NOTE

12.

EQUITY-BASED COMPENSATION

Equity Compensation Plans

October 2007,

the Company adopted the

2007

Omnibus Incentive Plan (the

“2007

Plan”) to provide for the granting of equity awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the Board of Directors. At the inception of the

2007

Plan,

40,000

shares were reserved for awards under the

2007

Plan.

For the years from

2009

2012,

the number of shares of common stock authorized for awards under the

2007

Plan increased annually in an amount equal to the lesser of (a)

40,000

shares; (b)

of the number of shares of the Company’s common stock outstanding on the last day of the preceding year; or (c) such lesser number as determined by the Board. Accordingly, an additional

40,000,

37,427,

and

37,207

shares of common stock were authorized for awards under the

2007

Plan in

January 2012,

2011

and

2010,

respectively. Beginning in

2013,

the shareholders voted to remove the

40,000

share cap and the

2007

Plan’s shares authorized for awards increased annually by

of the number of shares of the Company’s common stock outstanding on the last day of the preceding year. Accordingly, an additional

32,646

and

59,157

shares of common stock were authorized for awards under the

2007

Plan in

January 2014

and

2013,

respectively. On

March 30, 2015,

the Company filed a registration statement to add an additional

82,461

shares to the

2007

Plan’s shares authorized for awards. In

January 2016,

the Company added

139,449

shares to the

2007

Plan’s shares authorized for awards, per the

2007

Plan’s evergreen provision. On

May 26, 2016,

the stockholders of the Company approved an amendment to the

2007

Plan to increase the number of shares of Company common stock authorized for awards thereunder by

1,124,826

shares. In

January 2017,

the Company added

610,774

shares to the

2007

Plan’s shares authorized for awards, per the

2007

Plan’s evergreen provision. As a result of the foregoing, the aggregate number of shares authorized for awards under the

2007

Plan was

2,318,486

shares, prior to its expiration on

March 15, 2017 (

after taking into account prior awards under the

2007

Plan).

Upon expiration of the

2007

Plan, new awards cannot be issued pursuant to the

2007

Plan, but awards outstanding as of its

March 15, 2017

plan expiration date will continue to be governed by its terms. Under the terms of the

2007

Plan, the exercise price of incentive stock options

may

not

be less than

100%

of the fair market value of the common stock on the date of grant and, if granted to an owner of more than

10%

of the Company’s stock, then

not

less than

110%

of the fair market value of the common stock on the date of grant. Stock options granted under the

2007

Plan expire

later than

ten

years from the date of grant. Stock options granted to employees generally vest over

four

years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service.

March 2017,

the Company adopted the

2017

Omnibus Incentive Plan (the

“2017

Plan”), which was approved by shareholders on

June 2, 2017,

to provide for the granting of equity awards, such as nonqualified stock options (“NQSOs”), incentive stock options (“ISOs”), restricted stock, performance shares, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and other share-based awards to employees, directors, and consultants

, as determined by the Board of Directors. The new

2017

Plan will

not

affect awards previously granted under NovaBay’s prior incentive plan, the

2007

Plan

. The

2017

Plan allows for awards of up to

2,318,486

shares of the Company’s common stock, plus an automatic annual increase in the number of shares authorized for awards on the

first

day of each of the Company’s fiscal years beginning

January

2018

through

January

2027

equal to (i)

four

percent of the number of shares of Common Stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of Common Stock than provided for in Section

(a)(i) of the

2017

Plan as determined by the Board.

As of

June 30, 2017,

there were

1,604,286

shares available for future awards under the

2017

Plan.

Under the terms of the

2017

Plan, the exercise price of NQSOs, ISOs and SARs

may

not

be less than

100%

of the fair market value of the common stock on the date of grant and, if ISOs are granted to an owner of more than

10%

of the Company’s stock, then

not

less than

110%

of the fair market value of the common stock on the date of grant. The term of awards will

not

be longer than

ten

years, or in the case of ISOs,

not

longer than

five

years with respect to holders of more than

ten

percent of the Company’s stock. Stock

options granted to employees generally vest over

four

years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service. The Company issues new shares to satisfy option exercises under the

2007

and

2017

plans.

Stock Option Summary

The following table summarizes information about the Company’s stock options outstanding at

June 30, 2017,

and activity during the

six

-month period then ended:

(in thousands, except years and per share data)	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016		1,489		$	8.38		8.7	$	702
Options granted		1,377		$	2.91
Restricted stock units granted		31		$	—
Options exercised		-		$	—
Restricted stock units vested		(31	)	$	—
Options forfeited/cancelled		(38	)	$	33.04
Outstanding at June 30, 2017		2,828		$	5.39		9.0	$	2,631

Vested and expected to vest at June 30, 2017		2,796		$	5.41		9.0	$	2,597

Vested at June 30, 2017		1,236		$	8.56		8.3	$	—

Exercisable at June 30, 2017		1,236		$	8.56		8.3	$	—

For options that have a quoted market price in excess of the exercise price (“in-the-money options”), the aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE MKT as of

June 30, 2017.

