Stock-Based Compensation

Under the 2004 Amended and Restated Equity Incentive Plan, as amended (the "2004 EIP"), the Company had the ability to grant stock options, stock appreciation rights, restricted stock units, restricted stock awards, performance awards, and deferred stock awards. The 2004 EIP terminated in accordance with its terms on February 20, 2014. Since it has terminated, no further awards may be granted under the 2004 EIP, however, that plan continues to govern grants made under it. In March 2014, the Compensation Committee (the "Compensation Committee") of the Board of Directors of the Company adopted the 2014 Equity Incentive Plan of NuVasive, Inc. subject to stockholder approval, which, if approved, would also provide the Company with the ability to grant equity awards to its workforce. Additionally, the NuVasive, Inc. 2004 Employee Stock Purchase Plan, as amended (the "ESPP") provides eligible employees with a means of acquiring equity in the Company through accumulated payroll deductions and at a discounted purchase price.

The Company uses the Black-Scholes option-pricing model (the "Black-Scholes model") to value share-based employee stock option and purchase right awards and Monte Carlo simulations (the "Monte Carlo model") to value performance-based restricted stock units. The Company uses the stock price on the date of grant to value time-based restricted stock units. The determination of fair value of stock-based payment awards using the Black-Scholes model and the Monte Carlo model requires the use of certain estimates and assumptions that affect the reported amount of share-based compensation cost recognized in the condensed consolidated statements of operations. Among these cost-affecting estimates are the expected term of awards, estimated forfeitures, expected volatility of the Company’s stock price, expected dividends and the risk-free interest rate. In addition to these assumptions, performance-based conditions require the assessment of probability of achievement and correlation coefficients. The fair value of equity instruments that are expected to vest are recognized and amortized on an accelerated basis over the requisite service periods.

Stock Options and Purchase Rights

The weighted average assumptions used to estimate the fair value of stock purchase rights under the ESPP are as follows:



	Three Months Ended March 31,
	2014		2013
ESPP
Volatility	47	%	58	%
Expected term (years)	1.1		1.5
Risk free interest rate	0.2	%	0.2	%
Expected dividend yield	—	%	—	%

The Company did not grant any stock options during the three months ended March 31, 2014 or 2013.

The Company issued approximately 405,000 shares of common stock upon the exercise of stock options during the three months ended March 31, 2014 and issued approximately 177,000 shares of common stock upon the exercise of stock options during the year ended December 31, 2013.

Restricted Stock Units

Time-based restricted stock units ("RSUs") represent a right to receive shares of common stock at a future date determined in accordance with the participant’s award agreement. An exercise price and monetary payment are not required for receipt of RSUs or the shares issued in settlement of the respective awards. Instead, consideration is furnished in the form of the participant’s services to the Company. Time-based RSUs have graded vesting terms of up to four years. Total compensation cost for these awards is based on the fair value of the award on the date of grant. Performance-based restricted stock units ("PRSUs") are granted to certain senior Company executives and are earned based on the achievement of pre-defined performance criteria. The Compensation Committee has granted PRSUs annually since 2012, of which shares were earned in 2012 and 2013 pursuant to such types of awards. During February 2014, the Compensation Committee granted PRSUs (the "2014 PRSUs") with performance criteria measured by the Company’s two-year total shareholder return ("TSR") and total revenue growth, each as measured over the two-year performance period spanning 2014 and 2015. Each performance metric is also weighted equally and determined independently. The Company’s two-year TSR is measured as the change in the Company’s stock price between the opening stock price for 2014 and December 31, 2015, with the latter price being measured as the fifteen trading-day trailing average of the Company's stock price as of December 31, 2015. The target TSR is the median TSR of the companies comprising the Dow Jones Medical Devices Index. Achievement of a Company two-year TSR in excess of the 90th percentile of the index will result in shares equal to 250% of the target amount of PRSUs being awarded for this goal. Conversely, no shares would be awarded if the Company’s two-year TSR is below the 30th percentile of the index; provided, however, that, if the Company’s TSR during the two-year performance period is more than 5%, then, notwithstanding the Company’s percentile ranking, the minimum PRSU multiplier will be 25%. Revenue growth performance is measured as total revenue growth against the target revenue growth as determined by the Compensation Committee, measured over the two-year performance period spanning fiscal years 2014 and 2015. Achievement of 185.7% of the target revenue growth goal would result in shares equal to 250% of the target amount of PRSUs being awarded for this goal. Conversely, no shares would be awarded upon achievement of less than 28.6% of the target revenue growth goal. The number of shares achieved with respect to the 2014 PRSUs will be determined in or around January 2016, upon determination of the Company’s two-year TSR and total revenue growth over the two-fiscal year performance period as compared to the respective targets. Once the number of shares are determined pursuant to the formula, half of any such shares will vest on a date shortly after the date of such determination, as determined by the Compensation Committee, and the remaining half will vest on the one-year anniversary of such date, subject to continuous employment through each of the vesting dates.

The fair value of the 2014 PRSUs based on the TSR performance metric is measured on the date of grant using a Monte Carlo model and the associated expense is amortized over the three-year period from the date of grant. The fair value of the PRSUs based on the revenue growth performance metric is measured on the date of grant, considering a probability of achieving the specific goals, and expense is amortized over the three-year vesting period.

The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes. The Company considered its historical experience of pre-vesting forfeitures on RSUs by employee ("shareowner") rank as the basis to arrive at its estimated annual pre-vesting forfeiture rate of 0% to 8% per year for the three months ended March 31, 2014.

At March 31, 2014, there was $44.2 million of unamortized compensation expense for RSUs and PRSUs to be recognized over the remaining vesting periods.

The Company issued approximately 1,210,000 shares of common stock upon the vesting of RSUs and PRSUs during the three months ended March 31, 2014 and issued approximately 665,000 shares of common stock upon the vesting of RSUs and PRSUs during the year ended December 31, 2013.

The compensation cost that has been included in the statement of operations for all stock-based compensation arrangements was as follows (in thousands):



	Three Months Ended March 31,
	2014		2013
Sales, marketing and administrative expense	$	7,186	$	6,424
Research and development expense	465		342
Cost of goods sold	113		21
Total stock-based compensation expense	$	7,764	$	6,787