5. Stock-Based Compensation and Warrants

Stock Incentive Plan

On March 20, 2007, the Company’s Board of Directors approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 71,429 shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. This plan was approved by the stockholders on November 2, 2007. The exercise price of stock options under the 2007 Stock Plan was determined by the compensation committee of the Board of Directors and may be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. The total number of shares of stock with respect to which stock options and stock appreciation rights may be granted to any one employee of the Company or a subsidiary during any one-year period under the 2007 plan shall not exceed 7,143. Options become exercisable over various periods from the date of grant, and generally expire ten years after the grant date. As of December 31, 2019, there were 7,052 options issued and outstanding under the 2007 Stock Plan.

On November 2, 2010, the Board of Directors and stockholders adopted the 2010 Stock Incentive Plan (“2010 Stock Plan”) for the issuance of up to 85,714 shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. On October 22, 2013, the stockholders approved and adopted an amendment to the Company’s 2010 Incentive Stock Plan to increase the number of shares of Company’s common stock reserved for issuance under the Plan from 85,714 to 171,429. On May 15, 2015, the stockholders approved and adopted an amendment to the Company’s 2010 Incentive Stock Plan to increase the number of shares of the Company’s common stock reserved for issuance under the Plan from 171,429 to 228,572. On August 25, 2016, the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of the Company’s common stock reserved for issuance under the 2010 Stock Plan from 228,572 to 400,000. On September 7, 2017, the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of the Company’s common stock reserved for issuance under the 2010 Stock Plan from 400,000 to 500,000. On September 24, 2018, the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of the Company’s common stock reserved for issuance under the 2010 Stock Plan from 500,000 to 1,000,000. On September 5, 2019, the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of the Common Stock reserved for issuance under the 2010 Stock Plan from 1,000,000 to 4,000,000. The exercise price of stock options under the 2010 Stock Plan is determined by the compensation committee of the Board of Directors and may be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. Options become exercisable over various period from the date of grant, and expire between five and ten years after the grant date. As of December 31, 2019, there were 2,494,960 options issued and outstanding under the 2010 Stock Plan.

In the event of an employee’s termination, the Company will cease to recognize compensation expense for that employee. Stock forfeitures are recognized as incurred. There is no deferred compensation recorded upon initial grant date. Instead, the fair value of the stock-based payment is recognized over the stated vesting period.

The Company has applied fair value accounting for all stock-based payment awards since inception. The fair value of each option or warrant granted is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used for the years ended December 31, 2019 and 2018 are as follows:


	Year ended December 31,
	2019			2018
Exercise price	$	0.42		$	0.69
Expected dividends		—	%		—	%
Expected volatility		84	%		86	%
Risk free interest rate		1.61	%		2.75	%
Expected life of option (years)		4.5			4.0

Expected dividends —The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future.

Expected volatility—Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period.

Risk-free interest rate—The assumed risk free rate used is a zero coupon U.S. Treasury security with a maturity that approximates the expected term of the option.

Expected life of the option—The period of time that the options granted are expected to remain unexercised. Options granted during the year have a maximum term of seven years. The Company estimates the expected life of the option term based on the weighted average life between the dates that options become fully vested and the maximum life of options granted.

The Company records stock-based compensation based upon the stated vested provisions in the related agreements. The vesting provisions for these agreements have various terms as follows:

immediate vesting,

in full on one-year anniversary date of grant date,

half vesting immediately and remaining over three years,

quarterly over three years,

annually over three years,

one-third immediate vesting and remaining annually over two years,

one-half immediate vesting and remaining over nine months,

one-quarter immediate vesting and remaining over three years,

one-quarter immediate vesting and remaining over 33 months; and

monthly over three years.

During the years ended December 31, 2019 and 2018, the Company granted 1,725,000 and 671,500 options to employees and directors having an approximate fair value of $0.5 million and $0.3 million based upon the Black-Scholes option pricing model, respectively.

Stock-based compensation expense included in general and administrative expenses and research and development expenses relating to stock options issued to employees for the years ended December 31, 2019 and 2018 was $0.3 million and $1.8 million, respectively. Stock-based compensation expense included in general and administrative expenses and research and development expenses relating to stock options issued to consultants for the years ended December 31, 2019 and 2018 were $45,000 and $297,000, respectively.

