(11) Stock Plans and Stock-Based Compensation

The Company’s 2016 Equity Incentive Plan, or 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 or 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. As of September 30, 2018 there were an aggregate of 6,890,701 shares reserved for issuance under the 2008 Plan and the 2016 Plan and 1,477,556 available to be issued under the 2016 Plan.

2016 Employee Stock Purchase Plan

The Company’s Employee Stock Purchase Plan, or the 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, 2018 and 2017, 74,477 and 128,786 shares of common stock were purchased under the 2016 ESPP, respectively. The 2016 ESPP is considered compensatory for purposes of stock-based compensation expense. The Company recorded stock-based compensation expense of $0.2 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively. The Company recorded stock-based compensation expense of $0.5 million and $0.3 million for the nine months ended September 30, 2018 and 2017, respectively.

Stock Options

The Company recorded stock-based compensation expense of $0.8 million and $1.2 million for the three months ended September 30, 2018 and 2017, respectively. The Company recorded stock-based compensation expense of $4.7 million and $3.2 million for the nine months ended September 30, 2018 and 2017, respectively.

The total intrinsic value of options exercised for the nine months ended September 30, 2018 was $23.1 million. 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, 2018, the total intrinsic value of all outstanding options was $65.0 million.

The fair value of stock option grants and ESPP are 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,
	2018		2017		2018		2017
Employee Stock Options:
Market price per share on grant date	$58.75		$23.17 - $23.60		$33.06 - $58.75		$18.05 - $24.87
Expected term (in years)		6.00		6.00		6.00	6.00 - 6.11
Expected volatility	45%		60%		45% - 50%		60%
Risk-free interest rate	2.72%		1.82% - 1.93%		2.72% - 2.98%		1.82% - 2.47%
Dividend rate	0%		0%		0%		0%
Employee Stock Purchase Plan:
Expected term (in years)		0.50		0.50		0.50		0.50
Expected volatility	45% - 50%		60%		45% - 60%		60%
Risk-free interest rate	1.89% - 2.33%		1.18%		1.18% - 2.33%		0.45% - 1.18%
Dividend rate	0%		0%		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 weighted average of the Company’s historical volatility as a public company and 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 $14.6 million as of September 30, 2018, and is expected to be recognized over a weighted average period of 2.8 years.

A summary of activities under the 2008 Plan and the 2016 Plan is shown as follows for the year ended December 31, 2017 and the nine months ended September 30, 2018:

	Stock options outstanding			Weighted average exercise price
Outstanding at December 31, 2016		1,884,425		$	10.02
Granted		1,096,881			22.84
Exercised		(497,175	)		5.77
Forfeited		(43,841	)		15.60
Outstanding at December 31, 2017		2,440,290			16.55
Granted		557,896			35.01
Exercised		(703,826	)		12.53
Forfeited		(457,689	)		22.38
Outstanding at September 30, 2018		1,836,671		$	22.24

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, 2018

Remaining

contractual

life (years)

Weighted

average

exercise price

Exercisable

as of

September 30,

2018

Remaining

contractual

life (years)

Weighted

average

exercise price

1,836,671

8.13

22.24

515,735

6.89

13.51

Outstanding as of

December 31, 2017

Remaining

contractual

life (years)

Weighted

average

exercise price

Exercisable

as of

December 31,

2017

Remaining

contractual

life (years)

Weighted

average

exercise price

2,440,290

8.28

16.55

748,148

7.00

10.39

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, 2018		515,735	$	13.51		1,320,936	$	25.65
Outstanding at December 31, 2017		748,148	$	10.39		1,692,142	$	19.27

Restricted Stock Units

The Company has granted 555,364 restricted stock units, or RSUs, to members of its senior management and certain other employees pursuant to the 2016 Plan since inception. The Company accounts for RSUs issued to employees at fair value, based on the market price of the Company’s common stock on the date of grant. During the three and nine months ended September 30, 2018 the Company recorded $2.4 million and $4.4 million, respectively, of stock-based compensation related to the RSUs that had been issued to-date. $0.4 million of stock-based compensation expense was recorded for the three and nine months ended September 30, 2017, respectively. There were 138,155 RSUs that vested during the nine months ended September 30, 2018. There were no RSUs that vested during the nine months ended September 30, 2017.

