Annual report pursuant to Section 13 and 15(d)

Stock Based Compensation

Stock Based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement, Noncash Expense [Abstract]

2016 Equity Incentive Plan

On April 5, 2016, the Company’s Board of Directors adopted the 2016 Equity Incentive Plan (the “2016 Plan”) as the successor to the 2015 Omnibus Plan (the “2015 Plan”). The 2016 Plan was approved by the Company’s stockholders and became effective on May 18, 2016 (the “2016 Plan Effective Date”). Upon the 2016 Plan Effective Date, the 2016 Plan reserved and authorized up to 600,000 additional shares of common stock for issuance, as well as 464,476 unallocated shares remaining available for grant of new awards under the 2015 Plan. An Amended and Restated 2016 Equity Incentive Plan (the "2016 Amended Plan") was approved by the Company's stockholders in May 2018, which increased the share reserve by an additional 1.4 million shares. A Second Amended and Restated 2016 Equity Incentive Plan (the "2016 Second Amended Plan") was approved by the Company's stockholders in August 2019, which increased the share reserve by an additional 850,000 shares. During the term of the 2016 Second Amended Plan, the share reserve will automatically increase on the first trading day in January of each calendar year, by an amount equal to 4% of the total number of outstanding shares of common stock of the Company on the last trading day in December of the prior calendar year. As of December 31, 2019, there were 2,532,162 shares available for future issuance under the 2016 Second Amended Plan. On January 1, 2020, pursuant to the terms of the 2016 Second Amended Plan an additional 1,775,368 shares were made available for issuance for a total of 4,307,530 shares available for issuance.

Option grants expire after ten years. Employee options typically vest over three or four years. Options granted to directors typically vest over one or three years. Directors may elect to receive stock options in lieu of board compensation, which vest immediately. For stock options granted to employees and non-employee directors, the estimated grant date fair market value of the Company’s stock-based awards is amortized ratably over the individuals’ service periods, which is the period in which the awards vest. Stock-based compensation expense includes expense related to stock options, restricted stock units and employee stock purchase plan shares. The amount of stock-based compensation expense recognized for the years ending December 31, 2019 and 2018 was as follows:



	Year Ended December 31,
	2019		2018
Research and development	$	464,382	$	101,000
General and administrative	1,549,844		2,135,710
Sales and marketing	190,851		57,271
Total stock-based compensation, continuing operations	2,205,077		2,293,981
Total stock-based compensation, discontinued operations	257,719		137,082
Total stock-based compensation	$	2,462,796	$	2,431,063

In April 2019, the Company's former CEO resigned, however he remained on the Company's board of directors as of December 31, 2019. Subsequent to his resignation, during the second quarter of 2019, the former CEO agreed to forfeit the unvested portion of his equity awards granted to him during his service as CEO. As a result, he forfeited a total of 1,489,583 equity awards, which included 689,583 unvested service-based vesting options, 500,000 unvested market-based options and 300,000 unvested restricted stock units. The Company accounts for forfeitures as they occur. Because the requisite service period of 2.8 years was not rendered for the market-based options, the forfeiture of the market-based options resulted in the reversal in the second quarter of 2019 of the full expense recognized to date of $0.5 million, which was recorded as a reduction to general and administrative expense. Stock-based compensation during the year ended December 31, 2018 includes $0.3 million of expense related to modifications of awards related to a separated executive.

Stock options with service-based vesting conditions

The Company has granted stock options that contain service-based vesting conditions. The compensation cost for these options is recognized on a straight-line basis over the vesting periods. A summary of option activity with service-based vesting conditions for the year ended December 31, 2019 is as follows:



	Options Outstanding
	Number of shares		Weighted average exercise price		Grant date fair value of options		Weighted average remaining contractual term (in years)
Balance at December 31, 2018	3,746,597		$	4.16			7.8
Granted	2,631,927		$	5.70	$	8,106,310
Exercised	(323,403	)	$	2.59
Forfeited	(1,445,554	)	$	5.22	$	4,218,136
Expired	(428,961	)	$	4.99	$	1,062,853
Balance at December 31, 2019	4,180,606		$	4.80			7.9
Exercisable at December 31, 2019	2,228,748		$	4.58			6.8

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. As of December 31, 2019, the aggregate intrinsic value of options outstanding and options currently exercisable was $4.9 million and $3.5 million, respectively. The total intrinsic value of options exercised during the year ended December 31, 2019 was $1.0 million. The total grant date fair value of shares which vested during the years ended December 31, 2019 and 2018 was $2.2 million and $1.2 million, respectively. The per‑share weighted‑average grant date fair value of the options granted during 2019 and 2018 was estimated at $3.08 and $2.28, respectively. There were 983,644 options that vested during the year ended December 31, 2019 with a weighted average grant date fair value of $2.21 per share.

