Annual report pursuant to Section 13 and 15(d)

Stock Based Compensation

v3.20.4
Stock Based Compensation
 12 Months Ended
Dec. 31, 2020
Share-based Payment Arrangement, Noncash Expense [Abstract]  
Stock-Based Compensation Stock-Based Compensation
 
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. A Third Amended and Restated Equity Incentive Plan (the “2016 Third Amended Plan”) was approved by the Company's stockholders in June 2020 which increased the share reserve by an additional 2,014,400 shares. During the term of the 2016 Third 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, 2020, there were 2,971,623 shares available for future issuance under the 2016 Third Amended Plan. On January 1, 2021, pursuant to the terms of the 2016 Third Amended Plan an additional 3,000,165 shares were made available for issuance.

Option grants expire after ten years. Employee options typically vest over three or four years. Employees typically receive a new hire option grant, as well as an annual grant in the first or second quarter of each year. 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 ended December 31, 2020 and 2019 was as follows:
 
  Year Ended December 31,
  2020 2019
Research and development $ 1,338,916  $ 464,382 
General and administrative 5,131,380  1,549,844 
Sales and marketing 315,390  190,851 
Total stock-based compensation, continuing operations 6,785,686  2,205,077 
Total stock-based compensation, discontinued operations —  257,719 
Total stock-based compensation $ 6,785,686  $ 2,462,796 
 
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. The following table summarizes the Company's service-based option activity for the year ended December 31, 2020:
 
  Options Outstanding
  Number of shares Weighted average exercise price per share Weighted average grant date fair value per share Weighted average remaining contractual term (in years)
Balance at December 31, 2019 4,180,606  $ 4.80  $ 2.67  7.9
Granted 5,938,365  $ 3.38  $ 2.16 
Exercised (75,239) $ 1.52  $ 1.34 
Forfeited (629,300) $ 3.26  $ 1.95 
Expired (583,758) $ 5.42  $ 3.02 
Balance at December 31, 2020 8,830,674  $ 3.95  $ 2.36  7.7
Exercisable at December 31, 2020 2,906,450  $ 4.42  $ 2.46  5.0
 
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 executives who joined the Company in connection with the Aevi Merger. In March 2020, our Chief Executive Officer entered into an amended employment agreement in which his base salary in cash was reduced from an annual rate of $450,000 to an annual rate of $35,568 (the “Reduction”). In consideration for the Reduction, on a quarterly basis, the Company grants stock options, which vest immediately (the “Salary Options”), for the purchase of a number of shares of the Company’s common stock with a total value (based on the Black-Scholes valuation methodology) based on a pro rata total annual value of $414,432 of the foregone salary. In April 2020, the Company granted options with service-based vesting conditions as part of its annual grant to employees. Throughout 2020, the Company granted options with service-based vesting conditions to new employees who started with the Company during the year.    
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, 2020, the aggregate intrinsic value of options outstanding and options currently exercisable was $0.9 million and $0.6 million, respectively. The aggregate intrinsic value of options exercised for the years ended December 31, 2020 and 2019 was $0.1 million and $0.9 million, respectively. There were 1,336,699 options that vested during the year ended December 31, 2020 with a weighted average exercise price of $4.43 per share. The total grant date fair value of shares which vested during the year ended December 31, 2020 and 2019 was $3.3 million and $2.2 million, respectively.

The Company recognized stock-based compensation expense of $4.6 million related to stock options with service-based vesting conditions for the year ended December 31, 2020. At December 31, 2020, there was $10.2 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 2.9 years.

Stock options with market-based vesting conditions

The Company has granted stock options that contain market-based vesting conditions. The following table summarizes the Company's market-based option activity for the year ended December 31, 2020:
  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, 2019 300,000  $ 4.98  9.4
Granted 1,000,000  $ 3.29 
Forfeited (300,000) $ 4.98 
Balance at December 31, 2020 1,000,000  $ 3.29  9.5 $ — 
Exercisable at December 31, 2020 500,000  $ 2.51  9.5 $ 65,000 
(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 2020, 300,000 unvested market-based stock options were forfeited as a result of the resignation of an executive during that quarter. The forfeiture resulted in the reversal of the full expense previously recognized to date on this award of $0.4 million, which was recorded to general and administrative expense for the year ended December 31, 2020.

