9. SHARE-BASED COMPENSATION AND WARRANTS

The Company has adopted incentive and nonqualified stock option plans for executive, scientific and administrative personnel of the Company as well as outside directors and consultants. In June 2017, the Company’s shareholders approved an amendment to the 2011 Long-Term Incentive Plan, increasing the number of shares reserved for issuance from 11,230,000 to 14,230,000 shares of common stock to be available for grants and awards. As of December 31, 2017, there are 11,585,315 shares issuable under options previously granted and currently outstanding, with exercise prices ranging from $0.86 to $7.37. In 2017, the Company awarded options to employees, covering up to 2,225,000 shares, in which vesting is subject to achievement of certain performance milestones. Options granted under the plans generally vest over periods varying from immediately to one to three years, are not transferable and generally expire ten years from the date of grant. As of December 31, 2017, 2,852,234 shares remained available for grant under the Company’s 2011 Long-Term Incentive Plan. On March 13, 2018, upon the recommendation of the Compensation Committee of the Board of Directors (the “Board”), the Board approved a grant of stock options to the Company’s Executive Chairman exercisable for 1 million shares of common stock that will vest and become exercisable on the first anniversary date of the grant. In addition, the Board approved the grant of a performance-based option covering 4 million shares of common stock that will vest if, within 18 months of the date of grant, specific operational and strategic milestones are achieved. Both grants are conditioned upon stockholder approval at the 2018 Annual Meeting of Stockholders.

The Company records compensation expense associated with stock options and other equity-based compensation in accordance with provisions of authoritative guidance. Compensation costs are recognized over the requisite service period, which is generally the option vesting term of up to three years. Awards with performance conditions will be expensed if it is probable that the performance condition will be achieved. For the years ended December 31, 2017 and 2016, $30,500 and $10,100, respectively was expensed for share awards with performance conditions that became probable during that period.

The Company’s net loss for the years ended December 31, 2017 and 2016 includes $650,440 and $2,995,240, respectively, of non-cash compensation expense related to the Company’s share-based compensation awards. The compensation expense related to the Company’s share-based compensation arrangements is recorded as components of general and administrative expense and research and development expense, as follows:

	2017		2016
Research and development	$	271,733	$	746,027
General and administrative		378,707		2,249,213
Share-based compensation expense	$	650,440	$	2,995,240
Net share-based compensation expense, per common share:
Basic and diluted	$	0.01	$	0.05

Stock Options

The Company uses the Black-Scholes-Merton valuation model to estimate the fair value of service based and performance based stock options granted to employees. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant date fair value of an award. These assumptions include the risk free rate of interest, expected dividend yield, expected volatility, and the expected life of the award.

Expected Volatility—Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility based on the daily price observations of its common stock during the period immediately preceding the share-based award grant that is equal in length to the award’s expected term. The Company believes that historical volatility represents the best estimate of future long term volatility.

Risk-Free Interest Rate—This is the average interest rate consistent with the yield available on a U.S. Treasury note (with a term equal to the expected term of the underlying grants) at the date the option was granted.

Expected Term of Options—This is the period of time that the options granted are expected to remain outstanding. The Company uses a simplified method for estimating the expected term of service based awards granted. For performance based and market based awards, the expected term of service is based on the derived service period.

Expected Dividend Yield—The Company has never declared or paid dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. As such, the dividend yield percentage is assumed to be zero.

Forfeiture Rate—This is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. The Company estimated the forfeiture rate for 2016 based on historical forfeiture experience for similar levels of employees to whom options were granted. Beginning in 2017, in accordance with authoritative guidance, forfeitures were no longer required to be estimated.

Following are the weighted-average assumptions used in valuing the stock options granted to employees during the years ended December 31, 2017 and 2016:

	Years ended December 31,
	2017			2016
Expected volatility		78.88	%		82.12	%
Risk free interest rate		1.96	%		1.29	%
Expected term of option		6.29 years			5.33 years
Forfeiture rate		-			*3.00	%
Expected dividend yield		-			-

*- In 2016, authoritative guidance required forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Throughout 2016, forfeitures were estimated at 3% and the actual forfeiture rate was 6% for 2016. The Company adjusted stock compensation expense for 2016 based on the actual forfeiture rate.

The weighted average fair value of stock options granted was $0.73 and $0.75 in 2017 and 2016, respectively.

Share-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, net of estimated forfeitures. The authoritative guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

A summary of the Company’s stock option plans and of changes in options outstanding under the plans during the years ended December 31, 2017 and 2016 is as follows:

					Weighted Average
			Weighted Average		Remaining		Aggregate Intrinsic
	Number of Options		Exercise Price		Contractual Term		Value
					In Years
Outstanding at December 31, 2015		6,694,744	$	1.99
Exercised		-	$	-
Granted		4,213,518	$	1.00
Expired		(856,512)	$	2.24
Forfeited		(516,444)	$	1.14
Outstanding at December 31, 2016		9,535,306	$	1.57
Exercised		(154,545)	$	2.11
Granted		3,199,500	$	1.05
Expired		(978,070)	$	1.64
Forfeited		(16,876)	$	0.92
Outstanding at December 31, 2017		11,585,315	$	1.42		7.46	$	21,730,182
Exercisable at December 31, 2017		8,468,971	$	1.57		6.78	$	14,781,148

The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at December 31, 2017 and (ii) the exercise price of the underlying awards, multiplied by the number of options that had an exercise price less than the closing price on the last trading day of the year. The intrinsic value of options exercised during the year ended December 31, 2017 totaled approximately $168,000. Cash received from option exercises under all share-based payment arrangements for the year ended December 31, 2017 was approximately $326,000. There were no options exercised in 2016.

The following summarizes information about stock options granted to employees and directors outstanding at December 31, 2017:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
	Number		Remaining		Average		Number		Average
Range of	Outstanding at		Contractual		Exercise		Exercisable at		Exercise
Exercise Prices	December 31, 2017		Life in Years		Price		December 31, 2017		Price
$0.00 - $1.00		3,950,656		8.9	$	0.93		1,538,965	$	0.87
$1.01 - $2.00		7,083,119		7.0	$	1.53		6,378,466	$	1.57
$2.01 - $3.00		375,000		4.2	$	2.24		375,000	$	2.24
$3.01 - $7.00		122,000		3.0	$	6.24		122,000	$	6.24
$7.01 - $8.00		54,540		1.5	$	7.26		54,540	$	7.26

		11,585,315		7.5	$	1.42		8,468,971	$	1.57

As of December 31, 2017, there was approximately $544,000 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 1.8 years.

Warrants

Warrants issued generally expire after 2-5 years from the date of issuance. Stock warrant activity is as follows:

			Weighted Average
	Number of Shares		Exercise Price
Outstanding at December 31, 2015		4,010,903	$	2.27
Issued		4,625,510	$	1.69
Exercised		-	$	-
Expired		(2,247,912)	$	2.91
Outstanding at December 31, 2016		6,388,501	$	1.60
Issued		1,638,506	$	3.75
Exercised		-	$	-
Expired		(1,762,991)	$	1.46
Outstanding at December 31, 2017		6,264,016	$	2.23
Exercisable at December 31, 2017		4,625,510	$	1.69