Stock-Based Compensation

In 2010, the Company adopted the 2010 Equity Incentive Plan, or the 2010 Plan, which provides for the grant of incentive and nonstatutory stock options, restricted stock, stock appreciation rights, restricted stock units, restricted stock bonuses and other stock-based awards. Employee participation in the 2010 Plan is at the discretion of the Compensation Committee of the Board of Directors of the Company. As of December 31, 2018, there were 539,902 shares available for future grant of awards under the 2010 Plan.

The Company estimates potential forfeitures of stock-based award grants and adjusts compensation cost recorded accordingly. The estimate of forfeitures is based on historical forfeiture experience and is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of evaluation and will also impact the amount of stock compensation expense to be recognized in future periods.

Stock Options

All stock options granted under the 2010 Plan are exercisable at a price equal to the closing quoted market price of the Company’s shares on the NASDAQ Global Market on the date of grant and vest over a period of 4 years. Stock options are generally exercisable for a period up to 10 years after grant and are forfeited if employment is terminated before the options vest.

The following table summarizes stock option activity during the year ended December 31, 2018:



	Number of shares		Weighted average exercise price
Outstanding at December 31, 2017	2,490,465		$	9.59
Granted	—		$	—
Exercised	(5,042	)	$	4.33
Canceled	(45,509	)	$	11.35
Outstanding at December 31, 2018	2,439,914		$	9.57
Vested and expected to vest at December 31, 2018	2,439,607		$	9.57
Exercisable at December 31, 2018	2,416,389		$	9.54

No stock options were granted in the years ended December 31, 2018 and 2017. Stock options that were exercisable as of December 31, 2018 had a remaining weighted average contractual term of 3.82 years and an aggregate intrinsic value of $290,000. As of December 31, 2018, there was $75,000 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 0.16 years. The intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was $6,700, $173,000 and $184,000, respectively. As of December 31, 2018, there were 2,439,914 stock options outstanding, which had a remaining weighted average contractual term of 3.84 years and an aggregate intrinsic value of $290,300.

The Company uses the Black-Scholes option pricing model to estimate the fair value on the applicable grant date. The assumptions used in the valuation of stock options granted in the years ended December 31, 2018, 2017 and 2016, are summarized in the following table:



	Years Ended December 31,
	2018		2017		2016
Expected volatility	—	%	—	%	51	%
Expected life (years)	—		—		5.90
Risk free rate	—	%	—	%	1.35	%
Expected dividend yield	—	%	—	%	—	%

Restricted Stock Awards and Units

In March 2013, the Company transitioned to granting restricted stock units under the 2010 Plan in lieu of granting restricted stock awards. The remaining restricted stock awards vested during the year ended December 31, 2017 and all remaining expense for restricted stock awards granted by the Company was recognized during the year ended December 31, 2017. 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. 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 year ended December 31, 2018 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	1,827,626		$	4.55
Vested	(953,156	)	$	9.30
Canceled	(282,202	)	$	7.33
Unvested at December 31, 2018	2,665,708		$	6.12

As of December 31, 2018, there was $11,098,000 of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average period of 2.46 years. The total fair value of restricted stock units that vested during the years ended December 31, 2018, 2017 and 2016 was $5,404,000, $7,813,000 and $3,192,000, respectively.

Market-Based and Performance 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 up to 200% of the target number of units granted. The vesting and issuance of Company stock subject to the market-based stock units depends on the Company's stock performance as compared to the NASDAQ Composite Index over the three-year period following the grant. As of December 31, 2018, there was $1,283,000 of unrecognized stock-based compensation expense related to these awards, which is expected to be recognized over a weighted average period of 1.58 years. The total fair value of market-stock units that vested during the years ended December 31, 2018, 2017, and 2016 was $645,000, $0, and $2,433,000, respectively.

The Company’s market-based stock unit activity for the year ended December 31, 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
Units granted	320,000		$	7.19
Vested	(108,320	)	$	7.19
Canceled	(116,684	)	$	6.58
Unvested at December 31, 2018	328,739		$	10.03

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:



	Years Ended December 31,
	2018			2017			2016
Expected volatility	65		%	54		%	49		%
Risk-free interest rate	2.40		%	1.50		%	0.90		%
Expected dividend	—		%	—		%	—		%
Weighted average fair value	$	7.19		$	13.82		$	4.94

The Company granted 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 depended on obtaining regulatory clearance of a designated number of ePlex 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. On December 31, 2014, 10,800 shares of Company stock were earned and vested pursuant to outstanding performance-based restricted stock units with a total fair value of $147,000. On each of December 31, 2017, 2016, and 2015, 10,800 units were forfeited and canceled as the related performance metrics were not achieved by such dates. No performance-based restricted stock units were outstanding as of December 31, 2017 and all compensation related to the performance-based restricted stock units had been recognized.

Employee Stock Purchase Plan

The Company's stockholders originally approved the ESPP in May 2013 at the Company's Annual Meeting of Stockholders. In May 2018, the Company's stockholders approved the amendment and restatement of the ESPP, which increased the shares authorized for issuance under the ESPP from 650,000 to 1,750,000.

The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the 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 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 December 31, 2018, there were 940,493 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. As a result, stock-based compensation expense related to the ESPP has been recorded during the year ended December 31, 2018.

A summary of ESPP activity for the years ended December 31, 2018, 2017, and 2016 is as follows (in thousands, except share and per share data):



	Years Ended December 31,
	2018		2017		2016
Shares issued	252,623		174,723		138,058
Weighted average fair value of shares issued	$	4.20	$	5.82	$	6.67
Employee purchases	$	1,061	$	1,016	$	921

The Company uses the Black-Scholes model to estimate the fair value on the date of grant for ESPP purchase rights. The assumptions used in the valuation for the years ended December 31, 2018, 2017 and 2016, are summarized in the following table:



	Years Ended December 31,
	2018		2017		2016
Expected volatility	73% - 54%		90% - 36%		69% - 52%
Expected life (years)	0.50		0.50		0.50
Risk free rate	2.6% - 2.1%		1.5% - 0.6%		0.6% - 0.4%
Expected dividend yield	—	%	—	%	—	%

Stock-Based Compensation Expense Recognition

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



	Years Ended December 31,
	2018		2017		2016
Cost of revenue	$	871	$	546	$	258
Sales and marketing	5,549		2,819		2,329
Research and development	2,470		3,039		2,482
General and administrative	2,807		5,766		4,167
Total stock-based compensation expense	$	11,697	$	12,170	$	9,236

No stock-based compensation was capitalized during the periods presented, and there was no unrecognized tax benefit related to stock-based compensation for the years ended December 31, 2018, 2017 and 2016, respectively.