Stock-Based Compensation

Stock Options

A summary of our stock option activity for the nine months ended September 30, 2017, is as follows (number of shares in thousands):



	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life in Years
Options outstanding as of December 31, 2016	1,718		$	8.75	8.2
Options granted	172		24.77
Options exercised	(133	)	3.83
Options cancelled/forfeited	(29	)	9.84
Options outstanding as of September 30, 2017	1,728		$	10.70	7.9

During the nine months ended September 30, 2017, we granted PSOs to purchase up to 172,000 shares of our Class A common stock. The PSOs have a weighted average exercise price of $24.77 per share. Vesting of the PSOs is based on the achievement of pre-established performance metrics for the year ended December 31, 2019, and continued employment throughout the performance period. Of the PSOs granted during 2017, 132,000 shares would vest based upon the maximum payout of 165% when the 2019 free cash flow performance metric meets the maximum achievement of 150%. For performance at 100% of the targeted 2019 free cash flow metric, approximately 61% of the PSOs would vest. For performance at 80% of the targeted metric, approximately 48% of the PSOs would vest. For performance below 80% of the 2019 targeted metric, no PSOs would vest, all previously recognized compensation expense for the PSOs would be reversed, and no compensation expense would be recognized. The remaining 40,000 PSOs granted during 2017 have a pre-established adjusted gross margin target for 2019. PSOs tied to the gross margin performance metric have two levels of vesting, with 50% vesting based upon the achievement of 110% of the targeted amount and the remaining 50% vesting upon the achievement of 115% of the targeted amount. If the 110% performance target is not met, no shares will vest and all previously recognized expense for those PSOs would be reversed and no compensation expense would be recognized.

Included in the options outstanding as of September 30, 2017 are 500,000 PSOs granted in 2016, which vest based on the achievement of a pre-established free cash flow performance metric for the years ended December 31, 2017 and 2018. The number of PSOs granted in 2016 related to the performance metrics for the years ended December 31, 2017 and 2018, assumes achievement of the performance metric at the maximum level, which is 150% of the targeted performance metric. For performance at 100% of the targeted metric, approximately 67% of the PSOs would vest. For performance at 80% of the targeted metric, approximately 53% would vest. For performance below 50% of the 2017 targeted metric or 80% of the 2018 targeted metric, no PSOs would vest, all previously recognized compensation expense for PSOs would be reversed, and no compensation expense would be recognized.

During the nine months ended September 30, 2017, 247,000 of the PSOs vested based on the achievement of 148% of the pre-established free cash flow performance metric for the year ended December 31, 2016, and 3,000 PSOs were cancelled as a result of the PSOs being granted at 150% of the target metric. During the year ended December 31, 2016, $1.0 million of expense was recognized related to the PSOs that vested during the nine months ended September 30, 2017.

We recognize expense for the PSOs based on the grant date fair value of the PSOs that we determine are probable of vesting. Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSOs that are probable of vesting. Our stock-based compensation expense for stock options, including the PSOs, for the three months ended September 30, 2017 and 2016, was $0.7 million and $0.7 million, respectively, and $2.0 million and $1.6 million for the nine months ended September 30, 2017 and 2016, respectively.

The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes information relating to our stock options granted during the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Stock options granted (in thousands)	—			—			172			750
Weighted average exercise price per share	$	—		$	—		$	24.77		$	12.85
Weighted average grant-date fair value per share	$	—		$	—		$	9.58		$	4.85
Weighted average Black-Scholes model assumptions:
Risk-free interest rate	—		%	—		%	2.02		%	1.45		%
Expected term (in years)	—			—			6.4			5.9
Expected volatility	—		%	—		%	35		%	37		%
Expected dividend yield	—			—			—			—

As of September 30, 2017, the total estimated remaining stock-based compensation expense for unvested stock options, including the PSOs, was $2.7 million, which is expected to be recognized over a weighted average period of 1.5 years.

Restricted Stock Units

A summary of activity in connection with our RSUs for the nine months ended September 30, 2017, is as follows (number of shares in thousands):



	Number of Shares		Weighted- Average Grant Date Fair Value per Share
Unvested as of December 31, 2016	496		$	13.34
Granted	307		25.64
Vested	(139	)	12.81
Forfeited	(46	)	16.17
Unvested as of September 30, 2017	618		$	19.36

During the nine months ended September 30, 2017, we granted a total of 307,000 RSUs: 194,000 RSUs vest annually over four years; 100,000 PSUs vest based upon achievement of a pre-established free cash flow performance metric for the year ended December 31, 2019, and continued employment throughout the performance period; and 13,000 PSUs were granted and vested as a result of the attainment of the 2016 performance metric. The number of PSUs granted, as included in the above table, assumes achievement of the performance metric at 100% of the targeted performance metric. The actual number of shares to be issued at the end of the performance period will range from 0% to 165% of the initial target awards. For performance at 150% of the targeted metric in 2019, 165% of the PSUs would vest. For performance below 80% of the targeted metric in 2019, no PSUs would vest and no compensation expense would be recognized, and all previously recognized compensation expense for PSUs would be reversed.

During the nine months ended September 30, 2017, 41,000 of the PSUs vested based on the achievement of 148% of the pre-established free cash flow performance metric for the year ended December 31, 2016, and an additional 13,000 PSUs were granted and vested as a result of the attainment of the 2016 performance metric as approved by our Board of Directors. During the year ended December 31, 2016, $479,000 of expense was recognized related to the PSUs vested during the nine months ended September 30, 2017.

Included in the unvested RSUs as of September 30, 2017 are 56,000 PSUs granted in 2016, which vest based on the achievement of a pre-established free cash flow performance metric for the years ended December 31, 2017 and 2018, and continued employment throughout the performance period. The number of PSUs granted in 2016 related to the performance metrics for the years ended December 31, 2017 and 2018, and assumed achievement of the performance metric at 100% of the targeted performance metric. The actual number of shares to be issued at the end of the performance period will range from 0% to 150% of the initial target awards. For performance at 150% of the targeted metric, 150% of the PSUs would vest. For performance below 50% of the targeted metric for 2017 or 80% of the targeted metric for 2018, no PSUs would vest and no compensation expense would be recognized, and all previously recognized compensation expense for PSUs would be reversed.

We recognize expense for the PSUs based on the grant date fair value of the PSUs that we determine are probable of vesting. Adjustments to compensation expense are made each period based on changes in our estimate of the number of PSUs that are probable of vesting. Our stock-based compensation expense for the RSUs and PSUs for the three months ended September 30, 2017 and 2016, was $1.0 million and $571,000, respectively, and $2.6 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017, the total remaining estimated stock-based compensation expense for the RSUs and PSUs was $9.2 million, which is expected to be recognized over a weighted average period of 2.6 years.

Restricted Stock Awards

A summary of activity in connection with our restricted stock awards for the nine months ended September 30, 2017, follows (number of shares in thousands):



	Number of Shares		Weighted-Average Grant Date Fair Value per Share
Unvested as of December 31, 2016	46		$	8.55
Granted	9		33.30
Vested	(38	)	9.33
Forfeited	—		—
Unvested as of September 30, 2017	17		$	19.79

We have the right to repurchase any unvested restricted stock awards. Restricted stock awards vest over a four-year period for employees and a one-year period for non-employee directors. We recognized stock-based compensation expense for restricted stock awards of $84,000 and $113,000 for the three months ended September 30, 2017 and 2016, respectively, and $274,000 and $342,000 for the nine months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017, the total remaining stock-based compensation expense for unvested restricted stock awards with a repurchasing right was $268,000 which is expected to be recognized over a weighted average period of 0.8 years.