9. Stock-Based Compensation

The condensed consolidated statements of operations include $0.9 million and $2.6 million of stock compensation expense for the three and nine months ended September 30, 2013, respectively. Stock compensation expense for the three months ended September 30, 2013 consists of $0.5 million for restricted stock awards, and $0.4 million for stock option and stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2013 consists of $1.9 million for restricted stock awards, and $0.7 million for stock option and stock purchase plan expenses.

The condensed consolidated statements of operations include $0.7 million and $2.3 million of stock compensation expense for the three and nine months ended September 30, 2012, respectively. Stock compensation expense for the three months ended September 30, 2012 consists of $0.6 million for restricted stock awards, and $0.1 million for stock option and stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2012 consists of $2.1 million for restricted stock awards, and $0.2 million for stock option and stock purchase plan expenses.

The Company did not capitalize any stock compensation expense during the three and nine months ended September 30, 2013 or 2012.

Total stock-based compensation is reflected in the condensed consolidated statements of operations as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of revenues	$	104	$	99	$	294	$	298
Research and development		182		153		505		442
Sales and marketing		174		141		435		398
General and administrative		437		302		1,384		1,193

Total continuing operations		897		695		2,618		2,331
Discontinued operations		0		0		1		4

Total	$	897	$	695	$	2,619	$	2,335

Restricted Stock – Service Based

The Company grants shares of restricted stock as employee incentives as permitted under the Company’s 1997 Stock Plan, as amended and restated (“1997 Stock Plan”). In connection with the grant of restricted stock to employees, the Company records deferred stock compensation representing the fair value of the common stock on the date the restricted stock is granted. Stock-based compensation expense is recorded ratably over the vesting period of the applicable shares. These grants vest over various periods, but typically vest over four years.

For the three months ended September 30, 2013, the Company issued 10,580 restricted stock awards with grant date fair value of $93 and recorded cancellations of 10,172 shares with grant date fair value of $68. For the nine months ended September 30, 2013, the Company issued 23,982 restricted stock awards with grant date fair value of $198 and recorded cancellations of 19,533 shares with grant date fair value of $130.

For the three months ended September 30, 2013, 7,973 restricted shares vested with grant date fair value of $52 and intrinsic value of $67, respectively. For the nine months ended September 30, 2013, 360,538 restricted shares vested with grant date fair value of $2.1 million and intrinsic value of $2.7 million.

For the three months ended September 30, 2012, the Company did not issue any restricted stock awards and recorded cancellations of 22,850 shares with grant date fair value of $0.1 million. For the nine months ended September 30, 2012, the Company issued 229,950 shares of restricted stock with grant date fair value of $1.6 million and recorded cancellations of 75,506 shares with grant date fair value of $0.5 million.

For the three months ended September 30, 2012, 2,475 restricted shares vested with grant date fair value and intrinsic value of $17, respectively. For the nine months ended September 30, 2012, 468,730 restricted shares vested with grant date fair value of $2.8 million and intrinsic value of $3.5 million.

At September 30, 2013, total unrecognized compensation expense related to restricted stock was approximately $2.0 million, net of forfeitures to be recognized through 2017 over a weighted average period of 1.2 years.

The following table summarizes restricted stock activity for the nine months ended September 30, 2013:


	Shares			Weighted Average Grant Date Fair Value
Unvested Restricted Stock Awards - December 31, 2012		940,685		$	6.24
Shares awarded		23,982			8.26
Shares vested		(360,538	)		5.81
Shares cancelled		(19,533	)		6.68

Unvested Restricted Stock Awards - September 30, 2013		584,596		$	6.57

Stock Options

The Company issues stock options to purchase common stock with exercise prices no less than the fair value of the Company’s stock on the grant date. Employee stock options contain gradual vesting provisions, whereby 25% vest one year from the date of grant and thereafter in monthly increments over the remaining three years. Stock options may be exercised at any time prior to their expiration date or within ninety days of termination of employment, or such shorter time as may be provided in the related stock option agreement. Historically, the Company has granted stock options with a ten year life. Beginning with options granted in July 2010, the Company granted stock options with a seven year life. During 2012 and 2013, the Company has awarded stock options to eligible new employees for incentive purposes. The Company issued stock options to employees for long-term incentive purposes in April 2013.

The fair value of each unvested stock option was estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and expected option life. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models may not necessarily provide a reliable single measure of the fair value of the employee stock options.

During the three months ended September 30, 2013 the Company issued 3,500 stock options with a weighted average grant date fair value of $3.09. During the nine months ended September 30, 2013 the Company issued 693,050 stock options with a weighted average grant date value of $2.87. The Company received proceeds of $0.8 million from the exercise of 105,113 options during the three months ended September 30, 2013. The intrinsic value of these options exercised was $146. The Company received proceeds of $0.9 million from the exercise of 116,954 options during the nine months ended September 30, 2013. The intrinsic value of these options exercised was $153. During the three and nine months ended September 30, 2013, 32,817 and 144,018 options, respectively, were cancelled or expired.

