Quarterly report pursuant to Section 13 or 15(d)

Stock-Based Compensation

v3.10.0.1
Stock-Based Compensation
9 Months Ended
Sep. 30, 2018
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Stock-Based Compensation

Note 10—Stock-Based Compensation

In 2003, the Company adopted a stock option plan (the “2003 Plan”), which authorized the board of directors to grant stock option awards to eligible employees, directors, consultants and service providers (together the “Optionees”) of the Company. In April 2012, such plan expired. In 2014, the Company established the 2014 Stock Option Plan (the “2014 Plan”) whereby 1,000,000 shares of the Company’s common stock were reserved for issuance to eligible Optionees. The 2014 Plan provided for the grant of incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. Option awards under the 2014 Plan expired up to a maximum of 10 years from the date of the grant.

The Company concluded that option awards communicated to Optionees (the “Communicated Option Awards”) under the 2003 Plan and 2014 Plan were not validly authorized and therefore were not valid outstanding option awards. Although the Communicated Option Awards were not outstanding options, the Company believes the awards represented a contractual obligation to the Optionees and therefore the Company classified the option awards as liabilities in the financial statements which were remeasured at fair value each reporting period.

Obligations under the 2003 Plan and 2014 Plan included time and performance-based awards. For time-based awards, vesting generally occurred over the service period of up to four years. Performance based awards vested at the time that the underlying performance conditions were met.

The liabilities for stock-based compensation awards were classified as a component of noncurrent liabilities on the balance sheet as the Company did not expect that such amounts would be settled through the use of current assets or through the creation of current liabilities.

On May 17, 2018, the Company’s board of directors terminated the 2014 Stock Option Plan and on June 4, 2018, it was replaced with the 2018 Stock Compensation Plan (the “Compensation Plan”) whereby 3,300,000 shares of the Company’s common stock were reserved for issuance. On June 4, 2018, the Company’s board of directors authorized 1,901,900 replacement equity awards of stock options and, on June 8, 2018, 1,340,832 restricted stock units (collectively, the “Replacement Awards”) to the Optionees. On various dates in June 2018, but after the board of directors’ authorization, the Replacement Awards were communicated to the Optionees in exchange for the cancellation of, and waiver to any claims related to, the Communicated Option Awards granted under the 2003 Plan and 2014 Plan which were determined to be not validly authorized. The issuance of the Replacement Awards and cancellation of the Communicated Option Awards was treated as a modification. The modification date is the date of the grant of the Replacement Awards, such date being June 4, 2018, for options and June 8, 2018, for restricted stock unit awards. The Company will recognize the remaining unrecognized compensation cost, as well as any incremental compensation cost of the Replacement Awards of $17.2 million, over the remaining service period of the Replacement Awards, as described below. As the Replacement Awards have been determined to be equity-classified awards, the Company will no longer record such awards as liabilities.

In September 2018, the Company’s board of directors adopted, and the Company’s stockholders approved, the Company’s 2018 Equity Incentive Plan (the “2018 Plan”).  The 2018 Plan became effective on September 25, 2018.  A total of 1,632,134 shares of common stock are reserved for issuance pursuant to the Company’s 2018 Plan. In addition, the shares reserved for issuance under the 2018 Plan include (1) those shares reserved but unissued under the Compensation Plan as of the date of stockholder approval of the 2018 Plan and (2) shares of common stock subject to or issued pursuant to awards granted under the Compensation Plan that, after the date of stockholder approval of the 2018 Plan, expire or otherwise terminate without having been exercised in full or are forfeited to or repurchased by us (provided that the maximum number of shares that may be added to the 2018 Plan pursuant to (1) and (2) is 3,300,000 shares).   The 2018 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code  to the Company’s employees and any of the Company’s  parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants and the Company’s parent and subsidiary corporations’ employees and consultants. The number of shares available for issuance under the Company’s 2018 Plan also includes an annual increase on the first day of each fiscal year beginning with our 2019 fiscal year, equal to the least of 1) 1,632,134 shares; 2) five percent (5%) of the outstanding shares of our common stock as of the last day of the immediately preceding fiscal year; or 3) such other amount as our board of directors may determine.

Stock options granted under the Compensation Plan, including those granted as a component of the Replacement Awards, generally vest 33% at the first anniversary of the grant date with the balance vesting monthly over the remaining two years. The restricted stock units granted under the Compensation Plan, including those granted as a component of the Replacement Awards, include a service condition and a performance condition. The service condition generally begins on the grant date and continues through January 2020 and the restricted stock units vest at various times commencing the day following the expiration of the lock-up until January 2020. The performance condition related to the Company completing its IPO and the vesting of the restricted stock units were contingent upon the achievement of such IPO.

A summary of the activity and related information of the Communicated Option Awards classified as liabilities and communicated during the nine months ended September 30, 2018, is presented below:

 

 

 

Liability-

Classified

Awards

(in shares)

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Life

(in years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding at December 31, 2017

 

 

933,500

 

 

$

3.92

 

 

 

3.57

 

 

$

19,676

 

Granted

 

 

170,000

 

 

 

25.00

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(67,000

)

 

 

5.33

 

 

 

 

 

 

 

 

 

Cancelled and settled with Replacement Awards

 

 

(1,036,500

)

 

 

7.29

 

 

 

 

 

 

 

22,442

 

Outstanding at September 30, 2018

 

 

 

 

$

 

 

 

 

 

$

 

Exercisable at September 30, 2018

 

 

 

 

$

 

 

 

 

 

$

 

Vested and expected to vest at September 30, 2018

 

 

 

 

$

 

 

 

 

 

$

 

 

A summary of the activity and related information of the stock options issued during the nine months ended September 30, 2018 is presented below:

 

 

 

