NOTE 7. STOCKHOLDERS’ EQUITY

Underwritten Public Equity Offerings

In August 2017, we filed a shelf registration statement on Form S-3 with the SEC pursuant to which we may, from time to time, sell up to an aggregate of $150.0 million of our common stock, preferred stock, depository shares, warrants, units or debt securities. On August 18, 2017, the registration statement was declared effective by the SEC, which allows us to access the capital markets for the three-year period following this effective date.

In February 2018, we entered into an underwriting agreement, relating to the public offering of 12,500,000 shares of our common stock, $0.001 par value per share, at a price to the public of $2.40 per share. Under the terms of the underwriting agreement, we also granted the Underwriters a 30-day option to purchase up to an additional 1,875,000 shares of our common stock, which was subsequently exercised in full, and the offering as well as the sale of shares of common stock subject to the Underwriters’ option, closed in February 2018. In total, we sold 14.4 million shares of our common stock at a price of $2.40 per share. We paid a commission equal to 4% of the gross proceeds from the sale of shares of our common stock under the underwriting agreement. The total net proceeds to us from the offering after deducting the underwriting discount were approximately $33.1 million, which excludes approximately $0.3 million of offering expenses fully paid as of September 30, 2018.

In September 2018, we entered into an underwriting agreement, relating to the public offering of 14,117,647 shares of our common stock, $0.001 par value per share, at a price to the public of $4.25 per share. Under the terms of the underwriting agreement, we also granted the Underwriters a 30-day option to purchase up to an additional 2,117,647 shares of our common stock, which was subsequently exercised in full, and the offering as well as the sale of shares of common stock subject to the Underwriters’ option, closed in September 2018. In total, we sold 16.2 million shares of our common stock at a price of $4.25 per share. We paid a commission equal to 6% of the gross proceeds from the sale of shares of our common stock under the underwriting agreement. The total net proceeds to us from the offering after deducting the underwriting discount were approximately $64.9 million, excluding approximately $0.2 million of offering expenses unpaid as of September 30, 2018.

In total, for the nine months ended September 30, 2018, we issued 30.6 million shares of our common stock through our equity offerings, resulting in net proceeds of $97.7 million, excluding approximately $0.2 million of offering expenses unpaid as of September 30, 2018.

Subject to certain exceptions set forth in our Facility Agreement, holders of our Notes may elect to receive up to 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. However, in both February 2018 and September 2018, holders representing a majority of the aggregate principal amount of the outstanding Notes waived such right in connection with the issuance and sale of shares of common stock in our public offering.

Equity Plans

As of September 30, 2018, we had three active equity compensation plans: the 2010 Equity Incentive Plan (“2010 Plan”), the 2010 Outside Director Equity Incentive Plan (“2010 Director Plan”), and the 2010 Employee Stock Purchase Plan (“ESPP”). Under the 2010 Plan, with the approval of the Compensation Committee of the Board of Directors, we may grant restricted stock, RSU, stock appreciation rights and new shares of common stock upon exercise of stock options.

In January 2018, an additional 5.8 million shares were reserved under the 2010 Plan, an additional 1.2 million shares were reserved under the 2010 Director Plan and an additional 2.3 million shares were reserved under the ESPP.

Stock Options

The following table summarizes stock option activity for all our stock option plans for the nine months ended September 30, 2018 (in thousands, except per share amounts):



		Stock Options Outstanding
					Weighted
	Shares available	Number			average
	for grant	of shares	Exercise price		exercise price
Balances, December 31, 2017	6,795	25,404	$	1.16 – 16.00	$	6.10
Additional shares reserved	6,976
Options granted	(4,183)	4,183		2.47 – 4.28		2.56
Options exercised	—	(340)		1.16 – 5.27		2.49
Options canceled	1,850	(1,850)		1.16 – 16.0		6.12
Balances, September 30, 2018	11,438	27,397	$	1.16 – 16.00	$	5.60

Restricted Stock Units, or “RSUs”

Time-based RSUs

Beginning in the three months ended March 31, 2018, the Compensation Committee of the Board of Directors has approved awards of RSUs with time-based vesting from the 2010 Plan to certain employees. Each RSU represents one equivalent share of our common stock to be awarded after the vesting period. These RSUs vest over four years at a rate of 25% annually. The fair value for these RSUs is based on the closing price of our common stock on the date of grant. We measure compensation expense for these RSUs at fair value on the date of grant and recognize the expense over the expected vesting period on a straight-line basis. The RSUs do not entitle participants to the rights of holders of common stock, such as voting rights, until the shares are issued. The number of RSUs vested includes shares of common stock that we will withhold on behalf of employees to satisfy the minimum statutory tax withholding requirements. RSUs that are expected to vest are net of estimated future forfeitures.