As of September 30, 2018, there was $12.4 million of unrecognized compensation expense related to unvested employee RSU awards which is expected to be recognized over a weighted-average period of approximately 2.43 years. For RSUs subject to graded vesting, the Company recognizes compensation cost on a straight-line basis over the service period for the entire award.

Performance-Based Restricted Stock Units

As of September 30, 2018, the Company has granted 93,362 performance-based restricted stock units, or PSUs, to members of its management pursuant to the 2016 Plan. The PSUs vest based on the Company achieving certain revenue growth thresholds which range from 20% to 40% compounded annual growth over a measurement period of two years for the first 50% of each grant of PSU’s and three years for the remaining PSUs. The vesting of the PSU’s is subject to the employee’s continued employment with the Company through the date of achievement. The share price of the Company’s common stock on the date of issuance of the PSUs ranged from $43.86 to $58.75per share. The fair value is based on value of the Company’s common stock at the date of issuance and the probability of achieving the performance metric. The Company has assessed the probability of achievement of the award at 100% based on past performance of achievement of the performance metric. Compensation cost is adjusted in future periods for subsequent changes in the expected outcome of the performance related conditions. For the three and nine months ended September 30, 2018, the Company recognized $0.2 million and $0.4 million, respectively, for stock compensation expense in connection with these awards. No stock-based compensation expense was recorded for the three and nine months ended September 30, 2017, respectively.

As of September 30, 2018, there was $4.8 million of unrecognized compensation expense related to unvested PSUs that would be recognized if all of the performance targets were met, which is expected to be recognized over a weighted-average period of approximately 2.75 years. The Company recognizes compensation cost on a straight-line basis over the service period for the entire award.

None of the PSUs had vested as of September 30, 2018.

Market-Based Restricted Stock Units

The Company has granted 560,015 market-based restricted stock units, or market-based RSUs, to members of its senior management and certain other employees pursuant to the 2016 Plan. The market-based RSUs vest based on the Company achieving certain stock price thresholds, which range from $35 per share to $65 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 the Company’s common stock on the date of issuance of the market-based RSUs was $23.16 - $51.99 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% - 2.85%, dividend yield of zero, expected term of 10 years and volatility of 50% - 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, 2018, the Company recognized $0.1 million and $10.3 million, respectively, of stock compensation expense in connection with these awards. $1.0 million of stock-based compensation expense was recorded for the three and nine months ended September 30, 2017, respectively.

As of September 30, 2018, there was $0.1 million of unrecognized compensation expense related to unvested market based RSUs which is expected to be recognized over a weighted-average period of approximately 0.3 years. The Company recognizes compensation cost on a straight-line basis over the service period for the entire award.

There were 191,547 and 543,825 market-based RSUs which had vested during the three and nine months ended September 30, 2018. None of the market-based RSUs had vested during the three and nine months ended September 30, 2017.

A summary of activity in connection with the Company’s RSUs, market-based RSUs and PSUs for the nine-month period ended September 30, 2018 is as follows:

	Number of Shares
Outstanding as of December 31, 2017		784,000
Granted		424,741
Vested		(681,980	)
Forfeited		(4,313	)
Outstanding as of September 30, 2018		522,448

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,
	2018		2017		2018		2017
Cost of revenue	$	312	$	141	$	1,877	$	266
Sales and marketing		1,180		691		7,147		1,250
Research and development		1,091		416		5,606		738
General and administrative		958		1,555		5,627		2,618
Total	$	3,541	$	2,803	$	20,257	$	4,872