencing on

September 3, 2019.

Unless otherwise determined by the administrator, the Company’s common stock will be purchased for the accounts of employees participating in the ESPP at a price per share that is

85%

of the fair market value of the Company’s common stock on the last trading day of the offering period.

As of

December 31, 2019,

the Company had collected

$8,129

in proceeds pursuant to the ESPP. Based upon

85%

of the closing price on

December 31, 2019

$4.28,

approximately

2,200

shares could be purchased based upon employee withholdings as of

December 31, 2019.