Note 13. Common Stock and Stockholders’ Equity (Deficit)

Capitalization

On July 7, 2015, Teladoc completed its IPO in which the Company issued and sold 9,487,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $19.00 per share. The Company received net proceeds of $163.1 million after deducting underwriting discounts and commissions of $12.6 million as well as other offering expenses of $4.5 million.

On June 17, 2015, the Company filed a Certificate of Amendment to the Company’s Certificate of Incorporation to effect a one‑for‑2.2859 reverse stock split of all outstanding shares of common stock with the Secretary of State of the State of Delaware. The Certificate of Amendment provided that every 2.2859 shares of the Company’s issued and outstanding common stock automatically combine into one issued and outstanding share of the Company’s common stock. The Certificate of Amendment did not change the par value of the Company’s common stock and preferred stock. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split. In addition, the Certificate of Amendment increased the number of authorized shares of the Company’s common stock to 75,000,000 shares and the number of authorized shares of the Company’s preferred stock to 50,479,286 shares. Additionally, the holders of a majority of the outstanding shares of the Preferred Stock (voting as a single class on an as‑converted basis, including holders of at least a majority of the outstanding shares of Series F Preferred Stock) approved the automatic conversion of the Preferred Stock into common stock of the Company upon the closing of an IPO of the common stock of the Company at a per share price of at least $12.00 (prior to underwriting discounts and commissions) that results in aggregate proceeds to the Company of at least $75.0 million (net of underwriting discounts and commissions). On July 7, 2015, all of the Company’s then-outstanding convertible preferred stock converted into an aggregate of 25.5 million shares of common stock and all of the Company’s redeemable common stock converted into 113,294 shares of common stock.

See Note 18 “Subsequent Events” for information regarding the Company’s Follow-On Offering.

Warrants

On May 2, 2014, the Company issued 131,239 common stock warrants to purchase an aggregate of 131,239 shares of its common stock at an exercise price of $2.95 per share to two entities affiliated with SVB. The common stock warrants were immediately exercisable upon issuance and have a 10-year term. The fair value of the common stock warrants on the date of issue was approximately $0.2 million. On July 24, 2015, the Company issued 59,281 shares of common stock resulting from the cashless exercise of these 65,620 warrants at an exercise price of $2.95 per share for one of the SVB affiliates and on December 22, 2015, the Company issued 54,830 shares of common stock resulting from the cashless exercise of the remaining 65,619 warrants at an exercise price of $2.95 per share.

In July 2016, in conjunction with the debt refinancing of the Mezzanine Term Loan, the Company issued 798,694 common stock warrants to purchase an aggregate of 798,694 shares of its common stock at an exercise price of $13.50 per share to two entities affiliated with SVB. The common stock warrants were immediately exercisable upon issuance and have a 10-year term. The fair value of the common stock warrants on the date of issue was approximately $7.7 million. On December 9, 2016, the Company issued an aggregate of 107,931 shares of common stock resulting from an SVB affiliate cashless exercise of 399,347 of these warrants at an exercise price of $13.50 per share. At December 31, 2016, 399,347 warrants remain outstanding.

Stock Plan and Stock Options

The Company’s 2015 Incentive Award Plan (the “Plan”) provides for the issuance of incentive and nonstatutory options and other equity-based awards to its employees and non‑employees. Options issued under the Plan are exercisable for periods not to exceed ten years, and vest and contain such other terms and conditions as specified in the applicable award document. Prior to becoming a public company, pursuant to the Company’s Second Amended and Restated Stock Incentive Plan which is now retired, the Company historically issued incentive and non-statutory stock options with exercise prices equal to the fair value of the Company’s common stock on the date of grant, as determined by the Company’s board of directors informed by third-party valuations. Subsequent to becoming a public company, only options to buy common stock have been issued under the Plan, with exercise prices equal to the closing price of shares of the Company’s common stock on the New York Stock Exchange.

Activity under the Plan is as follows (in thousands, except share and per share amounts and years):


