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. In June 2016, our board of directors and stockholders approved an increase of 1,300,000 shares of common stock bringing the total shares allowed under the plan to 2,700,000.

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. For consultants we use an estimated expected life of the remaining term of the stock option grant, which is initially ten years. 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 that best approximates the expected term of the instrument being valued.

Stock Options to Employees and Non-Employees

During the years ended December 31, 2015 and 2016, we granted incentive stock options for the purchase of 77,500 and 346,500 shares, respectively, of our common stock to our employees and consultants. The options granted in 2015 have an exercise price range of $3.83 per share to $12.98 per share with a term of ten years. The options granted in 2016 have an exercise price range of $1.93 per share to $5.50 per share with a term of ten years. The options vest over various periods, generally quarterly over sixteen quarters. The options granted in 2015 had an aggregate grant date fair value of $384,000 and the options granted in 2016 had an aggregate grant date fair value of $627,000 utilizing the Black-Scholes option valuation model.

We estimated the fair value of stock options awarded during the years ended December 31, 2015 and 2016 using the Black-Scholes option valuation model. The fair values of stock options granted for the years were estimated using the following assumptions:



	Option Grants Awarded During the Year Ended December 31, 2015	Option Grants Awarded During the Year Ended December 31, 2016
Stock Price	$3.83 - $12.98	$1.93 - $5.50
Dividend Yield	0%	0%
Expected Volatility	60.0%	60.0%
Risk-free interest rate	1.44% - 1.86%	1.30% - 2.06%
Expected Term	7 years	7 years

Stock-based compensation expense related to stock options for employees was $451,000 and $529,000 for the years ended December 31, 2015 and 2016, respectively. 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 year ended December 31, 2015 there was no forfeiture rate applied as there had been very minimal forfeitures since the grant of awards. Beginning July 1, 2016, we applied a forfeiture rate of six percent, which is reflected in our stock-based compensation expense related to stock options for the year ended December 31, 2016, as we now have sufficient historical information to enable us to predict this rate.

In August 2016, we modified certain stock options previously granted to a former executive. The modification was made in connection with the executive’s termination. The modification included accelerated vesting of stock options to purchase 26,876 shares of common stock as well as an extension of the exercise period for all vested shares, including stock options to purchase 43,438 shares of common stock. As a result of the modification, additional stock compensation expense of $48,000 was recognized for the year December 31, 2016.

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 stock 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 stock 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 stock 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-based compensation expense related to stock options for consultants was $60,000 and $27,000 for the years ended December 31, 2015 and 2016, respectively.

Stock Option Award Activity

The following is a summary of our stock option activity during the year ended December 31, 2015:



	Number of Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Life In Years
Outstanding, January 1, 2015	491,200		$	6.29	$	4.14	9.42
Granted	77,500		8.36		4.95		9.27
Exercised	—		—		—		—
Canceled/Forfeited	(3,650	)	7.28		4.51		—
Outstanding, December 31, 2015	565,050		$	6.57	$	4.25	7.84



	Number of Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Life In Years
Exercisable, January 1, 2015	142,895		$	6.02	$	4.01	9.41
Vested	160,720		6.47		4.21		6.70
Exercised	—		—		—		—
Canceled/Forfeited	(1,200	)	8.06		5.19		—
Exercisable, December 31, 2015	302,415		$	6.25	$	4.11	7.07

The following is a summary of our stock option activity during the year ended December 31, 2016:



	Number of Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Life In Years
Outstanding, January 1, 2016	565,050		$	6.57	$	4.25	7.84
Granted	346,500		3.03		1.81		8.51
Exercised	—		—		—		—
Canceled/Forfeited	(109,860	)	5.08		3.32		—
Outstanding, December 31, 2016	801,690		$	5.25	$	3.32	7.40



	Number of Options		Weighted Average Exercise Price	Weighted Average Grant Date Fair Value	Weighted Average Remaining Life In Years
Exercisable, January 1, 2016	302,415		6.25	4.11	7.07
Vested	173,010		5.37	3.43	5.95
Exercised	—		—	—	—
Canceled/Forfeited	(56,251	)	5.87	3.87
Exercisable, December 31, 2016	419,174		5.94	3.86	6.00

