NOTE 12. STOCK PLANS

2014 Stock Incentive Plan

In 2014, the Company’s Board of Directors and stockholders approved and adopted the 2014 Stock Option/Stock Issuance Plan (the “2014 Plan”), which was amended in March 2015, October 2016 and April 2017. The Plan provides that awards granted may be options, restricted stock or restricted stock units. Stock option awards may be either incentive stock options or non-qualified options. Awards may be granted to eligible employees, directors and consultants under the 2014 Plan. The Company’s Board of Directors has resolved not to make any further awards under the 2014 Plan following the completion of the Company’s IPO. The 2014 Plan will continue to govern all outstanding awards granted thereunder.

2017 Stock Incentive Plan

In April 2017, the Company’s Board of Directors and stockholders approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective on May 11, 2017. Under the 2017 Plan, employees, non-employee directors, consultants and advisors may be granted options, stock appreciation rights, stock awards and restricted stock units. The Company had initially reserved 2,000,000 shares of its common stock for issuance under the 2017 Plan. The share reserve increases automatically on the first trading day of January each calendar year by an amount equal to 3% of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, up to an annual maximum of 750,000 shares. As of December 31, 2018, an aggregate of 941,827 shares of common stock were available for future grant under the 2017 Plan.

2018 Performance-Based Stock Incentive Plan

In June 2018, the Company’s stockholders approved the Company’s 2018 Performance-Based Stock Incentive Plan (the “2018 Plan”), and approved grants of performance-based nonstatutory stock options (each, a “Performance Option”) to the Company’s Chief Executive Officer (the “CEO Award”) and President (the “President Award”), under the 2018 Plan. In May 2018, the CEO Award and the President Award had been approved by a special committee of the Board of Directors of the Company (the “Special Committee”), and the 2018 Plan had been approved by the Company’s Board of Directors, subject to stockholder approval.

The 2018 Plan allows the Company to grant Performance Options to its executive officers and other employees as an incentive for them to remain in service with the Company and to further align their interests with the interests of the Company’s stockholders. A total of 4,200,000 shares of the Company’s common stock have been authorized for issuance under the 2018 Plan. The numbers of shares underlying the CEO Award and the President Award are 1,809,900 and 1,357,425, respectively.

All Performance Options granted under the 2018 Plan will become exercisable in three equal tranches based on the achievement of specific market price goals for the Company’s common stock. For each tranche to become exercisable, the closing price per share of the Company’s common stock must meet or exceed the applicable stock price goal for a period of 30 consecutive trading days. The exercise price of each of the CEO Award and the President Award is $21.25 per share, which was the closing market price of the Company’s common stock on the Nasdaq Global Market on May 4, 2018, the last trading day prior to the date on which the Special Committee approved such awards (which was not a trading day).

As of December 31, 2018, an aggregate of 1,032,675 shares of common stock were available for future grant under the 2018 Plan.

The 2014 Plan, 2017 Plan and 2018 Plan are collectively referred to herein as the “Stock Plans.” The Stock Plans are administered by the compensation committee of the Board of Directors, which determines the recipients and the terms of the awards granted (with the exception of the CEO Award and President Award, which were approved by the Special Committee). All stock options granted under the Stock Plans have exercise prices equal to or greater than the fair market value of the Company’s common stock on the grant date, and expire ten years after the grant date, subject to earlier expiration in the event of termination of the optionee’s continuous service with the Company as further described in each Stock Plan.

Equity awards that have been granted under the 2014 Plan and 2017 Plan to employees (with the exception the Company’s Chief Executive Officer and President) and consultants generally vest over a period of four years (with certain limited exceptions), subject to the optionee’s continuous service with the Company. The restricted stock units awarded to members of the Company’s Board of Directors under the automatic grant program provisions of the 2017 Plan generally vest over a period of one year.

In May 2017, the Company granted under the 2014 Plan to the Company’s Chief Executive Officer, Chad Steelberg, and President, Ryan Steelberg, pursuant to the terms of their employment agreements, (i) options to purchase an aggregate of 2,089,638 shares of the Company’s common stock, which are subject to time-based vesting conditions, and (ii) options to purchase an aggregate of 1,044,818 shares of the Company’s common stock, which are subject to performance-based vesting conditions. The exercise price of all such stock options is $15.00 per share, which was the IPO price of the Company’s common stock. The time-based stock options vest in equal monthly increments over three years, subject to each executive’s continuous service with the Company, and subject to acceleration of vesting under certain circumstances as set forth in the option agreements. The weighted average grant date fair value of performance-based stock options granted under the 2014 Plan during the year ended December 31, 2017 was $8.88 per share. The weighted average remaining contractual term is 8.4 years. The performance-based stock options provided for the awards to vest upon the earlier of the first date on which the market capitalization of the Company’s common stock equaled or exceeded $400,000 over five consecutive business days, or five years after the IPO. In September 2017, the performance-based stock options vested in full, as the performance measure relating to the Company’s market capitalization was achieved. Total stock-based compensation expense of $9,282, which was calculated using the Black-Scholes option-pricing model, was recorded in 2017 for these performance-based stock options.

Stock-based Compensation

The Company recognizes stock-based compensation expense for awards granted under the Stock Plans ratably over the requisite service period.  For awards granted under the 2014 Plan and 2017 Plan, the service period is generally the vesting period. For the Performance Options granted under the 2018 Plan, a derived service period is estimated for each tranche under the Monte Carlo simulation model. The Company also recognizes stock-based compensation expense related to the Company’s ESPP ratably over each purchase interval.

