Stock-Based Incentive Compensation Plans

In April 2008, the Company adopted the 2008 Stock Option Plan, as amended, under which the Board of Directors may issue incentive and nonqualified stock options to employees, directors and consultants. In October 2018, the Company adopted the 2018 Equity Incentive Plan, which serves as the successor to the 2008 Stock Option Plan, under which the Board of Directors may issue incentive and nonqualified stock options and restricted stock units (RSUs) to employees, directors and consultants. No new options have been granted under the 2008 Stock Option Plan since August 2018. Outstanding options under the 2008 Stock Option Plan continue to be subject to the terms and conditions of that plan.

The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and the exercise price. If an individual owns stock representing more than 10% of the outstanding shares, the price of each share shall be at least 110% of the fair market value, as determined by the Board of Directors. The exercise price of an incentive stock option and a nonqualified stock option shall not be less than 100% and 85%, respectively, of the fair market value on the date of grant. As of December 31, 2017, a total of 5,350,080 shares of common stock had been reserved for issuance under the 2008 Stock Option Plan. As of December 31, 2018, a total of 2,576,538 shares of common stock had been reserved for issuance under the 2018 Equity Incentive Plan.

Options granted have a term of 10 years, except, options granted to individuals holding more than 10% of the outstanding shares have a term of five years. Options generally vest over a four-year period. Certain shares issued under the Plan are exercisable immediately, but subject to a right of repurchase by the Company of any unvested shares. RSUs granted under the 2018 Equity Incentive Plan generally vest over two to four years based upon continued services and are settled at vesting in shares of the Company's common stock.

The following table summarizes stock option activity for the year ended December 31, 2018 for all stock plans:



	Options Outstanding
	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Contractual Remaining Life	Aggregate Intrinsic Value
					(Years)	(in thousands)
Balances at December 31, 2017	3,001,929		$	4.15		$	3,585
Options granted	100,080		$	8.88
Options exercised	(395,117	)	$	4.08
Options canceled	(65,694	)	$	4.81
Balances at December 31, 2018	2,641,198		$	4.27	6.6	$	43,905

Options vested and exercisable - December 31, 2018	1,762,687		$	3.73	5.9	$	41,882

Options vested and expected to vest - December 31, 2018	2,366,723		$	4.14	6.5	$	40,154

The weighted-average grant date fair value of all options granted were $3.98 and $1.80 for years ended December 31, 2018 and 2017, respectively. The aggregate intrinsic values of options outstanding, options vested and exercisable, and options vested and expected to vest were calculated as the difference between the exercise price of the options and the close price of the Company’s common stock on the last trading day of the year, as of December 31, 2018 and 2017, respectively.

Employee Stock Purchase Plan

The Company allows eligible employees to purchase shares of the Company's common stock through payroll deductions at the price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each six month offering period.

Early Exercise of Unvested Stock Options

Early exercises of stock options are subject to a right of repurchase by the Company of any unvested shares. The repurchase rights lapse over the original vesting period of the options. The Company accounts for the cash received in consideration for the early exercised options as a liability included in accrued liabilities, which is then reclassified to stockholders’ equity (deficit) as the options vest. At December 31, 2018 and December 31, 2017, the Company had a total of 74,019 and 16,117 shares of common stock, respectively, subject to repurchase under the Plan and $0.3 million and $0.1 million, respectively, of associated liabilities for the repurchase.

Stock-Based Compensation

The following table sets forth stock-based compensation expense recognized for the periods presented (in thousands):



	Year ended December 31,
	2018		2017
Cost of goods sold	$	34	$	23
Research and development	156		143
Sales and marketing	651		438
General and administrative	1,471		1,271
	$	2,312	$	1,875

Amounts above do not include $0.4 million of stock-based compensation expense related to forgiveness of notes receivable for the year ended December 31, 2017. No amounts of stock-based compensation expense related to forgiveness of notes receivable were recognized for the year ended December 31, 2018. Refer to Note 13 for details.

