|12 Months Ended|
Dec. 31, 2015
|Disclosure of Compensation Related Costs, Share-based Payments [Abstract]|
NOTE 9 STOCK-BASED COMPENSATION
Terms of the Companys share-based compensation are governed by the Companys 2015 Equity Incentive Plan, 2009 Stock Plan and 2008 Stock Plan (collectively the Plans.) The Plans permit the Company to grant non-statutory stock options, incentive stock options and other equity awards to the Companys employees, outside directors and consultants; however, incentive stock options may only be granted to the Companys employees. Beginning June 29, 2015, no further awards may be granted under the 2009 Stock Plan or 2008 Stock Plan. As of December 31, 2015, the aggregate number of shares of common stock available for issuance under the 2015 Equity Incentive Plan is 172,448. However, to the extent awards under the 2008 Plan or 2009 Plan are forfeited or lapse unexercised or are settled in cash, the common stock subject to such awards will be available for future issuance under the 2015 Equity Incentive Plan.
The exercise price for an option issued under the Plans is determined by the Board of Directors, but will be (i) in the case of an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than 110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair market value per share on the date of grant; and (ii) in the case of a nonstatutory stock option, no less than 100% of the fair market value per share on the date of grant. The options awarded under the Plans shall vest as determined by the Board of Directors but shall not exceed a ten-year period.
Options Issued to Directors and Employees as Compensation
Pursuant to the terms of the Plans, from inception to December 31, 2014, the Company issued options to purchase an aggregate of 1,996,712 shares to its executive officers and employees of the Company and non-employee directors for their services on the Board and its committees. Of these, 82,107 options were expired or exercised and 1,914,605 options remain outstanding as of December 31, 2014. The exercise prices of these option grants, as determined by the Companys Board of Directors, range from $0.79 to $13.23 per share, and a portion of these vest subject to certain performance conditions.
In 2015, the Company granted an aggregate of 30,000 non-qualified 10-year term options to purchase the Companys common stock to its Board of Directors and an aggregate of 41,957 options to purchase the Companys common stock were automatically terminated due to certain performance conditions not being met. As of December 31, 2015, the Company has a total of 1,902,648 options issued to its executive officers, employees and non-employee directors outstanding. The exercise prices of the outstanding options, as determined by the Companys Board of Directors, range from $0.79 to $13.23 per share, and a portion of these vest subject to certain performance conditions.
The Company recognized stock-based compensation expense for these services within general and administrative expense in the accompanying statements of operations of approximately $2.9 million and $0.7 million for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, there was approximately $2.1 million of total unrecognized compensation cost related to un-vested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.5 years.
Options Issued to Nonemployees for Services Received
The Company has issued options to purchase an aggregate of 106,573 shares of the Companys common stock since inception to 2014 to nonemployee consultants under the Plans. Of these, 68,662 options were expired or exercised and 37,911 options remain outstanding as of December 31, 2014. In 2015, the Company granted an aggregate of 4,000 non-qualified 10-year term options to purchase the Companys common stock to it nonemployee contractors. During 2015, 6,025 options were expired or exercised and 35,886 options remain outstanding as of December 31, 2015. The exercise prices of the outstanding options, as determined by the Companys Board of Directors, range from $0.72 to $2.25 per share. These outstanding options, with the exception of an option to purchase 7,272 shares granted to a consultant, vest 25% upon the first anniversary of the vesting commencement date with the remaining options vesting monthly in equal amounts over 36 months. The Company recognized an expense for these services of approximately $1,300 and $13,000 for the years ended December 31, 2015 and 2014, respectively, within research and development expense in the accompanying statements of operations.
The Company calculates the fair value of stock-based compensation awards granted to employees and nonemployees using the Black-Scholes option-pricing method. If the Company determines that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for the Companys stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense to non-employees determined at the date of grant.
Stock-based compensation expense to non-employee consultants affects the Companys general and administrative expenses and research and development expenses.
The fair value of each stock option granted has been determined using the Black-Scholes option pricing model. The material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted for the periods presented were as follows:
In addition to the assumptions used in the Black-Scholes option-pricing model, the Company also estimates a forfeiture rate to calculate the stock-based compensation for the Companys equity awards. The Company will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for the Companys stock-based compensation calculations on a prospective basis.
Significant factors, assumptions and methodologies used in determining the estimated fair value of the Companys common stock
The Company is also required to estimate the fair value of the common stock underlying the Companys stock-based awards when performing the fair value calculations using the Black-Scholes option-pricing model. The Companys Board of Directors, with the assistance of management, determined the fair value of the Companys common stock on each grant date. Option grants are based on the estimated fair value of the Companys common stock on the date of grant, which is determined by taking into account several factors, including the following:
The table below presents the prices received from sales to third parties of the Companys common stock and various classes of the Companys preferred stock from inception to date:
For options issued from inception to 2013, in determining the estimated fair value of the Companys common stock, the Companys Board of Directors, with the assistance of management, used the market approach to estimate the enterprise value of the Company in accordance with the American Institute of Certified Public Accountants (AICPA) Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation (the AICPA Guide) for the three valuation dates of November 7, 2013, July 31, 2012, and December 31, 2010. The Market Approach is one of the three approaches (along with the Income Approach and Asset Approach) used to estimate enterprise and equity value. The market approach employs analysis using comparable companies in determining the value of the entity. Both public and private companies, if publicly available information exists, are considered in the market approach. Two information points commonly available company valuation and transaction value are used for their respective methodologies. There are a number of different methods within the Market Approach that may be used: the three main methods utilized are: the Guideline Pubic Companies Method; the Guideline Transactions Method; and the Backsolve Method.
