Quarterly report pursuant to Section 13 or 15(d)

Stock Based Compensation

Stock Based Compensation

9 Months Ended

Sep. 30, 2018

10. Stock-Based Compensation

2016 Equity Incentive Plan

On April 5, 2016, the Company’s board of directors adopted the 2016 Equity Incentive Plan (the “2016 Plan”) as the successor to the 2015 Omnibus Plan (the “2015 Plan”). The 2016 Plan was approved by the Company’s stockholders and became effective on May 18, 2016 (the “2016 Plan Effective Date”).

As of the 2016 Plan Effective Date, no additional grants will be made under the 2015 Plan or the 2011 Stock Incentive Plan (the “2011 Plan”), which was previously succeeded by the 2015 Plan effective October 13, 2015. Outstanding grants under the 2015 Plan and 2011 Plan will continue according to their terms as in effect under the applicable plan.

Upon the 2016 Plan Effective Date, the 2016 Plan reserved and authorized up to 600,000 additional shares of common stock for issuance, as well as 464,476 unallocated shares remaining available for grant of new awards under the 2015 Plan. An Amended and Restated 2016 Equity Incentive Plan (the "2016 Amended Plan) was approved by the Company's stockholders in May 2018 which increased the share reserve by an additional 1.4 million shares. During the term of the 2016 Amended Plan, the share reserve will automatically increase on the first trading day in January of each calendar year, by an amount equal to 4% of the total number of outstanding shares of common stock of the Company on the last trading day in December of the prior calendar year. As of September 30, 2018, there were 730,067 shares available for future issuance under the 2016 Plan.

Option grants to employees and directors expire after ten years. Employee options typically vest over four years. Options granted to directors typically vest over three years. Directors may elect to receive stock options in lieu of board compensation which vest immediately. For stock options granted to employees and non-employee directors, the estimated grant date fair market value of the Company’s stock-based awards is amortized ratably over the individuals’ service periods, which is the period in which the awards vest.

For stock options issued to non‑employees, the Company measures the options at their fair value on the date at which the related service is complete. Expense is recognized over the period during which services are rendered by such non-employees until completed. At the end of each financial reporting period prior to the completion of the service, the fair value of the awards is remeasured using the then current fair market value of the Company's common stock and updated assumptions in the Black-Scholes option pricing model. Stock-based compensation expense includes expense related to stock options, restricted stock units and ESPP shares. The amount of stock-based compensation expense recognized for the three and nine months ended September 30, 2018 and 2017 as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Research and development	$	32,202	$	41,323	$	64,077	$	123,883
General and administrative	843,122		222,924		1,599,703		728,327
Sales and marketing	69,809		—		132,607		—
Total stock-based compensation	$	945,133	$	264,247	$	1,796,387	$	852,210

Stock-based compensation during the three and nine months ended September 30, 2018 includes $0.3 million of expense related to modifications of awards related to a separated executive.

Stock options with service-based vesting conditions

The Company has granted awards that contain service-based vesting conditions. The compensation cost for these options is recognized on a straight-line basis over the vesting periods. A summary of option activity for the nine months ended September 30, 2018 is as follows:



	Options Outstanding
	Number of shares		Weighted average exercise price		Grant date fair value of options		Weighted average remaining contractual term (in years)
Balance at December 31, 2017	2,823,489		$	3.93			7.29
Granted	1,504,700		$	3.88	$	3,475,857
Exercised	(243,115	)	$	2.08
Forfeited	(465,887	)	$	2.73
Balance at September 30, 2018	3,619,187		$	4.18			7.97
Exercisable at September 30, 2018	1,832,581		$	4.88			6.72

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. As of September 30, 2018, the aggregate intrinsic value of options outstanding, was $4.4 million. The total grant date fair value of shares which vested during the nine months ended September 30, 2018 was $943,270. The per‑share weighted‑average grant date fair value of the options granted during the nine months ended September 30, 2018 was estimated at $2.31. There were 476,399 options that vested during the nine months ended September 30, 2018 with a weighted average exercise price of $3.27.

