Stockholders' Equity

12 Months Ended

Dec. 31, 2018

Stockholders’ Equity

Preferred Stock

Our board of directors has the authority to fix and determine and to amend the number of shares of any series of preferred stock that is wholly unissued or to be established and to fix and determine and to amend the designation, preferences, voting powers and limitations, and the relative, participating, optional or other rights, of any series of shares of preferred stock that is wholly unissued or to be established. There was no preferred stock issued and outstanding as of December 31, 2018 and December 31, 2017.

Common Stock

We had 48,210,520 and 48,068,650 shares of common stock outstanding as of December 31, 2018 and 2017, respectively. Shares of common stock reserved for future issuance were as follows:



	AS OF DECEMBER 31,
	2018	2017

Shares available for issuance under the employee stock purchase plan	393,206	475,010
Options granted and outstanding	3,872,273	4,094,532
Unvested restricted stock units	465,396	195,172
Shares available for future option grants and restricted stock awards	2,761,914	947,199
Shares reserved for future issuance under equity incentive plans	7,492,789	5,711,913

In July 2017, we entered into a Sales Agreement (ATM Agreement) with Cowen and Company, LLC (Cowen) under which we could offer and sell, from time to time at our sole discretion through Cowen, as our sales agent, shares of our common stock having an aggregate offering price of up to $50.0 million. Under the ATM Agreement, Cowen could sell the common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act of 1933, as amended, including sales made directly on or through the Nasdaq Global Market (Nasdaq) or on any other existing trading market for our common stock. Cowen would receive a commission equal to 3.0% of the gross sales proceeds of any common stock sold under the ATM Agreement and also have provided Cowen with indemnification and contribution rights. Any common stock sold under the ATM Agreement would have be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-206324), which expired December 29, 2018. As of the expiration, we have not sold any common stock under the ATM Agreement.

Equity Incentive Plans

2014 Employee Stock Purchase Plan

In April 2014, our board of directors adopted, and in July 2014 our stockholders approved, the 2014 Employee Stock Purchase Plan (2014 ESPP). The total number of shares of common stock available for issuance under the 2014 ESPP may increase annually on January 1 by (i) the lesser of 1% of the total number of shares issued and outstanding as of December 31 of the immediately preceding year or (ii) 200,000 shares, or less as deemed appropriate by the Board of Directors. For 2018 and 2017, the Board of Directors determined the current shares available to be issued under the 2014 ESPP was sufficient and did not increase the amount of authorized shares.

2008 Equity Incentive Plan and 2014 Omnibus Incentive Plan

In 2008, we adopted the 2008 Equity Incentive Plan (2008 Plan) for eligible employees, officers, directors, and consultants, which provided for the grant of incentive and non-statutory stock options, restricted stock awards, restructured stock unit awards grant, and stock appreciation rights. The terms of the stock awards, including vesting requirements, were determined by the board of directors, subject to the provisions of the 2008 Plan.

In April 2014, our board of directors adopted, and in July 2014 our stockholders approved, the 2014 Omnibus Incentive Plan (2014 Plan) which provides for the granting of certain awards to eligible employees, officers, directors, and consultants. Upon approval of the 2014 Plan by the stockholders in July 2014, 1,400,000 shares of our common stock were reserved for issuance under the 2014 Plan, and we ceased granting stock awards under the 2008 Plan. All shares of common stock subject to awards under the 2008 Plan that expire, terminate, or are otherwise surrendered, canceled, forfeited or repurchased without having been fully exercised or resulting in the issuance of common stock become available for issuance under the 2014 Plan.

Stock options granted under the 2008 and 2014 Plans generally vest within two, three and four years, and vested options are generally exercisable until ten years after the date of grant. Vesting of certain employee options may be accelerated in the event of a change in control of our company. We grant stock options to employees with exercise prices equal to the fair value of our common stock on the date of grant. There were a total of 6,068,369 shares of common stock authorized under the 2014 Plan as of December 31, 2018.

The total number of shares of common stock available for issuance under the 2014 Plan will automatically increase each year on January 1 by 4% of the total number of shares issued and outstanding as of December 31 of the immediately preceding year. On January 1, 2018, in accordance with the annual increase provisions, the authorized shares under the 2014 Plan increased by 1,922,746 shares.

