Stock Option Plans | 10. STOCK OPTION PLANS In April 2015, the Company’s board of directors approved the 2015 Equity Incentive plan (“2015 Plan”), effective June 11, 2015, covering incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), restricted stock, restricted stock awards (“RSU”), stock appreciation rights and performance units that may be granted to employees, directors and consultants. In connection with the approval of the 2015 Plan, all remaining shares available for future award under the 2005 Stock Option Plan (the “2005 Plan”) were transferred to the 2015 Plan, and the 2005 Plan was terminated. The number of shares initially authorized for issuance under the 2015 Plan was 1,494,272 plus 169,529 shares remaining available for future awards under the Company’s 2005 Plan. Any options under the 2005 Plan or 2015 Plan (collectively “the Plans”) that expire or otherwise terminate will revert to the 2015 Plan and again become available for issuance. The number of shares available for issuance under the 2015 Plan will be increased on the first day of each fiscal year in an amount equal to the lessor of (i) 1,494,272 shares; (ii) five percent of the outstanding shares on the last day of the immediately preceding fiscal year or (iii) such number of shares determined by the Company’s board of directors. ISOs may be granted to employees or directors holding more than 10% of the voting power of all classes of stock of the Company at an exercise price of no less than 110% of the fair value of the common stock on the grant date and to all other employees or directors at an exercise price of no less than 100% of the fair value of the common stock on the grant date. NSOs may be granted to employees, directors and consultants at an exercise price no less than 100% of the fair value of the common stock on the grant date. Employee stock options under the 2015 plan generally vest 20% upon one year of continued service to the Company, with the remainder in monthly increments over four additional years. Options expire no more than ten years after the date of grant. The Company’s Board of Directors and stockholders previously approved the 2005 Plan. Pursuant to the 2005 plan, options and restricted stock may be granted to employees, directors and consultants of the Company. Options granted under the Company’s 2005 plan may be either incentive stock options or nonstatutory stock options. ISOs may be granted to employees with exercise prices of no less than 100% the fair value of the common stock on the grant date and NSOs may be granted to employees, directors or consultants at exercise prices of no less than 85% of the fair value of the common stock on the grant date, as determined by the Board of Directors. All options granted under the 2005 plan may be exercised before they are vested. Employee stock options granted under the 2005 plan generally vest 25% upon one year of continued service to the Company, with the remainder in monthly increments over three additional years. Stock options granted to consultants generally vest over the performance period of the consultancy agreement, ranging from two to four years. Options expire no more than ten years after the date of grant. As of December 31, 2015, there were 3,445,228 shares authorized for issuance under the Plans of which 1,406,439 were available for grant. In the event of stock splits and stock dividends, the Board of Directors may increase or decrease proportionately the number of shares and the exercise (purchase) price per share deliverable to the 2015 Plan participants. In the event of a merger in which the Company is not the surviving entity or sale of substantially all the Company’s assets, all outstanding options must be either assumed or substituted by the surviving corporation, or may be required to be exercised or settled. The following table summarizes stock option activity and related information: Options Outstanding Options Available for Grant Options Outstanding Weighted- Average Exercise Price Per Share Aggregate Intrinsic Value (in thousands) Balances at December 31, 2014 315,876 1,379,503 $ 2.57 $ 9,483 Options authorized 1,852,097 — Options granted (865,976 ) 865,976 $ 12.57 Options exercised — (102,250 ) $ 1.39 Options forfeited 104,442 (104,442 ) $ 6.17 Balances at December 31, 2015 1,406,439 2,038,787 $ 6.69 $ 7,504 Options exercisable—December 31, 2015 975,314 $ 3.28 $ 5,660 Options vested and expected to vest—December 31, 2015 1,929,208 $ 6.42 $ 7,409 The intrinsic value is the difference between the estimated fair value of the Company’s common stock at the date of exercise and the exercise price for in-the-money options. The aggregate intrinsic value of options exercised was $796,000, 310,000, and $24,000 for the years ended December 31, 2015, 2014, and 2013 respectively. The weighted-average grant-date fair value of options granted during the years ended December 31, 2015, 2014 and 2013 was $4.82, $5.99, and $4.32 per share, respectively. As of December 31, 2015 and 2014, the weighted-average remaining contractual life of options outstanding was 7.8 years and for options vested and expected to vest, was 7.7 years, respectively. The options outstanding, vested and currently exercisable by exercise price under the 2015 Plan at December 31, 2015 are as follows: Options Outstanding Options Exercisable Exercise Price Number of Options Weighted- Average Remaining Contractual Life (years) Weighted- Average Exercise Price Per Share Number of Options Weighted- Average Exercise Price Per Share $ 1.30 300,733 4.7 $ 1.30 300,733 $ 1.30 $1.48-2.78 71,748 6.0 $ 2.01 68,343 $ 1.98 $ 3.15 831,426 7.5 $ 3.15 510,397 $ 3.15 $4.81-11.09 107,818 9.5 $ 10.23 19,504 $ 8.39 $ 11.10 336,160 9.1 $ 11.10 63,991 $ 11.10 $11.96-14.25 241,218 9.8 $ 13.54 770 $ 12.49 $ 15.91 149,686 9.4 $ 15.91 11,576 $ 15.91 2,038,789 7.8 $ 6.69 975,314 $ 3.28 Early Exercise of Stock Options The 2005 Plan allowed for the granting of options that may be exercised before the options have vested. Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment or services, at the price paid by the purchaser. The Company’s right to repurchase these shares generally lapses 1/48 of the original grant date amount per month over four years. At December 31, 2015 and 2014, there were 8,648 and 17,566 shares of common stock outstanding, respectively, subject to the Company’s right of repurchase at a weighted-average price of $2.49 and $2.34 per share, respectively. Employee Stock-Based Compensation Stock-based compensation expense recognized during the years ended December 31, 2015, 2014, and 2013, includes compensation expense for stock-based awards granted to employees based on the grant date fair value of $1.1 million, $0.6 million, and $0.3 million respectively. As of December 31, 2015 and 2014, there were total unamortized compensation costs of $4.1 million and 2.0 million, respectively related to unvested stock options which the Company expects to recognize over a period of approximately 3.6 years and 3.0 years, respectively. On April 30, 2014, the Company modified the terms of 348,871 vested and unvested stock option awards by reducing their exercise price from $4.81 to $3.15 per share. There was no change in any of the other terms of the option awards. The modification resulted in an incremental value of $226,000 being allocated to the options, of which $158,000 was recognized to expense immediately based on options that were vested at the time of the modification. The remaining incremental value of $68,000 attributable to unvested shares is being recognized over their remaining vesting term of which 49,000 is still unvested as of December 31, 2015. The Company estimates the fair value of stock options using the Black-Scholes option valuation model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. Prior to our IPO, the fair value of the shares of the Company’s common stock underlying the stock options has historically been determined by the Company’s Board of Directors. Because there had been no public market for the Company’s common stock, its Board of Directors has determined the fair value of the Company’s common stock at the time of grant of the option by considering a number of objective and subjective factors, including the Company’s stage of development, sales of the Company’s convertible preferred stock, the Company’s operating and financial performance, equity market conditions affecting comparable public companies, the lack of liquidity of the Company’s capital stock, and the general and industry-specific economic outlooks. Since our IPO in June 2015, the fair value of our common stock is based on the closing price of our common stock, as quoted on the NASDAQ Global Market, on the date of grant. In addition to the value determined by our board and closing price on NASDAQ Global Market, the fair value is estimated using the assumptions below. Each of these inputs is subjective and its determination generally requires significant judgment. Year Ended December 31, 2015 2014 2013 Expected term (in years) 5.0 – 6.0 6.0 6.0 Expected volatility 35 – 50% 35% – 38% 43% Risk-free interest rate 1.31 – 1.89% 1.80% – 1.93% 1.08% – 1.82% Dividend yield 0% 0% 0% Expected Term. The expected term of stock-based awards represents the weighted-average period that the stock-based awards are expected to remain outstanding. The Company opted to use the “simplified method” for estimating the expected term of the awards, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the awards. Expected Volatility. The Company determined the share price volatility for stock-based awards based on an analysis of the historical volatilities of a peer group of publicly traded medical device companies. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size. Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the stock-based awards. Dividend Rate. The expected dividend was assumed to be zero as the Company has never paid dividends and has no current plans to do so. Expected Forfeiture Rate. The Company is required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses 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 actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period that the estimates are revised. Non-Employee Stock-Based Compensation Stock-based compensation expense related to non-employee awards was $103,000, $57,000 and $13,000 during the years ended December 31, 2015, 2014, and 2013, respectively. Total Stock-Based Compensation The following table summarizes total stock-based compensation expense for the years ended December 31, 2015, 2014, and 2013, which was included in the statements of operations as follows (in thousands): Year Ended December 31, 2015 2014 2013 Cost of goods sold $ 89 $ 23 $ 4 Selling, general and administrative 860 547 233 Research and development 300 93 42 Total stock-based compensation expense $ 1,249 $ 663 $ 279 |