NOTE

—STOCKHOLDERS’ EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION EXPENSE

As of

December 31, 2018,

the Company had the following stock-based employee compensation plans:

2004

Equity Incentive Plan and

1998

Stock Plan

1998,

the Company adopted the

1998

Stock Plan, or

1998

Plan, under which

4,650,000

shares of the Company’s common stock were reserved for issuance to employees, directors and consultants.

January 12, 2004,

the Board of Directors adopted the

2004

Equity Incentive Plan. A total of

1,750,000

shares of common stock were originally reserved for issuance pursuant to the

2004

Equity Incentive Plan. In addition, the shares reserved for issuance under the

2004

Equity Incentive Plan included shares reserved but un-issued under the

1998

Plan and shares returned to the

1998

Plan as the result of termination of options or the repurchase of shares. In

2012

the stockholders approved a “fungible share” provision whereby each full-value award issued under the

2004

Equity Incentive Plan results in a requirement to subtract

2.12

shares from the shares reserved under the Plan.

Options granted under the

1998

Plan and

2004

Equity Incentive Plan

may

be incentive stock options or non-statutory stock options. Stock purchase rights

may

also be granted under the

2004

Equity Incentive Plan. Incentive stock options

may

only be granted to employees. The Board of Directors determines the period over which options become exercisable. Options granted under the Plan to employees generally vest over a

four

-year term from the vesting commencement date and become exercisable

25%

on the

first

anniversary of the vesting commencement date and an additional

1/48th

on the last day of each calendar month until all of the shares have become exercisable. During

2013

and

2012

the officers of the Company were granted options that vest over a

three

-year term at the rate of

one

third

on the

one

-year anniversary of the vesting commencement date and

1/36th

thereafter. In

2014

the officers of the Company were granted RSUs and PSUs but were

not

granted any options. The contractual term of the options granted in

2013

and

2012

was

seven

years.

In accordance with the

2004

Equity Incentive Plan, prior to

2012,

the Company’s non-employee directors were granted

$60,000

of grant fair value (determined by dividing the award amount by the

-day moving average stock price on the day of the award), fully vested, stock awards annually on the date of the Company’s Annual Meeting of stockholders. Following Board of Directors action on

October 31, 2017,

the Company’s nonemployee directors receive

$60,000

of RSUs granted annually that cliff-vest on the

one

-year anniversary of the grant date. In the years ended

December 31, 2018,

2017

and

2016,

the Company issued

13,392,

21,605

and

45,350

RSUs, respectively, to its non-employee directors. Included in the

2016

grants, was

6,500

RSUs granted to

one

of the Company's non-employee directors for consulting services to the Company, which vest over a period of

four

years from the grant date.

In the years ended

December 31, 2018,

2017

and

2016

the Company’s Board of Directors granted

120,273,

270,707

and

229,865

RSUs, respectively, to its executive officers and certain members of the Company’s management. The RSUs granted to the employees vest at the rate of

one

fourth

on the

one

-year anniversary of the grant date, and

one

fourth

in each of the subsequent

three

years. The annual RSUs granted to the executive officers vests at the rate of

one

third

on the

one

-year anniversary of the grant date, and

one

third

in each of the subsequent

two

years. In addition, on

December 15, 2017,

the Company’s Board granted

100,000

RSUs to the President and Chief Executive Officer, which vest according to the following schedule:

15%,

25%

and

45%

on the first, second,

third

and

fourth

anniversary of the grant date, respectively. The Company measured the fair market values of the underlying stock on the dates of grant and recognizes the stock-based compensation expense over the vesting period. On the vesting date, the Company issues fully paid up common stock, net of stock withheld to settle the recipient’s minimum statutory tax liability.

In the years ended

December 31, 2018,

2017

and

2016

the Company’s Board of Directors granted its executive officers and certain senior management employees

49,498,

117,418

and

204,976

of PSUs, respectively. All PSUs vesting was subject to the recipient’s continued service and achievement of pre-established goals that were operational (in

2018,

2017

and

2016

). The operational PSU goals were related to revenue growth, operating income improvement and specific product releases. On the vest date of the PSUs, the Company issues fully-paid up common stock, based on the degree of achievement of the pre-established targets, net of the stock withheld to settle the recipient’s minimum statutory tax liability.

50%

of the U.S. domestic metric was achieved while international metric was

not

achieved in

2018.

2004

Employee Stock Purchase Plan

January

12,

2004,

the Board of Directors adopted the

2004

Employee Stock Purchase Plan. Under the

2004

Employee Stock Purchase Plan, or

2004

ESPP, eligible employees are permitted to purchase common stock at a discount through payroll deductions. The

2004

ESPP offering and purchase periods are for approximately

six

months. The

2004

ESPP has an evergreen provision based on which shares of common stock eligible for purchase are increased on the

first

day of each fiscal year by an amount equal to the lesser of:

600,000

shares;

ii.

2.0%

of the outstanding shares of common stock on such date; or

iii.

an amount as determined by the Board of Directors.

