8. Stockholders’ Equity

Common Stock

There were 120,000,000 shares of common stock authorized at December 31, 2016 and 2015.

Preferred Stock

There are 5,000,000 shares of preferred stock authorized and none issued or outstanding at December 31, 2016 and 2015.

On June 28, 2011, in connection with the issuance of the 2017 Warrants, the Company amended its Restated Certificate of Incorporation to designate 477,654 shares of the Company’s authorized preferred stock, par value $0.001 per share, as Series A Participating Preferred Stock (the “Series A Preferred Stock”). The Series A Preferred Stock will automatically convert into shares of the Company’s common stock. The holders of Series A Preferred Stock (collectively, the Preferred Holders) are entitled to receive dividends when and if declared by the Board of Directors. The preferred dividends are payable in preference and in priority to any dividends on the Company’s common stock. Shares of Series A Preferred Stock are convertible into 20 shares of common stock, subject to certain anti-dilution adjustments. Preferred Holders vote on an equivalent basis with common stockholders on an as-converted basis. The Preferred Holders are entitled to receive liquidation preferences at the rate of $648.20 per share. Liquidation payments to the Preferred Holders have priority and are made in preference to any payments to the holders of common stock.

Stock-based Compensation

In March 2014, the Compensation Committee (the "Compensation Committee") of the Board of Directors of the Company adopted the 2014 Equity Incentive Plan of NuVasive, Inc. (the "2014 EIP"), replacing the 2004 Amended and Restated Equity Incentive Plan (the “2004 EIP”). No further awards may be granted under the 2004 EIP; however, that plan continues to govern all awards previously issued under it (of which awards remain outstanding). The 2014 EIP provides the Company with the ability to grant various types of equity awards to its workforce (including, without limitation, restricted stock units (“RSUs”), restricted stock awards, performance awards, and deferred stock awards). The 2014 EIP also provides for the issuance of performance RSUs (“PRSUs”) to be granted subject to time- and/or performance-based vesting requirements. In addition, the award agreements under the 2014 EIP generally provide for the acceleration of 50% of the unvested equity awards of all shareowners upon a change in control and the vesting of the remaining unvested equity awards for those shareowners that are involuntarily terminated within a year of the change in control.

Each of the 2004 EIP and the 2014 EIP allow for “net share settlement” of certain equity awards whereby, in lieu of (i) making cash payments in satisfaction of the exercise price owed respective to non-qualified stock option awards, or (ii) open market selling award shares to generate cash proceeds for use in satisfaction of statutory tax obligations respective to an award’s settlement or exercise, the company offsets the award shares being settled in a respective transaction by the number of shares of company stock with a value equal to the respective obligation, and, in the case of taxes, making a cash payment to the respective taxing authority on behalf of the shareowner using Company cash. The net share settlement is accounted for with the cost of any award shares that are net settled being included in treasury stock and reported as a reduction in total equity at the time of settlement.

In connection with the acquisition of Ellipse Technologies in February 2016 (see Note 5 to the Consolidated Financial Statements included in this Annual Report for further discussion), the Company assumed the Ellipse Technologies, Inc. 2015 Incentive Award Plan and the shares thereunder, subject to an equity exchange adjustment, for future awards by the Company.

The compensation cost that has been included in the statement of operations for the Company’s stock-based compensation plans was as follows (in thousands):

	Year Ended December 31,
	2016			2015			2014
Sales, marketing and administrative expense	$	25,466		$	24,817		$	31,514
Research and development expense		1,231			1,157			1,841
Cost of goods sold		227			229			332
Stock-based compensation expense before taxes		26,924			26,203			33,687
Related income tax benefits		(10,770	)		(10,481	)		(13,475	)
Stock-based compensation expense, net of taxes	$	16,154		$	15,722		$	20,212

As of December 31, 2016, there was $18.5 million and $29.5 million of unrecognized compensation expense for RSUs and PRSUs, respectively, which is expected to be recognized over a weighted-average period of approximately 2.0 years and 2.6 years, respectively. In addition, as of December 31, 2016, there was $0.8 million of unrecognized compensation expense for shares expected to be issued under the ESPP which is expected to be recognized through April 2017. There was no unamortized expense for stock options as of December 31, 2016.

