Annual report pursuant to Section 13 and 15(d)

Stock Based Compensation

Stock Based Compensation

12 Months Ended

Dec. 31, 2018

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 December 31, 2018, there were 602,657 shares available for future issuance under the 2016 Plan. On January 1, 2019, on the terms of the 2016 Amended Plan an additional 1,632,167 shares were made available for issuance for a total of 2,234,824 shares available for issuance.

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. Stock-based compensation expense includes expense related to stock options, restricted stock awards and ESPP shares. The amount of stock-based compensation expense recognized for the years ending December 31, 2018 and 2017 was as follows:



	Year Ended December 31,
	2018		2017
Research and development	$	101,000	$	156,047
General and administrative	2,135,710		1,001,205
Sales and marketing	194,353		—
Total stock-based compensation	$	2,431,063	$	1,157,252

During the third quarter of 2018, the Company modified stock options of a senior executive who was separated in the period. This modification resulted in the recognition of approximately $322,000 of compensation expense, which is included in general and administrative expenses for the year ended December 31, 2018 in the accompanying statement of operations.

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 with service-based vesting conditions for the year ended December 31, 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	1,639,860		$	3.85	$	3,737,728
Exercised	(243,115	)
Forfeited	(473,637	)	$	2.77	$	1,109,083
Balance at December 31, 2018	3,746,597		$	4.16			7.79
Exercisable at December 31, 2018	1,997,468		$	4.71			6.62

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 December 31, 2018, the aggregate intrinsic value of options outstanding and options currently exercisable was $1.5 million and $1.0 million, respectively. The total intrinsic value of options exercised during the year ended December 31, 2018 was $0.5 million. The total grant date fair value of shares which vested during the years ended December 31, 2018 and 2017 was $1.2 million and $2.9 million, respectively. The per‑share weighted‑average grant date fair value of the options granted during 2018 and 2017 was estimated at $2.28 and $0.66, respectively. There were 641,286 options that vested during the year ended December 31, 2018 with a weighted average grant date fair value of $1.87 per share. At December 31, 2018, there was $3,062,257 of total unrecognized compensation cost related to nonvested service-based vesting conditions awards. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.1 years.

Stock options with market-based vesting conditions

During 2018 the Company granted awards that contain market-based vesting conditions. A summary of option activity with market-based vesting conditions for the year ended December 31, 2018 is as follows:



	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
Balance at December 31, 2018	500,000	$	4.24	9.24	$	—
Exercisable at December 31, 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 2018 was $2.52 per share or $1,260,000. At December 31, 2018, there was $917,568 of total unrecognized compensation cost related to nonvested market-based vesting conditions awards. This compensation cost is expected to be recognized over a weighted-average period of 2.05 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 for market-based stock option grants under a Monte Carlo simulation:



	Year Ended December 31,
Service-based options	2018			2017
Risk-free interest rate	2.51%	—	3.01%	1.85%	—	2.38%
Expected term of options (in years)	5.0	—	6.25	5.0	—	6.25
Expected stock price volatility	55%	—	65%	55%	—	100%
Expected annual dividend yield	0%	—	0%	0%	—	0%
Market-based options
Risk-free interest rate	2.84%
Expected term of options (in years)	2.8
Expected stock price volatility	60%
Expected annual dividend yield	0%

The valuation assumptions were determined as follows:


•	Risk‑free interest rate: The Company bases the risk‑free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

•

Expected term of options: Due to lack of sufficient historical data, the Company estimates the expected life of its stock options with service-based vesting granted to employees and members of the board of directors as the arithmetic average of the vesting term and the original contractual term of the option for service-based options. The expected life of stock options with market-based vesting is derived from a Monte Carlo simulation which is the valuation technique used to value such awards.

•

Expected stock price volatility: The Company estimated the expected volatility based on actual historical volatility of the stock price of other publicly‑traded biotechnology companies engaged in lines of business that are the same or similar to the Company’s. The Company calculated the historical volatility of the selected companies by using daily closing prices over a period of the expected term of the associated award. The companies were selected based on their enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the associated award. A decrease in the selected volatility would decrease the fair value of the underlying instrument.

•

Expected annual dividend yield: The Company estimated the expected dividend yield based on consideration of its historical dividend experience and future dividend expectations. The Company has not historically declared or paid dividends to stockholders. Moreover, it does not intend to pay dividends in the future, but instead expects to retain any earnings to invest in the continued growth of the business. Accordingly, the Company assumed and expected dividend yield of 0.0%.

Restricted Stock Award

During 2018, the Company granted restricted stock awards ("RSA") to certain employees. The Company measures the fair value of the restricted awards using the stock price at the date of the grant. The restricted shares vest annually over a four year period beginning on the first anniversary of the award. A summary of RSA grants activity for the year ended December 31, 2018 is as follows:



	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
Non-vested RSAs at December 31, 2018	445,000

The stock compensation expense on this award for the year ended December 31, 2018 was $346,514. At December 31, 2018, there was $1,551,986 of total unrecognized compensation cost related to the RSA grants. This compensation cost is expected to be recognized over a weighted-average period of 3.3 years.

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. As of December 31, 2018, 783,983 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 $49,863 and $76,305 for the years ended December 31, 2018 and December 31, 2017, respectively, which are included in the table above with stock-based compensation from stock options.