Note 2 - Stock-Based Compensation

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 2. - STOCK-BASED COMPENSATION

Stock Options

During the six months ended June 30, 2014, the Company issued no stock options without performance-based vesting conditions. During the six months ended June 30, 2013, the Company issued 11,000 stock options that vest over a four year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $2.47. Compensation expense related to stock options without performance-based vesting conditions was $36,000 and $85,000 for the three months ended June 30, 2014 and 2013, respectively. Compensation expense related to stock options without performance-based vesting conditions was $91,000 and $203,000 for the six months ended June 30, 2014 and 2013, respectively.

During the six months ended June 30, 2014, the Company issued 116,000 stock options with performance-based vesting conditions for the years ended December 31, 2014, 2015, and 2016, the achievement of which would result in pro rata vesting per year in March 2015, 2016, and 2017, respectively. The weighted average exercise price of these stock options is $5.75. During the six months ended June 30, 2013, the Company issued no stock options with performance-based vesting conditions. All stock options with performance-based conditions expire ten years from date of grant. Of the unvested stock options outstanding at June 30, 2014, 1,185,200 are subject to the achievement of certain performance conditions. The performance conditions related to approximately 45,000 of these stock options were deemed probable as of June 30, 2014. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $67,000 and $56,000 for the three months ended June 30, 2014 and 2013, respectively. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $120,000 and $112,000 for the six months ended June 30, 2014 and 2013, respectively. The performance conditions related to the remaining options were not deemed probable at June 30, 2014; therefore no compensation expense related to these options has been recorded.

The weighted-average remaining contractual life of stock options outstanding and exercisable at June 30, 2014 and 2013 was 6.95 years and 5.77 years, respectively.

As of June 30, 2014, there were 1,307,825 unvested options expected to vest over a weighted-average period of 8.7 years. As of December 31, 2013, there were 1,586,076 unvested options expected to vest over a weighted-average period of 8.9 years.

The following table summarizes the combined stock option activity under all of the plans:

	Number of Options			Weighted Average Option Price
Balance, December 31, 2013		2,187,019		$	4.11
Granted		116,000			5.75
Exercised		(625	)		4.37
Cancelled		(362,016	)		6.34
Balance, June 30, 2014		1,940,378		$	3.79

Option Valuation

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with weighted-average assumptions based on the grant date.

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Risk free interest rate range		2.70	%		1.86	%		2.70	%	1.86 – 2.04		%
Weighted average life (in years)		10			10			10			10
Weighted average volatility		65.30	%		66.10	%		65.30	%		66.23	%
Volatility range		65.30	%		66.10	%		65.30	%	66.10 – 66.28		%
Expected dividend yield		-			-			-			-
Weighted average grant-date fair value per share of options granted	$	4.31		$	1.80		$	4.31		$	1.80

Restricted Stock

The Interphase Corporation 2004 Long-Term Stock Incentive Plan, which expired on May 5, 2014 (so that no new awards may be made or granted under it), provided for grants of bonus stock awards (“restricted stock”) to its directors and certain employees at no cost to the recipient. Holders of restricted stock are entitled to cash dividends, if declared, and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a predefined vesting period, currently ranging from three to six years. There were no shares of restricted stock issued during the six months ended June 30, 2014 or 2013. Upon issuance of restricted stock under the plan, unearned compensation equivalent to the market value at the date of grant is recorded as a reduction to shareholders’ equity and subsequently amortized to expense over the respective restriction periods. Compensation expense related to previously granted restricted stock was $15,000 and $25,000 for the three months ended June 30, 2014 and 2013, respectively. Compensation expense related to previously granted restricted stock was $30,000 and $56,000 for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, there was $94,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 1 year. As of December 31, 2013, there was $124,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 1.2 years. The following table summarizes the restricted stock activity for the six months ended June 30, 2014:

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2013		61,656		$	3.21
Granted		-			-
Vested		(30,836	)		3.21
Cancelled/Forfeited		-			-
Nonvested restricted stock at June 30, 2014		30,820		$	3.21

New Plan

The Interphase Corporation 2014 Long-Term Stock Incentive Plan has been adopted by the Company’s Board of Directors and approved by its shareholders. No awards have been made or granted under that plan as of June 30, 2014.