12. Stock-based Compensation

In June 2016, the Company’s stockholders approved the 2016 Equity Incentive Plan (the 2016 Plan). The 2016 Plan provides for the issuance of incentive awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance-based stock awards. 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 or to a subsidiary of 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. Upon the exercise of stock options, the Company issues the resulting shares from shares reserved for issuance under the 2016 Plan. With the approval of the 2016 Plan, the remaining unallocated shares under the Company’s 2013 Stock Incentive Plan were allocated to the 2016 Plan and an additional 1,000,000 new shares were added to the authorized share reserve under the 2016 Plan.

The Company accounts for stock options related to its stock incentive plans under the provisions of ASC 718, Stock Compensation, which requires the recognition of the fair value of stock-based compensation. The Company uses the Monte Carlo valuation model 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. The fair value of stock options with performance and service conditions 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, 2016 and 2015 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. The Company’s expected life assumption was based on the simplified method set forth in the SEC Staff Accounting Bulletin 110, which is the mid point between the option vesting date and the expiration date. 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 expected 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 of 8% which 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:



	Year ended December 31,
	2016		2015
Risk-free interest rate	1.22 - 1.63	%	1.55 - 1.78	%
Expected volatility	113-123	%	139	%
Expected term (in years)	6.0		6.0 - 10.0
Expected dividend yield	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,
	2016		2015

Research and development	$	138,000	$	122,000
General and administrative		1,857,000		361,000
Total stock-based compensation	$	1,995,000	$	483,000

The following table summarizes stock option activity for the years ended December 31, 2016 and 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
Granted		(596,569)		596,569
Exercised		-		(214,815)
Forfeited/Cancelled		15,000		(152,680)
Shares authorized		520,000		-
Balance, December 31, 2015		723,431		669,769	$	8.68		9.29	$	-
Granted		(264,208)		264,208		2.65		-		-
Exercised		-		-		-		-		-
Forfeited/Cancelled		180,939		(185,039)		9.00		-		-
Shares authorized		1,000,000		-		-		-		-
Balance, December 31, 2016		1,640,162		748,938	$	6.45		8.65	$	-
Vested or expected to vest at December 31, 2016				703,508	$	6.57		8.62	$	-
Exercisable at December 31, 2016				316,107	$	8.88		8.20	$	-

The aggregate intrinsic value of unvested options and options exercisable as of December 31, 2016 was zero, based on the Company’s closing stock price of $0.44 per share and a weighted average exercise price of $4.68 and $8.88, respectively. As of December 31,2016, the Company had 432,831 unvested outstanding options, with a weighted average exercise price of $4.68 per share and weighted average grant date fair value of $4.12 per share.

During the year ended December 31, 2016, the Company issued 264,208 common stock options to its employees and an executive with an average exercise price of $2.65 per share. Included in this amount were 99,919 stock options, with an exercise price of $2.85 per share, to its Chief Financial Officer, pursuant to his employment agreement dated January 18, 2016.

As of December 31, 2016, there was $1.4 million of total unrecognized compensation expense related to unvested stock options that will be recognized over the weighted average remaining period of 2.59 years.

Employee Stock Purchase Plan (ESPP)

On June 20, 2016, the Company’s stockholders approved the Company’s 2016 Employee Stock Purchase Plan (“ESPP”). The ESPP allows eligible employees to purchase shares of the Company’s common stock on a voluntary basis. The shares are sold to participants at a price equal to the lesser of 85% of the fair market value of the Company’s common stock at the (i) beginning of the offering period, or (ii) end of the six month purchase period. The ESPP provides for four six month purchase periods during each 24 month term. The initial shares provided for under the plan were 120,000, and automatically increase annually as allowed for under the ESPP, beginning January 1, 2017 and through January 1, 2026.

During the year ended December 31, 2016, 32,726 shares were issued under the ESPP and the Company recognized $12,000 in compensation expenses related to the ESPP.

Shares Reserved For Future Issuance

As of December 31, 2016, the Company had reserved shares of its common stock for future issuance as follows:



	Shares Reserved
Stock options outstanding		748,938
Employee stock purchase plan		87,274
Available for future grants under the 2016 Plan		1,640,162
Warrants		7,751,376
Total shares reserved		10,227,750