NOTE 3—STOCK-BASED AWARDS AND PER SHARE INFORMATION

Stock-Based Compensation

The Company currently has one stock-based compensation plan, the 2002 Stock Incentive Plan (as amended effective as of May 26, 2004, November 15, 2005, May 16, 2007, May 5, 2011, June 6, 2013, and October 30, 2014) (the “2002 Plan”), which will expire on May 5, 2019. Persons eligible to receive awards under the 2002 Plan include certain officers, employees, and directors of the Company, as well as its consultants. As of March 31, 2015, a total of 9,250,000 shares have been authorized for issuance under the 2002 Plan (see Note 13 – Subsequent Events), of which 3,031,000 shares of Company common stock have been issued pursuant to options that were exercised, 5,469,000 shares of Company common stock have been reserved for options and restricted stock units that are outstanding, and 750,000 shares of Company common stock remain available for future grants.

Stock-based compensation cost recognized in operating results totaled approximately $700,000 and $310,000 for the three months ended March 31, 2015 and 2014, respectively. The net impact to earnings for the three months ended March 31, 2015 and 2014 was $(0.01) and $(0.01) per basic and diluted share, respectively. At March 31, 2015, the Company had approximately $5.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements. The Company expects that cost to be recognized over a weighted-average period of 3.4 years.

The following table summarizes the income statement classification of compensation expense associated with share-based payments (in thousands):

	Three Months Ended
	March 31,
	2015		2014
Cost of revenue	$	76	$	46
Sales and marketing		293		125
General and administrative		236		115
Engineering and development		95		24
	$	700	$	310

The stock option fair values, under the 2002 Plan, were estimated using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended
	March 31,
	2015		2014
Expected term	7.2 years		3.6 years
Volatility	89.90%		98.37%
Annual dividend per share	$	—	$	—
Risk-free interest rate	1.78%		1.65%

A summary of option activity under the 2002 Plan for the three months ended March 31, 2015 is as follows:

						Weighted Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Shares			Exercise Price		Term (Years)		Value(1)
Options outstanding at December 31, 2014		3,391,000		$	3.11		2.97	$	1,063,000
Granted at fair market value		2,232,000		$	2.44
Exercised		(38,000	)	$	1.15
Forfeited, cancelled, or expired		(153,000	)	$	3.44
Options outstanding at March 31, 2015		5,432,000		$	2.84		5.46	$	186,000
Options exercisable at March 31, 2015		2,680,000		$	3.11		2.31	$	183,000
Vested options expired during the quarter ended March 31, 2015		25,000		$	3.96

(1) The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than the exercise price of the grant.

Cash proceeds along with fair value disclosures related to grants, exercises, and vested options under the 2002 Plan are provided in the following table (in thousands, except per share amounts):

	Three Months Ended
	March 31,
	2015		2014
Proceeds from stock options exercised	$	44	$	248
Tax benefit related to stock options exercised (1)	N/A		N/A
Intrinsic value of stock options exercised (2)	$	52	$	82
Weighted-average fair value of options granted during period	$	2.44	$	1.86
Total fair value of shares vested during the period	$	293	$	346

(1) Excess tax benefits received related to stock option exercises are presented as financing cash inflows. The Company currently does not receive a tax benefit related to the exercise of stock options due to the Company’s net operating losses.

(2) The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant.

Restricted Stock Units

The Company issues restricted stock units (“RSUs”) to acquire shares of Company common stock as approved by its board of directors (the “Board”). For the three months ended March 31, 2015 and 2014, the Board did not grant any RSUs. As of March 31, 2015, 37,000 shares of Company common stock have been reserved for RSUs that are outstanding.

Warrants

The Company issues warrants to acquire shares of its common stock underlying such warrants as approved by the Board.

A summary of warrant activity for the three months ended March 31, 2015 is as follows:


			Weighted
			Average
	Shares		Exercise Price
Warrants outstanding at December 31, 2014		888,000	$	6.04
Granted		—
Exercised		—
Forfeited, cancelled, or expired		—
Warrants outstanding at March 31, 2015		888,000	$	6.04
Warrants exercisable at March 31, 2015		753,000	$	6.40
Vested warrants expired during the quarter ended March 31, 2015		—	N/A

No warrants were exercised during the three months ended March 31, 2015 and 2014.

Other Stock-Based Awards

Effective March 9, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase up to 871,710 shares of Company common stock to its Chief Financial Officer in connection with his employment agreement with the Company. These options were granted at an exercise price of $1.99 per share, the closing price of Company common stock on the grant date. These options expire ten years from the grant date and vest in two tranches as follows: (i) as to options to purchase 523,026 shares (the “First Tranche”), options to purchase 130,757 shares vest and become exercisable on the first anniversary of March 9, 2015, and options to purchase 10,896 shares vest and become exercisable each month following March 9, 2016 for a period of 35 consecutive months, and options to purchase 10,909 shares vest and become exercisable on March 9, 2019, and (ii) as to options to purchase 348,684 shares (the “Second Tranche”), all such shares vest and become exercisable on March 9, 2025 or based on the Company’s achievement of certain enumerated financial performance targets or other milestones, at the discretion of the Compensation Committee. The fair value of the First Tranche of $1.48 per share was estimated using the Black-Scholes option-pricing model with assumptions of 6.1 years for expected term, 88.79% volatility and 1.83% risk-free interest rate. The fair value of the Second Tranche of $1.70 per share was estimated using the Black-Scholes option-pricing model with assumptions of 10.0 years for expected term, 87.87% volatility and 2.19% risk-free interest rate.

Net Loss Per Share – Basic and Diluted

Basic net loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. In computing diluted net loss per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities.

Outstanding stock options and warrants to purchase 15,563,000 shares (including 9,206,000 shares issued in connection with the private placement completed by the Company on November 7, 2014) were not included in the computation of diluted loss per share for the three months ended March 31, 2015 as a result of their anti-dilutive effect. For the same 2014 period, anti-dilutive outstanding stock options and warrants to purchase 5,998,000 shares were not included in the computation of diluted loss per share.

Stock Dividend

In February 2014, the Board declared a one-half percent stock dividend payable March 28, 2014, to stockholders of record on March 14, 2014. There is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.