The Company recognized stock-based compensation expense of $2.0 million related to stock options with service-based vesting conditions for the year ended December 31, 2019. At December 31, 2019, there was $4.5 million of total unrecognized compensation cost related to unvested service-based vesting conditions awards. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.7 years.

Stock options with market-based vesting conditions

The Company has granted awards that contain market-based vesting conditions. A summary of option activity with market-based vesting conditions for the year ended December 31, 2019 is as follows:



	Options Outstanding
	Number of shares		Weighted average exercise price per share		Weighted average remaining contractual term (in years)	Aggregate intrinsic value (1)
Balance at December 31, 2018	500,000		$	4.24	9.2
Granted	300,000		$	4.98
Exercised	—
Forfeited	(500,000	)	$	4.24
Balance at December 31, 2019	300,000		$	4.98	9.4	$	123,000
Exercisable at December 31, 2019	—

(1) The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal period. Options with a market value less than its exercise value are not included in the intrinsic value amount.

During the second quarter of 2019, the Company granted the Executive Chairman of the Board an option to purchase 300,000 shares of Company common stock with market-based vesting conditions at an exercise price of $4.98 per share. One-third of the shares vest upon the Company's common stock closing at or above $8.00 per share for three consecutive days, one-third of the shares vest upon the Company's stock closing at or above $10.50 per share for three consecutive days, and one-third of the shares vest upon the Company's stock closing at or above $13.00 per share for three consecutive days. Each vesting tranche represents a unique requisite service period and therefore, the compensation cost for each vesting tranche is recognized on a straight-line basis over its respective vesting period.

The Company recognized $(0.1) million related to stock options with market-based vesting conditions for the year ended December 31, 2019, which includes the reversal of expense for the former CEO's forfeited options and the expense related to the market-based options granted to the Executive Chairman of the Board.

The weighted-average grant-date fair value of stock options with market-based vesting conditions granted during 2019 was $3.42 per share or $1.0 million. The weighted-average grant-date fair value of stock options with market-based vesting conditions forfeited during 2019 was $2.52 per share or $1.3 million.

At December 31, 2019, there was $0.8 million of total unrecognized compensation cost related to unvested market-based vesting conditions awards. This compensation cost is expected to be recognized over a weighted-average period of 2.0 years.

Stock-based compensation assumptions

The following table shows the assumptions used to compute stock-based compensation expense for stock options granted to employees and members of the board of directors under the Black-Scholes valuation model, and the assumptions used to compute stock-based compensation expense for market-based stock option grants under a Monte Carlo simulation:



	Year Ended December 31,
Service-based options	2019			2018
Risk-free interest rate	1.47%	—	2.59%	2.51%	—	3.01%
Expected term of options (in years)	5.0	—	6.25	5.0	—	6.25
Expected stock price volatility	55%			55%	—	65%
Expected annual dividend yield	0%			0%
Market-based options
Risk-free interest rate	2.32%			2.84%
Expected term of options (in years)	10			10
Expected stock price volatility	60%			60%
Expected annual dividend yield	0%			0%

The valuation assumptions were determined as follows:


•	Risk‑free interest rate: The Company bases the risk‑free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

•

Expected term of options: Due to lack of sufficient historical data, the Company estimates the expected life of its stock options with service-based vesting granted to employees and members of the board of directors as the arithmetic average of the vesting term and the original contractual term of the option for service-based options. The expected life of stock options with market-based vesting is derived from a Monte Carlo simulation which is the valuation technique used to value such awards.

•

Expected stock price volatility: The Company estimated the expected volatility based on actual historical volatility of the stock price of other publicly‑traded biotechnology companies engaged in lines of business that are the same or similar to the Company’s. The Company calculated the historical volatility of the selected companies by using daily closing prices over a period of the expected term of the associated award. The companies were selected based on their enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the associated award. A decrease in the selected volatility would decrease the fair value of the underlying instrument.