There were

stock option awards exercised for the

three

and

six

months ended

June 30, 2017.

Accordingly, the Company received

cash payments for the exercise of stock options during the

three

and

six

months ended

June 30, 2017.

As of

June 30, 2017,

total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately

$2.8

million. This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive loss over the remaining weighted average vesting period of

2.15

years.

Stock Option Awards to Employees and Directors

The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted. The Company has estimated the value of stock option awards as of the date of grant by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. See Note

for a description of the accounting policies that the Company applies to value its stock-based awards.

During the

six

months ended

June 30, 2017

and

2016,

the Company granted options to purchase an aggregate of

1,292

thousand and

1,099

thousand shares of common stock, respectively, to employees and directors.

The weighted-average assumptions used in determining the value of options are as follows:

	Six Months Ended June 30,
Assumption	2017			2016
Expected price volatility		87.72	%		84.00	%
Expected term (in years)		6.90			7.03
Risk-free interest rate		2.11	%		1.56	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	2.25		$	2.03

Expected Price Volatility

—This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock and comparable companies from a representative peer group selected based on industry and market capitalization data.

Expected Term

—This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.

Risk-Free Interest Rate

—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.

Dividend Yield

—We have

not

made any dividend payments nor do we have plans to pay dividends in the foreseeable future.

Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

Additionally, during the

six

months ended

June 30, 2017

the Company did

not

issue shares of common stock to employees. During the

six

months ended

June 30, 2016,

the Company issued

64,000

shares of common stock to employees.

For the

three

months ended

June 30, 2017

and

2016,

the Company recognized stock-based compensation expense of

$442

thousand and

$205

thousand, respectively, for stock-based awards to employees and directors. For the

six

months ended

June 30, 2017

and

2016,

the Company recognized stock-based compensation expense of

$1,600

thousand and

$412

thousand, respectively, for stock-based awards to employees and directors.

Stock-Based Awards to Non-Employees

During the

six

months ended

June 30, 2017

and

2016,

the Company granted options to purchase an aggregate of

thousand and

thousand shares of common stock, respectively, to non-employees in exchange for advisory and consulting services.

The stock options are recorded at their fair value on the measurement date and recognized over the respective service or vesting period. The fair value of the stock options granted was calculated using the Black-Scholes-Merton option pricing model based upon the following assumptions:

	Six Months Ended June 30,
Assumption	2017			2016
Expected price volatility		87.42	%		87.00	%
Expected term (in years)		10.00			10.00
Risk-free interest rate		2.27	%		1.62	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	2.38		$	2.08

The Company granted

thousand shares of fully vested registered stock to non-employee Dr. Ron Najafi in the

six

months ended

June 30, 2017,

as part of his settlement agreement, as described below. The Company granted restricted stock to non-employees totaling

thousand shares of common stock in the

six

months ended

June 30, 2016

in exchange for advisory and consulting services.

For the

three

months ended

June 30, 2017

and

2016,

the Company recognized stock-based compensation expense of

$53

thousand and

$65

thousand, respectively, related to non-employee consultant stock and option grants. For the

six

months ended

June 30, 2017

and

2016,

the Company recognized stock-based compensation expense of

$89

thousand and

$105

thousand, respectively, related to non-employee consultant stock and option grants.

November 2015,

Dr. Ron Najafi resigned from his position as President and CEO of the Company. As part of his separation agreement, in

December 2016,

the Company paid him a portion of the amount due under the agreement via a combination of registered shares and cash during fiscal year

2016.

The expense related to this separation agreement was accrued for and expensed in the year ended

December 31, 2015,

and the shares were issued to him via fully vested registered stock in

December 2016.

January 2017,

the remaining portion of the amount due under the agreement was paid via a combination of registered shares and cash.

March 2016,

Roy Wu left the Company as Senior Vice President of Business Development. As part of his separation agreement, in

March 2016,

the Company paid him a combination of stock and cash. The expense related to this separation agreement was accrued for and expensed in the year ended

December 31, 2015

based upon the known terms, and the shares were issued to him via fully vested restricted stock in

March 2016.

Summary of Stock-Based Compensation Expense

A summary of the stock-based compensation expense included in results of operations for the option and stock awards discussed above is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2017		2016		2017		2016
Research and development	$	28	$	48	$	49	$	79
Sales and Marketing		57		49		94		51
General and administrative		411		173		1,546		387
Total stock-based compensation expense	$	496	$	270	$	1,689	$	517

Since the Company has operating losses and net operating loss carryforwards, there are

tax benefits associated with stock-based compensation expense.