(13) Employee Stock Ownership Plans

Effective June 12, 2014, upon the pricing of the IPO, the Company adopted the 2014 Employee, Director and Consultant Equity Incentive Plan (the 2014 Equity Plan). Under the 2014 Equity Plan, the Company may grant incentive stock options, non-qualified stock options, restricted stock, RSUs and other stock-based awards. Stock options under the plan are to be granted with an exercise price not less than the fair market value of the Company’s common stock at the date of grant. Equity awards granted to employees generally vest over a service period of three to four years. Restricted stock granted to nonemployee directors vests over a one year service period.

During 2016, the Company issued 75,152 shares of restricted common stock and 103,593 non-qualified stock options (NSOs) to its nonemployee directors with a fair value of $0.4 million and $0.2 million, respectively, vesting over a one year period. The Company also issued 429,803 RSUs and NSOs to purchase 278,440 shares of common stock to employees. The RSUs and NSOs granted to employees during 2016 will vest over a three year period. All awards to nonemployee directors and employees during 2016 were granted under the 2014 Equity Plan.

On December 11, 2015, the Company issued certain equity grants to its chief executive officer which included 78,125 shares of restricted stock, NSOs to purchase 84,745 shares of common stock vesting solely over three years and NSOs to purchase 370,181 shares of common stock vesting subject to certain common stock price target achievements, as defined, over a three to five year period (the CEO Options). Collectively, these equity grants had an aggregate fair value of $2.0 million at the time of grant. The restricted stock award will vest based on achievement of a Company financial performance target for fiscal year 2020.

Stock-based compensation is included in cost of sales or operating expenses, as applicable, and consists of the following:

	Year Ended December 31,
	2016		2015		2014
	(In thousands)
Cost of product revenue	$	796	$	824	$	1,121
Research and development expenses		594		666		1,046
Sales and marketing expenses		1,066		1,012		1,390
General and administrative expenses		2,857		2,911		5,224
Total stock-based compensation	$	5,313	$	5,413	$	8,781

At December 31, 2016, 2,652,658 shares of common stock were reserved for outstanding stock-based awards granted under the 2014 Equity Plan. In addition, at December 31, 2016, 92,987 shares of common stock were reserved for stock-based awards granted under the Company’s 2001 Equity Incentive Plan, which was replaced by the 2014 Equity Plan. Any cancellations or forfeitures of these awards will become available for future grant under the 2014 Equity Plan. At December 31, 2016, there were 2,817,106 shares available for future grant under the 2014 Equity Plan.

Stock Options Valuation and Amortization Method

Prior to the IPO, the Board of Directors had historically determined the fair value of the Company’s common stock based on the market approach and the income approach to estimate the enterprise value of the business under various liquidity event scenarios, including an IPO by the Company and the sale of the Company. To support the valuations, the Company utilized a probability-weighted expected return under those various liquidity scenarios, public guideline companies, management cash flow projections and other assumptions to derive the enterprise value of the business. The Company then derived the estimated fair value of each class of stock, taking into consideration the rights and preferences of each instrument based on a probability-weighted expected return.

The fair value of each stock option is estimated as of the date of grant using the Black-Scholes option pricing model. Key inputs into this formula included expected term, expected volatility, expected dividend yield and the risk-free rate. Each assumption is set forth and discussed below.

For the performance-based stock options issued during the year ended December 31, 2013, the Company used a Monte Carlo simulation model to estimate the number of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO. The simulation model was based on a number of complex assumptions including the terms of the performance condition, the value of our common stock at the time of the Company’s IPO, the expected time from the date of grant to the Company’s IPO and expected volatility. The number of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO was estimated to be 96.8% and 97.4% of the options granted at August 7, 2013 and December 20, 2013, respectively. The fair value of each performance-based stock option was determined by multiplying the Black-Scholes estimate of grant date fair value by the percentage of options expected to remain outstanding and eligible for vesting upon completion of the Company’s IPO.

In December 2015, the Company issued NSOs to its chief executive officer to purchase 370,181 shares of common stock which are subject to the achievement of certain common stock price targets and may become exercisable on the third, fourth and fifth anniversary of the grant date. The Company used a Monte Carlo Simulation model to estimate the grant date fair value of awards expected to vest. The simulation model was based on a number of complex assumptions including (i) if the vesting condition is satisfied within the time-vesting periods, and (ii) the date the common stock price target is met per the terms of the agreement.

