Stock Plans

The Company has two active stock-based compensation plans as of September 30, 2017: the 2004 Employee Stock Purchase Plan and the 2013 Omnibus Equity Incentive Plan under which incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units can be granted to employees and non-employee directors.

The Company generally issues the majority of employee stock compensation grants in the first quarter of the year; other grants issued during the year are typically for new employees or non-employee directors.

Stock Options

Stock options are granted to certain employees from time to time on a discretionary basis. Beginning in 2017, non-employee directors receive annual stock option awards as part of their annual retainer compensation. During the three and nine months ended September 30, 2017, the Company granted 5,000 and 50,000 stock options, respectively, which had an average grant date fair value per share of $3.12 and $2.97, respectively. During the three and nine months ended September 30, 2016, no stock options were granted. Compensation expense recognized for stock options for the three months ended September 30, 2017 and 2016 was $62,000 and $49,000, respectively. Compensation expense recognized for stock options for the nine months ended September 30, 2017 and 2016 was $169,000 and $134,000, respectively. The fair value of the stock options granted during the three and nine months ended September 30, 2017 was estimated using the Black-Scholes valuation model with the following assumptions:



	Three Months Ended September 30, 2017		Nine Months Ended September 30, 2017
Expected dividend yield	—	%	—	%
Expected volatility	58	%	58% - 59%
Risk-free interest rate	1.96	%	1.87% - 1.96%
Expected term (in years)	5.5		5.5

Restricted Stock Awards

Beginning in 2014, the Company ceased granting restricted stock awards (“RSAs”) and began granting restricted stock units (“RSUs”) to employees as part of its annual equity incentive award program, therefore, no restricted stock awards were issued during the three and nine months ended September 30, 2017 and 2016. During the three months ended September 30, 2017 and 2016, compensation expense recognized for RSAs was $0.1 million and $0.2 million, respectively. During the nine months ended September 30, 2017 and 2016, compensation expense recognized for RSAs was $0.3 million and $0.2 million, respectively. During the first quarter of 2016, there were significant reversals of previously recorded expense due to terminations under the Company’s 2015 restructuring plan as well as other employee terminations.

Restricted Stock Units

Non-employee directors receive annual RSU awards as part of their annual retainer compensation. These awards vest approximately one year from the date of grant provided the non-employee director provides continued service. Additionally, new directors normally receive RSUs upon their election to the board. The Company also grants RSUs to employees as part of its annual equity incentive award program, with vesting typically in equal annual installments over four years of continuous service. Additionally, the Company grants performance-based restricted stock units (“PSUs”) to executives with vesting contingent on continued service and achievement of specified performance objectives or stock price performance. Each restricted stock unit represents the right to receive one unrestricted share of the Company’s common stock upon vesting.

During the three months ended September 30, 2017, the Company granted 355,075 RSUs of which 320,963 were service-based RSUs with an average grant date fair value of $5.58 per share and 34,112 were PSUs with an average grant date fair value of $6.79 per share. During the nine months ended September 30, 2017, the Company granted 1,768,492 RSUs of which 1,242,618 were service-based RSUs with an average grant date fair value of $5.54 per share and 525,874 were PSUs with an average grant date fair value of $6.77 per share.

During the three months ended September 30, 2016, the Company granted 49,116 service-based RSUs with an average grant date value of $5.09 per share. During the nine months ended September 30, 2016, the Company granted 1,236,747 RSUs of which 904,028 were service-based RSUs with an average grant date value of $5.56 per share and 332,719 were PSUs with an average grant date fair value of $7.50 per share.

