5. Stock-Based Compensation

Stock Incentive Plan

During 2001, the Company’s Board of Directors and stockholders adopted the 2001 Stock Incentive Plan (the “2001 Stock Plan”). The total number of shares of stock with respect to which stock options and stock appreciation rights may be granted to any one employee of the Company or a subsidiary during any one-year period under the 2001 Stock Plan shall not exceed 250,000. All awards pursuant to the 2001 Stock Plan shall terminate upon the termination of the grantee’s employment for any reason. Awards include options, restricted shares, stock appreciation rights, performance shares and cash-based awards (the “Awards”). The 2001 Stock Plan contains certain anti-dilution provisions in the event of a stock split, stock dividend or other capital adjustment, as defined in the plan. The 2001 Stock Plan provides for a Committee of the Board to grant awards and to determine the exercise price, vesting term, expiration date and all other terms and conditions of the awards, including acceleration of the vesting of an award at any time. As of December 31, 2013, there were 953,507 options issued and outstanding under the 2001 Stock Plan.

On March 20, 2007, the Company’s Board of Directors approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 2,500,000 shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. This plan was approved by stockholders on November 2, 2007. The exercise price of stock options under the 2007 Stock Plan is determined by the compensation committee of the Board of Directors, and may be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. The total number of shares of stock with respect to which stock options and stock appreciation rights may be granted to any one employee of the Company or a subsidiary during any one-year period under the 2007 plan shall not exceed 250,000. Options become exercisable over various periods from the date of grant, and generally expire ten years after the grant date. As of December 31, 2013, there were 443,573 options issued and outstanding under the 2007 Stock Plan.

On November 2, 2010, the Board of Directors and stockholders adopted the 2010 Stock Incentive Plan (“2010 Stock Plan”) for the issuance of up to 3,000,000 shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. The exercise price of stock options under the 2010 Stock Plan is determined by the compensation committee of the Board of Directors, and may be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. Options become exercisable over various period from the date of grant, and generally expire ten years after the grant date. As of December 31, 2013, there were 2,512,500 options issued and outstanding under the 2010 Stock Plan.

In the event of an employee’s termination, the Company will cease to recognize compensation expense for that employee. There is no deferred compensation recorded upon initial grant date, instead, the fair value of the stock-based payment is recognized ratably over the stated vesting period.

On October 22, 2013, the stockholders approved and adopted an amendment to the Company’s 2010 Incentive Stock Plan to increase the number of shares of Company’s common stock reserved for issuance under the Plan from 3,000,000 to 6,000,000.

The Company has applied fair value accounting for all share based payment awards since inception. The fair value of each option or warrant granted is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes assumptions used in the years ended December 31, 2013 and 2012 are as follows:

	Year ended December 31,
	2013	2012
Exercise price	$1.64 - $1.74	$1.69 - $2.47
Expected dividends	0%	0%
Expected volatility	141% - 154%	108% - 174%
Risk fee interest rate	0.77% - 2.54%	0.37% - 1.98%
Expected life of option	5 – 10 years	5 - 10 years
Expected forfeitures	0%	0%

The Company records stock-based compensation based upon the stated vested provisions in the related agreements. The vesting provisions for these agreements have various terms as follows:

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immediate vesting,

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half vesting immediately and the remainder over three years,

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quarterly over three years,

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annually over three years,

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one-third immediate vesting and remaining annually over two years,

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one half immediate vesting with remaining vesting over nine months,

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one quarter immediate vesting with the remaining over three years

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one quarter immediate vesting with the remaining over 33 months; and

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monthly over three years.

During 2013, the Company granted 222,500 options to employees and directors having an approximate fair value of $350,000 based upon the Black-Scholes option pricing model. During 2012, the Company granted 2,075,000 options to employees and directors having an approximate fair value of $4.5 million based upon the Black-Scholes option pricing model.

