4. Stock-Based Compensation

Stock Incentive Plan

During 2001, the Company’s Board of Directors and stockholders adopted the 2001 Stock Incentive Plan (the “2001 Stock Plan”). 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 2001 Stock Plan shall not exceed 250,000. All awards pursuant to the 2001 Stock Plan shall terminate upon the termination of the grantee’s employment for any reason. Awards include options, restricted shares, stock appreciation rights, performance shares and cash-based awards (the “Awards”). The 2001 Stock Plan contains certain anti-dilution provisions in the event of a stock split, stock dividend or other capital adjustment, as defined in the plan. The 2001 Stock Plan provides for a Committee of the Board to grant awards and to determine the exercise price, vesting term, expiration date and all other terms and conditions of the awards, including acceleration of the vesting of an award at any time. As of December 31, 2015, there were 671,607 options issued and outstanding under the 2001 Stock 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 2,500,000 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 stockholders on November 2, 2007. The exercise price of stock options under the 2007 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. 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 250,000. Options become exercisable over various periods from the date of grant, and generally expire ten years after the grant date. As of December 31, 2015, there were 428,657 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 3,000,000 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 3,000,000 to 6,000,000. 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 6,000,000 to 8,000,000. 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, 2015, there were 7,841,666 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. There is no deferred compensation recorded upon initial grant date, instead, the fair value of the stock-based payment is recognized ratably over the stated vesting period.

The Company has applied fair value accounting for all share 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 Black-Scholes assumptions used in the years ended December 31, 2015, 2014 and 2013 are as follows:

Year ended December 31,

2015

2014

2013

Exercise price

1.54 – $2.76

1.46 – $2.91

1.64 – $1.74

Expected dividends

Expected volatility

88% – 131%

101% – 150%

141% – 154%

Risk free interest rate

1.32% – 2.19%

1.57% – 2.73%

0.77% – 2.54%

Expected life of option

5 years – 10 years

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,

•

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, 2015, 2014 and 2013 the Company granted 3,781,666, 2,382,500 and 222,500 options to employees and directors having an approximate fair value of $8.0 million, $5.0 million and $350,000 based upon the Black-Scholes options 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, 2015, 2014 and 2013 was $2.3 million, $2.1 million and $1.3 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, 2015, 2014 and 2013 were $888,000, $380,000 and $324,000, respectively.

A summary of stock option activities for the years ended December 31, 2015, 2014 and 2013, is as follows:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance – December 31, 2012		4,453,746		$	1.78		6.43 years	$	1,308,000
Granted		222,500		$	1.69
Exercised		(291,666	)	$	0.79			$	71,000
Forfeited		(475,000	)	$	2.30
Balance – December 31, 2013		3,909,580		$	1.78		5.59 years	$	785,000
Granted		2,382,500		$	2.36
Exercised		(6,583	)	$	0.58			$	8,000
Forfeited		(304,391	)	$	1.93
Balance – December 31, 2014		5,981,106		$	2.01		5.80 years	$	685,000
Granted		3,781,666		$	2.37
Exercised		(35,008	)	$	1.16			$	44,000
Expired		(483,332	)	$	2.48
Forfeited		(302,502	)	$	1.91
Balance – December 31, 2015 – outstanding		8,941,930		$	2.14		5.67 years	$	2,900,000
Balance – December 31, 2015 – exercisable		4,757,754		$	1.92		4.54 years	$	2,272,000
Grant date fair value of options granted – 2015				$	7,974,000
Weighted average grant date fair value – 2015				$	2.12
Grant date fair value of options granted – 2014				$	4,974,000
Weighted average grant date fair value – 2014				$	2.09
Grant date fair value of options granted – 2013				$	350,000
Weighted average grant date fair value – 2013				$	1.57

The options outstanding and exercisable at December 31, 2015 are as follows:

Options Outstanding								Options Exercisable
Range of Exercise Price		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
$	0.09 – $2.00		3,029,938	$	1.40		4.12 years		2,363,683	$	1.34		3.38 years
$	2.01 – $3.00		5,866,168		2.50		6.50 years		2,348,247		2.44		5.76 years
$	3.01 – $6.00		45,824		5.24		1.62 years		45,824		5.24		1.62 years
$	0.09 – $6.00		8,941,930	$	2.14		5.67 years		4,757,754	$	1.92		4.54 years

The options outstanding and exercisable at December 31, 2014 are as follows:

Options Outstanding								Options Exercisable
Range of Exercise Price		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
$	0.09 – $2.00		2,703,280	$	1.37		4.33 years		2,018,074	$	1.28		3.73 years
$	2.01 – $3.00		3,232,002		2.49		7.08 years		1,829,298		2.40		6.73 years
$	3.01 – $6.00		45,824		5.24		2.62 years		45,824		5.24		2.62 years
$	0.09 – $6.00		5,981,106	$	2.01		5.80 years		3,893,196	$	1.85		5.12 years

The options outstanding and exercisable at December 31, 2013 are as follows:

