5. Shareholders’ Equity

Equity Compensation Plans

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 award, 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 September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Dividend yield		0	%		0	%		0	%		0	%
Expected life	3.3 years			4 years			3.3 years			4 years
Expected volatility		57	%		58	%		59	%		62	%
Risk-free interest rate		1.4	%		1.1	%		1.3	%		0.8	%

The impact on our results of operations of stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 was as follows (in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Cost of revenue — service	$	69	$	48	$	146	$	184
Selling, general and administrative		144		145		510		456
Research and development		15		27		35		86
Total stock-based compensation expense	$	228	$	220	$	691	$	726
Per diluted share	$	0.02	$	0.02	$	0.06	$	0.07

Stock Option Activity

The following table summarizes stock option activity under the Plans for the nine months ended September 30, 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		740,458			3.48
Exercised		(374,565	)		2.49
Forfeited		(96,531	)		3.27
Expired		(258,671	)		4.34
Balance at September 30, 2014		1,526,312		$	3.48		6.91	$	954,646
Vested and expected to vest at September 30, 2014		1,407,188		$	3.48		6.73	$	900,866
Exercisable at September 30, 2014		593,423		$	3.50		3.90	$	498,217

At September 30, 2014, total compensation cost related to stock options granted but not yet recognized was $923,055, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.3 years. The following table summarizes certain information about stock options for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Weighted-average grant-date fair value of option grants for the period	$	1.74	$	—	$	1.71		1.07
Options in-the-money at period end		425,877		541,000		425,877		541,000
Aggregate intrinsic value of options exercised	$	171,558	$	—	$	412,781	$	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 nine months ended September 30, 2014:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2013		187,382		$	4.40
Granted		102,735			3.16
Vested		(132,421	)		3.70
Forfeited		(56,732	)		5.54
Unvested at September 30, 2014		100,964		$	3.43
Expected to vest after September 30, 2014		96,371		$	3.37

At September 30, 2014, total compensation cost related to RSUs granted but not yet recognized was $403,482, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 1.1 years. There were no RSAs outstanding as of September 30, 2014 or December 31, 2013.

Common Stock Reserved for Future Issuance

The following table summarizes our shares of common stock reserved for future issuance under the Plans:

	September 30, 2014
Stock options outstanding		1,526,312
Restricted stock units outstanding		100,964
Stock awards available for future grant		706,053
Common stock reserved for future issuance		2,333,329