Note 17. Stock-Based Compensation

MEC 2009 Stock Plan

In connection with the MEC acquisition in February 2014, the Company assumed nonstatutory stock options granted under the Mainstream Energy Corporation 2009 Stock Plan (the “MEC Plan”) held by MEC employees who continued employment with the Company after the closing and converted them into options to purchase shares of the Company’s common stock. The MEC Plan was terminated on the closing of the acquisition but the outstanding awards under the MEC Plan that the Company assumed in the acquisition will continue to be governed by their existing terms. As of December 31, 2015, options to purchase 527,770 shares of the Company’s common stock remained outstanding under the MEC Plan.

2013 Equity Incentive Plan

In July 2013, the Board of Directors approved the 2013 Plan. In March 2015, the Board of Directors authorized an additional 3,000,000 shares reserved for issuance under the 2013 Plan. An aggregate of 4,500,000 shares of common stock are reserved for issuance under the 2013 Plan plus (i) any shares that were reserved but not issued under the plan that was previously in place, and (ii) any shares subject to stock options or similar awards granted under the plan that was previously in place that expire or otherwise terminate without having been exercised in full and shares issued that are forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2013 Plan pursuant to clauses (i) and (ii) equal to 8,044,829 shares. Stock options granted to employees generally have a maximum term of ten-years and vest over a four-year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three years. The options may include provisions permitting exercise of the option prior to full vesting. Any unvested shares shall be subject to repurchase by the Company at the original exercise price of the option in the event of a termination of an optionee’s employment prior to vesting. All the remaining shares that were available for future grants under the 2013 Plan were transferred to the 2015 Equity Incentive Plan (“2015 Plan”) at the inception of the 2015 Plan. As of December 31, 2015, the Company had not granted restricted stock or other equity awards (other than options) under the 2013 Plan.

2014 Equity Incentive Plan

In August 2014, the Board approved the 2014 Equity Incentive Plan (“2014 Plan”). An aggregate of 947,342 shares of common stock are reserved for issuance under the 2014 Plan. The 2014 Plan was adopted to accommodate a broader transaction with a sales entity and to allow for similar transactions in the future. In July 2015, the Board approved an increase in the number of shares of common stock reserved to 1,197,342. As of July 2015, the Company granted all 1,197,342 restricted stock units (“RSUs”) available under the 2014 Plan.

2015 Equity Incentive Plan

In July 2015, the Board approved the 2015 Plan. An aggregate of 11,400,000 shares of common stock are reserved for issuance under the 2015 Plan plus (i) any shares that were reserved but not issued under the 2013 Plan at the inception of the 2015 Plan, and (ii) any shares subject to stock options or similar awards granted under the 2008 Plan, 2013 Plan and 2014 Plan that expire or otherwise terminate without having been exercised in full and shares issued that are forfeited to or repurchased by the Company, with the maximum number of shares to be added to the 2015 Plan pursuant to clauses (i) and (ii) equal to 15,439,334 shares. Stock options granted to employees generally have a maximum term of ten-years and vest over a four-year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three years. The options may include provisions permitting exercise of the option prior to full vesting. Any unvested shares shall be subject to repurchase by the Company at the original exercise price of the option in the event of a termination of an optionee’s employment prior to vesting. RSUs granted to employees generally vest over a four-year period from the date of grant; 25% vest at the end of one year, and 75% vest quarterly over the remaining three years.

Stock Options

The following table summarizes the activity for all stock options under the Company’s equity incentive plans for the year ended December 31, 2015 (shares in thousands):

				Weighted		Weighted
				Average		Average
	Options			Exercise Price		Remaining
	Outstanding			Outstanding		Contractual Life
Outstanding at December 31, 2014		11,408		$	4.42		8.20
Granted		3,806			9.50
Exercised		(1,210	)		2.96
Cancelled / forfeited		(1,209	)		6.27
Outstanding at December 31, 2015		12,795		$	5.89		7.82

Options vested and exercisable at December 31, 2015		6,409		$	3.88		6.80

Options vested and expected to vest at December 31, 2015		10,460		$	5.69		7.65

As of December 31, 2015, 180,000 outstanding stock options had a performance feature that is required to be satisfied before the option is vested and exercisable. There were 517,285 and 469,000 unvested exercisable shares as of December 31, 2015 and December 31, 2014, respectively, which are subject to a repurchase option held by the Company at the original exercise price. These exercisable but unvested shares have a weighted average remaining vesting period of 3.2 years. There was no exercise of unvested options in the year ended December 31, 2015 and 2014. There were no unvested options subject to repurchase as of December 31, 2015 and 2014.

The weighted-average grant-date fair value of stock options granted during the year ended December 31, 2015, 2014 and 2013 were $4.56, $3.72 and $1.77 per share, respectively. The total intrinsic value of the options exercised during the year ended December 31, 2015, 2014 and 2013 was $8.1 million, $4.8 million and $1.4 million, respectively. The intrinsic value is the difference of the current fair value of the stock and the exercise price of the stock option. The total fair value of options vested during the year ended December 31, 2015, 2014 and 2013 was $9.1 million, $3.9 million and $2.3 million, respectively.

The Company estimates the fair value of stock-based awards on their grant date using the Black-Scholes option-pricing model. The Company estimates the fair value using a single-option approach and amortizes the fair value on a straight-line basis for options expected to vest. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods.

