Note 9. Stockholders’ Equity and Equity Incentive Programs

Common Stock

As of September 30, 2013, the Company had reserved 6,132,549 common stock shares for the issuance under the Company’s stock option plans, 594,874 common stock shares for the issuance under the stock purchase plan and 4,482 common stock shares to be issued upon exercise of the outstanding warrants.

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 estimated fair value of this derivative was $0.2 million and $0.1 million at September 30, 2013 and December 31, 2012, respectively.

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.

Stock Options

The Company granted 369,900 and 1,534,030 stock options during the third quarter and first nine months of 2013, respectively, with weighted-average grant-date fair values per share of $7.78 and $5.82, respectively. The Company granted 107,770 and 251,475 stock options during the third quarter and first nine months of 2012, respectively, with weighted-average grant-date fair values per share of $5.00 and $4.90, respectively.

The fair values of option awards were estimated at each grant date using the Black-Scholes option valuation model. The Black-Scholes model requires the input of assumptions, including the expected stock-price volatility and estimated option life. The expected volatilities utilized were based on the actual volatility of similar entities due to the limited history of the trading of the Company’s common stock since the initial public offering in February 2011. The expected lives of options granted were estimated using the Company’s historical and expected future exercise behavior. The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at each grant date. No dividends were assumed in estimated option values. Assumptions used in the Black-Scholes model are presented below:

	Three Months Ended September 30,						Nine Months Ended September 30,
Stock Options	2013			2012			2013			2012
Weighted-average expected term (years)		6.55			6.78			6.48			6.77
Weighted-average volatility		71	%		71	%		72	%		71	%
Risk-free interest rate		1.82-1.82	%		1.07-1.07	%		1.08-1.82	%		1.07-1.83	%
Expected dividends		0	%		0	%		0	%		0	%

On December 12, 2012, the Company granted 1,060,000 shares of stock options to key employees subject to an increase in the shares available to be granted which was approved by our stockholders at our Annual Meeting on June 11, 2013. The Company determined that the grant date for these performance options was June 11, 2013 for accounting purposes. During the three months ended September 30, 2013, the Company granted an additional 110,000 shares of performance-based stock options. These shares will vest during the term if the average closing price of the Company’s common stock over a period of 20 consecutive trading days is equal to or greater than $15.00 per share and the recipient remains in continuous service with the Company through such period, or fully accelerate and vest on the seventh anniversary of the grant date. The Company estimated the fair value of its performance options as $5.68 for the three months ended September 30, 2013 using a Monte Carlo simulation model on the date of grant with the assumptions discussed above. The Company recorded $0.2 million and $0.2 million of compensation expense for these options for the three months and nine months ended September 30, 2013, respectively.

As of September 30, 2013, there were 3,979,813 unexercised stock options outstanding.

Restricted Stock Units (“RSUs”)

The Company granted 606,300 and 637,340 RSUs during the third quarter and first nine months of 2013, respectively, with weighted-average grant-date fair values per share of $6.98 and $6.98, respectively. The Company granted 428,000 and 615,609 RSUs during the third quarter and first nine months of 2012, respectively, with weighted-average grant-date fair values per share of $4.96 and $5.27, respectively. As of September 30, 2013, there were 1,135,929 RSUs outstanding.

Stock appreciation units (“SAUs”)

The Company granted 25,000 and 275,000 SAUs during the third quarter and first nine months of 2013, with weighted-average grant-date fair values per share of $8.33 and $5.40, respectively. The Company did not grant SAUs during the third quarter and first nine months of 2012. As of September 30, 2013, there were 433,708 SAUs outstanding. SAUs are liability classified share-based awards which are re-measured each reporting period at fair value.

The fair values of SAUs were estimated at each grant date using the Black-Scholes option valuation model. The expected volatilities utilized were based on the actual volatility of similar entities. Vested SAUs 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 SAUs based on an average of the weighted-average exercise period and the remaining contractual term. The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at each grant date. No dividends were assumed in estimated option values. Assumptions used in the Black-Scholes model are presented below:

	Three Months Ended September 30,						Nine Months Ended September 30,
Stock Appreciation Units	2013			2012			2013			2012
Weighted-average expected term (years)		1.92			3.10			2.29			3.27
Weighted-average volatility		52	%		65	%		57	%		68	%
Risk-free interest rate		0.15-0.66	%		0.30-0.57	%		0.14-0.66	%		0.30-1.04	%
Expected dividends		0	%		0	%		0	%		0	%

The Company granted 250,000 shares and 25,000 shares of stock appreciation units to key employees on June 11, 2013 and August 6, 2013, respectively. These performance shares will vest during the term of the average closing price of the Company’s common stock over a period of 20 consecutive trading days is equal to or greater than $15.00 per share and the recipient remains in continuous service with the Company through such period, or fully accelerate and vest on the seventh anniversary of the grant date. The Company estimated the fair value of performance shares of $5.41 and $4.81for June 11, 2013 and August 6, 2013, respectively, for the three months ended September 30, 2013 using a Monte Carlo simulation model on the date of grant with the assumptions discussed above. The Company recorded $49,000 and $62,000 of compensation expense for these stock appreciation units for the three and nine months ended September 30, 2013, respectively.

Employee Stock Purchase Plan (“ESPP”)

Employees purchased 262,860 shares in the first nine months of 2013 for $1.2 million and 257,335 shares in the first nine months of 2012 for $0.9 million under the ESPP. The value of the ESPP 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. The expected volatilities utilized were based on the actual volatility of similar entities. The expected term represents the period of time from the beginning of the offering period to the purchase date. The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at each grant date. No dividends were assumed in estimated option values. Assumptions used in the Black-Scholes model are presented below:

	Three months ended September 30,						Nine months ended September 30,
ESPP	2013			2012			2013			2012
Weighted-average expected term (years)		0.73			0.75			0.73			0.75
Weighted-average volatility		48	%		71	%		48	%		71	%
Risk-free interest rate		0.09-0.16	%		0.04-0.15	%		0.09-0.16	%		0.04-0.15	%
Expected dividends		0	%		0	%		0	%		0	%

Stock-based compensation expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2013		2012		2013		2012
Cost of goods sold	$	471	$	228	$	845	$	553
Research and development		417		404		1,435		1,268
Sales and marketing		253		242		835		656
General and administrative		449		408		1,150		958
	$	1,590	$	1,282	$	4,265	$	3,435