12. Share-Based Compensation

Share-Based Compensation Expense

Share-based compensation expense for all share-based payment awards made to employees and directors is measured based on the grant-date fair value estimated in accordance with U.S. generally accepted accounting principles, or GAAP. We recognize share-based compensation using the straight-line, single-award method based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Share-based compensation is reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For performance-based awards that do not include market-based conditions, we record share-based compensation expense only when the performance-based milestone is deemed probable of achievement. We utilize both quantitative and qualitative criteria to judge whether milestones are probable of achievement. For awards with market-based performance conditions, we recognize the grant-date fair value of the award over the derived service period regardless of whether the underlying performance condition is met.

During the years ended December 31, 2018 and 2017, we recognized share-based compensation expense which consisted of the following types of awards (in thousands):



	2018		2017
Restricted stock	102		1,015
Options	6,267		4,731
Total share-based compensation expense	$	6,369	$	5,746

The following table summarizes share-based compensation expense for the years ended December 31, 2018 and 2017, which was allocated as follows (in thousands):



	2018		2017
Research and development	$	1,950	$	911
Selling, general and administrative	4,419		4,835
Total share-based compensation expense	$	6,369	$	5,746

Share-based compensation had a $6.4 million and $5.7 million effect on our net loss attributable to common stockholders for the years ended December 31, 2018 and 2017, respectively. It had no effect on cash flows from operating activities for the periods presented; however, during the years ended December 31, 2018 and 2017, we made payments of $21,000 and $0.1 million, respectively, relating to 5,800 shares and 21,000 shares, respectively, of our common stock withheld upon vesting of employee restricted stock awards based on taxes owed by employees upon vesting, which impacted cash flows used in financing activities.

As of December 31, 2018, unrecognized compensation cost related to unvested stock options and unvested restricted stock awards amounted to $7.8 million, which will be recognized over the remaining weighted-average requisite service period of 1.83 years. The unrecognized compensation cost related to unvested options and restricted stock does not include the value of performance-based awards.

For the years ended December 31, 2018 and 2017, no tax benefits were attributed to share-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

Stock Plans

In May 2017, the Company's 2017 Equity Incentive Plan, or the 2017 Plan, was approved by the Company's shareholders, and no additional awards will be granted under the 2015 Equity Incentive Plan, or the 2015 Plan.

The Company's 2007 Employee Stock Purchase Plan, as amended and restated in August 2009 and September 2015, or the Purchase Plan, was amended in September 2015 to increase the maximum number of shares of the Company’s common stock authorized for issuance by 0.2 million shares. Refer to Employee Stock Purchase Plan below for further details.

Pursuant to our 2017 Plan, we may grant the following types of incentive awards: (1) stock options, including incentive stock options and non-qualified stock options, (2) stock appreciation rights, (3) restricted stock, (4) restricted stock units and (5) cash awards. The 2017 Plan is administered by the Compensation Committee of our Board, which has the discretion to determine the employees and consultants who shall be granted incentive awards. The Board retained sole authority under the 2017 Plan with respect to non-employee directors’ awards, although the Compensation Committee has authority under its charter to make recommendations to the Board concerning such awards. Options expire 10 years from the date of grant, subject to the recipients continued service to the Company.

As of December 31, 2018, 11.6 million shares were authorized for issuance under equity incentive plans, of which 2.8 million shares of common stock were available for future grants under the 2017 Plan.

Stock Options

Fair value for stock options was estimated at the date of grant using the Black-Scholes pricing model, with the following weighted average assumptions:



	Year Ended December 31,
	2018		2017
Risk-free interest rate	2.9	%	1.9	%
Expected dividend yield	None		None
Expected life (in years)	5.4		5.2
Volatility	82	%	83	%

The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available for U.S. Treasury securities at maturity with an equivalent term. We have not declared or paid dividends on our common stock and do not currently expect to do so in the future. The expected term of options represents the period that our options are expected to be outstanding and was determined based on historical weighted average holding periods and projected holding periods for the remaining unexercised options. Consideration was given to the contractual terms of our options, vesting schedules and expectations of future employee behavior. Expected volatility is based on the annualized daily historical volatility, including consideration of the implied volatility and market prices of traded options for comparable entities within our industry.

Our stock price volatility and option lives, both of which impact the fair value of options calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option, involve management’s best estimates. As we recognize compensation expense for only the portion of options expected to vest, we apply estimated forfeiture rates that we derive from historical employee termination behavior. If the actual number of forfeitures differs from our estimates, additional adjustments to compensation expense may be required in future periods.

