Note 11—Stock-Based Compensation Arrangements

On August 9, 2013, the Company’s shareholders’ approved the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Plan”). The 2013 Plan allows for the issuance of up to 8,860,000 additional shares of our common stock pursuant to awards granted under the 2013 Plan. Additionally, the 2013 plan allows for the issuance of up to a maximum of 2,435,500 additional shares of our common stock, pursuant to the cancellation, forfeiture, or expiry, of awards granted under the 2004 Plan and terminated on or after the 2013 plan approval on August 9, 2013. During the year ended December 31, 2015, the Company granted 6,570,748 stock options under the 2013 Plan. On July 21, 2015, the Company’s stockholders approved an amendment to the 2013 Plan to increase the number of shares of common stock available for issuance thereunder by 30,000,000 shares. At December, 2015, the Company had an aggregate of 30,649,503 shares of common stock available for grant under the 2013 Plan.

Pursuant to his Employment Agreement on April 6, 2015, Mr. Carbeau was granted options to purchase up to 14,245,227 shares of Interleukin’s common stock at an exercise price of $0.1525 per share (the closing price of the common stock on April 6, 2015). Of those options, 2,622,948 were granted under the 2013 Plan and 11,622,279 were granted outside of the 2013 Plan. The options will vest as to 25% of the shares on April 6, 2016, and as to an additional 2.083% of the shares on the last day of each successive month thereafter, provided that he remains employed by Company on the vesting date.

Stock Option Grants

It is the Company’s policy to grant stock options with an exercise price equal to the fair market value of the Company’s common stock at the grant date. Historically, the majority of the Company’s stock options have been granted in connection with the employee’s start date with the Company. In addition, the Company may grant stock options in recognition of promotion and/or performance.

Nonqualified and incentive stock options with a life of 10 years are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Options generally vest ratably over a period of three to five years based upon continuous service.

For purposes of determining the stock-based compensation expense for stock option awards in 2015 and 2014, the Black-Scholes option-pricing model was used with the following weighted-average assumptions:

	2015			2014
Risk-free interest rate		1.54	%		1.53	%
Expected life		5.73 years			5.73 years
Expected volatility		138.80	%		144.74	%
Dividend yield		0	%		0	%

Using these assumptions, the weighted average grant date fair value of options granted in 2015 and 2014 was $0.16 and $0.32, respectively.

Restricted Stock Awards

Holders of restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. Recipients of restricted stock awards are generally not required to pay any consideration to the Company for these restricted stock awards. The Company measures the fair value of the shares based on the last reported price at which the Company’s common stock traded on the date of the grant and compensation cost is recognized over the remaining service period. During each of the years ended December 31, 2015 and 2014, the Company granted no restricted stock awards.

Employee Stock Purchase Plan

Purchases made under the Company’s Employee Stock Purchase Plan are deemed to be compensatory because employees may purchase stock at a price equal to 85% of the fair market value of the Company’s common stock on either the first day or the last day of a calendar quarter, whichever is lower. During the years ended December 31, 2015 and 2014, employees purchased 203,879 and 134,935 shares, respectively, of common stock at a weighted-average purchase price of $0.10 and $0.24, respectively, while the weighted-average market value was $0.12 and $0.28 per share, respectively, resulting in compensation expense of $4,053 and $5,437, respectively.

The following table details stock option and restricted stock activity for the years ended December 31, 2015 and 2014.

	2015				2014
			Weighted Avg.				Weighted Avg.
			Exercise				Exercise
	Shares		Price		Shares		Price
Outstanding, beginning of period		4,523,900	$	0.39		5,884,050	$	0.43
Granted		18,193,027		0.17		137,000		0.35
Stock options exercised		––		0.00		––		0.00
Restricted stock exercised		––		0.00		––		0.00
Forfeited/Expired		(1,059,151)		0.17		(1,497,150)		0.53
Outstanding, end of period		21,657,776	$	0.21		4,523,900	$	0.39
Exercisable, end of period		3,665,124	$	0.32		1,645,161	$	0.43

The following table details further information regarding stock options and restricted stock outstanding and exercisable at December 31, 2015:

Stock Options/Restricted Stock

Stock Options/Restricted Stock Outstanding

Exercisable

Weighted Avg.

remaining

Weighted Avg.

contractual life

Exercise

Range of Exercise Price:

(years)

Price

$0.01–$1.00

21,612,776

8.92

0.21

3,620,124

0.35

$1.01–$2.00

45,000

2.25

1.40

45,000

1.40

$2.01–$3.00

–

$3.01–$4.00

–

$4.01–$5.00

–

21,657,776

8.90

0.21

3,665,124

0.37

Aggregate intrinsic value

The aggregate intrinsic value in the preceding table is based on the last reported price at which the Company’s common stock traded on December 31, 2015, of $0.0585.

The following table summarizes the status of the Company’s non-vested options for the years ended December 31, 2015 and 2014:

	2015				2014
			Weighted Avg.				Weighted Avg.
			Exercise				Exercise
	Shares		Price		Shares		Price
Non-vested options, beginning of year		2,878,739	$	0.37		5,295,300	$	0.38
Granted		18,193,027		0.17		137,000		0.35
Vested		(2,038,435)		0.33		(1,360,436)		0.38
Forfeited		(1,040,679)		0.17		(1,193,125)		0.38
Non-vested options, end of year		17,992,652	$	0.18		2,878,739	$	0.37

Total cost for stock-based compensation arrangements is as follows:

	Year Ended December 31,
	2015		2014
Stock option grants beginning of period	$	730,102	$	492,332
Stock-based arrangements during the period:
Stock option grants		157,932		1,166
Restricted stock issued:
Employee stock purchase plan		4,053		5,437
Director agreements		––		––
	$	892,087	$	498,935

As of December 31, 2015 and 2014, there was approximately $2,248,591 and $835,551 respectively, of total unrecognized compensation related to non-vested share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted average period of approximately 3.11 and 2.6 years, respectively.