10. Stock-Based Compensation

Equity Incentive Plan

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).

Stock Options

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.

Stock option activity for the year ended December 31, 2019 is represented in the following table:


		Options Outstanding
	Shares		Weighted-
	Available	Number of	Average
	for Grant	Shares	Exercise Price
Balances at December 31, 2018	—	825,205	$	12.15
Additional shares reserved	763,973	—		—
Options granted	(696,874)	696,874		8.52
Options exercised	—	(11,884)		2.89
Options cancelled	129,883	(129,883)		11.67
Balances at December 31, 2019	196,982	1,380,312	$	10.06

Additional information related to the status of options as of December 31, 2019 is summarized as follows:


		Weighted-		Weighted-
		Average		Average
	Number of	Exercise		Contractual	Aggregate
	Options	Price		Term (Years)	Intrinsic Value
					(in thousands)
Options outstanding	1,380,312	$	10.06	7.89	$	258
Options vested and expected to vest	1,380,312	$	10.06	7.89	$	258
Options vested and exercisable	699,519	$	10.48	6.72	$	258

The Company estimated the fair value of options using the BSM option valuation model. The fair value of options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of the options granted during the years ended December 31, 2019 and 2018 were estimated using the following assumptions:


	Year Ended
	December 31,
	2019	2018
Expected term (in years)	6.25	6.25 - 9.7
Expected volatility	79% - 95%	77% - 84%
Risk-free interest-rate	1.59% - 2.67%	2.22% - 3.01%
Dividend yield	0%	0%

During the years ended December 31, 2019 and 2018, the Company granted options to employees to purchase 550,582 and 351,516 shares with a weighted-average grant date fair value of $5.97 and $9.89 per share, respectively, and the aggregate intrinsic value of options exercised was approximately $51,000 and $3,000, respectively.

The Company recognized stock-based compensation expenses related to employee stock options of approximately $1.9 million and $1.5 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, total unrecognized stock-based compensation expenses related to unvested employee stock options was approximately $4.3 million, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.64 years.

Nonemployee Stock-Based Compensation

The Company grants options to purchase common stock to nonemployees in exchange for services during the normal course of business. Stock-based compensation expense related to stock options granted to nonemployees is recognized on a straight-line basis, as the stock options are earned. The Company issued options to nonemployees, which generally vest ratably over the time period the Company expects to receive services from the nonemployee. The Company granted 69,875 stock options, with a weighted-average grant date fair value of $5.47, and 16,000 stock options, with a weighted-average exercise price of $12.37, to purchase shares of common stock to nonemployees during the years ended December 31, 2019 and 2018, respectively.

For the years ended December 31, 2019 and 2018, the Company recorded stock-based compensation expense related to options granted to nonemployees of approximately $77,000 and $38,000, respectively. As of December 31, 2019, total unrecognized stock-based compensation expenses related to unvested nonemployee stock options was approximately $289,000, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 3.21 years.

On January 1, 2019, the Company adopted the ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payment to employees, with certain exceptions. Prior to the adoption of ASU No. 2018-07, the Company measured the fair value of the vested options at each period using the Black-Scholes option-pricing model.

Stock-Based Compensation

The following table presents stock-based compensation expense related to stock options (in thousands):


	Twelve Months Ended
	December 31,
	2019		2018
Research and development	$	662	$	461
General and administrative		1,266		1,065
Total	$	1,928	$	1,526

Deferred Charge and Stock Option Liability

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 76,417 stock options are included in the options granted amounts within the 2019 stock option activity rollforward table above). The Company estimated the fair value of these options using the BSM option valuation model which resulted in a deferred charge of approximately $455,000 that was included in prepaid expenses and other current assets on the consolidated balance sheet and a stock option liability in the amount of approximately $455,000 that was included was accrued liabilities in the consolidated balance sheet as of December 31, 2018. On January 1, 2019, the Company increased the number of shares available under the 2014 Plan through the annual evergreen provision pursuant to the plan, and accordingly, the Company reversed the deferred charge in prepaid expenses and other current assets and the stock option liability in accrued liabilities in the consolidated balance sheet.

The fair value of the deferred charge and stock option liability during the year 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%