13. STOCK INCENTIVE PLANS

2014 Equity Incentive Plan

Prior to its IPO in July 2014, the Company had one active stock option plan, the 2008 Equity Incentive Plan (“2008 Plan”), one assumed stock option plan (the ImmuMetrix 2013 Equity Incentive Plan) and one terminated stock option plan, the 1998 Stock Plan.

Upon its IPO, the Company reserved 838,695 shares of common stock for issuance under a new 2014 Equity Incentive Plan (“2014 Plan”). The shares reserved for issuance under the 2014 Plan also include shares returned to the 2008 Plan as the result of expiration or termination of options, provided that the maximum number of shares that may be added to the 2014 Plan thereby is limited to a maximum of 865,252 shares. The number of shares available for issuance under the 2014 Plan will also include an annual increase on the first day of each year beginning in 2014, equal to the least of:

•

357,075 shares;

•

4.0% of the outstanding shares of common stock as of the last day of the immediately preceding year; or

•

such other number of shares as the Company’s board of directors may determine.

2016 Inducement Plan

On April 21, 2016, the Company’s board of directors, including its independent directors, adopted the Company’s 2016 Inducement Equity Incentive Plan (the “Inducement Plan”), pursuant to which the Company may grant stock awards of up to a total of 155,500 shares of common stock to new employees of the Company. The Inducement Plan was adopted to accommodate a reserve of additional shares of common stock for issuance to new employees hired by the Company from Allenex. The terms in the Inducement Plan are substantially similar to the Company’s 2014 Plan. The Inducement Plan allows restricted stock units (“RSUs”) to be granted in addition to stock options. The
RSUs vest annually over four years in equal increments. The Company began granting RSUs pursuant to the Inducement Plan starting June 2016.

Stock Options and Restricted Stock Units (“RSUs”)

The following table summarizes option and unvested RSU activity under the plans and related information:

	Shares Available for Grant			Stock Options Outstanding			Weighted- Average Exercise Price		Number of RSU Shares			Weighted- Average Grant Date Fair Value
Balance—December 31, 2013		332,995			466,965		$	1.99		—		$	—
Additional options authorized		940,884			—			—		—			—
Restricted stock grants		(4,899	)		—			—		—			—
Options granted		(585,345	)		585,345			11.76		—			—
Assumed in business combination		—			23,229			2.06		—			—
Options exercised		—			(9,363	)		2.14		—			—
Options forfeited		20,591			(20,591	)		10.36		—			—
Options expired		13,781			(13,781	)		2.74		—			—
Balance—December 31, 2014		718,007			1,031,804			7.36		—			—
Additional options authorized		357,075			—			—		—			—
Restricted stock grants		(38,121	)		—			—		—			—
RSUs granted		(114,400	)		—			—		114,400			6.49
Options granted		(652,078	)		652,078			6.09		—			—
Options exercised		—			(23,576	)		1.94		—			—
RSUs forfeited		8,200			—			—		(8,200	)		6.49
Options forfeited		77,660			(77,660	)		8.13		—			—
Options expired		5,329			(5,329	)		10.36		—			—
Balance—December 31, 2015		361,672			1,577,317			6.87		106,200			6.49
Additional options authorized		512,575			—			—		—			—
Restricted stock grants		(61,921	)		—			—		—			—
RSUs granted		(287,900	)		—			—		287,900			5.50
Options granted		(597,470	)		597,470			4.91		—			—
Options exercised		—			(5,688	)		3.29		—			—
RSUs forfeited		61,305			—			—		(61,305	)		5.81
RSUs vested		—			—			—		(26,550	)		6.49
Options forfeited		269,212			(269,212	)		6.64		—			—
Options expired		107,601			(107,601	)		8.88		—			—
Balance—December 31, 2016		365,074			1,792,286		$	6.15		306,245		$	5.69
Vested at December 31, 2016					990,371		$	6.05
Vested and expected to vest at December 31, 2016					1,757,309		$	6.15

The total intrinsic value of options exercised was approximately $7,100 during 2016.

As of December 31, 2016, the total intrinsic value of RSUs was approximately $827,000 and there were $1.2 million of unrecognized compensation costs related to RSUs, which are expected to be recognized over a weighted-average period of 2.85 years.

Options outstanding and options vested as of December 31, 2016 are summarized as follows:

	Options Outstanding						Options Vested
Range of Exercise Prices	Number of Options Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number of Options Vested		Weighted Average Exercise Price
$0.27 - 3.98		448,109		5.05	$	2.04		415,570	$	1.92
$4.37 - 4.60		179,263		9.15		4.47		18,064		4.46
$4.95 - 5.85		397,018		9.09		5.22		88,627		5.31
$6.49 - 7.03		384,910		8.18		6.64		189,136		6.64
$10.00 - 12.44		382,986		7.32		12.20		278,974		12.14
		1,792,286		7.51	$	6.14		990,371	$	6.05

Options outstanding that have vested and are expected to vest at December 31, 2016 are as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (In thousands)
Vested		990,371	$	6.05		6.55	$	427
Expected to Vest		766,938		6.28		8.70		—
Total		1,757,309	$	6.15		7.49	$	427

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock at December 31, 2016 for stock options that were in-the-money. The fair market value of the Company’s common stock as of December 31, 2016 was $2.70 per share.

