STOCK-BASED COMPENSATION

2014 Omnibus Incentive Plan

In January 2014, our board of directors approved the 2014 Omnibus Incentive Plan and amended and restated the plan in March 2014. Our stockholders approved the Amended and Restated 2014 Omnibus Incentive Plan, or the 2014 Plan, in March 2014. Our 2014 Plan initially permitted the issuance of equity-based instruments covering up to a total of 1,400,000 shares of common stock. In June 2016, our board of directors and stockholders approved an increase of 1,300,000 shares and in June 2017 approved an additional increase of 3,250,000 shares of common stock bringing the total shares allowed under the plan to 5,950,000. As of December 31, 2018, there were 1,189,389 shares available to issue under the 2014 Plan.

Option Valuation

We have computed the fair value of options granted to employees and non-employees using the Black-Scholes option valuation model. The compensation costs of non-employee arrangements are subject to re-measurement at each reporting period over the vesting terms as earned. Option forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material. The expected term used for options issued to non-employees is the contractual life and the expected term used for options issued to employees is the estimated period of time that options granted are expected to be outstanding. We have estimated the expected life of our employee stock options using the “simplified” method, whereby, the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to our lack of sufficient historical data. For non-employees we use an estimated expected life of the remaining term of the stock option grant, which is initially ten years. Since our stock has not been publicly traded for a sufficiently long period of time, we are utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within our industry. The risk-free interest rate was determined from the U.S. Treasury's Daily Treasury Yield Curve Rate with a term that best approximates the expected term of the instrument being valued.

Stock Options to Employees and Non-Employees

During the years ended December 31, 2017 and 2018, we granted incentive stock options for the purchase of 488,300 and 252,500 shares, respectively, of our common stock to our employees and non-employees. The options granted in 2017 have an exercise price range of $4.36 to $7.80 per share with a term of ten years. The options granted in 2018 have an exercise price range of $1.80 to $5.96 per share with a term of ten years. The options vest over various periods, generally quarterly over sixteen quarters. The options granted in 2017 had an aggregate grant date fair value of $1.4 million and the options granted in 2018 had an aggregate grant date fair value of $779,000 utilizing the Black-Scholes option valuation model.

We estimated the fair value of stock options awarded during the years ended December 31, 2017 and 2018 using the Black-Scholes option valuation model. The fair values of stock options granted for the years were estimated using the following assumptions:



	Option Grants Awarded During the Year Ended December 31, 2017	Option Grants Awarded During the Year Ended December 31, 2018
Stock Price	$4.36 - $7.80	$1.80 - $5.96
Dividend Yield	0%	0%
Expected Volatility	60.0%	70.0%
Risk-free interest rate	1.95% - 2.37%	2.50% - 3.09%
Expected Term	7 to 10 years	7 years

Stock-based compensation expense related to stock options for employees was $435,000 and $469,000 for the years ended December 31, 2017 and 2018, respectively. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from our estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised. For the years ended December 31, 2017 and 2018, we applied a forfeiture rate of six percent, which is reflected in our stock-based compensation expense related to stock options.

In January 2017, we modified certain stock options previously granted to a former executive. The modification was made in connection with the executive’s termination. The modification included accelerated vesting of stock options to purchase 8,752 shares of common stock as well as an extension of the exercise period for all vested shares, including stock options to purchase 17,504 shares of common stock. As a result of the modification, additional stock compensation expense of $19,000 was recognized for the year ended December 31, 2017. There was no expense related to the modification for the year ended December 31, 2018.

For stock options paid in consideration of services rendered by non-employees, we recognize compensation expense in accordance with the requirements of ASC 505-50. Non-employee stock option grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to performance, the value of these stock options, as calculated using the Black-Scholes option valuation model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of stock options granted to non-employees is subject to change in the future, the amount of the future compensation expense is subject to adjustment until the common stock options are fully vested. Stock-based compensation expense related to stock options for non-employees was $9,000 and $7,000 for the years ended December 31, 2017 and 2018, respectively.

Stock Option Award Activity

The following is a summary of our stock option activity during the year ended December 31, 2017:



	Number of Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Life In Years
Outstanding, January 1, 2017	801,690		$	5.25	$	3.32	7.40
Granted	488,300		4.62		2.79		9.51
Exercised	(32,928	)	2.37		1.41		—
Canceled/Forfeited	(174,572	)	6.40		4.18		—
Outstanding, December 31, 2017	1,082,490		$	4.87	$	3.00	8.38



	Number of Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Life In Years
Exercisable, January 1, 2017	419,174		$	5.94	$	3.86	6.00
Vested	457,338		4.57		2.77		8.65
Exercised	(32,928	)	2.37		1.41		—
Canceled/Forfeited	(139,281	)	6.65		4.38		—
Exercisable, December 31, 2017	704,303		$	5.08	$	3.17	8.15

The following is a summary of our stock option activity during the year ended December 31, 2018:



	Number of Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Life In Years
Outstanding, January 1, 2018	1,082,490		$	4.87	$	3.00	8.38
Granted	252,500		4.54		3.09		9.16
Exercised	(4,692	)	2.10		1.75		—
Canceled/Forfeited	(75,018	)	4.72		2.89		—
Outstanding, December 31, 2018	1,255,280		$	4.82	$	3.03	7.75



	Number of Options		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Life In Years
Exercisable, January 1, 2018	704,303		$	5.08	$	3.17	8.15
Vested	161,404		4.69		2.89		7.56
Exercised	(4,692	)	2.10		1.75		—
Canceled/Forfeited	(17,996	)	4.72		2.84		—
Exercisable, December 31, 2018	843,019		$	5.02	$	3.13	7.23

