Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

Note 9:  Stock-based Compensation

The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model.  Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.

The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three month periods ended June 30, 2011 and 2010 (in thousands):

	Three Months Ended June 30, (unaudited)				Six Months Ended June 30, (unaudited)
	2011		2010		2011		2010
Cost of revenue	$	61	$	30	$	86	$	127
Research and development		130		26		149		128
Selling, general and administrative		314		461		1,126		695
Total stock compensation expense	$	505	$	517	$	1,361	$	950

At June 30, 2011, total unrecognized compensation costs related to stock options was approximately $4.3 million, net of estimated forfeitures.  Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 2.9 years.  

Options granted to non-employees are measured at the grant date using a fair value options pricing model and remeasured to the current fair market value at each reporting period as the underlying options vest and services are rendered.   There were 12,500 options granted to consultants in the three and six months ended June 30, 2011 which were fully vested upon grant.  In May 2009, there were 60,000 options granted to consultants, of which the unvested options were remeasured to the current fair market value at June 30, 2011.  The following assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted to non-employees:  dividend yield – 0%; risk free interest rates – 0.96% to 2.32%; expected volatility – 69.7 % to 85.7%; and expected term – 3-5 years.

During the three and six month periods ended June 30, 2011, there were 97,931 and 1,392,108 stock options, respectively, granted to employees and directors.  During the three and six month periods ended June 30, 2010, there were 168,700 and 616,885 stock options, respectively, granted to employees and directors.  The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:

	For the Six Months Ended June 30,
	2011			2010
Dividend yield		0	%		0	%
Risk free interest rates		1.04-2.37	%		1.34 to 2.57	%
Expected  volatility		67.1 to 85.7	%		80.6 to 86.9	%
Expected term (in years)		3.5 to 5.5			3.5 to 5

The Company has not declared or paid any dividends and does not currently expect to do so in the near future.  The risk-free interest rate used in the Black-Scholes option pricing model is based on the implied yield currently available on U.S. Treasury securities with an equivalent term.   Expected volatility is based on the weighted average historical volatility of the Company's common stock for the most recent five year period.  The expected term of options represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.

For the six months ended June 30, 2011, 200,000 options were granted to employees from the 2008 Incentive Stock Plan ("2008 Plan") with a fair value of approximately $0.8 million and 1,192,108 options were granted to employees and directors from the 2003 Stock Option Plan ("2003 Plan") with a fair value of approximately $4.8 million.  The weighted average fair value per share for options granted in the first six months of 2011 was $3.95.

A summary of the Company's stock option activity for the six months ended June 30, 2011 is presented in the following tables:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		3,152,114		$	1.71
Options granted		1,404,608			7.49
Options exercised		(497,696	)		1.14
Options forfeited		(4,130	)		21.87
Options cancelled		(23,852	)		2.17
Outstanding at June 30, 2011		4,031,044		$	3.77		5.90	$	11,316,777
Vested or expected to vest at June 30, 2011 (1)		3,948,424		$	3.70		5.92	$	11,293,742
Exercisable at June 30, 2011		2,651,411		$	2.05		6.30	$	10,926,615

(1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options.

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company's common stock.  There were 2,500,551 options in-the-money at June 30, 2011.   The Company's closing stock price was $6.07 as of June 30, 2011. The Company issues new shares of common stock upon exercise of stock options.