Stock-Based Compensation Expense

3 Months Ended

Mar. 31, 2023

Share-based Payment Arrangement [Abstract]

Stock-Based Compensation Expense

12.   Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense for the three-month periods ended March 31, 2023 and 2022 consisted of the following (in thousands):

	Three Months Ended
	March 31,
	2023		2022
Cost of sales
Nonqualified stock options	$	441	$	588
Research and development
Nonqualified stock options		428		486
Selling, general and administrative
Nonqualified stock options		1,370		1,924
Performance-based restricted stock units		815		815
Restricted stock units		444		399
Cash-settled performance-based share-based awards ("Liability Awards")		471		430
Total selling, general and administrative		3,100		3,568
Stock-based compensation expense before taxes	$	3,969	$	4,642

We recognize stock-based compensation expense (net of a forfeiture rate), for those awards which are expected to vest, on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures.

Nonqualified Stock Options

During the three-month periods ended March 31, 2023 and 2022, we granted stock options representing 293,294 and 123,606 shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:

	Three Months Ended
	March 31,
	2023	2022
Risk-free interest rate	3.7% - 4.5%	1.4% - 1.8%
Expected option term	4.0 years	4.0 years
Expected dividend yield	—	—
Expected price volatility	47.1%	46.2% - 46.6%

The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock award. We determine the expected term of stock options using the historical exercise behavior of employees. The expected price volatility was determined using a weighted average of daily historical volatility of our stock price over the corresponding expected option term and implied volatility based on recent trends of the daily historical volatility. For awards with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period.

As of March 31, 2023, the total remaining unrecognized compensation cost related to non-vested stock options was $25.5 million, which was expected to be recognized over a weighted average period of 2.6 years.

Stock-Settled Performance-Based Restricted Stock Units (“Performance Stock Units”)

During the three-month periods ended March 31, 2023 and 2022, we granted performance stock units which represent up to 301,230 and 109,178 shares of our common stock, respectively. Conversion of the performance stock units occurs at the end of the relevant performance periods, or one year after the agreement date, whichever is later. The number of shares delivered upon vesting at the end of the performance periods are based upon performance against specified financial performance metrics and relative total shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements.

We use Monte-Carlo simulations to estimate the grant-date fair value of the performance stock units linked to total shareholder return. The fair value of each performance stock unit was estimated as of the grant date using the following assumptions for awards granted in the periods indicated below:

	Three Months Ended
	March 31,
	2023	2022
Risk-free interest rate	4.6%	1.6%
Performance period	2.8 years	2.8 years
Expected dividend yield	—	—
Expected price volatility	32.6%	42.6%

The risk-free interest rate of return was determined using the U.S. Treasury rate at the time of grant with a term equal to the expected term of the award. The expected volatility was based on the weighted average volatility of our stock price and the average volatility of our compensation peer group's stock price. The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.

Compensation expense is recognized using the grant-date fair value for the number of shares that are probable of being awarded based on the performance metrics. Each reporting period, this probability assessment is updated, and cumulative adjustments are recorded based on the financial performance metrics expected to be achieved. At the end of the performance period, cumulative expense is calculated based on the actual performance metrics achieved. As of March 31, 2023, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $15.9 million, which is expected to be recognized over a weighted average period of 2.4 years.

Liability Awards

During the three-month periods ended March 31, 2023 and 2022, we granted liability awards to our Chief Executive Officer with total target cash incentives in the amount of $1.3 million and $1.0 million, respectively. These awards entitle him to a target cash payment based upon the Company’s relative shareholder return as compared to the rTSR and achievement of specified performance metrics, as defined in the award agreements.

The fair value of these awards is measured at each reporting period until the awards are settled. These awards are classified as liabilities and reported in accrued expenses and other long-term obligations within our consolidated balance sheet. As of March 31, 2023, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was $4.5 million, which is expected to be recognized over a weighted average period of 2.3 years.

Restricted Stock Units

On June 24, 2022, we granted restricted stock units to our non-employee directors representing a total of 30,500 shares of our common stock. The expense recognized for restricted stock units is equal to the closing stock price on the date of grant, which is recognized over the vesting period. Restricted stock units granted to each director are subject to such director’s continued service through the vesting date, which is one year from the date of grant. As of March 31, 2023, the total remaining unrecognized compensation cost related to restricted stock units was $0.3 million, which will be recognized over the remaining vesting period.