NOTE 12 — STOCK BASED COMPENSATION

The Company recognizes stock-based compensation in accordance with ASC 718, “Compensation—Stock Compensation.” Stock-based compensation expense, which consists of the compensation cost for employee stock options granted under the 2009 Equity inventive Plan and under the 2014 Equity Incentive Plan, and the value of options issued to non-employees for services rendered, was allocated to research and development and general and administrative expenses in the unaudited consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 as follows (in thousands):

Valuation Assumptions

The Company estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is being amortized ratably over the requisite service periods of the awards, which is generally the vesting period. The fair value of employee stock options was estimated using the following weighted-average assumptions for the three and nine months ended September 30, 2017 and 2016:

To determine the expected term of the Company’s employee stock options granted, the Company utilized the simplified approach as defined by SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). To determine the risk-free interest rate, the Company utilized an average interest rate based on U.S. Treasury instruments with a term consistent with the expected term of the Company’s stock based awards. To determine the expected stock price volatility for the Company’s stock based awards, the Company utilized the historical volatility of the Company’s common stock. The fair value of all the Company’s stock based awards assumes no dividends as the Company does not anticipate paying cash dividends on its common stock.

Employee Stock-based Compensation Expense

As required by ASC 718, the Company recognized $1.4 million and $1.4 million of stock-based compensation expense related to stock options under the Company’s equity incentive plans for the three and nine months ended September 30, 2017 and $27,000 and $85,000 of stock-based compensation for the three and nine months ended September 30, 2016.  Additionally, pursuant to the terms of the Merger Agreement, the participants in the 2014 Equity Incentive Plan received accelerated vesting for all or a portion of their pre-merger awards as well as a modification of the exercise period. The Company recorded $1.2 million in stock compensation associated with the transaction.

As of September 30, 2017, the total unrecognized compensation cost related to unvested stock-based awards granted to employees under the Company’s equity incentive plans was approximately $1.7million. This cost will be recorded as compensation expense on a ratable basis over the remaining weighted average requisite service period of approximately 3.8 years.

Equity Incentive Plans

Equity Incentive Plans   The Company has a 2009 Equity Incentive Plan and assumed a 2014 Equity Incentive Plan as a result of the merger. The Company does not intend to issue any shares under the 2009 Stock Plan.

The following table summarizes stock option activity under the Company’s equity incentive plans:

The total intrinsic value of stock options exercised during the nine months ended September 30, 2017 and 2016, was $7,000 and $0, respectively, as determined at the date of the option exercise. Cash received from stock option exercises was $14,000 and $0 for the nine months ended September 30, 2017 and 2016, respectively. The Company issues new shares of common stock upon exercise of options. In connection with these exercises, there was no tax benefit realized by the Company due to the Company’s current loss position.