13. Stock Options and Equity-Classified Warrants

Stock Options

The Company has a 2000 Long-Term Incentive Plan under which 1.4 million shares of common stock were originally reserved for issuance. As of December 31, 2015, there were approximately 0.6 million shares subject to outstanding stock options. This plan expired on August 6, 2010, and thus no further shares are available for future grant under this plan.

The Company also has a 2008 Stock Incentive Plan under which 20 million shares of common stock are reserved for issuance. As of December 31, 2015, there were 13.6 million shares subject to outstanding stock options and 6.4 million shares available for future grant under this plan.

The Company follows the provisions of ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees.

On June 2, 2015, the Company announced that it had reached an agreement to settle the Delaware stockholder derivative action. Under the settlement, they have agreed to re-price outstanding stock options to purchase a total of 2,095,000 shares of its common stock that were granted on December 10, 2013 to certain of its directors and officers from the original exercise price of $2.39 to an exercise price of $4.66 (the share price at market closing on December 20, 2013).

The fair value of the stock options at the date of grant was estimated using the Black-Scholes option-pricing model, based on the following assumptions:

	2015			2014			2013
Risk-free interest rate		1.74% - 2.42	%		1.74% - 2.12	%		0.91% - 2.79	%
Expected volatility		74% - 85	%		82% - 90	%		85% - 89	%
Expected lives (years)		6 - 10			6 - 10			6 - 10
Expected dividend yield		0.00	%		0.00	%		0.00	%

The Company’s computation of expected volatility is based on the historical daily volatility of its publicly traded stock. For option grants issued during years ended December 31, 2015, 2014 and 2013, the Company used a calculated volatility for each grant. The Company lacks adequate information about the exercise behavior at this time and has determined the expected term assumption under the simplified method provided for under ASC 718, which averages the contractual term of the Company’s options of ten years with the average vesting term of three years for an average of six years. The dividend yield assumption of zero is based upon the fact the Company has never paid cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate used for each grant is equal to the U.S. Treasury rates in effect at the time of the grant for instruments with a similar expected life. Based on historical experience, for each of the years ended December 31, 2015 and 2014, the Company has estimated an annualized forfeiture rate of 10% for options granted to its employees, 2% for options granted to senior management and 0% for options granted to directors; for the year ended December 31, 2013, the Company has estimated an annualized forfeiture rate of 12% for options granted to its employees, 2% for options granted to senior management and 0% for options granted to directors. Compensation costs will be adjusted for future changes in estimated forfeitures. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated. No amounts relating to employee stock-based compensation have been capitalized.

At December 31, 2015, there remained approximately $5.6 million of unrecognized compensation expense related to unvested stock options granted to current employees and directors, to be recognized as expense over a weighted-average period of 1.26 years. Presented below is the Company’s stock option activity for employees and directors:

	Stock Options									Weighted Average Exercise Price
	2015			2014			2013			2015		2014		2013
Outstanding — beginning of year		9,348,592			6,228,593			3,240,850		$	2.83	$	3.11	$	4.08
Granted		4,590,000			3,180,000			3,323,176			2.61		2.47		2.43
Exercised		(287,143	)		(1,667	)		(476	)		2.05		1.83		1.93
Forfeited		—			(24,333	)		(127,812	)		—		2.81		3.09
Expired		(77,587	)		(34,001	)		(207,145	)		5.58		8.18		9.59
Outstanding — end of year		13,573,862			9,348,592			6,228,593			3.11		2.83		3.11
Exercisable at end of year		8,015,164			4,901,511			3,125,720		$	3.45	$	3.22	$	3.86
Weighted average fair value of stock options granted during the year:	$	1.88		$	1.80		$	1.82

For stock options paid in consideration of services rendered by non-employees, the Company recognizes compensation expense in accordance with the requirements of ASC 505-50.

Non-employee 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 options, as calculated using the Black-Scholes option pricing model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of 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.

The Company recorded approximately $0, $1,276,000 and $40,000 of non-cash charges related to the issuance of stock options to certain consultants in exchange for services during 2015, 2014 and 2013, respectively.

At December 31, 2015, there was no unrecognized compensation expense related to unvested non-employee stock options. Presented below is the Company’s non-employee stock option activity:

	Stock Options								Weighted Average Exercise Price
	2015			2014			2013		2015		2014		2013
Outstanding — beginning of year		692,143			167,143			142,143	$	3.47	$	5.69	$	6.20
Granted		—			550,000			25,000		—		2.76		2.79
Exercised		—			—			—		—		—		—
Expired/Forfeited		(56,429	)		(25,000	)		—		8.54		2.79		—
Outstanding — end of year		635,714			692,143			167,143		3.02		3.47		5.69
Exercisable at end of year		635,714			692,143			167,143	$	3.02	$	3.47	$	5.69
Weighted average fair value of stock options granted during the year:	$	—		$	2.32		$	1.98

The fair value of the stock options at the date of grant was estimated using the Black-Scholes option-pricing model, based on the following assumptions:

