8. Stock-Based Compensation

The condensed consolidated statements of operations include $0.7 million and $1.4 million of stock compensation expense for the three and nine months ended September 30, 2015, respectively. Stock compensation expense for the three months ended September 30, 2015 consisted of $0.5 million for restricted stock awards, $33 related to performance units, $57 for stock option expenses and $55 for stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2015 consisted of $1.4 million for restricted stock awards, $0.4 million for stock option expenses and $0.2 million for stock purchase plan expenses, offset by the expense reversal of $0.5 million related to performance units that are not expected to vest.

The condensed consolidated statements of operations include $0.7 million and $2.6 million of stock compensation expense for the three and nine months ended September 30, 2014, respectively. Stock compensation expense for the three months ended September 30, 2014 consisted of $0.5 million for restricted stock awards, $0.2 million for stock option expenses and $54 for stock purchase plan expenses. Stock compensation expense for the nine months ended September 30, 2014 consists of $1.6 million for restricted stock awards, $0.8 million for stock option expenses and $137 for stock purchase plan expenses.

The Company did not capitalize any stock compensation expense during the three months ended September 30, 2015 or 2014. 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,
	2015		2014		2015		2014
Cost of revenues	$	115	$	112	$	244	$	315
Research and development		99		149		244		509
Sales and marketing		230		155		370		491
General and administrative		206		315		534		1,263

Total	$	650	$	731	$	1,392	$	2,578

Restricted Stock – Service Based

The Company grants restricted shares as employee incentives. When service-based restricted stock is granted to employees, the Company records deferred stock compensation within additional paid-in capital, representing the fair value of the common stock on the date the restricted shares are granted. The Company records stock compensation expense on a straight-line basis over the vesting period of the applicable service-based restricted shares. These grants vest over various periods, but typically vest over four years. The 2015 annual service-based awards were granted to eligible employees in June 2015, and the 2014 annual service-based awards were granted to eligible employees in March 2014.

In September 2015, the Company’s Board of Directors awarded 200,000 restricted shares to Martin H. Singer, Chief Executive Officer. These shares vest in September 2017 if Mr. Singer remains an employee of the Company on the vesting date. In order to better align compensation incentives with long-term shareholder interest, effective August 31, 2015, the Board of Directors approved reductions in the base salaries of named executive officers and certain other executives, and concurrently therewith granted 117,300 shares of the Company’s common stock which will vest one year from the date of grant. The Company awarded 100,000 shares to Mr. Thakkar as part of his employment offer following the Nexgen acquisition in the first quarter of 2015. These shares vest in February 2017 if Mr. Thakkar remains an employee of the Company on the vesting date.

The following table summarizes restricted stock activity for the nine months ended September 30, 2015:


	Shares			Weighted Average Grant Date Fair Value
Unvested Restricted Stock Awards - December 31, 2014		343,836		$	7.41
Shares awarded		633,079			6.81
Shares vested		(176,849	)		7.21
Shares cancelled		(19,701	)		7.77

Unvested Restricted Stock Awards - September 30, 2015		780,365		$	6.96

The intrinsic value of service-based restricted shares that vested during the three months ended September 30, 2015, and 2014, was $57 and $25, respectively. The intrinsic value of service-based restricted shares that vested during the nine months ended September 30, 2015, and 2014, was $1.4 million and $3.2 million, respectively.

At September 30, 2015, total unrecognized compensation expense related to restricted stock was approximately $3.6 million, net of forfeitures to be recognized through 2019 over a weighted average period of 1.5 years.

Restricted Stock Units – Service Based

The Company grants restricted stock units as employee incentives. Restricted stock units are primarily granted to foreign employees for long-term incentive purposes. Employee restricted stock units are service-based awards and are amortized over the vesting period. At the vesting date, these units are converted to shares of common stock. The Company records expense on a straight-line basis for restricted stock units.

The following table summarizes the restricted stock unit activity during the nine months ended September 30, 2015:


	Units			Weighted Average Grant Date Fair Value
Unvested Restricted Stock Units - December 31, 2014		4,600		$	7.47
Units awarded		4,350			7.49
Units vested		(2,475	)		7.00
Units cancelled		(1,750	)		7.91

Unvested Restricted Stock Units - September 30, 2015		4,725		$	7.47

The intrinsic value of service-based restricted stock units that vested and issued as shares during the nine months ended September 30, 2015 and 2014 was $20 and $27, respectively. No units vested during the three months ended September 30, 2015 and 2014.

