12.	Share-Based Compensation

Total share-based compensation related to stock options, common stock awards and JSOP awards was $431,504 and $339,780 during the years ended December 31, 2013 and 2012, respectively.

 

Share-based compensation expense is classified in the consolidated statements of comprehensive loss as follows:

 

		Year ended December 31,
		2013				2012
Research and development expenses		$	60,980			$	41,851
Administrative expenses			370,524				297,929
		$	431,504			$	339,780

2000 Stock Plan (Incentive Stock Plan)

In July 2000, the Company’s Board of Directors and stockholders adopted the Lipoxen plc Unapproved Share Option Plan (the “2000 Stock Plan”), under which stock options may be granted to employees, consultants and non-employee directors. The 2000 Stock Plan was amended by resolution of the Board of Directors in March 2006.

Options granted under the 2000 Stock Plan expire no later than ten years from the date of grant and have limited transferability. Options are granted with an exercise price determined by the Board of Directors. Options may be granted with different vesting terms from time to time but not more than 50% on or after the first anniversary, 25% on or after the second anniversary, and 25% on or after the third anniversary.

The number of options available to grant under the 2000 Stock Plan is limited to 15% of the issued ordinary share capital of the Company. As of December 31, 2013, 14,355,591 shares of common stock were collectively available for future grant under the 2000 Stock Plan and 2007 Stock Plan (as defined below). Options to purchase 2,507,489 shares of common stock were outstanding under the 2000 Stock Plan.

Subsequent to the Acquisition, the 2000 Stock Plan was converted to reflect the new shares issued by the Company under the Scheme related to the Acquisition. As part of the conversion, option holders under the 2000 Stock Plan have the right to subscribe for a number of shares of common stock in the Company (the “Replacement Option Shares”) in exchange for the cancellation and surrender by the option holder of the original options granted by the 2000 Stock Plan. The number of Replacement Option Shares is determined in the same manner in which the shareholders of Xenetic UK were given the right to acquire shares of common stock in the Company according to the Acquisition. The aggregate exercise price payable in US dollars for Replacement Option Shares is the same as the aggregate exercise price in pounds sterling of the original options, using a foreign currency exchange rate for pounds sterling into US dollars quoted by Barclays Bank plc at 12 noon Greenwich Mean Time (“GMT”) on January 23, 2014, the date of the Acquisition. This conversion of the stock options is retrospectively reflected in these financial statements. The conversion of the options will be treated as an option modification during the first quarter of 2014.

 

In August 2007, the Company’s Board of Directors and stockholders adopted the Xenetic Biosciences plc 2007 Share Option Scheme (the “2007 Stock Plan”), under which Enterprise Management Incentives may be granted to employees and non-employee directors. The 2007 Stock Plan was amended by resolution of the Board of Directors and shareholders in June 2010 to include the US Share Option Addendum for the purposes of granting incentive stock options and non-statutory stock within the meaning of Section 422 of the Internal Revenue Code.

Options granted under the 2007 Stock Plan expire no later than ten years from the date of grant and have limited transferability. Options may be granted with different vesting terms from time to time or no vesting conditions. The option price of an incentive stock option granted to an employee or of a non-statutory stock option granted to any person who owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company (or any parent or subsidiary) shall be no less than 110% of the fair market value per share on the date of grant. The option price of an incentive stock option granted to any other employee shall be no less than 100% of the fair market value per share on the date of grant.

The number of options available to grant under the 2007 Stock Plan is limited to 15% of the issued ordinary share capital of the Company. As of December 31, 2013, 14,355,591 shares of common stock were collectively available for future grant under the 2000 Stock Plan and 2007 Stock Plan. Options to purchase 2,714,941 shares of common stock were outstanding under the 2007 Stock Plan.

