4. Stockholders’ Equity

Warrants

In February 2017, an institutional investor from the Company’s financing which closed in July 2016 converted its warrant to purchase 526,315 shares of the Company’s common stock by a “cashless” exercise and received 211,860 shares of the Company’s common stock. The warrant had an exercise price of $2.41 per share. The shares were issued, and the warrants were sold, in reliance upon the registration exemption set forth in Section 4(a)(2) of the Securities Act of 1933, as amended. The value of the exercised warrants was adjusted to the fair value immediately prior to the exercise and approximately $1.4 million was reclassified from warrant liability to additional paid-in capital, a component of stockholders’ equity.

In March 2018, the Company entered into the Warrant Amendments with each of the holders of the Company’s outstanding Warrants. As a result of the Warrant Amendments, all of the remaining Warrants to purchase 2,449,129 shares of the Company’s common stock are no longer required to be classified as liabilities. The value of the amended Warrants was adjusted to the fair value immediately prior to the Warrant Amendments, resulting in a gain of approximately $433,000 in the statement of operations, and approximately $3.3 million was reclassified from warrant liability to additional paid-in capital.

Sale of Common Stock in Public Offering

In February and March 2017, the Company completed the sale of 2,775,861 shares of its common stock in an underwritten public offering. The price to the public in this offering was $2.90 per share resulting in gross proceeds to the Company of approximately $8.0 million. After deducting underwriting discounts and commissions and offering expenses paid by the Company, the net proceeds to the Company from this offering was approximately $7.3 million.

At the Market Equity Offering Program

In November 2017, the Company filed a new shelf registration with the SEC on Form S-3 to replace a prior Form S-3 shelf registration which was set to expire on November 25, 2017. This new shelf registration was declared effective by the SEC on December 28, 2017. The new shelf registration statement includes a prospectus for the at-the-market offering to sell up to an aggregate of $16.0 million of shares of the Company’s common stock through B. Riley FBR, Inc. (“FBR”) as a sales agent (the “FBR Sales Agreement”). The Company did not sell any shares of common stock through the FBR Sales Agreement during 2017. During the six months ended June 30, 2018, the Company sold 1,485,054 shares of common stock at a weighted-average price per share of $2.38 pursuant to the FBR Sales Agreement and received proceeds of approximately $3.4 million, net of commissions and fees. From July 1, 2018 through August 3, 2018, the Company has not sold any additional shares of common stock pursuant to the FBR Sales Agreement.

Under current SEC regulations, if at the time the Company files its Annual Report on Form 10-K (“Form 10-K”), and the Company’s public float is less than $75 million, and for so long as its public float remains less than $75 million, the amount the Company can raise through primary public offerings of securities in any twelve-month period using shelf registration statements is limited to an aggregate of one-third of the Company’s public float, which is referred to as the baby shelf rules. As of August 3, 2018, the Company’s public float was approximately $45.7 million, based on 15,932,051 shares of outstanding common stock held by non-affiliates and at a price of $2.87 per share, which was the last reported sale price of the Company’s common stock on the Nasdaq Capital Market on June 5, 2018. As a result of the Company’s public float being below $75 million, the Company will be limited by the baby shelf rules until such time as the Company’s public float exceeds $75 million, which means the Company only has the capacity to sell shares up to one-third of its public float under shelf registration statements in any twelve-month period. If the Company’s public float decreases, the amount of securities the Company may sell under its Form S-3 shelf registration statement will also decrease. As of August 3, 2018, the Company had the capacity to issue up to approximately $11.7 million worth of additional shares of common stock pursuant to the FBR Sales Agreement.

Future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of the Company’s common stock and the Company’s capital needs. There can be no assurance that FBR will be successful in consummating future sales based on prevailing market conditions or in the quantities or at the prices that the Company deems appropriate.