The Company’s Board of Directors did

not

increase the shares available for future grant on

January 1, 2019,

2018

and

2017.

The price of the common stock purchased is the lower of

85%

of the fair market value of the common stock at the beginning or end of a

six

month offering period. In the years ended

December 31, 2018,

2017and

2016,

under the

2004

ESPP, the Company issued

64,511,

78,479

and

79,922

shares, respectively. At

December 31, 2018,

627,073

shares remained available for future issuance.

Option Activity

Activity under the

1998

Plan and

2004

Equity Incentive Plan is summarized as follows:

				Options Outstanding
	Shares Available For Grant			Number of Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in $ millions ) (1)
Balances as of December 31, 2015		1,263,425			2,148,797		$	9.31		3.4	$	7.9
Options granted		(162,000	)		162,000		$	11.55
Options exercised		—			(1,051,138	)	$	8.89
Options cancelled (expired or forfeited)		143,187			(143,187	)	$	12.93
Stock awards granted		(1,018,005	)		—			—
Stock awards cancelled (expired or forfeited)		495,050			—			—

Balances as of December 31, 2016		721,657			1,116,472		$	9.56		3.7	$	8.7

Options granted		(278,250	)		278,250		$	31.00
Options exercised		—			(488,398	)	$	8.96
Options cancelled (expired or forfeited)		66,405			(66,405	)	$	16.54
Stock awards granted		(873,881	)		—			—
Stock awards cancelled (expired or forfeited)		258,935			—			—
Additional shares reserved (2)		1,600,000			—			—
Balances as of December 31, 2017		1,494,866			839,919		$	16.46		3.99	$	24.4
Options granted		(21,010	)		21,010		$	50.65
Options exercised		—			(271,902	)	$	9.99
Options cancelled (expired or forfeited)		81,322			(81,322	)	$	21,55
Stock awards granted		(562,070	)
Stock awards cancelled (expired or forfeited)		148,197
Balances as of December 31, 2018		1,141,305			507,705		$	20.52		3.52	$	2.00
Exercisable as of December 31, 2018					335,348		$	14.68		2.73	$	1.87
Vested and expected to vest, net of estimated forfeitures, as of December 31, 2018					485,469		$	19.88		3.42	$	19.86

( 1 )	Based on the closing stock price of $17.02 of the Company’s stock on December 31, 201 8 , $ 45.35 on December 30, 201 7 , $ 17.35 on December 31 201 6 and $ 12.79 on December 31, 201 5 .
( 2 )	Approved by the board of directors and stockholders in 2017. .

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the Company’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on

December 31, 2018.

The aggregate intrinsic amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised in

2018,

2017

and

2016

was

$8.3

million,

$8.0

million, and

$3.6

million, respectively. The options outstanding and exercisable at

December 31, 2018

were in the following exercise price ranges:

Exercise Prices				Number Outstanding	Contractual Life (in years)	Number Outstanding
	$6.88	–	$7.44	28,832	0.58	28,832
		$8.80		97,268	1.44	97,268
	$9.65	–	$10.79	54,564	3.01	49,544
	$10.80	–	$11.24	57,521	3.18	47,293
	$11.67	–	$17.90	72,583	2.44	48,855
	$18.55	–	$25.70	71,250	5.21	28,512
		$39.30		72,000	5.83	23,230
		$43.40		6,510	6.45	—
		$47.40		38,927	5.86	10,564
		$53.90		8,250	5.30	1,250

Stock

Awards

(RSU

and

PSU)

Activity

Table

Information with respect to RSUs and PSUs activity is as follows (in thousands):

	Number of			Weighted-Average Grant- Date Fair		Aggregate Fair Value (1)			Aggregate Intrinsic Value (2)
	Shares			Value		(in thousands)			(in thousands)
Outstanding at December 31, 2015		371,630		$	12.39				$	4,753
Granted		480,191		$	10.80
Vested (3)		(172,990	)	$	12.56	$	1,906	(5)
Forfeited		(233,514	)	$	11.36
Outstanding at December 31, 2016		445,317		$	11.15				$	7,726
Granted		412,208		$	28.74
Vested (3)		(224,799	)	$	10.91	$	5,168	(6)
Forfeited		(122,139	)	$	13.56
Outstanding at December 31, 2017		510,587		$	24.88				$	23,155
Granted		265,124		$	44.57
Vested (3)		(231,515	)	$	21.10	$	9,483	(6)
Forfeited		(69,905	)	$	20.01
Outstanding at December 31, 2018		474,291		$	38.44				$	8,072

(

)

Represents

the

value

the

Company’s

stock

the

date

that

the

restricted

stock

units

and

performance

stock

units

vest.

	( 2 )	Based on the closing stock price of the C o m pan y ’ s stock of $ 17.02 on December 31, 2018 , $ 45.35 on December 31, 2017 , $ 17.35 on December 31 , 2016 and $12.79 on December 30 , 2015 .
	( 3 )	The number of restricted stock units vested includes shares tha t the Company withheld on behalf of the employees to satisfy the statutory tax withholding requirements.
	( 4 )	On the grant date, the fair value for these vested awards was $ 2.2 million.

