Note 8. 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 six months ended September 30, 2014 and 2013:


	Three Months Ended September 30,				Six Months Ended September 30,
	2014		2013		2014		2013
	(in $000’s)				(in $000’s)
Cost of product revenue	$	148	$	139	$	357	$	347
Research and development		773		540		1,626		1,285
Selling, general and administrative		3,103		2,119		6,331		5,087

	$	4,024	$	2,798	$	8,314	$	6,719

The components of stock-based compensation for the three and six months ended September 30, 2014 and 2013 were as follows:


	Three Months Ended September 30,				Six Months Ended September 30,
	2014		2013		2014		2013
	(in $000’s)				(in $000’s)
Restricted stock units and awards	$	3,334	$	2,162	$	6,754	$	5,098
Stock options		624		598		1,423		1,523
Employee stock purchase plan		66		38		137		98

	$	4,024	$	2,798	$	8,314	$	6,719

Stock Options

The following table summarizes the stock option activity for the six months ended September 30, 2014:


	Shares Underlying Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at April 1, 2014		3,492		$	13.27		4.92
Granted		313			22.26
Exercised		(222	)		11.49
Cancelled and expired		(5	)		15.66

Outstanding at September 30, 2014		3,578		$	14.16		5.04	$	38,287

Exercisable at September 30, 2014		2,787		$	11.94		3.99	$	35,928

Options vested and expected to vest at September 30, 2014		3,502		$	14.00		4.97	$	38,013

The aggregate intrinsic value of options exercised was $3.0 million for the six months ended September 30, 2014. The total fair value of options vested during the six months ended September 30, 2014 was $1.7 million.

The remaining unrecognized stock-based compensation expense for unvested stock option awards at September 30, 2014 was approximately $5.7 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 2.5 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 six months ended September 30, 2014 and 2013 was $9.05 and $9.67 per share, respectively.

The fair value of options granted during the three and six months ended September 30, 2014 and 2013 were calculated using the following weighted average assumptions:


	Three Months Ended September 30,						Six Months Ended September 30,
	2014			2013			2014			2013
Risk-free interest rate		1.75	%		1.39	%		1.60	%		0.85	%
Expected option life (years)		4.19			4.23			4.19			4.26
Expected volatility		48.7	%		50.6	%		49.3	%		51.9	%

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 six months ended September 30, 2014:


	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value (per share)
Outstanding at April 1, 2014		1,174		$	21.37
Granted		664			21.88
Vested		(465	)		20.48
Forfeited		(121	)		23.10

Outstanding at September 30, 2014		1,252		$	21.80

The remaining unrecognized compensation expense for outstanding restricted stock awards and restricted stock units, including performance-based awards, as of September 30, 2014 was $17.0 million and the weighted-average period over which this cost will be recognized is 2.0 years.

The weighted average grant-date fair value for restricted stock and restricted stock units granted during the six months ended September 30, 2014 and 2013 was $21.88 and $23.18 per share, respectively. The total fair value of restricted stock and restricted stock units vested during the six months ended September 30, 2014 and 2013 was $9.5 million and $6.0 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 2014, performance-based awards of restricted stock units for the potential issuance of 379,752 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 September 30, 2014, the Company is recognizing compensation expense based on the probable outcome related to the prescribed performance milestones on the outstanding awards.

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 September 30, 2014, the Company has met the prescribed performance milestones for these awards such that 154,991 shares of common stock will vest subject to service requirements for vesting for these employees and the compensation expense is being recognized accordingly.

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 September 30, 2014, 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, which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of September 30, 2014, the Company has met the prescribed milestones for 234,000 shares underlying these awards and recorded all related stock compensation expense. In March 2014, the Company modified the performance condition on the remaining 50,000 restricted stock units. As of September 30, 2014, the Company believes that it is probable that the prescribed performance milestones will be met on these restricted stock units and the compensation expense is being recognized accordingly.

During the three and six months ended September 30, 2014, the Company has recorded $2.1 million and $3.7 million, respectively, 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 September 30, 2014 is $8.0 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 1.8 years.