Stock-based Compensation and Awards

6 Months Ended

Jun. 30, 2020

Share-based Payment Arrangement [Abstract]

Stock-based Compensation and Awards

Valuation Assumptions

Compensation expense for all share-based payment awards, including stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”), is measured based on the estimated fair value of the award on the grant date over the related vesting or performance periods.

We estimate the fair value of our stock-based awards as follows:

Restricted Stock Units. The fair value of restricted stock units is determined based on the quoted market price of our common stock on the date of grant.

Performance Stock Units. Performance stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “performance stock units”). The fair value of our performance stock units is estimated using a Monte-Carlo simulation model which is a probabilistic approach for calculating the fair value of the awards. The Monte-Carlo simulation is a statistical technique used, in this instance, to simulate future stock prices of the Company relative to constituents in the S&P 600 Health Care Equipment and Services Index. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.

Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2012 Employee Stock Purchase Plan (ESPP), respectively, is estimated using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility. An expected term is estimated based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.

Stock Option Activity

A summary of the stock option activity for the six months ended June 30, 2020 is presented below:



	Options Outstanding
	Number of options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
	Number of options		Weighted average exercise price		(in years)	(in thousands)
Outstanding at December 31, 2019	606,327		$	13.41	3.62	$	4,566
Options granted	—		—
Options exercised	(124,417	)	10.65
Options canceled	(1,700	)	9.40
Outstanding at June 30, 2020	480,210		$	14.15	3.09	$	3,542

At June 30, 2020, there was no unrecognized compensation cost related to options. As of June 30, 2020, there were 848,424 shares that remained available for future issuance of options, restricted stock units (“RSUs”) or other equity awards under the 2012 Equity Incentive Plan.

Employee Stock Purchase Plan

In March 2012, the Company’s 2012 Employee Stock Purchase Plan (the “ESPP”) was approved. During the six months ended June 30, 2020 employees purchased 126,046 shares of common stock at an average price of $15.60. During the six months ended June 30, 2019 employees purchased 61,691 shares of common stock at an average price of $29.32. As of June 30, 2020, there were 1,063,572 shares available for future issuance under the ESPP.

The following Black-Scholes option-pricing assumptions were used for each respective period for the ESPP:



	Three months ended June 30,		Six months ended June 30,
	2020	2019	2020	2019
Expected term (in years)	0.50	0.50	0.50	0.50
Volatility	50% - 54.14%	33% - 45.2%	50% - 54.14%	33% - 45.2%
Risk-free interest rate	0.15% - 1.59%	2.43% - 2.51%	0.15% - 1.59%	2.43% - 2.51%
Dividend yield	0%	0%	0%	0%

Restricted Stock Units and Performance Stock Units

A summary of RSU and PSU activity for the six months ended June 30, 2020 is presented below:



	Restricted Stock Units and Performance Stock Units
	Number of shares		Weighted Average Grant Date Fair Value per Share
Outstanding at December 31, 2019	1,550,646		$	28.94
Granted	1,308,571		21.91
Vested	(705,835	)	27.97
Forfeited	(28,158	)	28.03
Outstanding at June 30, 2020	2,125,224		$	24.95

At June 30, 2020, there was $46.6 million of unrecognized compensation cost related to RSUs and PSUs, which is expected to be recognized over a weighted-average period of 2.18 years.

During the three months ended June 30, 2020, we granted 145,877 PSUs to certain executives under our 2012 Equity Incentive Plan (the “2012 Plan”). PSUs are contingent on the achievement of our comparative market-based returns. On the date of grant, we estimated the fair value of the total shareholder return (TSR) component of the PSUs using a Monte Carlo valuation model. The PSUs will vest over a three-year performance period. The number of shares the PSU holder receives is based on the extent to which the corresponding market conditions have been achieved. For awards subject to service and market conditions, the number of shares of our stock issued pursuant to the award can range from 0% to 200% of the target amount. Compensation expense for awards with performance-based and service-based conditions is recognized over the requisite service period if it is probable that the performance condition will be satisfied. The expense for performance-based awards is evaluated each quarter based on the achievement of the performance conditions.

The assumptions used in the Monte Carlo valuation model to value the PSUs were as follows:



	June 30, 2020
Grant date fair value per share	$	30.70
Expected term (in years)	3
Volatility	42.68		%
Risk-free interest rate	0.20		%
Dividend yield	—		%

Allocation of Stock-Based Compensation Expense

The following table presents the allocation of stock-based compensation expense:



	Three months ended June 30,				Six months ended June 30,
(in thousands)	2020		2019		2020		2019
Cost of revenue	$	1,114	$	1,178	$	2,087	$	2,156
Research and development	1,023		1,034		1,989		1,856
Sales and marketing	1,961		1,758		3,821		3,478
General and administrative	2,268		2,139		4,310		4,163
Total stock-based compensation	$	6,366	$	6,109	$	12,207	$	11,653