4. STOCK-BASED COMPENSATION

 

Accounting for Stock-Based Compensation

During the three months ended March 31, 2018 there were no option grants issued. The following table summarizes amounts charged to expense for stock-based compensation related to employee and director stock option grants and recorded in connection with stock options granted to non-employee consultants:

 

		Three Months Ended March 31,
		2018			2017
Employee and director stock option grants:
Research and development		$	34,127		$	16,648
General and administrative			139,311			149,026
Total stock-based compensation		$	173,438		$	165,674

 

Assumptions Used in Determining Fair Value

 

Valuation and amortization method. The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model.  The estimated fair value of employee stock options is amortized to expense using the straight-line method over the vesting period. The estimated fair value of the non-employee options is amortized to expense over the period during which a non-employee is required to provide services for the award (usually the vesting period).

 

Volatility. The Company estimates volatility based on an average of (1) the Company’s historical volatility since its common stock has been publicly traded and (2) review of volatility estimates of publicly held drug development companies with similar market capitalizations.

 

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption.

 

Expected term. The expected term of stock options granted is based on an estimate of when options will be exercised in the future. The Company applied the simplified method of estimating the expected term of the options, as described in the SEC’s Staff Accounting Bulletins 107 and 110, as the historical experience is not indicative of the expected behavior in the future. The expected term, calculated under the simplified method, is applied to groups of stock options that have similar contractual terms. Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted. The Company applied the simplified method to non-employees who have a truncation of term based on termination of service and utilizes the contractual life of the stock options granted for those non-employee grants which do not have a truncation of service.

 

Forfeitures. The Company records stock-based compensation expense only for those 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 differ from initial estimates. An annual forfeiture rate of 2% was applied to all unvested options for employees and directors, respectively, for the three months ended March 31, 2018 and for the year ended December 31, 2017.  Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest.

 

There were no stock option grants during the three months ended March 31, 2018.

 

Stock Option Activity

 

A summary of stock option activity is as follows:

 

		Number of  Shares Issuable  Upon Exercise  of Outstanding  Options			Weighted Average Exercise Price			Weighted Average Remaining Contracted Term in Years			Aggregate  Intrinsic  Value
Outstanding at December 31, 2017			531,729		$	6.55
Granted			—		$	—
Expired			(4,350)		$	48.57
Forfeited			(17,987)		$	1.89
Outstanding at March 31, 2018			509,392		$	6.36
Exercisable, March 31, 2018			278,499		$	8.40			7.75		$	—
Unvested, March 31, 2018			230,893		$	3.89			8.48		$	—

 

The aggregate intrinsic value of options outstanding is calculated based on the positive difference between the estimated per-share fair value of common stock at the end of the respective period and the exercise price of the underlying options.  There have been no option exercises to date. Shares of common stock issued upon the exercise of options are from authorized but unissued shares.

 

 

Restricted Stock Grants. During 2017, the Company granted 480,000 shares of restricted common stock with a weighted average grant date fair value of $2.10. The shares vest annually over a three year period. As of December 31, 2017 380,000 shares of restricted common stock were outstanding. There were no restricted stock grants issued during the three months ended March 31, 2018. A summary of restricted stock activity is as follows:

 

Outstanding at December 31, 2017		380,000
Granted		—
Vested		(93,332)
Outstanding at March 31, 2018		286,668