(

)

the

grant

date,

the

fair

value

for

these

vested

awards

was

$2.5

million.

(

)

the

grant

date,

the

fair

value

for

these

vested

awards

was

$4.9

million.

Stock-Based Compensation

Stock-based compensation expense for the years ended

December 31, 2018,

2017

and

2016

was as follows (in thousands):

	Year Ended December 31,
	201 8		201 7		201 6
Stock options	$	838	$	815	$	989
RSUs		4,648		1,813		1,508
PSUs		1,105		2,093		967
ESPP		566		389		249
Total stock-based compensation expense	$	7,157	$	5,110	$	3,713

As of

December 31, 2018,

the unrecognized compensation cost, net of expected forfeitures, was

$12.8

million for stock options and stock awards, which will be recognized over an estimated weighted-average remaining amortization period of

2.63

years. For the ESPP, the unrecognized compensation cost, net of expected forfeitures, was

$272,000,

which will be recognized over an estimated weighted-average amortization period

0.33

years.

The Company issues new shares of common stock upon the exercise of stock options, vesting of RSUs and PSUs, and the issuance of ESPP shares. The amount of cash received from these issuances (excluding PSUs), net of taxes withheld and paid, in

2018,

2017and

2016

was

$1.3

million,

$4.0

million and

$9.5

million.

Total stock-based compensation expense recognized during the year ended

December 31, 2018,

2017

and

2016

was recorded in the Consolidated Statement of Operations as follows (in thousands):

	Year Ended December 31,
	201 8		201 7		201 6
Cost of revenue	$	743	$	660	$	341
Sales and marketing		2,105		1,642		1,179
Research and development		824		936		596
General and administrative		3,485		1,872		1,597
Total stock-based compensation expense	$	7,157	$	5,110	$	3,713

Valuation Assumptions and Fair Value of Stock Options and ESPP Grants

The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under its equity incentive plans and rights to acquire stock granted under its employee stock purchase plan. The Company based the weighted average estimated values of employee stock option grants and rights granted under the employee stock purchase plan, as well as the weighted average assumptions used in calculating these values, on estimates at the date of grant, as follows:

	Stock Options									Stock Purchase Plan
	201 8			201 7			201 6			201 8			201 7			201 6

Expected term (in years) (1)		3.7			3.70			3.83			0.50			0.50			0.50
Risk-free interest rate (2)		2.6	%		1.73	%		1.09	%		2.34	%		1.14	%		0.46	%
Volatility (3)		44	%		40	%		40	%		61	%		42	%		39	%
Dividend yield (4)		—	%		—	%		—	%		—	%		—	%		—	%

Weighted average estimated fair value at grant date	$	18.0		$	9.98		$	3.72		$	9.6		$	8.21		$	3.22

( 1 )	The expected term represents the period during which the Company’s stock-based awards are expected to be outstanding. The estimated term is based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements, and expectation of future employee behavior, including post-vesting terminations. The expected term of groups of employees that have similar historical exercise patterns has been considered separately for valuation purposes.
( 2 )	The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of the option as of the date of grant.
( 3 )	Estimated volatility is based on historical volatility. The Company also considers implied volatility when there is sufficient volume of freely traded options with comparable terms and exercise prices in the open market.

The Company periodically estimates forfeiture rates based on its historical experience within separate groups of employees and adjusts the stock-based payment expense accordingly. The forfeiture rates used in

2018

ranged from

17%.

Non-Em

ployee Stock-Based Compensation

Stock-based compensation expense related to stock options granted to non-employees is recognized based on the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the time period the Company expects to receive services from the nonemployee. The Company revalues stock options granted to non-employees at each reporting date as the underlying equity instruments vest.

The Company granted

3,384

RSUs to

one

non-employee during the year ended

December 31, 2018,

7,745

stock options and

2,478

RSUs during the year ended

2017,

and

zero

shares during the year ended

2016.

The

7,745

stock options granted in

2017

vests over

years at

25%

on the

first

anniversary of the grant date and

1/48th

each month thereafter.

The

3,384

RSUs granted in

2018

vests over

years at

25%

each anniversary of the grant date. These RSUs and stock options were granted in exchange for consulting services to be rendered and are measured and recognized as they are earned.

Stock Awards Withholdings

For Stock Awards granted to employees, the number of shares issued on the date the Stock Awards vest is net of the tax withholding requirements paid on behalf of the employees. In

2018,

2017

and

2016,

the Company withheld

77,049,

64,490,

and

56,157shares

of common stock, respectively, to satisfy its employees’ tax obligations of

$3,130,360,

$1,

1,471,000

and

$619,000,

respectively. The Company paid this amount in cash to the appropriate taxing authorities. Although shares withheld are

not

issued, they are treated as common stock repurchases for accounting and disclosure purposes, as they reduce the number of shares that would have been issued upon vesting.