A summary of stock option activity for the years ended December 31, 2019 and 2018 is as follows:


		Weighted		Weighted Average	Aggregate
		Average Exercise		Remaining	Intrinsic
	Options	Price		Contractual Life	Value

Balance - December 31, 2017	359,076	$	53.93	4.60 years	$	1,800

Granted	671,500		0.69
Exercised	—		—		$	—
Expired	(78,667)		67.02
Forfeited	(12,927)		23.72
Balance - December 31, 2018	938,982	$	15.18	6.19 years	$	—

Granted	1,725,000		0.42
Exercised	—		—		$	—
Expired	(94,738)		58.25
Forfeited	(67,232)		5.95

Balance -December 31, 2019 - outstanding	2,502,012	$	3.62	6.51 years	$	153,353

Balance - December 31, 2019 - exercisable	358,949	$	21.92	5.18 years	$	—

Grant date fair value of options granted - December 31, 2019		$	470,000

Weighted average grant date fair value - December 31, 2019		$	0.27

Grant date fair value of options granted - December 31, 2018		$	301,000

Weighted average grant date fair value - December 31, 2018		$	0.45

The options outstanding and exercisable at December 31, 2019 are as follows:

Options Outstanding

Options Exercisable

Weighted

Average

Weighted

Average

Remaining

Average

Remaining

Range of

Exercise

Contractual

Exercise

Contractual

Exercise Price

Options

Price

Life

Options

Price

Life

$0.00 – $40.00

2,431,708

1.38

6.58 years

288,645

7.56

5.46 years

41.00 – $70.00

8,364

50.29

3.60 years

8,364

50.29

3.60 years

$71.00 – $102.00

61,940

85.02

4.07 years

61,940

85.02

4.07 years

As of December 31, 2019, total unrecognized stock-based compensation expense related to stock options was $681,000, which is expected to be expensed through June 2022.

The FASB’s guidance for stock-based payments requires cash flows from excess tax benefits to be classified as a part of cash flows from operating activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. The Company did not record any excess tax benefits in 2019 or 2018. Cash received from option exercises under the Company’s stock-based compensation plans for the years ended December 31, 2019 and 2018 was zero.

Stock Warrants

On October 15, 2018, the Company closed its underwritten public offering pursuant to which it received gross proceeds of approximately $18.6 million before deducting underwriting discounts, commissions and other offering expenses payable by the Company and sold an aggregate of (i) 2,520,000 Class A Units (the “Class A Units”), with each Class A Unit consisting of one share of the Common Stock, and one five-year warrant to purchase one share of Common Stock at an exercise price of $1.38 per share (each a “Warrant” and collectively, the “Warrants”), with each Class A Unit to be offered to the public at a public offering price of $1.15, and (ii) 15,723 Class B Units (the “Class B Units”, and together with the Class A Units, the “Units”), with each Class B Unit offered to the public at a public offering price of $1,000 per Class B Unit and consisting of one share of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”), with a stated value of $1,000 and convertible into shares of Common Stock at the stated value divided by a conversion price of $1.15 per share, with all shares of Series B Preferred Stock convertible into an aggregate of 13,672,173 shares of Common Stock, and issued with an aggregate of 13,672,173 Warrants . In addition, pursuant to the underwriting agreement that the Company had entered into with A.G.P./Alliance Global Partners (the “Underwriters”), as representative of the underwriters, the Company granted the Underwriters a 45 day option (the “Over-allotment Option”) to purchase up to an additional 2,428,825 shares of Common Stock and/or additional Warrants to purchase an additional 2,428,825 shares of Common Stock. The Underwriters partially exercised the Over-allotment Option by electing to purchase from the Company additional Warrants to purchase 1,807,826 shares of Common Stock.

The Warrants are immediately exercisable at a price of $1.38 per share of Common Stock (which is 120% of the public offering price of the Class A Units) and expire on October 15, 2023. If, at the time of exercise, there is no effective registration statement registering, or no current prospectus available for, the issuance of the shares of Common Stock to the holder, then the Warrants may only be exercised through a cashless exercise. No fractional shares of Common Stock will be issued in connection with the exercise of a Warrant. In lieu of fractional shares, the holder will receive an amount in cash equal to the fractional amount multiplied by the fair market value of any such fractional shares. The Company has concluded that the Warrants are required to be equity classified. The Warrants were valued on the date of grant using Monte Carlo simulations. In 2019, the Monte Carlo simulations were not used as the value of the warrants were deemed to be minimal based on the historical fair value of the warrants and the Company’s current stock price.

The assumptions used by the Company are summarized in the following table:


	Issuance
		Date
Closing stock price	$	0.88
Expected dividends		—	%
Expected volatility		90	%
Risk free interest rate		3.01	%
Expected life of warrant (years)		5.00

