8. Stock-Based Compensation

Stock Incentive Plans

2006 Stock Incentive Plan

The Company’s 2006 Stock Option Plan (the “2006 Plan”) was established for granting stock incentive awards to directors, officers, employees and consultants to the Company. Upon closing of the Company’s Initial Public Offering (“IPO”) in August 2014, the Company ceased granting stock incentive awards under the 2006 Plan. The 2006 Plan provided for the grant of incentive and non-qualified stock options and restricted stock grants as determined by the Board of Directors. Under the 2006 Plan, stock options were generally granted with exercise prices equal to or greater than the fair value of the common stock as determined by the board of directors, expired no later than 10 years from the date of grant, and vest over various periods not exceeding 4 years.

2014 Stock Incentive Plan

The Company’s 2014 Plan (the “2014 Plan” and, together with the 2006 Plan, the “Stock Incentive Plans”) provides for the issuance of shares of common stock in the form of stock options, awards of restricted stock, awards of restricted stock unit awards, performance awards, dividend equivalent awards, stock payment awards and stock appreciation rights to directors, officers, employees and consultants of the Company. Since the establishment of the 2014 Plan, the Company has only granted stock options and restricted stock units. Generally, stock options are granted with exercise prices equal to or greater than the fair value of the common stock on the date of grant, expire no later than 10 years from the date of grant, and vest over various periods not exceeding 4 years.

The number of shares reserved for future issuance under the 2014 Plan is the sum of (1) 823,529, (2) any shares that were granted under the 2006 Plan which are forfeited, lapse unexercised or are settled in cash subsequent to the effective date of the 2014 Plan and (3) an annual increase on the first day of each calendar year beginning January 1, 2015 and ending on January 1, 2024, equal to the lesser of (A) 4% of the shares outstanding on the final day of the immediately preceding calendar year and (B) such smaller number of shares determined by the Board of Directors. As of December 31, 2017 there were 1,026,422 shares available for future grant under the Plan.

Stock Options

During the years ended December 31, 2017, 2016, and 2015, the Company granted options with an aggregate fair value of $2.7 million and $7.0 million, and $10.1 million, respectively, which are being amortized into compensation expense over the vesting period of the options as the services are being provided.

The following is a summary of option activity under the Plan (in thousands, except share and per share amounts):

						Weighted-Average
				Weighted-Average		Remaining
	Number of			Exercise Price Per		Contractual Term		Aggregate Intrinsic
	Shares			Share		(In years)		Value
Outstanding at December 31, 2016		4,042,627		$	8.20		7.05	$	4,091
Granted		903,200			5.07
Exercised		(223,352	)		2.36				553
Forfeited		(587,040	)		9.12
Canceled		(350,352	)		11.96
Outstanding at December 31, 2017		3,785,083			7.31		6.88		1,989
Exercisable at December 31, 2017		2,327,392			7.19		5.75		1,923
Vested or expected to vest at December 31, 2017		3,598,126			7.35		6.77		1,977

Included in the stock options outstanding at December 31, 2016 are 146,066 options to purchase common stock granted to certain executive officers of the Company that vest upon the achievement of certain performance conditions, which include the attainment of specified operating result and regulatory targets, by December 31, 2017. Included in the stock options forfeited during the year ended December 31, 2017 are 40,000 options to purchase common stock upon the achievement of certain performance conditions. There are 106,066 performance based options included in the outstanding balance at December 31, 2017. The operating results and regulatory target were not achieved by December 31, 2017, so no expense was recorded.

The weighted‑average fair values of options granted in the years ended December 31, 2017, 2016, and 2015 were $2.95, $4.68, and $8.42 per share, respectively, and were calculated using the following estimated assumptions:

	Year ended
	December 31,
	2017			2016			2015
Weighted-average risk-free interest rate		1.99	%		1.42	%		1.69	%
Expected dividend yield		0.00	%		0.00	%		0.00	%
Expected volatility		60	%		61	%		56	%
Expected terms	6.0 years			6.0 years			6.0 years

The total fair values of stock options that vested during the years ended December 31, 2017, 2016, and 2015 were $3.5 million, $4.9 million, and $4.0 million, respectively.

