Common Stock and Share-based Compensation

The Company’s certificate of incorporation, as amended, authorizes the Company to issue 100 million shares of $0.0003 par value common stock.

At December 31, 2013, the Company has reserved shares for issuance of common stock as follows:



	Common Shares
Reserved under stock option plans	328,519
Exercise of warrants to purchase common stock	44,491
Total reserved for issuance	373,010

Incentive stock option plans

The Company has three equity incentive plans: the 2000 Stock Option Plan (the “2000 Plan”), the 2006 Stock Option Plan (the “2006 Plan”) and the 2012 Stock Option Plan (the “2012 Plan”). On March 26, 2012, all shares that were reserved under the 2006 Plan but not subject to outstanding awards became available for grant under the 2012 Plan. No additional shares will be issued under the 2006 Plan. The 2000 Plan terminated in March 2010 and no additional shares will be issued under this plan. All options currently outstanding under the 2000 Plan and the 2006 Plan continue to be governed by the terms and conditions of those plans. Under the 2012 Plan, the Company has the ability to issue incentive stock options (“ISOs”), stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards and stock bonuses. The ISOs will be granted at a price per share not less than the fair value at date of grant. Options granted to new hires generally vest over a 4-year period with 25% vesting at the end of one year and the remaining vest monthly thereafter, options granted as merit awards generally vest monthly over a four-year period. Options granted generally are exercisable up to 10 years. As of December 31, 2013, there were 328,519 shares remaining available for future issuance under the 2012 Plan.

Early exercise of stock options

The Company typically allows employees to exercise options granted under the 2000 and 2006 Plans prior to vesting. The unvested shares are subject to the Company’s repurchase right at the original purchase price. The proceeds initially are recorded as an accrued liability from the early exercise of stock options and reclassified to common stock as the Company’s repurchase right lapses. At December 31, 2013, 2012 and 2011, there were unvested shares in the amount of 14,360, 48,260 and 112,967, respectively, which were subject to repurchase at an aggregate price of $0.1 million, $0.2 million and $0.4 million, respectively.

Stock Option Activity

The following table summarizes the combined stock option activity under the 2000 Plan, the 2006 Plan and the 2012 Plan and non-plan stock option agreements:



	Options outstanding
	Number of options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
					(in years)	(in thousands)
Outstanding at December 31, 2012	3,187,559		$	7.51	6.81	$	56,362
Options granted	675,460		16.85
Options exercised	(420,492	)	3.94
Options canceled	(142,102	)	12.17
Options expired	(13,221	)	22.47
Outstanding at December 31, 2013	3,287,204		$	9.62	6.45	$	24,880
Options vested and expected to vest as of December 31, 2013	3,238,937		$	9.51	6.41	$	24,824
Options vested and exercisable as of December 31, 2013	1,996,061		$	5.82	5.05	$	21,169

At December 31, 2013, there was $8.2 million of unrecognized net compensation cost related to options which is expected to be recognized over a weighted-average period of 2.5 years The Company did not grant non-employee options in either of the years ended December 31, 2013 or 2012.

Using the Black-Scholes option-pricing model, the weighted-average grant-date fair value of options granted to employees during the years ended December 31, 2013, 2012 and 2011 was $7.34 per share, $10.19 per share, and $3.30 per share, respectively. Further information regarding the value of employee options vested and exercised during the years ended December 31, 2013, 2012 and 2011 is set forth below.



