Stock-based Compensation

2004 Stock Option Plan and 2013 Equity Incentive Plan

The Company’s 2004 Stock Option Plan and 2013 Equity Incentive Plan (the “Plans”) authorize the grant of options, restricted stock units (“RSUs”) and other equity awards to employees, directors and consultants. As of December 31, 2016, there were 6,425,421 shares authorized under the Plans. All options granted have a ten-year term and generally vest and become exercisable over four years of continued employment or service as defined in each option agreement. The Board of Directors determines the option exercise price and may designate stock options granted as either incentive or nonstatutory stock options. The Company generally grants stock options to employees with exercise prices equal to the estimated fair value of the Company’s common stock on the date of grant.

Stock Option Activity

A summary of the Company’s stock option activity under the Plans is as follows:



	Shares		Weighted- average exercise price per share		Weighted- average remaining contractual term (in years)	Aggregate intrinsic value (in thousands)
Outstanding at December 31, 2015	4,151,962		$	10.98	7.81	$	18,943
Granted	1,219,675		14.51
Canceled and forfeited	(300,713	)	12.85
Exercised	(348,983	)	7.94
Outstanding at December 31, 2016	4,721,941		$	12.00	7.41	$	48,670

December 31, 2016:
Options vested and expected to vest	4,423,662		$	11.83	7.33	$	46,353
Options exercisable	2,666,260		$	10.03	6.50	$	32,714

The weighted-average grant-date fair value per share of options granted with exercise prices equal to the market price on the date of the grant were $6.79, $7.07, and $9.45 for the years ended December 31, 2016, 2015, and 2014, respectively. The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock for all options that were in-the-money at December 31, 2016. The aggregate intrinsic value of options exercised was $5.0 million during 2016, $2.1 million during 2015, and $2.2 million during 2014, determined as of the option exercise date. The fair value of options vested was $6.8 million, $6.5 million, and $3.5 million for the years ended December 31, 2016, 2015, and 2014, respectively.

The following table summarizes information about the Company’s stock options outstanding at December 31, 2016:



	Outstanding		Exercisable
Exercise Price	Number of Shares	Weighted- Average Remaining Contractual Life in Years	Number of Shares	Weighted- Average Remaining Contractual Life in Years
$0.00 – $1.92	520,391	5.21	520,391	5.21
$2.24 – $6.72	589,559	4.64	584,346	4.63
$8.96 – $12.60	510,578	7.58	316,203	7.23
$12.77	754,288	8.12	320,425	8.12
$12.94	654,721	9.10	126,423	9.10
$13.58 – $14.95	365,131	8.59	108,188	7.95
$15.12 – $17.50	364,479	8.64	114,588	8.01
$18.18 – $18.90	736,894	7.09	533,742	7.09
$19.45 – $22.71	225,900	9.17	41,954	7.33
	4,721,941		2,666,260

Restricted Stock Unit (RSU) Activity

A summary of RSU activity under the Plans is as follows:



Non-vested RSUs	Share Equivalent		Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2015	15,000		$	12.77
Changes during the year:
Granted	153,602		15.89
Vested	(5,000	)	12.77
Forfeited	—		—
Non-vested at December 31, 2016	163,602		$	15.70

The fair value of the RSUs is determined based on the closing price of the Company’s common stock on the date of grant. The fair value of vested RSUs was $64,000 for the year ended December 31, 2016. There were no vested RSUs for the years ended December 31, 2015 and 2014.

Stock-based compensation

The following table sets forth stock-based compensation expense related to stock-based arrangements under the Plans for the years ended December 31 as follows (in thousands):



	2016		2015		2014
Cost of revenue	$	548	$	471	$	281
Research and development	2,046		1,453		1,018
Selling, general and administrative	5,602		3,919		3,234
Total stock-based compensation expense	$	8,196	$	5,843	$	4,533

As of December 31, 2016, total unrecognized stock-based compensation cost related to non-vested options was $15.6 million. This cost will be recognized on a straight-line basis over the weighted-average remaining service period of 2.40 years. The Company utilizes newly issued shares to satisfy option exercises. No tax benefit was recognized related to stock-based compensation cost since the Company has not reported taxable income to date and has established a full valuation allowance to offset all of the potential tax benefits associated with its deferred tax assets.

Valuation assumptions

The fair value of each employee option grant as of December 31 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:



	2016	2015	2014
Risk-free interest rates	1.18% – 2.12%	1.37% – 1.97%	1.74% – 2.15%
Expected term (years)	6.22	6.25	6.25
Expected dividend yield	—	—	—
Expected volatility	47.0%	57.0%	57.0%

The risk-free interest rates are based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. For purposes of determining the expected term of the awards in the absence of sufficient historical data relating to stock-option exercises, the Company applies a simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award. The Company has not declared or paid any dividends and does not currently expect to do so in the foreseeable future. The Company based its expected volatility on the historical volatility of similar companies whose share prices are publicly available, as management does not believe that the limited history of the Company’s measureable stock price volatility is representative of future expectations.

Employee Stock Purchase Plan

The Company’s 2013 Employee Stock Purchase Plan (“ESPP”) provides eligible employees with an opportunity to purchase common stock from the Company and to pay for their purchases through payroll deductions. The ESPP has overlapping offering periods of approximately 12 months in length. The offering periods generally start with the first trading day on or after March 1 and September 1 of each year and end on the first trading day on or after March 1 and September 1 of the following year, approximately 12 months later. Within each offering period, shares are purchased each six months on an exercise date.

An employee electing to participate in the ESPP (a “participant”) will be granted an option at the start of the offering period to purchase shares with contributions in any whole percentage ranging from 0% to 10% (or greater or lesser percentages or dollar amounts that the administrator determines) of the participant’s eligible compensation. The participant’s contributions will be accumulated and then used to purchase the Company’s shares on each exercise date. The purchase price on the exercise date will be 85% of the fair market value of the lesser of the Company’s share price on either the first trading day of the offering period or on the exercise date.

During 2016, 2015, and 2014, 139,195, 136,078, and 141,386 shares were issued under the ESPP, respectively. The Company recorded share-based compensation expense for shares issued from the ESPP of $0.8 million, $0.4 million, and $0.4 million for the years ended December 31, 2016, 2015, and 2014 respectively. A total of 610,166 shares of common stock have been reserved for issuance under the ESPP, of which 193,509 shares were available for issuance as of December 31, 2016.