NOTE 9. STOCKHOLDERS’ EQUITY

Preferred Stock

Our Certificate of Incorporation, as amended and restated in October 2010 in connection with the closing of our initial public offering, authorizes us to issue 1,000,000,000 shares of $0.001 par value common stock and 50,000,000 shares of $0.001 par value preferred stock. As of December 31, 2016 and 2015, there were no shares of preferred stock issued or outstanding.

Common Stock

Common stockholders are entitled to dividends when and if declared by our board of directors. There have been no dividends declared to date. The holder of each share of common stock is entitled to one vote.

On October 5, 2012, we entered into a sales agreement pursuant to which we sold shares of our common stock having an aggregate offering price of approximately $30.0 million through an “at-the-market” offering. On November 8, 2013, we amended the sales agreement to increase the shares of our common stock available for sale pursuant to the sales agreement, and pursuant to such amendment, sold additional shares of our common stock for an aggregate offering price of approximately $30.0 million. On February 3, 2015, we amended the sales agreement again in order to further increase the shares of our common stock available for sale pursuant to the sales agreement, and pursuant to such amendment, sold additional shares of our common stock for an aggregate offering price of approximately $30.0 million. On February 3, 2016, we filed a prospectus supplement pursuant to which we could offer and sell, from time to time, additional shares of our common stock having an aggregate offering price of up to $30.0 million under the sales agreement. Such aggregate offering price of shares of our common stock was in addition to the shares sold under the original sales agreement, dated October 5, 2012, the first amendment to the sales agreement, dated November 8, 2013, and the second amendment to the sales agreement, dated February 3, 2015. Pursuant to the prospectus supplement, we sold additional shares of our common stock for an aggregate offering price of approximately $30.0 million. On May 18, 2016, we filed a prospectus supplement pursuant to which we could offer and sell, from time to time, additional shares of our common stock having an aggregate offering price of up to $30.0 million under the sales agreement. Pursuant to such prospectus supplement, we sold additional shares of our common stock for an aggregate offering price of approximately $30.0 million.

On February 2, 2017, we filed an additional prospectus supplement pursuant to which we may offer and sell, from time to time, additional shares of our common stock having an aggregate offering price of up to $60.0 million under the sales agreement.

We pay a commission equal to 3% of the gross proceeds from the sale of shares of our common stock under the sales agreement. We are not obligated to sell shares of our common stock under the sales agreement.

Subject to certain exceptions set forth in our existing Facility Agreement, holders of our Notes may elect to receive 25% of the net proceeds from financing activities that include an equity component as prepayment of the Notes to be applied first, to accrued and unpaid interest and second, to principal. To the extent we raise additional capital in the future through the sale of common stock, including without limitation, sales of common stock pursuant to an “at-the-market” offering program, we may be obligated, at the election of the holders, to pay 25% of the net proceeds from any such financing activities as partial payment of the Notes.

Warrants

In connection with the execution of the Facility Agreement, we issued immediately exercisable warrants to purchase 5.5 million shares of common stock at an exercise price per share initially equal to $2.63, all of which were outstanding at December 31, 2015. The number of shares of common stock into which the warrants are exercisable and the exercise price will be adjusted to reflect any stock splits, payment of stock dividends, recapitalizations, reclassifications or other similar adjustments in the number of outstanding shares of common stock. The exercise price may also be adjusted to reflect certain dividends or other distributions, including distributions of stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement or similar transaction.

During the year ended December 31, 2016, warrants to purchase 5.5 million shares of common stock were net exercised, resulting in the issuance of approximately 4.2 million shares. The cashless net exercises of the warrants did not result in any additional funds being collected by us.

As of December 31, 2016, no warrants remained outstanding.

Equity Plans

As of December 31, 2016, we had three active equity plans: 1) the 2010 Equity Incentive Plan or “2010 Plan,” 2) the 2010 Outside Director Equity Incentive Plan or “2010 Director Plan,” and 3) the 2010 Employee Stock Purchase Plan or “ESPP”, all of which we adopted upon the effectiveness of our initial public offering in October 2010. Prior to the adoption of these plans, we granted options pursuant to the 2004 Equity Incentive Plan and 2005 Stock Plan. Upon termination of the predecessor plans, the shares available for grant at the time of termination, and shares subsequently returned to the plans upon forfeiture or option termination, were transferred to the successor plan in effect at the time of share return.

