Stock-Based Compensation

Stock Plans

In 2002, the Company adopted the 2002 Stock Plan (the “2002 Plan”), pursuant to which its board of directors issued incentive stock options, non-statutory stock options and stock purchase rights to its employees, officers, directors and consultants. In March 2010, the Company's board of directors and stockholders approved the 2010 Equity Incentive Award Plan (the “2010 Plan”), which became effective upon the completion of its initial public offering ("IPO") in April 2010. The 2010 Plan is similar to the 2002 Plan but allows for issuance of additional awards, such as a restricted stock unit (“RSU”), performance stock unit (“PSU”), deferred stock award and stock appreciation rights. A total of 1,100,000 shares of common stock were initially reserved for future issuance under the 2010 Plan and any shares of common stock reserved for future grant or issuance under the Company's 2002 Plan that remained unissued at the time of completion of the IPO became available for future grant or issuance under the 2010 Plan. In addition, the shares reserved for issuance pursuant to the exercise of any outstanding awards under the 2002 Plan that expire unexercised will also become available for future issuance under the 2010 Plan. The 2010 Plan also provides for automatic annual increases in the number of shares reserved for future issuance. As of June 30, 2014, total shares remaining available for issuance were approximately 5.4 million.

Performance Stock Units

PSUs awarded may be conditional upon the attainment of one or more performance objectives over a specified period. Total compensation expense for PSUs is determined by the product of the number of shares eligible to be awarded and expected to vest, and the market price of the Company's common stock, commencing at the inception of the requisite service period. The fair value of such an award is equal to the closing price of our common stock on the grant date. At the end of the performance period, if the goals are attained, the awards are granted. The Company recognizes compensation expense of these awards on a straight-line basis over the vesting period.

The Company awarded 775,000 PSUs for the six months ended June 30, 2014 and 523,048 PSUs for the six months ended June 30, 2013 under the 2010 Plan based upon achieving certain cash flow performance goals for each respective year. These PSUs vest such that one-half of the PSUs subject to the award vest one year following the grant, and the remainder of the PSUs vest two years following the grant, subject to the recipient’s continued service to the Company on each vesting date and the Company achieving the performance goals. If the performance goal is achieved at the threshold level the number of shares issuable in respect of the PSUs would be equal to half the number of PSUs granted. If the performance goal is achieved at the target level, the number of shares issuable in respect of the PSUs would be equal to the number of PSUs granted. If the performance goal is achieved at the superior level, the number of shares issuable in respect of the PSUs would be equal to two times the number PSUs granted. The number of shares issuable upon achievement of the performance goal at the levels between the threshold and target levels or target level and superior levels is determined using linear interpolation. Achievement below the threshold level results in no shares being issuable in respect of the PSUs.

During 2013, the Company revised its estimate of forecasted performance criteria and concluded that the performance target would not likely be achieved for the PSUs that were granted in 2013. The 358,308 outstanding PSUs that were granted in 2013 were canceled in February 2014 when the Company determined that it had not attained the threshold performance target for the 2013 awards.

Stock-Based Compensation Expense

The following table presents total stock-based compensation expense by functional areas included in the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Research and development	$	268	$	502	$	507	$	1,706
Selling, general and administrative	1,078		760		2,068		1,029
Total	$	1,346	$	1,262	$	2,575	$	2,735

Total stock-based compensation expense capitalized to inventory was not material for the periods presented.

The following table presents total stock-based compensation expense by security types included in the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Stock options	$	320	$	531	$	596	$	1,141
RSUs and RSAs	792		604		1,661		1,296
PSUs	234		127		318		298
Total	$	1,346	$	1,262	$	2,575	$	2,735

As of June 30, 2014, unrecognized stock-based compensation expense, net of expected forfeitures, was: $2.0 million related to unvested employee stock options; $3.8 million related to unvested RSUs and RSAs; and $0.9 million related to unvested PSUs.

Valuation Assumptions

The range of weighted-average assumptions used to estimate the fair value of employee stock options granted was as follows:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Expected term (in years)	—			6.0			6.0			6.0
Volatility	—			.6520			0.6394			0.6520
Risk-free interest rate	—		%	1.13		%	0.19		%	1.07%-1.13%
Dividend yield	—		%	—		%	—		%	—		%
Weighted-average estimated fair value of stock options granted	$	—		$	1.26		$	1.15		$	1.36

No employee stock options are shown for the three months ended June 30, 2014, as no stock options were granted during this period.