Stock-based Compensation and Stockholders’ Equity

Equity Incentive Plan

The authorized number of shares that may be issued under the Company's 2006 Equity Incentive Plan (the "2006 Plan") automatically increases on July 1 each year through 2016, by an amount equal to (a) 3.0% of shares of stock issued and outstanding on the immediately preceding June 30, or (b) a lesser amount determined by the Board of Directors. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company at the time of grant cannot be less than 110% of the fair value of the underlying share on grant date. Nonqualified stock options and incentive stock options granted to all other persons shall be granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant. Stock options and restricted stock units vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter. As of December 31, 2015, the Company had 1,360,495 authorized shares available for future issuance under the 2006 Plan.

Determining Fair Value

Valuation and amortization method—The Company's fair value of restricted stock units is based on the closing market price of the Company's common stock on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing formula and a single option award approach. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—The Company’s expected term represents the period that the Company’s stock options are expected to be outstanding and was determined based on a combination of the Company's peer group and the Company's historical experience.

Expected Volatility—Expected volatility is based on a combination of the Company's implied and historical volatility.

Expected Dividend Yield—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock options.

Estimated Forfeitures—The estimated forfeiture rate is based on the Company’s historical forfeiture rates and the estimate is revised in subsequent periods if actual forfeitures differ from the estimate.

The fair value of stock option grants for the three and six months ended December 31, 2015 and 2014 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



	Three Months Ended December 31,						Six Months Ended December 31,
	2015			2014			2015			2014
Risk-free interest rate	1.42		%	1.50		%	1.42% - 1.57%			1.50% - 1.76%
Expected term	5.31 years			5.44 years			5.31 - 5.33 years			5.44 years
Dividend yield	—		%	—		%	—		%	—		%
Volatility	49.46		%	49.31		%	47.06% - 49.46%			46.93% - 49.31%
Weighted-average fair value	$	11.50		$	11.64		$	11.54		$	11.69

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended December 31, 2015 and 2014 (in thousands):



	Three Months Ended December 31,						Six Months Ended December 31,
	2015			2014			2015			2014
Cost of sales	$	258		$	222		$	498		$	429
Research and development	2,472			1,997			4,874			3,893
Sales and marketing	435			414			839			779
General and administrative	841			548			1,671			1,060
Stock-based compensation expense before taxes	4,006			3,181			7,882			6,161
Income tax impact	(1,814		)	(785		)	(2,099		)	(1,392		)
Stock-based compensation expense, net	$	2,192		$	2,396		$	5,783		$	4,769

The cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options in excess of the compensation expense recorded for those options (excess tax benefits) issued or modified since July 1, 2006 are classified as cash provided by financing activities. Excess tax benefits for stock options issued prior to July 1, 2006 are classified as cash provided by operating activities. The Company had $878,000 and $5,003,000 of excess tax benefits recorded in additional paid-in capital in the six months ended December 31, 2015 and 2014, respectively. The Company had excess tax benefits classified as cash provided by financing activities of $355,000 and $2,782,000 in the six months ended December 31, 2015 and 2014, respectively, for options issued since July 1, 2006.

As of December 31, 2015, the Company’s total unrecognized compensation cost related to non-vested stock-based awards granted to employees and non-employee directors was $34,478,000, which will be recognized over a weighted-average vesting period of approximately 2.33 years.

Stock Option Activity

The following table summarizes stock option activity during the six months ended December 31, 2015 under all stock option plans:



	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in thousands)
Balance as of June 30, 2015 (7,208,475 shares exercisable at weighted average exercise price of $12.24 per share)	9,702,843		$	14.21
Granted (weighted average fair value of $11.54)	184,790		$	25.78
Exercised	(269,320	)	$	9.06
Forfeited	(25,878	)	$	19.11
Balance as of December 31, 2015	9,592,435		$	14.57	5.55	$	99,668
Options vested and expected to vest at December 31, 2015	9,420,529		$	14.41	5.49	$	99,053
Options vested and exercisable at December 31, 2015	7,663,628		$	12.91	4.86	$	89,777

The total pretax intrinsic value of options exercised was $2,113,000 and $4,854,000 during the three and six months ended December 31, 2015, respectively, and $16,721,000 and $22,070,000 during the three and six months ended December 31, 2014, respectively.

Restricted Stock Unit Activity

In January 2015, the Company began to grant restricted stock units to employees. The Company grants restricted stock units to certain employees as part of its regular employee equity compensation review program as well as to selected new hires. Restricted stock units are share awards that entitle the holder to receive freely tradable shares of the Company's common stock upon vesting and settlement.

The following table summarizes restricted stock unit activity during the six months ended December 31, 2015 under the 2006 Plan:



	Restricted Stock Units Outstanding		Weighted Average Grant-Date Fair Value per Share		Aggregate Intrinsic Value (in thousands)
Balance as of June 30, 2015	303,324		$	36.02
Granted	445,750		$	28.76
Vested	(52,006	)	$	34.34
Forfeited	(27,606	)	$	31.18
Balance as of December 31, 2015	669,462		$	31.51	$	16,409

The total pretax intrinsic value of restricted stock units vested was $811,000 and $1,358,000 for the three and six months ended December 31, 2015, respectively. In the three and six months ended December 31, 2015, upon vesting, 31,807 and 52,006 shares of restricted stock units were partially net share-settled such that the Company withheld 12,089 and 19,321 shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities, respectively. The total shares withheld were based on the value of the restricted stock units on their respective vesting dates as determined by the Company's closing stock price. Total payments for the employees' tax obligations to taxing authorities were $308,000 and $504,000 during the three and six months ended December 31, 2015, respectively, and are reflected as a financing activity within the condensed consolidated statements of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. Pursuant to the terms of the 2006 Plan, shares withheld in connection with net-share settlements are returned to the 2006 Plan and are available for future grants under the 2006 Plan.