7.Share-based Compensation

Shares reserved for issuance

The Company had reserved for issuance for the periods noted (in thousands):

	September 30, 2017		June 30, 2017
2014 Employee Stock Purchase Plan		6,517		7,785
Employee stock options and awards outstanding		10,130		9,726
2013 Equity Incentive Plan shares available for grant		5,353		7,629
Total shares reserved for issuance		22,000		25,140

Share-based compensation expense recognized in the condensed consolidated financial statements by line item caption is as follows (in thousands):

	Three Months Ended
	September 30, 2017		September 30, 2016
Cost of product revenue	$	92	$	68
Cost of service revenue		133		232
Research and development		1,051		1,141
Sales and marketing		1,643		1,062
General and administrative		1,884		972
Total share-based compensation expense	$	4,803	$	3,475

During the three months ended September 30, 2017 and 2016, the Company did not capitalize any share-based compensation expense in inventory, as the amounts were immaterial.

Stock Awards

Stock awards may be granted under the 2013 Equity Incentive Plan (the “2013 Plan”) on terms approved by the Compensation Committee of the Board of Directors. Stock awards generally provide for the issuance of restricted stock units (including performance or market-based restricted stock units) which vest over a fixed period of time or based upon the satisfaction of certain performance criteria. The Company uses the straight-line method for expense attribution, and beginning with fiscal 2017, the Company does not estimate forfeitures, but accounts for them as incurred.

The following table summarizes stock award activity for the three months ended September 30, 2017 (in thousands, except grant date fair value):

	Number of Shares			Weighted- Average Grant Date Fair Value		Aggregate Fair Market Value
Non-vested stock awards outstanding at June 30, 2017		6,664		$	4.66	$	61,440
Granted		2,094			10.55
Vested		(1,223	)		3.45
Cancelled		(118	)		4.72
Non-vested stock awards outstanding at September 30, 2017		7,417		$	6.53	$	88,195

The following table summarizes stock option activity for the three months ended September 30, 2017 (in thousands, except per share and contractual term):

	Number of Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Options outstanding at June 30, 2017		3,062		$	4.06		4.19	$	15,868
Exercised		(347	)		4.44
Cancelled		(2	)		5.58
Options outstanding at September 30, 2017		2,713		$	4.01		4.10	$	21,478
Vested and expected to vest at September 30, 2017		2,713		$	4.01		4.10	$	21,478
Exercisable at September 30, 2017		2,129		$	4.33		3.40	$	16,090

The fair value of each stock option grant under the 2013 Plan and 2005 Equity Incentive Plan is estimated on the date of grant using the Black-Scholes-Merton option valuation model with the weighted average assumptions noted in the following table. The Company uses the Monte-Carlo simulation model to determine the fair value and the derived service period of stock awards with market conditions, on the date of the grant. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk-free rate is based upon the estimated life of the option and the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility on the Company’s stock.

The fair value of each restricted stock units (“RSUs”) grant with performance-based vesting criteria (“PSUs”) under the 2013 Plan is estimated on the date of grant using the Monte-Carlo simulation model to determine the fair value and the derived service period of stock awards with market conditions, on the date of the grant.

During the first quarter of fiscal 2018, the Company approved the grant of 1,154,014 stock awards to the Company’s Executive Officers and 939,925 stock awards to other Company employees. Fifty percent (50%) of the stock awards granted to executives, except the chief executive officer, were in the form of PSUs, with grant date fair values of $10.90, and fifty percent (50%) of the stock awards granted were in the form of service-based RSUs. The Company’s chief executive received sixty percent (60%) of his stock award grant in the form of PSUs, while forty percent (40%) were in the form of RSUs, with a grant date fair value of $10.90. The RSUs vest from the original grant date as to one-third (1/3) on the one year anniversary and one-twelfth (1/12) each quarter thereafter, subject to continued service to the Company.

For the PSUs referenced in the preceding paragraph, they are considered earned once the Company’s combined earnings per share equals or exceeds $0.32 for two consecutive quarters. (“FY18 Performance Threshold”). Once the FY18 Performance Threshold is satisfied the PSUs shall vest with respect to the number of RSUs that have vested as of the date the FY18 Performance Threshold is satisfied and thereafter shall vest on the same schedule as the RSUs, subject to continued service to the Company. If the FY18 Performance Threshold is not met by the third anniversary of the grant date the award is canceled. In addition, the FY18 Performance Threshold shall be deemed satisfied upon the closing of a Change in Control (within the meaning of the Company’s 2013 Equity Incentive Plan) in the event the per share consideration received by the Company’s stockholders equals or exceeds $16.00 per share.

During the quarter ended September 30, 2017, none of the PSU grants referenced above achieved their FY18 Performance Threshold.

During the first quarter of fiscal 2017, the Company approved the grant of 680,000 stock awards to the Company’s Executive Officers and 1,878,420 stock awards to other Company employees. Fifty percent (50%) of the stock awards granted were in the form of PSUs, with grant date fair values ranging from $3.02 to $3.09, and fifty percent (50%) of the stock awards granted were in the form of RSUs. The RSUs vest from the original grant date as to one-third (1/3) on the one year anniversary and one-twelfth (1/12) each quarter thereafter, subject to continued service to the Company.

The PSUs were considered earned once the Company’s stock price equaled or exceeded $5.00 per share for 30 consecutive trading days after January 1, 2017 (“FY17 Performance Threshold”). Once the FY17 Performance Threshold goal was attainted the PSUs began to vest on the same schedule as the RSUs that were granted at the same time, subject to continued service to the Company.

During the quarter ended March 31, 2017, all of the PSU grants referenced above achieved their FY17 Performance Threshold and as such, began vesting and will be released on the schedule as noted, subject to continued service to the Company.

The fair value of each share purchase option under the Company’s Employee Stock Purchase Plan (“ESPP”) is estimated on the date of grant using the Black-Scholes-Merton option valuation model with the weighted average assumptions noted in the following table. The expected term of the ESPP represents the term of the offering period of each option. The risk-free rate is based upon the estimated life and on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility on the Company’s stock.

The weighted-average fair value of shares granted under the Company’s 2014 ESPP during the three months ended September 30, 2017 and 2016, was $2.41 and $1.00, respectively. There were 1,267,930 and 1,103,599 shares issued under the Company’s 2014 ESPP during the three months ended September 30, 2017 and 2016, respectively.

	Employee Stock Purchase Plan
	Three Months Ended
	September 30, 2017			September 30, 2016
Expected life	0.50 years			0.50 years
Risk-free interest rate		1.15	%		0.40	%
Volatility		42	%		40	%
Dividend yield		—	%		—	%