The Company estimates the fair value of stock options using the Black-Scholes option valuation 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.

Fair Value of Common Stock

The fair value of the shares of the Company’s common stock underlying the stock options has historically been determined by the Company’s Board of Directors. Because there had been no public market for the Company’s common stock prior to its IPO, its Board of Directors has determined the fair value of the Company’s common stock at the time of grant of the option by considering a number of objective and subjective factors, including independent third-party valuations, the Company’s stage of development, sales of the Company’s redeemable convertible preferred stock, the Company’s operating and financial performance, equity market conditions affecting comparable public companies, the lack of liquidity of the Company’s capital stock, and the general and industry-specific economic outlooks.

Subsequent to its IPO, the Company uses the market closing price for its common stock as reported on the NASDAQ Global Market on the date of grant.

Expected Term

The expected term represents the period that the share-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.

Expected Volatility

As the Company’s common stock has never been publicly traded, the expected volatility is derived from the average historical volatilities of publicly traded companies within its industry that the Company considers to be comparable to its business over a period approximately equal to the expected term for its stock options.

Risk-Free Interest Rate

The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

Dividend Yield

The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.

Expected Forfeiture Rate

The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period that the estimates are revised.

The grant date fair value of the stock option awards granted to employees was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:



	Year ended
	December 31,
	2018	2017
Expected term	6.17	5.71
Expected volatility	42%-47%	42%-55%
Risk-free interest rate	2.35%-2.96%	1.73%-2.31%
Dividend yield	—%	—%

Performance Stock Options

In March 2017, the Company granted 564,098 performance stock options at an exercise price of $5.94, of which 408,544 performance options will vest monthly over four years and 155,554 performance options will vest monthly over three years. The vesting period will begin on the date of the closing of an IPO, the performance condition, subject to the optionee’s continuous service. Stock-based compensation expense for performance stock options is based on the probability of achieving certain performance criteria, as defined in the individual option grant agreement. Periodically, the Company estimates the number of performance options ultimately expected to vest and recognizes stock-based compensation expense for those options when it becomes probable that the performance criteria will be met. In October 2018, the Company completed its IPO and recognized $0.6 million expense related to the performance stock options for the year ended December 31, 2018.

In December 2017, the Company modified the terms of 394,652 unvested stock option awards granted in March 2017, by reducing their exercise price from $5.94 to $4.68 per share. In addition, the vesting performance conditions for these options were removed and the vesting commencement date changed from the IPO date to September 2017. There were no other changes in any of the other terms of the option awards. Due to these options previously subject to performance conditions that were not deemed probable of occurring, the Company had not recognized any expense related to these grants. The modification resulted in total expense of $0.8 million that is recognized over the amended vesting period of forty-eight months

Restricted Stock Units

The following table summarizes restricted stock units activity for the year ended December 31, 2018:



	Number of Shares		Weighted- Average Grant Date Fair Value
Unvested as of December 31, 2017	—		$	—
Granted	54,036		$	11.79
Forfeited	(600	)	20.60
Vested	—		$	—
Unvested as of December 31, 2018	53,436		$	11.69

As of December 31, 2018, there was a total unrecognized compensation cost of $4.5 million. These costs are expected to be recognized over a period of approximately 2.29 years.

Employee Stock Purchase Plan

In October 2018, the Company adopted the 2018 Employee Stock Purchase Plan (the "ESPP"). 515,307 shares of common stock are reserved for issuance under the ESPP. The Company recognized $0.1 million compensation expense for the ESPP. As of December 31, 2018, the unrecognized compensation cost for the ESPP was approximately $0.3 million.

The assumptions used to determine the grant date fair value of employee stock options and ESPP purchase rights for the periods presented are as follows:



	Year ended
	December 31,
	2018
Expected term	0.5
Expected volatility	43.96%
Risk-free interest rate	2.49%
Dividend yield	—%