Share-Based Payment Arrangements

On June 22, 2018, the Company's stockholders adopted the FalconStor Software, Inc. 2018 Incentive Stock Plan (the "2018 Plan"). The 2018 Plan is administered by the Compensation Committee and provides for the issuance of up to 147,199,698 shares of the Company's common stock upon the grant of shares with such restrictions as determined by the Compensation Committee to the employees and directors of, and consultants providing services to, the Company or its affiliates. Exercise prices of the options will be determined by the Compensation Committee, subject to the consent of Hale Capital. The vesting terms shall be performance based and determined by the Committee, subject to the consent of Hale Capital, based on various factors, including (i) the return of capital to the holders of the Series A Preferred Stock and the Company’s Common Stock in the event of a Change of Control, (ii) the repayment of the Company’s obligations under its senior secured debt, and (iii) the Company’s free cash flow. Seventy percent (70%) of the Shares issuable under the 2018 Plan shall be granted as stock options. The remaining thirty percent (30%) of the shares subject to the Plan plus any returned shares will be reserved for future grants of awards to new hires.

The 2016 Incentive Stock Plan (the "2016 Plan") was terminated in April 2018.

The following table summarizes the 2018 Plan, which was the only plan under which the Company was able to grant equity compensation as of December 31, 2018:



Name of Plan	Shares Authorized	Shares Available for Grant	Shares Outstanding
FalconStor Software, Inc. 2018 Incentive Stock Plan	147,199,698	147,199,698	—

The following table summarizes the Company’s equity plans that have expired but that still have equity awards outstanding as of December 31, 2018:



Name of Plan	Shares Available for Grant	Shares Outstanding
FalconStor Software, Inc., 2016 Incentive Stock Plan	—	505,000
FalconStor Software, Inc., 2006 Incentive Stock Plan	—	944,200
FalconStor Software, Inc., 2000 Stock Option Plan	—	4,500

All outstanding options granted under the Company’s equity plans have terms of ten years.

A summary of the Company’s stock option activity for 2018 is as follows:



	Number of Options		Weighted Average Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Options Outstanding at December 31, 2017	2,026,200		$	2.14	5.32	$	—
Granted	—		$	—
Exercised	—		$	—
Forfeited	(451,000	)	$	2.55
Expired	(221,500	)	$	5.82
Options Outstanding at December 31, 2018	1,353,700		$	1.40	5.60	$	—
Options Exercisable at December 31, 2018	1,031,500		$	1.63	4.90	$	—
Options Expected to Vest after December 31, 2018	322,200		$	0.67	7.47	$	—

Stock option exercises are fulfilled with new shares of common stock.

Related to the 2016 Plan, many share-based compensation awards were forfeited and the related expense reversed accordingly, resulting in negative expense in the period. The following table summarizes the share-based compensation expense for all awards issued under the Company’s stock equity plans in the following line items in the consolidated statements of operations:



	Years ended December 31,
	2018			2017
Cost of revenue - Support and Service	26,203			64,427
Research and development costs	77,116			233,955
Selling and marketing	19,615			48,286
General and administrative	(58,262		)	76,285
	$	64,672		$	422,953

The Company did not recognize any tax benefits related to share-based compensation expense during the years ended December 31, 2018 and 2017.

The Company has the ability to issue both restricted stock and restricted stock units. The fair value of the restricted stock awards and restricted stock units are expensed at the fair value per share at date of grant for directors, officers and employees. A summary of the total stock-based compensation expense related to restricted stock awards and restricted stock units, which is included in the Company’s total share-based compensation expense for each respective year, is as follows:



	Years ended December 31,
	2018			2017
Directors, officers and employees	$	(49,289	)	$	167,369

A summary of the Company’s restricted stock activity for 2018 is as follows:



	Number of Restricted Stock Awards
Non-Vested at December 31, 2017	548,968
Granted	—
Vested	(32,300	)
Forfeited	(416,668	)
Non-Vested at December 31, 2018	100,000

Restricted stock and restricted stock units are fulfilled with new shares of common stock. The total intrinsic value of restricted stock for which the restrictions lapsed during the years ended December 31, 2018 and 2017 was $0.

Options granted to non-employee consultants have exercise prices equal to the fair market value of the stock on the date of grant and a contractual term of ten years. Restricted stock awards granted to non-employee consultants have a contractual term equal to the lapse of restriction(s) of each specific award. Vesting periods for share-based awards granted to non-employee consultants range from immediate vesting to three years depending on service requirements. A summary of the total stock-based compensation expense related to share-based awards granted to non-employee consultants, which is included in the Company’s total share-based compensation expense for each respective period, is as follows:



	Years ended December 31,
	2018		2017
Non-qualified stock options	$	—	$	41,159
Restricted stock awards	—		—
	$	—	$	41,159

The Company estimates the fair value of share-based payments using the Black-Scholes option-pricing model. For awards with market conditions the Company utilizes the Monte Carlo simulation model to estimate the fair value. The Company believes that these valuation techniques and the approach utilized to develop the underlying assumptions are appropriate in estimating the fair value of the Company’s share-based payments granted during the years ended December 31, 2018 and 2017. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

No awards were granted during the year ended December 31, 2018. The per share weighted average fair value of share-based payments granted during the years ended December 31, 2017 was $0.23. In addition to the exercise and grant date prices of the awards, certain weighted average assumptions were used to estimate the fair value of share-based payment grants in the respective periods are listed in the table below:



	Years ended December 31,
	2018	2017
Expected dividend yield	N/A	0%
Expected volatility	N/A	57 % - 59%
Risk-free interest rate	N/A	1.94% - 2.02%
Expected term (years)	N/A	5.5
Discount for post-vesting restrictions	N/A	N/A

Options granted to officers, employees and directors during fiscal 2017 have exercise prices equal to the fair market value of the stock on the date of grant, a contractual term of ten years, and a vesting period generally of three years.

The Company estimates expected volatility based primarily on historical daily volatility of the Company’s stock and other factors, if applicable. The risk-free interest rate is based on the United States treasury yield curve in effect at the time of grant. The expected option term is the number of years that the Company estimates that options will be outstanding prior to exercise. The expected term of the awards was determined based upon an estimate of the expected term of “plain vanilla” options as prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 110.

As of December 31, 2018, there was approximately $0.0 million total unrecognized compensation cost related to the Company’s unvested stock options, restricted stock and restricted stock unit awards granted under the Company’s stock plans. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.25 years.

As of December 31, 2018, the Company had 150,197,028 shares of common stock reserved for issuance upon the exercise or vesting of stock options, restricted stock, restricted stock units and warrants.