Note 6. Stock-Based Compensation

Stock Option Grants

The Company granted options to purchase 70,000 shares and 442,010 shares of common stock to employees during the three and six months ended June 30, 2014, respectively, and 57,750 shares and 375,250 shares of common stock to employees during the three and six months ended June 30, 2013, respectively. For the three and six months ended June 30, 2014, the Company issued 164,441 and 258,750 shares of common stock in connection with the exercise of stock options with a weighted-average exercise price of $11.51 and $11.16 per share, respectively. For the three and six months ended June 30, 2013, the Company issued 311,794 and 507,318 shares of common stock in connection with the exercise of stock options with a weighted-average exercise price of $17.04 and $16.70 per share, respectively.

Restricted Stock Units

During the three and six months ended June 30, 2014, the Company awarded 13,934 and 345,187 restricted stock units (“RSUs”) with a grant-date fair value equal to $370,226 and $10.1 million, respectively. During the three and six months ended June 30, 2013, the Company awarded 15,760 and 268,523 RSUs with a grant-date fair value equal to $441,000 and $7.7 million, respectively. Each RSU entitles the recipient to receive one share of the Company’s common stock upon vesting. RSUs awarded to employees generally vest as to one-third of the total number of shares awarded annually over a three-year period. During the three and six months ended June 30, 2014, the Company issued 8,141 and 172,673 shares of common stock in connection with the vesting of RSUs with a weighted-average grant date fair value of $31.95 and $28.17 per share, respectively. During the three and six months ended June 30, 2013, the Company issued 9,508 and 211,463 shares of common stock, respectively, in connection with the vesting of RSUs with a weighted-average grant date fair value of $32.05 and $26.69 per share, respectively.

Performance-Based Vesting Restricted Stock Units

In March 2014, the Company approved awards of performance-based restricted stock units (“PVRSUs”) for certain senior officers under the Company’s 2005 Stock Incentive Plan, as amended and restated by the Board of Directors on March 24, 2014. The awards were subject to approval of the amended and restated plan by the Company’s stockholders at the 2014 Annual Meeting. In order for the senior officers to be eligible to earn any of the PVRSUs, the Company must achieve certain corporate-level objectives. The amount potentially available under a PVRSU is subject to the attainment of pre-established, objective performance goals over a specified period. The PVRSUs vest based on achievement of three performance milestones, not to exceed 100% in the aggregate: a revenue milestone, weighted from 0% to 100%: a tests delivered milestone, weighted from 0% to 100%; and a reimbursement-related milestone, weighted from 0% to 33 1/3%. In addition, the awards also have a service vesting criteria following the achievement of performance criteria through February 2016. As of June 30, 2014, there were 40,600 PVRSUs outstanding with a grant date fair value of $1.1 million.

The Company recognizes the fair value of these awards to the extent the achievement of the related performance criteria is estimated to be probable. If a performance criteria is subsequently determined to not be probable of achievement, any related expense is reversed in the period such determination is made. Conversely, if a performance criteria is not currently expected to be achieved but is later determined to be probable of achievement, a “catch-up” entry is recorded in the period such determination is made for the expense that would have been recognized had the performance criteria been probable of achievement since the grant of the award. As of June 30, 2014, the achievement of the performance criteria is estimated not to be probable and no expense has been recognized related to the PVRSUs during either the three or six months ended June 30, 2014. Changes in the Company’s assessment of the probability of achievement of performance criteria could have a material effect on the results of operations in future periods.

Restricted Stock in Lieu of Directors’ Fees

Outside members of the Company’s Board of Directors may elect to receive fully-vested restricted stock in lieu of cash compensation for services as a director. During the three and six months ended June 30, 2014, the Company issued 2,256 and 3,961 shares of restricted stock to outside directors, with a grant date fair value of $60,000 and $110,000, respectively, and a weighted-average grant date fair value of $26.57 and $27.73 per share, respectively. During the three and six months ended June 30, 2013, the Company issued 2,142 and 3,977 shares of restricted stock to outside directors, with a grant date fair value of $60,000 and $110,000, respectively, and a weighted-average grant date fair value of $27.99 and $27.64 per share, respectively.

Employee Stock Purchase Plan

During the three and six months ended June 30, 2014, 101,701 shares were issued under the employee stock purchase plan (“ESPP”). A total of 1,250,000 shares of common stock have been reserved for issuance under the ESPP, of which 849,355 shares were available for issuance as of June 30, 2014. As of June 30, 2014, there was $528,000 of unrecognized compensation expense related to the ESPP, which is expected to be recognized over an estimated weighted-average period of five months.

Employee Stock-Based Compensation Expense

The Company recognized employee stock-based compensation expense of $4.3 million and $8.6 million for the three and six months ended June 30, 2014, respectively, and $4.1 million and $8.5 million for the three and six months ended June 30, 2013, respectively. Employee stock-based compensation expense includes expense related to stock option grants, RSU awards to employees, restricted stock issued in lieu of outside director fees and stock purchased under the Company’s ESPP. Stock-based compensation expense is calculated based on options and RSUs ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates

Valuation Assumptions

The Company values its stock option grants using the Black-Scholes option valuation model. Option valuation models require the input of highly subjective assumptions that can vary over time. The Company’s assumptions regarding expected volatility are based on the historical volatility of the Company’s common stock. The expected life of options granted is estimated based on historical option exercise data and assumptions related to unsettled options. The risk-free interest rate is estimated using published rates for U.S. Treasury securities with a remaining term approximating the expected life of the options granted. The Company uses a dividend yield of zero as it has never paid cash dividends and does not anticipate paying cash dividends in the foreseeable future. The weighted-average fair values and assumptions used in calculating such values during each period are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Expected volatility:
Stock options	44		%	45		%	44		%	46		%
ESPP	36		%	44		%	35		%	47		%
Risk-free interest rate:
Stock options	1.91		%	1.46		%	1.97		%	1.29		%
ESPP	0.09		%	0.12		%	0.09		%	0.13		%
Expected life in years:
Stock options	6.33			6.66			6.61			6.65
ESPP	0.50			0.50			0.50			0.50
Weighted-average fair value:
Stock options	$	12.63		$	16.71		$	14.13		$	13.73
ESPP	$	7.55		$	7.68		$	7.84		$	7.59