Subsequent to the Acquisition, the 2007 Stock Plan was converted to reflect the new shares issued by the Company under the Scheme related to the Acquisition. As part of the conversion, option holders under the 2007 Stock Plan have the right to subscribe for a number of shares of common stock in the Company in exchange for the cancellation and surrender by the option holder of the original options granted by the 2007 Stock Plan. The number of Replacement Option Shares is determined in the same manner in which the shareholders of Xenetic UK were given the right to acquire shares of common stock in the Company according to the Acquisition. The aggregate exercise price payable in US dollars for Replacement Option Shares is the same as the aggregate exercise price in Pounds Sterling of the original options, using a foreign currency exchange rate for Pounds Sterling into U.S. dollars quoted by Barclays Bank plc at 12 noon GMT on January 23, 2014, the date of the Acquisition. This conversion of the stock options is retrospectively reflected in these financial statements. The conversion of the options will be treated as an option modification during the first quarter of 2014.

Stock Options

The Company grants stock option awards to employees and non-employees with varying vesting terms. The Company measures the fair value of stock option awards using the Black-Scholes option pricing model, which uses the assumptions noted in the tables below. The risk-free interest rate is based upon the US Treasury yield curve in effect at the time of grant, with a term that approximates the expected life of the option. The Company estimates the expected life of options granted to employees using judgment based on the anticipated research and development milestones of the Company’s clinical projects and behavior of the Company’s employees. The expected life of non-employee options is the contractual life of the option. The Company determines the expected volatility based on a weighted-average of the historical volatility of a peer group of comparable publicly traded companies with product candidates in similar stages of development to the Company’s product candidates in conjunction with the Company’s historical volatility. The Company has applied an expected dividend yield of 0% as the Company has not historically declared a dividend and does not anticipate declaring a dividend during the expected life of the options. Further, the Company has applied a forfeiture rate of 0% as the Company has not historically experienced forfeitures. During 2013, approximately two million options were forfeited by a management executive as a result of his unanticipated short period of employment; however, the Company views this situation to be an independent event and does not expect this type of forfeiture to reoccur in the future.

Employee Stock Options

Key assumptions used in the Black-Scholes option pricing model on the date of grant for options granted to employees are as follows:

 

		December 31,
		2013				2012
Expected dividend yield (%)			-				-
Expected volatility (%)			73.39				77.00
Risk-free interest rate (%)			0.92				0.49
Expected life of option (years)			4.00				3.25
Weighted-average share price ($)			0.29				0.37
Weighted-average exercise price ($)			1.22				0.91
Model used			Black-Scholes				Black-Scholes

During the years ended December 31, 2013 and 2012, the Company granted employee stock options to purchase a total of 2.30 million and 960,000 shares of common stock respectively, with a weighted-average grant date fair value per option share of $1.22 and $0.91, respectively. Cash received from stock option exercises for the years ended December 31, 2013 and 2012 were $2,090 and $709, respectively. The Company considered the implications of these stock option exercises and concluded that there was not a material tax impact.

As of December 31, 2013, there was $77,496 of unrecognized share-based compensation related to employee stock options that are expected to vest. The Company expects to recognize this expense over a weighted-average period of two years.

 

The following is a summary of employee stock option activity for the years ended December 31, 2013 and 2012:

 

		Number of shares				Weighted- average exercise price				Weighted- average remaining life (years)				Aggregate intrinsic value
Outstanding as of January 1, 2012			4,068,024			$	0.31
Granted			960,000				0.91
Exercised			(19,535	)			0.04							$	8,726
Forfeited			(23,009	)			2.04
Outstanding as of December 31, 2012			4,985,480				0.42
Exercisable as of December 31, 2012			3,752,296				0.29				4.28			$	423,487
Outstanding as of January 1, 2013			4,985,480				0.42
Granted			2,304,000				1.22
Exercised			(55,379	)			0.04							$	10,663
Forfeited			(2,011,671	)			1.22
Outstanding as of December 31, 2013			5,222,430				0.47				4.68			$	432,392
Vested or expected to vest as of December 31, 2013			5,222,430				0.47				4.68			$	432,392
Exercisable as of December 31, 2013			4,063,646			$	0.30				3.72			$	432,392

