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, 2019 and 2018, 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.

“At-the-Market” Offering

For the year ended December 31, 2017, we issued 3.2 million shares of our common stock at an average price of $3.86 per share through our “at-the-market” offering program, resulting in net proceeds of $11.9 million.

We terminated our “at-the-market” offering program in June 2017. We paid a commission equal to 3% of the gross proceeds from the sale of shares of our common stock under the sales agreement.

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 June 2017, we issued and sold a total of 17.7 million shares of our common stock at a price to the public of $3.10 per share in an underwritten public offering. 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 proceeds to us from the offering, after deducting the underwriting commission and offering expenses, were approximately $52.5 million.

For the year ended December 31, 2018, we issued 30.6 million shares of our common stock through our two underwritten public offerings with an average offering price of $3.38 per share. The total net proceeds to us from the two offerings, after deducting the underwriting commissions and offering expenses, were approximately $97.5 million.

Subject to certain exceptions set forth in the 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. In June 2017, pursuant to a partial exercise by the Notes holders of this right, we repaid $4.5 million of outstanding principal, together with accrued and unpaid interest, to one of the Notes holders with proceeds from our underwritten public equity offering.

Equity Plans

As of December 31, 2019, we had two active equity plans: 1) the 2010 Equity Incentive Plan or “2010 Plan” and 2) the 2010 Outside Director Equity Incentive Plan or “2010 Director Plan”, both of which we adopted upon the effectiveness of our initial public offering in October 2010. The 2010 Employee Stock Purchase Plan or “2010 ESPP Plan” was terminated after the completion of the purchase period ended March 1, 2019. 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. Under the 2010 Plan, with the approval of the Compensation Committee of the Board of Directors, we may grant restricted stock, Restricted Stock Units (“RSU”), stock appreciation rights and new shares of common stock upon 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 employee vest at a rate of 25% upon the first anniversary of the vesting commencement date and 1/48th per month thereafter

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, 2019 and 2018, we had an aggregate of 20.5 million and 11.3 million shares of common stock, respectively, reserved and available for future issuance under the 2010 Plan and 2010 Director Plan.

In January 2020, an additional 7.7 million shares were reserved under the 2010 Plan and an additional 1.5 million shares were reserved under the 2010 Director Plan.

Stock Options

For the year ended December 31, 2019, no stock options were granted. The following table summarizes stock option activity for the year ended December 31, 2019 (in thousands, except per share amounts):



	Stock Options Outstanding
	Number			Weighted average
	of shares	Exercise price		exercise price
Balances, December 31, 2018	25,176	$	1.16 – 16.00	$	5.66
Additional shares reserved
Options granted	—		—		—
Options exercised	(1,199)	$	1.16 – 7.05	$	4.78
Options canceled	(1,280)	$	2.54 – 16.00	$	8.01
Balances, December 31, 2019	22,697	$	1.16 – 16.00	$	5.57

The expired options during the year ended December 31, 2019 totaled 0.9 million with exercise price range from $2.54 to $16.00 and a weighted average exercise price per share of $9.90.

The following table summarizes information with respect to stock options outstanding and exercisable under the plans at December 31, 2019:



		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	414,207	2.87	$	1.18	414,207	$	1.18
$	1.60 – 3.20	5,720,080	6.38	$	2.54	3,680,040	$	2.54
$	3.20 – 4.80	3,110,896	3.88	$	4.02	2,858,193	$	4.02
$	4.80 – 6.40	5,935,013	6.12	$	5.46	4,895,635	$	5.46
$	6.40 – 8.00	2,554,434	5.19	$	7.21	2,525,441	$	7.21
$	8.00 – 9.60	3,061,742	4.63	$	8.77	2,938,483	$	8.77
$	9.60 – 11.20	1,224,700	4.94	$	10.20	1,224,700	$	10.20
$	11.20 – 12.80	423,252	1.08	$	12.10	423,252	$	12.10
$	12.80 – 14.40	163,250	1.00	$	13.71	163,210	$	13.71
$	14.40 – 16.00	89,000	0.80	$	15.99	89,000	$	15.99
		22,696,574	5.30	$	5.57	19,212,161	$	5.90

The aggregate intrinsic value of the outstanding and exercisable options presented in the table above totaled $20.0 million and $14.5 million, respectively. The aggregate intrinsic value represents the total pretax intrinsic value (i.e., the difference between $5.14, our closing stock price on the last trading day of our fourth quarter of 2019 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, 2019. 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 4.86 years.

The vested and expected to vest options as of December 31, 2019 totaled 21,231,000, with aggregate intrinsic value of $17.8 million, weighted average exercise price per share of $5.69 and weighted average remaining contractual life of 5.13 years.

The total intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and 2017 was $2.6 million, $5.3 million and $1.7 million, respectively.