Stock options with market-based vesting conditions

The Company has granted awards that contain market-based vesting conditions. Activity for the market-based options was as follows for the nine months ended September 30, 2018:



	Options Outstanding
	Number of shares	Weighted average exercise price		Weighted average remaining contractual term (in years)	Aggregate intrinsic value (1)
Balance at December 31, 2017	—
Granted	500,000	$	4.24
Exercised	—
Forfeited	—
Balance at September 30, 2018	500,000	$	4.24	9.49	215,000
Exercisable at September 30, 2018	—

(1) The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal period. Options with a market value less than its exercise value are not included in the intrinsic value amount.

The weighted-average grant-date fair value of stock options with market-based vesting conditions granted during the first nine months of fiscal year 2018 was $2.52 per share or $1,260,000. At September 30, 2018, there was $1,030,068 of total unrecognized compensation cost related to nonvested market-based vesting conditions awards. This compensation cost is expected to be recognized over the next 2.3 years.

Stock-based compensation assumptions

The following table shows the assumptions used to compute stock-based compensation expense for stock options granted to employees and members of the board of directors under the Black-Scholes valuation model, and the assumptions used to compute stock-based compensation expense market-based stock option grants under a Monte Carlo simulation, for nine months ended September 30, 2018:



Service-based options
Expected dividend yield		—%
Expected volatility		55 - 65%
Expected life (in years)		5.0 - 6.25
Risk-free interest rate		2.53 - 2.94%

Market-based options
Expected dividend yield		—%
Expected volatility		60%
Expected life (in years)		10
Risk-free interest rate		2.84%

Restricted Stock Award

The Company has granted restricted stock awards ("RSA") to certain employees. The Company measures the fair value of the restricted awards using the stock price on the date of the grant. The restricted shares vest annually over a four year period beginning on the first anniversary of the award. The stock compensation expense on this award for the nine months ended September 30, 2018 was $227,858. At September 30, 2018, there was $1,670,642 of total unrecognized compensation cost related to the RSA grants. This compensation cost is expected to be recognized over the next 3.5 years.

The following table summarizes the Company's RSA grants for nine months ended September 30, 2018:



	Non-vested RSAs Outstanding
	Number of shares	Weighted average grant date fair value
Non-vested RSAs at December 31, 2017	—	$	—
Granted	445,000	$	4.27
Vested	—	$	—
Forfeited	—	$	—
Non-vested RSAs at September 30, 2018	445,000

Employee Stock Purchase Plan

On April 5, 2016, the Company’s board of directors approved the 2016 Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s stockholders and became effective on May 18, 2016 (the “ESPP Effective Date”).

Under the ESPP, eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the administrator. The ESPP is administered by the compensation committee of the Company’s board of directors. Under the ESPP, eligible employees may purchase stock at 85% of the lower of the fair market value of a share of the Company’s common stock (i) on the first day of an offering period or (ii) on the purchase date. Eligible employees may contribute up to 15% of their earnings during the offering period. The Company’s board of directors may establish a maximum number of shares of the Company’s common stock that may be purchased by any participant, or all participants in the aggregate, during each offering or offering period. Under the ESPP, a participant may not accrue rights to purchase more than $25,000 of the fair market value of the Company’s common stock for each calendar year in which such right is outstanding.

Upon the ESPP Effective Date, the Company reserved and authorized up to 500,000 shares of common stock for issuance under the ESPP. On January 1 of each calendar year, the aggregate number of shares that may be issued under the ESPP shall automatically increase by a number equal to the lesser of (i) 1% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, and (ii) 500,000 shares of the Company’s common stock, or (iii) a number of shares of the Company’s common stock as determined by the Company’s board of directors or compensation committee. The number of shares increased by 94,341 and 312,669 on January 1, 2017 and January 1, 2018, respectively. As of September 30, 2018, 806,390 shares remained available for issuance.

In accordance with the guidance in ASC 718-50, the ability to purchase shares of the Company’s common stock at the lower of the offering date price or the purchase date price represents an option and, therefore, the ESPP is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company used the Black-Scholes valuation model and recognized stock-based compensation expense of $31,788 for the nine months ended September 30, 2018, which is included in the table above with all other stock-based compensation.