On June 18, 2020, the Company granted its Chairman of the Board an option to purchase 1,000,000 shares of Company common stock with market-based vesting conditions. 500,000 of the shares vested immediately on the date of grant with an exercise price of the closing stock price on the date of grant of $2.51 per share. 250,000 of the shares vest upon the Company's common stock reaching a 50% premium to the stock price on June 18, 2020 and will have an exercise price of the stock at that time and 250,000 of the shares vest upon the Company's common stock reaching a 75% premium to the stock price on June 18, 2020 and will have an exercise price of stock at that time. 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 weighted-average grant date fair value of stock options with market-based vesting conditions granted during 2020 was $1.50 per share or $1.5 million. The total fair value of stock options with market-based vesting conditions that vested during 2020 was $0.8 million.

Subsequent to December 31, 2020, in the first quarter of 2021, the second tranche of 250,000 shares and the third tranche of 250,000 shares both vested upon the Company’s stock price reaching a 50% and 75% premium to the stock price on June 18, 2020, respectively.

The Company recognized stock-based compensation expense of $1.1 million related to stock options with market-based vesting conditions for the year ended December 31, 2020, which is recorded in general and administrative expenses within the consolidated statement of operations and comprehensive loss. At December 31, 2020, there was $0.1 million of total unrecognized compensation cost related to the market-based vesting conditions awards. This compensation cost is expected to be recognized over a weighted-average period of 0.3 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 2020 2019
Risk-free interest rate 0.19% — 1.48% 1.47% — 2.59%
Expected term of options (in years) 1.75 — 6.25 5.0 — 6.25
Expected stock price volatility 70  % 79  % 55%
Expected annual dividend yield 0% 0%
Market-based options
Risk-free interest rate 0.30% 0.34% 2.32%
Expected term of options (in years) 4.3 — 5.0 10
Expected stock price volatility 80% 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.

•Expected stock price volatility: The Company estimated the expected volatility based on a blend of Cerecor's actual historical volatility of its stock price and the historical volatility of other similar publicly-traded biotechnology companies. The Company calculated the historical volatility of the selected companies by using weekly 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 measures the fair value of the restricted stock units 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, 2020:
  RSUs Outstanding
  Number of shares Weighted average grant date fair value
Unvested RSUs at December 31, 2019 267,500  $ 4.92 
Vested (111,667) $ 4.93 
Unvested RSUs at December 31, 2020 155,833  $ 4.91 
    The Company recognized expense of $0.8 million related to RSUs for the year ended December 31, 2020. The total fair value of restricted stock units that vested for the year ended December 31, 2020 and 2019 was $0.6 million and $0.8 million, respectively.

Employee Stock Purchase Plan

On April 5, 2016, the Company’s board of directors approved 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 $25,000 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, 2020, 1,425,308 shares remained available for issuance. On January 1, 2020, the number of shares available for issuance under the ESPP increased by 500,000.

In accordance with the guidance in ASC 718-50, Employee Share Purchase Plans, 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 $0.3 million for the year ended December 31, 2020.

Subsequent Equity Grants

In January 2021, the Company granted 2.7 million options with service-based vesting conditions at an exercise price of $3.32 per share to its employees as part of its annual stock option award. The options were granted under the 2016 Third 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.

On March 1, 2021, the Company granted its newly appointed Chief Financial Officer, Schond L. Greenway, options to purchase 0.5 million shares of common stock at an exercise price of $3.73 per share as an inducement option grant, pursuant to NASDAQ Listing Rule 5635(c)(4). The options 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.