NOTE

6—STOCKHOLDERS’

EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION EXPENSE

As of

December 31, 2019,

the Company had

one

class of issued common stock with a par value of

$0.001.

Authorized capital stock consists of

55,000,000

shares comprised of

two

classes: (i)

50,000,000

shares of Common Stock, of which

14,315,586

shares are issued and outstanding as of

December 31, 2019,

and (ii)

5,000,000

shares of preferred stock, par value

$0.001

per share (“Preferred Stock”), of which

shares are issued and outstanding.

As of

December 31, 2019,

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

2004

Equity Incentive 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 (“the Board”) 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.

2019

Equity Incentive Plan

At the Company’s Annual Meeting of Stockholders on

June 14, 2019,

the Company’s stockholders approved the

2019

Equity Incentive Plan, which is an amendment and restatement of the

2004

Equity Incentive Plan. The

2004

Equity Incentive Plan was amended to: (i) increase the number of shares available for future grant by

700,000

(in addition to the

9,701,192

shares provided under the

2004

Equity Incentive Plan; (ii) extend the term of the

2004

Equity Incentive Plan to the date of the Annual Meeting of the Company’s stockholders in

2029;

(iii) amend the

2004

Equity Incentive Plan to eliminate the requirement for awards granted on or after

June 14, 2019

that any shares subject to awards with an exercise price less than fair market value on the date of such grant will be counted against the Plan as

2.12

shares for each full value share awarded in accordance with the

2004

Equity Incentive Plan; (iv) amend the

2004

Equity Incentive Plan to remove the requirement that any shares subject to awards with an exercise price less than fair market value on the date of such grant will be counted against the Plan as

2.12

shares for each full value share awarded; (v) amend the

2004

Equity Incentive Plan to remove certain provisions relating to the “performance based compensation” exception under Section

162

(m) of the Internal Revenue Code of

1986,

as amended; (vi) include a minimum

one

-year vesting period with respect to awards granted under the

2004

Equity Incentive Plan.

June 11, 2019,

the Board also approved amended and restated the Company’s Stock Ownership Guidelines adopted on

July 28, 2017

in their entirety, to require all officers (as defined by Rule

16a

(f) of the Securities Exchange Act of

1934,

as amended) to hold at least

50%

of any shares received pursuant to stock options, stock appreciation rights, vested restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance shares or performance units (net of taxes) for a minimum of

one

year following vesting and delivery.

June 11, 2019,

the Board also adopted a clawback policy to permit recovery of certain compensation paid to Named Executive Officers (as defined in Item

402

of Regulation S-K) of the Company if the Compensation Committee of the Board determines that a Named Executive Officer (i) has violated law, the Company’s Code of Business Conduct and Ethics, or any significant ethics or compliance policies, and (ii) such conduct results in material financial or reputational harm, or results in a need for a restatement of the Company’s consolidated financial statements. The Amended and Restated Plan provides for the grant of incentive stock options, non-statutory stock options, RSAs, RSUs, stock appreciation rights, performance units, performance shares, and other stock or cash awards.

In accordance with the

2019

and

2004

Equity Incentive Plans, prior to

2012,

the Company’s non-employee directors were granted

$60,000

of grant date fair value, fully vested, stock awards annually on the date of the Company’s Annual Meeting of stockholders. The quantity of units granted is determined by dividing the award amount by the

-day moving average stock price ending on the day of the award. 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, 2019,

2018

and

2017,

the Company issued

42,236,

13,392,

and

21,605

RSUs, respectively, to its non-employee directors.

In the years ended

December 31, 2019,

2018

and

2017

the Company’s Board of Directors granted

517,402,

210,532,

and

270,707

RSUs, respectively, to its executive officers and certain members of the Company’s management.

