Stock-Based Compensation

Stock Incentive Plans

2006 Stock Incentive Plan

The Company’s 2006 Stock Option Plan (“2006 Plan”) was established for granting stock incentive awards to directors, officers, employees and consultants of the Company. Upon closing of the Company’s IPO in August 2014, the Company ceased granting stock incentive awards under the 2006 Plan. The 2006 Plan provided for the grant of incentive and non-qualified stock options and restricted stock grants as determined by the Company’s board of directors. Under the 2006 Plan, stock options were generally granted with exercise prices equal to or greater than the fair value of the common stock as determined by the board of directors, expired no later than 10 years from the date of grant, and vest over various periods not exceeding 4 years.

2014 Stock Incentive Plan

The Company’s 2014 Plan (“2014 Plan”, and together with the 2006 Plan, the “Stock Incentive Plans”), provides for the issuance of shares of common stock in the form of stock options, awards of restricted stock, awards of restricted stock units, performance awards, dividend equivalent awards, stock payment awards and stock appreciation rights to directors, officers, employees and consultants of the Company. Since the establishment of the 2014 Plan, the Company has only granted stock options. Generally, stock options are granted with exercise prices equal to or greater than the fair value of the common stock on the date of grant, expire no later than 10 years from the date of grant, and vest over various periods not exceeding 4 years.

The number of shares reserved for future issuance under the 2014 Plan is the sum of (1) 823,529 shares, (2) any shares that were granted under the 2006 Plan which are forfeited, lapsed unexercised or are settled in cash subsequent to the effective date of the 2014 Plan and (3) an annual increase on the first day of each calendar year beginning January 1, 2015 and ending on January 1, 2024, equal to the lesser of (A) 4% of the shares outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year, and (B) such smaller number of shares determined by the Company’s Board of Directors. As of March 31, 2017 there were 973,512 shares available for future grant under the 2014 Plan.

Stock Options

During the three months ended March 31, 2017 and 2016, the Company granted stock options with an aggregate fair value of $1.7 million and $3.4 million, respectively, which are being amortized into compensation expense over the vesting period of the stock options as the services are being provided.

The following is a summary of stock option activity under the Plans (in thousands, except share and per share amounts):



	Number of Shares		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value
Outstanding at December 31, 2016	4,042,627		$	8.20	7.05	$	4,091
Granted	498,450		5.68
Exercised	(111,630	)	3.03			328
Forfeited	(215,608	)	8.60
Cancelled	(61,574	)	15.35
Outstanding at March 31, 2017	4,152,265		7.91		7.28	3,841
Exercisable at March 31, 2017	2,267,596		6.99		5.92	3,726
Vested or expected to vest at March 31, 2017	3,881,040		7.88		7.15	3,836

Included in the stock options outstanding as of December 31, 2016 are 166,066 options to purchase common stock granted to certain executive officers of the Company that vest upon the achievement of certain performance conditions, which include the attainment of specified operating result and regulatory targets, by December 31, 2017, of which 20,000 options to purchase common stock upon the achievement of certain performance conditions were forfeited during the year ended December 31, 2016. There are 146,066 performance based stock options outstanding at March 31, 2017 and December 31, 2016. The Company will continually evaluate the probability of achievement of each performance condition and will commence recognition of stock-based compensation expense on these awards in the period the achievement of each performance condition is deemed probable, including a catch-up adjustment from the grant date.

The weighted‑average fair values of stock options granted in the three month periods ended March 31, 2017 and 2016 were $3.34 per share and $4.95 per share, respectively, and were calculated using the following estimated assumptions:



	Three months ended
	March 31,
	2017			2016
Weighted-average risk-free interest rate	2.02	%		1.52	%
Expected dividend yield	—	%		—	%
Expected volatility	63	%		60	%
Expected terms	6.0		years	6.0		years

The total fair values of stock options that vested during the three months ended March 31, 2017 and 2016 were $1.1 million and $1.3 million, respectively.

As of March 31, 2017, there was $7.4 million of total unrecognized compensation cost related to unvested stock options granted under the Stock Incentive Plans, including the unrecognized compensation expense of stock options with performance conditions deemed probable of vesting. Total unrecognized compensation cost will be adjusted for future changes in the estimated forfeiture rate. The Company expects to recognize that cost over a remaining weighted‑average period of 2.5 years as of March 31, 2017.

Restricted Stock Units

During the three months ended March 31, 2017, the Company awarded shares of restricted stock units to certain employees at no cost to them, which cannot be sold, assigned, transferred or pledged during the restriction period. The restricted stock and restricted stock units vest through the passage of time, assuming continued employment. Restricted stock units are not included in issued and outstanding common stock until the shares are vested and released. The fair value of the award at the time of the grant is expensed on a straight line basis. The granted restricted stock units had an aggregate fair value of $1.5 million, which are being amortized into compensation expense over the vesting period of the options as the services are being provided.

The following is a summary of restricted stock unit activity under the 2014 Plan (in thousands, except share and per share amounts):




	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2016	272,195		5.83
Granted	249,925		5.85
Vested	—		—
Forfeited	(2,000	)	5.83
Canceled	—		—
Nonvested at March 31, 2017	520,120		5.84

There was no vesting of restricted stock units during the three months ended March 31, 2017. As of March 31, 2017, there was $2.3 million of total unrecognized compensation cost related to unvested stock options granted under the Stock Incentive Plans. Total unrecognized compensation cost will be adjusted for future changes in the estimated forfeiture rate. The Company expects to recognize that cost over a remaining weighted‑average period of 2.16 years as of March 31, 2017.

Employee Stock Purchase Plan

The Company’s 2014 Employee Stock Purchase Plan (the “2014 ESPP”) provides initially for granting up to 220,588 shares of the Company’s common stock to eligible employees. The 2014 ESPP plan period is semi-annual and allows participants to purchase the Company’s common stock at 85% of the lower of (i) the market value per share of common stock on the first day of the offering period or (ii) the market value per share of the common stock on the purchase date. Each participant can purchase up to a maximum of $25,000 per calendar year in fair market value. The first plan period began on August 7, 2014. Stock-based compensation expense from the 2014 ESPP was $62,000 and $53,000 for the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, there were 439,228 shares available under the 2014 ESPP.

Stock‑Based Compensation Expense

The following table summarizes the stock-based compensation expense resulting from awards granted under stock incentive plans, including the 2014 ESPP, that was recorded in the Company’s results of operations for the periods presented (in thousands):



	Three Months Ended March 31,
	2017		2016
Cost of product revenue	$	30	$	26
Research and development	302		270
Selling, general and administrative	796		968
Total stock-based compensation expense	$	1,128	$	1,264

As of March 31, 2017 and March 31, 2016, $29,000 and $26,000 of stock-based compensation expenses was capitalized as part of inventory or T2 instruments and components, respectively.