The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which provided for the change in classification for excess tax benefits in the Consolidated Statements of Cash Flows on a prospective basis. The excess tax benefits reported as a financing cash inflow for the years ended December 31, 2015 and 2014 were $15.2 million and $11.9 million, respectively, and accordingly, the Company did not report such financing cash flows for the year ended December 31, 2016. See Note 1 to the Consolidated Financial Statements included in this Annual Report for further discussion.

Restricted Stock Units

The total fair value of RSUs that vested during the year ended December 31, 2016, 2015, and 2014 was $31.2 million, $39.0 million and $27.5 million, respectively.

Following is a summary of RSU activity for the year ended December 31, 2016 (in thousands, except per share amounts):

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Outstanding at December 31, 2015		1,349		$	31.82
Granted		529			46.06
Vested		(627	)		25.54
Forfeited		(155	)		36.52
Outstanding at December 31, 2016		1,096		$	41.16

For the majority of RSUs, shares are issued on the vesting dates net of the amount of shares needed to satisfy statutory tax withholding requirements to be paid by the Company on behalf of the employees. The total shares withheld related to vested RSUs were approximately 227,000, 330,000, and 29,000 in 2016, 2015, and 2014, respectively, and were based on the value of the awards on their vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to the taxing authorities related to vesting RSUs were $11.4 million, $15.4 million and $1.1 million in 2016, 2015 and 2014, respectively.

Performance-Based Restricted Stock Units

The Company has granted PRSUs since 2012 for which the ultimate issuance amount is determined by the Company’s Compensation Committee upon its certification of Company performance against a pre-determined matrix, including revenue targets, total shareholder return, or earnings per share over pre-determined periods of time. Share payout levels range from 0 to 250% depending on the respective terms of an award. Based upon the company’s actual performance against the performance conditions, approximately 117,000 shares of common stock vested on each of March 1, 2013, March 1, 2014, and March 1, 2015 for PRSUs granted in 2012, and approximately 470,000 shares of common stock vested on each of February 1, 2014 and February 1, 2015 for PRSUs granted in 2013, in each case in the aggregate for all award recipients. On February 1, 2016, based upon the company’s actual performance against the performance conditions, approximately 102,000 shares of common stock vested for PRSUs granted in 2014.

In 2015 and 2016, the Company granted PRSU awards with five year cliff vesting terms to its Chief Executive Officer and Vice Chairman, respectively, for which the performance criteria was not based on Company specific performance metrics, and as such, the Company recorded the award as a long-term liability as expensed over the service period. No amounts have been paid out on this award, or are expected to become due until 2020 and 2021.

The total fair value of performance awards vested during 2016, 2015, and 2014 was $12.6 million, $27.1 million and $21.6 million, respectively.

Following is a summary of PRSU activity for the year ended December 31, 2016 (in thousands, except per share amounts):

				Maximum Number
	Shares			of Shares Eligible to be Issued			Average Grant Date Fair Value
Outstanding at December 31, 2015		803			1,357		$	46.42
Awarded at target		392			651			45.11
Vested		(145	)		(179	)		39.78
Forfeited		(179	)		(276	)		44.22
Outstanding at December 31, 2016		871			1,553		$	46.76

For the majority of PRSUs, shares are issued on the vesting dates net of the amount of shares needed to satisfy statutory tax withholding requirements to be paid by the Company on behalf of the employees. The total shares withheld related to vesting PRSUs were approximately 58,000 and 292,000 in 2016 and 2015, respectively, and were based on the value of the awards on their vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to the taxing authorities related to vesting PRSUs were $2.7 million and $13.5 million in 2016 and 2015, respectively. No shares were withheld from vesting PRSUs in 2014.

Stock Options

The Company has not granted any stock options since 2011. The stock options previously granted are exercisable for a period of up to ten years after the date of grant.