25%

of the RSUs granted to the employees vest on each of the

first

four

anniversaries of the vest date subject to the recipients’ continued service. 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, 2019,

2018

and

2017

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

387,172,

47,824,

and

117,418

of PSUs, respectively. The PSUs vest over

months subject to the recipient’s continued service and the achievement of pre-established performance goals. The PSUs granted in

2019

vest subject to the recipients continued service and the achievement of certain performance goals for the Company’s

2019

fiscal year established by the Board and relating to the achievement of revenue targets for consumable products, revenue targets for international revenue, and specific operational milestones related to product performance and IT systems implementation projects. On

September 5, 2019,

the Board made a modification to all the PSU grants outstanding as of

September 4, 2019,

such that

15%

of the PSUs would now vest upon the achievement of revenue targets for consumable products or revenue targets for international revenue rather than upon the achievement of targets related to IT systems implementation projects. The modified PSUs were valued at the Company’s share price on the date of the modification. As a result of the PSU modification the Company recognized an additional

$1.0

million of stock-based compensation in during the year ended

December 31, 2019.

During the

three

months ended

September 30, 2019

the Company's Board awarded its new CEO, David H. Mowry,

67,897

shares, which are scheduled to vest over

years from

2019

through

2022

(the

2019

tranche is

15%

of the award, or

10,185

PSUs; the

2020

tranche is

25%

of the award, or

16,974

PSUs; the

2021

tranche is

30%

of the award, or

20,269

PSUs; and the

2022

tranche is

30%

of the award, or

20,269

PSUs). These PSUs are subject to certain performance-based criteria related to achieving financial metrics in the Board approved annual budgets for the years

2019

through

2022.

As of

December 31, 2019,

the Company concluded that only the

2019

tranche of

10,185

PSUs meet the criteria for measurement and recognition (

85%

of which vested as of

December 31, 2019).

The

2020

2022

tranches do

not

meet the criteria for measurement and recognition as of

December 31, 2019,

and will meet the criteria for measurement and commencement of recognition when the Company’s Board of Directors establishes the financial metrics for each fiscal year.

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;

2.0%

of the outstanding shares of common stock on such date; or 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, 2020,

2019

and

2018.

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, 2019,

2018

and

2017,

under the

2004

ESPP, the Company issued

82,810,

64,511,

and

78,479

shares, respectively. At

December 31, 2019,

761,705

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, 201 6		721,657		1,116,472	$	9.56		3.70	$	8.70
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		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
Additional shares reserved (2)		700,000
Options exercised		-		(160,798)	$	10.03		-		-
Options cancelled (expired or forfeited)		51,208		(51,208)		24.61		-		-
Stock awards granted		(1,538,128)		-		-		-		-
Stock awards cancelled (expired or forfeited)		407,320		-		-		-		-
Balances as of December 31, 2019		761,705		295,699	$	25.52		3.19	$	3.04
Exercisable as of December 31, 2019				222,400	$	22.16		2.83	$	3.04
Vested and expected to vest, net of estimated forfeitures, as of December 31, 2019				285,462	$	25.08		3.00	$	3.06

(

)

Based

the

closing

stock

price

35.81

the

pan

’

stock

December

31,

201

17.02

December

201

45.35

December

201

and

17.35

December

31,

201

(

)

Approved

the

board

directors

and

stockholders

201

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, 2019.

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

2019,

2018

and

2017

was

$1.0

million,

$8.3

million, and

$8.0

million, respectively. The options outstanding and exercisable at

December 31, 2019

were in the following exercise price ranges:

Exercise Prices			Number Outstanding		Contractual Life (in years)		Number Exercisable
	$8.80			48,864		0.48		48,864
$9.65	–	$10.79		33,743		1.98		32,806
$10.80	–	$14.04		36,146		3.24		33,752
$15.32	–	$18.55		10,896		3.74		8,584
	$19.55			12,000		4.32		8,292
	$25.70			38,625		4.59		23,594
	$39.30			72,000		4.42		41,230
	$43.40			6,510		0.25		2,849
	$47.40			29,915		3.72		19,116
	$53.90			7,000		5.20		3,313
$ 8.80	–	$ 53.90		295,669		2.83		222,400