	Years ended December 31,
(in thousands)	2013		2012		2011
Grant-date fair value of options vested during period	$	3,053	$	2,256	$	881
Intrinsic value of options exercised during period	5,896		24,846		2,565

The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock options on their grant date. This model requires the following major inputs: the estimated fair value of the underlying common stock, the expected term of the option, the expected volatility of the underlying common stock over the expected life of the option, the risk-free interest rate and expected dividend yield. The following assumptions were used for each respective period for employee stock-based compensation:



	Years ended December 31,
	2013	2012	2011
Expected Term (in years)	5.38 - 5.43	5.23 - 5.60	5.49 - 5.73
Volatility	46.7% - 48.1%	47.9% - 48.7%	44.7% - 47.6%
Risk-free interest rate	0.81% - 1.80%	0.72% - 1.03%	0.98% - 2.48%
Dividend yield	0.0%	0.0%	0.0%

The computation of expected term is based on the historical exercise and forfeiture behavior of the Company’s employees, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. For the expected term so determined, the risk-free rate is the U.S. Treasury Rate for that term on the grant date. The Company's expected common stock price volatility is based on the historical volatility of a peer group of publicly-traded companies, using the same expected term. The peer group was selected based on industry and market capitalization data. The Company assumes the dividend yield to be zero, as the Company has never declared or paid dividends and does not expect to do so in the foreseeable future.

Employee Stock Purchase Plan

In March 2012, the Company's board of directors and stockholders approved the 2012 Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible employees to purchase shares of the Company's common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for six-month offering periods, except for the first offering period which was for 11 months. Additionally, in April 2013, the Company's compensation committee determined that following the February 15, 2013 six-month offering period, the next offering period under the ESPP would last for three months (commencing August 15, 2013 and expiring on November 14, 2013) and, following the expiration of such offering period, offering periods thereafter will commence on November 15, 2013, and May 15, 2014 and so on, each consisting of a single six-month purchase period.

At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company's common stock on the first trading day of the offering period or on the last day of the offering period. During the year ended December 31, 2013, employees purchased 215,039 shares of common stock at an average purchase price of $13.92. No shares were purchased under the plan in 2012. As of December 31, 2013, 193,920 shares remained available for future issuance under the ESPP.

The Company uses the Black-Scholes option-pricing model to calculate the fair value of periodic ESPP offerings on their offer date. The following assumptions were used for each respective period for the ESPP:



	Years ended December 31,
	2013	2012
Expected Term (in years)	0.25 - 0.50	0.50 - 0.88
Volatility	33.3% - 36.0%	43.2% - 50.0%
Risk-free interest rate	0.05% - 0.13%	0.14% - 0.18%
Dividend yield	0.0%	0.0%

Restricted Stock Awards and Restricted Stock Units

In 2012, the Company began incorporating restricted stock awards and RSUs as an element of its compensation plans. In February 2012, the Company granted certain of its directors restricted stock awards that vest 50% on the first anniversary of the grant, and 50% on the second anniversary of the grant. In May 2012, the Company granted certain employees RSUs, which vest one third on the first anniversary of the grant, one third on the second anniversary of the grant and one third upon the third anniversary of the grant.

A summary of the restricted stock activity for the year ended December 31, 2013 is presented below:



	Restricted Stock Awards				Restricted Stock Units
	Number of shares		Weighted Average Grant Date Fair Value per Share		Number of shares		Weighted Average Grant Date Fair Value per Share
Outstanding at December 31, 2012	24,152		$	12.42	373,908		$	25.34
Granted	—		—		558,686		16.91
Vested	(12,076	)	12.42		(117,245	)	25.18
Forfeited	—		—		(60,078	)	23.63
Outstanding at December 31, 2013	12,076		$	12.42	755,271		$	19.24

At December 31, 2013, there was $16,000 of unrecognized net compensation cost related to restricted stock awards which is expected to be recognized over a weighted-average period of 0.1 years. At December 31, 2013, there was $10.8 million of unrecognized net compensation cost related to RSUs, which is expected to be recognized over a weighted-average period of 2.1 years.

Non-Employee Stock-Based Compensation

While the Company granted no options to non-employees during the years ended December 31, 2013 and 2012, the Company granted 67,916 options to non-employees during the year ended December 31, 2011. All options granted to non-employees during 2011 were fully vested on the date of grant. Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock option vests, or if fully vested, on the date of grant.

