9. Stock Plans and Stock-Based Compensation

Stock Plans

In September 2013, the Company’s stockholders approved the 2013 Equity Incentive Plan (2013 Plan), under which shares of common stock are reserved for the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards by the Company. These awards may be granted to employees, members of the Board of Directors, and consultants. The 2013 Plan has a term of ten years and replaced the 2003 Equity Incentive Plan, which had similar terms. The 2013 Plan permits the Company to (i) grant incentive stock options to directors and employees at not less than 100% of the fair value of common stock on the date of grant; (ii) grant nonqualified options to employees, directors, and consultants at not less than 85% of fair value; (iii) award stock bonuses; and (iv) grant rights to acquire restricted stock at not less than 85% of fair value. Options generally vest over a four year period and have a term of ten years. Options granted to 10% stockholders have a maximum term of five years and require an exercise price equal to at least 110% of the fair value on the date of grant. The exercise price of all options granted to date has been at least equal to the fair value of common stock on the date of grant. The share reserve under the 2013 Plan will automatically increase on January 1^st of each year, for a period of not more than ten years, in an amount equal to 5% of the total number of shares of capital stock outstanding on December 31^st of the preceding calendar year, unless the Board determines otherwise prior to December 31^st of such calendar year.

Stock Plan Activity

As of December 31, 2016, there were 496,120 shares available for issuance under the 2013 Plan. In accordance with the provisions of the 2013 Plan, the number of shares available for issuance under the plan automatically increased by 1,172,350 shares on January 1, 2017.

The following table summarizes stock option activity:

 

		Shares Subject to Outstanding Options				Weighted- Average Exercise Price of Options				Weighted- Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2014			991,010			$	6.09				8.91			$	4,559
Options granted			845,703				9.00
Options exercised			—				0
Options forfeited			(15,631	)			4.75
Options expired			(16,999	)			12.31
Outstanding as of December 31, 2015			1,804,083				7.41				8.24			$	—
Options granted			646,667				1.28
Options exercised			—				0
Options forfeited			(14,319	)			4.50
Options expired			(42,043	)			25.01
Outstanding as of December 31, 2016			2,394,388			$	5.46				7.75			$	349
Vested and expected to vest as of December 31, 2016			2,351,745			$	5.50				7.73			$	331
Exercisable as of December 31, 2016			1,310,883			$	6.15				7.18			$	3

 

Vested and Unvested Awards

The total fair value of options including performance options vested was $2.2 million for each of the years ended December 31, 2016 and 2015.

As of December 31, 2016, and 2015 the total compensation expense related to unvested employee stock options including performance options to be recognized in future periods, excluding estimated forfeitures, was $3.5 million and $4.8 million, respectively. The weighted-average periods over which this compensation expense is expected to be recognized are 1.8 years and 2.6 years as of December 31, 2016 and 2015, respectively.

Performance Options

In July 2016, the Company granted 327,000 performance-based stock options (PSOs) to executives and senior officers. PSOs represent a contingent right to purchase the Company’s common stock upon the achievement of specific conditions. Specifically, these PSOs vest upon the achievement of certain clinical development and capital raising milestones which must occur before December 31, 2016. In December 2016, the PSOs were modified by extending the term by one month to January 31, 2017.

The following table summarizes performance option activity:

 

		Shares Subject to Outstanding Options				Weighted- Average Exercise Price of Options
Outstanding as of December 31, 2015			—			$	—
Options granted			327,000				1.82
Outstanding as of December 31, 2016			327,000			$	1.82

In 2016, the clinical development milestone was achieved and the related expense of $199,000 was recognized. The modification to extend the term of the PSOs did not have a material impact on the Company’s financial statements. The unrecognized stock-based compensation related to the remaining PSOs was $192,000 as of December 31, 2016, and its recognition is dependent upon the achievement of the capital raising milestone. Subsequent to December 31, 2016, the capital raising milestone was achieved within the modified term. Accordingly, all stock-based compensation expense related to this milestone will be recorded in 2017.

