STOCK-BASED COMPENSATION

2018 Long-Term Incentive Plan Overview

We have one active stockholder-approved stock-based compensation plan, the 2018 Long- Term Incentive Plan (the “2018 Plan”), which replaced our former 2009 Incentive Award Plan (the "2009 Plan") in June 2018. Under the 2018 Plan we may grant incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, performance awards, stock appreciation rights and other stock-based awards.

The maximum number of shares of our common stock available for issuance under the 2018 Plan at inception was 9.5 million shares. The number of shares of common stock that may be issued under the 2018 Plan may not exceed 9.5 million shares, plus any shares that become eligible for issuance under the 2018 Plan because of awards under the 2009 Plan that are terminated, forfeited, cancelled or expire unexercised. As of December 31, 2018, 17.6 million shares were available for grant, inclusive of aforementioned rollovers from our 2009 Plan. It is our policy that before stock is issued through the exercise of stock options, we must first receive all required cash payment for such shares (whether through an upfront cash exercise or net-settlement exercise).

Stock-based awards are governed by agreements between us and the recipients. Incentive stock options and nonqualified stock options may be granted under the 2018 Plan at an exercise price of not less than 100% of the fair market value of our common stock on the respective date of grant, and in some cases may not be less than 110% of such fair market value with respect to Incentive Stock Options ("ISOs"). The grant date is generally the date the terms of the award are approved by the Compensation Committee of the Board of Directors.

Stock-based awards generally vest at 25% to 33% on the first anniversary following the date of grant, or for new hires, the first anniversary of their initial date of employment. Awards generally vest annually thereafter on a straight-line basis over three to four years. Stock options must generally be exercised, if at all, no later than 10 years from the date of grant. Upon termination of employment, vested stock options may generally be exercised based on the option termination rules including the following: six months after the date of termination upon retirement; twelve months after the date of termination upon disability or death; ninety days after the date of termination for all other terminations (though whether vested or unvested, stock options of the employee recipient are immediately forfeited upon termination for "Cause", as defined in the 2018 Plan).

Employee Stock Purchase Plan

Under the terms of our 2009 Employee Stock Purchase Plan (the “ESPP”), eligible employees can purchase common stock through payroll deductions. The purchase price is equal to the closing price of our common stock on the first or last day of the offering period (whichever is less), minus a 15% discount. We use the Black-Scholes option-pricing model, in combination with the discounted employee price, in determining the value of ESPP expense to be recognized during each offering period. A participant may purchase a maximum of 50,000 shares of common stock during a six-month offering period, not to exceed $25,000 worth of stock on the offering date during each plan year.

As of December 31, 2018, a total of 8.9 million shares of common stock are authorized and remain available for issuance under the ESPP. Beginning on January 1, 2010, and each January 1st thereafter, the number of shares of common stock available for issuance under the ESPP shall automatically increase by an amount equal to the lesser of (i) one million shares or (ii) an amount determined by the ESPP administrator. However, in no event shall the number of shares of common stock available for future sale under the ESPP exceed 10 million shares, subject to capitalization adjustments occurring due to dividends, splits, dissolution, liquidation, mergers, or changes in control.

Stock-Based Compensation Expense Summary

We report our stock-based compensation expense (inclusive of our incentive stock plan, employee stock purchase plan, and 401(k) contribution matching program) in the accompanying Consolidated Statements of Operations, based on the assigned department of the recipient. Stock-based compensation expense included within “total operating costs and expenses” for the years ended December 31, 2018, 2017, and 2016, was as follows:



	Year Ended December 31,
	2018		2017		2016
Cost of sales	$	298	$	203	$	135
Selling, general and administrative	14,010		12,904		11,480
Research and development	3,175		2,032		2,055
Total stock-based compensation	$	17,483	$	15,139	$	13,670

Employee stock-based compensation expense for the years ended December 31, 2018, 2017, and 2016 was recognized (reduced for estimated forfeitures) on a straight-line basis over the vesting period. Forfeitures are estimated at the time of grant and prospectively revised if actual forfeitures differ from those estimates. We estimate forfeitures of stock options using the historical exercise behavior of our employees. For purposes of this estimate, we have applied an estimated forfeiture rate of 15%, 14%, and 11% for the years ended December 31, 2018, 2017, and 2016, respectively.

Valuation Assumptions – Restricted Stock and Stock Options

The grant-date fair value per share for restricted stock awards was based upon the closing market price of our common stock on the award grant-date.

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model. The following assumptions were used to determine fair value for the stock awards granted in the applicable year:



	Year Ended December 31,
	2018	2017	2016
Expected option life (in years) (a)	4.73	4.84	5.02
Risk-free interest rate (b)	1.81% - 2.75%	0.82% - 1.90%	1.07% - 1.90%
Volatility (c)	50.0% - 56.2%	49.3% - 61.4%	48.9% - 50.6%
Dividend yield (d)	—%	—%	—%
Weighted-average grant-date fair value per stock option	$8.64	$2.89	$2.80


(a)	Determined by the historical stock option exercise behavior of our employees (maximum term is 10 years).


