12. Stock Incentive Plan Compensation

The Company’s 2013 Stock Incentive Plan (Stock Incentive Plan) provides for the issuance of incentive awards, or awards, in the form of non-qualified and incentive stock options, stock appreciation rights, stock grants and restricted stock units. The awards may be granted by the Company’s Board of Directors to its employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to the Company. The exercise price for stock options must not be less than the fair market value of the underlying shares on the date of grant. Stock options expire no later than ten years from the date of grant and generally vest and typically become exercisable over a four-year period following the date of grant. Every non-employee member of the Company’s Board of Directors may also receive an annual non-qualified stock option or restricted stock unit grant. Upon the exercise of stock options, the Company issues the resulting shares from shares reserved for issuance under the Stock Incentive Plan.

The Company accounts for stock options and restricted stock units related to its stock incentive plans under the provisions of ASC 718, which requires the recognition of the fair value of stock-based compensation. The fair value of stock options and restricted stock units was estimated using a Black-Scholes option valuation model. This model requires the input of subjective assumptions in implementing ASC 718, including expected dividend, expected life, expected volatility and forfeiture rate of each award, as well as the prevailing risk-free interest rate and the fair value of the underlying common stock on the date of grant. The fair value of equity-based awards is amortized over the vesting period of the award, and the Company has elected to use the straight-line method of amortization. The assumptions used in the Black-Scholes option valuation model for the years ended December 31, 2015 and 2014 are set forth below.

The following are the assumptions for the periods in which we granted stock options:


		Expected Dividend : The Company does not anticipate paying any dividends on its common stock.
		Expected Life : The expected life represents the period that the Company expects its stock-based awards to be outstanding. For awards in fiscal 2014, the Company’s expected life was based on historical experience. During fiscal 2015, the Company’s expected life assumption was based on the simplified method set forth in the SEC Staff Accounting Bulletin 110, as the Company determined the use of this method provides a more reasonable estimate of expected life. The Company’s estimation of the expected life for stock options granted to parties other than employees or directors is the contractual term of the option award.
		Expected Volatility : The Company’s expected volatility represents the weighted average historical volatility of the shares of its common stock for the expected life of the stock options.
		Risk-Free Interest Rate : The Company bases the risk-free interest rate used on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. Where the expected term of its stock-based awards does not correspond with the terms for which interest rates are quoted, the Company performs a straight-line interpolation to determine the rate from the available term maturities.
		Forfeiture Rate : The Company applies an estimated forfeiture rate that is derived from historical forfeited shares. If the actual number of forfeitures differs from our estimates, the Company may record additional adjustments to compensation expense in future periods.

The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the stock option grants were as follows:



	Years Ended
	December 31,
	2015		2014
Risk-free interest rate	1.55 to 1.78	%	1.30	%
Expected volatility	139.0	%	160.9	%
Expected term (in years)	6.0 to 10.0		4.0
Expected dividend yield	0.0	%	0.0	%

Stock-based compensation expense is reduced by an estimated forfeiture rate derived from historical employee termination behavior. If the actual number of forfeitures differs from the Company’s estimates, the Company may record adjustments to increase or decrease compensation expense in future periods.

The estimated grant-date fair value of the Company’s stock-based awards is amortized ratably over the awards’ service periods. Stock-based compensation expense recognized was as follows:



	Year Ended December 31,
	2015		2014
Research and development	$	122,000	$	143,000
General and administrative		357,000		632,000
Severance charge		4,000		1,161,000
Total stock-based compensation expense	$	483,000	$	1,936,000

(1)

The severance charge component of stock incentive plan compensation relates to accelerated vesting of stock options held by the Company’s former Chief Executive Officer and a former executive per the terms of their employment agreements.

The following table summarizes stock option activity for the year ended December 31, 2015:



			Options Outstanding
							Average
					Weighted		Remaining
	Shares				Average		Contractual
	Available				Exercise		Term		Intrinsic
	For Grant		Shares		Price		(Years)		Value
Balance, December 31, 2014		785,000		440,695	$	9.37		8.18	$	640,837
Increase in authorized shares		520,000		-		-		-		-
Granted		(596,569)		596,569		8.47		-		-
Exercised		-		(214,815)		8.00		-		(383,994)
Forfeited		4,375		(4,812)		13.64		-		-
Expired		10,625		(147,868)		10.71		-		-
Balance, December 31, 2015		723,431		669,769	$	8.68		9.29	$	-
Vested or expected to vest at December 31, 2015				552,340	$	10.03		9.21	$	-
Exercisable at December 31, 2015				67,084	$	10.03		6.71	$	-

The intrinsic value of options exercisable as of December 31, 2015 was $0.0 million, based on the Company’s closing stock price of $3.98 per share and a weighted average exercise price of $10.03 per share.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of standard stock options at the grant date. The Black-Scholes model requires the Company to make certain estimates and assumptions, including estimating the fair value of the Company’s common stock, assumptions related to the expected price volatility of the Company’s common stock, the period during which the options will be outstanding, the rate of return on risk-free investments and the expected dividend yield for the Company’s common stock. The Company uses Monte Carlo valuation models to estimate the fair value of certain stock options with market-based vesting requirements. This method of option pricing involves the use of inputs such as the market value of the Company’s common stock, stock price volatility, the period during which the options will be outstanding, the rate of return on risk-free investments, expected dividend yield for the Company’s stock, and certain estimates of future value of the Company’s common stock.

During 2015, the Company issued 596,569 common stock options to its executives, board members, and consultants with a weighted average exercise price $8.47 per share. Included in this amount were 399,716 stock options, with an exercise price of $9.45, awarded to its Chief Executive Officer, pursuant to his employment agreement dated April 24, 2015.

As of December 31, 2015, there was $3.6 million of total unrecognized compensation expense related to unvested stock options that will be recognized over the weighted average remaining period of 6.71 years.

Shares Reserved For Further Issuance

As of December 31, 2015, the Company had reserved shares of its common stock for future issuance as follows:



	Shares Reserved
Stock options outstanding		669,769
Available for future grants under the Stock Incentive Plan		723,431
Warrants		1,209,649
Total shares reserved		2,602,849