Stockholders’ Equity

Common Stock and Preferred Stock

We have authorized the issuance of two classes of stock designated as “common stock” and “preferred stock,” each having a par value of $0.00001 per share. We are authorized to issue 200 million shares of common stock and 25 million shares of preferred stock.

Follow-On Offering

In May 2018, we sold 4,645,000 shares of our common stock, which included 645,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, in an underwritten public offering at a price of $53.00 per share, which resulted in gross proceeds of $246.2 million. Net proceeds after deducting fees, commissions, and other expenses related to the offering were $234.0 million.

CEO Performance Award

On May 24, 2018, our stockholders approved the CEO Performance Award of 6,365,856 stock option awards. The CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational goals (performance conditions) and market capitalization goals (market conditions), assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the CEO Performance Award have a 10-year contractual term and will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of the following eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters. Adjusted EBITDA for purposes of the CEO Performance Award ("Adjusted EBITDA (CEO Performance Award)") is defined as net income (loss) attributable to common stockholders before interest expense, investment interest income, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.



Eight Separate Revenue Goals ⁽¹⁾ (in thousands)		Eight Separate Adjusted EBITDA (CEO Performance Award) Goals (in thousands)
Goal #1, $710,058		Goal #9, $125,000
Goal #2, $860,058		Goal #10, $155,000
Goal #3, $1,010,058		Goal #11, $175,000
Goal #4, $1,210,058		Goal #12, $190,000
Goal #5, $1,410,058		Goal #13, $200,000
Goal #6, $1,610,058		Goal #14, $210,000
Goal #7, $1,810,058		Goal #15, $220,000
Goal #8, $2,010,058		Goal #16, $230,000

⁽¹⁾In connection with the business acquisition that was completed during the three months ended June 30, 2018 (Note 15), the revenue goals have been adjusted for the acquiree's Target Revenue, as defined in the CEO Performance Award agreement.

As of December 31, 2018, the following operational goals were considered probable of achievement:


•	Total revenue of $710.1 million; and


•	Adjusted EBITDA (CEO Performance Award) of $125.0 million.

Stock-based compensation expense associated with the CEO Performance Award is recognized over the longer of the expected achievement period for each pair of market capitalization and operational goals, beginning at the point in time when the relevant operational goal is considered probable of being met. The probability of meeting an operational goal and the expected achievement point in time for meeting a probable operational goal are based on a subjective assessment of our forward-looking financial projections, taking into consideration statistical analysis. Even though no tranches of the CEO Performance Award vest unless a market capitalization and a matching operational goal are both achieved, stock-based compensation expense is recognized when an operational goal is considered probable of achievement regardless of whether a market capitalization goal is actually achieved. Additionally, stock-based compensation represents a non-cash expense and is recorded in sales, general, and administrative operating expense on our consolidated statements of operations and comprehensive income.

The first two market capitalization goals have been achieved as of December 31, 2018. However, none of the stock options granted under the CEO Performance Award have vested thus far as the operational goals have not yet been achieved as of December 31, 2018. As there are two operational goals considered probable of achievement, we recorded stock-based compensation expense of $3.3 million related to the CEO Performance Award from the Grant Date through December 31, 2018. The number of stock options that would vest related to the two tranches is approximately 1.1 million shares.

As of December 31, 2018, we had $42.0 million of total unrecognized stock-based compensation expense for the operational goals that were considered probable of achievement, which will be recognized over a weighted-average period of 7.2 years. As of December 31, 2018, we had unrecognized stock-based compensation expense of $200.7 million for the operational goals that were considered not probable of achievement.

Stock-based Compensation Plans

We have historically utilized stock-based compensation, consisting of RSUs and stock options, for key employees and non-employee directors as a means of attracting and retaining quality personnel. Service-based grants generally have a vesting period of 3 to 5 years and a contractual maturity of ten years. Performance-based grants generally have vesting periods ranging from 1 to 5 years and a contractual maturity of ten years.

On March 29, 2018, our Board of Directors approved the 2018 Stock Incentive Plan (the “2018 Plan"), which was subsequently approved by stockholders at the Annual Meeting of Stockholders on May 24, 2018. Under the 2018 Plan, we reserved for future grants: (i) 1.0 million shares of common stock, plus (ii) the number of shares of common stock that were authorized but unissued under our 2016 Stock Incentive Plan (the “2016 Plan”) and all prior Company equity plans as of the effective date of the 2018 Plan, and (iii) the number of shares of stock that have been granted under the prior plans that either terminate, expire or lapse for any reason after the effective date of the 2016 Plan. As of December 31, 2018, approximately 1.7 million shares remain available for future grants. Shares issued upon exercise of stock awards from these plans have historically been issued from our authorized unissued shares.

