Plans

In 2006, the Company adopted the 2006 Equity Incentive Award Plan, as amended, (the 2006 Plan) under which 141,750 shares of common stock were reserved for issuance to employees, directors and consultants of the Company. The 2006 Plan provides for the grant of incentive stock options, non-qualified stock options and rights to purchase restricted stock to eligible recipients. Recipients of stock options are eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the 2006 Plan is ten years. Options granted pursuant to the 2006 Plan generally vest over four years with 25% vesting on the first anniversary of the vesting commencement date and 1/48th each month thereafter.

In 2010, the Company adopted the 2010 Equity Incentive Award Plan (the 2010 Plan), which became effective immediately prior to the completion of the IPO. An initial 280,459 shares were reserved for issuance to employees, directors and consultants of the Company under the 2010 plan. The number of shares initially reserved were subsequently increased by the number of shares of common stock related to awards granted under the 2006 Plan that are repurchased, forfeited, expired or are canceled on or after the effective date of the 2010 Plan, as well as an annual increase pursuant to an evergreen provision. The 2010 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units and rights to purchase restricted stock to eligible recipients. Recipients of stock options are eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the 2010 Plan is ten years.

Service-based options granted pursuant to the 2010 Plan generally vest over four years and vest with 25% vesting on the first anniversary of the vesting commencement date and 1/48th each month thereafter. Performance-based options are subject to the employee’s continued service and become vested and exercisable based on the completion of a specified regulatory milestone. Service-based restricted stock units granted pursuant to the 2010 Plan generally cliff vest one year from the date of grant.

In June 2012, the Company amended and restated the 2010 Plan (the Restated 2010 Plan). Pursuant to the Restated 2010 Plan, the number of shares that are reserved for issuance under the 2010 Plan was increased to 1,162,500, plus any shares related to outstanding options granted under the 2006 Plan that are repurchased, forfeited, expire or are canceled on or after the effective date of the Restated 2010 Plan. Further, the 2010 Plan’s evergreen provision was amended such that, commencing on January 1, 2013, and on each January 1 thereafter during the term of the Restated 2010 Plan, the aggregate number of shares available for issuance under the Restated 2010 Plan shall be increased by that number of shares of the Company’s common stock equal to the lower of:


•	4% of the Company’s outstanding common stock on the applicable January 1; or


•	an amount determined by the board of directors.

At December 31, 2016 and 2015, 571,778 and 324,713 shares of common stock were available for future issuance under the Restated 2010 Plan, respectively.

On December 4, 2013, the Company adopted the Employment Inducement Equity Incentive Award Plan (the Inducement Plan). The terms of the Inducement Plan are substantially similar to the terms of the Company’s 2010 Equity Incentive Award Plan with two principal exceptions: (1) incentive stock options may not be granted under the Inducement Plan; and (2) the annual compensation paid by the Company to specified executives will be deductible only to the extent that it does not exceed $1.0 million, as the conditions of Section 162(m) of the Internal Revenue Code will not be met. The Inducement Plan was adopted by the board of directors without stockholder approval pursuant to Rule 5635(c)(4) of the NASDAQ Listing Rules.

The Company has initially reserved 337,500 shares of the Company’s common stock for issuance pursuant to awards granted under the Inducement Plan. In accordance with Rule 5635(c)(4) of the NASDAQ Listing Rules, awards under the Inducement Plan may only be made to an employee who has not previously been an employee or member of the board of directors of the Company or any parent or subsidiary, or following a bona fide period of non-employment by the Company or a parent or subsidiary, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary. As of December 31, 2016 and 2015, there were 236,625 and 202,230 shares of common stock available for future issuance under the Inducement Plan, respectively.

The 2006 Plan, Restated 2010 Plan and Inducement Plan are intended to encourage ownership of stock by employees, consultants and non-employee directors of the Company, as applicable, and with respect to the 2006 Plan and Restated 2010 Plan, to provide additional incentives for them to promote the success of the Company’s business. The board of directors is responsible for determining the individuals to receive equity grants, the number of shares subject to each grant, the exercise price per share and the exercise period of each option. The Company satisfies option exercises through the issuance of new shares.

The following sections summarize activity under the Company’s stock plans.

Stock Options

The following table summarizes the Company’s stock option activity for 2016:



	Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2015	2,714		$	17.18
Granted	902		$	10.02
Exercised	(6	)	$	7.27
Canceled	(325	)	$	19.88
Outstanding at December 31, 2016	3,285		$	15.46	7.5	$	2,458
Exercisable at December 31, 2016	1,887		$	17.76	6.5	$	651
Vested and expected to vest at December 31, 2016	3,196		$	15.56	7.5	$	2,340

As of December 31, 2016, options outstanding include 137,000 shares that become vested and exercisable upon the achievement of a certain regulatory milestone for the Company’s ZX008 product candidate. The total intrinsic value of options exercised in 2016, 2015 and 2014 was $24,000, $0.3 million and $0.3 million, respectively.