The Company estimated the fair value of stock options with the following assumptions:

	Year Ended December 31,
	2015			2014			2013
Risk-free interest rate	1.55%-1.95%			1.68%-2.01%			0.82%-2.06%
Volatility	36.30%-39.63%			37.41%-46.68%			54.36%-55.80%
Expected term (in years)	5.50-6.23			5.34-6.08			5.54-6.08
Expected dividend yield		0.00	%		0.00	%		0.00	%

The expected term assumptions were determined based on the average vesting terms and contractual lives of the options. The risk-free interest rate is based on the rate for a U.S. Treasury zero-coupon issue with a term that approximates the expected life of the option grant. For stock options granted in the year ended December 31, 2015, 2014 and 2013, the Company considered the volatility data of a group of publicly traded peer companies in its industry. Forfeiture rates are estimated using the Company’s expectations of forfeiture rates for the Company’s employees and are adjusted when estimates change. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised. The Company considers many factors when estimating expected forfeitures, including historical forfeiture pattern, the types of awards and employee class. Actual results, and future changes in estimates, may differ substantially from management’s current estimates.

Restricted Stock Units

In 2014, the Company granted a total of 947,342 RSUs that are subject to certain performance targets to a third party partner. The RSUs will vest upon the third party originating certain thresholds of expected megawatts in new systems for the period starting August 2014 and ending August 2017. In addition, these RSUs are subject to a clawback provision that requires the holder of the RSUs to either forfeit all the RSUs or pay the Company the grant date fair value for all RSUs that are not forfeited if the third party breaches the exclusivity provision of the parties’ commercial agreement. Additionally, 372,342 of these RSUs are also subject to an additional performance-based clawback provision that is based on the third party originating certain additional thresholds of expected megawatts in new systems from April 2016 through September 2017. Both the exclusivity and performance-based clawback provisions expire in 2017.

The performance-based provision is considered substantive. As a result, the Company will start recognizing expense when the performance targets are met. The Company recognized $0.8 million compensation expense in the year ended December 31, 2015 as certain performance targets were met.

In 2015, the Company granted 250,000 RSUs to a third party partner, in addition to RSUs granted to employees as part of the 2015 Equity Incentive Plan. As of December 31, 2015, 783,228 outstanding RSUs had a performance feature that is required to be satisfied before the option is vested and exercisable. The following table summarizes the activity for all RSUs under all the Company’s equity incentive plans for the year ended December 31, 2015 (shares in thousands):

				Weighted
				Average Grant
				Date Fair
	Shares			Value
Unvested balance at December 31, 2014		947		$	9.40
Granted		808			11.13
Issued		(182	)		9.58
Cancelled / forfeited		(67	)		11.37
Unvested balance at December 31, 2015		1,506		$	10.44

Employee Stock Purchase Plan

In July 31, 2015, the board of directors approved the 2015 Employee Stock Purchase Plan (“ESPP”) and adopted the ESPP in August 2015, under which 1,000,000 shares of the Company’s common stock have been reserved for issuance to eligible employees. The number of shares of common stock available for sale under the Company’s ESPP will also include an annual increase on the first day of each fiscal year beginning on January 1, 2016, equal to the least of (i) 5,000,000 shares (ii) 2% of the common stock as of the last day of the immediately preceding fiscal year or (iii) such other amount as the Company’s board of directors may determine. Employees are offered shares bi-annually through two six month offering periods, which begin on the first trading day on or after May 15 and November 15 of each year. The first offering period began on November 16, 2015. Employees may purchase a limited number of shares of the Company’s common stock via regular payroll deductions at a discount of 15% of the lower of the fair market value of the Company’s common stock on the first trading date of each offering period or on the exercise date. Employees may deduct up to 15% of payroll up to $25,000 per calendar year, with a cap of 2,000 shares per employee per offering period. As of December 31, 2015 the Company has 1,000,000 total shares of common stock reserved for issuance under the 2015 ESPP.

Inputs used to calculate our stock based compensation for each stock purchase right granted under the 2015 ESPP included risk-free interest rate of 0.33%, expected volatility of 33.84%, expected term of 0.5 years and expected dividend yield rate of 0.00%.

Stock-Based Compensation Expense

The Company recognized stock-based compensation expense, including the compensation expense resulting from the sales of common stock by employees and former employees to existing investors and ESPP expenses, in the consolidated statements of operations as follows (in thousands):

	Year Ended December 31,
	2015		2014		2013
Cost of operating leases and incentives	$	1,649	$	155	$	116
Cost of solar energy systems and product sales		236		682		—
Sales and marketing		5,242		897		474
Research and development		205		270		379
General and administration		8,491		7,214		1,686
Total	$	15,823	$	9,218	$	2,655

In the year ended December 31, 2015 and 2014, the Company recognized $1.6 million and $3.4 million, respectively, in compensation expense resulting from sales of 1,131,028 shares and 1,092,421 shares, respectively, by employees and former employees to existing investors for amounts in excess of the deemed fair value.

The Company capitalized $0.2 million, $0.1 million and $0.0 million of stock based compensation for internal use software development projects during the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015 and 2014, total unrecognized compensation cost related to outstanding stock options was $20.9 million and $12.1 million, respectively, which is expected to be recognized over a weighted-average period of 2.8 years and 2.8 years, respectively.