7. Stock-Based Compensation

2016 Employee Incentive Plan

The Company’s board of directors adopted the 2016 Equity Incentive Plan (the 2016 Plan) on April 25, 2016, which was subsequently approved on September 20, 2016 by the Company’s stockholders. The 2016 Plan became effective on October 7, 2016, the date the Company’s registration statement was declared effective by the SEC.

The Company’s 2016 Plan provides for the grant of incentive stock options (ISOs), nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation to employees, directors and consultants. In addition, the Company’s 2016 Plan provides for the grant of performance cash awards to employees, directors and consultants.

The maximum number of shares of common stock that may be issued under the Company’s 2016 Plan is 500,000 subject to an automatic increase on January 1 of each year, beginning on January 1, 2017, and continuing through and including January 1, 2026, by 3% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors.

2008 Employee Incentive Plan

The 2008 Equity Incentive Plan (the 2008 Plan) provided for the issuance of incentive stock options (ISO), nonqualified stock options, and other stock compensation awards. Under the terms of the 2008 Plan, the exercise price of an ISO shall be not less than 100% of the fair value of the stock at the date of grant, as determined by the board of directors, or in the case of certain ISOs, at 110% of the fair market value at the date of grant.

The term and vesting periods for options granted under the 2008 Plan were determined by the Company’s board of directors. Options granted generally vest over four years. Options must be exercised within a 10‑year period or sooner if so specified within the option agreement.

No further grants will be made under the Company’s 2008 Plan. However, any outstanding stock awards granted under the 2008 Plan will remain outstanding, subject to the terms of the Company’s 2008 Plan and the applicable stock award agreements, until such outstanding stock awards that are stock options are exercised or until they terminate or expire by their terms, or until such stock awards are fully settled, terminated or forfeited. At December 31, 2017, 826,258 options under the 2008 Plan remained outstanding.

Summary of Stock Option Activity

The following table summarizes the stock option activity for all grants under the 2008 Plan and 2016 Plan:


		Options Outstanding
			Weighted-		Weighted-
			Average		Average
	Options		Exercise		Remaining	Aggregate
	Available for	Number of	Price Per		Contractual	Intrinsic
	Grant	Options	Share		Life (years)	Value
						(In thousands)
Balance—December 31, 2015	55,330	927,175	$	4.43	7.3	$	6,500
Options authorized	785,364	—
Options granted	(563,523)	563,523		13.20
Options exercised	—	(10,639)		4.43		$	114
Options cancelled/forfeited	65,329	(65,329)		4.71
Balance—December 31, 2016	342,500	1,414,730	$	5.28	7.6	$	4,267
Options authorized	374,944	—
RSUs granted	(30,680)	—
Options granted	(757,900)	757,900		13.02
Options exercised	—	(281,483)		4.75		$	2,101
Options cancelled/forfeited	155,065	(297,952)		6.13
Balance—December 31, 2017	83,929	1,593,195		8.88	6.6	$	1,997
Options exercisable—December 31, 2017		766,233		5.43	3.7	$	1,825
Options vested and expected to vest—December 31, 2017		1,593,195		8.88	6.6	$	1,997

During the years ended December 31, 2017, 2016, and, 2015, the Company granted options with a weighted-average grant date fair value of $6.48, $4.52 and $4.42 per share, respectively.

The total fair value of options vested during the year was $1.5 million, $622,000, and $353,000 for the years ended December 31, 2017, 2016, and, 2015, respectively.

2016 Employee Stock Purchase Plan

The Company’s board of directors adopted the 2016 Employee Stock Purchase Plan (the ESPP) on April 25, 2016, which was subsequently approved on September 20, 2016 by the Company’s stockholders. The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum efforts toward the Company’s success and that of the Company’s affiliates. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. The board of directors, or a duly authorized committee thereof, will administer the Company’s ESPP.

The maximum aggregate number of shares of common stock that may be issued pursuant to the exercise of purchase rights under the Company’s ESPP that are granted to employees or to employees of any of the Company’s designated affiliates is 96,153 shares, subject to annual increases. The number of shares of common stock reserved for issuance under the Company’s ESPP will increase automatically each year, beginning on January 1, 2017, and continuing through and including January 1, 2026, by 1% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number as determined by the board of directors. In 2017, there was an increase of 124,981 shares reserved for issuance under the Company’s ESPP due to this provision. Shares subject to purchase rights granted under the Company’s ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the Company’s ESPP. The initial offering period (Initial Offering) under the ESPP began on October 7, 2016 and ended on October 12, 2017. The first purchase period under the 2016 ESPP commenced on October 12, 2016 and ended on April 12, 2017. The second purchase period under the Initial Offering began on April 13, 2017 and ended on October 12, 2017. The second offering period (Second Offering) under the ESPP began on October 13, 2017 and will end on October 12, 2018. The first purchase of the Second Offering period began on October 13, 2017 and will end on April 12, 2018. After the Second Offering, a new offering will begin every six months. Each offering under the ESPP will consist of two purchase periods of approximately six months in duration and will run concurrently. The Company had 183,544 shares available for issuance under the Company’s ESPP as of December 31, 2017. Employees purchased 37,590 shares for $256,000 during the year ended December 31, 2017.

