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 consistent with the expected term of the instrument being valued.

Stock Options to Employees and Consultants

During the three and six months ended June 30, 2015, we granted incentive stock options for the purchase of 15,000 and 70,000 shares, respectively, of our common stock to our employees. The stock options have an exercise price range of $4.13 per share to $12.98 per share with a term of 10 years. The stock options vest quarterly over sixteen quarters. The options granted had an aggregate grant date fair value of $38,000 and $367,000 for the three and six months ended June 30, 2015, respectively, utilizing the Black-Scholes option valuation model.

During the three and six months ended June 30, 2016, we granted incentive and non-qualified stock options for the purchase of 20,000 and 236,500 shares, respectively, of our common stock to our employees and a consultant. The stock options have an exercise price range of $1.93 per share to $4.00 per share with a term of 10 years. The stock options vest quarterly over sixteen quarters for the employees and over eight quarters for our consultant. The stock options granted had an aggregate grant date fair value of $48,000 and $301,000 for the three and six months ended June 30, 2016, respectively, utilizing the Black-Scholes option valuation model.

We estimated the fair value of stock options awarded during the six months ended June 30, 2015 and June 30, 2016 using the Black-Scholes option valuation model. The fair values of stock options granted for the period were estimated using the following assumptions:



	Stock Option Grants Awarded During the Six Months Ended June 30, 2015	Stock Option Grants Awarded During the Six Months Ended June 30, 2016
Stock Price	$4.13 to $12.98	$1.93 to $4.00
Dividend Yield	0.00%	0.00%
Expected Volatility	60%	60%
Risk-free interest rate	1.44% - 1.83%	1.49% - 1.74%
Expected Life	7 years	7 years

Stock-based compensation expense related to stock options for employees was $129,000 and $133,000 for the three months ended June 30, 2015 and 2016, respectively, and was $237,000 and $263,000 for the six months ended June 30, 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 three and six months ended June 30, 2015 and 2016, we applied a forfeiture rate of zero.

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 $(2,000) and $8,000 for the three months ended June 30, 2015 and 2016, respectively, and was $17,000 and $14,000 for the six months ended June 30, 2015 and 2016, respectively.

Stock Option Award Activity

The following is a summary of our stock option activity during the six months ended June 30, 2016:



	Number of Stock 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	236,500		2.13		1.27		9.42
Exercised	—		—		—		—
Canceled/Forfeited	(58,125	)	5.68		3.76		—
Outstanding, June 30, 2016	743,425		$	5.23	$	3.34	8.57



	Number of Stock 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	71,839		5.78		3.70		8.33
Exercised	—		—		—		—
Canceled/Forfeited	(53,750	)	5.99		3.95		—
Exercisable, June 30, 2016	320,504		$	6.19	$	4.05	8.07

The following table presents information related to stock options outstanding and exercisable at June 30, 2016:



Stock Options Outstanding		Stock Options Exercisable
Exercise Price	Outstanding Number of Stock Options	Weighted Average Remaining Life In Years	Exercisable Number of Stock Options
$1.93 – $2.00	212,125	9.16	13,846
$3.83 – $4.35	42,500	8.94	5,158
$6.00	314,000	7.91	234,965
$6.49 – $7.20	60,000	8.15	26,888
$7.54 – $7.55	77,300	8.39	27,453
$8.06 – $12.98	37,500	8.60	12,194
	743,425	8.07	320,504

As of June 30, 2016, there was $1.1 million of unrecognized compensation expense related to unvested employee stock options, which is expected to be recognized over a weighted-average period of approximately 2.4 years. The aggregate intrinsic value of outstanding stock options and stock options vested as of June 30, 2016 were $527,000 and $35,000, respectively, which represent options whose exercise price was less than the closing fair market value of our common stock on June 30, 2016 of $4.38 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 and six months ended June 30, 2015 we recorded $175,000 and $421,000, respectively, of stock-based compensation related to the restricted stock unit shares that have been issued to-date. During the three and six months ended June 30, 2016, we recorded $299,000 and $537,000 respectively, of stock-based compensation related to restricted stock units. Shares vested during the three months ended June 30, 2015 and 2016 were 6,411 and 42,114 respectively, of which 1,941 shares and no shares, respectively, were surrendered by the employees for payment of payroll tax withholding liabilities.

Shares vested during the six months ended June 30, 2015 and 2016 were 26,919 and 176,390 respectively, of which 4,341 shares and no shares, respectively, were surrendered by the employees for payment of payroll tax withholding liabilities.

A summary of restricted stock unit activity for the six months ended June 30, 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	459,238		2.57
Vested	(176,390	)	4.32
Canceled	—		—
Outstanding at June 30, 2016	658,477		$	4.08

As of June 30, 2016, there was $2.3 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 2.5 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. We granted 90,265 restricted stock unit awards in February 2016, of which 45,140 shares vested on the issuance date and the remaining shares vest 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 three and six months ended June 30, 2015, we recorded $99,000 and $196,000 of stock-based compensation in connection with the 2015 performance plan, respectively. For the three months ended June 30, 2016, we recognized stock-based compensation of $25,000 related to the 90,265 restricted stock units granted, which is included in the restricted stock unit expense discussed under "restricted stock unit activity". During the six months ended June 30, 2016 we recognized stock-based compensation of $124,000 related to the 90,265 restricted stock units granted, of which $99,000 was recorded against the accrued liability balance at December 31, 2015, and the remainder was recognized as stock compensation expense and is included in the restricted stock unit expense discussed under "restricted stock unit activity".

For 2016, we have put in place a performance based bonus program which identifies five specific performance objectives to be accomplished during 2016 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 and a multiplier percentage ranging from 16.67% to 50% per objective for executive employees. Additionally, the performance bonus is 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 will be paid in the form of cash or restricted stock units which will vest in full on the tenth business day following grant. 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, 2016. The grant date is expected to be in the first quarter of 2017. 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 and six months ended June 30, 2016, we did not record any stock-based compensation expense related to the 2016 performance awards as the achievement of the performance conditions were not 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 June 30, 2015		Three Months Ended June 30, 2016		Six Months Ended June 30, 2015		Six Months Ended June 30, 2016
Research and development
Employees	$	131,000	$	182,000	$	307,000	$	345,000
Non-employees	2,000		7,000		19,000		10,000
General and administrative
Employees and directors	168,000		231,000		328,000		428,000
Non-employees	1,000		20,000		21,000		31,000
	$	302,000	$	440,000	$	675,000	$	814,000

Common Stock Issued for Services

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 $0 and $6,000 in stock compensation expense related to the stock issuances for the three and six months ended June 30, 2016, respectively. 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 related to the shares issued to our previous employee as the value of those shares had been accrued at the time of separation. There were no similar items, or expense recorded, for the three or six months ended June 30, 2015.