As of December 31, 2017, there was $5.3 million of total unrecognized compensation cost related to non‑vested stock options granted under the Stock Incentive Plans. Total unrecognized compensation cost will be adjusted for future changes in the estimated forfeiture rate. The Company expects to recognize that cost over a remaining weighted‑average period of 2.3 years as of December 31, 2017.

Restricted Stock Units

During the year ended December 31, 2017 the Company awarded shares of restricted stock units to certain employees at no cost to them, which cannot be sold, assigned, transferred or pledged during the restriction period. The restricted stock and restricted stock units vest through the passage of time, assuming continued employment. Restricted stock units are not included in issued and outstanding common stock until the shares are vested and released. The fair value of the award at the time of the grant is expensed on a straight line basis. The granted restricted stock units had an aggregate fair value of $2.9 million, which are being amortized into compensation expense over the vesting period of the options as the services are being provided.

The following is a summary of restricted stock unit activity under the Plan (in thousands, except share and per share amounts):

				Weighted-Average
	Number of			Grant Date Fair
	Shares			Value
Nonvested at December 31, 2016		272,195		$	5.83
Granted		552,925			5.17
Exercised		(116,173	)		5.83
Forfeited		(102,450	)		5.79
Canceled		—			—
Nonvested at December 31, 2017		606,497			5.23

During the year ended December 31, 2017, 116,173 restricted stock units vested.

As of December 31, 2017, there was $2.5 million of total unrecognized compensation cost related to non‑vested stock options granted under the Stock Incentive Plans. Total unrecognized compensation cost will be adjusted for future changes in the estimated forfeiture rate. The Company expects to recognize that cost over a remaining weighted‑average period of 1.4 years as of December 31, 2017.

Employee Stock Purchase Plan

The 2014 Employee Stock Purchase Plan (the “2014 ESPP”) period is semi-annual and allows participants to purchase the Company’s common stock at 85% of the lower of (i) the market value per share of common stock on the first day of the offering period or (ii) the market value per share of the common stock on the purchase date. Each participant can purchase up to a maximum of $25,000 per calendar year in fair market value. The first plan period began on August 7, 2014. Stock-based compensation expense from the 2014 ESPP for the years ended December 31, 2017, 2016 and 2015 was approximately $0.2 million, $0.3 million and $0.2 million, respectively.

The fair value of the purchase rights granted under this plan was estimated on the date of grant that uses the following weighted-average assumptions, which were derived in a manner similar to those discussed in Note 2 relative to stock options:

	Year ended
	December 31,
	2017			2016			2015
Weighted-average risk-free interest rate		1.03	%		0.50	%		0.19	%
Expected dividend yield		0.00	%		0.00	%		0.00	%
Expected volatility		68	%		67	%		57	%
Expected terms	0.5 years			0.5 years			0.5 years

The 2014 ESPP provides initially for the granting of up to 220,588 shares of the Company’s common stock to eligible employees. In addition, on the first day of each calendar year beginning January 1, 2015 and ending on January 1, 2024, the number of common shares available under the Plan shall be increased by the number of shares equal to the lesser of (1) 1% of the common shares outstanding on the final day of the immediately preceding calendar year and (2) such smaller number of common shares as determined by the Board of Directors. At December 31, 2017, there were 181,403 shares available under the 2014 ESPP.

Stock‑Based Compensation Expense

The following table summarizes the stock-based compensation expense for stock options granted to employees and non-employees, as well as stock-compensation expense for the 2014 ESPP that was recorded in the Company’s results of operations for the years presented (in thousands):

	Year ended
	December 31,
	2017		2016		2015
Cost of product revenue	$	125	$	123	$	—
Research and development		1,384		1,127		1,213
Selling, general and administrative		3,196		3,480		2,840
Total stock-based compensation expense	$	4,705	$	4,730	$	4,053

For the years ended December 31, 2017 and December 31, 2016, $0.1 million and $0.1 million of stock-based compensation expense was capitalized, respectively, as part of inventory or T2-owned instruments and components.