We issue new shares of common stock upon the exercise of stock options.

2010 Equity Incentive Plan and Outside Director Equity Incentive Plan

Stock options granted under the 2010 Plan may be either Incentive Stock Option (“ISO”) or Non-Qualified Stock Option (“NSO”). ISOs may be granted only to employees. NSOs may be granted to employees, consultants and directors. Stock options under the 2010 Plan may be granted with a term of up to ten years and at prices no less than the fair market value of our common stock on the date of grant. To date, stock options granted to existing employees generally vest over four years on a monthly basis and stock options granted to new employees vest at a rate of 25% upon the first anniversary of the vesting commencement date and 1/48th per month thereafter. In January 2017, an additional 4.6 million shares were reserved under the 2010 Plan.

Stock options granted under the 2010 Director Plan provide for the grant of NSOs. Stock options under the 2010 Plan may be granted with a term of up to ten years and at prices no less than the fair market value of our common stock on the date of grant. To date, stock options granted to existing directors generally vest over one year on a monthly basis and stock options granted to new directors generally vest over three years at a rate of one-third upon the first anniversary of the vesting commencement date and 1/36th per month thereafter.

As of December 31, 2016 we had an aggregate of 6.5 million shares of common stock reserved for future issuance under the 2010 Plan and 2010 Director Plan.

2010 Employee Stock Purchase Plan

We adopted the ESPP in October 2010. Our ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. Each offering period will generally consist of four purchase periods, each purchase period being approximately six months. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock at the beginning of an offering period or at the end of a purchase period. Each offering period will generally end and the shares will be purchased twice yearly on March 1 and September 1. If the stock price at the end of the purchase period is lower than the stock price at the beginning of the offering period, that offering period will then be terminated and new offering period comes to place. As of December 31, 2016, 738,063 shares of our common stock remain available for issuance under the Plan. The ESPP provides for an annual increase to the shares available for issuance at the beginning of each calendar year equal to 2% of the common shares then outstanding. During January 2017, an additional 1.9 million shares were reserved under the ESPP.

The following table summarizes stock option activity for all stock option plans for the year ended December 31, 2016 (in thousands, except per share amounts):



		Stock Options Outstanding
	Shares available	Number			Weighted average
	for grant	of shares	Exercise price		exercise price
Balances, December 31, 2015	5,814	19,468	$	0.70 – 16.00	$	5.69
Additional shares reserved	4,799
Options granted	(4,228)	4,228	$	3.89 – 12.85	$	8.68
Options exercised	—	(745)	$	0.70 – 8.90	$	3.37
Options canceled	450	(450)	$	1.16 – 16.00	$	7.29
Balances, December 31, 2016	6,835	22,501	$	1.16 – 16.00	$	6.30

The following table summarizes information with respect to stock options outstanding and exercisable under the plans at December 31, 2016:



		Options Outstanding				Options Exercisable
			Weighted average
		Number	remaining contractual	Weighted average		Number	Weighted average
Exercise price		outstanding	life (Years)	exercise price		vested	exercise price
$	0.00 – 1.60	711,212	5.85	$	1.18	573,528	$	1.18
$	1.60 – 3.20	3,551,871	5.15	$	2.43	3,140,084	$	2.46
$	3.20 – 4.80	3,939,254	5.65	$	4.12	3,553,978	$	4.10
$	4.80 – 6.40	3,326,312	7.12	$	5.66	2,011,713	$	5.67
$	6.40 – 8.00	3,818,451	7.35	$	7.14	2,012,847	$	7.03
$	8.00 – 9.60	4,438,277	7.74	$	8.78	1,727,277	$	8.66
$	9.60 – 11.20	1,590,991	8.12	$	10.18	585,398	$	10.37
$	11.20 – 12.80	607,902	4.06	$	12.11	607,902	$	12.11
$	12.80 – 14.40	385,500	4.03	$	13.87	383,600	$	13.87
$	14.40 – 16.00	131,500	3.86	$	15.99	131,500	$	15.99
		22,501,270	6.59	$	6.30	14,727,827	$	5.73

