9. Share/Stock-Based Compensation

2013 Equity Incentive Plan

In 2013, the Company adopted the 2013 Equity Incentive Plan (“2013 Plan”). The 2013 Plan provides incentives to employees, consultants and non-employee directors of the Company by providing incentive awards of Common B shares or any other class of equity authorized by the Company and designated by the Board of Directors as incentive equity. The Company classified the incentive awards as equity-classified grants of unvested stock within the scope of ASC 718.

The Common B shares were issued upon grant date and held in escrow in the grantee’s name, subject to vesting requirements. Unvested shares could participate in any distributions allocated to the Common B shares and would remain in the custody of the Company until vesting occurred, at which time the funds would be released and voting rights commenced.

Prior to the LLC Conversion and for the year ended December 31, 2014, the Company granted 355,156 Common B shares with a weighted average grant date fair value of $1.66 per share.

Upon the LLC Conversion, the Company terminated the 2013 Plan and adopted the 2015 Equity Incentive Plan (“2015 Plan”). All Common B shares issued under the 2013 Plan were replaced with stock options and restricted stock issued under the 2015 Plan.

Modification of Common B Share Awards

As discussed in Note 6, in connection with the LLC Conversion on March 10, 2015, the 355,156 Common B share awards granted, less forfeitures of 1,474 shares, were converted into a combination of 253,232 vested and unvested shares of restricted common stock and 100,446 vested and unvested options to purchase common stock (collectively the “Replacement Awards”) with no changes to the vesting provisions. The conversion ratio for each award was dependent upon the issuance date of the relevant shares with the modification affecting seven employees.

In accordance with ASC 718, the Company determined the fair value of the Common B share awards held by employees and nonemployees immediately before the Replacement Awards were issued and compared that amount to the then fair value of the Replacement Awards. Given there was no incremental fair value in connection with the issuance of the Replacement Awards, the Company continues to recognize the compensation expense originally estimated for the Common B shares at the date of grant. The original Common B share values were allocated to stock options and restricted stock awards based on proportionate conversion date fair values.

2015 Equity Incentive Plan

The 2015 Plan, administered by the Board of Directors, provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the Board of Directors and consultants of the Company. Under the terms of the 2015 Plan, the exercise prices, vesting and other restrictions may be determined at the discretion of the Board of Directors, or their committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant, the term of stock options may not be greater than ten years for all grants, and for grantees holding more than 10% of the total combined voting power of all classes of stock, the term may not be greater than five years.

The Company granted options under the 2015 Plan until April 2016 when it was terminated as to future awards, although it continues to govern the terms of options that remain outstanding under the 2015 Plan.

As of December 31, 2016, a total of 699,573 shares of common stock are subject to options outstanding under the 2015 Plan and 75,932 shares of unvested restricted stock are outstanding under the 2015 Plan. The shares will become available under the 2016 Equity Incentive Plan (“2016 Plan”) to the extent the options are forfeited or lapse unexercised or the restricted stock is forfeited prior to vesting.

2016 Equity Incentive Plan

On April 5, 2016, the day preceding the effectiveness of the Registration Statement, the 2016 Plan became effective and serves as the successor to the 2015 Plan. Under the 2016 Plan, the Company may grant stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards, and stock bonuses. The 2016 Plan provides for an initial reserve of 1,100,000 shares of common stock, plus 509,869 shares of common stock remaining under the 2015 Plan, and any share awards that subsequently are forfeited or lapse unexercised under the 2015 Plan. The shares reserved exclude shares of common stock reserved for issuance under the 2015 Plan.

As of December 31, 2016, the total number of shares reserved for issuance under the 2016 Plan was 1,624,561, of which 447,362 shares were subject to outstanding option awards.

The 2016 Plan allows the Company’s board of directors to approve an annual increase in the number of shares available for issuance thereunder, to be added on the first day of each fiscal year, beginning on January 1, 2017 and continuing through 2023, up to 4% of the outstanding number of shares of the Company’s common stock on the December 31 immediately prior to the date of increase. As a result of the operation of this provision, on January 1, 2017, an additional 537,233 shares became available for issuance under the 2016 Plan.

The Company generally grants stock-based awards with service conditions only (“service-based” awards). Awards granted under the 2016 Plan and 2015 Plan generally vest over four or five years and expire after ten years, although awards have been granted with vesting terms less than four years.

2016 Employee Stock Purchase Plan

On April 6, 2016, upon the effectiveness of the Registration Statement, the 2016 Employee Stock Purchase Plan (“2016 ESPP”) became effective. A total of 165,000 shares of common stock were reserved for issuance under the 2016 ESPP. Eligible employees may purchase shares of common stock under the 2016 ESPP at 85% of the lower of the fair market value of the Company’s common stock as of the first or the last day of each offering period. Employees are limited to contributing 15% of the employee’s eligible compensation, and may not purchase more than $25,000 of stock during any calendar year or more than 2,000 shares during any one purchase period or a lesser amount determined by the board of directors. The 2016 ESPP will terminate ten years from the first purchase date under the plan, unless terminated earlier by the board of directors. For the year ended December 31, 2016, the Company issued and sold 19,061 shares under the 2016 ESPP. The remaining 145,939 shares are available for issuance as of December 31, 2016.

Modification of Stock Options

In May 2016, the Company’s board of directors approved the modification of 542,392 outstanding stock options for 21 employees to align the vesting schedule of existing awards with the Company’s planned vesting schedule for future awards. The result was an acceleration of vesting for the modified awards. Stock options with a five year vesting schedule and 25% vesting after year two and 6.25% quarterly thereafter were modified to a four year vesting schedule with 25% vesting after year one and 2.08% monthly thereafter. Stock options with a four year vesting schedule and 25% vesting after year one and 6.25% quarterly thereafter were modified to a similar four year vesting schedule with 25% vesting after year one and 2.08% monthly thereafter. The modified awards have service conditions only.

