9. 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 has 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 last day of the preceding year, 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 September 30, 2019, the Company had 2,650,411 shares available for grant under the 2018 Plan.

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

The aggregate intrinsic value was calculated as the difference between the exercise prices of the underlying stock option awards and the estimated fair value of the Company’s common stock on the date of exercise. For the three and nine months ended September 30, 2019, the aggregate intrinsic value of stock options exercised was $63,000 and $119,000, respectively, determined at the date of the option exercise. For the three and nine months ended September 30, 2018, the aggregate intrinsic value of stock options exercised was $18,000 and $153,000, respectively, determined at the date of the option exercise.

Employee Stock Options Valuation

For determining stock-based compensation expense, the fair-value-based measurement of each employee stock option was estimated as of the date of grant using the Black-Scholes option-pricing model with assumptions as follows:

Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the three and nine months ended September 30, 2019 was $4.88 and $6.74 per share, respectively, and during both the three and nine months ended September 30, 2018 was $8.93 per share.   

Restricted Stock Units

During the nine months ended September 30, 2019, the Company granted 154,900 shares of restricted common stock, or RSUs, to certain employees. These RSUs will become fully vested over four years in March 2023.  

A summary of the status and activity of non-vested RSUs at September 30, 2019 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 nine months ended September 30, 2019, the fair value of ESPP shares was estimated using the following assumptions:

As of September 30, 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.

The Company recorded $2.0 million and $5.6 million, respectively, of stock-based compensation expense related to the stock options granted under the Company’s Equity Incentive Plans for the three and nine months ended September 30, 2019.  The Company recorded $0.3 million and $0.8 million, respectively, of stock-based compensation expense related to the stock options granted under the Company’s Equity Incentive Plans for the three and nine months ended September 30, 2018. The Company recorded $0.6 million and $1.6 million, respectively, of stock-based compensation expense related to the RSUs for the three and nine months ended September 30, 2019. The Company recorded $0.3 million and $0.4 million, respectively, of stock-based compensation expense related to the ESPP for the three and nine months ended September 30, 2019. The Company recorded no stock-based compensation expense related to the RSUs and ESPP for the three and nine months ended September 30, 2018.

As of September 30, 2019, unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $20.0 million and $4.3 million, respectively. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.9 years and 2.4 years, respectively. As of September 30, 2019, there is no unrecognized stock-based compensation expense related to the ESPP.

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 three and nine months ended September 30, 2019 and 2018 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 September 30, 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), net in the statement 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 relating to the call options granted in February 2017, 315,000 of such options had vested, 210,000 were exercised and 105,000 were outstanding and unvested as of September 30, 2019.  As related to the call options granted in August 2019, 7,500 of such options had vested, none were exercised and 22,500 were outstanding and unvested as of September 30, 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 three and nine months ended September 30, 2019 were $24,000 and $59,000, respectively.  The amounts recognized as compensation expense related to the 2017 Call Option Plan for the three and nine months ended September 30, 2018 were $19,000 and $50,000, respectively.  

The amounts recognized as other expense related to the 2017 Call Option Plan for the three and nine months ended September 30, 2019 were $15,000 and $8,000, respectively.  The amounts recognized as other income related to the 2017 Call Option Plan for the three and nine months ended September 30, 2018 were $6,000 and $10,000, respectively.