The weighted average grant-date fair value of options to purchase common stock granted for the years ended December 31, 2016, 2015 and 2014 using the Black-Scholes Model was $2.05, $2.53 and $4.81, respectively.

The Company uses the grant date fair value of its common stock to value both employee and non-employee options when granted. The Company revalues non-employee options each reporting period using the fair market value of the Company’s common stock as of the last day of each reporting period.

The total fair value of options that vested during 2016 was $1.1 million. As of December 31, 2016, there were approximately $1.6 million of unrecognized compensation costs related to stock options, which are expected to be recognized over a weighted-average period of 2.2 years.

The Company’s 2014 Plan and Inducement Plan allow RSUs to be granted in addition to stock options. The RSUs vest annually over four years in equal increments. The Company began granting RSUs under the 2014 Plan in March 2015 and under the Inducement Plan in June 2016.

2014 Employee Stock Purchase Plan

The Company’s board of directors adopted its 2014 Employee Stock Purchase Plan (the “ESPP”) in March 2014 and its stockholders approved the ESPP in July 2014. The first offering period of the ESPP began on January 1, 2015 and ended June 30, 2015. The Company issued 67,256 shares and 36,696 shares of common stock during the years ended December 31, 2016 and 2015, respectively, pursuant to the ESPP. The Company received proceeds of $0.3 million and $0.4 million from the purchase of shares during the years ended December 2016 and 2015, respectively. As of December 31, 2016, the Company had 253,117 shares available for issuance under the ESPP.

The option price per share of common stock to be paid by a participant upon exercise of the participant’s option on the applicable exercise date for an offering period shall be equal to 85% of the lesser of the fair market value of a share of common stock on (a) the applicable grant date or (b) the applicable exercise date.

Valuation Assumptions

The Company’s board of directors determines the estimated fair value of the Company’s common stock based on assistance from an independent third party valuation firm. The fair value of employee stock options and ESPP was estimated using the Black-Scholes Model using the following weighted-average assumptions.

	Year Ended December 31,
	2016			2015			2014
Employee Stock Options
Expected term (in years)		5.9			6.0			5.1
Expected volatility		42.10	%	41.17		%	42.18		%
Risk-free interest rate		1.52	%	1.84		%	1.69		%
Expected dividend yield	—		%	—		%	—		%
Employee Stock Purchase Plan
Expected term (in years)		0.5			0.5			—
Expected volatility	77.05 – 90.81		%	39.10 – 44.15		%		—
Risk-free interest rate	0.37 – 0.49		%		0.11	%		—
Expected dividend yield	—		%	—		%	—		%

Risk-free Interest Rate: The Company based the risk-free interest rate over the expected term of the award based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of grant.

Volatility: The Company used an average historical stock price volatility of comparable public companies that were deemed to be representative of future stock price trends as the Company does not have sufficient trading history for its common stock.

Expected Term: The expected term represents the period for which the Company’s stock-based awards are expected to be outstanding and is based on analyzing the vesting and contractual terms of the awards and the holders’ historical exercise patterns and termination behavior.

Expected Dividends: The Company has not paid and does not anticipate paying any dividends in the near future.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense relating to employee and nonemployee stock options, RSUs, and ESPP for the years ended December 31, 2016, 2015 and 2014, included in the statements of operations as follows (in thousands):

	Year Ended December 31,
	2016		2015		2014
Cost of testing	$	144	$	109	$	28
Research and development		449		247		88
Sales and marketing		156		173		29
General and administrative		1,249		812		390
	$	1,998	$	1,341	$	535

No tax benefit was recognized related to share-based compensation expense since the Company has never reported taxable income and has established a full valuation allowance to offset all of the potential tax benefits associated with its deferred tax assets. In addition, no amounts of share-based compensation costs were capitalized for the periods presented.

Non-Employee Director Equity-based Compensation

For the years ended December 31, 2016, 2015 and 2014, the Company paid a portion of its non-employee directors’ compensation through the award of common shares. The stock awards are classified as equity, and compensation expense was recognized upon the issuance of the shares. As of December 31, 2016, there was a total of 104,941 shares issued to non-employee directors, for a total fair value of $563,000. Expense associated with the awards was $271,000, $255,000 and $94,000 for the years ended December 31, 2016, 2015 and 2014, respectively, which was included in general and administrative expense in the statements of operations.