Note 9. Stock‑based Compensation

2005 Stock Incentive Plan

On September 8, 2005, the Board of Directors approved the 2005 Stock Incentive Plan (the “2005 Plan”), which was later approved by the Company’s stockholders. Pursuant to the 2005 Plan, stock options, restricted shares, stock units, including RSUs, and stock appreciation rights may be granted to employees, consultants, and outside directors of the Company. Options granted may be either incentive stock options or nonstatutory stock options. The Company initially reserved 5,000,000 shares of the Company’s common stock for issuance under the 2005 Plan, effective upon the closing of the Company’s initial public offering on October 4, 2005. On June 8, 2009, the Company’s stockholders approved an amendment to the 2005 Plan to increase the shares reserved for issuance under the 2005 Plan by 3,980,000 shares. The amended and restated plan also extends the term under which awards may be granted under the 2005 Plan until January 27, 2019. On June 11, 2015, the Company’s stockholders approved an amendment to the amended and restated 2005 Plan to increase the shares reserved for issuance under the 2005 Plan by 1,500,000 shares. As of December 31, 2015, options to purchase 2,000,000 shares of common stock were available for future grant under the 2005 Plan.

Stock Option Activity

Stock options are governed by stock option agreements between the Company and recipients of stock options. Incentive stock options may be granted under the 2005 Plan at an exercise price of not less than 100% of the fair market value of the common stock on the date of grant, determined by the Compensation Committee of the Board of Directors. Nonstatutory stock options may be granted under the 2005 Plan at an exercise price of not less than 80% of the fair market value of the common stock on the date of grant, determined by the Compensation Committee of the Board of Directors. Options become exercisable and expire as determined by the Compensation Committee, provided that the term of incentive stock options may not exceed 10 years from the date of grant. Stock option agreements may provide for accelerated exercisability in the event of an optionee’s death, disability, or retirement or other events.

Under the 2005 Plan, each outside director who joins the board after the effective date of the 2005 Plan will receive an automatic nonstatutory stock option grant that vests at a rate of 25% at the end of the first year, with the remaining balance vesting monthly over the next three years. On the first business day following the annual meeting of the Company’s stockholders, each outside director who is continuing board service and who was not initially elected to the board at the annual meeting will receive an additional nonstatutory stock option grant, which will vest in full on the first anniversary of the date of grant or, if earlier, immediately prior to the next annual meeting of the Company’s stockholders. Nonstatutory stock options granted to outside directors must have an exercise price equal to 100% of the fair market value of the common stock on the date of grant. Nonstatutory stock options terminate on the earlier of the day before the tenth anniversary of the date of grant or the date twelve months after termination of the outside director’s service as a member of the Board of Directors.

The following table summarizes option activity for the year ended December 31, 2015:


				Weighted-Average
	Outstanding Options			Remaining	Aggregate
	Number of	Weighted-Average		Contractual	Intrinsic
	Shares	Exercise Price		Life	Value
	(In thousands)	(In years)			(In thousands)
Balance at December 31, 2014	3,777	$	22.10
Options granted	450	$	30.38
Options exercised	(489)	$	15.34
Options forfeited	(47)	$	29.96
Options expired	(61)	$	29.73
Balance at December 31, 2015	3,630	$	23.80	5.1	$	41,402
Exercisable at December 31, 2015	2,872	$	22.06	4.1	$	37,776
Vested and expected to vest at December 31, 2015	3,572	$	23.69	5.0	$	41,144

The total intrinsic value of stock options exercised during the years ended December 31, 2015, 2014 and 2013 was $6.6 million, $8.2 million and $13.5 million, respectively. The total fair value of stock options vested during the years ended December 31, 2015, 2014 and 2013 was $4.2 million, $6.0 million and $7.3 million, respectively.

Performance-Based Vesting Stock Options

In February 2015, the Company granted performance-based vesting stock options (“PV stock options”) to purchase 148,100 shares of common stock with weighted-average exercise price of $31.12. There were no PV stock options granted prior to 2015. The number of shares potentially issuable under PV stock options were subject to the attainment of pre-established, objective performance goals over a specified period. In addition, the awards had a service vesting criteria following the achievement of performance criteria through February 2019. As of December 31, 2015, the achievement of the performance criteria was estimated to be remote and all the PV stock options were cancelled.

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 criterion 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 criterion 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 criterion been probable of achievement since the grant of the award.

Restricted Stock Unit Activity

In 2011, the Compensation Committee of the Board of Directors revised the Company’s equity incentive guidelines. Under the revised guidelines, most employees receive grants of RSUs in lieu of stock options. Employees with titles of vice president and above are eligible to receive stock options and RSUs. The target percentages of equity grant value for employees with titles of vice president and above other than executive officers are 50% stock options and 50% RSUs, and the target percentages for executive officers are 75% stock options and 25% RSUs. The RSUs generally vest in three equal annual installments. As of April 2011, outside directors were given the option to elect to receive some or all of their retainers (other than retainers for serving as committee chair) in the form of fully‑vested restricted stock. Restricted shares, stock units and stock appreciation rights granted under the 2005 Plan are governed by agreements between the Company and recipients of the awards. Terms of the agreements are determined by the Compensation Committee.

A following table summarizes RSU activity for the year ended December 31, 2015:


		Weighted-Average
	Number of	Grant Date Fair
	Shares	Value
	(In thousands)
Balance at December 31, 2014	630	$	29.65
RSUs granted	443	$	30.65
RSUs vested	(308)	$	29.78
RSUs cancelled	(83)	$	30.17
Balance at December 31, 2015	682	$	30.18

The weighted-average per share grant date fair values of RSUs granted were $30.65, $29.05 and $30.56 during the years ended December 31, 2015, 2014 and 2013, respectively. The fair value of RSUs vested were $9.4 million, $9.1 million $6.9 million for the year ended December 31, 2015, 2014 and 2013, respectively.