The following table presents information related to stock options outstanding and exercisable at December 31, 2016:



Options Outstanding		Options Exercisable
Exercise Price	Outstanding Number of Options	Weighted Average Remaining Life In Years	Exercisable Number of Options
$1.93 - $2.00	194,314	7.12	44,820
$3.83 - $4.70	70,000	8.70	8,127
$5.06 - $6.00	366,420	5.26	277,828
$6.49 – $7.20	60,000	7.65	34,390
$7.54 – $7.55	73,456	7.12	37,125
$8.06 - $12.98	37,500	8.10	16,884
	801,690	6.00	419,174

As of December 31, 2016, there was $1.0 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average vesting period of approximately 2.6 years. The aggregate intrinsic value of outstanding options and options vested as of December 31, 2015 were zero as there were no options whose exercise price was less than the closing fair market value of our common stock of $2.65 per share. The aggregate intrinsic value of outstanding options and options vested as of December 31, 2016 were $647,000 and $146,000, respectively, representing options whose exercise price was less than the closing fair market value of our common stock of $5.05 per share. There were no excess tax benefits realized for tax deductions from stock options exercised during the years ended December 31, 2016 and 2015 as no options were exercised.

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 re-measured 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 years ended December 31, 2015 and 2016 we recorded $849,000 and $1.7 million, respectively, of stock-based compensation related to the restricted stock unit shares that have been issued to-date. During the years ended December 31, 2015 and 2016 we granted 343,930 and 1,383,159 restricted stock unit shares, respectively. Shares vested during the years ended December 31, 2015 and 2016 were 73,122 and 262,201, respectively, of which 4,341 and no shares, respectively, were surrendered by the employees for payment of payroll tax withholding liabilities. During the years ended December 31, 2015 and 2016 there were 26,446 and 41,029 shares, respectively, forfeited as a result of employee terminations.

A summary of restricted stock unit activity for the years ended December 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	343,930		6.35
Vested	(73,122	)	6.07
Forfeited	(26,446	)	(8.06		)
Outstanding at December 31, 2015	375,629		$	6.16

A summary of restricted stock unit activity for the years ended December 31, 2016 is as follows:



	Number of Restricted Share Units		Weighted-Average Grant-Date Fair Value
Outstanding at January 1, 2016	375,629		6.16
Granted	1,383,159		3.22
Vested	(262,201	)	4.54
Forfeited	(41,029	)	5.64
Outstanding at December 31, 2016	1,455,558		$	3.64

As of December 31, 2016, there was $4.2 million of unrecognized compensation expense related to unvested restricted stock unit agreements which is expected to be recognized over a weighted-average period of approximately 2.7 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

In 2015, we put in place a performance based bonus program which identified five specific performance objectives to be accomplished during 2015 for all employees. The awards contained a combination of service conditions and performance conditions based on the achievement of specified performance thresholds approved by the board. The performance bonus amounts were based on each individual’s salary paid during the year multiplied by the bonus multiplier percentage ranging from 6.67% to 13.34% per objective plus an additional 10% bonus for non-executive employees and a multiplier percentage ranging from 16.67% to 25% per objective for executive employees. In February 2016, upon board approval, we granted 90,265 restricted stock unit awards, of which 45,140 shares vested on the issuance date and the remaining shares vested on January 1, 2017. The number of shares granted to each employee was determined based on the performance bonus amount divided by the 10-day average stock price prior to December 31, 2015 which was $2.68. For the year ended December 31, 2015, we recognized stock compensation expense of $121,000 in connection with the program, which was included in accrued salaries and payroll related expenses as of year-end. The accrual was released upon issuance of the equity awards in 2016. For the year ended December 31, 2016 we recognized additional stock compensation expense of $44,000, which is included in the restricted stock unit expense discussed under "Restricted Stock Units Activity" above.