Incentive Awards

In December 2013, January 2014, and April 2014, as permitted by the 2013 Plan, the Company issued certain incentive awards to directors, employees and a consultant which are subject to 252,752 shares of the Company’s common stock and are exercisable at a weighted average price of $5.21 per share when vested. The Company may determine at its option whether to settle exercised awards in shares of common stock or in cash. Each recipient’s incentive award defines the number of common shares that may be acquired upon exercise provided the Company chooses to settle in shares. For awards settled in cash, the Company must pay the recipient the excess of the fair market value of the Company’s common stock on the date of exercise over the exercise price paid by the recipient multiplied by the number of shares the recipient would be entitled to receive had the award been settled in shares of the Company’s common stock.

Pursuant to their terms, the incentive awards have a term of 10 years and were initially scheduled to vest 100% on the second anniversary of their grant date. However, as a result of the approval by Company’s shareholders of a 500,000 share increase to the 2013 Plan’s share reserve in June 2014, the incentive awards were automatically modified to vest monthly over four years effective from their grant date. The Company is recognizing the value of the incentive awards over the remaining four year vesting period.

 

The Company recorded $272,000 and $323,000 of stock based compensation expense in the years ended December 31, 2016 and 2015, respectively, pertaining to its incentive awards.

Options Granted to Nonemployees

The Company has issued options to purchase shares of common stock to certain scientific advisors and consultants. The stock options have various exercise prices, a term of ten years, and vest over periods up to sixty months. The Company granted to these advisors and consultants options to purchase 18,000 and 10,000 shares of common stock, in 2016 and 2015, respectively. As of December 31, 2016, options to purchase 28,410 shares of common stock remained unvested, and compensation related to these stock options is subject to remeasurement each reporting period as the shares vest. In 2013, the Company also issued an incentive award for 2,335 shares to a scientific advisor, of which 584 shares remained unvested as of December 31, 2016. The Company recorded $17,510 and $21,265 of expense in the years ended December 31, 2016 and 2015, respectively, related to these options and awards.

Stock-Based Compensation Expense

Stock-based compensation expense, net of estimated forfeitures, included in the statements of operations and comprehensive loss is as follows (in thousands):

 

		Year Ended December 31,
		2016				2015
Research and development		$	995			$	844
General and administrative			1,478				1,643
Total stock-based compensation expense		$	2,473			$	2,487

Valuation Assumptions

The following table presents the weighted-average assumptions the Company used in the Black-Scholes option-pricing model to derive the grant date fair values of stock options and performance-based stock options along with the resulting estimated weighted-average grant date fair values per share:

 

		Year Ended December 31,
		2016				2015
Expected term
Options			6.1 yrs				6.1 yrs
Performance options			5.1 yrs				—
Expected volatility
Options			80	%			78	%
Performance options			85	%			—
Risk-free interest rate
Options			1.57	%			1.65	%
Performance options			1.56	%			—
Expected dividend yield
Options			—				—
Performance options			—				—
Weighted-average grant date fair value per share
Options		$	0.89			$	6.13
Performance options		$	1.20				—

 

Expected Term

The Company does not believe it can currently place reliance on its historical exercise and post-vesting termination activity to provide accurate data for estimating the expected term. Therefore, for stock option grants made during the years ended December 31, 2016 and 2015, the Company has opted to use the simplified method for estimating the expected term which is an average of the contractual term of the options and its ordinary vesting period. The expected term represents the period of time that options are expected to be outstanding.

Expected Volatility

As the Company has limited trading history for its common stock, the expected stock price volatility for the Company’s common stock was estimated by considering the volatility rates of similar publicly traded peer entities within the life sciences industry. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate

The risk-free interest rate assumption was based on U.S. Treasury instruments with constant maturities whose term was consistent with the expected term of stock options granted by the Company.

Expected Dividend Yield

The Company has never declared or paid cash dividends and does not plan to pay cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero.

Forfeitures

The Company estimates forfeitures at the time of grant and revises these estimates in subsequent periods if actual forfeitures differ from those estimates. Changes in forfeiture estimates impact compensation in the period in which the change occurs.

The total intrinsic value of options exercised was not significant for the years ended December 31, 2016 and 2015.