•

Expected annual dividend yield: The Company estimated the expected dividend yield based on consideration of its historical dividend experience and future dividend expectations. The Company has not historically declared or paid dividends to stockholders. Moreover, it does not intend to pay dividends in the future, but instead expects to retain any earnings to invest in the continued growth of the business. Accordingly, the Company assumed an expected dividend yield of 0%.

Restricted Stock Units

The Company has granted restricted stock units ("RSU") to certain employees. The Company measures the fair value of the restricted awards using the stock price on the date of the grant. The restricted shares typically vest annually over a four-year period beginning on the first anniversary of the award. The following table summarizes the Company's RSU activity for the year ended December 31, 2019:



	RSUs Outstanding
	Number of shares		Weighted average grant date fair value
Unvested RSUs at December 31, 2018	445,000		$	4.27
Granted	295,000		$	4.98
Vested	(172,500	)	$	4.52
Forfeited	(300,000	)	$	4.24
Unvested RSUs at December 31, 2019	267,500

During the second quarter of 2019, the Company granted its newly appointed Executive Chairman of the Board 250,000 RSUs, of which 50,000 shares vested immediately on the grant date and the remainder are to vest in three equal annual increments based on continued service.

The Company recognized stock-based compensation expense of $0.5 million related to RSUs for the year ended December 31, 2019. At December 31, 2019, there was $1.3 million of total unrecognized compensation cost related to the RSU grants. This compensation cost is expected to be recognized over a weighted-average period of 2.3 years.

Employee Stock Purchase Plan

On April 5, 2016, the Company’s board of directors approved the 2016 Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s stockholders and became effective on May 18, 2016 (the “ESPP Effective Date”).

Under the ESPP, eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the administrator. The ESPP is administered by the compensation committee of the Company’s board of directors. Under the ESPP, eligible employees may purchase stock at 85% of the lower of the fair market value of a share of the Company’s common stock (i) on the first day of an offering period or (ii) on the purchase date. Eligible employees may contribute up to 15% of their earnings during the offering period. The Company’s board of directors may establish a maximum number of shares of the Company’s common stock that may be purchased by any participant, or all participants in the aggregate, during each offering or offering period. Under the ESPP, a participant may not accrue rights to purchase more than $0.03 million of the fair market value of the Company’s common stock for each calendar year in which such right is outstanding.

Upon the ESPP Effective Date, the Company reserved and authorized up to 500,000 shares of common stock for issuance under the ESPP. On January 1 of each calendar year, the aggregate number of shares that may be issued under the ESPP automatically increases by a number equal to the lesser of (i) 1% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, and (ii) 500,000 shares of the Company’s common stock, or (iii) a number of shares of the Company’s common stock as determined by the Company’s board of directors or compensation committee. As of December 31, 2019, 1,118,882 shares remained available for issuance. On January 1, 2020, the number of shares available for issuance under the ESPP increased by 443,842 for a total of 1,562,724 shares available for issuance.

In accordance with the guidance in ASC 718-50, the ability to purchase shares of the Company’s common stock at the lower of the offering date price or the purchase date price represents an option and, therefore, the ESPP is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company used the Black-Scholes valuation model and recognized stock-based compensation expense of $0.2 million and $0.05 million for the years ended December 31, 2019 and December 31, 2018, respectively, which are included in the table above with stock-based compensation from stock options.

Subsequent Equity Grants

In February 2020, the Company granted options to purchase 2.4 million shares of common stock as inducement option grants, pursuant to NASDAQ Listing Rule 5635(c)(4), to certain employees who joined the Company in connection with the Aevi Merger. Each inducement option grant will vest over four years, with the first 25% of such option vesting on the first anniversary of the date of grant, and the remainder vesting in equal monthly installments, subject to the continued service of the employees, respectively, through the applicable vesting date. Additionally, on February 3, 2020, the Company granted 500,000 options with service-based vesting conditions at an exercise price of $3.98 per share to Sol J. Barer, Ph.D., who was appointed to Cerecor's Board of Directors upon the consummation of the Aevi Merger. The options were granted under the 2016 Second Amended Plan and will vest over three years, with one-third of such option vesting on each of the first, second and third anniversaries of the date of grant. Finally, on February 3, 2020, the Company granted 514,400 options with service-based vesting conditions at an exercise price of $3.98 per share to other employees who joined the Company in connection with the Aevi Merger. The options were granted under the 2016 Second Amended Plan and will vest over four years, with one-quarter of such options vesting on the first anniversary of the grant date and the remaining three-quarters of the options vesting in equal monthly installments over the following 36 months.