On November 18, 2016, the Company completed a public offering of 714,286 shares of common stock in combination with accompanying warrants to purchase an aggregate of 1,428,571 shares of the common stock. The stock and warrants were sold in combination, with two warrants for each share of common stock sold, a Series A warrant and a Series B warrant, each representing the right to purchase one share of common stock. The purchase price for each share of common stock and accompanying warrants was $35.00. The shares of common stock were immediately separable from the warrants and were issued separately. The initial per share exercise price of the Series A warrants is $50.05 and the per share exercise price of the Series B warrants is $60.20, each subject to adjustment as specified in the warrant agreements. The Series A and Series B warrants may be exercised at any time on or after the date of issuance. The Series A warrants are exercisable until the four-year anniversary of the issuance date. The Series B warrants expired December 31, 2017 and none were exercised prior to expiration. The warrants include a provision, that if the Company were to enter into a certain transaction, as defined in the agreement, the warrants would be purchased from the holder for cash. Accordingly, the Company recorded the warrants as a liability at their estimated fair value on the issuance date of $15.7 million and changes in estimated fair value will be recorded as non-cash income or expense in the Company’s Statement of Operations at each subsequent period. At December 31, 2019, the fair value of the warrant liability was $100. At December 31, 2018, the fair value of the warrant liability was $100, which resulted in non-cash income of $3.7 million in 2018. The warrants were valued on the date of grant and on each remeasurement period.

The assumptions used by the Company are summarized in the following table:


	Series A
	December 31,			November 18,
	2018			2016
Closing stock price	$	0.56		$	31.15
Expected dividends		—	%		—	%
Expected volatility		92.50	%		85.00	%
Risk free interest rate		2.50	%		1.58	%
Expected life of warrant (years)		1.9			4.0

On October 10, 2014, the Company raised net proceeds of $19.1 million through the sale of 14,059,616 units at a price of $1.47 per unit to certain institutional investors in a registered direct offering. Each unit consisted of one share of the Company’s common stock and a warrant to purchase 0.50 shares of common stock. The warrants, exercisable for an aggregate of 200,852 shares of common stock, have an exercise price of $61.25 per share and a life of five years. The warrants vested immediately and expired on October 10, 2019.

The warrants issued in conjunction with the registered direct offering in October 2014 include a provision that if the Company were to enter into a certain transaction, as defined in the agreement, the warrants would be purchased from the holder at a premium. Accordingly, the Company recorded the warrants as a liability at their estimated fair value on the issuance date, which was $7.4 million, and changes in estimated fair value being recorded as non-cash income or expense in the Company’s Consolidated Statements of Operations at each subsequent period. At December 31, 2019, the fair value of the warrant liability was zero. At December 31, 2018, the fair value of the warrant liability was zero, which resulted in non-cash income of $416,000 in 2018. The warrants were valued on the date of grant using the Black-Scholes valuation model which approximates the value derived using Monte Carlo simulations. In 2019, the Monte Carlo simulations were not used as the value of the warrants were deemed to be minimal based on the historical fair value of the warrants and the Company’s current stock price.

The assumptions used by the Company are summarized in the following table:


	December 31,			October 10,
	2018			2014
Closing stock price	$	0.56		$	61.25
Expected dividends		—	%		—	%
Expected volatility		110.00	%		95.00	%
Risk free interest rate		2.60	%		1.39	%
Expected life of warrant (years)		0.79			5.00

The following table summarizes the estimated fair value of the warrant liability (in thousands):


Balance at December 31,2017	$	4,083
Change in fair value of warrant liability		(4,083)
Balance at December 31,2018		—
Change in fair value of warrant liability		—
Balance at December 31,2019	$	—

A summary of all warrant activity for the Company for the years ended December 31, 2019 and 2018 is as follows:


	Number of	Weighted Average
	Warrants	Exercise Price

Balance at December 31,2017	915,138	$	52.50
Granted	18,000,713		1.38
Exercised	—		—
Forfeited	—		—
Balance at December 31,2018	18,915,851		3.85
Granted	—		—
Exercised	—		—
Forfeited	(200,852)		61.25
Balance at December 31,2019	18,714,999	$	3.24

There was no stock-based compensation expense included in general and administrative and research and development expenses relating to warrants issued to consultants for the years ended December 31, 2019 and 2018.

On December 26, 2017, the Company entered into a consulting agreement for advisory services for a period of six months. As compensation for such services, the consultant was paid an upfront payment, is paid a monthly fee and on January 24, 2018, was issued a warrant exercisable for 714 shares of the Company’s common stock on the date of issue. The warrant is equity classified and the fair value of the warrant approximated $9,000 and was measured using the Black-Scholes option pricing model. This entire expense was recorded in the quarter ended March 31, 2018. The assumptions used by the Company are summarized in the following table:


Closing stock price	$	18.55
Expected dividends		—	%
Expected volatility		85	%
Risk free interest rate		2.42	%
Expected life of warrant (years)		4.92

A summary of all outstanding and exercisable warrants as of December 31, 2019 is as follows:


				Weighted Average
		Warrants	Warrants	Remaining
Exercise Price		Outstanding	Exercisable	Contractual Life
$	1.38	17,999,999	17,999,999	3.78 years
	18.20	714	714	2.99 years
	50.05	714,286	714,286	0.88 years
$	3.24	18,714,999	18,714,999	3.67 years