Stock-Based Compensation

The Company recognizes stock-based compensation expense related to stock options, restricted stock awards, restricted stock units, and market-based stock units granted to employees and directors in exchange for services under the Company's 2010 Equity Incentive Plan, or the 2010 Plan, and employee stock purchases under the Company's 2013 Employee Stock Purchase Plan, or the ESPP. Employee participation in the 2010 Plan is at the discretion of the Compensation Committee of the Board of Directors of the Company. Each equity award grant reduces the number of shares available for grant under the 2010 Plan. Stock-based compensation expense is based on the fair value of the applicable award utilizing various assumptions regarding the underlying attributes of the award. Stock-based compensation expense is recorded in cost of sales, sales and marketing, research and development, and/or general and administrative expenses based on the employee's respective function. During the six months ended June 30, 2017 and 2016, aggregate stock-based compensation expense was $5,602,000 and $4,540,000, respectively.

The estimated fair value, net of forfeitures expected to occur during the vesting period, is amortized as compensation expense that approximates straight-line expense to reflect vesting as it occurs. The stock option expense is derived from the Black-Scholes Option Pricing Model that uses several judgment-based variables to calculate the expense. The market-based stock expense is derived from the Monte Carlo Simulation Valuation. The inputs utilized in the valuation of the stock-based awards include the following factors:

• Expected Term. Expected term represents the period that the stock-based awards are expected to be outstanding and is determined by using the simplified method.

• Expected Volatility. Expected volatility represents the estimated volatility in the Company’s stock price over the expected term of the option or market-based award and is determined by review of the Company’s and similar companies’ historical experience.

• Expected Dividend. The valuation methods requires a single expected dividend yield as an input. The Company assumed no dividends as it has never paid dividends and has no current plans to do so.

• Risk-Free Interest Rate. The risk-free interest rate used in the Black-Scholes Option Pricing Model is based on published U.S. Treasury rates in effect at the time of grant for periods corresponding with the expected term of the option or market-based award.

All stock options granted under the 2010 Plan are exercisable at a per share price equal to the closing quoted market price of a share of the Company’s common stock on the NASDAQ Global Market on the grant date and generally vest over a period of between one and four years. Stock options are generally exercisable for a period of up to 10 years after grant and are typically forfeited if employment is terminated before the options vest.

The following table summarizes stock option activity during the six months ended June 30, 2017:



	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2016	2,569,550		$	9.53
Granted	—		$	—
Exercised	(23,555	)	$	7.21
Cancelled	(5,291	)	$	11.67
Outstanding at June 30, 2017	2,540,704		$	9.55
Vested and expected to vest at June 30, 2017	2,499,263		$	9.51
Exercisable at June 30, 2017	2,092,512		$	9.06

Options that were exercisable as of June 30, 2017 had a remaining weighted average contractual term of 5.34 years, and an aggregate intrinsic value of $6,472,000. As of June 30, 2017, there were 2,540,704 stock options outstanding, which had a remaining weighted average contractual term of 5.72 years and an aggregate intrinsic value of $6,830,000. No stock options were granted during the six months ended June 30, 2017.

Restricted stock awards or units may be granted in connection with the hiring or retention of personnel and are subject to certain conditions. In March 2013, the Company transitioned to granting restricted stock units under the 2010 Plan in lieu of granting restricted stock awards. The compensation expense related to the restricted stock awards or units is calculated as the fair market value of the stock on the grant date and is adjusted for estimated forfeitures. The Company’s restricted stock award and restricted stock unit activity for the six months ended June 30, 2017 was as follows:



	Restricted Stock Awards				Restricted Stock Units
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2016	156		$	11.19	1,766,123		$	7.18
Granted	—		$	—	1,111,130		$	10.85
Vested	(156	)	$	11.19	(493,697	)	$	6.55
Cancelled	—		$	—	(56,977	)	$	9.03
Unvested at June 30, 2017	—		$	—	2,326,579		$	9.02

As of June 30, 2017, all compensation expense related to restricted stock awards has been recognized. The total fair value of restricted stock awards that vested during the six months ended June 30, 2017 and 2016 was $2,000 and $138,000, respectively.

As of June 30, 2017, there was $14,593,000 of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted average period of 2.97 years. The total fair value of restricted stock units that vested during the six months ended June 30, 2017 and 2016 was $3,235,000 and $3,712,000, respectively.

The Company issued market-based stock units in February 2017 and February 2016, which may result in the recipient receiving shares of stock equal to 200% of the target number of units granted. The vesting and issuance of Company stock depends on the Company's stock performance as compared to the NASDAQ Composite Index over a three-year period following the grant and continued service with the Company. As of June 30, 2017, there was $1,769,000 of unrecognized stock-based compensation expense related to these awards, which is expected to be recognized over a weighted average period of 1.86 years. The Company’s market-based stock unit activity for the six months ended June 30, 2017 was as follows:



	Market-Based Stock Units
	Number of Shares	Weighted Average Grant Date Fair Value
Unvested at December 31, 2016	150,871	$	11.10
Units granted	166,434	$	13.82
Vested	—	$	—
Cancelled	—	$	—
Unvested at June 30, 2017	317,305	$	12.53

The fair value of these market-based stock units was estimated on the date of grant using the Monte Carlo Simulation Valuation Model, which estimates the potential outcome of achieving the market condition based on simulated future stock prices, with the following assumptions for the six months ended June 30, 2017:



	Six Months Ended
	June 30,
	2017			2016
Expected volatility	54		%	49		%
Risk-free interest rate	1.50		%	0.90		%
Expected dividend	—		%	—		%
Weighted average fair value	$	13.82		$	4.94

The Company issued 43,200 performance-based restricted stock units in March 2014 with a grant date fair value of $12.30 per share. The vesting and issuance of Company stock pursuant to these awards depends on obtaining regulatory clearance of various products within a defined time. Stock-based compensation expense for performance-based awards is recognized when it is probable that the applicable performance criteria will be satisfied. The probability of achieving the relevant performance criteria is evaluated on a quarterly basis. As of June 30, 2017, there was $133,000 of unrecognized stock-based compensation expense related to these awards.

Employee Stock Purchase Plan

The Company's stockholders approved the ESPP in May 2013. A total of 650,000 shares of the Company’s common stock were originally reserved for issuance under the ESPP, which permits eligible employees to purchase common stock at a discount through payroll deductions.

The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the Company's common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company's Board of Directors; provided that no offering period may exceed 27 months. Employees may invest up to 10% of their qualifying gross compensation through payroll deductions. In no event may an employee purchase more than 1,500 shares of common stock during any six-month offering period. As of June 30, 2017, there were 207,183 shares of common stock available for issuance under the ESPP. The ESPP is a compensatory plan as defined by the authoritative guidance for stock compensation; therefore, stock-based compensation expense related to the ESPP has been recorded during the six months ended June 30, 2017.