STOCK-BASED COMPENSATION

Non-cash compensation related to equity awards is included in the following line items in the accompanying consolidated statements of operations and comprehensive income (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Cost of revenue	$	41	$	29	$	129	$	99
Selling and marketing expense	1,366		737		2,543		2,118
General and administrative expense	5,864		1,072		8,684		3,511
Product development	667		510		1,712		1,682
Total non-cash compensation	$	7,938	$	2,348	$	13,068	$	7,410

Stock Options

A summary of changes in outstanding stock options is as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value^(a)
			(per option)		(in years)	(in thousands)
Options outstanding at January 1, 2017	1,991,802		$	21.23
Granted ^(b)	51,089		187.82
Exercised	(179,165	)	31.75
Forfeited	(20,001	)	71.04
Expired	—		—
Options outstanding at September 30, 2017	1,843,725		24.28		4.58	$	405,934
Options exercisable at September 30, 2017	1,072,151		$	11.82	2.71	$	249,411

(a)

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price of $244.45 on the last trading day of the quarter ended September 30, 2017 and the exercise price, multiplied by the number of shares covered by in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2017. The intrinsic value changes based on the market value of the Company's common stock.


(b)	During the nine months ended September 30, 2017, the Company granted stock options to certain employees and members of the board of directors with a weighted average grant date fair value per share of $93.26, calculated using the Black-Scholes option pricing model, which vesting periods include (a) three years from the grant date, (b) two years from the grant date and (c) immediately upon grant.

For purposes of determining stock-based compensation expense, the weighted average grant date fair value per share of the stock options was estimated using the Black-Scholes option pricing model, which requires the use of various key assumptions. The weighted average assumptions used are as follows:



Expected term ⁽¹⁾	5.00 - 6.00 years
Expected dividend ⁽²⁾	—
Expected volatility ⁽³⁾	51% - 52%
Risk-free interest rate ⁽⁴⁾	1.74% - 2.17%


(1)	The expected term of stock options granted was calculated using the "Simplified Method," which utilizes the midpoint between the weighted average time of vesting and the end of the contractual term. This method was utilized for the stock options due to a lack of historical exercise behavior by the Company's employees.


(2)	For all stock options granted in 2017, no dividends are expected to be paid over the contractual term of the stock options, resulting in a zero expected dividend rate.


(3)	The expected volatility rate is based on the historical volatility of the Company's common stock.


(4)	The risk-free interest rate is specific to the date of grant. The risk-free interest rate is based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date.

Restricted Stock Units and Restricted Stock

A summary of the changes in outstanding nonvested restricted stock units ("RSUs") and restricted stock is as follows:



	RSUs
	Number of Units		Weighted Average Grant Date Fair Value
			(per unit)
Nonvested at January 1, 2017	152,374		$	65.64
Granted	83,113		138.07
Vested	(72,112	)	54.79
Forfeited	(14,078	)	82.37
Nonvested at September 30, 2017	149,297		$	109.64



	Restricted Stock
	Number of Shares		Weighted Average Grant Date Fair Value
			(per share)
Nonvested at January 1, 2017	14,464		$	25.14
Granted	—		—
Vested	(14,464	)	25.14
Forfeited	—		—
Nonvested at September 30, 2017	—		$	—

Restricted Stock Units with Performance Conditions

A summary of the changes in outstanding nonvested RSUs with performance conditions is as follows:



	RSUs with Performance Conditions
	Number of Units		Weighted Average Grant Date Fair Value
			(per unit)
Nonvested at January 1, 2017	44,509		$	88.28
Granted	53,306		164.07
Vested	(1,931	)	96.46
Forfeited	—		—
Nonvested at September 30, 2017	95,884		$	130.25

Chairman and Chief Executive Officer Grants

As disclosed in the Company's report on Form 10-Q for the quarterly period ending June 30, 2017, on July 25, 2017, the Company’s Compensation Committee of its Board of Directors approved new compensation arrangements for its Chairman and Chief Executive Officer. The new compensation arrangements include the issuance of performance based equity compensation grants with a modeled total grant date value of $87.5 million of which 25% (119,015 shares) would be in the form of time-vested restricted stock awards with a performance condition and 75% (a maximum of 769,376 shares) would be in the form of performance-based nonqualified stock options.

