8. 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.

The Company’s 2016 Plan provides for the grant of incentive stock options, 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 subject to an automatic 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.

2008 Employee Incentive Plan

The 2008 Equity Incentive Plan (the 2008 Plan) provided 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.

No further grants will be made under the Company’s 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, 2019, 386,554 options under the 2008 Plan remained outstanding.

Summary of Stock Option Activity

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


		Options Outstanding
			Weighted-		Weighted-
	Options and		Average		Average
	Awards		Exercise		Remaining	Aggregate
	Available for	Number of	Price Per		Contractual	Intrinsic
	Grant	Options	Share		Life (years)	Value
						(In thousands)
Balance—December 31, 2018	764,145	1,475,299	$	7.60	7.8	$	284
Authorized	512,864
RSUs granted	(183,402)
RSUs cancelled/forfeited	22,450
Options granted	(660,852)	660,852	$	6.58
Options exercised	—	(10,416)	$	4.69		$	24
Options cancelled/forfeited	183,022	(193,832)	$	8.57
Balance—December 31, 2019	638,227	1,931,903	$	7.17	6.5	$	188
Options exercisable—December 31, 2019		961,162	$	7.11	5.4	$	187

During the years ended December 31, 2019 and 2018, the Company granted options with a weighted-average grant date fair value of $4.06 and $4.45 per share, respectively.

The total fair value of options vested during the year was $2.3 million and $1.9 million, for the years ended December 31, 2019, and 2018, 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 Company had 396,000 shares available for issuance under the Company’s ESPP as of December 31, 2019. Employees purchased 44,344 shares for $232,000 during the year ended December 31, 2019 and 42,327 shares for $266,000 during the year ended December 31, 2018.

The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine fair value of the Company’s common shares issued under the ESPP:


	Year Ended December 31,
	2019		2018
Expected volatility	39.6 – 74.2	%	59.5 – 87.8	%
Risk-free interest rate	1.67 – 2.66	%	0.94 – 2.11	%
Expected term (in years)	0.5 – 1.0		0.5 – 1.0
Dividend yield	—	%	—	%

Modification of Stock-Based Awards

In February 2018, the Company modified the terms of 400,000 vested and unvested stock option awards granted to the Chief Executive Officer, by reducing their exercise price from $16.25 per share to $7.64 per share. There was no change to any of the other terms of the option awards. The modification resulted in an incremental value of $600,000 being allocated to the options, of which $63,000 was recognized to expense immediately based on options that were vested at the time of the modification. The remaining incremental value of $537,000 attributable to unvested options will be recognized over the remaining vesting term through September 2021.

Restricted Stock Units

In September 2017, the Company’s board of directors authorized the issuance of Restricted Stock Units (RSUs), under the 2016 Plan and adopted a form of Restricted Stock Unit Award Agreement, which is intended to serve as a standard form agreement for RSU grants issued to employees, executive officers, directors and consultants. The fair value of the RSUs is recognized as expense ratably over the vesting period, as determined by the board of directors on the date of grant.

The following table summarizes RSU activity for the year ended December 31, 2019:


	RSUs Outstanding
		Weighted-
		Average
	Number of	Grant Date
	Restricted Stock	Fair Value Per
	Units	Share
Balance—December 31, 2018	93,560	$	8.38
Granted	183,402		6.64
Vested	(42,550)		8.04
Cancelled/forfeited	(22,450)		8.02
Balance—December 31, 2019	211,962	$	6.97

The fair value of RSUs is determined on the date of grant based on the market price of the Company’s common stock on that date. As of December 31, 2019, there was $1.0 million of unrecognized stock-based compensation expense related to RSUs to be recognized over a weighted-average period of 2.4 years.

Stock-based Compensation Expense

As of December 31, 2019, there was $4.5 million of total unrecognized compensation expense related to unvested options which is expected to be recognized over a weighted-average period of 2.5 years. Compensation cost capitalized within inventory at December 31, 2019 and 2018 was not material.

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.


	Year Ended December 31,
	2019		2018
Expected volatility	65.1 – 74.4	%	51.9 – 56.6	%
Risk-free interest rate	1.46 – 2.52	%	2.64 – 2.94	%
Expected term (in years)	5.3 – 6.1		5.7 – 6.1
Dividend yield	—	%	—	%

Expected volatility. The Company determines the expected stock price volatility based on the historical volatility of its common stock and the historical volatilities of a peer group. Industry peers consist of several public companies in the technology industry similar in size, stage of life cycle and financial leverage. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient trading history of our common stock becomes available. If circumstances change such that the identified companies are no longer similar, the Company will revise its peer group to substitute more suitable companies in this calculation.

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.

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.

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.