For the three months ended September 30, 2017 and 2016, PSUs granted included 34,112 market-condition restricted stock units. No market-condition restricted stock units were granted in the three months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, PSUs granted included 367,874 and 286,495 market-condition restricted stock units, respectively. The market-condition PSUs will vest based on the level of the Company’s stock price performance against a determined market index over one, two and three year performance periods. The market-condition PSUs have the potential to vest between 0% and 200% depending on the Company’s stock price performance and the recipients must remain employed through the end of each performance period in order to vest. The fair value of the market-condition PSUs granted was calculated using a Monte Carlo valuation model with the following assumptions:



	Three and Nine Months Ended September 30,
	2017		2016
Expected dividend yield	—	%	—	%
Expected volatility	53	%	62	%
Risk-free interest rate	1.55	%	1.07	%
Expected term (in years)	2.8		3.0

The following table summarizes the amount of compensation expense recognized for RSUs for the three and nine months ended September 30, 2017 and 2016 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
RSU Type	2017		2016		2017		2016
Service-based	$	1,124	$	544	$	2,460	$	1,613
Performance objectives	219		30		389		71
Market-condition	432		250		1,027		621
	$	1,775	$	824	$	3,876	$	2,305

Employee Stock Purchase Plan

The 2004 Employee Stock Purchase Plan (“ESPP”) permits substantially all employees to purchase common stock through payroll deductions, at 85% of the lower of the trading price of the stock at the beginning or at the end of each six month offering period. The number of shares purchased is based on participants’ contributions made during the offering period.

Compensation expense recognized for the ESPP for the three months ended September 30, 2017 and 2016 was $28,000 and $53,000, respectively, and was $81,000 and $189,000, respectively, for the nine months ended September 30, 2017 and 2016. The fair value of the ESPP shares for the three and nine months ended September 30, 2017 and 2016 was estimated using the Black-Scholes valuation model for a call and a put option with the following weighted-average assumptions:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Expected dividend yield	—		%	—		%	—		%	—		%
Expected volatility	37		%	54		%	32		%	58		%
Risk-free interest rate	1.09		%	0.36		%	0.78		%	0.45		%
Expected term (in years)	0.38			0.50			0.46			0.50
Fair value per share	$	1.45		$	1.59		$	1.28		$	2.04

Bonuses Settled in Stock

On January 15, 2016, the Compensation Committee of the Board of Directors of the Company adopted the Maxwell Technologies, Inc. Incentive Bonus Plan to enable participants to earn annual incentive bonuses based upon achievement of specified financial and strategic performance objectives. The Company may settle bonuses earned under the plan in either cash or stock, and currently intends to settle the majority of bonuses earned under the plan in stock. During the first quarter of 2017, the Company settled $1.2 million of bonuses earned under the plan for the 2016 performance period with 142,582 shares of fully vested common stock and 89,730 fully vested restricted stock units, which were subsequently settled during the second quarter of 2017. An additional $0.3 million of bonuses earned for the 2016 performance period were settled with 42,662 shares of fully vested common stock in the third quarter of 2017.

The Company recorded $0.7 million and $(31,000) of stock compensation expense related to the bonus plan during the three months ended September 30, 2017 and 2016, respectively. The Company recorded $1.9 million and $0.9 million of stock compensation expense related to the bonus plan during the nine months ended September 30, 2017 and 2016, respectively.

Director Fees Settled in Stock

In 2017, the Board approved a deferred compensation program under which non-employee directors may make irrevocable elections to receive all or a portion of their cash-based non-employee director fees (including, as applicable, any annual retainer fee, committee fee and any other compensation payable with respect to their service as a member of the Board) in stock and to elect to defer receipt of those shares. In the event that a director makes such an election, the Company will grant fully vested RSUs in lieu of cash, with an initial value equal to the cash fees, which will be settled either in the year granted or at a future date elected by the respective non-employee director through the issuance of Maxwell common stock. In addition, non-employee directors may elect to defer settlement of the initial and annual RSU awards granted to them in connection with their service as a non-employee director. During the three and nine months ended September 30, 2017, the Company settled $71,000 of director fees earned in the second quarter of 2017 with 12,904 fully vested RSUs. The Company recorded $92,000 and $164,000 of stock compensation expense related to director fees to be settled in stock during the three and nine months ended September 30, 2017, respectively.

Stock-Based Compensation Expense

Stock-based compensation cost included in cost of revenue; selling, general and administrative expense; and research and development expense is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Cost of revenue	$	271	$	146	$	721	$	643
Selling, general and administrative	2,097		799		4,762		2,436
Research and development	387		152		1,064		680
Total stock-based compensation expense	$	2,755	$	1,097	$	6,547	$	3,759