In accordance with ASC 718, the Company determined the fair value of the awards immediately before the modification and compared that amount to the then-fair value of the modified awards. Given there was no incremental fair value in connection with the modification of the awards, the Company will continue to recognize the compensation expense originally estimated for the stock options at the date of grant over the modified service period. The Company recognized $89,000 in cumulative expense as of the modification date related to changes in the service period for the modified awards.

The following table summarizes employee and nonemployee stock option activity for the year ended December 31, 2016:

	Shares Issuable Under Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)		(in thousands)
Outstanding as of December 31, 2015		629,848		$	4.55		9.29	$	2,833
Granted		731,779			7.04
Exercised		—			—
Forfeited		(214,692	)		7.19
Outstanding as of December 31, 2016		1,146,935		$	5.64	8.64		$	440
Options vested and expected to vest as of December 31, 2016		1,137,407		$	5.66	8.64		$	431
Options exercisable as of December 31, 2016		390,033		$	5.07	8.35		$	213

For the years ended December 31, 2016 and 2015, the weighted-average grant date fair value of non-replacement award options granted was $7.04 and $3.48, respectively. There were no option exercises during the year ended December 31, 2016. The total intrinsic value of options exercised during the year ended December 31, 2015 was $25,000.

There were no stock options issued to or vested for non-employees during the year ended December 31, 2016. For the year ended December 31, 2015, the Company issued 25,387 stock options to non-employees with 11,279 options vesting in the period.

Restricted Common Stock

As part of the LLC Conversion, the Company granted restricted common stock with time-based and performance-based vesting conditions. Unvested shares of restricted common stock may not be sold or transferred by the holder. These restrictions lapse according to the time-based vesting conditions of each award.

The Company issued 253,232 restricted stock awards (“RSAs”) during the year ended December 31, 2015 and all are Replacement Awards from the conversion of the Common B share awards as discussed above. The Company allocated the fair value from the Common B shares to the restricted stock at the then-applicable conversion date fair value.

The following table summarizes employee and nonemployee restricted stock activity for the year ended December 31, 2016:

	Shares			Weighted Average Grant Date Fair Value
Unvested restricted common stock as of December 31, 2015		118,554		$	1.85
Granted		—			—
Vested		(42,622	)		1.86
Forfeited		—			—
Unvested restricted common stock as of December 31, 2016		75,932		$	1.96

The fair value of RSAs that vested during the years ended December 31, 2016 and 2015 was $258,000 and $933,000, respectively.

There were no RSAs granted to non-employees during the year ended December 31, 2016. The Company issued 61,096 RSAs to non-employees during the year ended December 31, 2015 (and as part of the LLC Conversion) with 32,588 RSAs vesting in the period.

Share/Stock-Based Compensation Expense

Total share/stock-based compensation expense recognized from the Company’s equity incentive plans and the 2016 ESPP for the years ended December 31, 2016, 2015, and 2014 was as follows (in thousands):

	Year Ended December 31,
	2016				2015				2014
	Employees		Non-Employees		Employees		Non-Employees		Employees		Non-Employees
Research and development	$	389	$	—	$	101	$	340	$	7	$	30
General and administrative		832		—		326		—		107		3
Total share/stock-based compensation expense	$	1,221	$	—	$	427	$	340	$	114	$	33

No related tax benefits were recognized for the years ended December 31, 2016, 2015, and 2014.

The non-employee awards contain both performance and service-based vesting conditions. No expense was recognized for the unvested non-employee awards with only a performance condition for the years ended December 31, 2016, 2015, and 2014. The performance-based vesting conditions represent counterparty performance conditions. Share/stock-based compensation expense is recognized if the performance condition is considered probable of achievement using management’s best estimates. The lowest potential aggregate fair values of the unvested awards were $0 as of and for the years ended December 31, 2016, 2015, and 2014.

As of December 31, 2016, the Company had an aggregate of $3.1 million and $89,000 of unrecognized stock-based compensation expense for options and RSAs outstanding, respectively, which is expected to be recognized over a weighted average period of 2.6 years and 1.1 years, respectively.

In determining the fair value of the non-Replacement Award stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

Expected Term

The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). The Company utilizes this method due to lack of historical exercise data and the plain-vanilla nature of the Company’s stock-based awards.

Expected Volatility

Since the Company was privately held through April 2016, it alone does not have the relevant company-specific historical data to support its expected volatility. As such, the Company has used an average of expected volatilities based on the volatilities of a representative group of publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants. Subsequent to the IPO, the Company began to consider the Company’s own historic volatility. For purposes of identifying comparable companies, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company intends to consistently apply this process using the same similar entities until a sufficient amount of historical information regarding the volatility of the Company’s own share price becomes available or until circumstances change, such that the identified entities are no longer comparable companies. In the latter case, other suitable, similar entities whose share prices are publicly available would be utilized in the calculation.

Risk-Free Interest Rate

The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Expected Dividend

The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.

The fair value of the non-Replacement Award stock options granted under the 2016 Plan and 2015 Plan and the shares available for purchase under the 2016 ESPP were determined using the Black-Scholes option-pricing model. The following table summarizes the weighted-average assumptions used in calculating the fair value of the awards:

	Year Ended December 31,
	2016			2015
2016 Plan and 2015 Plan
Expected term		5.99			6.29
Expected volatility		87	%		87	%
Risk-free interest		1.28	%		1.37	%
Dividend yield		0	%		0	%
2016 ESPP
Expected term		0.45			—
Expected volatility		82	%		—
Risk-free interest		0.50	%		—
Dividend yield		0	%		—