	2015		2014			2013
Risk-free interest rate		—		2.23	%		2.05	%
Expected volatility		—		85.0	%		84.8	%
Expected lives (years)		—		10			10
Expected dividend yield		—		0	%		0	%

The following table summarizes significant ranges of outstanding stock options under the two plans at December 31, 2015:

Range of Exercise Prices		Number of Options		Weighted Average RemainingContractual Life (years)		Weighted Average Exercise Price		Number of Options Exercisable		Weighted Average Contractual Life		Weighted Average Exercise Price
$	1.75 — 2.00		1,374,500		6.95	$	1.83		1,374,500		6.95	$	1.83
$	2.01 — 2.50		8,215,556		9.14		2.33		3,280,923		8.54		2.30
$	2.51 — 4.00		986,980		8.06		2.89		919,481		8.01		2.87
$	4.01 — 32.55		3,632,540		7.03		5.38		3,075,974		6.85		5.48

			14,209,576		8.31	$	3.10		8,650,878		7.63	$	3.42

The aggregate intrinsic value of outstanding options and options vested as of December 31, 2015 and the options exercised during 2015 were $3.8 million, $2.3 million and $0.2 million, respectively, which represent options whose exercise price was less than the closing fair market value of the Company’s common stock on December 31, 2015 of $2.65.

The following table sets forth the total stock-based compensation expense resulting from stock options and warrants included in the Company’s Statements of Operations:

	Years Ended December 31,
	2015		2014		2013
Research and development - employee	$	1,590,267	$	932,482	$	241,459
General and administrative - employee		5,568,537		2,383,624		2,659,105
Total employee stock-based compensation	$	7,158,804	$	3,316,106	$	2,900,564

Research and development – non-employee	$	—	$	86,539	$	—
General and administrative – non-employee		225,852		1,736,703		898,153
Total non-employee stock-based compensation	$	225,852	$	1,823,242	$	898,153

Restricted Stock

The Company did not issue any restricted stock for the year ended December 31, 2015. On January 1, 2014, the Company granted to Dr. Daniel Levitt, Executive Vice President and Chief Medical Officer, 100,000 shares of restricted common stock pursuant to the 2008 Plan, which shares have now fully vested. The fair value of the restricted stock is based on the market price of the Company’s shares on the grant date less the par value received as consideration. The fair value of the restricted shares granted on January 1, 2014 was $626,900. The Company recorded an employee stock-based compensation expense for restricted stock of $0, $626,900 and $186,389 for the years ended December 31, 2015, 2014 and 2013, respectively.

Equity-Classified Warrants

In March 2015, the Company extended the term of the 250,000 warrants issued in November 2013 by three years. These warrants will now expire in 2018. The Company recognized a non-employee stock-based compensation expense of $61,480 relating to the term extension in 2015.

In March 2014, the Company issued a warrant to purchase 25,000 shares of its common stock at an exercise price of $5.60 in connection with the establishment of its Freiburg, Germany research and development laboratory.

In August 2013, the Company issued a warrant to purchase 500,000 shares of its common stock at an exercise price of $2.50 per share in connection with a financial advisory arrangement. In November 2013, they issued two warrants, each to purchase 125,000 shares of its common stock, at exercise prices of $3.00 and $3.75 per share, respectively, in connection with financial advisory arrangements.

A summary of the Company’s warrant activity and related information for the years ended December 31 are shown below.

	Warrants									Weighted Average Exercise Price
	2015			2014			2013			2015		2014		2013
Outstanding — beginning of year		7,349,760			8,324,609			7,518,113		$	4.27	$	4.86	$	5.09
Granted		—			25,000			816,667			—		5.60		2.80
Exercised		(10,000	)		(340,527	)		(8,572	)		2.50		2.56		4.48
Forfeited		—			—			—			—		—		—
Expired		(114,288	)		(659,322	)		(1,599	)		3.82		12.66		14.99
Outstanding — end of year		7,225,472			7,349,760			8,324,609			4.28		4.27		4.86
Exercisable at end of year		7,225,472			7,149,760			7,924,609		$	4.28	$	4.32	$	4.98
Weighted average fair value of warrants granted during the year:	$	—		$	3.46		$	1.31

During 2015, 10,000 warrants were surrendered in connection with the cashless exercise, as compared to 62,172 warrants during 2014. There were no cashless exercises of warrants in 2013.

The following table summarizes additional information concerning warrants outstanding and exercisable at December 31, 2015:

		Warrants Outstanding
Range of Exercise Prices		Number of Shares		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Warrants Number of Shares Exercisable		Exercisable Weighted Average Exercise Price
$	2.10 — 2.60		578,573		2.32	$	2.42		578,573	$	2.42
$	2.61 — 3.60		125,000		2.86		3.00		125,000		3.00
$	3.61 — 4.60		6,496,899		0.63		4.47		6,496,899		4.47
$	4.61 — 5.60		25,000		8.21		5.60		25,000		5.60
			7,225,472		0.83	$	4.28		7,225,472	$	4.28

On August 1, 2016, 6,371,899 warrants priced at $4.48 expire.