Stock Options and Warrants | 9. Stock Options and Warrants Stock Options The Company adopted the 2006 Equity Participation Plan (the “2006 Plan”), which provides for the grant of stock options, restricted stock and other equity based awards. Awards for up to 100,000 shares may be granted to employees, directors and consultants under this Plan. The options granted under the 2006 Plan may be either qualified or non-qualified options. Options may be granted with different vesting terms and expire no later than 10 years from the date of grant. In April 2010, the Company adopted the 2010 Equity Participation Plan (the “2010 Plan”), which provides for the grant of stock options, restricted stock and other equity based awards. Awards for up to 3,700,000 shares may be granted to employees, directors and consultants under the 2010 Plan, as amended. The options granted under the 2010 Plan may be either qualified or non-qualified options. Options may be granted with different vesting terms and expire no later than 10 years from the date of grant. In November and December of 2009, the Company issued non-qualified stock options to purchase 68,384 shares of common stock outside the 2006 and 2010 option plans to certain employees and consultants. These options vest over 50 months and expire no later than 10 years from the date of grant. Total stock-based compensation expense for the three and six months ended June 30, 2016 and 2015 was comprised of the following (in thousands): Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2016 2015 2016 2015 Cost of sales $ 8 $ 7 $ 14 $ 14 Research and development 141 31 176 91 Selling and marketing 17 8 27 17 General and administrative 121 46 173 220 $ 287 $ 92 $ 390 $ 342 Unrecognized compensation expense related to stock options as of June 30, 2016 was $3.1 million, which is expected to be recognized over a weighted average period of approximately 3.39 years. In accordance with applicable authoritative guidance, the Company is required to establish assumptions and estimates of the weighted-average fair value of stock options granted, as well as use a valuation model to calculate the fair value of stock-based awards. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. All options are amortized over the requisite service periods. Stock-based compensation for stock options granted to non-employees has been determined using the Black-Scholes option pricing model. These options are revalued at each reporting period until fully vested, with any change in fair value recognized in the condensed consolidated statements of operations. The fair value of options granted is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the three and six months ended June 30, 2016 Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2016 2015 2016 2015 Significant assumptions (weighted average): Risk-free interest rate at grant date 1.41% 0.00 % 1.52 % 1.75 % Expected stock price volatility 102.26% 0.00 % 100.00 % 93.54 % Expected dividend payout 0% 0 % 0 % 0 % Expected option life based on management's estimate 5.91 years 0.0 years 6.02 years 6.1 years Transactions involving stock options issued to employees, directors and consultants under the 2006 Plan, the 2010 Plan and outside the plans are summarized below. Options issued have a maximum life of 10 years. The following tables summarize the changes in options outstanding and the related exercise prices for the Company’s common stock options issued: Number of Weighted Options Weighted Average Aggregate Under Average Remaining Intrinsic 2006 Plan and Price Per Contractual Value 2010 Plan Share Term (in thousands) Outstanding at December 31, 2014 142,244 $ 128.47 Granted 76,271 $ 3.66 Exercised — $ — Canceled or expired (17,606 ) $ 105.46 Outstanding at December 31, 2015 200,909 $ 83.10 Granted 1,346,800 $ 3.41 Exercised — $ — Canceled or expired (7,702 ) $ 17.78 Outstanding at June 30, 2016 1,540,007 $ 13.74 9.34 years $ — Vested and expected to vest at June 30, 2016 1,309,353 $ 15.51 9.28 years $ — Exercisable at June 30, 2016 164,547 $ 97.77 6.13 years $ — Weighted Number of Weighted Average Aggregate Options Issued Average Exercise Remaining Intrinsic Outside Price Per Contractual Value the Plan Share Term (in thousands) Outstanding at December 31, 2014 50,730 $ 92.31 Granted — $ — Exercised — $ — Canceled or expired — $ — Outstanding at December 31, 2015 50,730 $ 92.31 Granted — $ — Exercised — $ — Canceled or expired — $ — Outstanding, vested and exercisable at June 30, 2016 50,730 $ 92.31 3.36 years $ — Restricted Stock Awards Restricted stock awards are grants that entitle the holder to acquire shares of common stock at zero or a fixed price, which is typically nominal. The Company accounts for the restricted stock awards as issued and outstanding common stock, even though the shares covered by a restricted stock award cannot be sold, pledged, or otherwise disposed of until the award vests and any unvested shares may be reacquired by the Company for the original purchase price following the awardee’s termination of service. Beginning in 2013, additional annual grants of restricted stock awards have been made to the non-employee members of the board of directors as partial compensation for their services. These awards vest quarterly at the end of each quarter. In addition, the Company has made restricted stock awards to non-employee consultants for their services, which generally vest in one year or less. The following table summarizes the changes in restricted stock award activity and the related weighted average exercise prices for the Company’s awards issued: Restricted Stock Issued from the Weighted 2006 Average Grant Date 2010 Plan Fair Value Unvested at December 31, 2014 968 $ 24.00 Granted 19,547 $ 4.95 Vested (20,515 ) $ 5.81 Forfeited — $ — Unvested at December 31, 2015 — $ — Granted 18,438 $ 2.64 Vested (18,438 ) $ 2.64 Forfeited — $ — Unvested at June 30, 2016 $ — $ — The fair value of the restricted stock awards is based on the market value of the common stock on the date of grant. The total grant-date fair value of restricted stock awards vested during the six months ended June 30, 2016 and 2015 was approximately $49,000 and $64,000, respectively. The Company recognized approximately $25,000 and $30,000 of stock-based compensation expense related to the restricted stock awards for the three months ended June 30, 2016 and 2015, respectively. Additionally, during the six months ended June 30, 2016 and 2015,the Company recognized approximately $49,000 and $55,000 of stock-based compensation expense related to the restricted stock awards, respectively. As of June 30, 2016, total unrecognized compensation costs related to unvested awards was $0. Warrants Warrants Issued with Preferred Stock Warrants issued in connection with the October 2014 Financing The Company has accounted for the warrants in accordance with current accounting guidance, which defines how freestanding contracts that are indexed to and potentially settled in a Company’s own stock should be measured and classified. The authoritative accounting guidance prescribes that only warrants issued under contracts that cannot be net-cash settled and are both indexed to and settled in the Company’s common stock can be classified as equity. As the Series A, Series B and Series C Warrants and Placement Agent Warrant agreements did not meet the specific conditions for equity classification, the Company was required to classify the fair value of the warrants issued as a liability, with subsequent changes in fair value to be recorded as income (loss) in the statement of operations upon revaluation of the fair value of warrant liability at each reporting period. Valuation of the Warrants was estimated at issuance, at December 31, 2015 and June 30, 2016 using the Monte-Carlo simulation model. The following assumptions were used as inputs to the model at June 30, 2016: for the Placement Agent Warrants, stock price of $1.98 and warrant exercise price of $1.75 as of the valuation date; the Company’s historical stock price volatility of 94.6%; risk free interest rate on U.S. treasury notes of 0.86%; warrant expiration of 3.79 years; and a zero dividend rate; simulated as a daily interval and anti-dilution impact if the Company had to raise capital below $1.75 per share. During the three and six months ended June 30, 2016, the Company recorded a net change in fair value of warrant liability gain of $30,000 and $70,000, respectively, in the condensed consolidated statements of operations related to the warrants from the October 2014 financing. Series B Warrant Exercises - During the year ended December 31, 2015, the Company received net proceeds of $83,388 upon the exercise of 12,409 of the Series B Warrants by, Dr. Russell Kern, the Company’s Executive Vice President and Chief Scientific Officer and director. On June 20, 2015, the remaining