Stock-based compensation expense included in general and administrative expenses and research and development expenses relating to stock options issued employees for the years ended December 31, 2013 and 2012 were $1.3 million and $1.4 million, respectively. Stock-based compensation expense included in general and administrative expenses and research and development expenses relating to stock options issued to consultants for the years ended December 31, 2013 and 2012 were $324,000 and $216,000, respectively.

A summary of stock option activities for the year ended December 31, 2013 and for the year ended December 31, 2012, is as follows:

					Weighted
					Average
			Weighted		Remaining	Aggregate
			Average Exercise		Contractual	Intrinsic
	Options		Price		Life	Value
Balance - December 31, 2011		2,979,010	$	1.34	6.01 years	$	-
Granted		2,075,000	$	2.21
Exercised		(374,851)	$	0.34		$	661,000
Forfeited		(225,413)	$	2.37
Balance - December 31, 2012		4,453,746	$	1.78	6.43 years	$	1,308,000
Granted		222,500	$	1.69
Exercised		(291,666)	$	0.79		$	71,000
Forfeited		(475,000)	$	2.30
Balance - December 31, 2013 - outstanding		3,909,580	$	1.78	5.59 years	$	785,000
Balance - December 31, 2013 - exercisable		3,153,537	$	1.69	5.24 years	$	773,000

Grant date fair value of options granted - 2013			$	350,000
Weighted average grant date fair value - 2013			$	1.57
Grant date fair value of options granted - 2012			$	4,468,000
Weighted average grant date fair value - 2012			$	2.15

The options outstanding and exercisable at December 31, 2013 are as follows:

Options Outstanding						Options Exercisable
			Weighted		Weighted Average			Weighted		Weighted Average
Range of			Average		Remaining			Average		Remaining
Exercise Price	Options		Exercise Price		Contractual Life	Options		Exercise Price		Contractual Life
$0.09 - $2.00		2,093,196	$	1.29	4.73 years		1,901,737	$	1.25	4.64 years
$2.01 - $3.00		1,770,560		2.28	6.65 years		1,205,976		2.26	6.25 years
$3.01 - $6.00		45,824		5.24	3.62 years		45,824		5.24	3.62 years
$0.09 - $6.00		3,909,580	$	1.78	5.59 years		3,153,537	$	1.69	5.24 years

The options outstanding and exercisable at December 31, 2012 are as follows:

Options Outstanding						Options Exercisable
			Weighted		Weighted Average			Weighted		Weighted Average
Range of			Average		Remaining			Average		Remaining
Exercise Price	Options		Exercise Price		Contractual Life	Options		Exercise Price		Contractual Life
$0.09 - $2.00		2,162,362	$	1.78	5.76 years		1,801,187	$	1.14	5.52 years
$2.01 - $3.00		2,212,227		2.26	7.15 years		1,011,533		2.17	6.14 years
$3.01 - $6.00		79,157		4.87	4.49 years		79,157		4.87	4.49 years
$0.09 - $6.00		4,453,746	$	1.78	6.43 years		2,891,877	$	1.60	5.71 years

The following is a summary of the Company’s non-vested stock options at December 31, 2013:

			Weighted Average
	Unvested		Grant
	Stock Options		Date Fair Value
Non-vested - December 31, 2012		1,561,869	$	2.11
Granted		222,500		1.69
Vested/Exercised		(883,882)		1.93
Forfeited/Cancelled		(144,444)		2.27
Non-vested - December 31, 2013		756,043	$	2.17
Weighted average remaining period for vesting		1.30 years

As of December 31, 2013, total unrecognized stock-based compensation expense related to stock options was $1.6 million, which is expected to be expensed through October 2016.

FASB’s guidance for stock-based payments requires cash flows from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. The Company did not record any excess tax benefits in 2013 or 2012. Cash received from option exercises under the Company’s stock-based compensation plans for the years ended December 31, 2013 and 2012 was $231,000 and $127,000, respectively.