The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine fair value of the Company’s common shares issued under the ESPP:


	Year Ended December 31,
	2017		2016		2015
Expected volatility	49.3 – 72.7	%	—	%	—	%
Risk-free interest rate	0.49 – 1.02	%	—	%	—	%
Expected term (in years)	0.5 – 1.0		—		—
Dividend yield	—	%	—	%	—	%

Modification of Stock Awards

In August 2017, the Company entered into a Separation Agreement with its former Chief Executive Officer which resulted in the acceleration in the vesting of certain unvested stock options as well as the extension of the exercise period for all vested options. As a result of the modification, the Company recorded stock-based compensation expense of $310,000 during the year ended December 31, 2017 to reflect the revised service period for the stock options and related vesting of shares that would otherwise not have vested.

In December 2016, the Company modified the terms of 396,028 vested and unvested stock option awards, affecting 77 employees, by reducing their exercise price from $15.86 per share to $6.63 per share. There was no change to any of the other terms of the option awards. The modification resulted in an incremental value of $629,000 being allocated to the options, of which $140,000 was recognized to expense immediately based on options that were vested at the time of the modification. The remaining incremental value of $489,000 attributable to unvested options is being recognized over their remaining vesting term.

Restricted of Stock Units

In September 2017, the Company’s board of directors authorized the issuance of Restricted Stock Units (RSUs), under the 2016 Plan and adopted a form of Restricted Stock Unit Award Agreement, which is intended to serve as a standard form agreement for RSU grants issued to employees, executive officers, directors and consultants. The fair value of the RSUs is recognized as expense ratably over the vesting period, as determined by the board of directors on the date of grant.

The following table summarizes RSU activity for the year ended December 31, 2017:


	RSUs Outstanding
		Weighted-
		Average
	Number of	Exercise
	Restricted Stock	Price Per
	Units	Share
Balance—December 31, 2016	—	$	—
Granted	30,680		10.55
Balance—December 31, 2017	30,680	$	10.55

The fair value of RSUs is determined on the date of grant based on the market price of the Company’s common stock on that date. As of December 31, 2017, there was $260,000 of unrecognized stock-based compensation expense related to RSUs to be recognized over a weighted-average period of 2.5 years.

Stock-based Compensation Expense

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


	Year Ended December 31,
	2017		2016		2015
Research and development	$	488	$	403	$	169
General and administrative		1,297		637		190
Sales and marketing		263		101		57
Total	$	2,048	$	1,141	$	416

As of December 31, 2017, there was $5.1 million of total unrecognized compensation expense related to unvested options which the Company expects recognize over a weighted-average period of 3.3 years.

Employee Stock-based Compensation

Stock-based compensation expense for employees was $2.0 million, $1.1 million, and $407,000 for the years ended December 31, 2017, 2016, and 2015, respectively.

The Company estimated the fair value of each option grant using the Black-Scholes option-pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the assumptions below. Each of these inputs is subjective and its determination generally requires significant judgment.


	Year Ended December 31,
	2017		2016		2015
Expected volatility	46.7 – 52.0	%	42.6 – 45.3	%	44.1 – 48.9	%
Risk-free interest rate	1.85 - 2.14	%	1.12 – 2.26	%	1.51 – 1.79	%
Expected term (in years)	5.3 – 6.1		4.8 – 6.1		5.6 – 6.1
Dividend yield	—	%	—	%	—	%

Expected volatility. Since the Company does not have a long trading history for its common stock, the expected volatility was derived from the average historical volatilities of publicly traded companies within a similar industry that are considered to be comparable to the Company’s business over a period approximately equal to the expected term for employees’ options.

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield with a maturity equal to the expected term of the option in effect at the time of grant.

Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company used the simplified method to determine the expected term, which is calculated as the average of the time to vesting and the contractual life of the options.

Dividend yield. The Company has never paid dividends on its common stock and is prohibited from paying dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.

Non-employee Stock-based Compensation

Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options vest. During the year ended December 31, 2017, the Company granted options to purchase 16,800 shares of common stock to non-employees with a weighted-average exercise price of $13.74 per share. During the year ended December 31, 2016, the Company granted options to purchase 8,073 shares of common stock to non-employees with a weighted-average exercise price of $7.51 per share. During the year ended December 31, 2015, the Company did not grant any options to non-employees.

Options to purchase 37,872 shares, 31,990 shares and 15,498 shares of common stock were outstanding with a weighted-average exercise price of $9.16, $5.26 and $4.42 per share as of December 31, 2017, 2016 and 2015, respectively. Stock-based compensation expense for non-employees was $69,000, $23,000, and $9,000 for the years ended December 31, 2017, 2016, and 2015, respectively.

The Company believes that the fair value of the stock options is more reliably measurable than the fair value of services received. The fair value of the stock options granted is calculated at each reporting date using the Black-Scholes option pricing model with the following assumptions:


	Year Ended December 31,
	2017		2016	2015
Expected volatility	46.7 – 60.5		52.3 – 52.7	51.6 – 52.9	%
Risk-free interest rate	2.09 – 2.44		1.94 – 2.41	1.72 – 2.02	%
Expected term (in years)	7.2 – 9.6		9.5 – 9.8	6.6 – 9.1
Dividend yield	—	%	—	—	%