The following table summarizes stock option activity for all of our stock option plans:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (Thousands)
Outstanding at December 31, 2016 (1,913,000 exercisable)	2,806,000		$	11.44
Granted	4,450,000		$	3.68
Exercised	—		$	—
Forfeited	(378,000	)	$	6.27
Cancelled and expired	(210,000	)	$	24.33
Outstanding at December 31, 2017 (2,500,000 exercisable)	6,668,000		$	6.15
Granted	3,100,000		$	3.04
Exercised	(12,000	)	$	3.89
Forfeited	(408,000	)	$	3.48
Cancelled and expired	(2,129,000	)	$	9.18
Outstanding at December 31, 2018 (2,597,000 exercisable)	7,219,000		$	4.08	8.1	$	—
Vested or expected to vest at December 31, 2018	6,321,000		$	4.32	7.7	$	—
Exercisable at December 31, 2018	2,597,000		$	5.49	6.4	$	—

The weighted average exercise price of options exercisable at December 31, 2018 and 2017 was $5.49 and $9.83, respectively. The weighted average grant-date fair value of options granted during 2018 and 2017 was $2.09 and $2.47 per option, respectively. The number of options vested or expected to vest at December 31, 2018 does not include 715,000 performance-based options with the weighted average exercise price of $2.18 since the achievement of such performance-based milestone was not deemed probable as of December 31, 2018.

In March 2017, Dr. Adam R. Craig, our President and CEO, was granted stock options to purchase 1.2 million shares of common stock at an exercise price of $4.24 per share. The stock options have a maximum term of ten years and vest in six equal semi-annual installments over the three-year period beginning March 20, 2017, subject to his continued employment through the applicable vesting dates and acceleration under certain circumstances. The stock options were granted in connection with his entering into employment with the Company as President and CEO. A portion of the stock options covering 80,000 shares were granted under the 2015 Plan. The balance of such stock options was granted in accordance with NASDAQ Listing Rule 5635(c)(4).

Restricted Stock Awards

We issued 2,000 shares of restricted stock awards in 2017 while we issued no restricted stock awards in 2018. The weighted average grant-date fair value of restricted stock awards issued during 2017 was $5.78. Additionally, 15,000 and 39,000 shares of restricted stock awards were cancelled during 2018 and 2017, respectively.

The total fair value of restricted stock awards vested during the years ended December 31, 2018 and 2017 was $0.1 million and $0.3 million, respectively.

A summary of the status of nonvested restricted stock awards as of December 31, 2018 and 2017 and changes during the periods then ended, is presented below:



	Nonvested Shares		Weighted Average Grant-Date Fair Value Per Share
Nonvested at December 31, 2016	183,000		$	12.76
Issued	2,000		$	5.78
Vested	(83,000	)	$	9.43
Forfeited	(39,000	)	$	14.39
Nonvested at December 31, 2017	63,000		$	15.93
Issued	—		$	—
Vested	(35,000	)	$	12.00
Forfeited	(15,000	)	$	16.12
Nonvested at December 31, 2018	13,000		$	26.23

Restricted Stock Units

We issued 20,000 restricted stock units during 2017 while no restricted stock units were issued during 2018. No restricted stock units were cancelled during 2018 or 2017. The weighted average grant-date fair value of restricted stock units issued during 2017 was $4.97 per unit. The total fair value of restricted stock units vested during the year ended December 31, 2018 and 2017 was $0.1 million and $0.8 million, respectively.

A summary of the status of nonvested restricted stock units as of December 31, 2018 and 2017 and changes during the periods then ended, is presented below:



	Nonvested Units		Weighted Average Grant-Date Fair Value Per Unit
Nonvested at December 31, 2016	187,000		$	5.35
Issued	20,000		$	4.97
Vested	(187,000	)	$	5.35
Forfeited	—		$	—
Nonvested at December 31, 2017	20,000		$	4.97
Issued	—		$	—
Vested	(20,000	)	$	4.97
Forfeited	—		$	—
Nonvested at December 31, 2018	—		$	—

Nonemployee Share-Based Compensation

Share-based compensation expense for awards granted to nonemployees is determined using the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of options and restricted stock awards granted to nonemployees is periodically remeasured as the underlying options or awards vest. The value of the instrument is amortized to expense over the vesting period with final valuation measured on the vesting date. As of December 31, 2018 and 2017, unvested options to acquire approximately 12,000 shares and 4,000 shares, respectively, of common stock were outstanding. We recorded compensation expense of $6,000 during the year ended December 31, 2018 and reversed $8,000 during the year ended December 31, 2017.

Employee Stock Purchase Plan

Under the Purchase Plan, eligible employees may purchase a limited number of shares of our common stock at 85% of the lower of the subscription date fair market value and the purchase date fair market value. There are two six-month offerings per year. Under the Purchase Plan, we issued approximately 5,000 and 4,000 shares of our common stock to employees in the years ended December 31, 2018 and 2017, respectively. There are 0.2 million shares of common stock authorized under the Purchase Plan and approximately 0.2 million shares are reserved for future purchases as of December 31, 2018.