7. Stockholders’ Equity and Stock-Based Compensation

Preferred Stock

The Company has authorized a total of 5,000,000 shares of preferred stock, par value $0.001 per share, none of which were outstanding at December 31, 2016 and 2015. The Company’s Board of Directors has the authority to issue preferred stock and to determine the rights, preferences, privileges, and restrictions, including voting rights, without any further vote or action by the Company’s stockholders.

Common Stock

The Company has authorized a total of 45,000,000 shares of common stock, par value $0.001 per share.

In conjunction with the incorporation of the Company, 1,125,000 shares of common stock were issued to its founding stockholders, which consisted of MDB Capital Group, LLC and its affiliated persons, for cash consideration of $8,000.

During November 2014, the Company sold 2,996,253 shares of common stock in a private placement to accredited investors for $2.67 per share, resulting in gross cash proceeds of $8.0 million. Direct costs of the private placement consisted of a 10% placement agent fee to MDB Capital Group, LLC and its designees, of $0.8 million and related legal fees and reimbursable expenses of $54,000. In conjunction with this private placement, the Company issued warrants to MDB Capital Group, LLC and its designees for a consideration of $1,000. The placement agent warrants had a fair value of $0.6 million, calculated pursuant to the Black-Scholes option-pricing model, as described below. Issuance costs of the private placement, net of the consideration received from MDB Capital Group, LLC of $1,000, aggregated $0.9 million and were charged directly to additional paid-in capital.

During November 2014, the Company issued an aggregate of 3,444,198 shares of common stock valued at $9.2 million to acquire businesses and intellectual property license rights.

During May 2016, the Company completed an IPO whereby it sold 5,749,846 shares of the Company’s common stock at $4.00 as described in Note 1.

Common Stock Warrants

During the year ended December 31, 2016, in connection with the closing of the Company’s initial public offering, the Company issued warrants as compensation to the underwriters of its initial public offering to purchase a total 574,985 shares of is common stock at a price of $5.00 per share. The warrants became exercisable 180 days after issuance and are exercisable for a period of five years. These warrants were valued pursuant to the Black-Scholes option-pricing model at $1.4 million, based on the following assumptions: fair value of common stock – $4.12 to $4.27 per share; risk free interest rate: 1.22% – 1.38%; expected volatility – 80%; expected dividend yield – 0%; and expected term – 5 years.

In conjunction with the private placement of common stock during November 2014 at $2.67 per share, the Company issued warrants to the placement agent to purchase 299,625 shares of common stock, exercisable at issuance for a period of seven years at $2.67 per share. The placement agent warrants have standard anti-dilution protections and cashless exercise rights. The placement agent warrants have piggy-back registration rights commencing on the date that the Company became a reporting company under the Securities Exchange Act of 1934, as amended, and for a period of seven years thereafter, and a one-time demand registration right commencing six months after the date that the Company became a reporting company under the Securities Exchange Act of 1934, as amended, and for a period of 54 months thereafter.

A summary of warrant activity for the year ended December 31, 2016 is presented below:



				Weighted
				Average
		Weighted		Remaining
	Number of	Average		Contractual
	Shares	Exercise Price		Life (in Years)
Warrants outstanding at December 31, 2015	299,625	$	2.67	5.85
Issued	574,985		5.00
Exercised	—		—
Expired/terminated	—		—
Warrants outstanding and exercisable at December 31, 2016	874,610	$	4.20	4.53

The intrinsic value of exercisable in-the-money stock warrants was approximately $2.0 million as of December 31, 2016.

Stock Options

During August 2015, the Company adopted the 2015 Stock Incentive Plan (the “2015 Plan”) and reserved 1,134,818 shares of common stock for issuance under the 2015 Plan, including stock options and restricted or performance stock awards. The 2015 Plan is administered by the Compensation Committee of the Company’s Board of Directors. Eligible participants in the 2015 Plan include the Company’s employees, officers and directors, and any person who has a business relationship with the Company. Options issued under the 2015 Plan may have a term of up to ten years and may have variable vesting provisions. New hire grants generally vest 25% upon the first anniversary of the grant and 1/12 quarterly thereafter, over the subsequent twelve quarters. Grants issued to existing employees generally vest quarterly over four years.

