Stock Option Plan

In April 2008, the Company adopted the 2008 Stock Option Plan (the “Plan”), as amended, under which the Board of Directors may issue incentive and nonqualified stock options to employees, directors and consultants. The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and the exercise price. If an individual owns stock representing more than 10% of the outstanding shares, the price of each share shall be at least 110% of the fair market value, as determined by the Board of Directors. The exercise price of an incentive stock option and a nonqualified stock option shall not be less than 100% and 85%, respectively, of the fair market value on the date of grant. As of December 31, 2017, a total of 5,350,080 shares of common stock have been reserved for issuance under the Plan. Options granted have a term of 10 years, except, options granted to individuals holding more than 10% of the outstanding shares have a term of five years. Options generally vest over a four-year period. Certain shares issued under the Plan are exercisable immediately, but subject to a right of repurchase by the Company of any unvested shares.

The following table summarizes activity under the Plan for the nine months ended September 30, 2018:



	Options Outstanding
	Shares Available for Grant		Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
							(in years)	(in thousands)

Balances at December 31, 2017	29,654		3,001,929		$	4.15		$	3,585
Options granted	(73,783	)	73,783		5.51
Options exercised	—		(309,767	)	4.11			960
Options cancelled	54,278		(54,278	)	4.77
Balances at September 30, 2018	10,149		2,711,667		$	4.12	6.8	$	23,957

Options vested and exercisable - September 30, 2018			1,639,606		$	3.65	6.0	$	15,271

Options vested and expected to vest - September 30, 2018			2,489,664		$	4.01	6.7	$	22,285

The aggregate intrinsic values of options outstanding, options exercisable, options vested and exercisable, and options vested and expected to vest were calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock, as determined by the board of directors, as of September 30, 2018 and December 31, 2017.

Early Exercise of Unvested Stock Options

Early exercises of stock options are subject to a right of repurchase by the Company of any unvested shares. The repurchase rights lapse over the original vesting period of the options. The Company accounts for the cash received in consideration for the early exercised options as a liability included in accrued liabilities, which is then reclassified to stockholders’ deficit as the options vest. At September 30, 2018 and December 31, 2017, the Company had a total of 78,757 and 16,117 shares of common stock, respectively, subject to repurchase under the Plan and $0.4 million and $0.1 million, respectively, of associated liabilities for the repurchase.

Stock-Based Compensation

The following table sets forth stock-based compensation expense related to options granted for the periods presented (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017

Cost of goods sold	$	5	$	5	$	17	$	18
Research and development	30		33		101		98
Sales and marketing	110		107		350		313
General and administrative	183		198		613		609
	$	328	$	343	$	1,081	$	1,038

Amounts above do not include $0.4 million of stock-based compensation expense related to forgiveness of notes receivable for the nine months ended September 30, 2017. No amounts of stock-based compensation expense related to forgiveness of notes receivable were recognized for the three months ended September 30, 2018. Refer to Note 12 for details.

Employee Stock-Based Compensation

During the three months ended September 30, 2018, the Company granted stock options to employees to purchase 19,998 shares of common stock with a weighted-average exercise price of $9.88 per share. During the nine months ended September 30, 2018, the Company granted stock options to employees to purchase 73,783 shares of common stock with a weighted-average exercise price of $5.51 per share. As of September 30, 2018, there was a total unrecognized compensation cost of $1.9 million. These costs are expected to be recognized over a period of approximately 2.1 years. 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. The fair value of employee stock options was estimated using the assumptions below. Each of these inputs is subjective and its determination generally requires significant judgment.

Performance Stock Options

In March 2017, the Company granted 564,098 performance stock options at a grant price of $5.94, of which 408,544 performance options will vest monthly over four years and 155,554 performance options will vest monthly over three years. The vesting period will begin on the date of the closing of an IPO, the performance condition, subject to the optionee’s continuous service. Stock-based compensation expense for performance stock options is based on the probability of achieving certain performance criteria, as defined in the individual option grant agreement. Periodically, the Company estimates the number of performance options ultimately expected to vest and recognizes stock-based compensation expense for those options when it becomes probable that the performance criteria will be met. As of September 30, 2018 an IPO was not deemed probable and thus no expense was recognized.

Fair Value of Common Stock

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 has 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 independent third-party valuations, the Company’s stage of development, sales of the Company’s redeemable 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.

Expected Term

The expected term represents the period that the share-based awards are expected to be outstanding. The Company used the simplified method to determine the expected term, which is calculated as the average of the time to vesting and the contractual life of the options.

Expected Volatility

As the Company’s common stock has never been publicly traded, the expected volatility is derived from the average historical volatilities of publicly traded companies within its industry that the Company considers to be comparable to its business over a period approximately equal to the expected term for its stock options.

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 the option.

Dividend Yield

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.

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.

The grant date fair value of the stock option awards granted to employees was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:



	Three months ended		Nine months ended
	September 30,		September 30,
	2018	2017	2018	2017

Expected term	6.04	6.03	5.98	5.05
Expected volatility	41%-44%	42%-46%	41%-46%	41%-55%
Risk-free interest rate	2.74%-2.80%	1.73%-2.15%	2.35%-2.93%	1.73%-2.75%
Dividend yield	—%	—%	—%	—%

Restricted Stock Units

In August 2018, the Company granted 37,036 restricted stock units with a grant-date fair value of $7.74 per share. Fifty percent of these awards will vest on the first day of the first open trading window that occurs after the one-year anniversary of the closing of an IPO, and fifty percent will vest on the first day of the first open trading window that occurs after the two-year anniversary of the closing of an IPO, subject to continued service through each relevant vesting date.