Stock-Based Compensation

12 Months Ended

Dec. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

10. Stock-Based Compensation

Under the 2003 Plan, as restated in June 2011, the Company was authorized to issue options covering up to 3,500,000 common stock shares. Effective June 1, 2011, the Company adopted the 2011 Equity Incentive Plan (the “2011 Plan”). The maximum number of shares with respect to which options may be granted under the 2011 Plan is 7,500,000 shares, which is offset and reduced by options previously granted under the 2003 Plan. The option price is determined by the Board of Directors but cannot be less than the fair value of the shares at the grant date. Generally, the options vest ratably over either four or five years and expire ten years from the grant date. Both plans provide for accelerated vesting if there is a change of control, as defined in the plans.

On May 15, 2015 shareholders approved (1) an increase of 2,000,000 shares in the number of shares available for option awards under the 2011 Equity Incentive Plan, and (2) an Employee Stock Purchase Plan, with an initial 250,000 shares with annual increases of shares available equal to the lesser of (i) 1% of outstanding shares or (ii) 100,000 shares. On May 10, 2016 shareholders approved an increase of 1,500,000 shares in the number of shares available for option awards under the 2011 Equity Incentive Plan.

No option shall be granted under the 2011 Plan after May 31, 2021.

The Company recognized stock-based compensation cost of $3,367,000, $2,687,000 and $1,475,000 during 2016, 2015 and 2014, respectively. The calculated value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	2016		2015		2014
Risk-free interest rate		1.40% – 2.03%		1.93% – 2.21%		0.3–2.2%
Expected dividend yield		0%		0%		0%
Expected volatility		47.6% – 48.2%		47.5% – 50.4%		50.0%–61.2%
Expected term		6.25 years		6.25 – 6.5 years		1.5–6.5 years
Weighted-average grant date calculated fair value	$	1.97	$	6.17	$	4.73

As the Company has limited stock trading history, the expected volatility is based on the historical volatility of similar companies that have a trading history. The expected term represents the estimated average period of time that the options are expected to remain outstanding. Since the Company does not have sufficient historical data on the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual term. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds over the expected term of the options.

A summary of stock option activity for the years ended December 31, 2016, 2015 and 2014 is presented below (in thousands, except per share and contractual life data):

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)
Options outstanding at December 31, 2013		2,241		$	4.84
Granted		1,378			7.62
Exercised		(115	)		4.40
Forfeited or expired		(252	)		4.44
Options outstanding at December 31, 2014		3,252		$	6.07
Granted		998			12.29
Exercised		(574	)		4.85
Forfeited or expired		(204	)		7.08
Options outstanding at December 31, 2015		3,472		$	8.01
Granted		745			4.18
Exercised		(96	)		5.00
Forfeited or expired		(454	)		8.66
Options outstanding at December 31, 2016		3,667		$	7.23		6.27
Options exercisable at December 31, 2016		1,954		$	6.66		4.29

The exercise prices of common stock options outstanding and exercisable are as follows at December 31, 2016 (in thousands):

Exercise Price		Options Outstanding (Shares)		Options Exercisable (Shares)
$	2.34  to   4.25		627		125
$	4.88  to   5.23		1,430		1,168
$	7.00  to   9.01		842		415
$	12.43  to 14.06		768		246
			3,667		1,954

The estimated aggregate intrinsic value of stock options exercisable at December 31, 2016 and 2015 was approximately $0 and $1,294,000, respectively. As of December 31, 2016, there was $6,240,000 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted average period of 2.62 years.

During the first quarter of 2016, the Company recorded a charge of $55,000 to extend the exercise period of 98,681 vested options for one employee who resigned and became a consultant for the Company. All unvested options for this employee were terminated when this employee ceased full-time employment with the Company.

During the year ended December 31, 2016, the Company granted stock options to purchase 30,000 shares of common stock to an outside attorney in connection with his services relating to the Company’s rights offering to stockholders. The options have fully vested and are exercisable for a period of four years from the date of grant at a price of $5.23 per share, which was 125% of the fair value of the Company’s common stock on the grant date of January 14, 2016. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $53,000 ($1.77 per share). Assumptions used in the model were an expected term of 6.25 years, volatility of 48.2%, a risk-free interest rate of 1.87%, and an expected dividend rate of 0%. The cost of these shares was treated as an issuance cost of the offering and was deducted from the gross proceeds of the offering.

On January 1, 2015, the Company’s current Chairman, who at that time was the Chief Executive Officer, exercised stock options expiring on that date on a cashless basis to purchase 59,063 shares of common stock at an exercise price of $4.75 per share. Based on the closing market price of the Company’s common stock of $10.26 on December 31, 2014, the Chief Executive Officer tendered 27,344 shares of common stock that he owned to satisfy the aggregate exercise price and surrendered 12,055 shares of common stock to satisfy the related $124,000 of income and payroll tax withholding amounts related to the transaction.

In June 2015 the Company’s current Chairman, who at that time was the Chief Executive Officer, exercised stock options on a cashless basis to purchase 150,000 shares of common stock at an exercise price of $4.75 per share. Related to these exercises, the Chief Executive Officer tendered 50,753 shares of common stock that he owned to satisfy the aggregate exercise price.