The total fair value of stock options vested during the years ended December 31, 2019, 2018 and 2017 was $2.9 million, $3.9 million and $6.4 million, respectively.

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 under 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. RSUs that are expected to vest are net of estimated future forfeitures.

The following table summarizes the time-based RSUs activity for the year ended December 31, 2019 (in thousands, except per share amounts):


		Weighted average
	Number	grant date
	of shares	fair value
RSUs outstanding at December 31, 2018	371	$	3.20
RSUs granted	900		7.06
RSUs vested	(127)		4.35
RSUs forfeited	(58)		5.86
Unvested RSUs outstanding at December 31, 2019	1,086	$	6.12

For the years ended December 31, 2019, we recognized compensation expense of $4.9 million related to time-based RSUs.

Performance-based RSUs

During 2018, the Compensation Committee of the Board of Directors approved awards of RSUs with performance-based vesting under 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. RSUs that are expected to vest are net of estimated future forfeitures.

The following table summarizes the performance-based RSUs activity for the year ended December 31, 2019 (in thousands, except per share amounts):


		Weighted average
	Number	grant date
	of shares	fair value
PSUs outstanding at December 31, 2018	586	$	2.58
PSUs granted	—		—
PSUs vested	(204)		2.57
PSUs forfeited	(244)		2.57
Unvested PSUs outstanding at December 31, 2019	138	$	2.63

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.

For the years ended December 31, 2019, 2018 and 2017, 1,306,329 shares, 1,674,960 shares and 1,289,663 shares of common stock were purchased under the ESPP, respectively. As of December 31, 2019, 3,651,066 shares of our common stock remain available for issuance under our ESPP. Pursuant to the terms of the Merger Agreement, the ESPP was terminated after the completion of the purchase period ended March 1, 2019.

Since the Merger Agreement has been terminated, we will begin offerings under the ESPP again starting with the offering period on March 1, 2020.

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 2020, an additional 3.1 million shares were reserved under the ESPP.

Stock-based Compensation

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



	Years Ended December 31,
	2019		2018		2017
Cost of revenue	$	1,857	$	3,124	$	2,311
Research and development		7,699		10,076		8,506
Sales, general and administrative		6,845		9,953		9,535
Total stock-based compensation expense	$	16,401	$	23,153	$	20,352

As of December 31, 2019 and 2018, $0.3 million and $0.7 million 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, 2019, 2018 and 2017.

Stock Options

We estimated the fair value of employee stock options 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 year ended December 31, 2019, we did not grant any stock option. For the years ended December 31, 2018 and 2017, the weighted average fair value at grant date per stock option was $1.50 and $3.08, respectively. We recorded stock-based compensation expense for stock options of $11.0 million, $15.5 million and $17.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

For the years ended December 31, 2019, 2018 and 2017, the fair value of employee stock options was estimated using the following weighted average assumptions:



	Years Ended December 31,
	2019		2018		2017
Expected term (years)		—		5.2 years		6.1 years
Expected volatility		—		66.8%		70.0%
Risk-free interest rate		—		2.6%		2.1%
Dividend yield		—		—		—

As of December 31, 2019, $5.6 million of total unrecognized compensation expense related to stock options was expected to be recognized over a weighted-average period of 1.5 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, 2019, 2018 and 2017 was $5.9 million, $6.3 million and $3.6 million, respectively.

ESPP

We estimated the fair value of shares to be issued under the ESPP using the Black-Scholes option pricing model. For the years ended December 31, 2019, 2018 and 2017, weighted average fair value at grant date for shares to be issued under the ESPP was $0, $1.47 and $2.28, respectively. We recorded stock-based compensation expense for ESPP of $0.5 million, $6.8 million and $3.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Pursuant to the Merger Agreement, the ESPP was terminated after the completion of the purchase period ended March 1, 2019. As a result, approximately $2.5 million of ESPP expense was accelerated and recognized in the fourth quarter of 2018. In addition, for the year ended December 31, 2019 there were no offerings after March 1, 2019 and as such, there were no new Black-Scholes calculations performed to calculate the fair value of new purchase rights granted for the three months ended March 31, 2019 and for the year ended December 31, 2019.

For the years ended December 31, 2019, 2018 and 2017, the fair value of shares to be issued under the ESPP was estimated using the following assumptions:



	Years Ended December 31,
	2019		2018		2017
Expected term (years)		—		0.5 - 2.0		0.5 - 2.0
Expected volatility		—		65% - 67%		70.0%
Risk-free interest rate		—		1.3%-2.7%		0.8%-1.4%
Dividend yield		—		—		—

Cash received through the ESPP for the years ended December 31, 2019, 2018 and 2017 was $2.7 million, $3.4 million and $5.3 million, respectively.