Quarterly report pursuant to Section 13 or 15(d)

Stock Based Compensation

Stock Based Compensation

3 Months Ended

Mar. 31, 2019

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”).

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 March 31, 2019, there were 2.1 million shares available for future issuance under the 2016 Amended Plan.

Option grants to employees and directors typically expire after ten years. Employee options with service based vesting conditions typically vest over three or four years. Options granted to directors typically vest over three years. Directors may also elect to receive stock options in lieu of cash 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 unit awards, and ESPP shares. The amount of stock-based compensation expense recognized for the three months ended March 31, 2019 and 2018 was as follows:



	Three Months Ended March 31,
	2019		2018
Research and development	$	57,376	$	11,497
General and administrative	489,953		207,382
Sales and marketing	49,364		23,945
Total stock-based compensation	$	596,693	$	242,824

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 three months ended March 31, 2019 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, 2018	3,746,597		$	4.16			7.79
Granted	134,379		$	4.78	$	334,624
Exercised	(31,288	)	$	3.01
Forfeited	(4,383	)	$	4.25	$	11,297
Balance at March 31, 2019	3,845,305		$	4.19			7.61
Exercisable at March 31, 2019	2,269,081		$	4.56			6.76

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 March 31, 2019, the aggregate intrinsic value of options outstanding and currently exercisable was $8.1 million and $4.6 million, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2019 was $0.1 million. The total grant date fair value of shares which vested during the three months ended March 31, 2019 was $0.6 million. The per‑share weighted‑average grant date fair value of the options granted during the three months ended March 31, 2019 was estimated at $2.49. There were 302,901 options that vested during the three months ended March 31, 2019 with a weighted average grant date fair value of $2.09.

At March 31, 2019, there was $3.1 million of total unrecognized compensation cost related to unvested service-based vesting conditions awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.9 years.

Stock options with market-based vesting conditions

During 2018, the Company granted awards that vest upon the Company's common stock closing at or above $12.50 per share for three consecutive days. A summary of option activity with market-based vesting conditions for the three months ended March 31, 2019 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, 2018	500,000	$	4.24	9.24
Granted	—
Balance at March 31, 2019	500,000	$	4.24	8.99	$	800,000
Exercisable at March 31, 2019	—

(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.

At March 31, 2019, there was $805,068 of total unrecognized compensation cost related to unvested market-based vesting conditions awards. This compensation cost is expected to be recognized over a weighted-average period of 1.8 years.

Stock-based compensation assumptions

The following table shows the assumptions used to compute stock-based compensation expense for stock options with service-based vesting conditions granted to employees and members of the board of directors under the Black-Scholes valuation model for the three months ended March 31, 2019. There were no stock options granted with market-based vesting conditions for the three months ended March 31, 2019.



Service-based options
Expected dividend yield		—%
Expected volatility		55%
Expected life (in years)		5.0 - 6.25
Risk-free interest rate		2.23 - 2.59%

Restricted Stock Units

During 2018, the Company granted restricted stock units ("RSU") to certain employees. The Company measures the fair value of the restricted units 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 RSU grants activity for the three months ended March 31, 2019 is as follows:



	RSUs outstanding
	Number of shares		Weighted average grant date fair value
Non-vested RSUs at December 31, 2018	445,000		$	4.27
Vested	(100,000	)	$	4.24
Non-vested RSUs at March 31, 2019	345,000		$	4.27

The stock compensation expense related to RSUs for the three months ended March 31, 2019 was $118,656. At March 31, 2019, there was $1,433,329 of total unrecognized compensation cost related to the RSU grants. The compensation cost is expected to be recognized over a weighted-average period of 3.0 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. The number of shares increased by 408,042 on January 1, 2019. As of March 31, 2019, 1,192,025 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 $35,298 for the three months ended March 31, 2019, which is included in the table above with stock-based compensation from stock options.

Subsequent Equity Grants

On April 1, 2019, the Company granted 1.8 million options with service-based vesting conditions at an exercise price of $6.22 per share to its employees as part of its annual stock option award. One-quarter of the shares subject to the stock option will vest on the first anniversary of the grant date and the remaining three-quarters of the shares will vest in equal monthly installments over the following 36 months.

Furthermore, on April 15, 2019, the Company granted 300,000 options with service-based vesting conditions at an exercise price of $5.17 to its newly appointed Executive Chairman of the Board. One-third of the shares subject to the stock option will vest on the first anniversary of the date of grant and the remaining two-thirds of the shares will vest in equal monthly installments over the following 24 months, based on continuous service.

Additionally, the Company agreed to grant the Executive Chairman of the Board an option to purchase 300,000 additional shares of Company common stock with market-based vesting conditions. The exercise price will equal the market value on the date of the grant with one-third of the shares vesting upon the Company's common stock closing at or above $8.00 per share for three consecutive days, one-third of the shares vesting upon the Company's stock closing at or above $10.50 per share for three consecutive days, and one-third of these shares vesting upon the Company's stock closing at or above $13.00 per share for three consecutive days. The Company also agreed to grant the Executive Chairman of the Board 250,000 RSUs, of which 50,000 shares will vest immediately on the grant date and the remainder will vest in three equal annual increments based on continued service. These two equity awards will be granted upon the Company having an adequate share reserve available for future issuance under the 2016 Amended Plan as a result of either an increase to the total share reserve subject to shareholder approval or as a result of an increase to the existing available share reserve due to future forfeitures and expirations.