SHARE-BASED COMPENSATION

3 Months Ended

Mar. 31, 2016

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

SHARE-BASED COMPENSATION

NOTE 11 – SHARE-BASED COMPENSATION

The Company has granted ordinary share options, issued restricted stock units and ordinary shares as an alternative or supplement to the compensation of its executives, employees, directors and outside consultants. The Company’s share-based compensation program is a long-term retention program intended to attract and reward talented executives, employees and outside consultants, and align their interests with stockholders. The Company is currently granting share-based awards under the magicJack VocalTec Ltd. 2013 Stock Incentive Plan and the magicJack VocalTec Ltd. 2013 Israeli Stock Incentive Plan (together, the “2013 Plans”). In July 2013, the shareholders approved the 2013 Plans at the annual general meeting of shareholders to allow grants of ordinary share options, restricted stock units and ordinary shares. In April 2014, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant. As of March 31, 2016, the aggregate number of shares subject to awards under the 2013 Plans, as amended, is 3,600,000. The Company had previously granted shares under the VocalTec amended Master Stock Plan (the “2003 Plan”) which expired in April 2013. During the three months ended March 31, 2016, the Company issued 1,000,000 ordinary share options outside of the 2013 Plans as an inducement for the two founders of Broadsmart to become employed by the Company. Share-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation expense for awards with only service conditions and a graded vesting on a straight-line basis over the requisite vesting period for the entire award.

The Company’s share-based compensation expense for ordinary share options, issued restricted stock units and ordinary shares for the three months ended March 31, 2016 and 2015 was as follows (in thousands):

	Three Months Ended
	March 31,
	2016		2015
Ordinary share options	$	635	$	997
Restricted stock units		367		286
	$	1,002	$	1,283

The detail of total stock-based compensation recognized by classification on the unaudited condensed consolidated statements of operations is as follows (in thousands):

	Three Months Ended
	March 31,
	2016		2015
Cost of revenues	$	6	$	31
Marketing		43		194
General and administrative		895		852
Research and development		58		206
	$	1,002	$	1,283

The decrease in share based compensation for the three months ended March 31, 2016, is due to the favorable impact of forfeitures on the calculation of stock based compensation expense during 2015 and the timing of ordinary share options issued during the three months ended March 31, 2016.

Ordinary Share Options

Ordinary share options granted under the 2013 Plans have a five-year life and typically vest over a period of 36 months beginning at the date of grant. The 2013 Plans, as amended, currently allow for a maximum term of five years for awards granted. The following table provides additional information regarding ordinary share options issued, outstanding and exercisable for the year ended December 31, 2015, and three months ended March 31, 2016 (aggregate intrinsic value in thousands):

						Weighted
						Average
				Weighted		Remaining
				Average		Contractual		Aggregate
	Number of			Exercise		Term		Intrinsic
Date of Grant	Options			Price		(in years)		Value *
January 1, 2015		2,043,857		$	14.87		3.80	$	-
Granted		998,614		$	9.33
Exercised		(4,250	)	$	0.57
Forfeited		(247,257	)	$	14.42
Expired or cancelled		(263,537	)	$	12.67
December 31, 2015		2,527,427		$	12.98		3.61	$	-
Granted		1,000,000		$	7.18
Exercised		(400	)	$	0.45
Forfeited		(6,666	)	$	13.26		0.00
Expired or cancelled		(102,500	)	$	13.59
Outstanding at March 31, 2016 (unaudited)		3,417,861		$	11.27		3.34	$	-
Vested at  March 31, 2016 (unaudited)		1,279,249		$	15.42		2.36	$	-
* The aggregate intrinsic value is the amount by which the market value for the Company's common stock exceeds the weighted average exercise price of the outstanding stock options on the measurement date.

Share-based compensation expense recognized for ordinary share options was approximately $0.6 million and $1.0 million for the three months ended March 31, 2016 and 2015, respectively. The total intrinsic value of ordinary share options exercised during the three months ended March 31, 2016 and 2015 was $4 thousand and $0, respectively. As of March 31, 2016, there was approximately $5.8 million of unrecognized share-based compensation expense related to unvested ordinary share options, which is expected to be recognized over a weighted average remaining period of 1.86 years.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, assumed employee exercise behaviors, risk-free interest rate and expected dividends. For purposes of valuing ordinary share options, the Company used historical volatility at the date of grant. The approximate risk-free interest rate was based on the U.S. Treasury yield for comparable periods. The Company has experienced forfeitures in the past and estimates a forfeiture rate for awards issued. The expected term of the ordinary share options was calculated using the simplified method in accordance with SAB No. 107, “Share Based Payment.” The Company does not expect to pay dividends on its ordinary shares in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its option pricing model. There were no ordinary share options granted during the three months ended March 31, 2015. The Company granted 1,000,000 ordinary share options during the three months ended March 31, 2016 with a weighted average fair value of $2.79. The grants were measured using the following assumptions:

	Three Months Ended March 31,
	2016			2015
Expected term (in years)		3.50			-
Dividend yield		0.00	%		-
Expected volatility		52.70	%		-
Risk free interest rate		1.13	%		-
Forfeiture rate		0.00	%		-

Restricted Stock Units

The Company may also award non-vested restricted stock units to its executives, employees, directors and outside consultants under the 2013 Plans, which may vest based on service or a combination of service and other conditions, such as market share price. The compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. Each non-vested stock unit, upon vesting, represents the right to receive one ordinary share of the Company. During the three months ended March 31, 2016 and 2015, the Company did not grant any restricted stock units under the 2013 Plans, as amended.

The following table summarizes the Company’s restricted stock unit activity for the three months ended March 31, 2016:

				Average
	Number of			Fair Value
	Shares			at Grant Date
December 31, 2015		443,102		$	10.20
Granted		-		$	-
Vested		(2,016	)	$	14.42
Forfeited		-		$	-
Non-vested at March 31, 2016		441,086		$	10.19

Share-based compensation expense recognized for restricted stock units was approximately $0.4 million and $0.3 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, there was $2.7 million in unrecognized share-based compensation costs related to restricted stock units. The unrecognized share-based compensation expense is expected to be recognized over a weighted average remaining period of 1.45 years.