Stock-Based Compensation

2006 Stock Incentive Plan

The Company has one active stockholder-approved stock-based compensation plan, the 2006 Stock Incentive Plan (the "2006 Plan"), which replaced the Company's former stockholder-approved plans. Incentive stock options, non-qualified options, restricted stock awards, restricted stock units, and stock appreciation rights may be granted under the 2006 Plan.

The maximum number of shares of the Company's common stock available for issuance under the 2006 Plan is 8.5 million shares. As of December 31, 2012, 0.3 million shares were available for grant. It is the Company's policy that before stock is issued through the exercise of stock options, the Company must first receive all required cash payment for such shares.

Stock-based awards are governed by agreements between the Company and the recipients. Incentive stock options and nonqualified stock options may be granted under the 2006 Plan at an exercise price of not less than 100% of the closing fair market value of the Company's common stock on the respective date of grant. The grant date is generally the date the award is approved by the Compensation Committee of the Board of Directors, though for aggregate awards of 50,000 or less in each quarter, the grant date is the date the award is approved by the Company's Chief Executive Officer.

The Company's standard stock-based award vests 25% on the first anniversary of the date of grant, or for new hires, the first anniversary of their initial date of employment with the Company. Awards vest monthly thereafter on a straight-line basis over three years. Stock options must be exercised, if at all, no later than 10 years from the date of grant. Upon termination of employment with the Company, vested stock options may be exercised within 90 days from the last date of employment. In the event of an optionee's death, disability, or retirement, the exercise period is 365 days from the last date of employment.

Employee Stock Purchase Plan

Under the terms of the Company's 2006 Employee Stock Purchase Plan (the "ESPP"), eligible employees can purchase common stock through payroll deductions. The purchase price is equal to the closing price of the Company's common stock on the first or last day of the offering period (whichever is less), minus a 15% discount. The Company uses the Black-Scholes option-pricing model, in combination with the discounted employee price, in determining the value of ESPP expense to be recognized during each offering period.

The table below summarizes the stock-based compensation recognized, common stock shares purchased by Company employees, and the average purchase price per share as part of the ESPP program during the years ended December 31, 2012, 2011, and 2010.



	Year Ended December 31,
	2012		2011		2010
Stock-based compensation expense	$	759	$	733	$	468
Common stock shares purchased by Company employees	224		287		293
Average purchase price per share	$	10.59	$	6.84	$	3.81

Stock Options and Restricted Stock

The Company values stock-based awards, including stock options and restricted stock, as of the date of grant (and is marked-to-market at each reporting period for unvested grants issued to consultants).

The Company recognizes stock-based compensation expense (net of estimated forfeitures) using the straight-line method over the requisite or implicit service period, as applicable. Forfeitures of employee awards are estimated at the time of grant and the forfeiture assumption is periodically adjusted for actual employee exercise behavior.

Stock-Based Compensation Expense Summary

The Company classifies related compensation expense in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss), based on the Company department to which the recipient belongs. Stock-based compensation expense included in cost of goods sold and operating expenses for years ended December 31, 2012, 2011, and 2010 was as follows:



	Year Ended December 31,
	2012		2011		2010
Cost of goods sold	$	597	$	209	$	188
Operating expenses:
Research and development	1,336		753		362
Clinical and regulatory affairs	320		113		15
Marketing and sales	1,558		1,097		919
General and administrative	2,641		1,740		1,168
Total operating expenses	$	5,855	$	3,703	$	2,464

Total	$	6,452	$	3,912	$	2,652

In addition, the Company had $0.2 million, $0.2 million, and $43,000 of stock-based compensation capitalized in inventory as of December 31, 2012, 2011, and 2010, respectively.

Employee stock-based compensation expense for the years ended December 31, 2012, 2011, and 2010 was recognized (reduced for estimated forfeitures) on a straight-line basis over the vesting period. Applicable GAAP requires forfeitures to be estimated at the time of grant and prospectively revised if actual forfeitures differ from those estimates. The Company estimates forfeitures of stock options using the historical exercise behavior of its employees. For purposes of this estimate, the Company has applied an estimated forfeiture rate of 30% for the years ended December 31, 2012, 2011, and 2010.

Valuation Assumptions

The grant-date fair value per share for restricted stock awards was based upon the closing market price of the Company’s common stock on the award grant-date.

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model. The following assumptions were used to determine fair value for the stock awards granted in the applicable year:



	Year Ended December 31,
	2012	2011	2010
Average expected option life (in years) (a)	6.0	6.0	6.0
Volatility (b)	55.8%	56.6%	56.4%
Risk-free interest rate (c)	1.0%	2.0%	2.4%
Dividend Yield (d)	—%	—%	—%
Weighted-average grant-date fair value per stock option	$6.90	$4.55	$2.46

(a) Determined by the historical stock option exercise behavior of the Company's employees (maximum term is 10

years).

(b) Measured using weekly price observations for a period equal to stock options' expected term.

(c) Based upon the U.S. Treasury yields in effect at the end of the quarter that the options were granted (for a period equaling the stock options' expected term).

