7. Stock-Based Compensation

The condensed consolidated statements of operations include $0.7 million and $0.9 million of stock compensation expense for the three months ended March 31, 2017 and 2016, respectively. Stock compensation expense for the three months ended March 31, 2017 consists of $0.6 million for service-based restricted stock awards, $42 for stock options and $45 for the Employee Stock Purchase Plan (“ESPP”). Stock compensation expense for the three months ended March 31, 2016 consists of $0.7 million for service-based restricted stock awards, $87 for stock options and $47 for the ESPP.

The Company did not capitalize any stock compensation expense during the three months ended March 31, 2017 or 2016. Effective January 1, 2017, the Company has elected to account for forfeitures as they occur. Prior to the adoption of ASU No. 2016-09, the Company estimated the number of stock-based awards that were expected to vest, and only recognized compensation expense for such awards.

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

	Three Months Ended
	March 31
	2017		2016

Cost of revenues	$	78	$	131
Research and development		146		167
Sales and marketing		123		145
General and administrative		382		416
Total	$	729	$	859

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. During the first quarter 2017, the Company issued 285,000 service-based restricted stock awards to employees as long-term incentives that cliff vest in two years.

The following table summarizes service-based restricted stock activity for the three months ended March 31, 2017:

				Weighted
				Average
				Grant Date
	Shares			Fair Value

Unvested Restricted Stock Awards - December 31, 2016		1,120,960		$	5.83
Shares awarded		286,014			5.97
Shares vested		(179,861	)		6.41
Shares cancelled		(17,200	)		6.34
Unvested Restricted Stock Awards - March 31, 2017		1,209,913		$	5.77

The intrinsic value of service-based restricted shares that vested during the three months ended March 31, 2017, and 2016, was $1.0 million and $0.7 million, respectively.

At March 31, 2017, total unrecognized compensation expense related to restricted stock was approximately $5.2 million to be recognized through 2020 over a weighted average period of 1.6 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 three months ended March 31, 2017:

				Weighted
				Average
				Grant Date
	Units			Fair Value

Unvested Restricted Stock Units - December 31, 2016		36,388		$	5.57
Units awarded		5,000			5.97
Units vested		(4,088	)		5.80
Unvested Restricted Stock Units - March 31, 2017		37,300		$	5.60

The intrinsic value of service-based restricted stock units that vested and were issued as shares during the three months ended March 31, 2017 and 2016 was $23 and $10, respectively.

As of March 31, 2017, the unrecognized compensation expense related to the unvested portion of the Company’s restricted stock units was approximately $0.1 million, to be recognized through 2020 over a weighted average period of 1.0 years.

Stock Options

The Company grants stock options to purchase common stock as long-term incentives. The exercise price of the stock options is no less than the fair value of the Company’s stock on the grant date. The stock options have a seven-year life and generally vest over a period of four years, 25% after one year, and monthly thereafter. 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.

A summary of the Company’s stock option activity for the three months ended March 31, 2017 is as follows:

				Weighted
				Average
	Options			Exercise
	Outstanding			Price

Outstanding at December 31, 2016		825,561		$	7.30
Expired or Cancelled		(44,520	)		8.84
Forfeited		(16,773	)		5.84
Outstanding at March 31, 2017		764,268		$	7.24

Exercisable at March 31, 2017		719,195		$	7.27

There were no stock options granted or exercised during the three months ended March 31, 2017.

The range of exercise prices for options outstanding and exercisable at March 31, 2017, was $5.00 to $11.00. The following table summarizes information about stock options outstanding under all stock option plans:

					Options Outstanding						Options Exercisable
							Weighted
							Average		Weighted-				Weighted
Range of					Number		Contractual Life		Average		Number		Average
Exercise Prices ($)					Outstanding		(# Years)		Exercise Price		Exercisable		Exercise Price
$	5.00	--	$	6.00		23,107		5.73	$	5.23		3,315	$	5.92
	6.01	--		7.00		48,726		1.27		6.72		48,726		6.72
	7.01	--		8.00		619,485		2.96		7.19		613,623		7.19
	8.01	--		9.00		48,650		4.19		8.22		29,483		8.29
	9.01	--		10.00		22,900		1.12		9.51		22,648		9.50
	10.01	--		11.00		1,400		1.34		10.46		1,400		10.46
$	5.00	--	$	11.00		764,268		2.96	$	7.24		719,195	$	7.27

The weighted average contractual life and intrinsic value at March 31, 2017, was the following:

Weighted

Average

Contractual

Life (years)

Intrinsic

Value

Options Outstanding

2.96

Options Exercisable

2.80

The intrinsic value is based on the share price of $7.12 at March 31, 2017.

The fair value of each stock option outstanding 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. 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. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and expected option life.

The Company calculated the volatility based on a five-year historical period of the Company’s stock price. The expected life used for options granted was based on historical data of employee exercise performance. 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 volatility was based on a five-year historical period of the Company’s stock price. The Company records expense based on the grading vesting method.

As of March 31, 2017, the unrecognized compensation expense related to the unvested portion of the Company’s stock options was approximately $0.1 million to be recognized through 2020 over a weighted average period of 1.2 years.

Performance-based Equity Awards

The Company had 274,500 and 296,500 unvested performance awards at March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017, the Company does not expect any performance awards to vest. There were forfeitures of 22,000 awards during the three months ended March 31, 2017 due to employee attrition.

The following table summarizes the performance-based equity activity during the three months ended March 31, 2017:

				Weighted
				Average
				Grant Date
	Units			Fair Value

Unvested Performance Units - December 31, 2016		296,500		$	7.95
Units cancelled		(22,000	)		7.85
Unvested Performance Units - March 31, 2017		274,500		$	7.95

Short-term incentive plan

For the Company’s 2016 short-term incentive plan (“STIP”), executives were paid in shares of the Company’s stock. During the first quarter 2017, the Company issued 112,916 shares with a fair value of $0.6 million earned under the 2016 STIP. The Company recorded the expense during the year ended December 31, 2016. Bonuses earned for the 2017 STIP will be paid in cash.

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 $0.3 million from the issuance of 72,218 shares under the ESPP in February 2017 and received proceeds of $0.4 million from the issuance of 78,415 shares under the ESPP in February 2016.

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,
	2017			2016
Dividend yield		3.6	%		4.2	%
Risk-free interest rate		0.8	%		0.6	%
Expected volatility		33	%		34	%
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. For withholding taxes related to stock awards, the Company paid $0.6 million and $0.2 million during the three months ended March 31, 2017 and 2016, respectively.

Stock Repurchases

No shares were repurchased during the first quarter 2017. The Company repurchased 783,212 shares at an average price of $5.23 during the first quarter 2016. As of the first quarter 2016, the Company had no shares that could still be repurchased under previously approved programs.