9. Stock-Based Compensation

In May 2014, the Company adopted and the shareholders approved the 2014 Equity Incentive Plan (the 2014 Plan). Under the 2014 Plan, 233,722 shares of the Company’s common stock were initially reserved for the issuance of stock options to employees, directors, and consultants, under terms and provisions established by the Board of Directors. Under the terms of the 2014 Plan, options may be granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive stock options may not be less than 110% of fair market value, as determined by the Board of Directors. The terms of options granted under the 2014 Plan may not exceed ten years.

In addition, the 2014 Plan contains an "evergreen" provision allowing for an annual increase in the number of shares of our common stock available for issuance under the 2014 Plan on the first day of each fiscal year beginning in fiscal year 2015. The annual increase in the number of shares shall be equal to the greater of:

77,908 shares of our common stock; or

such number of shares as is equal to the number of shares sufficient to cause the option pool to equal 20% of the issued and outstanding common stock of the Company, provided, however, that if on any calculation date the number of shares equal to 20% of the total issued and outstanding shares of common stock is less than the number of shares of common stock available for issuance under the 2014 Plan, no change will be made to the aggregate number of shares of common stock issuable under the 2014 Plan for that year (such that the aggregate number of shares of common stock available for issuance under the 2014 Plan will never decrease).

The number of shares, terms, and vesting periods are determined by the Company’s Board of Directors or a committee thereof on an option by option basis. Options generally vest ratably over service periods of up to four years and expire ten years from the date of grant.

The Company estimated the fair value of options using the BSM option valuation model. The fair value of employee options is being amortized on a straight -line basis over the requisite service period of the awards. During the year ended December 31, 2018 and 2017, stock-based compensation expense for employees was approximately $1,488,000 and $1,303,000, respectively, and stock-based compensation expense for director warrants was approximately $132,000 and $132,000, respectively.

The fair value of the employee options granted during the years ended December 31, 2018 and 2017 were estimated using the following assumptions:


	Year Ended December 31,
	2018	2017
Expected term (in years)	6.25	6.25
Expected volatility	77% - 79%	78% - 80%
Risk-free interest-rate	2.22% - 2.99%	1.83% - 2.22%
Dividend yield	0%	0%

Stock option activity for the year ended December 31, 2018 and 2017 are represented in the following table:


		Options Outstanding
	Shares		Weighted-
	Available	Number of	Average
	for Grant	Shares	Exercise Price
Balance — December 31, 2016	214,758	455,605	$	8.75
Additional shares reserved	77,908	—	$	—
Options granted	(158,918)	158,918	$	11.38
Options cancelled	11,232	(11,232)	$	4.64
Balance — December 31, 2017	144,980	603,291	$	9.52
Additional shares reserved	77,908	—	$	—
Options exercised	—	(974)	$	9.63
Options granted	(291,100)	291,100	$	17.21
Options cancelled	68,212	(68,212)	$	10.52
Balance — December 31, 2018	—	825,205	$	12.15

Options outstanding and exercisable at December 31, 2018 is as follows:


Options Outstanding and Exercisable at December 31, 2018
			Weighted Average
			Remaining
Exercise		Number	Contractual Life	Total Shares	Weighted Average
Price		Outstanding	(in years)	Exercisable	Exercise Price
$	2.89	183,840	5.9	182,151	$	2.89
$	8.50	47,883	9.9	125	$	8.50
$	9.63	72,340	8.5	31,238	$	9.63
$	12.77	23,175	9.7	2,095	$	12.77
$	12.96	58,161	7.0	54,786	$	12.93
$	13.16	181,915	7.8	178,602	$	13.16
$	17.01	154,711	9.0	42,284	$	17.01
$	17.20	103,180	9.3	27,927	$	17.20
$	11.24	825,205	8.2	519,208	$	9.85

During the year December 31, 2018 and 2017, the Company granted options to employees to purchase 351,516 and 138,662 shares with a weighted-average grant date fair value of $9.89 and $11.78 per share, respectively.

As of December 31, 2018, there were total unrecognized compensation costs for employees of approximately $3,704,000 related to these options. These costs are expected to be recognized over a period of approximately 2.9 years, respectively. The aggregate intrinsic value, based on the fair market value of the Company’s common stock, of options outstanding and vested as of December 31, 2018 was $1,556,000 and $1,186,000, respectively.

The Company grants options to purchase common stock to consultants in exchange for services during the normal course of business. During the year ended December 31, 2018 and 2017, the Company granted options to consultants to purchase 16,000 and 20,256 shares, respectively.

The fair value of the options granted to consultants during the year ended December 31, 2018 and 2017 were estimated using the following assumptions:


	Year Ended December 31,
	2018	2017
Expected term (in years)	9.7	9.2 - 10.0
Expected volatility	84%	76% - 85%
Risk-free interest-rate	3.01%	2.20% - 2.40%
Dividend yield	0%	0%

Stock-based compensation expense related to stock options granted to consultants is recognized on a straight-line basis, as the stock options are earned. The Company issued options to non-employees, which generally vest ratably over the time period the Company expects to receive services from the non-employee. The values attributable to these options are amortized over the service period and the unvested portion of these options was remeasured at each vesting date. During the year ended December 31, 2018 and 2017, stock-based compensation expense for consultants was approximately $38,000 and $173,000, respectively.

In December 2018, the Company granted 76,417 stock options that were in excess of the number of shares available under the 2014 Plan. The Company estimated the fair value of these options using the BSM option valuation model which resulted in a deferred charge of $455,000 that is included in prepaid expenses and other current assets on the balance sheet and a stock option liability in the amount of $455,000 that is included in accrued liabilities in the consolidated balance sheet as of December 31, 2018.

The fair value of the deferred charge and stock option liability during the years ended December 31, 2018 were estimated using the following assumptions:


		Year Ended December 31,
		2018
Expected term (in years)		6.25
Expected volatility		77% - 79%
Risk-free interest-rate		2.22% - 2.99%
Dividend yield		0%