Restricted Stock Units

In 2016, we began issuing restricted stock units (RSUs) to employees under the 2014 Plan. The fair value of the RSUs is determined on the date of grant based on the market price of our common stock. RSUs are recognized as an expense ratably over the vesting period and our RSUs generally vest over one, three and four years. In January 2018, the Compensation Committee of our Board of Directors granted 198,835 time-based restricted stock units (RSUs) and 367,500 performance-based restricted stock units (January PSUs) to our employees. Restricted stock units are awards that entitle the holder to receive shares of our common stock upon vesting. The RSUs and January PSUs cannot be transferred and are subject to forfeiture if the holder’s employment terminates prior to vesting. One-third of the RSUs will vest on each anniversary of the grant date over three (3) years. The fair value of each RSU is equal to the closing price of our common stock on the applicable grant date.

Fifty percent of the January PSUs would have vested on each of June 30, 2018 and December 31, 2018 upon the achievement of certain performance criteria by such date. If the performance criteria was not met by the specified dates, the corresponding number of January PSUs would expire. Stock-based compensation for the January PSUs is recognized over the service period beginning in the period management determines it is probable that the performance criteria will be achieved. During the period ending March 31, 2018, we began recognizing stock compensation expense on the January PSUs as the outcome of the performance criteria being achieved was deemed probable. As of June 30, 2018, 183,750 shares of the January PSUs that were granted in January 2018 expired unvested as the performance criteria was not met by the specified date. In addition, management determined that the performance criteria associated with the remaining January PSUs would not be achieved by December 31, 2018, due to a change in program strategy, and accordingly, we reversed the related stock-based compensation expense of $508,000 recorded in the period ending March 31, 2018. On December 31, 2018, the remaining January PSUs expired unvested, and no expense was recorded, as the performance criteria was not met by the specified date.

In July 2018, the Compensation Committee of the Board of Directors granted 322,020 additional PSUs to our employees (July PSUs). The July PSUs would vest on or before December 31, 2018, as to either fifty percent (50%) or one hundred percent (100%) of the total shares, upon achievement of certain performance criteria on or before such date, subject to the employee’s continued service with us upon the vesting date. If the performance criteria was not met by December 31, 2018, the corresponding July PSUs would expire. During the period the July PSUs were outstanding, management determined that the performance criteria associated with the July PSUs would most likely not be achieved by December 31, 2018, and as a result, no expense was recorded in the second half of 2018. On December 31, 2018, the July PSUs expired unvested, and no expense was recorded, as the performance criteria was not met by the specified date.

In November 2018, the Compensation Committee of our Board of Directors granted an additional 225,500 time-based RSUs that vest 100% one year from date of grant.

Summary RSU information is as follows:



	Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017	107,250		$	19.39
Granted	224,540		$	5.60
Vested	(26,802	)	$	19.39
Canceled/Forfeited	(109,816	)	$	6.13
Outstanding at December 31, 2017	195,172		$	10.99
Granted	1,113,855		$	3.53
Vested	(58,468	)	$	11.85
Canceled/Forfeited	(785,163	)	$	4.34
Outstanding at December 31, 2018	465,396		$	4.25

During the year ended December 31, 2018, the total estimated grant date fair value for RSUs granted was $3.9 million. The total fair value of RSUs vested was $228,000. In 2018, the Company recognized stock-based compensation expenses of $874,000 related to RSUs. As of December 31, 2018, total unrecognized stock-based compensation expenses related to unvested RSUs was $1.3 million, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 1.47 years.

