5. Shareholders’ Equity

Stock Options

We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (the “Inducement Plan”) (collectively the “Plans”). Under the Plans, stock options may be granted with a fixed exercise price that is equivalent to fair market value on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan may only be granted to our employees. The Plans also allow for awards of non-qualified stock options, stock appreciation rights, RSAs and unrestricted stock awards, and RSUs

Stock-Based Compensation

The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the awards, net of estimated forfeitures. We estimate forfeitures based on historical experience and expected future activity. The fair value of RSAs and RSUs is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date based on the fair value of each vesting tranche as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The fair values of our stock option grants were estimated with the following weighted average assumptions:


	Three Months Ended March 31,
	2014			2013
Dividend yield		0	%		0	%
Expected life		3.2 years			3.7 years
Expected volatility		61	%		68	%
Risk-free interest rate		1.2	%		0.6	%

Stock-based compensation expense for the three months ended March 31, 2014 and 2013 was as follows (in thousands, except per share amounts):


	Three Months Ended March 31,
	2014		2013
Cost of revenue — service	$	41	$	73
Selling, general and administrative		175		149
Research and development		28		30

Total stock-based compensation expense	$	244	$	252

Per basic and diluted share	$	0.02	$	0.02

Stock Option Activity

The following table summarizes stock option activity for the three months ended March 31, 2014:


Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2014		1,515,621		$	3.36
Granted at fair value		330,850			3.32
Exercised		(123,613	)		2.48
Forfeited		(12,959	)		3.64
Expired		(57,032	)		5.92

Balance at March 31, 2014		1,652,867		$	3.33		4.91	$	444,091

Vested and expected to vest at March 31, 2014		1,561,427		$	3.33		4.69	$	444,151

Exercisable at March 31, 2014		983,478		$	3.30		2.57	$	398,709

At March 31, 2014, total compensation cost related to stock options granted but not yet recognized was $708,242, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.5 years.

The following table summarizes certain information about stock options for the three months ended March 31, 2014 and 2013:


	Three Months Ended March 31,
	2014		2013
Weighted-average grant-date fair value of option grants for the period	$	1.82	$	1.65

Options in-the-money at period end		585,885		615,419

Aggregate intrinsic value of options exercised	$	130,876	$	1,000

The aggregate intrinsic value represents the difference between the exercise price of the underlying options and the quoted price of our common stock for the number of options that were in-the-money at period end or that were exercised during the period. We issue new shares of common stock upon exercise of stock options.

Restricted Stock Unit Activity

The following table summarizes RSU activity for the three months ended March 31, 2014:


	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2013		187,382		$	4.40
Granted		15,000			3.34
Vested		(52,858	)		4.17
Forfeited		(23,125	)		5.60

Unvested at March 31, 2014		126,399		$	4.16

Expected to vest after March 31, 2014		120,556		$	4.02

At March 31, 2014, total compensation cost related to RSUs granted but not yet recognized was $412,570, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 1.3 years.

Common Stock Reserved for Future Issuance

The following table summarizes our shares of common stock reserved for future issuance under the Plans at March 31, 2014:


	March 31, 2014
Stock options outstanding		1,652,867
Restricted stock units outstanding		126,399
Stock options available for future grant		884,578

Common stock reserved for future issuance		2,663,844