Performance-based stock awards

We have issued performance-based stock options and performance-based RSUs, the vesting of which is generally contingent upon the achievement of certain performance criteria related to our operating performance, as well as successful and timely development and market acceptance of future product introductions. In addition, certain of the performance RSUs have additional service requirements subsequent to the achievement of the performance criteria. Compensation expense is recognized over the requisite service period, which is defined as the longest explicit, implicit or derived service period based on management’s estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date.

Restricted Stock Units

The following table summarizes RSU activity for the years ended December 31 (number of units and aggregate intrinsic value in thousands):



	2018					2017				2016
	Number of Units			Weighted Average Grant-Date Fair Value		Number of Units		Weighted Average Grant-Date Fair Value		Number of Units		Weighted Average Grant-Date Fair Value
Units outstanding, beginning of year	2,348			$	23.47	1,330		$	20.40	1,139		$	19.30
Granted	381			46.06		1,731		24.59		718		19.75
Released	(772		)	23.85		(519	)	18.85		(414	)	15.91
Forfeited	(302		)	24.73		(194	)	24.61		(113	)	21.65
Units outstanding, end of year	1,655			28.34		2,348		23.47		1,330		20.40
Aggregate intrinsic value at year end	$	72,406

Aggregate intrinsic value represents our closing stock price on the last trading day of the period, which was $43.75 per share at December 31, 2018, multiplied by the number of RSUs. The fair value as of the respective vesting dates of RSUs that vested during the year ended December 31, 2018 was $36.6 million. Certain RSUs that vested in 2018 were net-share settled, such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld during 2018 were 0.2 million and had a value of approximately $7.8 million on their respective vesting dates as determined by the closing stock price of our stock. Payments for the employees’ tax obligations are reflected as a financing activity within the statement of cash flows. These net-share settlements had the effect of share repurchases by us as they reduced the amount of shares that would have otherwise been issued as a result of the vesting.

In 2018, 2017 and 2016, we granted approximately 94,000, 353,000 and 79,000 performance-based RSUs, respectively (included in the table above). Certain of the performance-based RSUs outstanding as of December 31, 2018 can vest with a range of shares earned being between 0% and 200% of the targeted shares granted, depending on the final achievement of pre-determined performance criteria as of the vesting date. As of December 31, 2018, the performance criteria had been met for approximately 4,000 of the 0.4 million performance-based RSUs outstanding. We recognized $4.8 million, $2.5 million and $2.1 million of compensation expense related to performance-based RSUs during the years ended December 2018, 2017 and 2016, respectively.

As of December 31, 2018, there was $35.9 million in unrecognized compensation costs related to RSUs under our stock plans. We expect to recognize the cost related to the RSUs over a weighted average period of 2.26 years.

Stock Option Activity

The following table summarizes stock option activity for the years ended December 31 (number of options in thousands):



	2018				2017				2016
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Options outstanding, beginning of year	804		$	4.99	1,008		$	5.40	1,103		$	5.37
Granted	6,366		28.58		—		—		—		—
Exercised	(664	)	5.09		(198	)	6.99		(95	)	5.02
Expired / terminated	(48	)	4.55		(6	)	8.32		—		—
Options outstanding, end of year	6,458		28.24		804		4.99		1,008		5.40
Options exercisable, end of year	92		4.45		775		5.00		977		5.42

6.4 million stock options were granted in 2018 and none were granted in 2017 or 2016. The total intrinsic value of options exercised was $28.5 million, $3.2 million and $2.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. The intrinsic value for options exercised was calculated as the difference between the exercise price of the underlying stock option awards and the market price of our common stock on the date of exercise.

Of the total stock options exercised during the year ended December 31, 2018, 0.3 million were exercised and the shares then sold by our CEO in connection with our follow-on offering. The CEO surrendered already owned shares to cover the exercise price of the option exercises. The option exercises were net-share settled such that we withheld shares with value equivalent to the CEO’s minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total shares withheld for tax purposes and surrendered to cover the option exercises were 0.1 million and 29,854, respectively, and had a value of $6.2 million and $1.6 million, respectively, on the exercise date as determined by the closing stock price on that day. Payments for the employee's tax obligations are reflected as a financing activity within the statement of cash flows. We recorded a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.