In January 2014, the Company granted a stock option to its current Chairman, who at that time was the Chief Executive Officer, to purchase 125,000 shares of common stock at an exercise price of $4.25 per share, exercisable for a period of three years from the date of grant. The stock option grant was fully vested on the date of issuance and was intended to replace an earlier stock option grant with the same exercise price that had expired in January 2014. The stock option was not granted pursuant to the 2011 Plan. The grant date fair value of the stock option, calculated pursuant to the Black-Scholes option-pricing model utilizing a volatility factor of 50% and a dividend rate of 0%, was determined to be $393,000, which was charged to operations as general and administrative expense in the year ended December 31, 2014.

During the year ended December 31, 2014, the Company recorded a charge of $235,000 to extend the exercise period of 232,003 options for four employees who resigned and became consultants for the Company. All unvested options for employees were terminated when they ceased full-time employment with the Company.

The Company adopted an employee stock purchase plan in June, 2015 for all eligible employees. Under the plan, shares of the Company's common stock may be purchased at six-month intervals at 85% of the lower of the closing fair market value of the common stock (i) on the first trading day of the offering period or (ii) on the last trading day of the purchase period. An employee may purchase in any one calendar year shares of common stock having an aggregate fair market value of up to $25,000 determined as of the first trading day of the offering period. Additionally, a participating employee may not purchase more than 100,000 shares of common stock in any one offering period. At December 31, 2016, 241,714 shares were issued under the stock purchase plan.

The following table presented below summarizes Restricted Stock Unit (RSU) activity for the years ended December 31, 2016 and 2015 (in thousands, except per share data):

	Number of Awards		Weighted Average Grant Date Fair Value Per Share
Outstanding as of December 31, 2014		-	$	-
Awarded		190		12.43
Vested		-		-
Forfeited/canceled		-		-
Outstanding as of December 31, 2015		190	$	12.43
Awarded		-		-
Vested		59		12.43
Forfeited/canceled		-		-
Outstanding as of December 31, 2016		131	$	12.43

As of December 31, 2016, there was $1,551,000 of total unrecognized compensation cost related to the outstanding RSUs that will be recognized over a weighted average period of 2.63 years.

The total stock-based compensation recognized for stock-based awards granted in the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):

	2016		2015		2014
Cost of sales	$	312	$	279	$	192
Research and development		303		208		293
Clinical and regulatory		173		235		113
Selling and marketing		104		442		141
General and administrative		2,475		1,523		736
Total	$	3,367	$	2,687	$	1,475

From time to time, the Company has extended full-recourse loans to certain non-officer employees for the purpose of financing stock option exercises. These loans bear interest ranging from 1.27% to 1.91% per annum and are payable over three years in monthly installments of principal and interest. At December 31, 2016, and 2015 the outstanding balance of such loans, including accrued interest, was $2,000 and $5,000, respectively. These loans receivable are recorded in the Company’s consolidated financial statements as an offset to stockholders’ equity.

Stock Awards

In July 2014, the Company awarded Alfred E. Mann, who at the time was the Chairman of the Board of Directors, 25,000 shares of common stock in recognition of services rendered to the Company since inception. These shares were valued at $175,000, or $7.00 per share, and were charged to general and administrative expense in 2014.

In 2014, the Company awarded 21,215 shares to an outside attorney and his staff as part of the fee paid for drafting the Company’s prospectus and S-1 filing. These shares were valued at $170,000, with 10,715 shares valued at $7.00 per shares and the balance valued at $9.00 per share. The cost of these shares was treated as an issuance cost of the Company’s initial public offering and was deducted from the gross proceeds from the offering.

Employment Agreement

On June 19, 2015 the Company entered into an at will employment agreement with Will McGuire to become the Company’s President and Chief Executive Officer. The Company has agreed to pay Mr. McGuire an annual salary of $390,000 and he will also be entitled to receive performance bonuses which will be based on performance standards and goals established by the Company’s Board of Directors. Upon termination without cause, Mr. McGuire will be entitled to receive severance consisting of his salary for a period of 12 months following such termination and his pro-rated target bonus through the balance of the calendar year in which such termination occurs. As part of the agreement, the Company agreed to grant Mr. McGuire, effective on his official start date as an employee, options to purchase 420,000 shares of the Company’s common stock, the fair value of which was determined to be $2,574,000, of which $645,000 and $240,000 was recognized during the years ended December 31, 2016 and 2015, respectively, and 190,000 RSUs the fair value of which was determined to be $2,362,000, of which $591,000 and $220,000 was recognized during the years ended December 31, 2016 and 2015, respectively. The fair value of the RSUs and the exercise price of the options were both marked at $12.43 which was the closing price of the Company’s stock on Nasdaq on August 17, 2015. The options and RSUs vest over four years, with 25% vesting on the first anniversary of the grant date, and the remainder vesting thereafter in twelve equal installments of 6.25% on the quarterly anniversaries of the grant date.