(b)	Based upon the U.S. Treasury yields in effect during the period which the options were granted (for a period equaling the stock options’ expected term).


(c)	Measured using our historical stock price for a period equal to stock options’ expected term.


(d)	We do not expect to declare any cash dividends in the foreseeable future.

Stock Option Activity

Stock option activity during the years ended December 31, 2018, 2017, and 2016 was as follows:



	Number of Shares		Weighted- Average Exercise Price/Share		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding — December 31, 2015	13,836,851		$	6.97
Granted	1,435,550		5.94
Exercised	(39,010	)	5.18			$	50	(1	)
Forfeited	(379,268	)	7.21
Expired	(513,541	)	7.26
Outstanding — December 31, 2016	14,340,582		6.86
Granted	1,223,483		6.51
Exercised	(937,482	)	6.40			$	6,813	(1	)
Forfeited	(244,793	)	6.26
Expired	(524,577	)	6.27
Outstanding — December 31, 2017	13,857,213		6.89
Granted	1,094,358		18.87
Exercised	(7,858,141	)	6.74			$	84,758	(1	)
Forfeited	(214,464	)	6.54
Expired	(35,381	)	6.94
Outstanding — December 31, 2018	6,843,585		$	8.98	6.39	$	11,095	(2	)
Vested (exercisable) — December 31, 2018	4,955,073		$	7.87	5.62	$	8,422	(2	)
Unvested (unexercisable) — December 31, 2018	1,888,512		$	11.91	8.38	$	2,673	(2	)


(1)	Represents the total difference between our closing stock price at the time of exercise and the stock option exercise price, multiplied by the number of options exercised.


(2)	Represents the total difference between our closing stock price on the last trading day of 2018 and the stock option exercise price, multiplied by the number of in-the-money options as of December 31, 2018. The amount of intrinsic value will change based on the fair market value of our stock.

The following table summarizes information with respect to stock option grants as of December 31, 2018:



	Outstanding				Exercisable
Exercise Price	Granted Stock Options Outstanding	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Granted Stock Options Exercisable	Weighted- Average Exercise Price
$1.03 - 3.16	7,250	0.23	$	1.76	7,250	$	1.76
$3.17 - 4.96	212,880	4.27	4.22		168,409	4.16
$4.97 - 6.91	2,938,104	6.98	5.97		2,029,420	5.90
$6.92 - 9.00	1,914,493	5.00	7.75		1,856,327	7.77
$9.01 - 22.64	1,770,858	7.18	15.92		893,667	13.27
	6,843,585	6.39	$	8.98	4,955,073	$	7.87

As of December 31, 2018, there was unrecognized compensation expense of $7.7 million related to unvested stock options, which we expect to recognize over a weighted average period of 2.3 years.

Restricted Stock Award Activity

A summary of restricted stock award activity is as follows:



	Number of Restricted Stock Awards		Weighted Average Fair Value per Share at Grant Date
Unvested — December 31, 2015	2,173,982		$	6.58
Granted	1,203,675		5.93
Vested	(889,857	)	6.49
Forfeited	(335,643	)	6.33
Unvested — December 31, 2016	2,152,157		6.29
Granted	927,306		6.22
Vested	(1,137,555	)	6.38
Forfeited	(378,990	)	5.95
Unvested — December 31, 2017	1,562,918		6.27
Granted	1,092,534		17.35
Vested	(635,320	)	6.51
Forfeited	(218,002	)	7.56
Unvested — December 31, 2018	1,802,130		$	12.75



	Year Ended December 31,
	2018		2017		2016
Restricted stock award expense	$	7,652	$	6,821	$	6,518

As of December 31, 2018, there was approximately $16.9 million of unrecorded expense related to issued restricted stock awards that will be recognized over an estimated weighted average period of 2.2 years. These unvested shares are included in our reported issued and outstanding common stock as of December 31, 2018.

Restricted Stock Unit Activity

Our outstanding restricted stock units substantially relate to awards that contain "market-based" vesting conditions that are issued to certain of our executive officers. These conditions result in a variable number of shares ultimately issued at the assessment date designated by our Compensation Committee. A summary of restricted stock unit activity is as follows:



	Number of Restricted Stock Units		Weighted Average Fair Value per Share at Grant Date
Outstanding — December 31, 2016	—		$	—
Granted	217,206		6.49
Outstanding — December 31, 2017	217,206		6.49
Granted	138,334		28.31
Market-based achievement adjustment at vesting	100,326		6.49
Share issuance upon approved achievement date	(200,652	)	6.49
Outstanding — December 31, 2018	255,214		$	17.91



	2018		2017		2016
Restricted stock unit expense	$	2,301	$	1,030	$	—

401(k) Plan – Stock Matching Contribution

We issued shares of common stock to our employees in connection with our 401(k) program, partially matching our employees’ annual 401(k) contributions, as summarized below:



	Year Ended December 31,
	2018		2017		2016
Shares of common stock issued	70,379		102,874		172,650
Match contribution value	$	1,175	$	912	$	953