unexercised outstanding Series B Warrants for 206,815 shares expired. Series C Warrant Exercises - During the year ended December 31, 2015, the Company received net proceeds of $681,000 upon the exercise of 258,518 of the Series C Warrants by Dr. Andrey Semechkin and Dr. Russell Kern, the Company’s Co-Chairman and Chief Executive Officer and Executive Vice President and Chief Scientific Officer and director, respectively, and other holders of the Series C Warrants. At October 20, 2015, all Series C Warrants were exercised. Series A Warrant Exercises - During the year ended December 31, 2015, the Company received net proceeds of $404,000 upon the exercise of 246,108 of the Series A Warrants by Dr. Andrey Semechkin, the Company’s Co-Chairman and Chief Executive Officer and other holders of the Series A Warrants. On June 29, 2016, the Company received net proceeds of approximately $22,000 upon the exercise of 12,408 of the Series A Warrants by Dr. Russell Kern, the Company’s Executive Vice President and Chief Scientific Officer. At June 29, 2016, all Series A Warrants were exercised. Placement Agent Warrants Price Adjustment - The Warrants are immediately exercisable and the exercise price of the Warrants is subject to certain reset adjustments as set forth in the forms of Warrant, including the date of the amendment to the Company’s certificate of incorporation with respect to the reverse stock split, the effectiveness dates of the registration statements and the six and twelve month anniversaries of the date of issuance of the Warrants. The Company’s registration statement on Form S-1 filed on November 3, 2014 with the SEC became effective after amendment on November 25, 2014. Pursuant to the terms of the Series I Agreement, the exercise price of the Placement Agent Warrants was reset at $1.75 per share. In April 2016, 59,564 of the Placement Agent Warrants were exercised and 33,935 shares of the Company’s common stock was issued upon such warrant exercises. At June 30, 2016, 2,483 of the Placement Agent Warrants remained outstanding. Warrants issued in connection with the March 2016 Financing The Company has accounted for the warrants in accordance with current accounting guidance, which defines how freestanding contracts that are indexed to and potentially settled in a Company’s own stock should be measured and classified. The authoritative accounting guidance prescribes that only warrants issued under contracts that cannot be net-cash settled and are both indexed to and settled in the Company’s common stock can be classified as equity. As the Series A, Series B and Series C Warrants and Placement Agent Warrant agreements did not meet the specific conditions for equity classification, the Company was required to classify the fair value of the warrants issued as a liability, with subsequent changes in fair value to be recorded as income (loss) in the statement of operations upon revaluation of the fair value of warrant liability at each reporting period. Valuation of the Warrants was estimated at issuance and June 30, 2016 using the Monte-Carlo simulation model. The following assumptions were used as inputs to the model at June 30, 2016 for Series A Warrants and the Placement Agent Warrants, stock price of $1.98 and warrant exercise price of $2.60 as of the valuation date; the Company’s historical stock price volatility of 94.6%; risk free interest rate on U.S. treasury notes of 0.97%; warrant expiration of 4.71 years; and a zero dividend rate, for Series B Warrants, stock price of $1.98 and warrant exercise price of $1.75 as of the valuation date; the Company’s historical stock price volatility of 94.6%; risk free interest rate on U.S. treasury notes of 0.26%; warrant expiration of 0.21 years; and a zero dividend rate, for Series C Warrants, stock price of $1.98 and warrant exercise price of $1.75 as of the valuation date; the Company’s historical stock price volatility of 94.6%; risk free interest rate on U.S. treasury notes of 0.41%; warrant expiration of 0.71 years; and a zero dividend rate; simulated as a daily interval and anti-dilution impact if the Company had to raise capital below $1.75 per share. The fair value of the warrant liability at the issuance date exceeded the gross proceeds received for the Series I Preferred shares, Series A, Series B and Series C Warrants by $9,902,000. The Series A Warrants, Series B Warrants, Series C Warrants and Placement Agent Warrants had