Restricted Stock Units

The following table summarizes the Company’s restricted stock unit activity for 2016:



	Shares (in thousands)		Weighted Average Fair Value per Share at Grant Date
Nonvested at December 31, 2015	—		$	—
Granted	112		10.31
Vested	—		—
Canceled	(9	)	10.35
Nonvested at December 31, 2016	103		10.31

The restricted stock units granted in 2016 cliff vests on the earlier of two years from the date of grant or the achievement of a certain regulatory milestone for the Company’s ZX008 product candidate.

The intrinsic value of restricted stock units vested during 2014 was $3.0 million. There were no vestings of restricted stock units in 2016 and 2015. As of December 31, 2016, nonvested restricted stock units had a weighted average remaining contractual term of 1.2 years with an intrinsic value of $1.3 million.

Employee Stock Purchase Plan (ESPP)

In 2010, the Company adopted the 2010 Employee Stock Purchase Plan (Purchase Plan), which allows employees to purchase shares of the Company’s common stock during specified offering periods at a discount to the fair market value at the time of purchase. The Purchase Plan is implemented by overlapping, twelve-month offering periods and each offering period may contain up to two purchase periods of six months each. At any one time, there may be up to two offering periods under the Purchase Plan. In general, a new twelve-month offering period commences on each June 1 and December 1 of a calendar year.

Stock may be purchased under the Purchase Plan at a price equal to 85% of the fair market value of the Company’s stock on either the date of purchase or the first day of an offering period, whichever is lower. Eligible employees may elect to withhold up to 20% of their compensation through payroll deductions during an offering period for the purchase of stock. The Purchase Plan contains a reset provision whereby if the price of the Company’s common stock on the first day of a new offering period is less than the price on the first day of any preceding offering period, all participants in the preceding offering period with higher first day price will be automatically withdrawn from such offering periods and re-enrolled in the new offering period. The reset feature, when triggered, will be accounted for as a modification to the original offering period, resulting in incremental expense to be recognized over the twelve-month period of the new offering.

The Purchase Plan limits the maximum number of shares that may be purchased by any one participant in an offering period to 2,500 shares. In addition, the Internal Revenue Code limits purchases under an ESPP to $25,000 worth of stock in any one calendar year, valued as of the first day of the offering period.

At December 31, 2016 and 2015, a total of 147,576 and 151,490 shares of common stock were reserved for issuance under the Purchase Plan, respectively. A total of 35,164, 25,204, and 62,987 shares were issued under the Purchase Plan in 2016, 2015 and 2014, respectively.

Stock-Based Compensation

Valuation of Equity Awards

The Company uses the Black-Scholes option-pricing model for determining the estimated fair value and stock-based compensation for stock-based awards to employees and the board of directors. The assumptions used in the Black-Scholes option-pricing model are as follows:



	Year Ended December 31,
	2016	2015	2014
Stock Options
Risk free interest rate	1.1% to 2.1%	1.5% to 1.9%	1.6% to 2.0%
Expected term	5.1 to 6.1 years	5.1 to 6.1 years	5.1 to 6.1 years
Expected volatility	76.5 to 78.1%	76.7 to 79.2%	79.7 to 84.9%
Expected dividend yield	—%	—%	—%
Weighted-average fair value of option on grant date	$6.69	$8.37	$18.58

Employee Stock Purchase Plan
Risk free interest rate	0.5% to 0.8%	0.1% to 0.5%	0.1%
Expected term	0.5 to 1.0 years	0.5 to 1.0 years	0.5 to 1.0 years
Expected volatility	59.5% to 71.3%	67.4% to 77.8%	65.0% to 83.2%
Expected dividend yield	—%	—%	—%

The risk-free interest rate assumption was based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the stock option or purchase right being valued. The assumed dividend yield was zero as the Company currently does not intend to pay dividends in the foreseeable future. The weighted average expected term of options was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, when necessary, the estimated volatility was calculated based upon the Company’s historical volatility, supplemented with historical volatility of comparable companies whose share prices are publicly available for a sufficient period of time.

Restricted Stock Units

The fair value of restricted stock units granted is determined based on the price of the Company’s common stock on the date of grant.

Stock-Based Compensation Expense

The Company recognized stock-based compensation expense in continuing operations as follows (in thousands):



	Year Ended December 31,
	2016		2015		2014
Cost of revenue	$	386	$	390	$	467
Research and development	1,924		1,266		1,236
Selling, general and administrative	5,043		5,285		5,833
Total	$	7,353	$	6,941	$	7,536

As of December 31, 2016, there was approximately $9.4 million of total unrecognized compensation costs related to outstanding equity awards, which is expected to be recognized over a weighted average period of 2.3 years.

At December 31, 2016, there were 32,000 unvested options and RSUs outstanding to consultants, with approximately $0.3 million of related unrecognized compensation expense based on a December 31, 2016 measurement date. These unvested stock options outstanding to consultants are expected to vest over approximately 2.5 years. In accordance with accounting guidance for stock-based compensation, the Company remeasures the fair value of stock option grants to non-employees at each reporting date and recognizes the related income or expense during their vesting period. Expense (income) recognized for equity awards to consultants was $0.1 million, $0.2 million and $(0.2) million for 2016, 2015 and 2014, respectively, and was included in the consolidated statement of operations within selling, general and administrative expense.