Performance-Based Restricted Stock Unit Activity

Under the 2005 Plan, the Company grants performance-based restricted stock units (“PVRSUs”) which vest upon achievement of specified performance goals. The fair value of each PVRSU is estimated at the date of grant or when performance objectives are defined for the grants.

In March 2014, the Company approved awards of PVRSUs for certain senior officers under the 2005 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, which was approved at the June 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 was 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 December 31, 2014, there were 13,533 PVRSUs outstanding with a grant date fair value of $368,000.

In February 2015, the Company awarded 22,980 PVRSUs with a grant-date fair value of $715,000, or $31.12 per share. The amount potentially available under the PVRSU was subject to the attainment of a pre-established, objective performance goal over a specified period. In addition, the award had a service vesting criteria following the achievement of performance criteria through February 2018. As of December 31, 2015, the achievement of the performance criteria was estimated to be remote and the award was cancelled.

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.

A following table summarizes PVRSU activity for the year ended December 31, 2015:


		Weighted-Average
	Number of	Grant Date Fair
	Shares	Value
	(In thousands)
Balance at December 31, 2014	14	$	27.21
PVRSUs granted	23	$	31.12
PVRSUs vested	(7)	$	27.21
PVRSUs cancelled	(24)	$	31.02
Balance at December 31, 2015	6	$	27.21

The weighted-average per share grant date fair values of PVRSUs granted were $31.12 and $27.21 during the years ended December 31, 2015 and 2014, respectively. The fair value of PVRSUs vested was $211,000 for the year ended December 31, 2015. There were no PVRSUs vested during 2014 and no PVRSUs granted prior to 2014.

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 years ended December 31, 2015, 2014 and 2013, the Company issued 7,365, 8,209, and 7,769 shares of restricted stock, respectively, to outside directors, with vesting date fair values of $200,000, $230,000, and $230,000, respectively, and a weighted‑average grant date fair value of $27.10, $27.97, and $29.54 per share, respectively.

Employee Stock Purchase Plan

In June 2011, the Company’s stockholders approved the Company’s Employee Stock Purchase Plan (“ESPP”). The ESPP provides eligible employees with an opportunity to purchase common stock from the Company and to pay for their purchases through payroll deductions. The ESPP is implemented through a series of offerings of purchase rights to eligible employees beginning December 1, 2011. Under the ESPP, the Compensation Committee of the Company’s Board of Directors may specify offerings with a duration of not more than 27 months, and may specify shorter purchase periods within each offering. During each purchase period, payroll deductions accumulate without interest. On the last day of the purchase period, accumulated payroll deductions are used to purchase common stock for employees participating in the offering. The purchase price is specified pursuant to the offering, but cannot, under the terms of the ESPP, be less than 85% of the fair market value per share of the Company’s common stock on either the last trading day preceding the offering date or on the purchase date, whichever is less.

The Company’s Board of Directors has determined that the purchase periods initially shall have a duration of six months and that the purchase price will be 85% of the fair market value per share of the Company’s common stock on either the last trading day preceding the offering date or the purchase date, whichever is less. The length of the purchase period applicable to U.S. employees and the purchase price may not be changed without the approval of the independent members of the Company’s Board of Directors.

A total of 1,250,000 shares of common stock have been reserved for issuance under the ESPP, of which 555,896 shares were available for issuance as of December 31, 2015. During 2015, 2014 and 2013, 203,842, 191,318 and 152,881 shares were issued under the ESPP, respectively.

As of December 31, 2015, there was $736,000 of unrecognized compensation expense related to the ESPP, which is expected to be recognized over a period of five months.

Employee Stock‑Based Compensation Expense

Stock-based compensation is recognized as expense over the requisite service periods in the consolidated statements of operations using the straight-line expense attribution approach for stock options and RSUs, and using a graded vesting expense attribution approach for PV stock options and PVRSUs. The Company recognized employee stock‑based compensation expense of $16.0 million, $16.5 million and $17.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. Employee stock‑based compensation expense was calculated based on awards 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. Employee stock‑based compensation expense includes expense related to stock options granted to outside directors of the Company as well as stock purchased under the ESPP. The following table presents the impact of employee stock‑based compensation expense on selected statement of operations line items for the periods indicated:


	Year Ended December 31,
	2015		2014		2013
	(In thousands)
Cost of product revenues	$	525	$	497	$	483
Research and development		4,228		4,143		4,486
Selling and marketing		4,526		4,822		4,756
General and administrative		6,726		7,076		7,732
Total	$	16,005	$	16,538	$	17,457

As of December 31, 2015, unrecognized compensation expense related to unvested stock options, RSUs and PVRSUs, net of estimated forfeitures, were $6.7 million, $12.3 million and $12,000, respectively. The Company expects to recognize these expenses over a weighted‑average period of 2.4 years, 1.9 years, and 0.1 year, respectively. There was no unrecognized compensation expense related to unvested PV stock options.

Valuation Assumptions

Fair values of awards granted under the 2005 Plan and ESPP were estimated at grant or purchase dates using a 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 fiscal year are as follows:


	Year Ended December 31,
	2015			2014			2013
Expected volatility:
Stock options		44	%		44	%		46	%
ESPP		35	%		37	%		39	%
Risk-free interest rate:
Stock options		1.66	%		1.97	%		1.40	%
ESPP		0.10	%		0.08	%		0.11	%
Expected life in years:
Stock options		5.94			6.61			6.64
ESPP		0.50			0.50			0.50
Weighted-average fair value:
Stock options	$	13.37		$	14.13		$	14.11
ESPP	$	6.99		$	7.24		$	7.82