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, directors and non-employee advisors in exchange for services under the Company's 2010 Equity Incentive Plan, or the 2010 Plan, and employee stock purchases under the Company's Amended and Restated 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 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, 2018 and 2017, aggregate stock-based compensation expense was $5,799,000 and $5,602,000, respectively.

Stock Options

The fair value of stock options granted is derived from the Black-Scholes Option Pricing Model, which uses several judgment-based variables to calculate the expense. The inputs include the expected term of the stock option, the expected volatility and other 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 stock option and is determined by review of the Company’s and similar companies’ historical experience.

• Expected Dividend. The Black-Scholes Option Pricing Model calls for a single expected dividend yield as an input. The Company has 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.

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 four years. Stock options are generally exercisable for a period of up to ten 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, 2018:



	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2017	2,490,465		$	9.59
Granted	—		$	—
Exercised	(5,042	)	$	4.33
Cancelled	(33,728	)	$	11.48
Outstanding at June 30, 2018	2,451,695		$	9.58
Vested and expected to vest at June 30, 2018	2,446,937		$	9.57
Exercisable at June 30, 2018	2,353,368		$	9.44

Options that were exercisable as of June 30, 2018 had a remaining weighted average contractual term of 4.60 years, and an aggregate intrinsic value of $945,000. As of June 30, 2018, there were 2,451,695 stock options outstanding, which had a remaining weighted average contractual term of 4.68 years and an aggregate intrinsic value of $948,000. No stock options were granted during the six months ended June 30, 2018.

Restricted Stock Awards and Units

Restricted stock awards or units may be granted at the discretion of the compensation committee of the board of directors under the 2010 Plan 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.

Restricted stock awards or units granted under the 2010 Plan generally vest over a period of between one and four years and are typically forfeited if employment is terminated before the restricted stock awards or units vest. The compensation expense related to the restricted stock awards or units is calculated as the fair market value of the Company's stock on the grant date and is adjusted for estimated forfeitures. Restrictions expire after the grant date in accordance with specific provisions in the applicable award agreement.

The Company’s restricted stock unit activity for the six months ended June 30, 2018 and 2017 was as follows:



	Restricted Stock Units
	Number of Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2017	2,073,440		$	9.14
Granted	1,677,126		$	4.45
Vested	(548,089	)	$	9.74
Cancelled	(119,547	)	$	9.02
Unvested at June 30, 2018	3,082,930		$	6.49

As of June 30, 2018, there was $14,079,000 of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted average period of 2.72 years. The total fair value of restricted stock units that vested during the six months ended June 30, 2018 and 2017 was $2,929,000 and $3,235,000, respectively.

Market-Based Stock Units

The Company issued market-based stock units in February 2018, 2017, and 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 the three-year period following the grant, subject to the recipient's continued service with the Company. As of June 30, 2018, there was $1,902,000 of unrecognized stock-based compensation expense related to market-based stock unit awards, which is expected to be recognized over a weighted average period of 1.78 years.

The Company’s market-based stock unit activity for the six months ended June 30, 2018 was as follows:



	Market-Based Stock Units
	Number of Shares	Weighted Average Grant Date Fair Value
Unvested at December 31, 2017	233,743	$	10.88
Target units granted	320,000	$	7.19
Unvested at June 30, 2018	553,743	$	8.75

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, 2018:



	Six Months Ended June 30,
	2018			2017
Expected volatility	65		%	54		%
Risk-free interest rate	2.40		%	1.50		%
Expected dividend	—		%	—		%
Weighted average fair value	$	7.19		$	13.82

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. In March 2018, the Company’s Board of Directors approved the amendment and restatement of the ESPP to increase the total number of shares authorized for issuance under the ESPP from 650,000 shares to 1,750,000 shares, which was approved by the Company’s stockholders at the Company’s 2018 Annual Stockholder Meeting held on May 24, 2018.

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, 2018, there were 1,059,213 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, 2018.

Stock-Based Compensation Expense Recognition

Stock-based compensation was recognized in the unaudited condensed consolidated statements of comprehensive loss as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Cost of revenue	$	220	$	131	$	407	$	274
Sales and marketing	695		684		1,340		1,359
Research and development	658		754		1,285		1,427
General and administrative	1,502		1,225		2,767		2,542
Total stock-based compensation expense	$	3,075	$	2,794	$	5,799	$	5,602

Stock-based compensation capitalized during the periods presented was not material and there was no unrecognized tax benefit related to stock-based compensation for the six months ended June 30, 2018 and 2017.