The aggregate intrinsic value of the outstanding and exercisable options presented in the table above totaled $7.3 million and $6.3 million, respectively. The aggregate intrinsic value represents the total pretax intrinsic value (i.e., the difference between $3.80, our closing stock price on the last trading day of our fourth quarter of 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2016. The aggregate intrinsic value changes at each reporting date based on the fair market value of our common stock. The weighted average remaining contractual life for exercisable options is 5.62 years.

The vested and expected to vest option as of December 31, 2016 totaled 19,636,962, with aggregate intrinsic value of $6.9 million, weighted average exercise price per share of $6.17 and weighted average remaining contractual life of 6.34 years.

The total intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $4.7 million, $3.5 million and $2.0 million, respectively.

The total fair value of stock options vested during the years ended December 31, 2016, 2015 and 2014 was $20.7 million, $7.3 million and $6.0 million, respectively.

Stock-based Compensation

Total stock-based compensation expense consists of the following (in thousands):



	Years Ended December 31,
	2016		2015		2014
Cost of revenue	$	2,133	$	1,313	$	758
Research and development		8,257		5,196		3,785
Sales, general and administrative		9,172		7,331		5,400
Total stock-based compensation expense	$	19,562	$	13,840	$	9,943

As of December 31, 2016 and December 31, 2015, $389,000 and $315,000 of stock-based compensation cost was capitalized in inventory on our consolidated balance sheets, respectively.

The tax benefit of stock-based compensation expense was immaterial for the years ended December 31, 2016, 2015 and 2014.

Stock Options

We estimated the fair value of employee stock option using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. For the years ended December 31, 2016, 2015 and 2014, the weighted average fair value at grant date per stock option was $5.47, $4.75 and $3.81, respectively. We recorded stock-based compensation expense for stock options of $15.7 million, $10.2 million and $7.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.

For the years ended December 31, 2016, 2015 and 2014, the fair value of employee stock options was estimated using the following weighted average assumptions:



	Years Ended December 31,
	2016		2015		2014
Expected term (years)		6.1 years		6.1 years		6.1 years
Expected volatility		70.0%		70.0%		70.0%
Risk-free interest rate		1.5%		1.7%		1.9%
Dividend yield		—		—		—

As of December 31, 2016, $23.4 million of total unrecognized compensation expense related to stock options was expected to be recognized over a weighted-average period of 2.7 years. Future option grants will increase the amount of compensation expense to be recorded in those future periods. Cash received from option exercises for the years ended December 31, 2016, 2015 and 2014 was $2.5 million, $3.0 million and $1.6 million, respectively.

ESPP

We estimated the fair value of ESPP using the Black-Scholes option pricing model. For the years ended December 31, 2016, 2015 and 2014, weighted average fair value at grant date for ESPP was $4.21, $2.20 and $2.98 , respectively. We recorded stock-based compensation expense for ESPP of $3.7 million, $3.6 million and $2.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.

For the years ended December 31, 2016, 2015 and 2014, the fair value of ESPP was estimated using the following assumptions:



	Years Ended December 31,
	2016		2015		2014
Expected term (years)		0.5 - 2.0		0.5 - 2.0		0.5 - 2.0
Expected volatility		70.0%		70.0%		70.0%
Risk-free interest rate		0.5%-0.9%		0.1%-0.7%		0.1%-0.5%
Dividend yield		—		—		—

For the years ended December 31, 2016, 2015 and 2014, 1.3 million shares, 1.1 million shares and 1.3 million shares of common stock were purchased under the ESPP, respectively. Cash received through the ESPP for the years ended December 31, 2016, 2015 and 2014 was $5.2 million, $4.4 million and $2.3 million, respectively.