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, 2016		445,317		$	11.15				$	7,726
Granted		412,208		$	28.74
Vested (3)		(224,799	)	$	10.91	$	5,168	(4)
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	(5)
Forfeited		(69,905	)	$	20.01
Outstanding at December 31, 2018		474,291		$	38.44				$	8,072
Granted		963,814		$	18.68
Vested (3)		(172,281	)	$	33.66	$	6,169	(6)
Forfeited		(161,022	)	$	37.91
Outstanding at December 31, 2019		1,104,802		$	22.10				$	37,442

(

)

Represents

the

value

the

Company’s

stock

the

date

that

the

restricted

stock

units

and

performance

stock

units

vest.

(

)

Based

the

closing

stock

price

the

Company’s

stock

35.81

December 31, 2019

17.02

December 31, 2018

45.35

December 31

2017

and

$17.35

December 30

2016

(

)

The

number

restricted

stock

units

vested

includes

that

the

Company

withheld

behalf

the

employees

satisfy

the

statutory

tax

withholding

requirements.

(

)

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.

(

)

the

grant

date,

the

fair

value

for

these

vested

awards

was

$5.9

million.

Stock-Based Compensation

Stock-based compensation expense for the years ended

December 31, 2019,

2018

and

2017

was as follows (in thousands):

	Year Ended December 31,
	201 9		201 8		201 7
Stock options	$	622	$	838	$	815
RSUs		4,786		4,648		1,813
PSUs		3,948		1,105		2,093
ESPP		476		566		389
Total stock-based compensation expense	$	9,832	$	7,157	$	5,110

As of

December 31, 2019,

the unrecognized compensation cost, net of expected forfeitures, was

$12.2

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

2.64

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

$0.2

million, 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

2019,

2018and

2017

was

$3.9

million,

$1.3

million, and

$4.0

million.

Total stock-based compensation expense recognized during the year ended

December 31, 2019,

2018

and

2017

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

	Year Ended December 31,
	201 9		201 8		201 7
Cost of revenue	$	1,572	$	743	$	660
Sales and marketing		4,510		2,105		1,642
Research and development		1,536		824		936
General and administrative		2,214		3,485		1,872
Total stock-based compensation expense	$	9,832	$	7,157	$	5,110

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 weighted average estimated fair values of the employee stock options and rights granted under the employee stock purchase plan, and the weighted average assumptions used to calculate the grant date fair values, are as follows:

	Stock Options And ESPP									Stock Purchase Plan
	201 9			201 8			201 7			201 9			201 8			201 7

Expected term (in years) (1)		3.65			3.70			3.70			0.50			0.50			0.50
Risk-free interest rate (2)		1.64	%		2.60	%		1.73	%		2.49	%		2.34	%		1.14	%
Volatility (3)		54	%		44	%		40	%		70	%		61	%		42	%
Dividend yield (4)		-	%		-	%		-	%		-	%		-	%		-	%
Weighted average estimated fair value at grant date	$	14.83		$	18.00		$	9.98		$	9.60		$	9.60		$	8.21

(

)

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.

(

)

The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of the option or ESSP participation right as of the date of grant.

(

)

Estimated volatility is based on historical volatility. The Company estimates volatility based on a

blend of the Company’s historical volatility and the implied volatility of freely traded options of the Company’s stock in the open market.

(

)

The Company has

not

paid dividends since its inception.

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

2019

ranged from

17.7%.

Non-Employee 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 fair value of the award issued on the day of the grant.

The Company granted

9,303

RSU’s to non-employees, during the year ended

December 31, 2019,

3,384

RSUs during the year ended

December 31, 2018,

and

7,745

stock options and

2,478

RSUs during the year ended

2017.

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

9,303

RSUs granted in

2019

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

2019,

2018,

and

2017,

the Company withheld

42,695,

77,049,

and

64,490

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

$0.8

million,

$3.1

million, and

$1.5

million, 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.