(10) Stock Plans and Stock-Based Compensation

The Company’s 2016 Equity Incentive Plan (the “2016 Plan”) became effective on September 15, 2016. The 2016 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights and performance share awards to employees, directors and consultants of the Company. A total of 3,893,118 shares of the Company’s common stock were initially reserved for issuance under the 2016 Plan, which is the sum of (1) 2,000,000 shares, (2) the number of shares reserved for issuance under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”) at the time the 2016 Plan became effective (up to a maximum of 42,934 shares) and (3) shares subject to stock options or other stock awards granted under the 2008 Plan that would have otherwise returned to the Company’s 2008 Plan (up to a maximum of 1,850,184 shares). The number of shares of common stock reserved for issuance under the 2016 Plan will automatically increase on January 1 of each year, beginning on January 1, 2017, by 3% of the number of shares of the Company’s capital stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s board of directors.

As a result of the adoption of the 2016 Plan, no further grants may be made under the 2008 Plan. The 2008 Plan provided for the grant of stock options to the Company’s employees, directors and consultants. Stock option awards were granted with an exercise price equal to the fair market value of the Company’s common stock at the date of grant as determined by the Company’s board of directors. The option awards generally vested over four years and were exercisable any time after vesting. The stock options expire ten years after the date of grant.

2016 Employee Stock Purchase Plan

The Company’s Employee Stock Purchase Plan (“2016 ESPP”) became effective on September 15, 2016. A total of 500,000 shares of the Company’s common stock were initially reserved for issuance under the 2016 Plan. The number of shares reserved for issuance under the 2016 ESPP will automatically increase on January 1 of each year, beginning on January 1, 2017, by the lesser of 200,000 shares of the Company’s common stock, 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s board of directors.

The 2016 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016 ESPP provides for separate six-month offering periods beginning each March and September of each fiscal year.

On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s common stock on the offering date or (ii) the fair market value of the Company’s common stock on the purchase date.

For the nine months ended September 30, 2017, 128,786 shares of common stock were purchased under the 2016 ESPP. The 2016 ESPP is considered compensatory for purposes of stock-based compensation expense.

Stock Options

The Company recorded stock-based compensation expense of $2.8 million and $4.9 million for the three and nine months ended September 30, 2017, respectively. The Company recorded stock-based compensation expense of $0.8 million and $2.2 million for the three and nine months ended September 30, 2016, respectively.

The total intrinsic value of options exercised for the three and nine months ended September 30, 2017 was $2.9 million and $6.5 million, respectively. This intrinsic value represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option. Based on the fair market value of the Company’s common stock at September 30, 2017, the total intrinsic value of all outstanding options was $26.7 million.

The fair value of stock option grants is determined using the Black-Scholes option pricing model with the following weighted average assumptions. In addition, the fair value per share on grant date is presented below:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Employee Stock Options:
Fair value per share on grant date	$23.17 - $23.60		$8.94 - $9.02		$18.05 - $24.87		$8.51 - $9.02
Expected term (in years)		6.00	5.99 - 6.11		6.00 - 6.11		5.29 - 6.11
Expected volatility	60%		70%		60%		70%
Risk-free interest rate	1.82% - 1.93%		1.21% - 1.25%		1.82% - 2.47%		1.21% - 1.86%
Dividend rate		0%		0%		0%		0%
Employee Stock Purchase Plan:
Expected term (in years)		0.50		—		0.50		—
Expected volatility	60%			—	60%			—
Risk-free interest rate	1.18%			—	0.45% - 1.18%			—
Dividend rate		0%		—		0%		—

⁽¹⁾

The expected term represents the period that the stock-based compensation awards are expected to be outstanding. Since the Company did not have sufficient historical information to develop reasonable expectations about future exercise behavior, the Company used the simplified method to compute expected term, which reflects the average of the time-to-vesting and the contractual life;

⁽²⁾	The expected volatility of the Company’s common stock on the date of grant is based on the volatilities of publicly traded peer companies that are reasonably comparable to the Company’s own operations;

⁽³⁾	The risk-free interest rate is based on the U.S. Treasury yield curve 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; and

⁽⁴⁾	The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock.

