12.

Stock-Based Compensation

Summary of Plans

Upon completion of the Merger with Arsanis on March 13, 2019, X4’s 2015 Employee, Director and Consultant Equity Incentive Plan, as amended (the “2015 Plan”), Arsanis’ 2017 Equity Incentive Plan (the “2017 Plan”) and Arsanis’ 2017 Employee Stock Purchase Plan (the “2017 ESPP”) (collectively, the “Plans”) were assumed by the Company. These Plans are administered by the board of directors or, at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or its committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant and the term of the stock option may not be greater than ten years. Incentive stock options granted to employees and restricted stock awards granted to employees, officers, members of the board of directors, advisors, and consultants of the Company typically vest over four years. Non-statutory options granted to employees, officers, members of the board of directors, advisors, and consultants of the Company typically vest over three or four years. Shares that are expired, terminated, surrendered or canceled under the Plans without having been fully exercised will be available for future awards. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for the grant of awards.

2015 Employee, Director and Consultant Equity Incentive Plan

In 2015, the board of directors and shareholders of X4 adopted the 2015 Plan, which provided for the Company to grant incentive stock options or nonqualified stock options, restricted stock awards and other stock-based awards to employees, directors and consultants of the Company. Each stock option outstanding under the 2015 Plan at the effective time of the Merger was automatically converted into a stock option exercisable for a number of shares of the Company’s common stock calculated based on the Exchange Ratio and the exercise price per share of such outstanding stock option.

The total number of shares of common stock that may be issued under the 2015 Plan was 1,700,000 shares, adjusted for the reverse stock split as of December 31, 2018 and March 31, 2019. Shares that are expired, forfeited, canceled or otherwise terminated without having been fully exercised will be available for future grant under the 2015 Plan. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for future grants.

2017 Equity Incentive Plan

In 2017, the board of directors and shareholders of Arsanis adopted the 2017 Plan which provided for the Company to grant incentive stock options, non-qualified options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. Incentive stock options may be granted only to the Company’s employees, including officers and directors who are also employees. Awards other than incentive stock options may be granted to employees, officers, members of the board of directors, advisors and consultants of the Company. The number of shares of common stock reserved for issuance under this plan will automatically increase on January 1 of each year, through January 1, 2027, in an amount equal to the lowest of 1,025,490 shares of the Company’s common stock, 4% of the number of shares of the Company’s common stock outstanding on January 1 of each year and an amount determined by the Company’s board of directors.

2017 Employee Stock Purchase Plan

In 2017, the board of directors and shareholders of Arsanis adopted the 2017 ESPP. The 2017 ESPP provides participating employees with the opportunity to purchase shares of the Company’s common stock at defined purchase prices over six-month offering periods. For the three month period ended March 31, 2019, no shares of common stock were issued under the 2017 ESPP.

Stock Option Valuation

The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Company has historically been a private company prior to March 13, 2019, and as a result, lacked company-specific historical and implied volatility information. The Company estimated expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until it has adequate historical data regarding the volatility of its own traded stock price. For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employee consultants is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted to employees, directors and non- employees:


	Three Months Ended March 31,
	2019			2018
Risk-free interest rate		2.4	%		2.8	%
Expected term (in years)		5.90			5.94
Expected volatility		90.6	%		86.0	%
Expected dividend yield		0	%		0	%

Stock Options

The following table summarizes the Company’s stock option activity since December 31, 2018:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2018		797,931		$	8.29		8.42	$	6,486
Assumed as part of Merger with Arsanis		271,230			62.60
Granted		136,913			17.22
Exercised		(16,483	)		6.85
Forfeited		(22,378	)		8.43

Outstanding as of March 31, 2019		1,167,213		$	21.97		7.65	$	7,168

Exercisable as of March 31, 2019		556,774		$	30.13

Vested and expected to vest as of March 31, 2019		979,466		$	48.79

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2019 was $123. The weighted average grant-date fair value per share of stock options granted during the three months ended March 31, 2019 was $12.88.

Stock-Based Compensation

Effective January 1, 2019, the Company adopted ASU 2018-07 which required the Company to adjust compensation expense for the three months ended March 31, 2019 for an immaterial amount for the unvested non-employee share options outstanding. The Company no longer remeasures the fair value of options granted to non-employees at each reporting period end (see Note 2).

During the three months ended March 31, 2019, the Company granted options to purchase 136,913 shares of common stock. As of March 31, 2019, total unrecognized compensation expense related to unvested stock options award was $5,066, which is expected to be recognized over a weighted average period of 2.5 years.

Stock-based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows:


	Three Months Ended March 31,
	2019		2018
Research and development expense	$	84	$	38
General and administrative expense		178		90

Total stock-based compensation		262		128