11. Equity Incentive Plans, Employee Stock Purchase Plan and Stock-Based Compensation

2004 Equity Incentive Plan and 2018 Equity Incentive Plan

In September 2018, the Company adopted the 2018 Equity Incentive Plan (“2018 Plan”), which became effective on September 25, 2018. As a result, the Company will not grant any additional awards under the 2004 Equity Incentive Plan (“2004 Plan”). The terms of the 2004 Plan and applicable award agreements will continue to govern any outstanding awards thereunder. In addition to the shares of common stock reserved for future issuance under the 2004 Plan that were added to the 2018 Plan upon its effective date, the Company initially reserved 2,300,000 shares of common stock for issuance under the 2018 Plan. In addition, the number of shares of common stock reserved for issuance under the 2018 Plan will automatically increase on the first day of January for a period of up to ten years, commencing on January 1, 2019, in an amount equal to 5% of the total number of shares of the Company’s capital stock outstanding on the immediately preceding December 31 (rounded to the nearest whole share), or a lesser number of shares determined by the Company’s board of directors. As a result, common stock reserved for issuance under the 2018 Plan was increased by 1,142,409 shares on January 1, 2019.  As of December 31, 2019, the Company had 2,750,416 shares available for grant under the 2018 Plan.

The following table summarizes option activities under the Company’s 2004 Plan and 2018 Plan:

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal year 2019 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the stock option holders had all stock option holders exercised their stock options on December 31, 2019.  For the years ended December 31, 2019, 2018 and 2017, the aggregate intrinsic value of stock options exercised was $0.2 million, $0.2 million and $0.1 million, respectively, determined at the date of the option exercise.

Employee Stock Options Valuation

For determining stock-based compensation expense under the Plan, the fair-value-based measurement of our share-based payments were estimated as of the date of grant using the Black-Scholes option pricing model with assumptions as follows:

Expected Term—The expected term represents the period that the stock-based awards are expected to be outstanding. The Company used the “simplified” method to determine the expected term of options granted, which calculates the expected terms as the average of the weighted-average vesting term and the contractual term of the option.

Expected Volatility—Since the Company has limited information available on the volatility of its common stock due to its short trading history, the expected volatility was estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the options.

Expected Dividend—The Company has never paid dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.

Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the years ended December 31, 2019, 2018 and 2017 was $6.71, $9.48 and $7.26 per share, respectively. The total fair value of options vested during the years ended December 31, 2019, 2018 and 2017 was $1.1 million, $2.3 million and $1.6 million, respectively.

Restricted Stock Units

During the years ended December 31, 2019 and 2018, the Company granted 154,900 and 312,400 shares, respectively, of restricted common stock, or RSUs, to certain employees. These restricted shares will become fully vested over four years in March 2023.   

A summary of the status and activity of non-vested RSUs during the years of December 31, 2019 and 2018 is as follows:

2018 Employee Stock Purchase Plan

In September 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective on September 26, 2018, the day that the Form S-1 related to the IPO was declared effective, in order to enable eligible employees to purchase shares of the Company’s common stock.  The Company initially reserved 230,000 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP will increase automatically on January 1st of each of the first ten calendar years after the effective date by the number of shares equal to the lesser of 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31 (rounded to the nearest whole share) or a number of shares as may be determined by the Company’s board of directors. As a result, common stock reserved for issuance under the ESPP was increased by 228,481 shares on January 1, 2019.  The aggregate number of shares issued over the term of the Company’s ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 2,300,000 shares of the Company’s common stock.

The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model. For the year ended December 31, 2019, the fair value of ESPP shares was estimated using the following assumptions:

As of December 31, 2019, 131,939 shares had been purchased and 326,542 shares were available for future issuance under the ESPP.

Stock-Based Compensation Expense

The Company believes that the fair value of the stock options, RSUs and ESPP shares is more reliably measurable than the fair value of services received.

For the year ended December 31, 2019, the Company recorded $7.7 million of stock-based compensation expense related to the stock options granted under the Company’s Equity Incentive Plans, $2.1 million of stock-based compensation expense related to the RSUs, and $0.5 million of stock-based compensation expense related to the ESPP. As of December 31, 2019, unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $16.9 million and $3.7 million, respectively. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.7 years and 2.0 years, respectively. As of December 31, 2019, unrecognized stock-based compensation expense related to the ESPP was $0.1 million.

For the year ended December 31, 2018, the Company recorded $2.4 million stock-based compensation expense related to the stock options granted under the Company’s Equity Incentive Plans, $0.4 million of stock-based compensation expense related to the RSUs and $0.1 million stock-based compensation expense related to the ESPP. As of December 31, 2018, unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $18.2 million and $3.9 million, respectively. The remaining unrecognized compensation cost was expected to be recognized over a weighted-average period of 3.5 years and 2.0 years, respectively. As of December 31, 2018, unrecognized stock-based compensation expense related to the ESPP was $0.1 million.

Total stock-based compensation expense recognized was as follows:

Non-Employee Stock-Based Compensation Expense

The fair value of options granted to non-employees was estimated using the Black-Scholes method. The stock-based compensation expense related to non-employees for the years ended December 31, 2019, 2018 and 2017 was immaterial.

2017 Call Option Plan

In February 2017, the Company adopted a 2017 Call Option Plan to grant selected employees, officers, directors and consultants (collectively, the “Participants”) options to purchase shares of the common stock of SutroVax, an unconsolidated investee of the Company.  As of December 31, 2019, the Company has reserved 450,000 shares of SutroVax common stock for issuance under the program, under which call options covering 420,000 and 30,000 shares were granted in February 2017 and August 2019, respectively. The call options granted in February 2017 vest 25% on each of January 1, 2017, 2018, 2019, and 2020, and expire one year from the vesting date. The call options granted in August 2019 vest 25% on each of January 1, 2019, 2020, 2021, and 2022, and expire one year from the vesting date.

Using the Black-Scholes option-valuation model, the call options are measured at fair value on grant date and at each reporting period prior to their vesting, with cost recognized over the requisite service period as compensation cost. Any changes in the fair value subsequent to the vesting date are recognized in other income (expense) in the statements of operations.  Call options covering 420,000 and 30,000 shares have been granted with an exercise price of $0.76 per share and $1.21 per share, respectively.  As related to the call options granted

in February 2017, 315,000 of such options had vested and were exercised and 105,000 were outstanding and unvested as of December 31, 2019.  As related to the call options granted in August 2019, 7,500 of such options had vested and were exercised and 22,500 were outstanding and unvested as of December 31, 2019. As of December 31, 2018, 210,000 of the call options granted in February 2017 had vested and were exercised and 210,000 were outstanding and unvested.  

The amounts recognized as compensation expense related to the 2017 Call Option Plan for the years ended December 31, 2019, 2018 and 2017 were $78,000, $65,000 and $79,000, respectively.  

The amounts recognized as other income related to the 2017 Call Option Plan for the years ended December 31, 2019, 2018 and 2017 were $153,000, $133,000 and $109,000, respectively.