As of September 30, 2015, the unrecognized compensation expense related to the unvested portion of the Company’s restricted stock units was approximately $22, to be recognized through 2019 over a weighted average period of 1.5 years.

Stock Options

The Company grants stock options to purchase common stock as long-term incentives. The Company issues stock options with exercise prices no less than the fair value of the Company’s stock on the grant date. Employee option grants are subject to installment vesting typically 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 July 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. During the three and nine months ended September 30, 2015, respectively, the Company awarded 1,500 and 20,500 stock options to eligible new employees. In addition, in March 2015, the Company awarded 130,000 stock options to former employees of Nexgen in connection with the acquisition of the Nexgen business.

A summary of the Company’s stock option activity for the nine months ended September 30, 2015 is as follows:


	Options			Weighted Average Exercise Price
Outstanding at December 31, 2014		1,357,928		$	7.81
Granted		150,500			8.00
Exercised		(35,134	)		7.25
Expired or Cancelled		(110,683	)		9.00
Forfeited		(72,820	)		7.76

Outstanding at September 30, 2015		1,289,791		$	7.74
Exercisable at September 30, 2015		796,046		$	7.96

There were no stock option exercises during the three months ended September 30, 2015. During the nine months ended September 30, 2015, the Company received proceeds of $0.3 million from the exercise of 35,134 options. The intrinsic value of these options exercised was $34. During the three months ended September 30, 2014, the Company received proceeds of $13 from the exercise of 1,894 options. The intrinsic value of these options exercised was $2. During the nine months ended September 30, 2014, the Company received proceeds of $0.3 million from the exercise of 41,841 options. The intrinsic value of these options exercised was $55.

The range of exercise prices for options outstanding and exercisable at September 30, 2015, was $5.50 to $11.00. The following table summarizes information about stock options outstanding under all stock option plans:


	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 - $6.00		4,879		4.97	$	5.75		3,124	$	5.63
6.01 - 6.50		16,267		3.54		6.23		12,722		6.23
6.51 - 7.00		38,491		2.59		6.85		35,688		6.86
7.01 - 7.50		793,096		4.43		7.18		427,814		7.17
7.51 - 8.00		27,750		5.04		7.79		11,791		7.82
8.01 - 8.50		127,195		5.21		8.17		27,935		8.45
8.51 - 9.00		32,478		1.15		8.76		28,986		8.76
9.01 - 9.50		188,085		0.98		9.19		187,511		9.19
9.51 - 10.00		20,650		2.37		9.64		19,575		9.64
10.01 - 11.00		40,900		0.72		10.64		40,900		10.64

$5.50 - $11.00		1,289,791		3.72	$	7.74		796,046	$	7.96

The weighted average contractual life and intrinsic value at September 30, 2015, was the following:


	Weighted Average Contractual Life (years)		Intrinsic Value
Options Outstanding		3.72	$	1
Options Exercisable		2.93	$	1

The intrinsic value is based on the share price of $6.01 at September 30, 2015.

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 September 30^th:


	September 30,
	2015			2014
Dividend yield		3.4	%		2.2	%
Risk-free interest rate		0.6	%		0.5	%
Expected volatility		34	%		34	%
Expected life (in years)		5.2			5.2

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 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.

As of September 30, 2015, the unrecognized compensation expense related to the unvested portion of the Company’s stock options was approximately $0.4 million, net of estimated forfeitures to be recognized through 2019 over a weighted average period of 1.2 years.

Performance-based Equity Awards

In June 2015, the Company’s Board of Directors approved the 2015 Long-Term Incentive Plan (“2015 LTIP”). Under the 2015 LTIP, shares are earned by certain executive employees based upon achievement of revenue goals over a four-year period 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 on December 31, 2016, and the second of which will end on December 31, 2018. The number of shares that can be earned at threshold and target are 212,000 and 424,000, respectively. Stock compensation expense is amortized over the performance period for these awards based on estimated achievement of the goals. No expense was recorded for the 1^st Interim Period of the 2015 LTIP because the Company does not believe it will meet the revenue threshold for the year ended 2016.

In March 2014, the Company’s Board of Directors approved the 2014 Long-Term Incentive Plan (“2014 LTIP”) and the LTIP award agreements were completed in April 2014. Under the 2014 LTIP, shares are earned by certain executive employees based upon achievement of revenue goals over a four-year period 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 on December 31, 2015, and the second of which will end on December 31, 2017. The number of shares that can be earned at threshold and target are 190,000 and 380,000, respectively. Stock compensation expense is amortized over the performance period for these awards based on estimated achievement of the goals. The achievement period for one executive was modified from two years to one year. For the units that vested, shares were awarded with intrinsic value of $50 and the unvested units were cancelled. For the remaining units, no expense has been recorded for the 1^st Interim Period of the 2014 LTIP because the Company does not believe it will meet the revenue threshold for the year ended 2015.

