Note 7. Stock-Based Compensation

The following table summarizes stock-based compensation expense by financial statement line item in the Company’s consolidated statements of operations for the three months ended June 30, 2013 and 2012:


	Three Months Ended June 30,
	2013		2012
	(in $000’s)
Cost of product revenue	$	208	$	146
Research and development		745		563
Selling, general and administrative		2,968		1,970

	$	3,921	$	2,679

The components of stock-based compensation for the three months ended June 30, 2013 and 2012 were as follows:


	Three Months Ended June 30,
	2013		2012
	(in $000’s)
Restricted stock units	$	2,644	$	1,323
Stock options		925		970
Restricted stock		292		338
Employee stock purchase plan		60		48

	$	3,921	$	2,679

Stock Options

The following table summarizes the stock option activity for the three months ended June 30, 2013:


	Shares Underlying Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at April 1, 2013		4,228		$	11.49		5.37
Granted		298			23.10
Exercised		(192	)		10.04
Cancelled and expired		(8	)		10.29

Outstanding at June 30, 2013		4,326		$	12.35		5.51	$	40,584

Exercisable at June 30, 2013		3,493		$	10.78		4.72	$	37,729

Options vested and expected to vest at June 30, 2013		4,186		$	12.24		5.42	$	39,701

The aggregate intrinsic value of options exercised was $2.3 million for the three months ended June 30, 2013. The total fair value of options vested during the three months ended June 30, 2013 was $2.2 million.

The remaining unrecognized stock-based compensation expense for unvested stock option awards at June 30, 2013 was approximately $5.7 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 3.1 years.

The Company estimates the fair value of each stock option granted at the grant date using the Black-Scholes option valuation model. The weighted average grant-date fair value for options granted during the three months ended June 30, 2013 and 2012 was $9.68 and $10.13 per share, respectively.

The fair value of options granted during the three months ended June 30, 2013 and 2012 were calculated using the following weighted average assumptions:


	Three Months Ended June 30,
	2013			2012
Risk-free interest rate		0.85	%		0.78	%
Expected option life (years)		4.26			4.33
Expected volatility		51.9	%		56.3	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on the historical volatility of the Company’s stock and adjustments for factors not reflected in historical volatility that may be more indicative of future volatility. The Company estimates the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options. An expected dividend yield of zero is used in the option valuation model because the Company does not pay cash dividends and does not expect to pay any cash dividends in the foreseeable future. The Company estimates forfeitures based on an analysis of actual historical forfeitures, adjusted to reflect that historical forfeitures may not be indicative of forfeitures in the future.

Restricted Stock and Restricted Stock Units

In addition to stock option grants, the Company also has the ability to grant restricted stock and restricted stock units. Similar to stock options, these restricted stock and restricted stock unit grants are subject to certain vesting criteria. The following table summarizes the activity for the three months ended June 30, 2013:


	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value (per share)
Outstanding at April 1, 2013		1,022		$	18.44
Granted		503			23.15
Vested		(346	)		16.61
Forfeited		(11	)		21.15

Outstanding at June 30, 2013		1,168		$	20.98

The remaining unrecognized compensation expense for outstanding restricted stock awards and restricted stock units, including performance-based awards, as of June 30, 2013 was $14.7 million and the weighted-average period over which this cost will be recognized is 2.3 years.

The weighted average grant-date fair value for restricted stock and restricted stock units granted during the three months ended June 30, 2013 and 2012 was $23.15 and $22.40 per share, respectively. The total fair value of restricted stock and restricted stock units vested during the three months ended June 30, 2013 and 2012 was $5.7 million and $2.9 million, respectively.

Performance Based Awards

Included in the restricted stock and restricted stock units activity discussed above are certain awards that vest subject to certain performance-based criteria.

In May 2013, performance-based awards of restricted stock units for the potential issuance of 268,988 shares of common stock were issued to certain executive officers and employees, all of which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of June 30, 2013, the Company is recognizing compensation expense based on the probable outcome related to the prescribed performance targets on these awards.

In May 2012, performance-based awards of restricted stock units for the potential issuance of 195,188 shares of common stock were issued to certain executive officers and employees of the Company, all of which will vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of June 30, 2013, the Company has met the prescribed performance milestones for these awards. These awards are still subject to service requirements for vesting for these employees and the compensation expense is being recognized accordingly.

In May 2011 and June 2011, performance-based awards of restricted stock units for the potential issuance of 284,000 shares of common stock were issued to certain executive officers and members of the senior management of the Company, all of which will vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of June 30, 2013, the Company has met the prescribed milestones for 209,000 shares underlying these awards and believes it is probable that the prescribed performance milestones will be met for the remaining 75,000 shares, and the compensation expense is being recognized accordingly.

During the three months ended June 30, 2013, the Company recorded $1.7 million in stock-based compensation expense for equity awards in which the prescribed performance milestones have been achieved or are probable of being achieved. The remaining unrecognized compensation expense related to these equity awards at June 30, 2013 is $6.8 million based on the Company’s current assessment of probability of achieving the performance milestones. The weighted-average period over which this cost will be recognized is 2.3 years.