Note 8. Stock-Based Compensation

The following table summarizes stock-based compensation expense by financial statement line item in the Company’s condensed consolidated statements of operations for the three months ended June 30, 2015 and 2014:


	Three Months Ended June 30,
	2015		2014
	(in $000’s)
Cost of product revenue	$	237	$	209
Research and development		931		853
Selling, general and administrative		3,631		3,228

	$	4,799	$	4,290

The components of stock-based compensation for the three months ended June 30, 2015 and 2014 were as follows:


	Three Months Ended June 30,
	2015		2014
	(in $000’s)
Restricted stock units	$	3,903	$	3,420
Stock options		819		799
Employee stock purchase plan		77		71

	$	4,799	$	4,290

Stock Options

The following table summarizes the stock option activity for the three months ended June 30, 2015:


	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at beginning of period		2,892		$	14.72		5.18
Granted		97			66.36
Exercised		(363	)		12.65
Cancelled and expired		(1	)		14.00

Outstanding at end of period		2,625		$	16.92		5.43	$	128,218

Exercisable at end of period		2,020		$	13.02		4.51	$	106,478

Options vested and expected to vest at end of period		2,567		$	16.70		5.37	$	125,940

The aggregate intrinsic value of options exercised was $19.8 million for the three months ended June 30, 2015. The total fair value of options that vested during the three months ended June 30, 2015 was $2.2 million.

The remaining unrecognized stock-based compensation expense for unvested stock option awards at June 30, 2015 was approximately $6.4 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 2.3 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, 2015 and 2014 was $27.33 and $8.78 per share, respectively.

The fair value of options granted during the three months ended June 30, 2015 and 2014 were calculated using the following weighted average assumptions:


	Three Months Ended June 30,
	2015			2014
Risk-free interest rate		1.57	%		1.57	%
Expected option life (years)		4.15			4.19
Expected volatility		50.4	%		49.4	%

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 the extent historic forfeitures may not be indicative of forfeitures in the future.

Restricted Stock and Restricted Stock Units

The following table summarizes the activity of restricted stock and restricted stock units for the three months ended June 30, 2015:


	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value (per share)
Restricted stock and restricted stock units at beginning of period		1,160		$	21.90
Granted		598			88.28
Vested		(407	)		22.31
Forfeited		(40	)		12.27

Restricted stock and restricted stock units at end of period		1,311		$	52.39

As of June 30, 2015, there are no restricted stock awards outstanding.

The weighted average grant-date fair value for restricted stock units granted, including performance and market-based awards discussed below, during the three months ended June 30, 2015 and 2014 was $88.28 and $21.55 per share, respectively. Included in the weighted average grant-date fair value for restricted stock units granted during the three months ended June 30, 2015 were 322,980 market based awards which were valued at $107.10 per share in which a Monte Carlo simulation was used to account for the market condition in valuing the award. See details below in “Market Based Awards”.

The total fair value of restricted stock units that vested during the three months ended June 30, 2015 and 2014 was $9.1 million and $8.8 million, respectively. The remaining unrecognized compensation expense for outstanding restricted stock units, including performance and market-based awards, as of June 30, 2015 was $36.7 million and the weighted-average period over which this cost will be recognized is 2.9 years.

On June 29, 2015, the Company’s Board of Directors adopted a non-employee director retirement policy that provides for the accelerated vesting of all stock options, restricted stock units and other equity awards held by a non-employee director if he or she permanently ceases his or her service on the Company’s Board of Directors by reason of death, disability, or the non-employee director’s retirement following at least five years of service and so long as his or her age plus service equals or exceeds 65. This policy accelerated the vesting on outstanding unvested restricted stock units held by retirement eligible non-employee directors and resulted in stock-based compensation expense of $1.4 million for the three months ended June 30, 2015.

Performance and Market-Based Awards

Included in the restricted stock units activity discussed above are certain awards that vest subject to certain performance and market-based criteria. The remaining unrecognized compensation expense for outstanding performance and market-based restricted stock units as of June 30, 2015 was $27.3 million and the weighted-average period over which this cost will be recognized is 3.1 years.

Performance-Based Awards

In May 2015, performance-based awards of restricted stock units for the potential issuance of 183,940 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, 2015, the Company is recognizing compensation expense based on the probable outcome related to the prescribed performance targets on the outstanding awards.

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. The Company met the prescribed performance milestones in fiscal 2015 such that the remaining outstanding 222,563 shares of common stock as of June 30, 2015 will vest subject to service requirements for vesting for these employees. The compensation expense is being recognized accordingly over the remaining service term.

In March 2014, the Company modified the performance condition on 50,000 restricted stock units originally granted in June 2011. During the three months ended June 30, 2015, the Company reversed $1.0 million that had been previously recorded as stock-based compensation expense based on the expectation that it is not probable that certain performance milestones related to this award will be achieved within the time period required by the award.

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. The Company met the prescribed performance milestones in fiscal 2014 such that the remaining outstanding 148,995 shares of common stock as of June 30, 2015 will vest subject to service requirements for vesting for these employees. The compensation expense is being recognized accordingly over the remaining service term.

Market-Based Awards

In June 2015, the Company awarded certain executive officers a total of up to 322,980 market-based restricted share units. These restricted stock units will vest and result in the issuance of common stock based on continuing employment and the relative ranking of the total shareholder return (“TSR”) of the Company’s common stock in relation to the TSR of the component companies in the S&P Health Care Equipment Select Industry Index over a three-year performance period based on a comparison of average closing stock prices in June 2015 and June 2018. The actual number of market-based restricted stock units that may be earned ranges from 0% to 300% of the target number of shares. One-half of the market-based restricted stock units that vest based on performance as described above will vest in June 2018 following the end of the three-year performance period on and the remaining one-half will vest one year thereafter.

The Company used a Monte Carlo simulation model to estimate that the grant-date fair value of the restricted stock units. The fair value related to the restricted stock units will be recorded as compensation expense over the period from date of grant to June 2018 regardless of the actual TSR outcome reached.

The table below sets forth the assumptions used to value the awards and the estimated grant-date fair value:


Risk-free interest rate		1.10	%
Dividend yield		0	%
Remaining performance period (years)		2.96
Expected volatility		47.2	%
Estimated grant date fair value (per share)	$	107.10
Target performance (number of shares)		107,660