6.Stock-based Compensation

 

Total stock-based compensation expense related to all of our share-based payments that we recognized for the three months ended March 31, 2017 and 2016 were as follows (in thousands):

 

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. We have segregated option awards into the following three homogenous groups for the purposes of determining fair values of options: officers and directors, all other employees, and consultants.

 

We determined weighted-average valuation assumptions separately for each of these groups as follows:

 

 

 

 

 

In connection with the adoption ASU No. 2016-09 on January 1, 2017, we have elected to account for forfeitures as they occur and its adoption did not have a material impact on our financial statements.

 

The following table summarizes the weighted-average assumptions relating to options granted pursuant to our equity incentive plans, including the performance-based stock option awards which will vest upon the achievement of certain corporate performance-based milestones or corporate sales target, for the three months ended March 31, 2017 and 2016:

 

 

The exercise price of stock options is at the market price of our common stock on the date immediately preceding the date of grant. Options become exercisable at varying dates and generally expire 10 years from the date of grant.

 

We granted options to purchase 2,624,175 shares of common stock during the three months ended March 31, 2017 with a grant-date weighted-average fair value of $1.32 per share. Of the 2,624,175 common stock options granted, 1,025,000 shares related to outstanding performance-based stock option awards with a grant date fair value of $1.3 million will vest upon the achievement of a corporate performance-based milestone and 50,000 shares related to performance-based stock option awards with a grant date fair value of $71,000 will vest upon achievement of certain corporate sales target.  We did not consider the corporate-based milestones nor the corporate sales target as probable of achievement as of March 31, 2017.  Accordingly, no stock-based compensation cost was recognized during the three months ended March 31, 2017 for these performance-based stock option awards.

 

We granted options to purchase 3,184,250 shares of common stock during the three months ended March 31, 2016, with a grant-date weighted-average fair value of $1.60 per share. Of the 3,184,250 common stock options granted, 700,000 shares related to outstanding performance-based stock option awards with a grant date fair value of $1.1 million will vest upon the achievement of a corporate performance-based milestone.  We did not consider the corporate performance-based milestone as probable of achievement as of March 31, 2016.  Accordingly, no stock-based compensation expense related to these performance-based stock option awards was recognized during the three months ended March 31, 2016.  As of December 31, 2016, we considered the achievement of the corresponding corporate-based milestone as probable.  Accordingly, we recognized the $1.1 million as stock-based compensation expense during the fourth quarter of 2016. In addition, as of March 31, 2017, we have 200,000 shares of outstanding performance-based stock option awards granted in the fourth quarter of 2016, wherein 100,000 shares with a grant date fair value of $232,000 will vest upon achievement of corporate performance-based milestoness and 100,000 shares with a grant date fair value of $240,000 will vest upon achievement of certain corporate sales target. We did not consider these corporate-based milestones nor the corporate sales target as probable of achievement as of March 31, 2017. Accordingly, for these performance-based option awards, no stock-based compensation expense was recognized during the three months ended March 31, 2017.

 

As of March 31, 2017, there was approximately $7.8 million of total unrecognized stock-based compensation cost related to all unvested options granted under our equity incentive plans.

 

At March 31, 2017, there were 5,152,425 shares of common stock available for future grant under our equity incentive plans and 161,380 options to purchase shares were exercised during the three months ended March 31, 2017.

 

Employee Stock Purchase Plan

 

Our Employee Stock Purchase Plan (Purchase Plan) permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which the stock is purchased is equal to the lesser of 85% of the fair market value of the common stock on the first day of the offering or 85% of the fair market value of our common stock on the purchase date. The initial offering period commenced on the effective date of our initial public offering.

 

The fair value of awards granted under our Purchase Plan is estimated on the date of grant using the Black-Scholes option pricing model, which uses weighted-average assumptions. Our Purchase Plan provides for a twenty-four month offering period comprised of four six-month purchase periods with a look-back option. A look-back option is a provision in our Purchase Plan under which eligible employees can purchase shares of our common stock at a price per share equal to the lesser of 85% of the fair market value on the first day of the offering period or 85% of the fair market value on the purchase date. Our Purchase Plan also includes a feature that provides for a new offering period to begin when the fair market value of our common stock on any purchase date during an offering period falls below the fair market value of our common stock on the first day of such offering period. This feature is called a “reset.” Participants are automatically enrolled in the new offering period. We had a “reset” on July 1, 2016 because the fair market value of our stock on June 30, 2016 was lower than the fair market value of our stock on January 5, 2015, the first day of the offering period. We applied modification accounting in accordance with ASC Topic No. 718, Stock Compensation, to determine the incremental fair value associated with this Purchase Plan “reset” and will recognize the related stock-based compensation expense according to FASB ASC Subtopic No. 718-50, Employee Share Purchase Plans. The total incremental fair value for this Purchase Plan “reset” was approximately $1.0 million and will be recognized from July 1, 2016 to June 30, 2018.

 

As of March 31, 2017, there were approximately 2,518,870 shares reserved for future issuance under the Purchase Plan. The following table summarizes the weighted-average assumptions related to our Purchase Plan for the three months ended March 31, 2017 and 2016. Expected volatilities for our Purchase Plan are based on the historical volatility of our stock. Expected term represents the weighted-average of the purchase periods within the offering period. The risk-free interest rate for periods within the expected term is based on U.S. Treasury constant maturity rates.