Note 8 - Stock-based Compensation

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

8. Stock-Based Compensation

Stock-based Compensation

Upon consummation of the Merger, all outstanding options to purchase Diffusion LLC units were converted into stock options to purchase the Company’s common stock on terms substantially identical to those in effect prior to the reverse merger, except for adjustments to the underlying number of shares and the exercise price based on the Exchange Ratio. At the time of the Merger, there were 301,156 RestorGenex stock options that were exercisable for shares of the Company’s common stock at a weighted average exercise price of $40.13 per share.

The Company recorded stock-based compensation expense in the following expense categories of its unaudited interim condensed consolidated statements of operations for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Research and development	$	174,932	$	78,289	$	601,260	$	197,871
General and administrative		215,425		63,119		520,730		176,118
Total stock-based compensation expense	$	390,357	$	141,408	$	1,121,990	$	373,989

The following table summarizes the activity related to all stock option grants to employees and non-employees for the nine months ended September 30, 2016:

	Number of Options			Weighted average exercise price per share		Weighted average remaining contractual life (in years)
Balance at January 1, 2016		1,495,615		$	3.92
RestorGenex options outstanding		301,156			40.13
Cancelled		(48,190	)		61.30
Granted		261,828			8.89
Outstanding at September 30, 2016		2,010,409		$	8.62		7.6
Exercisable at September 30, 2016		1,357,109		$	9.64		7.1
Vested and expected to vest at September 30, 2016		2,006,156		$	8.62		7.6

At September 30, 2016, there was $3,076,088 of unrecognized compensation cost related to non-vested options of which $402,910 is attributable to 67,597 options issued to non-employees and subject to re-measurement until vested. The total unrecognized compensation expense will be recognized as expense over a weighted-average period of 5.9 years.

Generally, the options have a ten-year term and vest in equal monthly installments over three years. In August 2016, the Company granted an option to purchase 204,907 shares of Common Stock to a new director in connection with his appointment to the board of directors. The options will vest in equal quarterly installments over ten years and any options exercised are restricted from being sold until August 2021. All options granted were valued using the Black-Scholes model and assumptions used to value the options granted during the first nine months of 2016 were as follows:

Grant date fair value	$7.30	-	$8.01
Exercise price	$8.75	-	$9.60
Expected term (in years)	5.77	-	7.48
Risk-free interest rate	1.2%	-	1.5%
Expected volatility	106.8%	-	124.0%
Dividend yield		0%

Restricted Stock Awards

As of September 30, 2016, and December 31, 2015, there were 10,738 and 15,341, respectively, unvested shares of restricted stock. During the three and nine months ended September 30, 2016, 1,534 and 4,603 shares vested, respectively, and the Company recognized stock-based compensation expense of $3,024 and $9,057 during the three and nine months ended September 30, 2016, respectively.

At September 30, 2016, there was $20,538 of unrecognized compensation cost related to unvested restricted stock that will be recognized as expense over a weighted average period of 1.7 years.

2015 Equity Plan

The 2015 Equity Plan, as amended in July 2016, currently allows for the issuance of up to a maximum of 500,000 shares of common stock in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate, not including shares subject to awards assumed in connection with certain transactions, including the Merger. As of September 30, 2016, there were 237,507 shares of common stock available for future issuance under the 2015 Equity Plan. In addition, beginning on January 1, 2017, on each January 1

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through the term of the plan, up to 4.0% of the total shares of the Company’s common stock outstanding as of December 31

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may be added to the plan reserve upon Board approval.