For 2016, we put in place a performance based bonus program which identified five specific performance objectives to be accomplished during 2016 for all employees. The awards contained a combination of service and performance conditions based on the achievement of specified performance thresholds approved by the board. The performance bonus amounts were 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 and a multiplier percentage ranging from 16.67% to 50% per objective for executive employees. Additionally, the performance bonus was subject to the achievement of certain stock price thresholds for the ten trading days ending on the last trading day of 2016. The performance bonus was to be paid in the form of cash or equity awards which would vest in full on the tenth business day following grant. The number of shares granted to each employee would be determined based on the performance bonus amount divided by the 10-day average stock price prior December 31, 2016. Although the specific performance objectives were not achieved, it was determined that a discretionary bonus would be awarded under the program based on the significant achievements made toward the objectives during the year. The payment method and terms remain the same as the original bonus program. The discretionary awards were granted in February, 2017, and consisted of cash awards totaling $688,000 and equity awards in the form of restricted stock units and stock options which will vest in full 10 days following grant. The equity awards consisted of 27,390 restricted stock units with a grant date fair value of $119,000 based on the grant date share price of $4.36 and 125,880 stock options with a grant date fair value of $332,000 using the Black-Scholes option valuation model using the following assumptions: stock price of $4.36; dividend yield of 0%; expected volatility of 60%; risk-free rate of 2.15% and expected life of 7 years. For the year ended December 31, 2016, we recorded stock compensation expense of $451,000 in connection with these equity awards and salary expenses of $688,000 related to the cash portion of awards under this program. These expenses, totaling $1.1 million are included in accrued salaries and payroll related expenses as of December 31, 2016. For the year ended December 31, 2016, $679,000 and $460,000 are included in research and development expenses and general and administrative expenses, respectively.

On August 8, 2016, we issued a market based restricted stock award of 250,000 shares to one of our executives. The award will vest 50% on the date the awards are earned and 50% on September 30, 2019. Earning of the awards is based on the attainment of stock price performance objectives during the performance period which is measured quarterly or upon an earlier liquidation event. The number of RSUs which will be earned is dependent on the average share price during the last month of the quarter. If the average share price, as defined in the agreement, is less than or equal to $15 then no shares shall be earned. If the average share price is greater than or equal to $65 then 100% of the shares shall become earned. If the average share price is between $15 and $65 then a linear interpolation will be applied to determine the shares earned. To determine the fair value of the award we used a Monte Carlo simulation which simulates future stock prices for the Company and, hence, shares vested, pursuant to the award. A key input into the model is the expected volatility for our stock. This estimate considers the historical volatility of our stock as well as the stock price volatility of guideline public companies. The fair value was determined to be $67,000 of which $8,000 was recorded as stock compensation expense in the year ended December 31, 2016 and is included in general and administrative expenses. The unamortized expense related to this award is $59,000 and is expected to be recognized over 2.7 years.

Common Stock Issued to Non-Employees

In September 2015, we issued a total of 33,000 shares of our common stock to two consultants in exchange for business and corporate development services provided both in Asia and in the United States. We recorded $156,000 in stock compensation expense related to these stock issuances for the year ended December 31, 2015, which represents the fair value of the stock on the date of issuance. There were no similar items, or expense recorded, for the year ended December 31, 2015.

In February 2016, we issued 3,000 shares of our common stock to a consultant in exchange for employment recruiting services. In April 2016, we issued 5,549 shares of common stock to a previous employee in connection with a separation agreement. We recorded $6,000 in stock compensation expense related to the stock issuances for the year ended December 31, 2016. The amount of compensation expense related to the consultant shares issued represents the fair value of the stock on the dates of issuance. There was no expense recorded during the year ended December 31, 2016 related to the shares issued to our previous employee as the value of those shares had been accrued at the time of separation in 2015.

Total equity-based compensation costs recorded in the consolidated statements of comprehensive loss is allocated as follows:



	Year Ended December 31, 2015		Year Ended December 31, 2016
Research and development
Employees	$	721,000	$	944,000
Non-employees	33,000		36,000
Total research and development	754,000		980,000

General and administrative
Employees and directors	673,000		1,372,000
Non-employees	184,000		307,000
Total general and administrative	857,000		1,679,000

Total equity-based compensation	1,611,000		2,659,000