Total share-based compensation related to stock options, common stock awards and JSOP awards was $702,042 and $431,504 for the years ended December 31, 2014 and 2013, respectively.

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

Stock Option Modification

Prior to the Acquisition, the Company had two incentive stock plans, the Lipoxen plc Unapproved Share Option Plan (the “2000 Stock Plan”) and the Xenetic Biosciences plc 2007 Share Option Scheme (the “2007 Stock Plan”). Subsequent to the Acquisition, the 2000 and 2007 Stock Plans were converted to reflect the new shares issued by the Company under the Scheme of Arrangement related to the Acquisition. As part of the conversion, option holders under the 2000 and 2007 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 and 2007 Stock Plans. 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. The conversion of the options is treated as an option modification. The Company accounted for the option modification under ASC Topic 718, Compensation – Stock Compensation, and determined the option modification does not result in incremental stock compensation cost that is material to the Company’s results of operations during the year ended December 31, 2014.

Stock Options

The Company grants stock option awards to employees and non-employees with varying vesting terms under the Xenetic Biosciences, Inc. Equity Incentive Plan (“Stock Plan”). 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, including the risk-free interest rate, expected term, share price volatility, dividend yield and forfeiture rate. 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. For employee stock options issued in 2014 that qualify as “plain vanilla” stock options in accordance with Staff Accounting Bulletin No. 110 (“SAB 110”), the expected term is based on the simplified method, as defined by SAB 110. The Company has a limited history of stock option exercises, which does not provide a reasonable basis for the Company to estimate the expected term of employee stock options. For all other employee stock options, the Company estimates the expected life using judgment based on the anticipated research and development milestones of the Company’s clinical projects and behaviour 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

During the years ended December 31, 2014 and 2013, 1.08 million and 2.30 million total stock options to purchase shares of common stock were granted under the Stock Plan, respectively, with a weighted average grant date fair value per option share of $0.23 and $0.07, respectively. During the years ended December 31, 2014 and 2013, 1,984,080 and 55,379 stock options were exercised, respectively, and cash received from those stock option exercises was $101,933 and $2,090, respectively.

During the year ended December 31, 2014 and 2013, 0.68 million and 0.45 million total stock options vested, with total fair values of $115,864 and $63,616, respectively. As of December 31, 2014, there was $199,286 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 approximately two years.

Key assumptions used in the Black-Scholes option pricing model for options granted to employees during the years ending December 31, 2014 and 2013 are as follows:

The following is a summary of employee stock option activity for the years ended December 31, 2014 and 2013:

A summary of the status of the Company’s non-vested employee stock option shares as of December 31, 2014 and the changes during the year ended December 31, 2014 is as follows:

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 that 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.

During the years ended December 31, 2014 and 2013, 480,000 and zero non-employee stock options were granted under the Stock Plan, respectively, with a weighted average grant date fair value per option share of $0.23 and zero, respectively. No non-employee stock options were exercised during years ended December 31, 2014 and 2013.

During the year ended December 31, 2014 and 2013, 0.26 million and 0.10 million total stock options vested, with total fair values of $62,121 and $18,034, respectively. As of December 31, 2014, there was $88,692 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 approximately two years.

Key assumptions used in the Black-Scholes option pricing model for non-employees options during the years ended December 31, 2014 and 2013 are as follows:

The following is a summary of non-employee stock option activity for the years ended December 31, 2014 and 2013:

A summary of the status of the Company’s non-vested non-employee stock option shares as of December 31, 2014 and the changes during the year ended December 31, 2014 is as follows:

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.

The Company granted 187,406 and 282,508 common stock awards during the years ended December 31, 2014 and 2013, respectively, in exchange for professional services. As all services were rendered in each respective period, compensation expense related to common stock awards of $102,000 and $85,825 was recognized during the years ended December 31, 2014 and 2013, respectively. All common stock awards were authorized but not issued as of December 31, 2014.

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. 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.

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 2013 related to this accelerated vesting. During the first quarter of 2014, the 2012 JSOP awards fully vested under the terms of the JSOP due the achievement of specific share price hurdles and the related compensation charges were fully recorded during the first quarter of 2014 related to this accelerated vesting. As of December 31, 2014, all JSOP awards were fully vested.

The total fair value of the 2012 JSOP awards was $853,889 at the date of issuance. The Company recognized $344,905 and $279,484 of compensation costs during the years ended December 31, 2014 and 2013.