Share-based Compensation
 9 Months Ended
Sep. 30, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Share-based Compensation
Share-Based Compensation
In December 2015, the Board of Directors approved and adopted the 2015 Equity Incentive Plan, or 2015 Plan. Under the 2015 Plan, the Company may grant share options, equity appreciation rights, and restricted shares and restricted share units. Pursuant to the 2015 Plan, the Company has granted RSAs and stock options to Board of Directors, employees and consultants.
The 2015 Plan, as amended, reserves 2,650,000 Class A shares for issuance. If an award granted under the 2015 Plan expires, terminates, is unexercised, or is forfeited, or if any shares are surrendered in connection with an incentive award, the shares subject to such award and the surrendered shares become available for further awards under the 2015 Plan.
Concurrent with the closing of the IPO, the Board of Directors terminated the 2015 Plan and approved the 2018 Equity Incentive Plan, or the 2018 Plan, with an initial reserve of 1,500,000 shares of the Company’s common shares for issuance under the 2018 Plan.
During the periods presented, the Company recorded the following share-based compensation expense for stock options and restricted stock awards:
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Sales, general and administrative
 
$
1,409

 
$
230

 
$
1,995

 
$
865

Research and development
 
1,345

 
338

 
2,971

 
1,525

Total
 
$
2,754

 
$
568

 
$
4,966

 
$
2,390

 
 
 
 
 
 
 
 
 

Stock Options
 
 
 
 
 
 
 
 
 
 
 
Number of Options Outstanding
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
Balances at December 31, 2017
 
863,932

 
$
5.36

 
7.6
 
$
4,199

Granted (weighted-average fair value of $10.27 per share)
 
778,628

 
16.15

 
 
 
 
Exercised
 
(125,596
)
 
4.91

 
 
 
 
Forfeited/canceled
 
(56,101
)
 
7.54

 
 
 
 
Balances at September 30, 2018
 
1,460,863

 
$
11.09

 
8.96
 
$
19,247

 
 
 
 
 
 
 
 
 

As of September 30, 2018, 407,126 options were vested and exercisable with weighted-average exercise price of $4.81 per share and a total aggregate intrinsic value of $7.9 million.
During the nine months ended September 30, 2018, 125,596 options were exercised at a price of $4.91 per share. The intrinsic value of the options exercised during the nine months ended September 30, 2018 and 2017 was $2.4 million and zero, respectively. Upon the exercise of stock options, the Company issued new shares from its authorized shares. There were no exercises of stock options during the year ended December 31, 2017.
At September 30, 2018, unrecognized compensation expense was $3.7 million related to stock options granted to employees and Board of Directors and $6.7 million related to stock options granted to consultants. The weighted-average period over which such compensation expense will be recognized is 3.1 years.
Stock Options Granted to Employees
Share-based compensation expense for employees is based on the grant date fair value. The Company recognizes compensation expense for all share-based awards on a straight-line basis over the requisite service period of the awards, which is generally the vesting term of four years. During the nine months ended September 30, 2018 and 2017, the Company recognized $0.6 million and $62,000, respectively, of stock-based compensation expense for stock options granted to employees.
The Company uses the Black-Scholes option valuation model to value options granted to employees and consultants, which requires the use of highly subjective assumptions to determine the fair value of share-based awards. The assumptions used in the Company’s option-pricing model represent management’s best estimates. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment. If factors change and different assumptions are used, the Company’s share-based compensation expense could be materially different in the future. The assumptions and estimates that the Company uses in the Black-Scholes model are as follows:
▪
Fair Value of Common Shares. Following the IPO, the closing price of the Company’s publicly-traded common stock on the date of grant and at quarter-end is used as the fair value of the shares. Prior to the IPO, the fair value of ordinary shares was estimated on a periodic basis by the Company’s Board of Directors, with the assistance of an independent third-party valuation firm.  The Board of Directors intended all options granted to be exercisable at a price per share not less than the estimated per share fair value of the shares underlying those options on the date of grant.
▪
Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to that of the term of the options for each option group on the measurement date.
▪
Term. For employee stock options, the expected term represents the period that the Company’s share-based awards are expected to be outstanding. Because of the limitations on the sale or transfer of the Company’s shares as a privately held company, the Company does not believe its historical exercise pattern is indicative of the pattern it will experience as a publicly traded company. The Company has consequently used the Staff Accounting Bulletin 110, or SAB 110, simplified method to calculate the expected term of employee stock options, which is the average of the contractual term and vesting period. The Company plans to continue to use the SAB 110 simplified method until it has sufficient trading history as a publicly traded company. For consultant stock options, the term used is equal to the remaining contractual term on the measurement date.
▪
Volatility. The Company determines the price volatility based on the historical volatilities of industry peers as it does not have sufficient trading history for its shares. Industry peers consist of several public companies in the medical device industry with comparable characteristics, including revenue growth, operating model and working capital requirements. The Company intends to continue to consistently apply this process using the same or a similar peer group of public companies until a sufficient amount of historical information regarding the volatility of its own shares becomes available, or unless circumstances change such that the identified peer companies are no longer similar, in which case other suitable peer companies whose common share prices are publicly available would be utilized in the calculation. The volatility is calculated based on the term on the measurement date.
▪
Dividend Yield. The expected dividend assumption is based on the Company’s current expectations about its anticipated dividend policy. The Company has no expectation that it will declare dividends on its common shares, and therefore has used an expected dividend yield of zero.
The fair value of stock options granted to employees in 2018 was estimated using the following assumptions:
 
