Note 12. Stock-based compensation

Stock-based compensation expense

The Company’s stock-based compensation expense was recorded as follows (in thousands):


	Three months ended March 31,
(in thousands)	2013		2012
Cost of goods sold	$	243	$	188
Research and development		418		469
Sales and marketing		238		209
General and administrative		303		278
	$	1,202	$	1,144

Stock options

The following tables summarize the components of stock-based compensation expense for stock options for the three months ended March 31, 2013 and 2012, respectively (in thousands):


	Three months ended March 31,
	2013		2012
Cost of goods sold	$	79	$	61
Research and development		174		209
Sales and marketing		78		94
General and administrative		173		174
	$	504	$	538

The weighted-average fair value of options granted was $3.80 and $4.33 per share for the three months ended March 31, 2013 and 2012, respectively. At March 31, 2013, there was $3.1 million of unrecognized stock-based compensation expense that will be recognized over the remaining weighted-average period of 2.41 years.

The Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following assumptions:


	Three months ended March 31,
Stock Options	2013			2012
Weighted-average expected term (years)		6.55			6.71
Weighted-average volatility		76	%		71	%
Risk-free interest rate		1.08	%		1.81	%
Expected dividends		0	%		0	%

Expected term. The expected term was estimated using the Company’s historical and expected future exercise behavior.

Volatility. Due to the limited history of the trading of the Company’s common stock since the initial public offering in February 2011, the expected volatility used by the Company is based on the actual volatility of similar entities. In evaluating similarity, factors such as industry, stage of life cycle, size, and financial leverage are taken into consideration. The term over which volatility was measured was commensurate with the expected term.

Risk-free interest rate. The risk-free rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term.

Expected dividends. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Stock appreciation units

Stock appreciation units are remeasured each period at fair value. The following table summarizes the expense (credit) recognized for stock appreciation units for the three months ended March 31, 2013 (in thousands):


	Three months ended March 31,
	2013			2012
Cost of goods sold	$	(24	)	$	(5	)
Research and development		(32	)		(9	)
Sales and marketing		(13	)		(4	)
General and administrative		(9	)		(3	)
	$	(78	)	$	(21	)

As of March 31, 2013 and December 31, 2012, the liabilities for the settlement of the stock appreciation units were $0.3 million and $0.4 million, respectively and were included in accrued and other current liabilities on the condensed consolidated balance sheet.

Based on the fair value of the stock appreciation units as of March 31, 2013, the Company had $0.05 million of unrecognized stock-based compensation expense that would be recognized over the remaining weighted-average period of 1.10 years. The Company estimated the fair value of all employee stock appreciation units using a Black-Scholes valuation model with the following assumptions:


	Three months ended March 31,
Stock appreciation units	2013	2012
Weighted-average expected term (years)	2.61	3.39
Weighted-average volatility	63%	69%
Risk-free interest rate	0.20 - 0.46%	0.42 - 1.04%
Expected dividends	0%	0%

Expected term. Vested stock appreciation units first become exercisable upon the expiration of the lock-up period associated with the initial public offering. Therefore, the Company estimated the term of the award based on an average of the weighted-average exercise period and the remaining contractual term.

Employee stock purchase plan (“ESPP”)

The following tables summarize the components of ESPP expense for the three months ended March 31, 2013 and 2012, respectively (in thousands):


	Three months ended March 31,
	2013		2012
Cost of goods sold	$	80	$	67
Research and development		120		176
Sales and marketing		38		40
General and administrative		40		37
	$	278	$	320

As of March 31, 2013 there was $0.4 million of unrecognized stock-based compensation expense for stock purchase rights that will be recognized over the remaining offering period, through November 2013.

The value of the stock purchase right consists of: (1) the 15% discount on the purchase of the stock, (2) 85% of the call option and (3) 15% of the put option. The call option and put option were valued using the Black-Scholes option pricing model with the following assumptions:


	Three months ended March 31,
Stock purchase rights	2013	2012
Weighted-average expected term (years)	0.74	0.72
Weighted-average volatility	48%	71%
Risk-free interest rate	0.13 - 0.16%	0.04 - 0.11%
Expected dividends	0%	0%

Expected term. The expected term represents the period of time from the beginning of the offering period to the purchase date.

Restricted stock units

The following table summarizes the stock-based compensation expense recognized for restricted stock units for the three months ended March 31, 2013 (in thousands):


	Three months ended March 31,
	2013		2012
Cost of goods sold	$	108	$	65
Research and development		156		93
Sales and marketing		135		79
General and administrative		99		70
	$	498	$	307

The weighted-average fair value of restricted stock units granted was $5.74 and $6.10 per share for the three months ended March 31, 2013 and 2012, respectively. At March 31, 2013, the Company has $3.3 million of unrecognized stock-based compensation expense that will be recognized over the remaining weighted-average period of 1.92 years.