The fair values of stock options granted under the 2014 Plan and 2017 Plan and purchase rights under the ESPP are determined as of the grant date using the Black-Scholes option-pricing model. The assumptions used in calculating the fair values of options granted during the years ended December 31, 2018 and 2017 are set forth in the table below:

The assumptions used in calculating the fair values of purchase rights granted under the ESPP during the year ended December 31, 2018 and 2017 are set forth in the table below:

The Company valued the CEO Award and the President Award granted under the 2018 Plan using a Monte Carlo simulation model. The grant date of such awards was June 29, 2018, the date that was such awards were approved by the Company’s stockholders. The following assumptions were used in the Monte Carlo simulation model for computing the grant date fair values of the CEO Award and the President Award:

The fair value per share was determined for each of the three equal tranches of each award and is presented in the table below:

The total fair value of such awards is $30,375 and is being recorded as stock-based compensation expense over the derived service periods.

The stock-based compensation expense by type of award and by operating expense grouping are presented below:

Restricted Stock Awards

The Company’s restricted stock activity for the year ended December 31, 2018 was as follows:

As of December 31, 2018, total unrecognized compensation cost related to restricted stock was $400, which is expected to be recognized over a period of 1.6 years. The weighted average grant date fair value per share of restricted stock granted was $15.47 for the year ended December 31, 2017. There was no restricted stock granted during the year ended December 31, 2018. The fair values of restricted stock vested during the years ended December 31, 2018 and 2017 totaled $1,022 and $2,185, respectively.

Restricted Stock Units

The Company’s restricted stock units activity for the year ended December 31, 2018 was as follows:

As of December 31, 2018, total unrecognized compensation cost related to restricted stock units was $362, which is expected to be recognized over a period of 0.6 year. The weighted average grant date fair value per share of restricted stock units granted was $13.46 and $14.76 for the years ended December 31, 2018 and 2017. The fair values of restricted stock units vested during the years ended December 31, 2018 and 2017 totaled $901 and $0, respectively.

Performance-Based Stock Options Under 2018 Plan

The activity related to performance-based stock options granted under the 2018 Plan for the year ended December 31, 2018 was as follows:

The weighted average grant date fair value of performance-based stock options granted under the 2018 Plan during the year ended December 31, 2018 was $9.59 per share. No performance-based stock options vested during the year ended December 31, 2018. At December 31, 2018, total unrecognized compensation expense related to performance-based stock options was $26,534 and is expected to be recognized over a weighted average period of 3.9 years.

Stock Options

The activity related to stock options granted under the 2014 Plan and 2017 Plan for the year ended December 31, 2018 was as follows:

The aggregate intrinsic value in the table above represents the difference between the fair market value of the Company’s common stock and the average option exercise price of in-the-money options multiplied by the number of such options. The weighted average grant date fair value per share of stock options granted was $7.40 and $8.95 for the years ended December 31, 2018 and 2017, respectively. The aggregate intrinsic value of the options exercised during the years ended December 31, 2018 and 2017 was $1,984 and $1,875, respectively. The total grant date fair value of stock options vested during the years ended December 31, 2018 and 2017 was $8,929 and $13,094, respectively.

At December 31, 2018, total unrecognized compensation expense related to stock options was $18,232 and is expected to be recognized over a weighted average period of 2.3 years.

Employee Stock Purchase Plan

In April 2017, the Company’s Board of Directors and stockholders approved and adopted the ESPP, which became effective on May 11, 2017. The ESPP is administered by the compensation committee of the Board of Directors and is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. Under the ESPP, each offering period is generally 24 months with four, six-month purchase intervals, and new offering periods generally commence every six months, as determined by the compensation committee of the Board of Directors.

The purchase price for shares of the Company’s common stock under the ESPP will be established by the plan administrator prior to the start of the offering period, but will not be less than 85% of the lower of the fair market value of the Company’s common stock on (i) the first day of the offering period and (ii) the purchase date. Each purchase right granted to an employee will provide an employee with the right to purchase up to 1,000 shares of common stock on each purchase date within the offering period, subject to an aggregate limit of 200,000 shares purchased under the ESPP on each purchase date, and subject to the purchase limitations in each calendar year under Section 423 of the Internal Revenue Code.

The Company had initially reserved 1,000,000 shares of its common stock for issuance under the ESPP. The share reserve increases automatically on the first trading day of January each calendar year by an amount equal to 1% of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, up to an annual maximum of 250,000 shares.

The ESPP contains a reset provision, which provides that, if the Company’s stock price on any purchase date under an offering period is less than the stock price on the start date of that offering period, then all employees participating in that offering period will be automatically transferred to the new offering period starting on the next business day following such purchase date, so long as the stock price on that start date is lower than the stock price on the start date of the offering period in which they are enrolled.  This reset feature was triggered under the ESPP on August 1, 2018 and, as a result, all employees participating in the ESPP were automatically transferred to the offering period that commenced on August 1, 2018. This reset constituted a modification pursuant to the guidance in ASC 718, Stock Based Compensation.  The Company engaged specialists to determine the incremental cost associated with the modification by calculating the expense related to the modified awards using the assumptions before and after the trigger date. The modification did not have a material effect on the Company’s stock-based compensation expense for the year ended December 31, 2018.

Employee payroll deductions accrued under the ESPP as of December 31, 2018 and 2017 totaled $448 and $253, respectively. During the year ended December 31, 2018 a total of 80,654 shares of common stock were purchased under the ESPP at a weighted average purchase price of $12.72.