8. Stock-Based Compensation

2014 Stock Incentive Plan

In June 2014, the shareholders approved the 2014 Stock Option Plan of Heat Biologics, Inc. (the “2014 Plan”), under which the Company is authorized to grant 500,000 awards in the form of both incentive and non-qualified stock options, restricted stock, stock appreciation rights and other stock based awards on terms established by the Compensation Committee of the Board of Directors which has been appointed by the Board of Directors to administer the 2014 Plan. Persons eligible to participate in the 2014 Plan include employees, directors, and consultants. Stock options granted under the 2014 Plan generally have terms of 10 years and have various vesting schedules. As of September 30, 2014, 263,415 awards had been granted under the 2014 Plan, of which 244,249 are outstanding, leaving 255,751 shares of common stock available for grant under the plan.

The 2014 Plan supplements the Company's 2009 Stock Incentive Plan (the “2009 Plan”) under which the Company is authorized to grant 869,565 awards in the form of options, restricted stock, restricted stock units and other stock based awards. As of September 30, 2014, 960,176 awards had been granted under the 2009 Plan, of which 592,712 are outstanding, leaving 5,620 shares of common stock available for grant under the plan.

As of September 30, 2014, awards for 1,223,591 shares of common stock have been granted under the 2009 and 2014 Plans (“the Plans) and there were 261,371 shares of common stock remaining available for grant under the Plans.

Restricted Stock

As of September 30, 2014, all restricted stock has vested and accordingly all stock-based compensation expense related to vested restricted stock has been recognized.

Stock Options

The following is a summary of the stock option activity for the nine months ended September 30, 2014:

	Shares		Weighted Average Exercise Price
Outstanding, December 31, 2013		633,482	$	3.36
Granted		315,379	$	6.45
Exercised		(67,794)	$	0.69
Forfeited		(44,106)	$	3.19
Outstanding, September 30, 2014		836,961	$	4.75

The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2014 was $4.42.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following assumptions for stock options granted during the nine months ended September 30, 2014:

Dividend yield	0.0	%
Expected volatility	108.2	%
Risk-free interest rate	2.15	%
Expected lives (years)	5.9

The risk-free interest rate is based on U.S. Treasury interest rates at the time of the grant whose term is consistent with the expected life of the stock options. The Company used an average historical stock price volatility based on an analysis of reported data for a peer group of comparable companies that have issued stock options with substantially similar terms, as the Company did not have sufficient trading history for its common stock. Expected term represents the period that the Company's stock option grants are expected to be outstanding. The Company elected to utilize the “simplified” method to value stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option.

Expected dividend yield was considered to be 0% in the option pricing formula since the Company has not paid any dividends and has no plans to do so in the future. The forfeiture rate was considered to be none insofar as the historical experience of the Company is very limited. As required by ASC 718, the Company will adjust the estimated forfeiture rate based upon actual experience.

The Company recognized stock-based compensation expense of $224,586 and $26,793 for the three months ended September 30, 2014 and 2013, respectively and $722,358 and $377,388 for the nine months ended September 30, 2014 and 2013, respectively for the Company's stock option awards.

The following table summarizes information about stock options outstanding at September 30, 2014:

Options Outstanding

Options Exercisable

Options Vested or Expected to Vest

Balance
as of
9/30/2014

Weighted
Average
Remaining
Contractual
Life
(Years)

Weighted

Average

Exercise

Price

Balance

as of

9/30/2014

Weighted

Average

Remaining

Contractual

Life

(Years)

Weighted

Average

Exercise

Price

Balance

as of

9/30/2014

Weighted

Average

Remaining

Contractual

Life

(Years)

Weighted

Average

Exercise

Price

836,961

7.6

4.75

440,615

5.9

2.29

440,615

5.9

2.29

As of September 30, 2014, the unrecognized stock-based compensation expense related to unvested stock options was $2,964,247 which is expected to be recognized over a weighted average period of approximately 14.6 months.