Stock Option Activity

Summary stock option information is as follows:



	OPTIONS OUTSTANDING		WEIGHTED- AVERAGE EXERCISE PRICE		WEIGHTED- AVERAGE REMAINING CONTRACT TERM (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN THOUSANDS)
Outstanding at January 1, 2017	3,590,393		$	12.13
Granted	954,301		$	6.46
Exercised	(175,183	)	$	2.56
Forfeited	(117,124	)	$	14.35
Expired	(157,855	)	$	17.19
Outstanding at December 31, 2017	4,094,532		$	10.96	7.2	$	2,771
Granted	2,366,119		$	4.10
Exercised	(1,598	)	$	1.15
Forfeited	(2,279,560	)	$	13.71
Expired	(307,220	)	$	14.55
Outstanding at December 31, 2018	3,872,273		$	4.87	6.4	$	50
Vested and expected to vest after December 31, 2018	3,872,273		$	4.87	6.4	$	50
Exercisable at December 31, 2018	1,920,745		$	5.38	4.7	$	50

As of December 31, 2018, there was $5.0 million of total unrecognized stock-based compensation expense related to nonvested stock options that is expected to be recognized over a weighted-average period of 1.9 years. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $4,000, $868,000 and $124,000, respectively.

Stock-Based Compensation Expense

Total stock-based compensation expense recognized in our statements of operations is as follows (in thousands):



	YEARS ENDED DECEMBER 31,
	2018		2017		2016

Employee:
Research and development	$	3,030	$	3,613	$	3,923
General and administrative	4,212		4,879		5,029
Non-Employee:
Research and development	28		85		268
General and administrative	6		56		63
Total stock-based compensation expense	$	7,276	$	8,633	$	9,283

We use the Black-Scholes option pricing model to estimate the fair value of stock options at the grant date. The Black-Scholes option pricing model requires us to make certain estimates and assumptions, including assumptions related to the expected price volatility of our stock, the period during which the options will be outstanding, the rate of return on risk-free investments, and the expected dividend yield of our stock.

The fair values of stock options granted to employees were calculated using the following assumptions:



	YEARS ENDED DECEMBER 31,
	2018		2017		2016

Weighted-average estimated fair value	$	3.90	$	4.41	$	10.07
Risk-free interest rate (1)	2.3% - 3.0%		1.9% - 2.2%		1.1% - 2.4%
Expected term of options (in years) (2)	5.5 - 6.1		5.5 - 6.1		5.5 - 9.5
Expected stock price volatility (3)	77% - 85%		80% - 91%		77% - 93%
Expected dividend yield (4)	—%		—%		—%


(1)	The risk-free interest rate assumption was based on zero-coupon U.S. Treasury instruments that had terms consistent with the expected term of our stock option grants.


(2)	We used the “simplified method” for options to determine the expected term of our stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option.


(3)	Volatility is a measure of the amount by which a financial variable, such as share price, has fluctuated or is expected to fluctuate during a period. We analyzed the stock price volatility of companies at a similar stage of development to estimate expected volatility of our stock price, and utilized the Company’s historical volatility starting in October 2018.


(4)	We have never declared or paid cash dividends and do not presently plan to pay cash dividends in the foreseeable future.

Stock Option Exchange Program

On June 18, 2018, we filed a Tender Offer Statement on Schedule TO relating to an option exchange program for our officers and employees (Option Exchange) to exchange certain stock options to purchase up to an aggregate of 2,462,566 shares of our common stock that had been granted to eligible holders, for a lesser number of new stock options with a lower exercise price. Stock options with an exercise price equal to or greater than $5.00 and held by eligible holders in continuous service through the termination of the Option Exchange were eligible for exchange in the program. The eligible shares were exercisable for a reduced number of shares based on the following exchange ratios:



Eligible Option Exercise Price Ranges		Exchange Ratio (Surrendered Eligible Options: New Options)*
$5.00-$14.99		1.50 to 1
$15.00-$29.99		1.75 to 1
$30.00-And Up		2.00 to 1
* Rounded up to the nearest share

Upon the closing of the Option Exchange on July 17, 2018, 31 out of 49 eligible employees had tendered an aggregate of 1,590,083 options, representing 65% of the total eligible options, for 962,099 new options to purchase shares of our common stock. Each new stock option was granted on July 17, 2018, pursuant to our 2014 Plan with an exercise price per share of $4.40 per share, which was the closing market price on the grant date of the new options. The exchange of stock options was treated as a modification for accounting purposes and resulted in an incremental expense of $12,000 for the vested options, which was calculated using the Black-Scholes option pricing model. We elected the “bifurcated approach” to amortize the incremental expense over the new vesting period of the new options and will continue to amortize the unamortized expense on the original grants through the end of the original vesting term.

IMMUNE DESIGN CORP. 10-K