7. Stock-Based Compensation

2016 Employee Incentive Plan

The Company’s board of directors adopted the 2016 Equity Incentive Plan (the “2016 Plan”) on April 25, 2016, which was subsequently approved on September 20, 2016 by the Company’s stockholders. The 2016 Plan became effective on October 7, 2016, the date the Company’s registration statement was declared effective by the SEC. No further grants will be made under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). However, any outstanding stock awards granted under the 2008 Plan will remain outstanding, subject to the terms of the Company’s 2008 Plan and the applicable stock award agreements, until such outstanding stock awards that are stock options are exercised or until they terminate or expire by their terms, or until such stock awards are fully settled, terminated or forfeited. At December 31, 2016, 1,257,230 options under the 2008 Plan remained outstanding.

The Company’s 2016 Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation to employees, directors and consultants. In addition, the Company’s 2016 Plan provides for the grant of performance cash awards to employees, directors and consultants.

The maximum number of shares of common stock that may be issued under the Company’s 2016 Plan is 500,000. The number of shares of common stock reserved for issuance under the Company’s 2016 Plan will automatically increase on January 1 of each year, beginning on January 1, 2017, and continuing through and including January 1, 2026, by 3% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors. The maximum number of shares that may be issued upon the exercise of ISOs under the Company’s 2016 Plan is 500,000.

2008 Employee Incentive Plan

The 2008 Plan provides for the issuance of incentive stock options (“ISO”), nonqualified stock options, and other stock compensation awards. Under the terms of the 2008 Plan, the exercise price of an ISO shall be not less than 100% of the fair value of the stock at the date of grant, as determined by the board of directors, or in the case of certain ISOs, at 110% of the fair market value at the date of grant.

The term and vesting periods for options granted under the 2008 Plan were determined by the Company’s board of directors. Options granted generally vest over four years. Options must be exercised within a 10‑year period or sooner if so specified within the option agreement.

Summary of Stock Option Activity

The following table summarizes the stock option activity for all grants under the 2008 Plan and 2016 Plan:


		Options Outstanding
			Weighted-		Weighted-
			Average		Average
	Options		Exercise		Remaining	Aggregate
	Available for	Number of	Price Per		Contractual	Intrinsic
	Grant	Options	Share		Life (years)	Value
						(In thousands)
Balance—December 31, 2014	106,468	852,639	$	4.42	8.0	$	-
Options authorized	24,956	—
Options granted	(123,830)	123,830		4.50
Options exercised	—	(1,558)		4.42		$	11
Options cancelled/forfeited	47,736	(47,736)		4.42
Balance—December 31, 2015	55,330	927,175		4.43	7.3	$	6,500
Options authorized	785,364	—
Options granted	(563,523)	563,523		13.20
Options exercised	—	(10,639)		4.43		$	114
Options cancelled/forfeited	65,329	(65,329)		4.71
Balance—December 31, 2016	342,500	1,414,730		5.28	7.6	$	4,267
Options exercisable—December 31, 2016		729,746		4.52	6.1	$	2,752
Options vested and expected to vest—December 31, 2016		1,414,732		5.28	7.6	$	4,267

During the years ended December 31, 2016, 2015, and, 2014, the Company granted options with a weighted-average grant date fair value of $4.52, $4.42 and $1.82 per share, respectively.

The total fair value of options vested during the year was $622,000, $353,000, and $332,000 for the years ended December 31, 2016, 2015, and, 2014, respectively.

2016 Employee Stock Purchase Plan

The Company’s board of directors adopted the 2016 Employee Stock Purchase Plan (the “ESPP”) on April 25, 2016, which was subsequently approved on September 20, 2016 by the Company’s stockholders. The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum efforts toward the Company’s success and that of the Company’s affiliates. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. The board of directors, or a duly authorized committee thereof, will administer the Company’s ESPP.

The maximum aggregate number of shares of common stock that may be issued pursuant to the exercise of purchase rights under the Company’s ESPP that are granted to employees or to employees of any of the Company’s designated affiliates is 96,153 shares. Additionally, the number of shares of common stock reserved for issuance under the Company’s ESPP will increase automatically each year, beginning on January 1, 2017, and continuing through and including January 1, 2026, by 1% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number as determined by the board of directors. Shares subject to purchase rights granted under the Company’s ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the Company’s ESPP. The first offering period (“First Offering”) under the ESPP began on October 7, 2016 and will end on October 12, 2017. Each offering under the ESPP will consist of two purchase periods of approximately six months in duration. The first purchase period in the First Offering will end on April 12, 2017. There was no employee participation in the First Offering during 2016.