The following table summarizes the time-based RSUs activity for the nine months ended September 30, 2018 (in thousands, except per share amounts):


		Weighted average
	Number	grant date
	of shares	fair value
RSUs outstanding at December 31, 2017	—	$	—
RSUs granted	365		2.57
RSUs released	—		—
RSUs forfeited	(16)		2.54
Unvested RSUs outstanding at September 30, 2018	349	$	2.57

For the three and nine months ended September 30, 2018, we recognized compensation expense of $55,000 and $128,000, respectively, related to time-based RSUs.

Performance-based RSUs

During the three months ended March 31, 2018, the Compensation Committee of the Board of Directors approved awards of RSUs with performance-based vesting from the 2010 Plan to certain employees. Each RSU represents one equivalent share of our common stock to be awarded upon vesting at the end of the performance periods, if specific performance goals set by the Compensation Committee of the Board of Directors are achieved. No RSUs with performance-based vesting will vest if the performance goals are not met. The fair value of these RSUs is based on the closing price of our common stock on the date of grant. We make a quarterly probability assessment as to whether the performance goals will be achieved. Changes in our assessment of the probability of vesting results in adjustments to stock-based compensation, which may include either a cumulative catch-up of expense or a reduction of expense depending on whether the likelihood of vesting has increased or decreased, that is recognized in the period such determination is made. The RSUs do not entitle participants to the rights of holders of common stock, such as voting rights, until the shares are issued. The number of RSUs vested includes shares of common stock that we will withhold on behalf of employees to satisfy the minimum statutory tax withholding requirements. RSUs that are expected to vest are net of estimated future forfeitures.

The following table summarizes the performance-based RSUs activity for the nine months ended September 30, 2018 (in thousands, except per share amounts):


		Weighted average
	Number	grant date
	of shares	fair value
PSUs outstanding at December 31, 2017	—	$	—
PSUs granted	657		2.58
PSUs released	—		—
PSUs forfeited	(23)		2.54
Unvested PSUs outstanding at September 30, 2018	634	$	2.58

For the three and nine months ended September 30, 2018, we recognized compensation expense of $178,000 and $430,000, respectively, related to performance-based RSUs.

ESPP shares

Shares issued under our ESPP totaled 1,674,960 and 1,289,663 shares during the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, 1,952,507 shares of our common stock remain available for issuance under our ESPP.

Stock-Based Compensation

The following table summarizes the stock-based compensation expense for stock options, RSUs and shares from the ESPP for the three and nine months ended September 30, 2018 and 2017, respectively (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cost of revenue	$	608	$	608	$	1,905	$	1,703
Research and development		2,207		2,071		6,658		6,131
Sales, general and administrative		2,310		2,289		7,068		7,128
Total stock-based compensation expense	$	5,125	$	4,968	$	15,631	$	14,962

We estimated the fair value of employee stock options on the grant date using the Black-Scholes option pricing model. The estimated fair value of employee stock options is amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following weighted average assumptions:



	Three Months Ended September 30,		Nine Months Ended September 30,
Stock Option	2018	2017	2018	2017
Expected term in years	5.2	6.1	5.2	6.1
Expected volatility	65%	70%	67%	70%
Risk-free interest rate	2.8%	1.9%	2.5%	2.1%
Dividend yield	—	—	—	—

We estimate the value of employee stock purchase rights on the grant date using the Black-Scholes option pricing model. The fair value of shares to be purchased under our ESPP was estimated using the following assumptions:



	Three Months Ended September 30,		Nine Months Ended September 30,
ESPP	2018	2017	2018	2017
Expected term in years	0.5-2.0	0.5-2.0	0.5-2.0	0.5-2.0
Expected volatility	65%	70%	65% - 67%	70%
Risk-free interest rate	1.3%-2.7%	1.1%-1.4%	1.3%-2.7%	0.8%-1.4%
Dividend yield	—	—	—	—