Stock Options with Market Conditions

The performance-based nonqualified stock options have a target number of shares that vest upon achieving targeted total shareholder return performance of 110% stock price appreciation and a maximum number of shares for achieving superior performance up to 167% of the target number of shares. No shares will vest unless 70% of the targeted performance is achieved. Time-based service vesting conditions would also have to be satisfied in order for performance-vested shares to become fully vested and no longer subject to forfeiture. In connection with the new compensation arrangements, on July 26, 2017, an initial grant of performance-based nonqualified stock options with a target number of shares of 402,694 and a maximum number of shares of 672,499 were issued with an exercise price of $183.80, the closing stock price on July 26, 2017. The fair value of the performance-based stock options will be recognized on a straight-line basis through the vest date of September 30, 2022, whether or not any of the total shareholder return targets are met. In the three months ended September 30, 2017, the Company recorded $2.0 million in stock-based compensation expense in the consolidated statement of operations and comprehensive income.

The Company's Fifth Amended and Restated 2008 Stock and Annual Incentive Plan (the "2008 Plan") imposes a per employee upper annual grant limit of 672,500 shares. As a result, the remaining 58,010 target performance-based nonqualified stock options (and potential performance-based restricted stock awards) will be awarded on or about January 2, 2018. The form of the awards will consist of a performance-based nonqualified stock option award with a per share exercise price of $183.80 or the closing price of the Company's common stock on such future grant date (“2018 Performance Option”) if the closing price on such future grant date is greater than $183.80; and, if the closing share price of the Company's common stock on January 2, 2018 is greater than the closing share price on July 26, 2017, a second performance-based restricted stock award will be granted, substituting for an equal number of the performance-based options, to compensate for the increase in the exercise price of the performance-based option granted on July 26, 2017. The number of performance-based options and performance-based restricted stock shares will not be determined until January 2, 2018. As of September 30, 2017, the Company estimated the fair value of the remaining 58,010 target shares using a Monte Carlo simulation model and the Company's common stock price on September 30, 2017 to record mark-to-market expense associated with the commitment to issue the shares. In the three months ended September 30, 2017, the Company recorded $0.4 million in stock-based compensation expense based on the current estimated fair value on a straight-line basis.

As of September 30, 2017, the performance conditions associated with the performance-based nonqualified stock options and the potential performance-based restricted stock shares had not been met.

A summary of changes in outstanding stock options with market conditions is as follows:



	Number of Options with Market Conditions	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value^(a)
		(per option)		(in years)	(in thousands)
Options outstanding at January 1, 2017	—	$	—
Granted (b)	402,694	183.80
Exercised	—	—
Forfeited	—	—
Expired	—	—
Options outstanding at September 30, 2017	402,694	183.80		9.82	$	24,423
Options exercisable at September 30, 2017	—	$	—	0	$	—

(a)


(b)	During the nine months ended September 30, 2017, the Company granted stock options to an employee with a weighted average grant date fair value per share of $142.45, calculated using the Monte Carlo simulation model, which have a vesting date of September 30, 2022.

For purposes of determining stock-based compensation expense, the weighted average grant date fair value per share of the stock options was estimated using the Monte Carlo simulation model, which requires the use of various key assumptions. The weighted average assumptions used are as follows:



Expected term ⁽¹⁾	7.50 years
Expected dividend ⁽²⁾	—
Expected volatility ⁽³⁾	50%
Risk-free interest rate ⁽⁴⁾	2.12%


(1)	The expected term of stock options with a market condition granted was calculated using the "Simplified Method," which utilizes the midpoint between the weighted average time of vesting and the end of the contractual term. This method was utilized for the stock options with market conditions due to a lack of historical exercise behavior by the Company's employees.


(2)	For all stock options with a market condition granted in 2017, no dividends are expected to be paid over the contractual term of the stock options, resulting in a zero expected dividend rate.


(3)	The expected volatility rate is based on the historical volatility of the Company's common stock.


(4)	The risk-free interest rate is specific to the date of grant. The risk-free interest rate is based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date.

Time Vested Restricted Stock Awards with Performance Conditions

On January 2, 2018, 119,015 restricted stock awards with time-vesting and a performance condition will be granted. The terms of these awards were fixed in the approved new compensation agreements in July 2017. In the three months ended September 30, 2017, the Company recorded $1.3 million in stock-based compensation to reflect the commitment to issue the shares in the consolidated statement of operations and comprehensive income. The performance condition is tied to the Company's operating results during the first six months of 2018. As of September 30, 2017, the performance condition associated with the awards had not been met.