For stock options with a service condition, the fair value is amortized on a straight-line basis over the requisite service period of the options, which is generally a three- to four-year vesting period from the date of grant. For the performance-based stock options issued during the year ended December 31, 2013, a portion of the fair value was recognized as expense when the IPO performance condition was achieved and the remainder over the requisite service period, which is generally a three- to four-year vesting period from the date of grant.

Expected Term

The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company uses the simplified method as prescribed by FASB ASC 718 to calculate the expected term for options granted, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

Expected Volatility

Due to the Company’s limited historical data, the estimated volatility reflects the incorporation of the historical volatility of comparable companies with publicly available share prices. In 2016, 2015 and 2014, the expected volatility is based on the weighted average volatility of up to 15 companies with business, financial and market attributes that the Company believes are similar to its own.

Expected Dividend

The Company uses an expected dividend yield of zero. The Company does not intend to pay cash dividends on its common stock in the foreseeable future, nor has it paid dividends on its common stock in the past.

Risk-free Interest Rate

The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant.

Estimated Forfeitures

Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Forfeitures are estimated based on voluntary termination behavior as well as analysis of actual option forfeitures. Accordingly, share-based compensation expense has been reduced by an estimated annual forfeiture rate for the years ended December 31, 2016, 2015 and 2014.

Assumptions Utilized

The following information relates to the fair value of the option awards estimated by use of the Black-Scholes option pricing model:

	Year Ended December 31,
	2016			2015			2014
	(In thousands)
Weighted average assumptions:
Expected term (in years)		5.86			6.02			6.17
Expected volatility		53.56	%		57.95	%		50.09	%
Risk free rate		1.36	%		1.79	%		1.94	%
Expected dividend yield		0.00	%		0.00	%		0.00	%
Weighted average fair value:
Grant-date fair value of options granted	$	2.16		$	3.82		$	5.37
Grant-date fair value of options vested	$	7.58		$	11.89		$	97.33
Aggregate intrinsic value of options exercised	$	—		$	—		$	4,816.50

Outstanding Options

The following table summarizes information about stock options outstanding:

	Number of Shares			Weighted Average Grant Date Fair Value Per Share		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	($ in thousands, except share and per share data)
Options outstanding at December 31, 2015		1,702,337		$	9.60	$	13.47		9.08	$	6,152
Granted		382,033		$	2.16	$	4.30
Forfeited		(20,796	)	$	6.62	$	10.58
Exercised		—		$	—	$	—			$	—
Options outstanding at December 31, 2016		2,063,574		$	8.26	$	11.80		8.30	$	36,326
Exercisable at December 31, 2016		707,260		$	17.10	$	19.81		7.68	$	—
Expected to vest at December 31, 2016		1,190,710		$	3.58	$	6.99		8.67	$	31,473

As of December 31, 2016, total unrecognized compensation cost related to nonvested options granted under the 2014 Equity Plan was $3.0 million. The unrecognized compensation cost consisted of $3.0 million relating to service-based awards and less than $0.1 million to performance-based awards. The unrecognized compensation cost for the service-based options and performance-based awards is expected to be recognized over a weighted average period of 1.97 and 0.97 years, respectively.

Restricted Stock Awards and Restricted Stock Units

The Company values restricted stock awards and RSUs based on the closing trading value of our shares on the date of grant. RSUs have time-based vesting conditions and typically vest pro rata over three or four years. Restricted stock awards issued to nonemployee directors generally vest in full one year from the date of grant.

Information related to grants of RSUs during 2016 is as follows:

	Restricted Stock Units			Weighted Average Grant Date Fair Value
Balance at December 31, 2015		417,126		$	9.01
Granted		429,803			4.04
Vested		(155,707	)		9.20
Forfeited		(9,137	)		9.37
Balance at December 31, 2016		682,085		$	5.83

Restricted stock awards granted during 2016 are considered issued and outstanding common stock and are excluded from the table above. As of December 31, 2016 there were 153,277 shares of restricted stock outstanding.

The total intrinsic values of restricted stock and RSUs that vested in 2016 and 2015 was $0.6 million and $0.5 million, respectively. No restricted stock or RSUs vested in 2014. As of December 31, 2016, of the total shares of restricted stock and RSUs outstanding, 757,147 will vest upon the fulfillment of service conditions. In addition, 78,125 shares of restricted stock will vest only if certain performance conditions are achieved. As of December 31, 2016, the Company has determined that the performance-based condition was not probable, and no compensation has been recorded to date in conjunction with the award.

As of December 31, 2016, total unrecognized compensation cost related to restricted stock awards and RSUs granted under the 2014 Equity Plan was $0.2 million and $2.3 million, respectively, and is expected to be recognized over a weighted average period of 0.48 and 1.67 years, respectively.