Note 10. Stock-Based Compensation

Stock Incentive Plans

The Company has two equity incentive plans: the 2006 Stock Plan (“2006 Plan”) and the 2015 Omnibus Equity Incentive Plan (“2015 Plan”).

In February 2006, the Company adopted the 2006 Plan, which provided for the granting of stock options to executives, employees, and other service providers under the terms and provisions established by the Board of Directors. The Company granted options under the 2006 Plan until May 2015, at which time it was terminated with respect to future awards, although it continues to govern the terms of options that remain outstanding under the plan. Certain options vested upon completion of the IPO and the remaining unvested options vest over original service periods between two-and-a-quarter and four years.

In May 2015, the 2015 Plan became effective upon the IPO and all shares that were reserved, but not issued, under the 2006 Plan were assumed by the 2015 Plan. Upon effectiveness, the 2015 Plan had 3,087,729 shares of common stock reserved for future issuance, which included 212,729 shares under the 2006 Plan that were transferred to and assumed by the 2015 Plan. The 2015 Plan provides for automatic annual increases in shares available for grant, beginning on January 1, 2016. In addition, shares subject to awards under the 2006 Plan that are forfeited or terminated will be added to the 2015 Plan.

The 2015 Plan provides for the grant of incentive stock options (“ISOs”), within the meaning of Section 422 of the Code, to our employees and for the grant of nonstatutory stock options (“NSOs”), stock appreciation rights, restricted stock, restricted stock units, performance units, and performance shares to our employees, directors, and consultants. The ISOs and NSOs will be granted at a price per share not less than the fair value at date of grant. Options granted generally vest over a four-year period, with 25% vesting at the end of one year and the remaining vesting monthly thereafter. Options granted generally are exercisable for 10 years, the maximum contractual period.

As of December 31, 2016, a total of 5,223,245 shares of common stock were reserved for issuance under the 2015 Plan, of which 3,522,999 shares of common stock are available for future grant. As of December 31, 2016, a total of 2,878,536 and 1,700,246 options are outstanding under the 2006 and 2015 Plans, respectively.

The following is a summary of stock option information and weighted average exercise prices under the Company’s stock incentive plans (in thousands, except share data and price per share):

	Shares Subject to Outstanding Options			Weighted- Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding — Balance at December 31, 2014		3,759,839		$	3.00	$	12,499
Options granted		352,494			7.30
Options exercised		(609,066	)		0.59
Options cancelled and forfeited		(75,758	)		7.33
Outstanding — Balance at December 31, 2015		3,427,509		$	3.76	$	3,707
Options granted		1,799,395			5.17
Options exercised		(228,141	)		1.18
Options cancelled and forfeited		(419,981	)		4.49
Outstanding — Balance at December 31, 2016		4,578,782			4.38	$	—
Vested and expected to vest — December 31, 2016		4,561,042			4.37	$	—
Exercisable —December 31, 2016		2,804,796		$	3.65	$	—

Aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company’s common stock determined by the Board of Directors for each of the respective periods. The intrinsic value of options exercised was $0 and $1.5 million for the years ended December 31, 2016 and 2015, respectively.

At December 31, 2016 and 2015, there were no expired options, and the total fair value of shares vested during the years were $283,000 and $730,000, respectively.

As of December 31, 2016, there was $1.7 million of unrecognized compensation cost related to unvested stock-based compensation grants that will be recognized over the weighted-average remaining recognition period of 3.12 years.

In determining the fair value of the stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

Expected Term—The expected term is the estimated period of time outstanding for stock options granted and was estimated based on historical, as well as anticipated future, exercise activity.

Expected Volatility—Since the Company was privately held and does not have a long trading history for its common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. When selecting comparable publicly traded biotechnology companies on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate—The risk-free interest rate is based on the interest rate of U.S. Treasuries of comparable maturities on the date the options were granted.

Expected Dividend—The expected dividend yield is based on the Company’s expectation of future dividend payouts to common stockholders.

The fair value of stock option awards to employees was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumption:

	Year Ended December 31,
Assumptions	2016		2015
Expected term (years)	5.40 - 6.25			5.52
Expected volatility	87.80% - 91.40%			100%
Risk-free interest rate	1.17% - 1.54%			1.61%
Expected dividend yield		—		—

The weighted- average, estimated grant-date fair value of employee stock options granted during the years ended December 31, 2016 and 2015 was $1.13 and $4.64, respectively. The Company recognized $1.0 million and $1.3 million of compensation expense for stock options to employees and nonemployees for the years ended December 31, 2016 and 2015, respectively.

Employee Stock Purchase Plan

In May 2015, the Company’s 2015 Employee Stock Purchase Plan (“ESPP”) was introduced. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. After the first offering period, which began on May 14, 2015 and ended on February 1, 2016, the ESPP provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period. The initial number of shares of common stock reserved for issuance under the ESPP is 625,000, and the ESPP provides for automatic annual increases in the shares available for purchase beginning on January 1, 2016. As of December 31, 2016, 75,342 shares had been issued under the ESPP. The Company recorded $80,000 and $69,000 of ESPP related compensation expense for the years ended December 31, 2016 and 2015, respectively.