The following summarizes the performance unit activity during the nine months ended September 30, 2015:


	Units			Weighted Average Grant Date Fair Value
Unvested Performance Units - December 31, 2014		380,000		$	8.47
Units awarded		424,000			7.49
Units vested		(6,202	)		8.47
Units cancelled		(33,798	)		8.04

Unvested Performance Units - September 30, 2015		764,000		$	7.95

Within a revised employment offer letter to Jigar Thakkar in May 2015, the Company offered Mr. Thakkar the opportunity to earn up to 50,000 shares of common stock-based on achieving revenue goals for 2016. Mr. Thakkar is the primary founder of Nexgen, and remained with the acquired business as the Company’s Vice President, Network Analytics. Under terms of the offer, 50% of the shares will vest on February 27, 2017 and 50% of the shares will vest on February 27, 2018 if Mr. Thakkar remains an employee of the Company on such dates. Stock compensation expense is amortized over the vesting period for these awards based on estimated achievement of the goals.

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 approximately six months. The Company received proceeds of $0.4 million from the issuance of 76,314 shares under the ESPP in August 2015 and received proceeds of $0.3 million from the issuance of 51,545 shares under the ESPP in August 2014.The Company received proceeds of $0.4 million from the issuance of 57,293 shares under the ESPP in February 2015 and received proceeds of $0.3 million from the issuance of 49,063 shares under the ESPP in February 2014.

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:


	September 30,
	2015			2014
Dividend yield		3.4	%		2.2	%
Risk-free interest rate		0.6	%		0.3	%
Expected volatility		34	%		38	%
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.

In June 2014, the Company’s shareholders approved an amended and restated ESPP. Under the restated ESPP, the number of shares authorized for issuance was increased by 750,000. In addition, the expiration date of the ESPP was modified from March 2017 to the date that all shares authorized have been granted.

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 $0.4 million and $1.0 million for withholding taxes related to stock awards during the nine months ended September 30, 2015 and 2014, respectively.

Stock Repurchases

All share repurchase programs are authorized by the Company’s Board of Directors and are announced publicly. On November 13, 2014, the Board of Directors approved a share repurchase program of up to 926,000 of the Company’s outstanding shares that will expire on the earlier of the date that the total shares are repurchased or November 13, 2016. On April 20, 2015, the Board of Directors authorized an increase to the share repurchase program to purchase another 500,000 shares of stock. Additionally, on August 10, 2015, the Board of Directors authorized another increase to the share repurchase program to purchase an additional 1,300,000 shares, for a total of 2,726,000 shares. The Company repurchased 1,113,934 shares at an average price of $6.18 during the three months ended September 30, 2015. The Company repurchased 1,494,019 shares at an average price of $6.49 during the nine months ended September 30, 2015. At September 30, 2015, the Company had 1,231,981 shares that could still be repurchased under these programs.

Amended and Restated Stock Plan

On June 10, 2015, the Company’s stockholders approved the amendment and restatement of the PCTEL, Inc. Stock Plan (previously known as the “1997 Stock Plan”) (the “Stock Plan”) to, among other things, increase the number of shares of common stock authorized for issuance under the Stock Plan. As amended and restated, the Stock Plan provides that the maximum aggregate number of shares with respect to which awards may be made under the Stock Plan after the effective date of the amendment and restatement is the sum of (i) 3,573,981 shares, plus (ii) any shares returned (or that would have otherwise been returned) to the Stock Plan on or after the date of approval of the amendment and restatement of the Stock Plan as a result of the Stock Plan’s lapsed share and share counting provisions, plus (iii) any remaining shares that would have been available for grant under the Stock Plan as of the effective date of the amendment and restatement.

At the time of the approval of the amendment and restatement of the Stock Plan by the Company’s stockholders, there were 2,058,769 shares of the Registrant’s Common Stock that had been previously registered under the prior Form S-8s and that were available for issuance under the Stock Plan. In addition, under the Stock Plan there were an aggregate of 316,740 unvested restricted shares outstanding and outstanding options to purchase 1,437,661 shares. Substantially all of the shares that remained available for grants under the Stock Plan had already been committed to awards under various incentive programs. Accordingly, the Company requested, and obtained, the approval of the stockholders to increase the number of shares available to enable the Company to continue making planned awards in 2015 and subsequent years.