Stock-based Compensation Expense

The Company recognized stock-based compensation expense as follows (in thousands):


	Year Ended December 31,
	2016		2015		2014
Research and development	$	403	$	169	$	304
General and administrative		637		190		392
Sales and marketing		101		57		103
Total	$	1,141	$	416	$	799

As of December 31, 2016, there was $3.4 million of total unrecognized compensation expense related to unvested options which the Company expects recognize over a weighted-average period of 3.1 years.

Employee Stock-based Compensation

Stock-based compensation expense for employees was $1.1 million, $407,000, and $776,000 for the years ended December 31, 2016, 2015, and 2014, respectively. In May 2014, the Company modified the terms of 333,774 vested and unvested stock option awards, affecting 75 employees, by reducing their exercise price from $7.54 and $13.52 per share to $4.42 per share. There was no change in any of the other terms of the option awards. The modification resulted in an incremental value of $939,000 being allocated to the options, of which $207,000 was recognized to expense immediately based on options that were vested at the time of the modification. The remaining incremental value of $732,000 attributable to unvested options is being recognized over their remaining vesting term.

In December 2016, the Company modified the terms of 396,028 vested and unvested stock option awards, affecting 77 employees, by reducing their exercise price from $15.86 per share to $6.63 per share. There was no change to any of the other terms of the option awards. The modification resulted in an incremental value of $629,000 being allocated to the options, of which $140,000 was recognized to expense immediately based on options that were vested at the time of the modification. The remaining incremental value of $489,000 attributable to unvested options is being recognized over their remaining vesting term.

The Company estimated the fair value of each option grant using the Black-Scholes option-pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the assumptions below. Each of these inputs is subjective and its determination generally requires significant judgment.


	Year Ended December 31,
	2016		2015		2014
Expected volatility	42.6 – 45.3	%	44.1 – 48.9	%	36.4 – 53.2	%
Risk-free interest rate	1.12 – 2.26	%	1.51 – 1.79	%	0.43 – 2.04	%
Expected term (in years)	4.8 – 6.1		5.6 – 6.1		2.1 – 6.1
Dividend yield	—	%	—	%	—	%

Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company used the simplified method to determine the expected term, which is calculated as the average of the time to vesting and the contractual life of the options.

Expected volatility. Since the Company does not have a long trading history for its common stock, the expected volatility was derived from the average historical volatilities of publicly traded companies within a similar industry that are considered to be comparable to the Company’s business over a period approximately equal to the expected term for employees’ options.

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield with a maturity equal to the expected term of the option in effect at the time of grant.

Dividend yield. The Company has never paid dividends on its common stock and is prohibited from paying dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.

Non-employee Stock-based Compensation

Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options vest. During the year ended December 31, 2016, the Company granted options to purchase 8,073 shares of common stock to non-employees with a weighted-average exercise price of $7.51 per share. During the year ended December 31, 2015, the Company did not grant any options to non-employees. During the year ended December 31, 2014, the Company granted options to purchase 23,606 shares of common stock to non-employees with a weighted-average exercise price of $4.42 per share.

Options to purchase 31,990 shares, 15,498 shares and 15,498 shares of common stock were outstanding with a weighted-average exercise price of $5.26, $4.42 and $4.42 per share as of December 31, 2016, 2015 and 2014, respectively. Stock-based compensation expense for non-employees was $23,000, $9,000, and 23,000 for the years ended December 31, 2016, 2015, and 2014, respectively.

The Company believes that the fair value of the stock options is more reliably measurable than the fair value of services received. The fair value of the stock options granted is calculated at each reporting date using the Black-Scholes option pricing model with the following assumptions:


	Year Ended December 31,
	2016		2015		2014
Expected volatility	52.3 - 52.7	%	51.6 - 52.9	%	52.8 - 53.8	%
Risk-free interest rate	1.94 - 2.41	%	1.72 - 2.02	%	2.17 - 2.48	%
Expected term (in years)	9.5 - 9.8		6.6 - 9.1		7.3 - 9.8
Dividend yield	—	%	—	%	—	%