The following table summarizes information about stock options that were fully vested or expected to vest as of December 31, 2018 (number of options in thousands):



	Options Outstanding				Options Exercisable
Range of Exercise Price	Number of Options Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number of Options Exercisable	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$4.20 - $6.30	92	$	4.45	1.54	92	$	4.45	1.54

The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2018 was $3.6 million and $3.6 million, respectively. Aggregate intrinsic value represents the difference between the exercise price of the underlying stock option awards and the closing market price of our common stock of $43.75 on December 31, 2018.

At December 31, 2018, we had 6,365,856 unvested options outstanding with a weighted average exercise price of $28.58 per share, weighted average grant-date fair value of $38.64 per share and weighted average remaining contractual life of 9.8 years. The aggregate intrinsic value of unvested options at December 31, 2018 was $96.6 million.

We granted approximately 1.0 million performance-based stock options (included in the table above) from 2008 through 2011. As of December 31, 2018, approximately 0.1 million performance-based stock options are outstanding and exercisable. The aggregate grant-date fair value of the 0.1 million performance-based stock options vested as of December 31, 2018 was approximately $3.6 million.

Stock-based Compensation Expense

We account for stock-based compensation using the fair-value method. Reported stock-based compensation was classified as follows for the years ended December 31 (in thousands):



	2018		2017		2016
Cost of product and service sales	$	511	$	508	$	342
Sales, general and administrative expenses	12,710		9,047		5,707
Research and development expenses	8,658		6,055		3,320
Total stock-based compensation expense	$	21,879	$	15,610	$	9,369
Income tax benefit	$	4,049	$	5,791	$	3,526

Stock Repurchase

In February 2016, our Board of Directors authorized a stock repurchase program to acquire up to $50.0 million of our outstanding common stock subject to stock market conditions and corporate considerations. During the year ended December 31, 2016, we purchased, under a Rule 10b5-1 plan, approximately 1.8 million common shares for a total cost of approximately $33.7 million, or a weighted average cost of $18.90 per share. As of December 31, 2018 and 2017, $16.3 million remained available under the plan for future purchases. We suspended our 10b5-1 plan during 2016, and any future purchases will be discretionary.

Stock Incentive Plan

In February 2019, our shareholders approved a new stock incentive plan (the “2019 Plan”) authorizing an additional 6.0 million shares, plus remaining available shares under prior plans, for issuance under the new plan.

eXponential Stock Performance Plan

On February 12, 2019 , our shareholders approved the 2019 Plan, which was adopted by the Board of Directors to reserve a sufficient number of shares to facilitate our eXponential Stock Performance Plan (“XSPP”) and grants of eXponential Stock Units (“XSUs”) under the plan. Pursuant to the XSPP, all eligible full-time U.S. employees were granted an award of 60 XSUs in January 2019, and certain employees had the opportunity to elect to receive a percentage of the value of their target compensation over the next nine years (2019-2027) in the form of additional XSUs. For employees who elected to receive XSUs, the XSU grants were made as an up front, lump sum grant in January 2019, and are intended to replace that portion of the target compensation they elected to receive in the form of XSUs for the next nine years. Accordingly, their go forward target compensation will be reduced until 2027 by the amount of such compensation that the employees elected to receive in the form of the January 2019 XSU grants. A total of approximately 5.1 million XSUs were granted in January 2019.

The XSUs are grants of restricted stock units, each with a term of approximately nine years, that vest in 12 equal tranches. Each of the 12 tranches will vest upon certification by the Compensation Committee of the Board of Directors that both (i) the market capitalization goal for such tranche, which begins at $2.5 billion for the first tranche and increases by increments of $1.0 billion thereafter, and (ii) any one of eight operational goals focused on revenue or eight operational goals focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters.

The XSPP contains an anti-dilution provision, which is used to calculate a maximum number of shares outstanding for purposes of determining achievement of the market capitalization goals whereby the maximum number of shares used to calculate the market capitalization goal is calculated by organically growing the current number of shares outstanding by 3% per year (the "XSU Maximum"). Any shares of Stock issued to Patrick W. Smith upon the exercise of the stock options granted to Mr. Smith under the CEO Performance Award shall increase the XSU Maximum. The XSU Maximum shall also be adjusted for acquisitions, spin-offs or other changes in the number of outstanding shares of common stock, if such changes have a corresponding adjustment on the market capitalization goals.

The market capitalization and operational goals are identical to the CEO Performance Award, except for the number of shares that are used to calculate the market capitalization goals if shares outstanding exceed the XSU Maximum. Additionally, because the grant date is different than that of the CEO Performance Award, the measurement period for market capitalization is not identical.