Total unrecognized compensation cost related to nonvested stock options was approximately $15.3 million as of September 30, 2017, and is expected to be recognized over a weighted average period of 3.12 years.

A summary of activities under the 2008 Plan and the 2016 Plan is shown as follows for the year ended December 31, 2016 and the nine months ended September 30, 2017:

	Stock options outstanding			Weighted average exercise price
Outstanding at December 31, 2015		1,821,722		$	8.68
Granted		292,204			14.75
Exercised		(163,968	)		4.30
Forfeited		(65,533	)		8.03
Outstanding at December 31, 2016		1,884,425			10.02
Granted		997,244			22.47
Exercised		(370,084	)		5.64
Forfeited		(42,032	)		15.50
Outstanding at September 30, 2017		2,469,553		$	15.61

Stock-based compensation expense is recognized over the award’s expected vesting schedule, which is reduced for forfeitures.

Stock options outstanding, and options exercisable and vested are as follows:

Outstanding as of

September 30, 2017

Remaining

contractual

life (years)

Weighted

average

exercise price

Exercisable

as of

September 30,

2017

Remaining

contractual

life (years)

Weighted

average

exercise price

2,469,553

8.36

15.61

768,956

7.03

9.45

Outstanding as of

December 31, 2016

Remaining

contractual

life (years)

Weighted

average

exercise price

Exercisable

as of

December 31,

2016

Remaining

contractual

life (years)

Weighted

average

exercise price

1,884,425

7.86

10.02

809,900

7.13

6.81

Vested and nonvested stock option activity was as follows:

	Vested				Nonvested
	Options outstanding		Weighted average exercise price		Options outstanding		Weighted average exercise price
Outstanding at September 30, 2017		768,956	$	9.45		1,700,597	$	18.40
Outstanding at December 31, 2016		809,900	$	6.81		1,074,525	$	12.44

Restricted Stock Units

In August 2017, we granted 286,000 restricted stock units to members of our senior management pursuant to the 2016 Plan. We account for restricted stock units issued to employees at fair value, based on the market price of our stock on the date of grant. During the three months ended September 30, 2017 and 2016 we recorded $0.4 million and none, respectively, of stock-based compensation related to the restricted stock units that had been issued to-date. During the nine months ended September 30, 2017 and 2016 we recorded $0.4 million and none, respectively, of stock-based compensation related to the restricted stock units that had been issued to-date. There were no restricted stock units which vested during the three and nine months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017, there was $6.3 million of unrecognized compensation expense related to unvested employee restricted stock unit awards which is expected to be recognized over a weighted-average period of approximately 2.8 years. For restricted stock unit awards subject to graded vesting, we recognize compensation cost on a straight-line basis over the service period for the entire award.

Market-Based Restricted Stock Units

In August 2017, we granted 286,000 market-based restricted stock units to members of our senior management pursuant to the 2016 Plan. The restricted stock units vest based on the Company achieving certain stock price thresholds which range from $35 per share to $55 per share for 30 consecutive trading days as reported by The Nasdaq Stock Market, LLC, subject to the employee’s continued employment with the Company through the date of achievement. The share price of our common stock on the date of issuance of the market-based restricted stock unit was $23.60 per share. The fair value is based on values calculated under the Monte Carlo simulation model on the grant date. The key estimates used in the Monte-Carlo simulation were a risk-free rate of 2.26%, dividend yield of zero, expected term of 10 years and volatility of 60%. Compensation cost is not adjusted in future periods for subsequent changes in the expected outcome of market related conditions. For the three and nine months ended September 30, 2017, we recognized $1.0 million, respectively, of stock compensation expense in connection with these awards, which is included in general and administrative expenses.

As of September 30, 2017, there was $6.8 million of unrecognized compensation expense related to unvested market based awards which is expected to be recognized over a weighted-average period of approximately 1.1 years. We recognize compensation cost on a straight-line basis over the service period for the entire award.

Stock-Based Compensation Expense

The Company recorded the total stock-based compensation expense as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Cost of revenue	$	141	$	46	$	266	$	135
Sales and marketing		691		211		1,250		503
Research and development		416		87		738		263
General and administrative		1,555		415		2,618		1,264
Total	$	2,803	$	759	$	4,872	$	2,165