A summary of the status of the Company’s non-vested employee stock option shares as of December 31, 2013 and the changes during the year ended December 31, 2013 is as follows:

 

		Number of shares				Weighted-average grant date fair value
Balance as of January 1, 2013			1,233,184			$	0.11
Granted			2,304,000				0.07
Vested			(454,400	)			0.14
Forfeited			(1,924,000	)			0.07
Balance as of December 31, 2013			1,158,784			$	0.08

Non-Employee Stock Options

Share-based compensation expense related to stock options granted to non-employees is recognized as the services are rendered on a straight-line basis. The Company determined the fair value of the stock options is more reliably measurable than the fair value of the services received. Compensation expense related to stock options granted to non-employees is subject to re-measurement at each reporting period until the options vest.

 

Key assumptions used in the Black-Scholes option pricing model on the date of grant for options granted to non-employees are as follows:

 

		December 31,
		2013				2012
Expected dividend yield (%)			-				-
Expected volatility (%)			78.25				73.79
Risk-free interest rate (%)			1.75				1.09
Expected life of option (years)			5.90				6.92
Weighted-average share price ($)			0.26				0.23
Weighted-average exercise price ($)			0.52				0.52
Model used			Black-Scholes				Black-Scholes

During the year ended December 31, 2012, the Company granted non-employee stock options to purchase a total of 416,000 shares of common stock. No non-employee stock options were granted during 2013 and no non-employee stock options were exercised during the years ended December 31, 2013 and 2012. During the year ended December 31, 2013, options to purchase 104,000 shares of common stock vested, with options to purchase 288,000 shares of common stock remaining unvested as of December 31, 2013.

As of December 31, 2013, there was $33,635 of unrecognized share-based compensation related to non-employee stock options that are expected to vest. The Company expects to recognize this expense over a weighted-average period of three years.

The following is a summary of non-employee stock option activity for the years ended December 31, 2013 and 2012:

 

		Number of shares				Weighted- average exercise price				Weighted- average remaining life (years)				Aggregate intrinsic value
Outstanding as of January 1, 2012			-			$	-
Granted			416,000				0.52
Exercised			-				-
Forfeited			-				-
Outstanding as of December 31, 2012			416,000				0.52
Exercisable as of December 31, 2012			24,000				0.31				4.73			$	0
Outstanding as of January 1, 2013			416,000				0.52
Granted			-				-
Exercised			-				-
Forfeited			-				-
Outstanding as of December 31, 2013			416,000				0.52				5.90			$	49
Vested or expected to vest as of December 31, 2013			416,000				0.52				5.90			$	49
Exercisable as of December 31, 2013			128,000			$	0.48				4.38			$	49

 

Common stock awards

The Company granted common stock awards to a non-employee in exchange for services provided. The Company measured the fair value of these awards using the fair value of the services provided as it is a more reliable measure of the fair value of the awards. The fair value measurement date of these awards is generally the date the performance of services is complete. The fair value of the awards is recognized as services are rendered on a straight-line basis.

During the years ended December 31, 2013 and 2012, the Company granted 282,509 and 177,607 common stock awards, respectively, with a calculated grant date fair value of $85,825 and $58,339, respectively. As all services were rendered in each respective year, $85,825 and $58,339 of compensation expense related to common stock awards was recognized during the years ending December 31, 2013 and 2012, respectively. As of December 31, 2013, there was no unrecognized share-based compensation related to non-employee common stock awards. These common stock awards were not issued as of December 31, 2013 or 2012.

Joint Share Ownership Plan

In 2010 and 2012, the Company issued 1,701,913 and 8,986,281 JSOP awards, respectively, to two senior executives under the JSOP. During 2011, the 2010 JSOP awards fully vested under the terms of the JSOP due to a significant change in beneficial ownership of the Company, and the related compensation charges were fully recorded during periods prior to 2012 related to this accelerated vesting. As of December 31, 2013, all 2012 JSOP awards were outstanding and unvested, while all 2010 JSOP awards were outstanding and vested.

