Quarterly report pursuant to Section 13 or 15(d)

Stock Based Compensation

Stock Based Compensation

6 Months Ended

Jun. 30, 2019

Share-based Payment Arrangement, Noncash Expense [Abstract]

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 June 30, 2019, there were 934,972 shares available for future issuance under the 2016 Amended Plan.

Option grants expire after ten years. Employee options typically vest over three or 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 units and ESPP shares. The amount of stock-based compensation expense recognized for the three and six months ended June 30, 2019 and 2018 was as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Research and development	$	120,709	$	20,379	$	178,085	$	31,876
General and administrative	196,211		549,199		665,336		756,581
Sales and marketing	209,789		38,853		279,981		62,798
Total stock-based compensation	$	526,709	$	608,431	$	1,123,402	$	851,255

In April 2019, the former CEO resigned, however he remains on the Company's board of directors. Subsequent to his resignation, during the second quarter of 2019, the former CEO agreed to forfeit the unvested portion of his equity awards granted to him during his service as CEO. As a result, he forfeited a total of 1,489,583 equity awards, which included 689,583 unvested service-based vesting options, 500,000 unvested market-based options and 300,000 unvested restricted stock units. The Company accounts for forfeitures as they occur. Because the requisite service period of 2.8 years was not rendered for the market-based options, the forfeiture of the market-based options resulted in the reversal in the second quarter of 2019 of the full expense recognized to date of $0.5 million, which was recorded as a reduction to general and administrative expense.

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 six months ended June 30, 2019 is as follows:



	Options Outstanding
	Number of shares		Weighted average exercise price per share		Weighted average grant date fair value of options		Weighted average remaining contractual term (in years)
Balance at December 31, 2018	3,746,597		$	4.16			7.8
Granted	2,381,627		$	5.96	$	7,691,720
Exercised	(74,902	)	$	3.44
Forfeited	(796,063	)	$	5.12	$	2,325,463
Expired	(80,712	)	$	7.95	$	279,812
Balance at June 30, 2019	5,176,547		$	4.79			8.3
Exercisable at June 30, 2019	2,321,047		$	4.38			7.0

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 June 30, 2019, the aggregate intrinsic value of options outstanding and currently exercisable was $6.3 million and $4.3 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2019 was $0.1 million. The total grant date fair value of shares which vested during the six months ended June 30, 2019 was $1.0 million. The per‑share weighted‑average grant date fair value of the options granted during the six months ended June 30, 2019 was estimated at $3.23. There were 480,680 options that vested during the six months ended June 30, 2019 with a weighted average exercise price of $3.49 per share.

The Company recognized stock-based compensation expense of $0.6 million and $0.9 million related to stock options with service-based vesting conditions for the three and six months ended June 30, 2019, respectively. At June 30, 2019, there was $7.5 million of total unrecognized compensation cost related to unvested service-based vesting condition awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.3 years.

Stock options with market-based vesting conditions

The Company has granted awards that contain market-based vesting conditions. The following table summarizes the Company's market-based option activity for the six months ended June 30, 2019:



	Options Outstanding
	Number of shares		Weighted average exercise price per share		Weighted average remaining contractual term (in years)	Aggregate intrinsic value (1)
Balance at December 31, 2018	500,000		$	4.24	9.2
Granted	300,000		$	4.98
Exercised	—
Forfeited	(500,000	)	$	4.24
Balance at June 30, 2019	300,000		$	4.98	9.9	$	138,000
Exercisable at June 30, 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.

During the second quarter of 2019, the Company granted the Executive Chairman of the Board an option to purchase 300,000 shares of Company common stock with market-based vesting conditions at an exercise price of $4.98 per share. One-third of the shares vest upon the Company's common stock closing at or above $8.00 per share for three consecutive days, one-third of the shares vest upon the Company's stock closing at or above $10.50 per share for three consecutive days, and one-third of the shares vest upon the Company's stock closing at or above $13.00 per share for three consecutive days. Each vesting tranche represents a unique requisite service period and therefore the compensation cost for each vesting tranche is recognized on a straight-line basis over its respective vesting period.

The Company recognized stock-based compensation expense of $(0.4) million and $(0.3) million for the three and six months ended June 30, 2019, which includes the reversal of expense for the former CEO's forfeited options and the expense related to the market-based options granted during the quarter. At June 30, 2019, there was $1.0 million 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 2.5 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 options grants under a Monte Carlo simulation for the six months ended June 30, 2019:



Service-based options
Expected dividend yield		—%
Expected volatility		55%
Expected life (in years)		5.0 - 6.25
Risk-free interest rate		1.76 - 2.59%

Market-based options
Expected dividend yield		—%
Expected volatility		60%
Expected life (in years)		10
Risk-free interest rate		2.32%

Restricted Stock Units

The Company has granted restricted stock units ("RSU") 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 typically vest annually over a four-year period beginning on the first anniversary of the award. The following table summarizes the Company's RSU activity for six months ended June 30, 2019:



	RSUs Outstanding
	Number of shares		Weighted average grant date fair value
Unvested RSUs at December 31, 2018	445,000		$	4.27
Granted	295,000		$	4.98
Vested	(161,250	)	$	4.49
Forfeited	(300,000	)	$	4.24
Unvested RSUs at June 30, 2019	278,750

During the second quarter of 2019, the Company granted its newly appointed Executive Chairman of the Board 250,000 RSUs, of which 50,000 shares vested immediately on the grant date and the remainder are to vest in three equal annual increments based on continued service.

The Company recognized stock-based compensation expense of $0.3 million and $0.4 million related to RSUs for the three and six months ended June 30, 2019, respectively. At June 30, 2019, there was $1.4 million of total unrecognized compensation cost related to the RSU grants. This compensation cost is expected to be recognized over a weighted-average period of 2.8 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 June 30, 2019, 1,148,085 shares remained available for issuance.

In accordance with the guidance in ASC 718-50, Employee Stock Purchase Plans, 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 $52,388 and $87,685 for the three and six months ended June 30, 2019, respectively.