Stock Warrants

On October 25, 2012, the Company entered into a Common Stock Purchase Agreement with certain accredited investors. As part of this agreement, the Company issued warrants to purchase 635,855 shares of common stock to the placement agent, or its permitted assigns. The warrants have an exercise price of $1.60 and a life of five years. The warrants vested immediately and expire October 25, 2017. Since these warrants were granted as part of an equity raise, the Company has treated them as a direct offering cost. The result of the transaction has no affect to equity. As of December 31, 2013, all the warrants were outstanding.

On March 15, 2012, the Company entered into a consulting agreement for a financial communications program, for a period of 12 months that began on February 20, 2012, which was extended to March 14, 2014. As compensation for such program, the consultant is paid a monthly fee and will be issued a performance warrant exercisable for 250,000 shares of the Company’s common stock based on achievement of certain stock price milestones through March 14, 2013. In March 2013, the Company extended the period to which the milestones could be achieved to March 14, 2014. Upon initiation of the program, 50,000 of the performance warrants vested. The performance warrant is exercisable for a period of two years from the date of issuance for an exercise price equal to the price ($2.20 per share) of the Company’s common stock on the date of execution (March 15, 2012). The expense recorded for the years ended December 31, 2013 and December 31, 2012 approximated $0 and $63,000, respectively, and was estimated using the Monte Carlo valuation model. The assumptions used by the Company are summarized in the following table:

Exercise price	$	2.20
Expected dividends		0	%
Expected volatility		110	%
Risk free interest rate		0.26	%
Expected life of warrant		2 years

On December 20, 2011, the Company entered into a consulting agreement for financial advisory services, for a period of 12 months. As compensation for such services, the consultant is paid a monthly fee and on February 2, 2012, was issued a warrant exercisable for 100,000 shares of the Company’s common stock. The warrant is exercisable upon issuance for a period of five years from the date of issue at an exercise price equal to the price of the Company’s common stock on the date of issue. The fair value of the warrant approximated $200,000 and was measured using the Black-Scholes valuation model. All of this expense was recorded in the year ended December 31, 2012. The assumptions used by the Company are summarized in the following table:

Exercise price	$	1.14
Expected dividends		0	%
Expected volatility		174	%
Risk free interest rate		0.71	%
Expected life of warrant		5 years

A summary of warrant activity for the Company for the year ended December 31, 2012 and for the year ended December 31, 2013 is as follows:

			Weighted Average
	Number of Warrants		Exercise Price
Balance at December 31, 2011		3,259,186	$	1.95
Granted		985,855		1.71
Exercised		(1,768,167)		1.11
Forfeited		(844,373)		3.32
Balance as December 31, 2012		1,632,501		1.99
Granted		-		-
Exercised		-		-
Forfeited		-		-
Balance as December 31, 2013		1,632,501	$	1.99

There was no stock-based compensation expense included in general and administrative expenses relating to warrants issued to consultants for the year ended December 31, 2013. Stock-based compensation expense included in general and administrative expenses relating to warrants issued to consultants for the year ended December 31, 2012 was $271,000.

A summary of all outstanding and exercisable warrants as of December 31, 2013 is as follows:

						Weighted Average
Exercise		Warrants		Warrants		Remaining		Aggregate
Price		Outstanding		Exercisable		Contractual Life		Intrinsic Value
$	1.14		100,000		100,000		3.09 years	$	43,000
$	1.32		18,182		18,182		2.00 years	$	4,000
$	1.60		635,855		635,855		3.82 years	$	-
$	2.20		250,000		50,000		0.20 years	$	-
$	2.22		517,257		517,257		2.91 years	$	-
$	3.30		61,207		61,207		1.41 years	$	-
$	3.75		50,000		50,000		2.13 years	$	-
$	1.99		1,632,501		1,432,501		2.77 years	$	47,000

Options of Subsidiary

As of December 31, 2013, Epitope, a majority-owned subsidiary of Synthetic Biologics, has 50,000 stock options outstanding and 40,000 stock options exercisable. These stock options have an exercise price of $0.001 and a remaining contractual life of 4.50 years.