					Weighted-
			Weighted-		Average
	Shares	Number of	Average		Remaining	Aggregate
	Available	Shares	Exercise		Contractual	Intrinsic
	for Grant	Outstanding	Price		Life in Years	Value
Balance at January 1, 2014	694,280	2,115,069	$	1.14	8.28	$	4,058
Increase in Plan authorized shares	1,621,795	—	$	—	—	$	—
Stock option grants	(1,574,104)	1,574,104	$	5.53	—	$	—
Stock options exercised	—	(786,074)	$	0.96	—	$	—
Stock options cancelled	—	(27,993)	$	1.60	—	$	—
Balance at December 31, 2014	741,971	2,875,106	$	3.73	8.38	$	6,758
Increase in Plan authorized shares	2,493,337	—	$	—	—	$	—
Stock option grants	(1,522,581)	1,522,581	$	—	—	$	—
Stock options exercised	—	(270,545)	$	—	—	$	—
Stock options cancelled	240,064	(240,064)
Stock options expired	33,599	(33,599)	$	—	—	$	—
Balance at December 31, 2015	1,986,390	3,853,479	$	7.62	8.54	$	41,894
Increase in Plan authorized shares	1,937,770	—	$	—	—	$	—
Stock option grants	(3,910,431)	3,910,431	$	14.58	—	$	519
Stock options exercised	—	(594,555)	$	4.29	—	$	6,984
Stock options expired	329,487	(329,487)	$	11.62	—	$	1,699
Balance at December 31, 2016	343,216	6,839,868	$	11.70	8.64	$	36,795
Vested or expected to vest December 31, 2016		6,199,485	$	11.38	8.55	$	35,426
Exercisable as of December 31, 2016		1,604,209	$	6.08	7.20	$	17,505

The total grant‑date fair value of stock options granted during the year ended December 31, 2016, 2015 and 2014 was $25.9 million, $10.8 million and $4.8 million, respectively.

Stock‑Based Compensation

All stock‑based awards to employees are measured based on the grant‑date fair value of the awards and are generally recognized in the Company’s consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award (generally requiring a four‑year vesting period for each award). The Company estimates the fair value of stock options granted using the Black‑Scholes option‑pricing model. Compensation cost is generally recognized over the vesting period of the applicable award using the straight‑line method.

Given the absence of a public trading market prior to July 2015, the Company’s board of directors considered numerous objective and subjective factors to determine the fair value of its common stock at each grant date. These factors included, but were not limited to, (i) contemporaneous valuations of common stock performed by unrelated third‑party specialists; (ii) the prices for the Preferred Stock sold to outside investors; (iii) the rights, preferences and privileges of the Preferred Stock relative to the common stock; (iv) the lack of marketability of the common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or a merger or acquisition of the Company, given prevailing market conditions.

The assumptions used in the Black‑Scholes option‑pricing model were determined as follows:

Volatility. Since the Company does not have a trading history prior to July 2015 for its common stock, the expected volatility was derived from the historical stock volatilities of several unrelated public companies within its industry that it considers to be comparable to its business combined with the Company’s over a period equivalent to the expected term of the stock option grants.

Risk‑Free Interest Rate. The risk‑free interest rate is based on U.S. Treasury zero‑coupon issues with remaining terms similar to the expected term on the options.

Expected Term. The expected term represents the period that the stock‑based awards are expected to be outstanding. When establishing the expected term assumption, the Company utilized the historical data.

Dividend Yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, it used an expected dividend yield of zero.

Forfeiture rate. The Company uses historical data to estimate pre‑ vesting option forfeitures and record stock‑based compensation expense only for those awards that are expected to vest.

The fair value of each option grant was estimated on the date of grant using the Black‑Scholes option‑pricing model with the following assumptions and fair value per share:


	Year Ended December 31,
	2016		2015		2014
Volatility		44.7% – 47.8%		45.4% – 51.0%		53.3% – 53.7%
Expected life (in years)		6.0		6.9		7
Risk-free interest rate		1.09% - 2.29%		1.85% - 2.06%		1.92% - 2.30%
Dividend yield		–		–		–
Weighted-average fair value of underlying common stock	$	6.63	$	7.09	$	5.53

Employee Stock Purchase Plan

In July 2015, the Company adopted the 2015 Employee Stock Purchase Plan, or ESPP, in connection with its initial public offering. A total of 458,024 shares of common stock were reserved for issuance under this plan. The Company’s ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. Under the ESPP, the Company may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of its common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock at the beginning of an offering period or on the date of purchase.

As of December 31, 2016, the Company had not issued any shares under the ESPP and 458,024 remained available for issuance.

For the year ended December 31, 2016, the Company recorded stock-based compensation expense related to the ESPP of $0.4 million based on offerings made under the plan to-date, and there was none in 2015 and 2014.

Total compensation costs charged as an expense for stock‑based awards, including stock options and ESPP, recognized in the components of operating expenses are as follows (in thousands):


	Year Ended
	December 31,
	2016		2015		2014
Administrative and marketing	$	514	$	83	$	23
Sales		1,365		422		75
Technology and development		1,322		337		39
General and administrative		4,522		2,233		396
Total stock-based compensation expense	$	7,723	$	3,075	$	533

As of December 31, 2016, the Company had $24.7 million in unrecognized compensation cost related to non‑vested stock options, which is expected to be recognized over a weighted‑average period of approximately 2.9 years.