Stock-Based Compensation

For the years ended December 31, 2018, 2017 and 2016 stock-based compensation expense was $11.7 million, $9.1 million and $8.0 million, respectively, of which $3.4 million, $4.1 million and $4.7 million, respectively, related to stock options and $6.7 million, $4.9 million and $2.4 million, respectively, related to restricted stock units. For the years ended December 31, 2018, 2017 and 2016, the Company recorded $1.6 million, $0.1 million and $0.9 million in stock-based compensation expense, respectively, associated with the deferred bonus compensation program, described in Note 5. During the years ended December 31, 2018 and 2016, $1.6 million and $0.9 million, respectively, was initially recorded as a component of accrued payroll and related expenses. Since the employee Deferred Bonus Compensation Program was suspended in 2017, there was no component of stock-based compensation recorded to accrued payroll related expenses during the year ended December 31, 2017.

Stock-based compensation expense related to stock options and restricted stock units was as follows (in thousands):



	Year ended December 31,
	2018		2017		2016
Cost of sales	$	763	$	579	$	617
Research and development	2,266		1,886		1,551
Sales and marketing	2,843		2,129		1,189
General and administrative	5,837		4,467		4,629
Total stock-based compensation expense	$	11,709	$	9,061	$	7,986

Stock-based compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the years ended December 31, 2018, 2017 and 2016.

Stock Options

Compensation expense related to stock options granted is recognized ratably over the service vesting period for the entire option award. The estimated fair value of each stock option was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:



	Year ended December 31,
	2018		2017		2016
Risk-free interest rate	2.49	%	2.30	%	1.47	%
Expected option life (in years)	6.29		6.63		6.59
Volatility rate	36	%	36	%	36	%
Dividend rate	—	%	—	%	—	%

The computation of the expected option life is based on a weighted-average calculation combining the average life of options that have already been exercised and post-vest cancellations with the estimated life of the remaining vested and unexercised options. The expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield curve over the expected term of the option. The Company has never paid any cash dividends on its common stock, and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company’s estimated forfeiture rate is based on its historical experience and future expectations.

The Company’s determination of fair value is affected by the Company’s stock price as well as a number of assumptions that require judgment. The weighted-average fair value per share was $18.76, $8.99 and $6.00 for options granted during the years ended December 31, 2018, 2017 and 2016, respectively. The total intrinsic value was $38.2 million, $26.8 million and $4.5 million for options exercised during the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, total unrecognized compensation expense related to stock options was approximately $4.4 million and the related weighted-average period over which it is expected to be recognized is approximately 1.7 years. The maximum contractual term of the Company’s stock options is ten years.

A summary of the status of stock option activity for the years ended December 31, 2016, 2017 and 2018 is as follows (in thousands, except price data and years):



	Number of Shares		Weighted- average exercise price per share		Weighted- average remaining contractual term (in years)	Aggregate intrinsic value
Outstanding at January 1, 2016	3,967		$	17.44
Granted	677		15.48
Exercised	(553	)	13.76
Cancelled	(150	)	20.86
Outstanding at December 31, 2016	3,941		17.49
Granted	263		22.21
Exercised	(1,527	)	16.38
Cancelled	(18	)	24.91
Outstanding at December 31, 2017	2,659		18.54
Granted	159		46.50
Exercised	(891	)	17.07
Cancelled	(50	)	21.19
Outstanding at December 31, 2018	1,877		$	21.53	5.98	$	49,976
Vested and expected to vest at December 31, 2018	1,838		$	21.34	5.93	$	49,302
Exercisable at December 31, 2018	1,117		$	19.28	4.83	$	32,374

Restricted Stock Units

The Company grants both time-based restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”). The fair value of RSUs and PSUs is determined based on the closing market price of the Company’s common stock on the grant date. Compensation expense for RSUs is measured at the grant date and recognized ratably over the vesting period. A portion of the restricted stock granted in 2018 and 2017 is performance-based and vesting is tied to achievement of specific Company goals over a three-year time period, subject to early vesting upon achievement of the performance goals. For purposes of measuring compensation expense for PSUs, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. There was no stock-based compensation expense related to PSUs for the year ended December 31, 2016.

A summary of the status of restricted stock unit activity for the years ended December 31, 2016, 2017 and 2018 is as follows (in thousands, except price data):



	Shares		Weighted-average grant date fair value
Non-vested at January 1, 2016	459		$	21.61
Granted	185		16.14
Vested	(120	)	18.50
Forfeited	(23	)	20.80
Non-vested at December 31, 2016	501		20.37
Granted	349		22.34
Vested	(100	)	23.49
Forfeited	(4	)	18.69
Non-vested at December 31, 2017	746		20.88
Granted	242		49.97
Vested	(296	)	21.70
Forfeited	(16	)	28.40
Non-vested at December 31, 2018	676		$	30.75

Since the employee Deferred Bonus Compensation Program was suspended in 2017, there were no restricted stock units issued in exchanged for the deferred bonus liability in 2018. In 2017 and 2016, the Company issued approximately 0.1 million restricted stock units each year in exchange for the deferred bonus liability of $0.9 million and $0.5 million, respectively.

The total amount of unrecognized compensation expense related to non-vested restricted stock units as of December 31, 2018 was approximately $12.1 million, which is expected to be recognized over a weighted-average period of approximately 2.1 years.