 
 
 
 
Nine Months Ended September 30,
 
 
2018
Volatility
 
56.0% - 57.0%
Risk-free interest rate
 
2.7% - 2.9%
Term (in years)
 
6.25
Dividend yield
 
0%
 
 
 

The Company did not grant any stock options to employees during 2017.
Stock Options Granted to Non-Employees
Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned using an accelerated attribution method. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services rendered. For the nine months ended September 30, 2018 and 2017, the Company recognized expense of $2.7 million and $0.7 million for stock options granted to consultants.
The fair value of stock options granted to consultants was estimated using the following assumptions during the following periods presented:
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Volatility
 
58.0% - 59.0%
 
43.0%
Risk-free interest rate
 
2.8% - 3.1%
 
2.3%
Term (in years)
 
10.0
 
9.5 - 9.8
Dividend yield
 
0.0%
 
0.0%
 
 
 
 
 

Restricted Stock
Each vested RSA and RSU entitles the holder to be issued one common share. These awards vest according to a vesting schedule determined by the Compensation Committee of the Company’s Board of Directors, generally over a one to four year period.
The following table represents RSA activity for fiscal 2018:
 
 
 
 
 
 
 
Restricted Stock Awards
 
Weighted-
Average
Grant Date
Fair Value
Outstanding unvested at December 31, 2017
 
585,056

 
$
7.57

Granted
 
90,301

 
13.27

Vested
 
(163,871
)
 
7.00

Forfeited/canceled
 
(116,502
)
 
9.60

Outstanding unvested at September 30, 2018
 
394,984

 
$
8.51

 
 
 
 
 
The following table represents RSU activity for fiscal 2018:
 
 
 
 
 
 
 
Restricted Stock Units
 
Weighted-
Average
Grant Date
Fair Value
Outstanding unvested at December 31, 2017
 
—

 
$
—

Granted
 
3,852

 
25.35

Vested
 
(3,852
)
 
25.35

Forfeited/canceled
 
—

 
—

Outstanding unvested at September 30, 2018
 
—

 
$
—

 
 
 
 
 

The fair value of restricted stock is the grant date market value of common shares. The Company recognizes share-based compensation expense related to restricted stock using a straight-line method over the vesting term of the awards. The fair value of RSAs and RSUs that vested during the nine months ended September 30, 2018 and 2017, was $1.6 million and $1.5 million, which was calculated based on the market value of the Company’s common shares on the applicable date of vesting.
As of September 30, 2018, we had unrecognized share-based compensation cost of approximately $4.3 million associated with unvested restricted stock awards. This cost is expected to be recognized over a weighted-average period of approximately 2.1 years.