Under the JSOP, shares in the Company are jointly purchased at fair market value by the participating executives and the trustees of the JSOP trust, with such shares held in the JSOP trust. For US GAAP purposes the awards are valued as employee options.

The JSOP trust holds the shares of the JSOP until such time as the JSOP shares are vested and the participating executives exercise their rights under the JSOP. The JSOP trust is granted an interest bearing loan by the Company in order to fund the purchase of its interest in the JSOP shares. The loan held by the trust is eliminated on consolidation in the financial statements of the Company. The Company funded portion of the share purchase price is deemed to be held in treasury until such time as they are transferred to the employee and is recorded as a reduction in equity.

The exercise price of the “option” is deemed to be the market value of the shares at the date of issue. The awards vest based on certain market conditions, which require each tranche of shares to meet specific share price hurdles, or change in control conditions, as defined by the plan. Under the JSOP and subject to the vesting of the participants’ interest, participating executives will, when the JSOP shares are sold, be entitled to a share of the proceeds of sale equal to the growth in market value of the JSOP shares versus the exercise price, less simple interest on the original share purchase price, net of executives’ cash contribution at inception, as agreed for each grant (the “Carry Charge”). The balance of the proceeds will remain to the benefit of the JSOP trust and be applied to the repayment of the loan originally made by the Company to the JSOP trust. Any funds remaining in the JSOP trust after settlement of the loan and any expenses of the JSOP trust are for the benefit of the Company.

The Company measures the fair value of the awards using Monte Carlo simulations, which requires estimates based on the Company’s judgment as well as other assumptions. These estimates include the expected term of each tranche of the JSOP awards, which the Company determined to be the initial life of the awards, and expected volatility, which is based on a weighted-average of the historical volatility of a peer group of comparable publicly traded companies with product candidates in similar stages of development to the Company’s product candidates in conjunction with the historical volatility of Xenetic Biosciences plc’s shares when traded on the UK Alternative Investment Market. The Company has applied an expected dividend yield of 0% as the Company has not historically declared a dividend and does not anticipate declaring a dividend during the expected life of the awards. The risk-free interest rate is based upon the U.S. Treasury yield curve in effect at the time of grant, with a term that approximates the expected life of the awards. The compensation expense is recorded over the expected life of the option, regardless of whether the awards vest. Having established the full value of the JSOP awards using the Monte Carlo simulation outlined above, a deduction is made in respect of the anticipated Carry Charge in order that the expense recorded in the financial statements only represents the participating executives’ net interest in the awards.

On exercise of the JSOP awards by the executives the Carry Charge due to the Company will be recognized as additional paid-in capital, arising from the sale of treasury stock.

Due to the nature of the vesting of the JSOP awards, the Company uses a graded vesting model to recognize the related compensation expense. The share price hurdles range from $0.75 to $2.50 per share of common stock. The Company used the following weighted-average assumptions for the 2012 JSOP awards:

 

		December 31,
		2012
Expected dividend yield (%)			-
Expected volatility (%)			76.00
Risk-free interest rate (%)			0.57
Expected life of option (years)			3.00
Weighted-average share price ($)			0.17
Weighted-average exercise price ($)			0.17
Model used			Monte Carlo

The total fair value of the 2012 JSOP awards was $853,889. The Company recognized $279,484 and $235,927 of compensation costs in 2013 and 2012 respectively, related to 2012 JSOP awards.

As of December 31, 2013, there was $326,066 of total unrecognized compensation costs related to the 2012 JSOP awards. Subsequent to December 31, 2013, the 2012 JSOP awards fully vested under the terms of the JSOP due to market share price hurdles that were met. As a result, the Company expects to recognize $326,066 of compensation expense during the first quarter of 2014 related to this accelerated vesting.