During the three months ended September 30, 2012 the Company issued 65,000 stock options with a weighted average grant date value of $2.49. During the nine months ended September 30, 2012 the Company issued 69,500 stock options with a weighted average grant date value of $2.51. The Company received proceeds of $8 from the exercise of 1,281 options during the three months ended September 30, 2012. The intrinsic value of these options exercised was $1. The Company received proceeds of $33 from the exercise of 5,000 options during the nine months ended September 30, 2012. The intrinsic value of these options exercised was $4. During the three months ended September 30, 2012, 120,200 options were cancelled or expired. During the nine months ended September 30, 2012, 336,692 options were cancelled, expired, or forfeited.

As of September 30, 2013, the unrecognized compensation expense related to the unvested portion of the Company’s stock options was approximately $2.0 million, net of estimated forfeitures to be recognized through 2017 over a weighted average period of 1.6 years.

The range of exercise prices for options outstanding and exercisable at September 30, 2013 was $5.50 to $11.84. The following table summarizes information about stock options outstanding under all stock plans at September 30, 2013:


					Options Outstanding						Options Exercisable
Range of Exercise Prices					Number Outstanding		Weighted Average Contractual Life (Years)		Weighted- Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
	$ 5.50	—	$	6.86		88,574		4.86	$	6.62		62,278	$	6.72
	6.87	—		7.93		756,648		5.99		7.26		78,511		7.73
	8.07	—		8.63		40,045		2.71		8.48		38,045		8.48
	8.76	—		8.76		43,000		2.36		8.76		43,000		8.76
	8.96	—		9.09		101,500		1.91		9.09		100,000		9.09
	9.11	—		9.12		6,627		2.73		9.11		6,627		9.11
	9.16	—		9.16		132,000		2.84		9.16		132,000		9.16
	9.19	—		10.25		121,780		2.45		9.70		121,780		9.70
	10.46	—		11.00		100,960		1.21		10.72		100,960		10.72
	11.01	—		11.84		140,050		0.31		11.56		140,050		11.56

	$ 5.50	—	$	11.84		1,531,184		4.07	$	8.40		823,251	$	9.46

The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model using the following assumptions:


	September 30,
	2013			2012
Dividend yield		1.6	%		1.7	%
Risk-free interest rate		0.2	%		0.2	%
Expected volatility		51	%		52	%
Expected life (in years)		4.6			5.1

The dividend yield rate was calculated by dividing the Company’s annual dividend by the closing price on the grant date. The risk-free interest rate was based on the U.S. Treasury yields with remaining term that approximates the expected life of the options granted. The Company calculates the volatility based on a five-year historical period of the Company’s stock price. The Company incorporates a forfeiture rate based on historical data in the expense calculation. The expected life used for options granted is based on historical data of employee exercise performance.

The intrinsic value and contractual life of the options outstanding and exercisable at September 30, 2013 were as follows:


	Weighted Average Contractual Life (years)		Intrinsic Value
Options Outstanding		4.07	$	1,419
Options Exercisable		1.97	$	239

The intrinsic value is based on the share price of $8.85 at September 30, 2013.

The following table summarizes the stock option activity for the nine months ended September 30, 2013:


	Options Outstanding			Weighted Average Exercise Price
Outstanding at December 31, 2012		1,099,106		$	9.06
Granted		693,050			7.21
Exercised		(116,954	)		7.93
Expired or Cancelled		(109,235	)		8.47
Forfeited		(34,783	)		6.71

Outstanding at September 30, 2013		1,531,184		$	8.40

Exercisable at September 30, 2013		823,251		$	9.46

Retention Stock Options

In April 2013, the Company awarded 182,500 retention stock options to executive officers with a weighted average grant date fair value of $2.83. The actual number of stock options awarded will be based on performance goals for 2013. The options will vest between two and four years beginning in 2014. The Company records expense for these retention stock options based on estimated achievement of the performance goals. The assumptions used for the valuation of these stock options were consistent with the employee stock options awarded to employees in April 2013.

The following table summarizes the retention stock option activity for the nine months ended September 30, 2013:


	Retention Options Outstanding		Weighted Average Exercise Price
Outstanding at December 31, 2012		0	$	0.00
Granted		182,500		7.16

Outstanding at September 30, 2013		182,500	$	7.16

Exercisable at September 30, 2013		0	$	0.00

Performance Units

The Company grants performance units to certain executive officers. Shares are earned upon achievement of defined performance goals such as revenue and earnings. Certain performance units granted are subject to a service period before vesting. The fair value of the performance units issued is based on the Company’s stock price on the date the performance units are granted. The Company records expense for the performance units based on estimated achievement of the performance goals.