(d) The Company has never paid cash dividends on its common stock and does not expect to declare any cash dividends.

Stock Option Activity

Stock option activity during the years ended December 31, 2012, and 2011 is as follows:



	Number of Stock Options	Weighted Average Exercise Price	Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding — January 1, 2011	5,914,884	$3.91
Granted	1,264,333	8.38
Exercised	(1,393,794)	3.84		(a)	$7,246
Forfeited	(228,889)	5.29
Expired	—	—
Outstanding — December 31, 2011	5,556,534	$4.89
Granted	756,289	13.31
Exercised	(1,167,715)	4.28		(a)	$11,135
Forfeited	(188,378)	8.32
Expired	—	—
Outstanding — December 31, 2012	4,956,730	$6.21	6.9	(b)	$39,947
Vested and Expected to Vest — December 31, 2012	4,235,058	$5.87	6.7	(b)	$35,536
Vested — December 31, 2012	2,551,156	$4.35	5.7	(b)	$25,242

(a) Represents the total difference between the Company's stock price at the time of exercise and the stock option exercise price, multiplied by the number of options exercised.

(b) Represents the total difference between the Company's closing stock price on the last trading day of 2012 and the stock option exercise price, multiplied by the number of in-the-money options as of December 31, 2012. The amount of intrinsic value will change based on the fair market value of the Company's stock.

As of December 31, 2012 there was $3.3 million of total unrecognized compensation expense related to granted, but unvested stock options, which are expected to be recognized over a weighted average period of 2.8 years.

The following table summarizes information regarding outstanding stock option grants as of December 31, 2012:



					Outstanding				Exercisable
Range of Exercise Prices					Granted Stock Options Outstanding	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Granted Stock Options Exercisable	Weighted- Average Exercise Price
$	1.64	—	$	2.25	237,196	5.7	$	2.07	232,301	$	2.07
$	2.26	—	$	2.62	239,228	5.4	2.55		238,707	2.55
$	2.67	—	$	2.69	442,065	5.4	2.67		442,065	2.67
$	2.79	—	$	3.02	57,658	4.1	2.89		57,033	2.89
$	3.35	—	$	3.45	154,821	4.4	3.42		146,281	3.42
$	3.46	—	$	3.90	378,248	4.3	3.55		234,333	3.60
$	3.92	—	$	4.31	302,717	6.0	4.14		149,193	4.10
$	4.32	—	$	4.51	825,479	7.0	4.40		391,046	4.37
$	4.63	—	$	5.49	284,561	5.7	5.26		121,597	5.03
$	5.72	—	$	7.12	403,986	5.8	6.31		166,458	6.23
$	7.14	—	$	8.26	632,754	8.3	8.02		268,550	8.12
$	8.57	—	$	11.68	417,570	8.8	10.40		78,254	10.38
$	11.97	—	$	13.93	307,693	9.5	13.32		18,150	13.53
$	14.01	—	$	15.51	272,754	9.4	14.65		7,188	14.83
$	1.64	—	$	15.51	4,956,730	6.9	$	6.21	2,551,156	$	4.35

Non-employees - Stock Options

During the years ended December 31, 2012, 2011, and 2010, $0, $0, and $(7,000), respectively, was recorded as compensation expense for the change in the fair value of unvested non-employee option grants. During the years ended December 31, 2012 and 2011, the Company did not grant any stock options to non-employees.

As of December 31, 2012, 2011, and 2010, a total of 40,000, 40,000, and 68,750 non-employee stock options, respectively, were outstanding and fully vested.

Restricted Stock Award Activity

The following table summarizes activity and related information for the Company's restricted stock awards:



	Number of Restricted Stock Awards		Weighted Average Fair Value per Share at Grant Date		Grant Date Fair Value		Vest Date Fair Value*
Unvested as of December 31, 2009	685,000
Granted	518,045		$	5.95	$	3,082
Cancelled	(35,965	)
Vested	(575,625	)
Unvested as of December 31, 2010	591,455
Granted	34,000		$	6.19	$	210
Cancelled	(6,303	)
Vested	(35,851	)
Unvested as of December 31, 2011	583,301
Granted	475,253		$	12.67	$	6,022
Canceled	(43,598	)
Vested	(70,111	)					$	1,002
Unvested as of December 31, 2012	944,845

*Represents the Company's stock price on the vesting date multiplied by the number of vested shares.

The Company recognized restricted stock expense of $2.8 million, $0.9 million, and $0.4 million for the years ended December 31, 2012, 2011, and 2010, respectively. As of December 31, 2012, there was $6.4 million of unrecorded expense related to issued restricted stock that will be recognized over an estimated weighted average period of 2.2 years.

Non-employee Restricted Stock

During the years ended December 31, 2012, 2011, and 2010, $0.9 million, $0.4 million, and $43,000, respectively, was recorded as compensation expense for the change in the fair value of unvested non-employee restricted stock. During the years ended December 31, 2012 and 2011, the Company did not grant any restricted stock to non-employees.

As of December 31, 2012, 2011, and 2010, a total of 135,000, 169,000, and 135,000 shares of unvested restricted stock, respectively, issued to non-employees were outstanding.