The aggregate intrinsic value of outstanding stock options at December 31, 2016 is based on the Company’s closing stock price on December 31, 2016 of $67.36. The Company received $3.0 million, $6.2 million and $17.5 million in proceeds from the exercise of stock options during the years ended December 31, 2016, 2015 and 2014, respectively. The total intrinsic value of stock options exercised was $29.0 million, $63.4 million, and $17.6 million during the years ended December 31, 2016, 2015 and 2014, respectively. There were no stock options that vested during the year ended December 31, 2016. The total fair value of stock options that vested during the year ended December 31, 2015 and 2014 was $0.3 million and $3.5 million, respectively.

Following is a summary of stock option activity for the year ended December 31, 2016 under all stock plans (in thousands, except years and per share amounts):

						Weighted-Average
						Remaining
				Weighted		Contractual		Aggregate
				Avg. Exercise		Term		Intrinsic
	Shares			Price		(Years)		Value
Outstanding at December 31, 2015		1,970		$	34.91		2.99	$	37,820
Exercised		(1,556	)		34.95
Cancelled		(4	)		18.92
Outstanding at December 31, 2016		410			34.93		2.47	$	13,292
Exercisable at December 31, 2016		410		$	34.93		2.47	$	13,292
Vested or expected to vest at December 31, 2016		410		$	34.93		2.47	$	13,292

For the majority of stock options, shares are issued on the exercise dates net of the amount of shares needed to satisfy each of the exercise price (in lieu of cash) and statutory tax withholding requirements, the latter to be paid by the Company on behalf of the employee. The total shares withheld related to exercised stock options were approximately 1,157,000, 2,461,000, and 205,000 in 2016, 2015, and 2014, respectively, and were based on the value of the stock options on their exercise dates as determined by the Company’s closing stock price. Total cash payments for the employees’ tax obligations to the taxing authorities related to exercised stock options were $10.7 million, $28.0 million, and $2.7 million, in 2016, 2015, and 2014, respectively.

Employee Stock Purchase Plan

The NuVasive, Inc. 2004 Amended and Restated Employee Stock Purchase Plan (the “ESPP”), provides eligible employees with a means of acquiring equity in the Company at a discounted purchase price using their own accumulated payroll deductions. Under the terms of the ESPP, employees can elect to have up to 15% of their annual compensation, up to a maximum of $21,250 per year, withheld to purchase shares of Company common stock for a purchase price equal to 85% of the lower of the fair market value per share (at closing) of Company common stock on (i) the commencement date of the two-year or six-month offering period (depending on the purchase period enrolled) or (ii) the respective purchase date. In the years ended December 31, 2016, 2015 and 2014, 152,000, 209,000, and 268,000 shares, respectively, were purchased under the ESPP.

The weighted average assumptions used to estimate the fair value of stock options granted and stock purchase rights under the ESPP are as follows:

	Year Ended December 31,
	2016			2015			2014
ESPP
Volatility		29	%		40	%		46	%
Expected term (years)		0.5			1.2			1.3
Risk free interest rate		0.4	%		0.2	%		0.2	%
Expected dividend yield		—	%		—	%		—	%

Common Stock Reserved for Future Issuance

The following table summarizes common shares reserved for issuance on exercise or conversion at December 31, 2016 (in thousands):

Issued and outstanding stock options			410
Issued and outstanding RSUs and PRSUs			2,150
Available for issuance under the ESPP			1,398
Available for future grant			4,383
2017 Notes			1,954
2017 Warrants			19,106
2021 Notes			14,396
2021 Warrants			32,596
Total shares reserved for future issuance			76,393

Pursuant to the terms of the 2014 EIP, shares subject to awards granted under the 2004 EIP may be utilized for future grants of awards under the 2014 EIP, to the extent such awards are terminated, cancelled or they expire, or shares subject thereto are withheld to cover taxes. During the year ended December 31, 2016, the Company filed a registration statement with the Securities and Exchange Commission with respect to 2.2 million of such shares for future issuance under the 2014 EIP. These shares are reflected in the number of shares available for future grants.