Note 13. Stockholders’ Equity (Deficit)

Common Stock

The Company amended its certificate of incorporation on May 11, 2015, to decrease the number of authorized shares from 600,000,000 to 200,000,000 shares. The 200,000,000 authorized shares of common stock have a par value of $0.001 per share. As of December 31, 2016, 7,939,967 and 7,938,571 shares were issued and outstanding, respectively. As of December 31, 2015, 6,845,638 and 6,844,242 shares were issued and outstanding, respectively.

Each share of common stock is entitled to one vote. The shares of common stock have no preemptive or conversion rights, no redemption or sinking fund provisions, no liability for further call or assessment, and are not entitled to cumulative voting rights.

Treasury Stock

Shares of common stock repurchased by the Company are recorded as treasury stock and result in an increase of stockholders’ equity (deficit) on the balance sheets. Reacquired common shares may be retired by resolution of the board of directors and resume the status of authorized and unissued common shares. There was no new treasury stock activity for the years ended December 31, 2016 and 2015. In January 2017, the Company’s Board of Directors retired 1,396 shares of treasury stock to be returned to the status of authorized and unissued shares of the Company’s common stock.

Preferred Stock

Pursuant to the Company’s certificate of incorporation the Company has been authorized to issue 10,000,000 shares of preferred stock, each having a par value of $0.001. The preferred stock may be issued from time to time in one or more series with the authorization of the Company’s Board of Directors. The Board of Directors can determine voting power for each series issued, as well as designation, preferences, and relative, participating, optional or other rights and such qualifications, limitations or restrictions thereof.

Stock-based Compensation

The Company incurs stock-based compensation expense relating to the grants of RSUs and stock options to employees and non-employee directors and through its employee stock purchase plan. Amounts recognized in the statements of operations with respect to the Company’s stock-based compensation were as follows:

	Year Ended December 31,
	2016		2015
Selling, general and administrative	$	651,034	$	367,000
Research and development		195,685		38,426
Cost of revenue		56,865		—
	$	903,584	$	405,426

The Company initially established the 2001 Stock Option Plan (“2001 Plan”), which included incentive and nonqualified stock options and restricted stock to be granted to directors, officers, employees, consultants and others. The 2001 Plan terminated and no further awards were granted under the 2001 Plan upon the effective date of the Company’s 2011 Equity Incentive Plan (“2011 Plan”).

In February 2014, pursuant to the Series E Agreement, the number of shares reserved under the 2011 Plan was increased to 20% of the total outstanding shares of the Company calculated on a fully diluted basis. The shares reserved under the 2011 Plan were required to be kept at that percentage with each subsequent equity financing. No new equity awards may be granted under the 2011 Plan.

On May 11, 2015, 940,112 shares were reserved for issuance under the Company’s 2014 Equity Incentive Plan (“2014 Plan”), including 14,006 shares from the 2011 Plan. On January 1, 2016, an additional 273,769 shares were reserved for issuance under the 2014 Plan in accordance with the automatic annual share increase allowed for in the 2014 Plan. As of December 31, 2016, there were 96,008 shares available for issuance under the 2014 Plan.

The Company’s Board of Directors determines the option exercise price and grant date for all awards granted. The exercise price of options granted is generally equal to the estimated fair value of the Company’s common stock on the date of grant. All options granted have a ten-year term. The vesting period of options and RSUs is established by the Board of Directors but typically ranges between two and four years.

The following table summarizes stock option activity during the two-year period ended December 31, 2016:

	Number of Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Balance at January 1, 2015		595,577		$	3.71	7.8		$	-
Granted		171,408		6.11
Exercised		(13,960	)	2.5				$	86,070
Forfeited		(16,380	)		8.57
Balance at December 31, 2015		736,645		$	4.18		7.5	$	947,794
Granted		563,400		2.46
Exercised		(11,093	)	2.15				$	2,126
Forfeited		(70,754	)		4.60
Expired/Cancelled		(56,493	)		3.97
Balance at December 31, 2016		1,161,705		$	3.35		7.7	$	36,887
Vested and expected to vest at December 31, 2016		1,087,266		$	3.36	7.6		$	36,465
Exercisable at December 31, 2015		410,649		$	3.55	6.3		$	641,115
Exercisable at December 31, 2016		593,670		$	3.46	6.4		$	28,822

The weighted-average fair value of stock options granted was $1.59 and $3.61 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, total unrecognized compensation cost related to stock option awards was approximately $932,153, which is expected to be recognized over approximately 2.3 years.

In April 2016, in connection with the severance of an employee, the Company accelerated the vesting of 8,957 unvested stock options, as well as the period following termination whereby all of the employee’s vested stock options, including those accelerated as part of the severance agreement, could be exercised for a two-year period from the termination date. As a result of this modification, the Company recorded incremental stock-based compensation expense of approximately $13,500 for the year ended December 31, 2016.

The fair value of each stock option granted has been determined using the Black-Scholes option pricing model. The material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted for the periods presented were as follows:

	2016	2015
Fair value of common stock	$ 1.98 - 2.88	$ 4.88 - 14.64
Risk-free interest rate	1.13% - 2.08%	1.36% - 2.22%
Expected volatility	59.9% - 93.7%	60.5% - 75.0%
Expected term	4.8 to 6.2 years	5.0 to 10 years
Expected dividend yield	—%	—%

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Expected stock-price volatility. The expected volatility assumption is derived from the volatility of the Company’s common stock in recent periods, as well as that of publicly traded industry competitors, over a period approximately equal to the expected term.

