Stock-Based Compensation

9 Months Ended

Sep. 30, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

The Company has adopted certain equity incentive and stock purchase plans as described in the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

In March 2018, our board of directors approved an amendment and restatement of our non-employee director compensation policy, pursuant to which any non-employee director who is first elected to the board of directors is granted an option to purchase 20,000 shares of our common stock on the date of his or her initial election to the board of directors. In addition, on the date of each annual meeting of our stockholders, commencing with the 2018 annual meeting, each non-employee director is eligible to receive an option to purchase 15,000 shares of common stock. Prior to March 2018, under our non-employee director compensation policy, any non-employee director who was first elected to the board of directors was granted an option to purchase 30,000 shares of our common stock on the date of his or her initial election to the board of directors. In addition, on the date of each annual meeting of our stockholders, each non-employee director was eligible to receive an option to purchase 20,000 shares of common stock.

Performance Stock Options

In October 2015, the Company granted employees certain performance-based stock options for retention purposes. The stock options would vest upon satisfaction of a specified regulatory milestone within three years of the date of grant. In 2017, management determined the achievement of the performance condition was no longer probable and the cumulative compensation expense previously recognized was reversed. In September 2018, these awards were modified to allow for 90% of such options outstanding at the modification date to vest immediately. The remaining 10% of the awards were canceled in October 2018 since the performance condition was not met. This improbable to probable modification resulted in the calculation and recognition of incremental stock-based compensation expense of $3.5 million during the third quarter of 2018.

Equity Incentive Awards Activity

Stock Options

The following is a summary of stock option activity for the nine months ended September 30, 2018 (in thousands, except per share data):


	Shares (in thousands)	Weighted- Average Exercise Price per Share
Outstanding at December 31, 2017	3,392	$	14.41
Granted	842	43.13
Exercised	(290)	16.45
Canceled	(59)	26.10
Outstanding at September 30, 2018	3,885	$	20.30

Restricted Stock Units

The following is a summary of restricted stock unit activity for the nine months ended September 30, 2018 (in thousands, except per share data):


	Shares (in thousands)	Weighted- Average Fair Value per Share at Grant Date
Outstanding at December 31, 2017	259	$	10.43
Granted	146	42.76
Vested	(98)	10.74
Canceled	(8)	29.74
Outstanding at September 30, 2018	299	$	25.58

As of September 30, 2018, outstanding restricted stock units included 159,000 granted in March 2017 with performance-based conditions to employees and executives. The restricted stock units vest upon the approval of the Company’s new drug application for ZX008 by the FDA, provided such approval occurs within five years following the grant date. Due to the uncertainties associated with the FDA approval process, approval is not yet probable, as such term is used for accounting purposes, prior to the occurrence of the event. Accordingly, no compensation expense has been recognized to date for these performance-based awards.

Valuation of Equity Awards

The fair value of the stock options granted or modified during the periods indicated was estimated using the Black-Scholes option pricing model, based on the following assumptions:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		2018		2017
Risk free interest rate	2.8% to 2.9%		1.9% to 2.1%		2.3% to 2.9%		1.9% to 2.3%
Expected term	3.5 to 6.1 years		6.1 years		3.5 to 6.1 years		5.1 to 6.1 years
Expected volatility	79.9% to 83.2%		75.1% to 75.5%		79.9% to 85.2%		75.1% to 76.6%
Expected dividend yield	—	%	—	%	—	%	—	%

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 following table summarizes the components of total stock-based compensation expense included in the condensed consolidated statements of operations (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		2018		2017
Cost of contract manufacturing	$	—	$	—	$	—	$	71
Research and development	3,275		294		5,018		1,313
Selling, general and administrative	3,706		968		6,934		2,682
Total	$	6,981	$	1,262	$	11,952	$	4,066