Note 7.Stock-Based Compensation

The Company has four stock based compensation plans (collectively, the Stock Plans)—the 2001 Stock Option Plan (the 2001 Stock Plan), the 2011 Stock Plan (the 2011 Stock Plan), the 2015 Omnibus Incentive Compensation Plan (the 2015 Stock Plan) and the ESPP. The 2015 Stock Plan permits grants of RSU awards.

The purpose of these plans is to provide incentives to employees, directors and nonemployee consultants. The Company no longer grants any awards under the 2001 Stock Plan and the 2011 Stock Plan. The maximum term of any stock options granted under the Stock Plans is 10 years. For employees and nonemployees, stock options generally vest 25% on the first anniversary of the original vesting date, with the balance vesting monthly or annually over the remaining three years. Stock options are granted at exercise prices at least equal to the fair value of the underlying stock at the date of the grant. For employees and nonemployees, generally, RSU awards vest 25% on each of the first, second, third and fourth anniversaries of the grant date and in certain cases, vest one year after grant date.

The ESPP permits eligible employees to purchase shares of the Company’s common stock, using contributions via payroll deduction of up to 15% of their earnings, at a price per share equal to 85% of the lower of the stock’s fair market value on the offering date or purchase date. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

As of January 1, 2019, the Company has reserved an aggregate of 11.3 million shares of common stock for issuance under the 2015 Stock Plan, and 1.8 million shares of common stock for issuance under the ESPP.

Valuation and expense recognition of stock-based awards

The Company accounts for the measurement and recognition of compensation expense for all share‑based awards made to the Company’s employees and nonemployees based on the estimated fair value of the awards.

The fair value of RSU awards made to employees and nonemployees is equal to the closing market price of the Company’s common stock price on the grant date.

The Company uses the Black‑Scholes option‑pricing model to estimate the fair value of stock options and look back options included as part of the ESPP. The determination of fair value using the Black‑Scholes option‑pricing model is affected by the estimated fair market value per share of the Company’s common stock as well as assumptions regarding a number of highly complex and subjective variables, including expected stock price volatility, risk‑free interest rate, expected dividends and expected option life and generally requires significant management judgment to determine.

Risk‑free interest rate. The risk‑free interest rate is equal to the U.S. Treasury Note interest rate for the comparable term for the expected option life as of the valuation date. If the expected option life is between the U.S. Treasury Note rates of two published terms, then the risk‑free interest rate is based on the straight‑line interpolation between the U.S. Treasury Note rates of the two published terms as of the valuation date.

Expected dividend yield. The expected dividend yield is based on the Company’s history and expectation of dividend payouts. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.

Expected volatility. The Company only recently began to have publicly traded equity and has a limited operating history and a lack of Company‑specific historical and implied volatility data, and therefore has estimated its stock price volatility based upon an index of the historical volatilities of a group of comparable publicly‑traded medical device peer companies. The historical volatility data was computed using the historical daily closing prices for the selected peer companies’ shares during the equivalent period of the calculated expected term of the Company’s stock options. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Expected term. The Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term, and therefore it uses the simplified method for estimating the expected term of stock option grants. Under this approach, the weighted‑average expected term is presumed to be the average of the vesting term and the contractual term of the option.

Fair value of common stock. Historically, and until the June 30, 2015 completion of the Company’s IPO, the fair value of the shares of common stock underlying the stock options has been the responsibility of and determined by the Company’s Board of Directors. Because there had been no public market for the Company’s common stock, the Board of Directors determined the fair value of common stock at the time of grant of the option by considering a number of objective and subjective factors including independent third‑party valuations of the Company’s common stock, sales prices of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors. Subsequent to the date of the Company’s IPO in June 2015, the Company has used the daily market prices in the determination of the fair value of its common stock.

Stock Options

The following table summarizes stock option activity under the 2001 Stock Plan, 2011 Stock Plan and 2015 Stock Plan (in thousands):


	Number of			Weighted-
	shares	Weighted-		average	Aggregate
	underlying	average		remaining	intrinsic
	options	exercise price		contractual	value (in
	(in thousands)	per share		life (in years)	thousands)
Outstanding at December 31, 2015	5,701	$	7.10	6.7	$	102,390
Granted	1,979		21.24
Exercised	(1,660)		3.65			42,458
Canceled/forfeited/expired	(109)		20.00
Outstanding at December 31, 2016	5,911	$	12.59	7.3		129,591
Granted	1,877		43.85
Exercised	(639)		5.76			22,105
Canceled/forfeited/expired	(123)		23.79
Outstanding at December 31, 2017	7,026	$	21.36	7.3	$	69,555
Granted	896		30.83
Exercised	(1,304)		14.27			46,639
Canceled/forfeited/expired	(311)		31.14
Outstanding at December 31, 2018	6,307	$	23.69	6.7	$	204,896
Vested and expected to vest at December 31, 2018	6,213	$	23.53	6.7	$	202,779
Exercisable at December 31, 2018	3,929	$	17.54	5.8	$	151,798

Intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock for the options that had exercise prices that were lower than the fair value per share of the common stock on the date of exercise.