Stock

Options

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Life

(in years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding at December 31, 2017

 

 

 

 

$

 

 

 

 

 

$

 

Granted

 

 

1,901,900

 

 

 

28.94

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(9,900

)

 

 

28.94

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

1,892,000

 

 

$

28.94

 

 

 

9.6

 

 

$

 

Exercisable at September 30, 2018

 

 

 

 

$

 

 

 

 

 

$

 

Vested and expected to vest at September 30, 2018

 

 

1,892,000

 

 

$

28.94

 

 

 

9.6

 

 

$

 

 

A summary of the activity and related information of the restricted stock units issued during the nine months ended September 30, 2018 is presented below:

 

 

 

Restricted

Stock Units

 

 

Weighted

Average

Grant Date

Fair Value

 

Outstanding at December 31, 2017

 

 

 

 

$

 

Granted

 

 

1,340,832

 

 

 

28.94

 

Forfeited

 

 

(3,110

)

 

 

28.94

 

Outstanding at September 30, 2018

 

 

1,337,722

 

 

$

28.94

 

 

Stock-based compensation expense recorded in operating expenses was as follows (in thousands):

 

 

 

Three months

ended September 30,

 

 

Nine months

ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Selling, general and administrative

 

$

1,370

 

 

$

492

 

 

$

5,328

 

 

$

7,659

 

Research and development

 

 

83

 

 

 

77

 

 

 

992

 

 

 

3,181

 

Stock-based compensation in operating expenses

 

$

1,453

 

 

$

569

 

 

$

6,320

 

 

$

10,840

 

 

Stock-based compensation of $0.1 million was capitalized to inventory during both the three months ended September 30, 2018 and 2017, respectively and stock-based compensation of $0.4 million and $0.7 million were capitalized to inventory during the nine months ended September 30, 2018 and 2017, respectively.

Unrecognized compensation expense for stock options issued as of September 30, 2018 was $15.6 million and is expected to be recognized over a weighted-average period of 2.7 years. Unrecognized compensation expense for the restricted stock units as of September 30, 2018 was $38.7 million and is subject to the performance condition explained above.

The Communicated Option Awards are presented as a stock-based compensation liability which was revalued at each reporting period with the change in fair value recorded to compensation expense. As of December 31, 2017 and September 30, 2018, the stock-based compensation liability was $15.4 million and $0, respectively. As of the date of the modification of the Communicated Option Awards, the stock-based compensation liability was $18.2 million.

The fair value of the Communicated Option Awards classified as liabilities was estimated using the Black Scholes option pricing model and the weighted-average assumptions used in the model are noted in the following table:

 

 

 

Three months

ended September 30,

 

 

Nine months

ended September 30,

 

 

 

2018

 

2017

 

 

2018

 

 

2017

 

Risk-free interest rate

 

N/A

 

 

1.44

%

 

 

2.49

%

 

 

1.44

%

Volatility

 

N/A

 

 

40.67

%

 

 

34.13

%

 

 

40.67

%

Expected dividend yield

 

N/A

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Expected life

 

N/A

 

 

2.9

 

 

 

2.9

 

 

 

2.9

 

 

The weighted-average fair value for Communicated Option Awards granted during the three months ended September 30, 2017 was 18.57 and during the nine months ended September 30, 2018 and 2017 was $14.00 and $8.15, respectively. No Communicated Option Awards were granted during the three months ended September 30, 2018. The Company’s shares were not traded on any public market during the term of the Communicated Option Awards. The common stock value as of the date of grant was based on the share price of recent equity issuances, if available. If there were no such recent transactions, the Company’s share valuation was estimated. As of December 31, 2017, the date at which the stock-based compensation liability was remeasured at fair value, the common stock price was based on the recent equity issuances with third party investors, who were not previous shareholders of the Company. As of the date of the modification of the Communicated Option Awards, which resulted in the settlement of the stock-based compensation liability, the common stock price was estimated utilizing a hybrid method, a combination of the Probability Weighted Expected Return Method (“PWERM”) and Option Pricing Model (“OPM”). The estimate incorporated a near-term IPO scenario using PWERM weighted at 80%. Other near-term exit events, a long-term stay private case, and dissolution were all considered as non-IPO scenarios using OPM, and were weighted at 20%. The estimate also reflected a 10% and 15% discount for lack of marketability under PWERM and OPM, respectively. The risk free interest rate approximates the implied yield available on United States Treasury securities with an equivalent remaining term. Expected volatility is based on the historical volatilities of certain “guideline” companies. Expected dividend yield is based on dividends historically paid by the Company. The expected life is based on the “simplified” method using the average of the term and vesting period.

The fair value of the stock options issued was estimated using the Black Scholes option pricing model and the weighted-average assumptions used in the model are noted in the following table:

 

 

 

Three months

ended September 30, 2018

 

 

Nine months

ended September 30, 2018

 

Risk-free interest rate

 

N/A

%

 

 

2.84

%

Volatility

 

N/A

%

 

 

42.18

%

Expected dividend yield

 

N/A

%

 

 

0.00

%

Expected life

 

N/A

 

 

 

6

 

 

The weighted average fair value for the stock options granted during the nine months ended September 30, 2018 was $12.91. No stock options were granted during the three months ended September 30, 2018. The Company’s shares were not traded in any public market at the stock option grant dates during the first nine months of 2018. For purposes of determining the fair value of the Company’s common stock for the grants made in June 2018, the Company utilized a hybrid method, a combination of the PWERM and OPM as described above. The risk free interest rate approximates the implied yield available on United States Treasury securities with an equivalent remaining term. Expected volatility is based on the historical volatilities of certain “guideline” companies. Expected dividend yield is based on dividends historically paid by the Company. The expected life is based on the “simplified” method using the average of the term and vesting period.