Stockholders' Equity

3 Months Ended

Mar. 31, 2013

Stockholders' Equity

Note 11. Stockholders’ equity

Common Stock

As of March 31, 2013, the Company had reserved the following shares of authorized but unissued common stock:

	Common Stock
Stock option plans		5,088,612
Stock purchase plan		257,734
Warrants		4,482
		5,350,828

Private Sale of Common Stock

On April 27, 2012, the Company issued and sold approximately 4.97 million shares of its common stock in a private placement transaction at a price of $8.00 per share for a gross amount of approximately $39.8 million.

The shares of common stock are restricted from transfer pursuant to a lockup agreement for up to two years, at the end of which the Company is obligated to file one or more registration statements covering the potential resale of the shares of common stock.

In connection with this private placement transaction, the Company agreed to certain performance obligations including establishing a wholly-owned subsidiary in the Russian Federation and making a $30.0 million investment commitment (the ‘Investment Obligation’) towards the Company’s Russian operations. The Investment Obligation can be partially satisfied by investment outside of the Russian Federation and/or by way of non-cash asset transfers, including but not limited to capital equipment, small tools, intellectual property, and other intangibles.  A minimum of $15.0 million of the Investment Obligation is required to be satisfied by making capital expenditures and the remaining $15.0 million can be satisfied through general working capital and research and development expenditures.  All of the amount for general working capital can be spent either inside or outside of Russia.  However, at least 80% of the amount expended for research and development expenditure must be spent inside Russia.  General working capital can include acquisition of other businesses or portions thereof to be owned by the Russian subsidiary.

The purchaser of the common stock has non-transferable veto rights over the Company’s Russian subsidiary’s annual budget during the investment period and must approve non-cash asset transfers to be made in satisfaction of the Investment Obligation.  Spending and/or commitments to spend for general working capital and research and development do not require approval by the purchaser. There are no legal restrictions on the specific usage of the $39.8 million received in the private placement transaction or on withdrawal from the Company’s bank accounts for use in general corporate purposes.

The Company is required to satisfy the Investment Obligation by July 31, 2014 or, in the event the Company has not recorded aggregate revenue from sales of its products in the Russian Federation of at least $26.8 million during the period beginning July 1, 2012 and ending June 30, 2014, then will be automatically extended from July 31, 2014 to March 31, 2015. The Company expects the date for achievement of the Investment Obligation will be extended to March 31, 2015. Therefore, the Company intends to meet its Investment Obligation by March 31, 2015.  If the Company fails to meet the Investment Obligation by the deadline, including failure to meet the Investment Obligation because the purchaser of the common stock does not approve the transfer of non-cash assets, the Company will be required to pay a $5.0 million penalty (the ‘Penalty Payment’) as the sole and exclusive remedy for damages and monetary relief available to the purchaser for failure to meet the Investment Obligation.  

The Company has accounted for the $5.0 million Penalty Payment as an embedded derivative instrument, with the underlying being the performance or nonperformance of meeting the Investment Obligation by the extended deadline of March 31, 2015 and has classified $4.9 million of the $5.0 million as additional paid-in capital and the remaining $0.1 million, representing the estimated fair value of the Penalty Payment derivative, as other noncurrent liabilities.

The fair value of the Penalty Payment derivative has been estimated at the date of the original common stock sale (April 27, 2012) and at each subsequent balance sheet date using a probability-weighted discounted future cash flow approach using unobservable inputs, which are classified as Level 3 within the fair value hierarchy. The primary inputs for this approach include the probability of achieving the Investment Obligation and a discount rate that approximates the Company’s incremental borrowing rate. After the initial measurement, changes in the fair value of this derivative were recorded in other income (expense). The change in fair value of the Penalty Payment derivative from April 27, 2012 to December 31, 2012 and to March 31, 2013 was not significant.

Accumulated Deficit

Approximately $6.3 million of the Company’s accumulated deficit at December 31, 2012 was subject to restriction due to the fact that the Company’s subsidiaries in China are required to set aside at least 10% of their respective accumulated profits each year to fund statutory common reserves as well as allocate a discretional portion of their after-tax profits to their staff welfare and bonus fund.

Equity Incentive Programs

The Company grants stock options, restricted stock units, stock appreciation units and stock purchase rights pursuant to stockholder and board approved equity incentive plans. These equity incentive plans are described in further detail in Note 12 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Stock options and restricted stock units

The following table summarizes the Company’s stock option activity during the three months ended March 31, 2013:

				Stock Options					Restricted Stock Units
	Shares available for grant			Numberofshares			Weighted average exercise price		Numberofunits			Weighted average grant date fair value
Balance at December 31, 2012		382,668			2,773,887		$	5.87		924,823		$	5.84
Authorized for issuance		1,069,115			-			0.00		-			0.00
Granted		(30,000	)		17,800			5.60		12,200			5.74
Exercised/Converted		-			(18,251	)		4.32		(51,634	)		6.12
Forfeited		58,998			(14,472	)		8.43		(36,522	)		5.84
Balance at March 31, 2013		1,480,781			2,758,964		$	5.86		848,867		$	5.82

The following table summarizes information about stock options outstanding as of March 31, 2013:

	Options Outstanding
	Numberofshares		Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value(in thousands)
Vested and expected to vest		2,700,303	$	5.87		6.39	$	1,228
Exercisable		1,902,220	$	5.67		5.50	$	1,143

The intrinsic value of options vested and expected to vest and exercisable as of March 31, 2013 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of March 31, 2013. The intrinsic value of options exercised during the three months ended March 31, 2013 and 2012 was $16,000 and $14,000, respectively.

The following table summarizes information about restricted stock units outstanding as of March 31, 2013:

	Restricted Stock Units Outstanding
	Number ofshares		Weighted average grant date fair value		Weighted average remaining contractual term (years)		Aggregate intrinsic value (in thousands)
Vested and expected to vest		782,071	$	5.82		1.15	$	3,996

The intrinsic value of restricted stock units vested and expected to vest as of March 31, 2013 is calculated based on the fair value of the Company’s common stock as of March 31, 2013. The intrinsic value of restricted stock units converted during the three months ended March 31, 2013 and 2012 was $301,000 and $0, respectively.

Stock appreciation units

The following table summarizes the Company’s stock appreciation unit activity during the three months ended March 31, 2013:

	Stock Appreciation Units			Weightedaverageexerciseprice
Stock appreciation units outstanding as of December 31, 2012		212,534		$	7.07
Stock appreciation units cancelled		(4,423	)		8.93
Stock appreciation units exercised		(316	)		4.25
Stock appreciation units outstanding as of March 31, 2013		207,795		$	7.04

The following table summarizes information about stock appreciation units outstanding as of March 31, 2013:

	Stock Appreciation Units Outstanding
	Number ofunits		Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value(in thousands)
Vested and expected to vest		207,396	$	7.03		5.86	$	101
Exercisable		181,913	$	6.71		5.69	$	98

The intrinsic value of stock appreciation units vested and expected to vest and exercisable as of March 31, 2013 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of March 31, 2013. The intrinsic value of stock appreciation units exercised during the three months ended March 31, 2013 and 2012 was $0 and $6,000, respectively.