8. Stock-Based Compensation

Stock Plans

On July 28, 2005, our Shareholders approved the 2005 Stock Option / Stock Issuance Plan (“2005 Plan”). The 2005 Plan, which became effective the same date, replaced the 1995 Stock Option / Stock Issuance Plan (“1995 Plan”), which expired on May 24, 2005. All outstanding options under the 1995 Plan remained outstanding, but no further grants will be made under that Plan.

The 2005 Plan provides for the issuance of non-qualified or incentive stock options and restricted stock to employees, non-employee members of the board and consultants. The exercise price per share for option grants is not to be less than the fair market value per share of the Company’s common stock on the date of grant. The Board of Directors has the discretion to determine the vesting schedule. Options may be exercisable immediately or in installments, but generally vest over a four-year period from the date of grant. In the event the holder ceases to be employed by the Company, all unvested options terminate and all vested options may be exercised within a period following termination. In general, options expire ten years from the date of grant. Restricted stock is valued using the closing stock price on the date of the grant. The total value is expensed over the vesting period of 12 to 48 months. The maximum number of shares of the Company’s common stock that were available for issuance over the term of the original 2005 Plan previously could not exceed 5,000,000 shares, plus additional shares equal to 2.5% of the number of shares of common stock outstanding on the last trading day of the calendar year commencing with calendar year 2006, but not in excess of 750,000 shares. On October 11, 2007, our shareholders voted to approve an amendment to the 2005 Plan to increase the maximum number of shares of common stock that may be issued under the 2005 Plan from 5,000,000 shares (plus an annual increase) to 7,000,000 shares (plus an annual increase).

Employee Stock Purchase Plan

The Company has a shareholder approved employee stock purchase plan (“ESPP”), under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning and end of six-month offering periods. An employee’s payroll deductions under the ESPP are limited to 10% of the employee’s compensation and employees may not purchase more than the lesser of $25,000 of stock, or 1,000 shares, for any purchase period. Additionally, no more than 1,000,000 shares may be purchased under the plan.

Stock Compensation Expense

The Company accounts for all stock-based payment awards made to employees and directors based on their fair values and recognized as compensation expense over the vesting period using the straight-line method over the requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-Stock Compensation.

Valuation of Stock Option and Restricted Stock Awards

The assumptions used to compute the share-based compensation costs for the stock options granted during the years ended December 31, 2013, 2012 and 2011, respectively, using the Black-Scholes option pricing model, were as follows:


		Year Ended December 31,
		2013			2012			2011
Weighted average grant-date fair value of stock options	$	0.63		$	0.80		$	1.16

Assumptions
Risk-free interest rate (weighted average)		0.6	%		0.5	%		0.2	%
Expected dividend yield		-			-			-
Weighted average expected life (years)		4			4			1
Volatility (weighted average)		68.1	%		80.0	%		73.0	%
Forfeiture rate		11.4	%		13.7	%		-

The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The Company assumed no dividend yield because it does not expect to pay dividends for the foreseeable future. The weighted average expected life is the vesting period for those options granted during that period. The average volatility is based on the actual historical volatility of our common stock. The forfeiture rate was based on modified employee turnover.

Grants of restricted stock are valued using the closing stock price on the date of grant. In the year ended December 31, 2013, a total of 40,000 shares of restricted stock, with a total value of $0.1 million, were granted to non-employee members of the Board of Directors. This cost will be amortized over a period of 12 months. In addition, 1.5 million shares of restricted stock, with a total value of $2.5 million, were granted to key officers and employees of the Company. This cost will be amortized over a period of 48 months.

Valuation of ESPP

The fair values are estimated at the beginning of each offering period using a Black-Scholes valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant. Expected volatility was based on the historical volatility on the day of grant. Following is a schedule of the shares purchased, the fair value per share, and the Black-Scholes model assumptions for each offering period:


		(Ending)
Offering Period Ended		March 31,			September 31,			March 31,			September 31,			March 31,
		2014			2013			2013			2012			2012
Shares purchased for offering period					19,490			18,594			8,052			44,666
Fair value per share	$	0.30		$	0.44		$	0.65		$	0.93		$	0.69

Assumptions
Risk-free interest rate (average)		0.40	%		0.11	%		0.14	%		0.14	%		0.50	%
Expected dividend yield		-			-			-			-			-
Weighted average expected life (years)		0.5			0.5			0.5			0.5			0.5
Volatility (average)		44.0	%		45.0	%		74.0	%		78.0	%		105.0	%

Compensation Costs

Stock-based non-cash compensation expenses related to stock options, restricted stock grants and the ESPP were recorded in the financial statements as follows (in thousands):


		Year Ended December 31,
		2013		2012		2011
Cost of revenues	$	20	$	13	$	31
Selling and marketing		766		865		1,922
Research and development		809		765		1,198
General and administrative		1,938		2,306		3,379

Total non-cash stock compensation expense	$	3,533	$	3,949	$	6,530

Total share-based compensation for each year includes cash payment of income taxes related to grants of restricted stock in the amounts of $0.4 million, $0.4 million and $1.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Stock Options

A summary of the Company’s stock options outstanding under the 2005 Plan as of December 31, 2013 and the activity during the years ended herein are as follows (in thousands except per share amounts):


				Weighted Ave.		Aggregate
	Shares			Exercise Price		Intrinsic Value
Outstanding as of December 31, 2010		2,706		$	11.69	$	-

(2,545 options exercisable at a weighted average exercise price of $11.54)
Granted (weighted average fair value of $1.16)		25		$	4.07
Exercised		(7	)	$	1.77
Cancelled		(557	)	$	14.04

Outstanding as of December 31, 2011		2,167		$	11.03	$	-

(2,167 options exercisable at a weighted average exercise price of $11.03)
Granted (weighted average fair value of $0.80)		826		$	1.39
Exercised		(32	)	$	0.50
Cancelled		(686	)	$	12.37

Outstanding as of December 31, 2012		2,275		$	7.02	$	-

(1,474 options exercisable at a weighted average exercise price of $10.09)
Granted (weighted average fair value of $0.63)		120		$	1.31
Exercised		-		$	-
Cancelled		(225	)	$	6.52

Outstanding as of December 31, 2013		2,170		$	6.76	$	-


Exercisable as of December 31, 2013		1,573		$	8.81	$	-


Vested and expected to vest at December 31, 2013		2,092		$	6.96	$	-

No options were exercised during the year ended December 31, 2013. The weighted-average grant-date fair value of options granted during the year ended December 31, 2013 was $0.63. As of December 31, 2013, there is $4.3 million of unrecognized compensation costs related to non-vested stock options and restricted stock granted under the Plan. At December 31, 2013, there were 2.0 million shares available for future grants under the 2005 Stock Issuance / Stock Option Plan.

Restricted Stock Awards

A summary of the Company’s restricted stock awards outstanding under the 2005 Plan as of December 31, 2013, and the activity during years ended therein, are as follows (in thousands):


	Number of shares			Weighted average grant date fair value
Unvested at December 31, 2010	1,604		$	7.23

Granted	1,000		$	8.86
Vested	(823	)	$	7.40
Cancelled and forfeited	(426	)	$	7.81

Unvested at December 31, 2011	1,355		$	3.21

Granted	995		$	2.64
Vested	(611	)	$	6.42
Cancelled and forfeited	(420	)	$	8.73

Unvested at December 31, 2012	1,319		$	4.60

Granted	1,495		$	1.70
Vested	(752	)	$	4.43
Cancelled and forfeited	(316	)	$	3.00

Unvested at December 31, 2013	1,746		$	2.48