Options Outstanding								Options Exercisable
Range of Exercise Price		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
$	0.09 – $2.00		2,093,196	$	1.29		4.73 years		1,901,737	$	1.25		4.64 years
$	2.01 – $3.00		1,770,560		2.28		6.65 years		1,205,976		2.26		6.25 years
$	3.01 – $6.00		45,824		5.24		3.62 years		45,824		5.24		3.62 years
$	0.09 – $6.00		3,909,580	$	1.78		5.59 years		3,153,537	$	1.69		5.24 years

The following is a summary of the Company’s non-vested stock options at December 31, 2015:

	Unvested Stock Options			Weighted Average Grant Date Fair Value
Balance – December 31, 2012		1,561,869		$	2.11
Granted		222,500		$	1.57
Vested/Exercised		(883,882	)	$	1.93
Forfeited/Cancelled		(144,444	)	$	2.27
Balance – December 31, 2013		756,043		$	2.17
Granted		2,382,500		$	2.09
Vested/Exercised		(1,050,633	)	$	2.35
Balance – December 31, 2014		2,087,910		$	2.30
Granted		3,781,666		$	2.12
Vested/Exercised		(1,382,898	)	$	2.02
Forfeited/Cancelled		(302,502	)	$	1.92
Non-vested – December 31, 2015		4,184,176		$	1.97
Weighted average remaining period for vesting		2.36 years

As of December 31, 2015, total unrecognized stock-based compensation expense related to stock options was $8.3 million, which is expected to be expensed through April 2018.

FASB’s guidance for stock-based payments requires cash flows from excess tax benefits to be classified as a part of cash flows from financing 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 2015, 2014 or 2013. Cash received from option exercises under the Company’s stock-based compensation plans for the years ended December 31, 2015, 2014 and 2013 was $41,000, $4,000 and $232,000, respectively.

Stock Warrants

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 0.5 shares of common stock. The warrants, exercisable for an aggregate of 7,029,808 shares of common stock, have an exercise price of $1.75 per share and a life of five years. The warrants vested immediately and expire 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 will be recorded as non-cash income or expense in the Company’s statement of operations at each subsequent period. At December 31, 2015, the fair value of the warrant liability was $10.6 million, which resulted in non-cash expense of $3.8 million in 2015. At December 31, 2014, the fair value of the warrant liability was $6.8 million, which resulted in non-cash income of $620,000 in 2014. In accordance with authoritative accounting guidance, the warrants were valued on the date of grant using the Black-Scholes valuation model. The assumptions used by the Company are summarized in the following table:

	Issuance Date		December 31, 2014		December 31, 2015
Closing stock price		$1.75		$1.46		$2.29
Expected dividends		0%		0%		0%
Expected volatility		95%		90%		85%
Risk free interest rate		1.39%		1.59%		1.49%
Expected life of warrant		5 years		4.7 years		3.79 years

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

Balance at December 31, 2013	$	—
Warrants liability		7,376
Change in fair value of warrant liability		(620	)
Balance at December 31, 2014		6,756
Change in fair value of warrant liability		3,811
Balance at December 31, 2015	$	10,567

As of December 31, 2015, all of the warrants remained outstanding.

On October 25, 2012, the Company entered into a Common Stock Purchase Agreement with certain accredited investors. As part of this agreement, the Company issued warrants to purchase 635,855 shares of common stock to the placement agent, or its permitted assigns. The warrants have an exercise price of $1.60 and a life of five years. The warrants vested immediately and expire October 25, 2017. Since these warrants were granted as part of an equity raise, the Company has treated them as a direct offering cost. The result of the transaction has no affect to equity. As of December 31, 2015, 311,834 warrants were outstanding.

A summary of warrant activity for the Company for the years ended December 31, 2015, 2014 and 2013 is as follows:

	Number of Warrants			Weighted Average Exercise Price
Balance at December 31, 2012		1,632,501		$	1.99
Granted		—		$	—
Exercised		—		$	—
Forfeited		—		$	—
Balance at December 31, 2013		1,632,501		$	1.99
Granted		7,029,808		$	1.75
Exercised		(232,619	)	$	1.47
Forfeited		(454,896	)	$	1.88
Balance at December 31, 2014		7,974,794		$	1.80
Granted		—		$	—
Exercised		(2,446	)	$	1.60
Forfeited		(63,449	)	$	1.79
Balance at December 31, 2015		7,908,899		$	1.79

There was no stock-based compensation expense included in general and administrative expenses relating to warrants issued to consultants for the years ended December 31, 2015, 2014 and 2013.

A summary of all outstanding and exercisable warrants as of December 31, 2015 is as follows:

Exercise Price		Warrants Outstanding		Warrants Exercisable		Weighted Average Remaining Contractual Life
$	1.60		311,834		311,834		1.82 years
$	1.75		7,029,808		7,029,808		3.78 years
$	2.22		517,257		517,257		0.91 years
$	3.75		50,000		50,000		0.13 years
$	1.79		7,908,899		7,908,899		3.49 years