During the year ended December 31, 2015, prior to the adoption of the 2015 Plan, all of the stock options granted to directors were at an exercise price of $2.67 per share, the same price as the common shares sold in the November 2014 private placement. Pursuant to an employment agreement with Darrin Uecker, the Company’s President and Chief Executive Officer (the “Executive”), the Company agreed to issue to the Executive, upon consummation of the proposed IPO, an additional stock option equal to 3% of the Company’s fully diluted shares of common stock outstanding after taking into account the shares to be issued in the IPO exercisable at the IPO per share price. On October 5, 2016, the Executive offered, and the Company accepted, to forgo receipt of such grant until such time the Company’s shareholders approve a new equity incentive plan or an increase in the number of shares available under the existing plan. In exchange for the Executive’s forgoing receipt of the post-IPO option grant, the Company agreed to amend the Executive’s employment agreement (the “Amendment”) so that the Executive will receive (i) an option grant to purchase 187,286 shares of the Company’s common stock, which is a number of shares equal to the number of shares he would have been entitled to receive upon completion of the IPO, and (ii) a restricted stock grant equal in value to (A) the difference between the exercise price previously agreed to for the post-IPO option grant, which was $4.00 per share, and the exercise price on the date of the deferral grant, multiplied by (B) 187,286. In the event of a change of control that precedes the aforementioned option grant while the Executive is still an employee of the Company, the Executive would be entitled to receive a cash bonus equal to the consideration the Executive would have received as a holder of 187,286 vested options to purchase the Company’s common stock at an exercise price of $4.00 per share.

A summary of stock option activity for the year ended December 31, 2016 is presented below:



				Weighted
		Weighted		Average
		Average		Remaining
	Number of	Exercise		Contractual
	Shares	Price		Life (in Years)
Stock options outstanding at December 31, 2015	875,221	$	3.51	7.8
Issued	405,132		4.44
Exercised	—		—
Expired/terminated	(50,998)		3.57
Stock options outstanding at December 31, 2016	1,229,355	$	3.82
Vested and expected to vest at December 31, 2016	1,229,355	$	3.82	7.6
Stock options exercisable at December 31, 2016	354,855	$	3.34	6.0

The exercise prices of stock options outstanding and exercisable are as follows at December 31, 2016:



Options Outstanding				Options Exercisable
		Weighted average
	Number	remaining contractual	Weighted average	Number	Weighted average
Exercise Price	outstanding	life (in years)	exercise price	vested	exercise price
$2.67	302,620	3.3	$ 2.67	176,528	$ 2.67
$4.00 - $4.28	692,335	8.9	4.02	178,327	4.00
$4.67 - $4.68	234,400	9.6	4.68	—	-
	1,229,355	7.6	$ 3.82	354,855	$ 3.34

The intrinsic value of exercisable in-the-money stock options at December 31, 2016 was approximately $1.1 million.

The fair value of option awards was estimated using the Black-Scholes option-pricing model utilizing the following assumptions:



					May 19, 2014
					(inception)
	Years Ended				through
	December 31,				December 31,
	2016		2015		2014
Expected term in years		6.08		3.5 - 6.25		—
Expected volatility		80%		89% - 90%		—
Risk-free interest rate		1.16%-1.45%		0.88% - 1.89%		—
Dividend yield		—		—		—

The fair value of the stock options granted during the years ended December 31, 2016 and 2015, calculated pursuant to the Black-Scholes option-pricing model, was $1.2 million and $3.1 million, respectively.

Total stock-based compensation expense consisted of the following (in thousands):



					May 19, 2014
					(inception)
	Years Ended				through
	December 31,				December 31,
	2016		2015		2014
General and administrative	$	674	$	397	$	—
Research and development		196		5		—
Total stock-based compensation expense	$	870	$	402	$	—

At December 31, 2016, there was $2.4 million of unrecognized compensation cost related to unvested stock-based compensation arrangements, which is expected to be recognized over a weighted average period of 2.84 years.