9. Stock-Based Compensation

The condensed consolidated statements of operations include $0.8 million and $0.6 million of stock compensation expense for the three months ended March 31, 2014 and 2013, respectively. Stock compensation expense for the three months ended March 31, 2014 consists of $0.4 million for restricted stock awards, $0.4 million for stock option expenses and $31 for stock purchase plan expenses. Stock compensation expense for the three months ended March 31, 2013 consists of $0.6 million for restricted stock awards, and $59 for stock option and stock purchase plan expenses. The Company did not capitalize any stock compensation expense during the three months ended March 31, 2014 or 2013.

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


	Three Months Ended March 31,
	2014		2013
Cost of revenues	$	86	$	85
Research and development		173		147
Sales and marketing		147		106
General and administrative		345		286

Total continuing operations	$	751	$	624

Restricted Stock – Service Based

The Company grants shares of restricted stock as employee incentives as permitted under the Company’s 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.

The following table summarizes restricted stock activity for the three months ended March 31, 2014:


	Shares			Weighted Average Grant Date Fair Value

Unvested Restricted Stock Awards - December 31, 2013		543,021		$	6.59
Shares awarded		105,950			8.48
Shares vested		(319,200	)		6.41

Unvested Restricted Stock Awards - March 31, 2014		329,771		$	7.37

The intrinsic value of service-based restricted shares that vested during the three months ended March 31, 2014, and 2013, was $2.7 million, and $2.5 million, respectively.

At March 31, 2014, total unrecognized compensation expense related to restricted stock was approximately $2.1 million, net of forfeitures to be recognized through 2018 over a weighted average period of 1.6 years.

Restricted Stock Units – Service Based

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.

The following table summarizes the restricted stock unit activity during the three months ended March 31, 2014:


	Shares			Weighted Average Grant Date Fair Value

Unvested Restricted Stock Units - December 31, 2013		6,325		$	6.70
Units awarded		1,500			8.77
Units vested		(3,225	)		6.56

Unvested Restricted Stock Units - March 31, 2014		4,600		$	7.47

The intrinsic value of service-based restricted stock units that vested and issued as shares during the three months ended March 31, 2014 and 2013 was $27 and $28, respectively.

As of March 31, 2014, the unrecognized compensation expense related to the unvested portion of the Company’s restricted stock units was approximately $32, to be recognized through 2018 over a weighted average period of 1.6 years.

Stock Options

The Company grants stock options to purchase common stock for incentive purposes. The stock options contain exercise prices no less than the fair value of the Company’s stock on the grant date and typically vest in installments over a period of four 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. Prior to 2010, the Company primarily granted stock options with a ten year life. Beginning with options granted in July 2010, the Company grants stock options with a seven year life.

The fair value of each unvested 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.

The following table summarizes the stock option activity for the three months ended March 31, 2014:


	Options Outstanding			Weighted Average Exercise Price

Outstanding at December 31, 2013		1,461,559		$	8.40
Granted		7,500			8.69
Retention stock rights converted to stock options		207,236			7.16
Exercised		(27,270	)		7.28
Expired or Cancelled		(243,050	)		10.98
Forfeited		(3,250	)		8.18

Outstanding at March 31, 2014		1,402,725		$	7.79

Exercisable at March 31, 2014		495,374		$	8.88

During the three months ended March 31, 2014 the Company issued 7,500 stock options with a weighted average grant date fair value of $2.44.

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 at March 31:


	March 31,
	2014			2013
Dividend yield		1.8	%		2.0	%
Risk-free interest rate		0.5	%		0.3	%
Expected volatility		39	%		52	%
Expected life (in years)		5.2			6.0

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 Company records expense based on the grading vesting method.

During the three months ended March 31, 2014, the Company received proceeds of $0.2 million from the exercise of 27,270 options. The intrinsic value of these options exercised was $34. In March 2014, in accordance with plan documents, the Company awarded an additional 24,736 stock option rights to executive employees under the 2013 LTIP. These options were earned based on 2013 performance criteria. In March 2014, the total stock option rights earned under the 2013 LTIP were converted to stock options that vest between two and four years from the April 2013 grant date.

As of March 31, 2014, the unrecognized compensation expense related to the unvested portion of the Company’s stock options was approximately $1.7 million, net of estimated forfeitures to be recognized through 2018 over a weighted average period of 1.4 years.

The range of exercise prices for options outstanding and exercisable at March 31, 2014 was $5.50 to $11.00. The following table summarizes information about stock options outstanding under all stock plans at March 31, 2014:


	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		60,209		4.52	$	6.58		41,425	$	6.65
6.87 – 7.93		922,306		5.78		7.22		47,739		7.66
7.94 – 8.63		37,645		2.69		8.49		32,895		8.49
8.64 – 8.76		28,500		2.28		8.76		26,500		8.76
8.77 – 9.09		105,250		1.60		9.08		100,000		9.09
9.10 – 9.12		6,575		2.23		9.11		6,575		9.11
9.13 – 9.16		132,000		2.34		9.16		132,000		9.16
9.17 – 10.25		69,280		3.24		9.40		67,280		9.39
10.26 – 10.50		1,400		4.34		10.46		1,400		10.46
10.51 – 11.00		39,560		2.14		10.65		39,560		10.65

$5.50 – $11.00		1,402,725		4.69	$	7.79		495,374	$	8.88

The intrinsic value and contractual life of the options outstanding and exercisable at March 31, 2014 were as follows:


	Weighted Average Contractual Life (years)		Intrinsic Value
Options Outstanding		4.69	$	1,535
Options Exercisable		2.25	$	145

The intrinsic value is based on the share price of $8.73 at March 31, 2014.

Performance-based Equity Awards

In March 2014, the Company’s Board of Directors approved the 2014 Long-Term Incentive Plan (“2014 LTIP”). Under the LTIP, shares are earned by certain executive employees based upon achievement of four-year revenue goals with a penalty if certain profit levels are not maintained. The four-year period is divided into two interim periods (each an “Interim Period”), the first of which will end at December 31, 2015 and the second of which will end at December 31, 2017. The number of shares that can be earned at threshold and target are 190,000 and 380,000, respectively. The LTIP award agreements were completed in April 2014.

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 six months. The Company received proceeds of $0.3 million from the issuance of 49,063 shares under the ESPP in February 2014 and received proceeds of $0.3 million from the issuance of 61,230 shares under the ESPP in February 2013.

Based on the 15% discount and the fair value of the option feature of this plan, this plan 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:


	March 31,
	2014			2013
Dividend yield		1.8	%		1.9	%
Risk-free interest rate		0.3	%		0.2	%
Expected volatility		39	%		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 dividend yield rate is calculated by dividing the Company’s annual dividend by the closing price on the grant date. 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 $0.9 million for withholding taxes related to stock awards during the three months ended March 31, 2014 and 2013, 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 share repurchase program for up to $5.0 million. There were no share repurchases during the three months ended March 31, 2014. The Company repurchased 59,510 shares at an average price of $7.31 during the year ended December 31, 2013. At March 31, 2014, the Company had $4.6 million in share value that could still be repurchased under this program.