STOCK-BASED COMPENSATION

We have a number of stock-based compensation plans including an ESPP. The purpose of these plans is to provide incentives to employees, directors, agents and our advisors and these Plans as determined and administered by the compensation committee of our board of directors or its delegates. The number, type of equity incentive, exercise or share purchase price and vesting terms are determined in accordance with the respective plan, as applicable. Depending on the particular plan, incentive or other awards may take the form of incentive or non-qualified stock options, stock appreciation rights, shares of restricted stock, RSUs or other stock-based awards, subject to certain limitations. As of December 31, 2017, there was a total of 1,386,074 shares of common stock available for future grants under the plans.

The following table summarizes the stock-based compensation expense by financial statement line item and type of award:



	Year Ended December 31,
	2017		2016		2015
Cost of revenue	$	133	$	168	$	705
Research and development	264		532		844
Sales and marketing	1,197		1,581		4,045
General and administrative	4,338		4,675		5,594
	$	5,932	$	6,956	$	11,188



	Year Ended December 31,
	2017		2016		2015
Stock options	$	3,109	$	2,985	$	5,116
Restricted stock	1,952		1,052		313
Restricted stock units	570		2,527		5,460
ESPP	301		392		299
Total	$	5,932	$	6,956	$	11,188

Stock Options

The following table summarizes stock option plans activity:



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value ⁽¹⁾
Outstanding at December 31, 2016 ⁽²⁾	3,685,125		$	12.45	6.05	$	29,142
Granted	414,507		22.67
Exercised	(842,704	)	10.25
Expired	(4,904	)	8.03
Forfeited	(86,637	)	17.23
Outstanding at December 31, 2017	3,165,387		$	14.26	5.88	$	15,567
Vested:
At December 31, 2017	2,331,801		$	12.29	4.84	$	13,939
Expected to vest:
At December 31, 2017	833,586		$	19.76	1.86	$	1,087


(1)	Calculated using the fair market value per share of our common stock as of December 31, 2017 and 2016 of $18.00 and $20.04, respectively.


(2)	The total includes 980,671 performance-based options at December 31, 2016.

The total fair value of employee stock options that vested was approximately $7,258, $3,062 and $1,791 during the years ended December 31, 2017, 2016 and 2015, respectively.

The weighted-average fair value per share of options granted by us was $8.57, $5.08 and $8.73 during the years ended December 31, 2017, 2016 and 2015, respectively. The fair value was determined by applying the Black-Scholes-Merton option pricing model, utilizing the following weighted-average assumptions:



	Year Ended December 31,
	2017		2016		2015
Expected dividend yield	—	%	—	%	—	%
Expected volatility	34.05-35.42		34.16-36.54		36.31-41.33
Risk-free interest rate	1.89-2.18		1.20-1.64		1.42-2.18
Expected average life of options	6.5 years		6-7 years		7 years

A discussion of management’s methodology for developing each of the assumptions used in the valuation model follows:


•	Dividend Yield – We have never declared or paid dividends and have no plans to do so in the foreseeable future.


•	Risk-Free Interest Rate – This is the U.S. Treasury rate for the week of each option grant during the year that has a term that most closely resembles the expected life of the option.


•	Expected Life of the Option Term – This is the period of time that the options granted are expected to remain unexercised. For options granted during the years ended December 31, 2017, 2016 and 2015, we derived the expected life of the option based on the average midpoint between vesting and the contractual term, as we have little exercise history.


•	Expected Volatility – Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We use an estimated volatility based on the volatility of a number of similarly situated public companies, along with other factors deemed relevant by management.

As of December 31, 2017 and 2016, there was approximately $4,654 and $4,170, respectively of total unrecognized compensation expense under our stock-based compensation plans. As of December 31, 2017 and 2016, this expense is expected to be recognized over a weighted-average period of 1.98 years and 1.98 years, respectively. Effective December 31, 2017, with the adoption of ASU 2016-09, we no longer estimate forfeitures related to non-vested employee stock options under our stock-based compensation plans. The increase in stock compensation expense was approximately $236 in 2017.

Certain stock options granted by us subsequent to the Merger through 2011 were not exercised until certain performance conditions were met. Such options were subject to both a four-year time-based vesting schedule, and vesting upon the satisfaction of performance and market-based criteria, based on WCAS’s internal rate of return on their investment in the Company as measured following their sale of at least 75% of their total holdings in K2M. As of December 31, 2016, there were 978,614 options that had time vested but were still subject to the performance vesting condition. On February 1, 2017, following the cumulative sale of at least 75% of their investment in K2M, WCAS informed us that the rate of return performance criteria underlying these awards had been met and such options had become vested and were exercisable.

The intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 approximated $9,616, $2,301 and $11,643, respectively.

Restricted Stock and Restricted Stock Units

Restricted stock and RSUs awarded after April 2014 have a three-year vesting schedule and vest in one-third increments over the three-year period. For the years ended December 31, 2017, 2016 and 2015, restricted stock and RSUs issued had a grant date fair value equal to the closing price of the our common stock on the grant date. The weighted average grant date fair values of restricted stock and RSUs granted to employees during the years ended December 31, 2017, 2016 and 2015 is as follows:



	Year Ended December 31,
	2017		2016		2015
Weighted-average grant date fair value per share - restricted stock	$	22.81	$	14.38	$	23.46
Weighted-average grant date fair value per share or unit - RSUs	$	21.63	$	16.05	$	—

A summary of restricted stock and RSU activity during the year ended December 31, 2017 is as follows:



	Restricted Stock					Restricted Stock Units
	Number of Shares		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Term (years)	Number of Shares		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Term (years)
Non-vested at December 31, 2016	218,505		$	16.59	2.35	79,457		$	15.22	0.81
Vested	(80,384	)	$	17.39		(68,464	)	$	15.08
Granted	131,562		$	22.81		35,254		$	21.63
Forfeited	(3,999	)	$	14.38		—		$	—
Non-vested at December 31, 2017	265,684		$	19.46	2.03	46,247		$	15.83	2.28
Vested or expected to vest:
At December 31, 2017	265,684		$	19.46	2.03	46,247		$	15.83	2.28

Employee Stock-Purchase Plan

The ESPP was established to provide employees and participating affiliates with an opportunity to purchase our common stock. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. As of December 31, 2017, there were 189,663 shares available for issuance under the ESPP.

Generally, all domestic employees are eligible to participate in the ESPP if they are employed by us or any participating affiliate, for at least 20 hours per week. Participants are permitted to purchase our shares of common stock through payroll deductions of no less than 1% and no more than 10% of their eligible compensation. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each offering period. The purchase price of the shares will be equal to 85% of the lower of the fair value of our common stock on the first day of the offering period, or on the common stock purchase date at the end of each offering period. Participants may end their participation at any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of common stock. In addition, participation ends automatically upon termination of employment.

We issued 65,599, 78,491 and 50,586 shares of common stock to ESPP participants for proceeds of $1,070, $1,047 and $871 during the years ended December 31, 2017, 2016 and 2015, respectively.