For stock options issued to non-employees with specific performance criteria, the Company makes a determination at each balance sheet date whether the performance criteria are probable of being achieved. Compensation expense is recognized at the time it is determined that it is probable the performance criteria will be met. For the November 2010 ExperiaHealth acquisition, the entire $0.1 million consideration to the seller was in the form of revenue milestone performance options, with 41,666 options for 2010 revenue performance and another 41,666 options for 2011. Of the first tranche, 35,452 options ultimately vested, and the 2011 performance options for 41,666 shares vested entirely in March 2012. Under accounting guidance for acquisitions, such contingent consideration is recorded initially as a liability, and adjusted to fair value at each reporting date through net income, until vested. The 2012 pricing model assumptions below refer not to new non-employee grants in 2012, but to revaluation of the 2011 performance options. During the first quarter of 2012, the fair value of these increased from $419,000 to $448,000, resulting in 2012 stock-based compensation expense of $29,000. The entirely liability was then reclassified back to December 31, 2011 as equity.

The fair value of the stock options granted to non-employees was calculated using the Black-Scholes option-pricing model with the following assumptions:



	As of December 31,
		2012	2011
Expected Term (in years)		8.67	8.83 - 10.0
Volatility		46.7%	45.0% - 54.0%
Risk-free interest rate		1.77%	1.63% - 3.41%
Dividend yield		0.0%	0.0%

For the years ended December 31, 2013, 2012 and 2011, the Company recognized expenses of approximately zero, $29,000 and $907,000, respectively, related to these options.

Allocation of Stock-Based Compensation Expense

Stock-based compensation expense is recognized based on a straight-line amortization method over the respective vesting period of the award and has been reduced for estimated forfeitures. The Company estimated the expected forfeiture rate based on its historical experience, considering voluntary termination behaviors, trends of actual award forfeitures, and other events that will impact the forfeiture rate. To the extent the Company’s actual forfeiture rate is different from the estimate, the stock-based compensation expense is adjusted accordingly.

The following table presents the stock-based compensation allocation of expense (both for employees and non-employees):



	Years ended December 31,
(in thousands)	2013		2012		2011
Cost of revenue	$	967	$	421	$	30
Research and development	861		449		121
Sales and marketing	2,942		1,262		285
General and administrative	3,897		2,100		1,022
Total stock-based compensation	$	8,667	$	4,232	$	1,458

Exercise of common stock warrants

Prior to the April 2012 IPO, outstanding warrants to purchase preferred stock were classified as liabilities, which were adjusted to fair value at each reporting period until the earlier of their exercise or expiration or the completion of a liquidation event, including the completion of an initial public offering, at which time the preferred stock warrant liability automatically converted into a warrant to purchase shares of common stock and was reclassified to stockholders’ equity (deficit). The Company recorded an expense in other income (expense), net of zero, $1.6 million and $1.0 million for the years ended December 31, 2013, 2012 and 2011, respectively, to reflect the change in the fair value of the outstanding preferred stock warrants. Since April 2012, the converted common stock warrants are classified within stockholder's equity (deficit) because they are considered to be "indexed to the entity's own stock".

The holders of all the common stock warrants described above may undertake a cashless conversion of the warrant, in whole or in part, in lieu of exercising the warrant. The number of shares to be issued in such a conversion shall be determined by dividing (a) the aggregate fair market value of the shares issuable upon the exercise of the warrant minus the aggregate warrant price of such shares by (b) the fair market value of one share at the time of conversion.

During the year ended December 31, 2013, holders of common stock warrants exercised 34,142 shares for cash proceeds of $0.2 million. There were no cash exercises in the prior twelve-month period. During the year ended December 31, 2012, holders of common stock warrants net exercised warrants for the purchase of 108,155 shares and received 78,487 shares. There were no such cashless exercises in the current twelve month period.

At December 31, 2013 warrants to purchase 44,491 shares of common stock, each with exercise price of $6.61, were outstanding and expire in October 2015.