The weighted average estimated grant date fair value per share of stock options granted during the years ended December 31, 2018, December 31, 2017 and December 31, 2016 was $14.98, $20.62 and $10.81, respectively.

The total fair value of stock options that vested during the years ended December 31, 2018, December 31, 2017 and December 31, 2016 was $24.2 million, $12.9 million and $5.7 million, respectively.

Restricted Stock Units

The following table summarizes the activity of unvested restricted stock units under the Stock Plans during the years ended December 31, 2018 and December 31, 2017:


		Weighted-
	Number of	average
	shares	grant date
	(in thousands)	fair value
Unvested at December 31, 2016	—	$	—
Granted	173		39.10
Vested	—		—
Canceled/forfeited	—		—
Unvested at December 31, 2017	173	$	39.10
Granted	419		33.64
Vested	(41)		39.36
Canceled/forfeited	(19)		33.67
Unvested at December 31, 2018	532	$	35.17

The total fair value of restricted stock units that vested during the years ended December 31, 2018 was $1.6 million. No restricted stock units vested during the year ended December 31, 2017.

All share-based compensation arrangements

The following table summarizes the allocation of stock-based compensation related to stock options and RSUs in the accompanying consolidated statements of operations (in thousands):


	Year ended
	December 31,
	2018		2017		2016

Cost of sales	$	703	$	597	$	233
Selling, general & administrative		19,816		13,006		6,475
Research and development		5,185		3,989		2,078
Total	$	25,704	$	17,592	$	8,786

In the years ended December 31, 2018, December 31, 2017, and December 31, 2016, the related tax benefits were $10.5 million, $5.4 million and $9.9 million, respectively, relating to stock-based compensation.

At December 31, 2018, the total unamortized stock‑based compensation expense is approximately $48.3 million. Of the approximately $48.3 million in unamortized stock-based compensation expense, $35.4 million is attributable to stock options and is to be recognized over the stock options’ remaining vesting terms of approximately 4.0 years (2.3 years on a weighted average basis). The remaining $12.9 million is attributable to restricted stock units and is to be recognized over the restricted stock units’ vesting terms of approximately 4.0 years (2.9 years on a weighted-average basis).

The total stock-based compensation cost capitalized in inventory was not material for the years ended December 31, 2018, December 31, 2017 and December 31, 2016, respectively.

Stock‑based awards to employees

The weighted‑average assumptions used to estimate the fair value of stock options granted to employees were as follows:


	Year ended
	December 31,
	2018		2017		2016
Risk-free interest rate	2.67	%	2.13	%	1.59	%
Expected dividend yield	0.0	%	0.0	%	0.0	%
Expected volatility	44.9	%	46.5	%	52.9	%
Expected term (in years)	6.10		6.04		6.04

Forfeiture rate. The Company reduces employee share‑based compensation expense for estimated forfeitures. Forfeitures are estimated at the time of grant based on historical experience, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The weighted‑average per share exercise price of options granted to employees during the years ended December 31, 2018, December 31, 2017 and December 31, 2016 was $30.83, $43.85 and $21.24, respectively.

Stock‑based awards to nonemployees

The fair values of stock‑based awards made to nonemployees are remeasured at the end of the reporting period using the Black‑Scholes option pricing model. The expected life for each option is determined based on the time remaining until the expiration of the option as of the date of remeasurement. Compensation expense for these share‑based awards is determined by applying the recalculated fair values to the shares that have vested during a period.

For the years ended December 31, 2018, December 31, 2017 and December 31, 2016, the Company recorded nonemployee stock‑based compensation expense of $0.8 million, $0.5 million and $0.8 million, respectively.

Common stock reserved for future issuance

Common stock reserved for issuance is as follows (in thousands):


		As of
		December 31,
		2018

Stock options issued and outstanding—2001 Plan		510
Stock options issued and outstanding—2011 Plan		1,540
Stock options issued and outstanding—2015 Plan		4,789
Employee stock purchase plan		1,062
Authorized for future stock awards or option grants		4,226
		12,127