Annual report pursuant to Section 13 and 15(d)

Stock Based Compensation

Stock Based Compensation

12 Months Ended

Dec. 31, 2017

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”).

As of the 2016 Plan Effective Date, no additional grants will be made under the 2015 Plan or the 2011 Stock Incentive Plan (the “2011 Plan”), which was previously succeeded by the 2015 Plan effective October 13, 2015. Outstanding grants under the 2015 Plan and 2011 Plan will continue according to their terms as in effect under the applicable plan.

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. During the term of the 2016 Plan, the share reserve will automatically increase on the first trading day in January of each calendar year, beginning in 2017, 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, 2017, there were 41,448 shares available for future issuance under the 2016 Plan. On January 1, 2018, an additional 1,250,679 shares were made available for issuance.

Option grants to employees and directors expire after ten years. Employee options typically vest over four years. Options granted to directors typically vest over 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. For stock options issued to non‑employees, the Company measures the options at their fair value on the date at which the related service is complete. Expense is recognized over the period during which services are rendered by such non-employees until completed. At the end of each financial reporting period prior to the completion of the service, the fair value of the awards is remeasured using the then current fair market value of the Company's common stock and updated assumptions in the Black-Scholes option pricing model. Stock-based compensation expense includes stock options and ESPPP shares. The amount of stock based compensation expense recognized for the years ending December 31, 2017, 2016 and 2015 was as follows:



	Year Ended December 31,
	2017		2016		2015
Research and development	$	156,047	$	141,247	$	67,021
General and administrative	1,001,205		1,553,644		327,727
Total stock-based compensation	$	1,157,252	$	1,694,891	$	394,748

During the first quarter of 2016, the Company modified stock options of its former chief executive officer by extending the life of the awards, which were set to expire in March 2016, to coincide with their original life. This modification resulted in the recording of approximately $781,000 of compensation expense, which is included in general and administrative expenses for the year ended December 31, 2016 in the accompanying statement of operations. During the fourth quarter of 2017 two members of the Company's board of directors resigned. The Company modified the stock options of the directors by extending the life of the awards, which were set to expire in January, 2017, to August 15, 2018. Also, during the fourth quarter of 2017, the Company modified stock options of a former executive officer by extending the life of the awards, which were set to expire in February 2018, to May 2019. These modifications resulted in recording approximately $67,000 of compensation expense.

A summary of option activity for the years ended December 31, 2017 and 2016 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, January 1, 2016	959,188		$	7.68			7.51
Granted	915,242		$	3.35	$	2,155,234
Forfeited	(25,071	)	$	5.04
Balance, December 31, 2016	1,849,359		$	5.57			8.44
Granted	1,020,377		$	0.94	$	669,816
Forfeited	(46,247	)	$	3.57
Balance, December 31, 2017	2,823,489		$	3.93			7.29
Vested and expected to vest at December 31, 2017	2,823,489		$	3.93			7.29
Exercisable at December 31, 2017	1,762,908		$	5.02			6.16

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, 2017, the aggregate intrinsic value of options outstanding, vested and expected to vest was $2.4 million. The total grant date fair value of shares which vested during the years ended December 31, 2017, 2016 and 2015 was $2.9 million, $0.4 million and $0.7 million, respectively. The per‑share weighted‑average grant date fair value of the options granted during 2017, 2016 and 2015 was estimated at $0.66, $2.35 and $2.80, respectively. There were 997,902 options that vested during the year ended December 31, 2017 with a weighted average grant date fair value of $2.98. There were no options exercised during the years ended December 31, 2017, 2016 and 2015.

The assumptions used to determine the grant date fair value of stock options granted to employees and non-employee directors are as follows:



	Year Ended December 31,
	2017					2016					2015
Risk-free interest rate	1.85	%	—	2.38	%	1.01	%	—	1.93	%	1.64	%	—	1.97	%
Expected term of options (in years)	5.0		—	6.25		5.0		—	6.25		5.00		—	6.25
Expected stock price volatility	55	%	—	100.0	%	80.00	%	—	100.0	%				70.0	%
Expected annual dividend yield	—	%	—	—	%	—	%	—	—	%	—	%	—	—	%

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 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. The Company estimates the expected life of its stock options granted to consultants and nonemployees to be the contractual term of the options.

•

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 and expected dividend yield of 0.0%.

The Company considered numerous objective and subjective factors in the assessment of fair value of its common stock for grants made prior to the date the Company’s common stock began trading separately on the NASDAQ Capital Market, which was November 13, 2015, and includes all grants made to date. The factors considered include the price for the Company’s convertible preferred stock that was sold to investors and the rights, preferences and privileges of the convertible preferred stock and common stock, the trading price of the Company’s units between the IPO date and November 13, 2015, the Company’s financial condition and results of operations during the relevant periods, including the status of the development of the Company’s product candidates, and the status of strategic initiatives. These estimates involve a significant level of judgment.

As of December 31, 2017, there was approximately $1,342,072 of total unrecognized compensation expense related to unvested options granted under the Plan to be recognized as follows:



Year ending December 31,
2018	$	732,441
2019	352,657
2020	188,351
2021	68,623
	$	1,342,072

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 $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 shall automatically increase 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, 2016, 480,000 shares remained 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 $76,305 for the year ended December 31, 2017, which is included in the table above with stock-based compensation from stock options.