CAPITAL STOCK

3 Months Ended

Mar. 31, 2015

Notes to Financial Statements

CAPITAL STOCK

4. CAPITAL STOCK

Stock Option Plans

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions for options granted in the three months ended March 31, 2014 and 2015.

	Three Months Ended March 31,
	2014	2015
Risk-free interest rate	0.89%	1.10%
Expected lives	3.4 years	3.4 years
Expected volatility	43%	42%
Expected dividend yield	0%	0%

A summary of the Company's stock option plans, excluding options to purchase fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split is as follows:

		Year Ended December 31, 2014					Three Months Ended March 31, 2015
		Options			Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of period			1,321,232		$	10.386		1,074,251	$	10.111
	Granted at market		134,800		$	16.398		2,546	$	19.651
	Cancelled		(218,926	)	$	17.786		(27,457)	$	10.076
	Exercised		(162,855	)	$	7.234		(95,750)	$	8.632
Outstanding at end of period			1,074,251		$	10.110		953,590	$	10.286
Exercisable at end of period			729,175		$	9.800		655,639	$	9.977

The estimated fair value of stock options granted during the three months ended March 31, 2014 and 2015 was computed to be approximately $14 thousand and $15 thousand, respectively. The amount is amortized ratably over the vesting period of the options. The per share weighted average estimated fair value of options granted during the three months ended March 31, 2014 and 2015 was computed to be approximately $2.98 and $6.17, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2014 and 2015 was approximately $151 thousand and $1.28 million, respectively. The cash proceeds from options exercised during the three months ended March 31, 2014 and 2015 were approximately $253 thousand and $407 thousand, respectively.

The following table summarizes information about stock options outstanding and exercisable at March 31, 2015, excluding outstanding options to purchase an aggregate of 9.2 fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split with a weighted average remaining contractual life of 1.25 years, a weighted average exercise price of $14.75 and exercise prices ranging from $7.30 to $22.50. The Company intends to issue whole shares only from option exercises.

	Options Outstanding						Options Exercisable
Exercise Prices	Number of Options Outstanding at March 31, 2015		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Number of Options Exercisable at March 31, 2015		Weighted Average Exercise Price
$  2.70 - $  6.90		234,971		5.65	$	5.609		216,027		$	5.512
$  6.91 - $  7.36		188,366		8.64	$	7.359		64,293		$	7.358
$  7.37 - $11.47		195,322		7.44	$	8.996		136,697		$	9.182
$11.48 -$17.17		173,854		2.10	$	13.630		167,733		$	13.616
$17.18 - $22.50		161,077		6.88	$	18.484		70,889		$	18.881
$  2.70 - $22.50		953,590		6.17	$	10.286		655,639		$	9.977

As of March 31, 2015, there was approximately $1.04 million of total unrecognized compensation cost related to outstanding stock options. That cost is expected to be recognized over a weighted average period of 1.7 years, with approximately $324 thousand to be recognized in the nine months ending December 31, 2015 and all the cost to be recognized as of February 2019, assuming all options vest according to the vesting schedules in place at March 31, 2015. As of March 31, 2015, the aggregate intrinsic value of outstanding options was approximately $14.8 million and the aggregate intrinsic value of exercisable options was approximately $10.4 million.

Employee Stock Purchase Plan (the "ESPP")

In the three months ended March 31, 2014 and March 31, 2015, the Company issued 7,647 and 827 shares under the ESPP, respectively. For the three months ending March 31 of the following years, the Company estimated the fair values of stock purchase rights granted under the ESPP using the Black-Scholes pricing model and the following weighted average assumptions:

	Three Months Ended March 31,
	2014	2015
Risk-free interest rate	0.23%	0.23%
Expected lives	1.3 years	1.3 years
Expected volatility	33%	35%
Expected dividend yield	0%	0%

For the three months ended March 31, 2014 and March 31, 2015, the weighted-average fair value of the purchase rights granted was $2.33 and $5.21 per share, respectively.

Restricted Stock Vesting and Issuance

In the three months ended March 31, 2015, Mr. Wilson vested 13,000 shares originally issued on May 6, 2014 following a vote of approval by the Company’s stockholders pursuant to an employment agreement between Mr. Wilson and the Company effective as of March 26, 2014 (the "Wilson Employment Agreement") upon the Company’s achievement of certain stock price targets as defined and further described in the Wilson Employment Agreement.

On March 17, 2015, the Company issued unvested shares to certain Executive Officers related to performance-based restricted stock grants (the "Performance Grants") and performance-based restricted stock grants related to the Company’s 2015 Management Incentive Plan (the "MIP Grants"). The Performance Grants are to cliff vest three years following issuance, subject to the Company’s achieving $7 million in Operating Cash Flow, as defined in the underlying restricted stock grant agreement, in at least one of 2015, 2016 or 2017, and other vesting provisions in the underlying restricted stock grant agreement. The MIP Grants are to vest on the date MIP Payouts are to be made under the 2015 Management Incentive Plan and are subject to the Company’s achievement of certain financial goals and other vesting provisions in the underlying restricted stock grant agreement. The Company issued 52,956 shares under Performance Grants and 24,649 shares under MIP Grants on March 17, 2015.

Restrictions on the transfer of Company stock

The Company’s Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), places restrictions (the "Transfer Restrictions") on the transfer of the Company’s stock that could adversely effect the Company’s ability to utilize its domestic Federal Net Operating Loss Position. In particular, the Transfer Restrictions prevent the transfer of shares without the approval of the Company’s Board of Directors if, as a consequence of such transfer, an individual, entity or groups of individuals or entities would become a 5-percent holder under Section 382 of the Internal Revenue Code of 1986, as amended, and the related Treasury regulations, and also prevents any existing 5-percent holder from increasing his or her ownership position in the Company without the approval of the Company’s Board of Directors. Any transfer of shares in violation of the Transfer Restrictions (a "Transfer Violation") shall be void ab initio under the Certificate of Incorporation, and the Company’s Board of Directors has procedures under the Certificate of Incorporation to remedy a Transfer Violation including requiring the shares causing such Transfer Violation to be sold and any profit resulting from such sale to be transferred to a charitable entity chosen by the Company’s Board of Directors in specified circumstances.