Note 12— Share-Based Compensation

The Company accounts for its share-based compensation based on an estimate of fair value of the grant on the date of grant.

In determining the fair value of stock options, the Company uses the Black-Scholes option pricing model. The following key weighted average assumptions were employed in the calculation for the three month periods ended March 31, 2017 and March 31, 2016:



	Three Months Ended March 31,
	2017	2016
Risk-free interest rate	1.64%	1.06%
Expected dividend yield	—%	—%
Volatility	54.39%	51.62%
Expected life	4.0 years	4.0 years
Weighted average Black-Scholes value of options granted	$7.51	$16.90

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is based on historical data. The expected life of an option is based on the assumption that options will be exercised, on average, about two years after vesting occurs. The Company recognizes compensation expense for only the portion of options that are expected to vest. Therefore, management applies an estimated forfeiture rate that is derived from historical employee termination data and adjusted for expected future employee turnover rates. The estimated forfeiture rate applied to the Company’s stock option grants during the three months ended March 31, 2017 and 2016 was 8.0%. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods. The Company’s stock price volatility, option lives and expected forfeiture rates involve management’s best estimates at the time of such determination, which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting period or requisite service period of the option. The Company typically issues stock options with a four year vesting period (the requisite service period) and amortizes the fair value of stock options (stock compensation cost) ratably over the requisite service period.

A summary of the Company’s year-to-date stock option activity and related information follows:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2016	1,989,137		$	16.99
Grants	10,000		$	17.35
Exercises	(10,147	)	$	7.16
Canceled and forfeited	(4,129	)	$	29.81
Outstanding at March 31, 2017	1,984,861		$	17.01	5.5
Exercisable at March 31, 2017	1,527,184		$	13.46	4.7
Available for grant at March 31, 2017	4,038,811

As of March 31, 2017, there was $15.1 million of aggregate intrinsic value of outstanding stock options, including $15.0 million of aggregate intrinsic value of exercisable stock options. Intrinsic value represents the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of its first quarter of 2017 and the exercise price, multiplied by the number of shares of common stock underlying the stock options) that would have been received by the option holders had all option holders exercised their options on March 31, 2017. During the three months ended March 31, 2017, stock options covering 10,147 shares of common stock with a total intrinsic value of $0.1 million were exercised. During the three months ended March 31, 2016, stock options covering 122,327 shares of common stock with a total intrinsic value of $3.5 million were exercised.

The fair value of unvested restricted stock and unvested restricted stock units is based on the market price of a share of the Company’s common stock on the date of grant and is amortized over the vesting period.

A summary of the Company’s unvested restricted stock grants and changes during the three months ended March 31, 2017 is as follows:



	Service Vesting Restricted Shares				Performance Vesting Restricted Shares				Total Restricted Shares
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016	256,802		$	26.43	513,500		$	15.00	770,302		$	18.81
Granted	—		$	—	—		$	—	—		$	—
Forfeited	(2,040	)	$	31.47	(476,000	)	$	14.88	(478,040	)	$	14.95
Vested	(3,073	)	$	30.39	—		$	—	(3,073	)	$	30.39
Outstanding at March 31, 2017	251,689		$	26.34	37,500		$	16.52	289,189		$	25.06

The estimated forfeiture rate applied to the Company’s service vesting restricted share grants during the three months ended March 31, 2017 and 2016, was 8%. The aggregate fair value of restricted stock vested during the three months ended March 31, 2017, was $0.1 million. The aggregate fair value of restricted stock vested during the three months ended March 31, 2016, was $0.2 million. The performance vesting restricted shares are subject to performance measures that are currently not considered “probable” of attainment and as such, no compensation cost has been recorded for these shares. The performance vesting restricted shares are eligible to vest in 2017.

A summary of the Company’s unvested restricted stock unit grants and changes during the three months ended March 31, 2017 is as follows:



	Service Vesting Restricted Stock Units				Performance Vesting Restricted Stock Units			Total Restricted Stock Units
	Units		Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016	425,721		$	30.89	656,285	$	30.49	1,082,006		$	30.65
Granted	47,000		$	19.69	26,000	$	20.25	73,000		$	19.89
Forfeited	(3,175	)	$	28.50	—	$	—	(3,175	)	$	28.50
Vested	(4,625	)	$	39.96	—	$	—	(4,625	)	$	39.96
Outstanding at March 31, 2017	464,921		$	29.69	682,285	$	30.10	1,147,206		$	29.93

The estimated forfeiture rate applied to the Company’s service vesting restricted stock unit grants during the three months ended March 31, 2017 and 2016, was 8.0%. The aggregate fair value of restricted stock units vested during the three months ended March 31, 2017, was $0.1 million. Restricted stock units are not outstanding shares and do not have any voting or dividend rights. At the time of vesting, a share of common stock representing each restricted stock unit vested will be issued by the Company. The performance vesting restricted stock units are subject to performance measures that are currently not considered “probable” of attainment and as such, no compensation cost has been recorded for these units. The performance vesting restricted stock units are eligible to vest between 2017 and 2020.

Including performance-based equity awards, the Company had $34.6 million of total unrecognized compensation cost related to unvested stock options, unvested restricted stock and unvested restricted stock units as of March 31, 2017. Excluding the $21.2 million of unrecognized compensation cost related to unvested restricted stock and unvested restricted stock units that are subject to performance measures that are currently not considered “probable” of attainment, unrecognized compensation cost is $13.4 million. No compensation expense is recognized for unvested restricted stock or unvested restricted stock units subject to performance measures that are not considered “probable” of attainment. Unrecognized compensation cost related to unvested stock options and unvested non-performance-based restricted stock is expected to be recognized over a weighted average period of 2.4 years.

The following table sets forth the gross share-based compensation cost resulting from stock options, unvested restricted stock and unvested restricted stock units that were recorded in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (in thousands):



	Three Months Ended March 31,
	2017		2016
Cost of product revenue	$	40	$	82
Cost of service revenue	66		68
Research and development, net	891		949
Sales and marketing	885		835
General and administrative	869		918
Total	$	2,751	$	2,852

The Company also has an employee stock purchase plan, or ESPP, which allows employees to purchase shares of the Company’s common stock at 95% of fair market value on the fourth business day after the end of each offering period. The ESPP is deemed non-compensatory and therefore is not subject to the fair value provisions.