Given the early stage of the Company, the Backsolve Method was used to estimate the fair value of the Companys securities. This method derives an implied market value of invested capital from a transaction involving a companys own securities. The price of a companys security that was involved in a recent arms-length transaction is used as a reference point in an allocation of value. The Company first raised additional capital through the sales of the Companys LLC units. These units later converted into common shares and preferred shares upon the Companys conversion to a corporation. Subsequent to the Companys corporation conversion, the Company raised additional capital through the sales of the Companys Series A-1, Series A-2, Series A-3, Series B, and Series C preferred shares at the price of $0.07, $0.40, $0.62, $1.19, and $1.30, respectively.
The Company valued LLC units and common stock (after converting to a corporation) from inception through 2009 by reference to the Companys sales of units and/or common stock & preferred stock over the period. Beginning in 2010, the Company valued the Companys common stock using the Backsolve Method. The Backsolve Method requires considering the rights and preferences of each class of equity and solving for the total market value of invested capital that is consistent with a recent transaction in the Companys own securities, considering the rights and preferences of each class of equity. However, management has decided that the liquidation preferences between the Companys preferred shares and common shares are immaterial for a pre-revenue company.
Per the AICPA Guide, the Backsolve Method is generally the most reliable indicator of value of early-stage enterprises with no product revenue or cash flow, if relevant and reliable transactions have occurred in the Companys equity securities. This methodology is also prescribed by the AICPA when a valuation is conducted in close proximity to the date of a financing transaction, and when other methodologies are deemed less reliable.
The stage of development of the Companys compound was reflected in the Companys selection of the term and volatility estimates used in the analysis. The estimate of the term considers the Companys existing cash runway and the time to the next potential financing or liquidity event, while the volatility estimate reflects the relative riskiness of the Companys equity securities (or asset base) relative to the general stock market.
Management estimated the implied market value of invested capital of the Company by backsolving for the purchase price of the Companys preferred shares for one common share through the option-pricing method. The premise of this method is that the transaction implied a market price for a share which in turn implied values for the other classes of equity based on relative claims on equity value, such as liquidation preferences and conversion rights. The application of the backsolve method considering the Companys capital structure yielded a total market value of invested capital of approximately $15.5 million, $14.4 million, and $8.9 million, of which approximately $819,000, $870,000, and $670,000 were allocated to the total value of common stock as of the Companys three valuation dates of November 7, 2013, July 31, 2012, and December 31, 2010, respectively.
On the three valuation dates of November 7, 2013, July 31, 2012, and December 31, 2010, after estimating the market value of invested capital, the Company allocated it to the various equity classes comprising the subject companys capitalization table. This process ultimately results in creating a final estimate of value for the subject companys underlying equity interests. While there are many different value allocation methods, these various methods can be grouped into three general categories as defined by the AICPA Guide, one of which is the Option-Pricing Method (OPM).
The Company used the OPM to allocate market value of invested capital to the various equity classes and debt comprising the Companys capitalization structure. The Company chose the OPM over other acceptable methods due to the complex capital structure, the uncertainty related to market conditions, and the lack of visibility on an imminent exit event. Under the OPM, each equity class is modeled as a call option with a distinct claim on the equity of the Company. The options exercise price is based on the Companys total equity value available for each participating equity holder. The characteristics of each equity class determine the equity class claim on the total equity value. By constructing a series of options in which the exercise price is set at incremental levels of value, which correspond to the equity value necessary for each level of equity to participate, the Company determined the incremental option value of each series. When multiplied by the percentage of ownership of each equity class participating under that series, the result is the incremental value allocated to each class under that series.
The OPM relies on the Black-Scholes option-pricing model to value the call options on the Companys invested capital. The following inputs were applied in the Black-Scholes calculations of the OPM:
Discounts ranging from 35.8% to 40% were applied for lack of control and lack of marketability for the common stock. The calculation resulted in a fair value for the common stock of $1.17, $1.19, and $1.03 per share as of the Companys three valuation dates of November 7, 2013, July 31, 2012, and December 31, 2010, respectively.
For options issued in 2014, given the Companys distinct possible exit scenarios of an initial public offering, the Company used the probability weighted expected return method (PWERM) to estimate the fair value of the Companys common equity. Under this method, an analysis of future values of a company is performed for several likely liquidity scenarios. The value of the common stock is determined for each scenario at the time of each future liquidity event and discounted back to the present using a risk-adjusted discount rate. The present values of the common stock under each scenario are then weighted based on the probability of each scenario occurring to determine the value for the common stock. The Companys management determined the probability weighting of potential liquidity events to be 45% for an initial public offering and 55% for other scenarios, which represents all other likely outcomes for the Company.
Management estimated the implied market value of invested capital of the Company by backsolving for the purchase price of the Companys preferred shares for one common share through the use of OPM. The application of the backsolve method considering the Companys capital structure yielded a total market value of invested capital of approximately $25.2 million, of which approximately $1.4 million was allocated to the total value of common stock as of the Companys valuation date of October 31, 2014.
Given the lack of marketability for the common stock, the Company applied a discount of 21.4% for using the average strike put option approach. This resulted in a probability weighted common share value, after adjustment, of $5.86 per share as of valuation date of October 31, 2014.
Stock-based Compensation Summary Tables
Information regarding the Companys stock option grants to the Companys employees and non-employees, along with the estimated fair value per share of the underlying common stock, for stock options granted since 2005 is summarized as follows:
The following represents a summary of the options granted to employees and non-employees outstanding at December 31, 2015 and changes during the period then ended:
The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.
Reference 1: http://www.xbrl.org/2003/role/presentationRef