NOTE H – Stock Based Compensation

In August 2013, the Company adopted the 2013 Equity Compensation Plan (the “Plan”), which provides for the granting of incentive stock options, nonqualified stock options, restricted stock units, performance units, and stock purchase rights. Options under the Plan may be granted at prices not less than 100% of the fair value of the shares on the date of grant as determined by the Board Committee. The Board Committee determines the period over which the options become exercisable subject to certain restrictions as defined in the Plan, with the current outstanding options generally vesting over three years. The term of the options is no longer than ten years. The Company currently has available approximately 4.9 million shares of common stock available for issuance under the plan.

With the approval of the Board of Directors and majority Shareholders, effective May 8, 2014, the Plan was amended and restated. The amendment provides for an automatic increase in the number of shares of common stock available for issuance under the Plan each January (with Board approval), commencing January 1, 2015 in an amount up to four percent (4%) of the total number of shares of common stock outstanding on the preceding December 31st.

The Company recognized stock-based compensation expense (options, and restricted share grants) in its condensed consolidated statements of operations as follows ($ and shares in thousands):

* includes both restricted stock grants and option grants

The following table summarizes the Company’ stock option activity and related information for the period from December 31, 2017 to September 30, 2018 (number of options in thousands):

As of September 30, 2018, the number of vested and exercisable shares underlying outstanding options was 8,531,493 at a weighted average exercise price of $1.18. The aggregate intrinsic value of in the-money options outstanding as of September 30, 2018 was approximately $1.5 million. The aggregate intrinsic value is calculated as the difference between the Company’s closing stock price of $0.92 on September 30, 2018, and the exercise price of options, multiplied by the number of options. As of September 30, 2018, there was approximately $2.6 million of total unrecognized share-based compensation. Such costs are expected to be recognized over a weighted average period of approximately 2.27 years.

All options expire ten years from date of grant. The majority of the options granted to employees vest entirely and evenly over three years. The Company changed its standard vesting terms at the end of 2017 and recent option grants to employees vest over four years with 25% of the shares vesting on the first annual anniversary and the remaining shares vesting in 36 equal monthly installments. A portion of options granted to consultants vests over four years, with the remaining vesting being based upon the achievement of certain performance milestones, which are tied to either financing or drug development initiatives.

The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period, with the exception of options granted subject to a consulting agreement, whereby the option vesting period and the service period defined pursuant to the terms of the consulting agreement may be different. Stock options issued to consultants are revalued quarterly until fully vested, with any change in fair value expensed. The following weighted-average assumptions were used to calculate share based compensation for the three months and nine months ended September 30, 2018 and 2017:

The Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The Company uses the “simplified method” described in Staff Accounting Bulletin (SAB) 107 to estimate expected term of share option grants for employees. For non-employee options, the expected term is the contractual term.

The expected stock price volatility assumption is based on the historical volatility of the Company’s common stock price.

The risk-free interest rate assumption is based on the U.S treasury instruments whose term was consistent with the expected term of the Company’s stock options.

The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has never paid dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable future. Accordingly, the Company has assumed no dividend yield for purposes of estimating the fair value of the Company share-based compensation.

The Company accounts for forfeitures as they occur.

Detailed below is the restricted stock grant activity since the inception of the Company through September 30, 2018:

As of September 30, 2018, there was $121,100 of total unrecognized compensation cost related to non-vested restricted stock grants, which are expected to be recognized over a weighted-average period of 0.5 years.