During the nine months ended September 30, 2013, the Company did not grant any performance units and cancelled 147,250 performance units with a grant date fair value of $1.0 million. There was no activity during the three months ended September 30, 2013.

During the nine months ended September 30, 2012, the Company granted 169,650 performance units with a grant date fair value of $1.2 million and cancelled 11,320 performance units with a grant date fair value of $79. During the nine months ended September 30, 2012, 4,836 performance units vested with a grant date fair value of $33 and intrinsic value of $36. During the nine months ended September 30, 2012, 139,150 performance units were converted to time-based restricted stock awards. The Company did not record expense for performance share awards during the nine months ended September 30, 2012 because the Company did not anticipate the 2012 fiscal year targets associated with the performance shares to be met.

As of September 30, 2013, there are no unvested performance units. The following table summarizes the performance share activity during the nine months ended September 30, 2013:


	Shares			Weighted Average Grant Date Fair Value
Unvested Performance Units - December 31, 2012		147,250		$	7.04
Units cancelled		(147,250	)		7.04

Unvested Performance Units - September 30, 2013		0		$	0.00

Restricted Stock Units

The Company grants restricted stock units as employee incentives as permitted under the Company’s 1997 Stock Plan. Employee restricted stock units are time-based awards and are amortized over the vesting period. At the vesting date, these units are converted to shares of common stock. These units vest over various periods, but typically vest over four years. The fair value of the restricted stock units issued is based on the Company’s stock price on the date the restricted stock units are granted.

During the nine months ended September 30, 2013, the Company did not issue any time-based restricted stock units and cancelled 1,125 shares with a grant date fair value of $8. During the nine months ended September 30, 2013, 3,850 restricted stock units vested with a grant date fair value of $25 and intrinsic value of $28. There was no activity during the three months ended September 30, 2013.

The Company issued 5,000 time-based restricted stock units with a fair value of $35 to employees during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, 2,600 restricted stock units vested with a grant date fair value of $16 and intrinsic value of $20.

As of September 30, 2013, the unrecognized compensation expense related to the unvested portion of the Company’s restricted stock units was approximately $29, to be recognized through 2016 over a weighted average period of 1.2 years.

The following table summarizes the restricted stock unit activity during the nine months ended September 30, 2013:


	Shares			Weighted Average Grant Date Fair Value
Unvested Restricted Stock Units - December 31, 2012		11,925		$	6.61
Units vested		(3,850	)		6.56
Units cancelled		(1,125	)		6.77

Unvested Restricted Stock Units - September 30, 2013		6,950		$	6.62

Employee Stock Purchase Plan (“ESPP”)

The ESPP enables eligible employees to purchase common stock at the lower of 85% of the fair market value of the common stock on the first or last day of each offering period. Each offering period is nine months. The Company received proceeds of $0.3 million from the issuance of 61,230 shares under the ESPP in February 2013 and received proceeds of $0.3 million from the issuance of 48,032 shares under the ESPP in February 2012. The Company received proceeds of $0.3 million from the issuance of 51,735 shares under the Purchase Plan in August 2013 and received proceeds of $0.3 million from the issuance of 56,041 shares under the Purchase Plan in August 2012.

Based on the 15% discount and the fair value of the option feature of this plan, the ESPP is considered compensatory. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model.

The Company calculated the fair value of each employee stock purchase grant on the date of grant using the Black-Scholes option-pricing model using the following assumptions:


	September 30,
	2013			2012
Dividend yield		1.7	%		1.7	%
Risk-free interest rate		0.3	%		0.2	%
Expected volatility		51	%		52	%
Expected life (in years)		0.5			0.5

The dividend yield rate was calculated by dividing the Company’s annual dividend by the closing price on the grant date. The risk-free interest rate was based on the U.S. Treasury yields with a remaining term that approximates the expected life of the options granted. The Company calculates the volatility based on a five-year historical period of the Company’s stock price. The expected life used is based on the offering period.

Employee Withholding Taxes on Stock Awards

For ease in administering the issuance of stock awards, the Company holds back shares of vested restricted stock awards and short-term incentive plan stock awards for the value of the statutory withholding taxes. For each individual receiving a share award, the Company redeems the shares it computes as the value for the withholding tax and remits this amount to the appropriate tax authority. The Company paid $1.0 million and $1.2 million for withholding taxes related to stock awards during the nine months ended September 30, 2013 and 2012, respectively.

Stock Repurchases

All share repurchase programs are authorized by the Company’s Board of Directors and are announced publicly. On March 18, 2013, the Company’s Board of Directors approved a new share repurchase program of $5.0 million. The Company repurchased 59,510 shares at an average price of $7.31 during the three months ended June 30, 2013. No shares were repurchased during the three months ended September 30, 2013. At September 30, 2013, the Company had $4.6 million in share value that could still be repurchased under this program.