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 and nine months ended December 31, 2013 and 2012:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
	(in $000’s)				(in $000’s)
Cost of product revenue	$	130	$	83	$	476	$	330
Research and development		527		333		1,813		1,331
Selling, general and administrative		991		1,520		6,078		5,238

	$	1,648	$	1,936	$	8,367	$	6,899

The components of stock-based compensation for the three and nine months ended December 31, 2013 and 2012 were as follows:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
	(in $000’s)				(in $000’s)
Restricted stock units	$	1,013	$	1,220	$	5,808	$	4,085
Stock options		571		583		2,094		2,135
Restricted stock		7		81		310		541
Employee stock purchase plan		57		52		155		138

	$	1,648	$	1,936	$	8,367	$	6,899

Stock Options

The following table summarizes the stock option activity for the nine months ended December 31, 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		333			23.53
Exercised		(907	)		9.18
Cancelled and expired		(37	)		18.74

Outstanding at December 31, 2013		3,617		$	13.10		5.13	$	49,330

Exercisable at December 31, 2013		2,798		$	11.25		4.18	$	43,350

Options vested and expected to vest at December 31, 2013		3,521		$	13.00		5.06	$	48,397

The aggregate intrinsic value of options exercised was $13.8 million for the nine months ended December 31, 2013. The total fair value of options vested during the nine months ended December 31, 2013 was $2.3 million.

The remaining unrecognized stock-based compensation expense for unvested stock option awards at December 31, 2013 was approximately $4.9 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 2.8 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 nine months ended December 31, 2013 and 2012 was $9.84 and $10.07 per share, respectively.

The fair value of options granted during the three and nine months ended December 31, 2013 and 2012 were calculated using the following weighted average assumptions:


	Three Months Ended December 31,						Nine Months Ended December 31,
	2013			2012			2013			2012
Risk-free interest rate		1.71	%		0.63	%		0.94	%		0.77	%
Expected option life (years)		4.18			4.23			4.25			4.32
Expected volatility		50.2	%		58.1	%		51.8	%		56.4	%

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 nine months ended December 31, 2013:


	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value (per share)
Outstanding at April 1, 2013		1,022		$	18.44
Granted		553			23.18
Vested		(364	)		16.58
Forfeited		(52	)		18.86

Outstanding at December 31, 2013		1,159		$	21.27

The remaining unrecognized compensation expense for outstanding restricted stock awards and restricted stock units, including performance-based awards, as of December 31, 2013 was $10.5 million and the weighted-average period over which this cost will be recognized is 1.9 years.

The weighted average grant-date fair value for restricted stock and restricted stock units granted during the nine months ended December 31, 2013 and 2012 was $23.18 and $22.32 per share, respectively. The total fair value of restricted stock and restricted stock units vested during the nine months ended December 31, 2013 and 2012 was $6.0 million and $3.0 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 December 31, 2013, the Company is recognizing compensation expense based on the probable outcome related to the prescribed performance targets on the outstanding 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 December 31, 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 December 31, 2013, the Company has met the prescribed milestones for 234,000 shares underlying these awards and believes that it is not probable that the prescribed performance milestones will be met for the remaining 50,000 shares. The compensation expense on these performance-based awards is being recognized accordingly.

During the three months ended December 31, 2013, the Company incurred $3,000 in stock-based compensation expense on performance-based awards as it reversed $0.8 million that had been previously recorded as stock-based compensation expense based on it no longer being probable that certain performance milestones will be achieved. During the nine months ended December 31, 2013, the Company recorded $2.8 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 December 31, 2013 is $4.0 million based on the Company’s current assessment of the probability that certain performance milestones will be achieved. The weighted-average period over which this cost will be recognized is 1.9 years.