9. STOCK‑BASED COMPENSATION

Stock Incentive Plans—In December 2009, the Board of Directors (the “Board”) adopted the 2009 Employee, Director and Consultant Equity Incentive Plan (the “2009 Plan”) for the issuance of common stock and stock options to employees, officers, directors, consultants, and advisors.

In July 2017, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective, as a result, and no further stock options or other awards will be made under the 2009 Plan. The 2017 Plan was established to provide equity based ownership opportunities for employees, officers, directors, consultants, and advisors. As of September 30, 2018, there were 1,050,649 shares of common stock available for grant under the 2017 Plan. In addition, any shares of common stock subject to awards under the 2009 Plan that expire, are forfeited, or are otherwise surrendered, without having been fully exercised or resulting in any common stock being issued will become available for issuance under the 2017 Plan, up to an additional 2,649,952 shares, which is the number of shares issuable pursuant to outstanding awards granted under the 2009 Plan.

Also approved under the 2017 Plan is an annual increase for each of the years through December 31, 2027, equal to the least of (i) 3,573,766 shares of common stock, (ii) 4% of the shares of common stock outstanding on December 31 of the prior year and (iii) an amount determined by the Board.

Under the plans, the Board determines the number of shares of common stock to be granted pursuant to the awards, as well as the exercise price and terms of such awards. The exercise price of incentive stock options could not be less than the fair value of the common stock on the date of grant. Stock options awarded under the plans expire 10 years after the grant date, unless the Board sets a shorter term. Options granted under the plans generally vest over a four‑year period. A portion of the unvested stock options will vest upon the sale of all or substantially all of the stock or assets of the Company.

In the past, the Company had granted stock options which contain performance‑based vesting criteria. These criteria were milestone events that were specific to the Company’s corporate goals. Stock‑based compensation expense associated with performance‑based stock options is recognized if the achievement of the performance condition is considered probable using management’s best estimates. As of September 30, 2018 there were no performance-based awards outstanding.

For the three months ended September 30, 2018 and 2017, the Company did not grant any stock options to non-employee consultants. For the nine months ended September 30, 2018 and 2017, the Company granted 0 and 4,224 stock options to non‑employee consultants, respectively. During the three months ended September 30, 2018 and 2017, the Company recognized $0 and $46,000, respectively, in stock compensation expense related to non‑employee consultants. During the nine months ended September 30, 2018 and 2017, the Company recognized $11,000 and $83,000, respectively, in stock compensation expense related to non‑employee consultants.

Inducement Stock Option Awards—During the three months ended September 2018, the Company granted non-statutory stock options to purchase an aggregate of 69,500 shares of the Company’s common stock to seven new employees. During the nine months ended September 2018, the Company granted non-statutory stock options to purchase 219,500 shares of Company’s common stock to a total of eight new employees. These stock options will vest over a four-year period, with 25% of the shares underlying each option award vesting on the one-year anniversary of the applicable employees’ new hire date and the remaining 75% of the shares underlying each award vesting monthly thereafter for three-years. Vesting of each option is subject to such employee’s continued service with the Company through the applicable vesting dates. These stock options were granted outside of the 2017 Plan as an inducement material to each employee’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

A summary of option activity for employee and non‑employee awards under the 2009 Plan, the 2017 Plan and inducement grants for the nine months ended September 30, 2018 is as follows (in thousands, except share and per share amounts):


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number of	Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value
				(Years)
Outstanding at January 1, 2018	3,738,928	$	6.93	8.4	$	44,578
Granted	1,449,690		13.74
Exercised	(107,233)		2.71
Forfeited	(144,152)		5.85
Outstanding at September 30, 2018	4,937,233	$	9.04	8.03	$	16,968
Vested or expected to vest at September 30, 2018	4,937,233	$	9.04	8.03	$	16,968
Options exercisable at September 30, 2018	2,414,308	$	5.29	7.14	$	13,198

The Company records stock‑based compensation related to stock options granted at fair value. The Company utilizes the Black‑Scholes option‑pricing model to estimate the fair value of stock option grants and to determine the related compensation expense. The assumptions used in calculating the fair value of stock‑based payment awards represent management’s best estimates. There were 747,892 options granted during the nine months ended September 30, 2017. The assumptions used in determining fair value of the stock options granted in the nine months ended September 30, 2018 and 2017 are as follows:


	Nine Months Ended September 30,
	2018			2017
Expected volatility	80%	–	85%	103%	–	122%
Risk-free interest rate	2.63%	–	2.96%	1.81%	–	2.29%
Expected dividend yield		0%			0%
Expected term (in years)	5.27	–	6.13	5.04	–	9.82

The Company derived the risk‑free interest rate assumption from the U.S. Treasury rates for U.S. Treasury zero‑coupon bonds with maturities similar to those of the expected term of the awards being valued. The Company based the assumed dividend yield on its expectation of not paying dividends in the foreseeable future. The Company calculated the weighted‑average expected term of options using the simplified method, as the Company lacks relevant historical data due to the Company’s limited operating experience. The estimated volatility is based upon the historical volatility of comparable companies with publicly available share prices. The impact of forfeitures on compensation expense is recorded as they occur.

During the three months ended September 30, 2018 and 2017, the weighted average grant‑date fair value of options granted was $8.83 and $14.74, respectively. During the nine months ended September 30, 2018 and 2017, the weighted average grant‑date fair value of options granted was $9.99 and $13.19, respectively. The fair value is being expensed over the vesting period of the options on a straight‑line basis as the services are being provided. As of September 30, 2018, there was $22.7 million of unrecognized compensation cost related to the stock options granted, which is expected to be expensed over a weighted‑average period of 2.98 years.

Employee Stock Purchase Plan—In 2017, the Company approved the 2017 Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lesser of the closing price of the common stock on (i) the first business day of the plan period or (ii) the exercise date. The initial six-month period will not commence until January 1, 2019.

Reserved Shares—As of September 30, 2018 and December 31, 2017, the Company had reserved the following shares of common stock issuable upon exercise of rights under equity compensation plans and inducement stock option awards:


	September 30,	December 31,
	2018	2017

ESPP	223,341	223,341
Shares reserved for outstanding inducement stock option award	219,500	—
2009 Plan	2,649,952	2,868,449
2017 Plan	3,118,430	2,025,633
Total	6,211,223	5,117,423

Stock-based Compensation Expenses—Stock‑based compensation expense was classified in the statements of operations as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017

Research and development	$	684	$	357	$	2,064	$	749
General and administrative		1,581		624		4,353		1,321
Total	$	2,265	$	981	$	6,417	$	2,070

For three and nine months ended September 30, 2018, stock-based compensation expense for the Company’s manufacturing employees related to INVELTYS manufactured since the FDA approval of $66,000, has been capitalized into inventory as a component of overhead expense.