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Risk-free interest rate. The risk-free interest rate assumption is based on observed interest rates on the date of grant with maturities approximately equal to the expected term.

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Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

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Expected dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and does not anticipate paying any dividends on its common stock.

In addition to the assumptions used in the Black-Scholes option-pricing model, the Company also estimates a forfeiture rate to calculate the stock-based compensation for the Company’s stock option awards. The Company will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for the Company’s stock-based compensation calculations on a prospective basis.

The following table summarizes RSU award activity during the two-year period ended December 31, 2016:

	Restricted Stock Units (RSU)			Weighted- Average Grant Date Fair Value Per Share
Balance at January 1, 2015	$	—		$	—
Granted		27,500		5.45
Vested		—			—
Forfeited		—			—
Balance at December 31, 2015		27,500		$	5.45
Granted		389,761		2.43
Vested		(36,762	)		2.90
Forfeited		(25,000	)		2.46
Balance at December 31, 2016		355,499		$	2.41
Vested and expected to vest at December 31, 2016		342,879		$	2.42

The weighted-average fair value of RSUs granted was $2.43 and $5.45 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, total unrecognized compensation cost related to RSU awards was approximately $549,744, which is expected to be recognized over approximately 9-months, primarily relating to 353,000 RSUs granted in 2016 that vest 50% on February 27, 2017 and 50% on August 28, 2017, and will be issued upon grantee satisfaction of minimum statutory employee tax withholding liabilities relating to these vested shares.

Stock Purchase Plan

In December 2015, the Board of Directors adopted a Stock Purchase Plan (the “Purchase Plan”) which allows directors, any individual deemed by the Board of Directors to be an officer for purposes of Section 16 of the Exchange Act, and anyone designated by the Board of Directors as eligible to participate in the Purchase Plan to purchase shares of the Company’s common stock from the Company at fair market value. The aggregate number of shares of common stock that may be issued under the Purchase Plan shall not exceed 250,000 shares of common stock, and a maximum of 7,500 shares of common stock may be purchased by any one participant on any one purchase date. The Board of Directors or an authorized committee must review and approve each individual request to purchase common stock under the Purchase Plan. No common stock was sold by the Company under the Purchase Plan for the year ended December 31, 2016. Cash received from the sale of common stock by the Company to eligible participants for the year ended December 31, 2015 was $20,000 which resulted in the sale of 4,184 shares of the Company’s common stock at fair market value.

2014 Employee Stock Purchase Plan

In April 2015, the Company’s stockholders approved the 2014 Employee Stock Purchase Plan, which became effective in May 2015. Initially, the ESPP authorized the issuance of up to 110,820 shares of common stock pursuant to purchase rights granted to the Company’s employees or to employees of any of the Company’s designated affiliates. The number of shares of common stock reserved for issuance automatically increases on January 1 of each calendar year, from January 1, 2016 to January 1, 2024 by the least of (i) 1% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, (ii) 195,000 shares, or (iii) a number determined by the Company’s board of directors that is less than (i) and (ii). The ESPP enables participants to contribute up to 15% of such participant’s eligible compensation during a defined period (not to exceed 27 months) to purchase common stock of the Company. The purchase price of common stock under the ESPP is the lesser of: (i) 85% of the fair market value of a share of the Company’s common stock on the first day of an offering or (ii) 85% of the fair market value of the Company’s common stock at the applicable purchase date.

During the year ended December 31, 2016, employees purchased 39,984 shares at $1.83 per share and 39,978 shares at $2.54 per share at the end of each of the 6-month purchase periods that occurred under the plan. As of December 31, 2016, approximately 99,300 shares of the Company’s common stock were reserved for future issuance under the ESPP. The first offering under the ESPP began January 1, 2016. As such, no shares of common stock were issued under the ESPP during the year ended December 31, 2015.

The Company recognizes ESPP expense based on the fair value of the ESPP stock purchase rights, estimated for each 6-month purchase period using the Black-Scholes option pricing model. The model requires the company to make subjective assumptions, including expected stock price volatility, risk free rate of return and estimated life. The fair value of equity-based awards is amortized straight-line over the vesting period of the award. Stock-based compensation expense relating to the ESPP was $98,544 and $0 for the years ended December 31, 2016 and 2015, respectively.

The material factors incorporated in the Black-Scholes model in estimating the fair value of the ESPP awards for the periods presented were as follows:

	2016
Fair value of common stock	$ 3.03 - 4.09
Risk-free interest rate	0.41% - 0.48%
Expected volatility		70.0%
Expected term	0.5 years
Expected dividend yield	—%

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Fair value of common stock. Estimated as the price of the Company’s common stock on the first day of each offering period.

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Expected stock-price volatility. The expected volatility assumption is derived from the average volatility of the Company’s common stock in recent periods, as well as that of publicly traded industry competitors, over a period approximately equal to the expected term.

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Risk-free interest rate. The risk-free interest rate assumption is based on observed interest rates on the first day of the purchase period with maturities approximately equal to the expected term.

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Expected term. The expected term represents the length of a purchase period under the ESPP.

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Expected dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and does not anticipate paying any dividends on its common stock.