Share-Based Compensation

The share-based compensation expense relating to the Company’s stock options, restricted stock awards ("RSAs"), restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") for the three months ended March 31, 2018 and 2017 was $3.9 million and $3.7 million, respectively, with related tax expense of approximately $1.0 million and tax benefit of $1.4 million, respectively.

As of January 1, 2017, the Company adopted ASU 2016-09. The Company elected to change its accounting policy to account for forfeitures as they occur under the new standard. The change was applied on a modified retrospective basis with a cumulative effect adjustment recorded to increase accumulated deficit by $0.9 million, increase additional paid-in capital by $1.5 million and increase non-current deferred tax assets by $0.6 million as of January 1, 2017. Excess tax benefits and shortfalls for share-based payments are now included in operating activities rather than in financing activities. The changes have been applied prospectively in accordance with ASU 2016-09 and prior periods have not been adjusted.

Amendments related to accounting for excess tax benefits and shortfalls have been adopted prospectively, resulting in recognition of excess tax benefits and shortfalls in income tax expenses (benefit) rather than additional paid-in capital. The Company recognized $0.7 million of tax benefit and $0.9 million of income tax expense from windfalls and shortfalls associated with vesting and exercises of equity awards for the three months ended March 31, 2018 and 2017, respectively.

Total share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in millions):



	Three Months Ended March 31,
	2018		2017
Share-Based Compensation Expense Allocation Details:
Cost of services	$	1.3	$	1.2
Selling, general and administrative	2.6		2.5
Other	—		—
Total share-based compensation expense (1)	$	3.9	$	3.7

(1) Includes $0 million and $0.1 million in share-based compensation expense paid in cash during the three months ended March 31, 2018 and 2017, respectively. In addition to the share-based compensation expense recorded above, $0.1 million and $0.3 million of share-based compensation expense was capitalized to deferred contract costs for the three months ended March 31, 2018 and 2017, respectively. See Note 16, Deferred Contract Costs, for further discussion.

The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of its grant date. Monte Carlo simulations are used to estimate the fair value of its PBRSUs. The PBRSUs vest upon satisfaction of both time-based requirements and performance targets based on share price. Expected life is based on the market condition to which the vesting is tied.

The following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the Monte Carlo simulations and the calculation of share-based compensation expense for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
	2018	2017
Expected dividend yield	—	—
Risk-free interest rate	2.3% to 2.7%	1.9% to 2.3%
Expected volatility	40% to 45%	45%
Expected term (in years)	2.75 to 6.25	6.25 to 6.29

The risk-free interest rate input is based on U.S. Treasury instruments, and expected volatility of the share price based upon review of the historical volatility levels of the Company’s common stock in conjunction with that of public companies that operate in similar industries or are similar in terms of stage of development or size and a projection of this information toward its future expected volatility. The Company used the simplified method to estimate the expected option life for 2018 and 2017 option grants. The simplified method was used due to the lack of sufficient historical data available to provide a reasonable basis upon which to estimate the expected term of each stock option.

Stock options

A summary of the options activity during the three months ended March 31, 2018 is shown below:



	Shares		Weighted- Average Exercise Price
Outstanding at December 31, 2017	17,742,966		$	4.70
Granted	147,959		4.68
Exercised	(100,012	)	2.43
Canceled/forfeited	(81,773	)	3.82
Outstanding at March 31, 2018	17,709,140		4.71
Outstanding, vested and exercisable at March 31, 2018	5,971,110		$	8.66
Outstanding, vested and exercisable at December 31, 2017	5,778,376		$	8.87

On May 12, 2017, the Company offered certain employees and directors an opportunity to elect to exchange certain stock options for new options covering a fewer number of shares of common stock. Under this offer, the Company accepted for exchange 4,279,463 options. All surrendered options were canceled and the Company issued 1,728,795 new stock options in exchange for such tendered options. The exchange ratios were established with the intent not to generate incremental share-based compensation expense and were established just prior to commencement of the offer. The incremental compensation associated with the fluctuations in the Company’s common stock price between the date the exchange ratios were established and the commencement of the offer was insignificant.

Restricted stock awards

A summary of the restricted stock award activity during the three months ended March 31, 2018 is shown below:



	Shares		Weighted- Average Grant Date Fair Value
Outstanding and unvested at December 31, 2017	2,352,490		$	3.03
Granted	—		—
Vested	(1,037,342	)	2.77
Forfeited	—		—
Outstanding and unvested at March 31, 2018	1,315,148		$	3.32

RSA vesting is based on the passage of time. The amount of share-based compensation expense is based on the fair value of the Company's common stock on the respective grant dates and is recognized ratably over the vesting period.

The Company's RSA agreements allow employees to surrender to the Company shares of common stock upon vesting of their RSAs in lieu of their payment of the required personal employment-related taxes. During the three months ended March 31, 2018 and 2017, employees delivered to the Company 360,680 and 640,974 shares of stock, respectively, which the Company recorded at a cost of approximately $1.8 million and $1.5 million, respectively. Shares surrendered for payment of personal employment-related taxes are held in treasury.

Restricted stock units

A summary of the restricted stock unit activity during the three months ended March 31, 2018 is shown below:



	Shares		Weighted- Average Grant Date Fair Value
Outstanding and unvested at December 31, 2017	1,183,500		$	2.50
Granted	—		—
Vested	(5,325	)	2.35
Forfeited	(20,760	)	2.35
Outstanding and unvested at March 31, 2018	1,157,415		$	2.50

The Company's RSU agreements allow employees to surrender to the Company shares of common stock upon vesting of their RSUs in lieu of their payment of the required personal employment-related taxes. During the three months ended March 31, 2018 and 2017, employees delivered to the Company 1,722 and no shares of stock, respectively, which the Company recorded at a cost of approximately $0.1 million and $0.0 million, respectively. Shares surrendered for payment of personal employment-related taxes are held in treasury.

Performance-based restricted stock units

In the third quarter of 2017, the Company began to grant PBRSUs to its employees. The PBRSUs vest upon satisfaction of both time-based requirements and performance targets based on share price with certain awards vesting on December 31, 2019 and certain awards vesting on December 31, 2020. Depending on the average price of the stock for the 60 days prior to the end of the vesting period, the number of shares vesting could be between 0% and 350% of the number of PBRSUs originally granted. Based on the established price targets, 9,378,874 is the maximum number of shares that could vest.

A summary of the PBRSU activity during the three months ended March 31, 2018 is shown below:



	Shares		Weighted- Average Grant Date Fair Value
Outstanding and unvested at December 31, 2017	4,785,900		$	3.37
Granted	245,868		9.93
Vested	—		—
Forfeited	(768,741	)	4.00
Outstanding and unvested at March 31, 2018	4,263,027		$	3.64

Of the 4,263,027 outstanding PBRSUs at March 31, 2018, 983,472 shares subject to the PBRSU award agreements are intended to be settled in cash until such time as the share reserve available under the 2010 Amended Plan has been deemed sufficient by the Compensation Committee of our Board of Directors to allow for settlement of the PBRSUs in shares. On the consolidated balance sheet, the awards settleable in cash are liability classified as of March 31, 2018 with $1.2 million in liability classified awards included in other non-current liabilities as of March 31, 2018.