In addition, the Company will not be able to make future sales of common stock pursuant to the FBR Sales Agreement unless certain conditions are met, which include the accuracy of representations and warranties made to FBR under the FBR Sales Agreement. Furthermore, FBR is permitted to terminate the FBR Sales Agreement in its sole discretion upon ten days’ notice, or at any time in certain circumstances, including the occurrence of an event that would be reasonably likely to have a material adverse effect on the Company’s assets, business, operations, earnings, properties, condition (financial or otherwise), prospects, stockholders’ equity or results of operations. The Company has no obligation to sell the remaining shares available for sale pursuant to the FBR Sales Agreement.

Employee Stock Purchase Plan and Equity Incentive Award Plan

As a result of payroll withholdings from the Company’s employees of approximately $80,000, the Company sold 50,244 shares of common stock through its ESPP during the six months ended June 30, 2017. The Company did not sell any shares of stock through its ESPP during the six months ended June 30, 2018.

In May 2017, the Company’s stockholders approved an amendment and restatement of the Company’s ESPP to increase the number of shares of common stock reserved under the ESPP by 100,000 shares (to an aggregate of 1,250,000 shares), to increase the annual evergreen provision from 30,000 shares to 100,000 shares, and to extend the term of the ESPP into 2027.

On April 26, 2018, the Company’s stockholders approved the amendment and restatement of the Company’s 2013 Equity Incentive Award Plan (the “Restated Equity Incentive Plan”) to increase the number of shares of common stock authorized for issuance under the Restated Equity Incentive Plan by 1,500,000 shares, to an aggregate of 6,286,425 shares, and to extend the term of the Restated Equity Incentive Plan to February 2028. In addition, beginning on January 1, 2019, the number of shares available for issuance will be annually increased on the first day of each fiscal year by that number of shares equal to the least of (a) four percent of the outstanding shares of common stock on the last day of the immediately preceding calendar year, and (b) such other amount determined by the Company’s board of directors. Notwithstanding the foregoing, the number of shares of common stock that may be issued or transferred pursuant to incentive stock options under the Restated Equity Incentive Plan may not exceed an aggregate of 8,000,000 shares.

Stock-Based Compensation

Stock-based compensation expense includes charges related to employee stock purchases under the ESPP and stock option grants. The Company measures stock-based compensation expense based on the grant date fair value of any awards granted to its employees. Such expense is recognized over the period of time that employees provide service and earn rights to the awards.

The estimated fair value of each stock option award granted was determined on the date of grant using the Black Scholes option-pricing valuation model with the following weighted-average assumptions for option grants during the three and six months ended June 30, 2018 and 2017:

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Common Stock Options
Risk free interest rate	2.85%	1.93%	2.66%-2.85%	1.93%-2.16%
Expected option term	5.5 years	5.5 years	5.5-6.0 years	5.5-6.0 years
Expected volatility of common stock	92.30%	98.23%	90.15%-92.30%	94.05%-98.23%
Expected dividend yield	0.0%	0.0%	0.0%	0.0%

The estimated fair value of the shares to be acquired under the ESPP was determined on the initiation date of each six month purchase period using the Black-Scholes option-pricing valuation model with the following weighted-average assumptions for ESPP shares to be purchased during the three and six months ended June 30, 2018 and 2017:

	Six Months Ended June 30,
	2018	2017
Employee Stock Purchase Plan
Risk free interest rate	1.85%	0.79%
Expected term	6.0 months	6.0 months
Expected volatility of common stock	58.76%	99.23%
Expected dividend yield	0.0%	0.0%

The Company recognized non-cash stock-based compensation expense to employees and directors in its research and development and its general and administrative functions as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Research and development	$	168,733	$	219,345	$	357,510	$	426,203
General and administrative		218,696		245,526		423,694		502,826
Total stock-based compensation expense	$	387,429	$	464,871	$	781,204	$	929,029

As of June 30, 2018, there were approximately $2.5 million of unrecognized compensation costs related to outstanding employee and board of director options, which are expected to be recognized over a weighted-average period of 1.30 years.