The following table presents information related to stock options outstanding and exercisable at December 31, 2018:



Options Outstanding		Options Exercisable
Exercise Price	Outstanding Number of Options	Weighted Average Remaining Life In Years	Exercisable Number of Options
$1.80 - $2.00	161,183	7.09	99,637
$3.25 - $4.92	652,297	8.41	393,944
$5.01 - $6.00	281,500	5.87	214,115
$6.18 – $7.20	70,000	5.97	55,004
$7.54 – $7.80	67,800	6.09	58,749
$8.06 - $12.98	22,500	6.05	21,570
	1,255,280	7.23	843,019

As of December 31, 2018, there was $1.1 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average vesting period of approximately 2.8 years. The aggregate intrinsic value of outstanding options and options vested as of December 31, 2017 were $2.9 million and $1.7 million, respectively, representing options whose exercise price was less than the closing fair market value of our common stock of $7.47 per share. The aggregate intrinsic value of outstanding options and options vested as of December 31, 2018 were zero as there were no options whose exercise price was less than the closing fair market value of our common stock of $1.33 per share. There were no excess tax benefits realized for tax deductions from stock options exercised during the years ended December 31, 2017 and 2018 as we have recorded a full valuation allowance against our deferred income taxes.

Restricted Stock Units Activity

We account for restricted stock units (RSUs) issued to employees at fair value, based on the market price of our stock on the date of grant, net of estimated forfeitures. The fair value of non-employee restricted stock units awarded are re-measured as the awards vest, and the resulting increase in fair value, if any, is recognized as expense in the period the related services are rendered. RSUs issued in connection with our employee incentive programs typically vest within 10 days of grant. All other RSUs, primarily issued as long term incentives, generally vest annually over three to four years. During the years ended December 31, 2017 and 2018 we recorded $3.6 million and $4.8 million, respectively, of stock-based compensation related to the restricted stock units that have been issued to-date.

A summary of restricted stock unit activity for the year ended December 31, 2017 is as follows:



	Number of Restricted Share Units		Weighted-Average Grant-Date Fair Value Per Share
Outstanding at January 1, 2017	1,455,558		$	3.64
Granted	722,400		5.37
Vested	(649,359	)	4.26
Forfeited	(51,741	)	5.40
Outstanding at December 31, 2017	1,476,858		$	4.96

A summary of restricted stock unit activity for the year ended December 31, 2018 is as follows:



	Number of Restricted Share Units		Weighted-Average Grant-Date Fair Value Per Share
Outstanding at January 1, 2018	1,476,858		$	4.96
Granted	1,661,750		4.60
Vested	(1,051,939	)	4.68
Forfeited	(165,075	)	5.17
Outstanding at December 31, 2018	1,921,594		$	4.78

As of December 31, 2018, there was $6.3 million of unrecognized compensation expense related to unvested restricted stock unit agreements which is expected to be recognized over a weighted-average period of approximately 2.1 years. For restricted stock unit awards subject to graded vesting, we recognize compensation cost on a straight-line basis over the service period for the entire award.

Market-based Awards

In August 2016, we granted 250,000 market-based restricted stock units to an executive. The restricted stock units are subject to market-based vesting requirements, measured quarterly, based on the average of (a) the average high daily trading price of our common stock for each trading day during the last month of the applicable calendar quarter and (b) the average low daily trading price of our common stock for each trading day during the last month of the applicable calendar quarter, each as reported by The Nasdaq Stock Market, LLC. The restricted stock units are eligible to be earned on a quarterly basis based on a linear interpolation of the applicable share price, or in the case of a liquidation event, on the day of (or in connection with) such liquidation event based on the applicable transaction price. Once earned, the restricted stock units vest 50% on the date such restricted stock units become earned and 50% on September 30, 2019. We recognize compensation expense for restricted stock units with market-based conditions using a graded vesting model, based on the probability of the performance condition being met, net of estimated pre-vesting forfeitures. The share price on the date of issuance was $5.06 per share. To determine the fair value of the award, we used a Monte Carlo simulation, which simulates future stock prices for the Company and, hence, shares vested, pursuant to the award. A key input into the model is the expected volatility for our stock. This estimate considered the historical volatility of our stock as well as the stock price volatility of guideline public companies. The fair value was determined to be $74,000. For each of the years ended December 31, 2017 and 2018, we recognized $24,000 of stock compensation expense in connection with this award, which is included in sales, marketing and administration expenses. The unamortized expense related to this award is $18,000 and is expected to be recognized over 0.8 years.

Incentive Bonus Awards

We provide eligible employees, including executives, the opportunity to earn bonus awards upon achievement of predetermined performance goals and objectives. The purpose is to reward attainment of company goals and/or individual performance objectives, with award opportunities expressed as a percentage of base salary. Bonuses can be measured and paid quarterly and/or annually, and are paid in cash, equity or a combination of cash and equity, at the discretion of our compensation committee.

Total stock-based compensation recorded in the consolidated statements of comprehensive loss is allocated as follows:



	Year Ended December 31, 2017		Year Ended December 31, 2018
Research and development
Employees	$	1,937,000	$	2,479,000
Non-employees	181,000		77,000
Total research and development	2,118,000		2,556,000

Sales, marketing and administration
Employees and directors	1,824,000		2,604,000
Non-employees	179,000		102,000
Total sales, marketing and administration	2,003,000		2,706,000

Total stock-based compensation	$	4,121,000	$	5,262,000