NOTE 5— STOCK-BASED COMPENSATION

2014 Omnibus Incentive Plan

In January 2014, our board of directors approved the 2014 Omnibus Incentive Plan and amended and restated the plan in March 2014. Our stockholders approved the Amended and Restated 2014 Omnibus Incentive Plan, or the 2014 Plan, in March 2014. Our 2014 Plan permits for the issuance of equity based instruments covering up to an initial total of 1,400,000 shares of common stock.

Option Valuation

We have computed the fair value of options granted to employees and non-employees using the Black-Scholes option valuation model. The compensation costs of non-employee arrangements are subject to re-measurement at each reporting period over the vesting terms as earned. Option forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material. The expected term used for options issued to non-employees is the contractual life and the expected term used for options issued to employees is the estimated period of time that options granted are expected to be outstanding. We have estimated the expected life of our employee stock options using the “simplified” method, whereby, the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to our lack of sufficient historical data. Since our stock has not been publicly traded for a sufficiently long period of time, we are utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within our industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.

Stock Options to Employees and Consultants

During the three months ended March 31, 2015, we granted incentive stock options for the purchase of 55,000 shares of our common stock to our employees. The options have an exercise price range of $7.54 per share to $12.98 per share with a term of ten years. The options vest quarterly over sixteen quarters. The options granted had an aggregate grant date fair value of $328,000 utilizing the Black-Scholes option valuation model.

We estimated the fair value of stock options awarded during the three months ended March 31, 2015 using the Black-Scholes option valuation model. There were no stock options granted as of March 31, 2014. The fair values of stock options granted for the period were estimated using the following assumptions:

		Option Grants Awarded During the Three Months Ended March 31, 2015
Stock Price		$7.54 to $12.98
Dividend Yield		0%
Expected Volatility		60%
Risk-free interest rate		1.44% - 1.77%
Expected Life		7 years

Stock-based compensation expense related to stock options for employees and consultants was $108,000 and $19,000, respectively, for the three months ended March 31, 2015 and there was no stock-based compensation expense for the three months ended March 31, 2014 since no stock options or restricted share units had been issued during the period. We are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from our estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised. For the three months ended March 31, 2015, there was no forfeiture rate applied as there have not been any forfeitures since the grant of awards nor currently do we expect to incur any for those shares currently awarded.

For stock options paid in consideration of services rendered by non-employees, we recognize compensation expense in accordance with the requirements of ASC 505-50.

Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to performance, the value of these options, as calculated using the Black-Scholes option valuation model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense is subject to adjustment until the common stock options are fully vested.

Stock Option Award Activity

There were no stock options issued as of March 31, 2014. The following is a summary of our stock option activity during the three months ended March 31, 2015:

	Number of Options	Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Life In Years	Total Grant Date Fair Value
Outstanding, January 1, 2015	491,200	$	6.29	$	4.14	9.17	$	2,034,000
Granted	55,000	10.10		5.97		10.00	328,000
Exercised	—	—		—		—	—
Forfeited	—	—		—		—	—
Outstanding, March 31, 2015	546,200	$	6.68	$	4.42	9.24	$	2,362,000

Exercisable, January 1, 2015	142,895	$	6.02	$	4.01	9.16	$	574,000
Vested	23,554	6.39		4.15		8.90	97,000
Exercised	—	—		—		—	—
Forfeited	—	—		—		—	—
Exercisable, March 31, 2015	166,449	$	6.07	$	4.03	9.12	$	671,000

The following table presents information related to stock options outstanding and exercisable at March 31, 2015:

Options Outstanding		Options Exercisable
Exercise Price	Outstanding Number of Options	Weighted Average Remaining Life In Years	Exercisable Number of Options
$5.79 – $6.00	369,000	9.12	155,180
$6.49 – $6.97	47,500	9.44	5,783
$7.20 – $8.06	99,700	8.77	5,486
$11.44 – $12.98	30,000	—	—
	546,200	9.12	166,449

As of March 31, 2015, there was $1.4 million of unrecognized compensation expense related to unvested employee stock option agreements, which is expected to be recognized over a weighted-average period of approximately 3.2 years. The aggregate intrinsic value of outstanding options and options vested as of March 31, 2015 were $418,000 and $169,000, respectively, which represent options whose exercise price was less than the closing fair market value of our common stock on March 31, 2015 of $7.07 per share.

Restricted Stock Units Activity

We account for restricted stock units issued to employees at fair value, based on the market price of our stock on the date of grant, net of estimated forfeitures. The fair value of non-employee restricted stock units awarded are remeasured as the awards vest, and the resulting increase in fair value, if any, is recognized as expense in the period the related services are rendered. During the three months ended March 31, 2015, we recorded $246,000 of stock-based compensation related to the restricted stock unit shares that have been issued to-date. Shares vested during the three months ended March 31, 2015 were 20,508 shares of which 2,400 shares were surrendered by the employees for payment of payroll tax withholding liabilities.

A summary of restricted stock unit activity for the three months ended March 31, 2015 is as follows:

	Number of Restricted Share Units		Weighted- Average Grant-Date Fair Value
Outstanding at January 1, 2015	131,267		$	6.00
Granted	174,621		8.14
Vested	(20,508	)	6.55
Cancelled	—		—
Outstanding at March 31, 2015	285,380		$	7.27

As of March 31, 2015, there was $1.6 million of unrecognized compensation expense related to unvested employee restricted stock unit agreements which is expected to be recognized over a weighted-average period of approximately 3.3 years. For restricted stock unit awards subject to graded vesting, we recognize compensation cost on a straight-line basis over the service period for the entire award.

Performance Awards

For 2015 we have put in place a performance based bonus program which identifies five specific performance objectives to be accomplished during 2015 for all employees. The awards contain a combination of service conditions and performance conditions based on the achievement of specified performance thresholds approved by the board.

The performance bonus amounts will be based on each individual’s salary paid during the year multiplied by the bonus multiplier percentage (ranging from 6.67% to 20% per objective) plus an additional 10% bonus for non-executive employees. The performance bonus will be paid in the form of restricted stock units which will vest half on the issuance date and the remaining half on January 1, 2017. The number of shares granted to each employee will be determined based on the performance bonus amount divided by the 10-day average stock price prior December 31, 2015. The grant date is expected to be in the first quarter of 2016. We recognize stock-based compensation expense for restricted stock units with performance conditions based on the probability of the performance condition being met, net of estimated pre-vesting forfeitures. For the three months ended March 31, 2015, we recorded $97,000 of stock-based compensation which represents one quarter of one-half of the estimated performance bonus amount. The estimated performance bonus amount has been recorded, as the achievement of a portion of the performance conditions were considered probable.

Total equity-based compensation cost recorded in the condensed consolidated statements of operations, which includes the value of stock options and restricted stock units issued to employees, directors and non-employees for services and excludes the performance bonus accrual and warrant consultant cost, is allocated as follows:

	Three Months Ended March 31, 2015
Research and development
Employees	$	177,000
Non-employees	16,000
General and administrative
Employees and directors	160,000
Non-employees	20,000
	$	373,000