7.Share-based Compensation

Shares reserved for issuance

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

	March 31, 2018		June 30, 2017
2014 Employee Stock Purchase Plan		5,365		7,785
Employee stock options and awards outstanding		10,405		9,726
2013 Equity Incentive Plan shares available for grant		11,944		7,629
Total shares reserved for issuance		27,714		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				Nine Months Ended
	March 31, 2018		March 31, 2017		March 31, 2018		March 31, 2017
Cost of product revenue	$	163	$	73	$	389	$	262
Cost of service revenue		354		56		783		475
Research and development		2,367		625		5,247		2,593
Sales and marketing		2,735		809		7,077		3,129
General and administrative		2,199		911		6,150		2,869
Total share-based compensation expense	$	7,818	$	2,474	$	19,646	$	9,328

During the nine months ended March 31, 2018 or 2017, 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 (“RSUs”) including performance or market-based RSUs 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 nine months ended March 31, 2018 (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		4,335			11.26
Vested		(2,488	)		3.75
Cancelled		(374	)		7.23
Non-vested stock awards outstanding at March 31, 2018		8,137		$	8.34	$	90,084

The following table summarizes stock option activity for the nine months ended March 31, 2018 (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		(779	)		4.56
Cancelled		(15	)		4.25
Options outstanding at March 31, 2018		2,268		$	3.89		3.11	$	16,283
Vested and expected to vest at March 31, 2018		2,268		$	3.89		3.11	$	16,283
Exercisable at March 31, 2018		1,961		$	4.10		2.95	$	13,670

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 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 its vice president level employees or above (“VPs”), including 560,344 stock awards to its Executive Officers, and 939,925 stock awards to its other employees. Fifty percent (50%) of the stock awards granted to the VPs, 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 officer received sixty percent (60%) of his stock award grant in the form of PSUs, while forty percent (40%) of this award 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. No PSUs were granted during the second quarter of fiscal 2018.

For the PSUs referenced in the preceding paragraph, they will be considered earned once the Company’s combined earnings per share equals or exceeds $0.32 for two consecutive quarters (the “FY18 Performance Threshold”). Upon satisfying the FY18 Performance Threshold, the PSUs shall vest with respect to the same number of RSUs that have vested which were granted on the same date 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 three and nine months ended March 31, 2018, none of the PSU grants referenced above achieved their FY18 Performance Threshold.

During the third quarter of fiscal 2018, the Company approved the grant of 100,000 stock awards with market-based vesting criteria to certain VPs with grant date fair values ranging from $10.61 to $12.19 determined by using the Monte-Carlo simulation model.

During the first quarter of fiscal 2017, the Company approved the grant of 1,505,120 stock awards to its VPs, including 680,000 stock awards to its Executive Officers, and 1,053,300 stock awards to other Company employees. Fifty percent (50%) of the stock awards granted to the VPs 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. No PSUs were granted during the second quarter of fiscal 2017.

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 (the “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 2014 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.

There were 1,151,759 and 1,114,707 shares issued under the ESPP during the three months ended March 31, 2018 and 2017, respectively. There were 2,419,689 and 2,218,306 shares issued under the ESPP during the nine months ended March 31, 2018 and 2017, respectively. The following assumptions were used to calculate the fair value of shares granted under the ESPP during the following periods:

	Three Months Ended						Nine Months Ended
	March 31, 2018			March 31, 2017			March 31, 2018			March 31, 2017
Expected life	0.5 years			0.5 years			0.5 years			0.5 years
Risk-free interest rate		1.15	%		0.40	%	1.64%–1.15%				0.40	%
Volatility		42	%		37	%		42	%	40%–37%
Dividend yield		—	%		—	%		—	%		—	%

The weighted-average fair value of shares granted under the ESPP during the three months ended March 31, 2018 and 2017 was $4.00 and $1.34, respectively. The weighted-average fair value of shares granted under the ESPP during the nine months ended March 31, 2018 and 2017 was $3.26 and $1.24, respectively.