15. Stock-Based Compensation

In September 2016, the Company adopted the 2016 Equity Compensation Plan (the “2016 Plan”) and merged the 2014 Equity Compensation Plan (the “2014 Plan”) into the 2016 Plan on September 28, 2016. No additional grants were made thereafter under the 2014 Plan. Outstanding grants under the 2014 Plan will continue according to their terms as in effect before the merger with the 2016 Plan, and the shares with respect to outstanding grants under the 2014 Equity Plan will be issued or transferred under the 2016 Plan. The 2016 Plan authorizes the issuance or transfer of up to the sum of the following: (1) 800,000 new shares, plus (2) the number of shares of common stock subject to outstanding grants under the 2014 Equity Plan as of the effective date of the 2016 Plan; provided, however, that the aggregate number of shares of the Company’s common stock that may be issued or transferred under the 2016 Plan pursuant to incentive stock options may not exceed 800,000. During the term of the 2016 Plan, the share reserve will automatically increase on the first trading day in January of each calendar year, beginning in calendar year 2017, by an amount equal to the lesser of 5% of the total number of outstanding shares of common stock on the last trading day in December of the prior calendar year or such other number set by the Board. During 2018, in accordance with the terms of the 2016 Plan, the share reserve increased by 964,876 shares. As of September 30, 2018, 598,178 shares were available for future grants under the 2016 Plan.

The option price per share cannot be less than the fair market value of a share on the date the option was granted, and in the case of incentive stock options granted to an employee owning more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall not be less than 110% of the fair market value of Company stock on the date of grant. Stock option grants under the 2016 Plan generally expire 10 years from the date of grant, other than incentive stock option grants to 10% shareholders, which expire the earlier of 5 years from the date of grant, 90 days after termination, or one year after the date of death or termination due to disability. Stock options generally vest over a period of four years, with 25% of the options becoming exercisable on the one year anniversary of the commencement date and the remaining shares vesting monthly thereafter for 36 months in equal installments of 2.08% per month.

Restricted Common Stock

The Company began issuing restricted stock awards pursuant to the 2016 Plan to certain employees, including executive officers, and non-employee directors in fiscal year 2016. Restricted stock awards vest over a one to four year period and the unvested portion of the restricted stock award is forfeited if the employee or non-employee director leaves the Company before the vesting period is completed. The grant date fair value of restricted stock awards is determined using the Company’s closing stock price at grant date.

The following table summarizes the restricted stock award activity under the 2016 Plan for the nine months ended September 30, 2018:


		Weighted
		average
	Number	grant-date
	of shares	fair value
Outstanding at December 31, 2017	753,666	$	12.25
Granted	433,459		31.56
Vested	(120,970)		12.78
Forfeited	(2,474)		12.00
Outstanding at September 30, 2018	1,063,681	$	20.06

For the three and nine months ended September 30, 2018, $1,074 and $2,779 of expense was recognized related to restricted stock awards, respectively. For the three and nine months ended September 30, 2017, $68 and $5,336 of expense was recognized related to restricted stock awards, respectively. As of September 30, 2018, there was unrecognized compensation expense of $11,535 related to non-vested restricted stock awards under the 2016 Plan, which is expected to be recognized over a weighted average period of 3.18 years.

Performance-Based Stock Award

On August 6, 2018, the Board approved the grant of a performance-based stock award to a consultant pursuant to the 2016 Plan. The award provides that 50,000 shares of common stock will be issued based on the achievement of certain milestones. The award has a grant-date fair value of $61.85 based on the Company’s closing stock price on the grant date. Compensation cost is being recognized over the service period based on management’s determination that it is probable that the milestones will be achieved. For the three and nine months ended September 30, 2018, the Company recorded $623 of expense related to performance-based stock awards. As of September 30, 2018, there was unrecognized compensation expense of $2,470 related to the performance-based stock award.

Stock Options

The Company recorded $1,299 and $871 of stock-based compensation expense related to the vesting of employee and non-employee stock options for the three months ended September 30, 2018 and 2017, respectively. The Company recorded $3,719 and $2,440 of stock-based compensation expense related to the vesting of employee and non-employee stock options for the nine months ended September 30, 2018 and 2017, respectively. The Company records forfeitures as they occur.

The estimated fair value of options granted was calculated using a Black-Scholes option-pricing model. The computation of expected life for employees was determined based on the simplified method. The risk-free rate is based on the U.S. Treasury security with terms equal to the expected time of exercise as of the grant date. The Company's common stock had not been publicly traded until the IPO commenced on September 29, 2016; therefore, expected volatility is based on the historical volatilities of selected public companies whose services are comparable to that of the Company. The table below sets forth the weighted average assumptions for employee grants during the nine months ended September 30, 2018 and 2017:


	Nine Months Ended
	September 30,
Valuation assumptions:	2018		2017
Expected volatility	58.40	%	61.00	%
Expected term (years)	6.08		6.03
Risk-free interest rate	2.41	%	2.21	%
Dividend yield	—		—

The weighted average grant date fair value of employee options granted during the nine months ended September 30, 2018 and 2017 was $19.87 and $8.13 per share, respectively.

The following table summarizes stock option activity under the 2016 Plan for the nine months ended September 30, 2018:


				Weighted
		Weighted		average
		average		remaining	Aggregate
	Number	exercise		contractual	intrinsic
	of shares	price		term	value
Outstanding at December 31, 2017	2,883,175	$	9.26
Granted	468,250		35.23
Exercised	(695,216)		5.61
Forfeited	(89,354)		22.03
Outstanding at September 30, 2018	2,566,855	$	14.54	7.25	$	171,084
Options vested and expected to vest at September 30, 2018	2,566,855	$	14.54	7.25	$	171,084
Exercisable at September 30, 2018	1,331,417	$	7.80	5.7	$	97,708

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the Company’s closing stock price or estimated fair value on the last trading day of the fiscal quarter for those stock options that had exercise prices lower than the fair value of the Company's common stock. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised during the nine months ended September 30, 2018 and 2017 was $26,905 and $11,665, respectively.

As of September 30, 2018, there was $13,674 of total unrecognized compensation cost related to nonvested stock options granted under the 2016 Plan, which is expected to be recognized over a weighted average period of 2.55 years.

Cash received from option exercises for the nine months ended September 30, 2018 and 2017 was $2,590 and $194, respectively. During the nine months ended September 30, 2018, 32,742 shares of common stock were delivered by option holders as payment for the exercise price and employee payroll taxes owed for the exercise of 291,031 stock options with a gross exercise value of $1,313. During the nine months ended September 30, 2017, 362,440 shares of common stock were delivered by option holders as payment for the exercise price and employee payroll taxes owed for the exercise of 956,327 stock options with a gross exercise value of $3,187.

The Company recorded total stock-based compensation expense for the three and nine months ended September 30, 2018 and 2017 in the following expense categories of its consolidated statement of operations:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Cost of revenue - product	$	171	$	138	$	592	$	359
Cost of revenue - service		412		91		1,055		203
Research and development		912		195		1,431		515
Sales and marketing		401		158		1,172		440
General and administrative		1,100		357		2,871		6,259
Total stock-based compensation expense	$	2,996	$	939	$	7,121	$	7,776