fair values of approximately $5,627,000, $5,658,000, $4,927,000 and $535,000 at issuance, respectively. The classification and valuation of the warrants resulted in total warrant liabilities of $16,747,000 at issuance. During the three and six months ended June 30, 2016, the Company recorded a net change in fair value of warrant liability gain of $12.3 million and $9.6 million in the condensed consolidated statements of operations related to the warrants from the March 2016 financing, respectively. On June 29, 2016, the Company received net proceeds of approximately $376,000 upon the exercise of 215,000 of the Series B Warrants by, Dr. Andrey Semechkin, the Company’s Co-Chairman and Chief Executive Officer. Series A, B, C and Placement Agent Warrants Price Adjustment - The Warrants are immediately exercisable and the exercise price of the Warrants is subject to certain reset adjustments as set forth in the forms of Warrant, including the date of the amendment to the Company’s certificate of incorporation with respect to any reverse stock split, the effectiveness dates of the registration statements and (in certain events) upon the six and twelve month anniversaries of the date of issuance of the Warrants. The Company’s registration statement on Form S-1 filed on April 20, 2016 with the SEC became effective on May 9, 2016. Pursuant to the terms of the respective warrant agreements, the exercise price of the Series A Warrants and the Placement Agent Warrants were reset at $2.60 per share. Warrants Issued with Common Stock 2013 Securities Purchase Agreements for Common Stock In conjunction with the Company’s sale of 67,500 shares of common stock on January 22, 2013, the Company issued warrants convertible into 33,750 shares of common stock at an exercise price of $30.00 per share. The warrants have a five-year term. These warrants are held by Dr. Andrey Semechkin and Dr. Simon Craw, the Company’s Co-Chairman and Chief Executive Officer and the Company’s Former Executive Vice President Business Development, respectively. On March 12, 2013 the Company issued warrants convertible into 16,667 shares of common stock in conjunction with the sale of 33,334 shares of common stock. These warrants have a five-year term and an exercise price of $30.00 per share. Dr. Andrey Semechkin, the Company’s Co-Chairman and Chief Executive Officer is the holder of 1,667 of these warrants. Warrants Issued in Connection with SkinCare Marketing Agreement In September 2011, the Company signed a Marketing Agreement (“agreement”) with an effective date of June 30, 2011, with a third party marketing organization. According to the terms of the agreement as described in Note 10 below, Commitments and Contingencies, under Marketing Arrangement and Agreement, the third party marketing organization would provide assistance to LSC to sell its skin care products through various specific proprietary mailings. The agreement provides for two tranches of common stock warrants issued by the Company for the benefit of the third party marketing organization for 667 shares each, with strike prices of $225.00 and $300.00, respectively, vesting over four quarters, and a warrant term of five years. As of June 30, 2016 and December 31, 2015, there were 1,334 warrants outstanding. These warrants expire in September 2016. Share data related to warrant transactions through June 30, 2016 were as follows: Common Stock Common Stock Common Stock Price per Warrant March 2016 Financing October 2014 Financing Weighted Placement Placement Skin Care Jan 2013 Mar 2013 Total Average Series A Series B Series C Agent Series A Series B Series C Agent Marketing Financing Financing Warrants Range Exercise Price Outstanding, December 31, 2014 — — — — 258,519 219,224 258,519 62,045 1,334 33,750 16,667 850,058 $ 8.64-300.00 $ 10.31 2015 Issued — $ — $ — Exercised (246,108 ) (12,409 ) (258,518 ) (517,035 ) $ 1.79-6.72 $ 2.40 Forfeited/Cancelled (206,815 ) (206,815 ) $ 11.25 $ 11.25 Rounding due to July 29, 2015 reverse stock split (3 ) (1 ) 2 (2 ) — — Outstanding, December 31, 2015 — — — — 12,408 — — 62,047 1,334 33,750 16,667 126,206 $ 1.79-300.00 $ 15.82 2016 Issued 3,605,713 3,605,713 3,605,713 342,856 11,159,995 $ 1.75-2.60 $ 2.42 Exercised (215,000 ) (12,408 ) (59,564 ) (286,972 ) $ 1.75 $ 1.75 Forfeited/Cancelled — $ $ Outstanding, June 30, 2016 3,605,713 3,390,713 3,605,713 342,856 — — — 2,483 1,334 33,750 16,667 10,999,229 $ 1.79-300.00 $ 2.59 |