10. Stock-based Compensation

The Company’s equity incentive program is a long-term retention program that is intended to attract, retain, and provide incentives for talented employees, consultants, officers, and directors and to align stockholder and employee interests. The Company may grant options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares, performance units, and other stock-based or cash-based awards to employees, officers, directors, and consultants. Under these programs, stock options may be granted at prices not less than the fair market value on the date of grant for stock options. These options generally vest over 4 years and expire from 5 to 10 years from the date of grant. Restricted stock generally vests over one year. RSUs generally vest over 3 years. Awards granted other than an option or stock appreciation right shall reduce the common stock shares available for grant by 1.75 shares for every share issued.


	December 31,
	2013
Common stock shares available for grant		1,811,121
Common stock options outstanding		3,227,167
Restricted stock awards outstanding		44,000
Restricted stock units outstanding		668,056

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees may purchase common stock through payroll deductions at a purchase price of 85% of the lower of the fair market value of the Company’s stock at the beginning of the offering period or the purchase date. Participants may not purchase more than 2,000 shares in a six-month offering period or purchase stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period. A total of 1,000,000 shares of common stock have been reserved for issuance under the ESPP. As of December 31, 2013, 519,440 shares had been purchased since the inception of the ESPP in 1999. Under ASC 718-10, the ESPP is considered a compensatory plan and the Company is required to recognize compensation cost related to the fair value of the award purchased under the ESPP. Shares purchased under the ESPP for the year ended December 31, 2013 are listed below. Shares purchased under the ESPP for the year ended December 31, 2012 are 25,628. The intrinsic value listed below is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.


	Year Ended December 31, 2013
Shares purchased under ESPP		36,921
Average price of shares purchased under ESPP	$	5.36
Intrinsic value of shares purchased under ESPP	$	210,984

Summary of Stock Options

The following table sets forth the summary of option activity under the Company’s stock option plans for the years ended December 31, 2013, 2012, and 2011:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Fair Value Of Options Granted		Aggregate Intrinsic Value of Options Exercised (In thousands)

Outstanding at January 1, 2011		4,000,526		$	6.26
Granted		429,963			7.11	$	4.07
Exercised		(560,132	)		4.09			$	2,485
Cancelled		(602,519	)		6.99

Outstanding at December 31, 2011		3,267,838			6.61
Granted		425,150			6.10		3.35
Exercised		(231,403	)		4.52				443
Cancelled		(305,954	)		7.10

Outstanding at December 31, 2012		3,155,631			6.65
Granted		1,058,700			10.20		5.63
Exercised		(956,633	)		6.68				5,774
Cancelled		(30,531	)		8.75

Outstanding at December 31, 2013		3,227,167			7.78

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the options that were in-the-money.

Information regarding stock options outstanding at December 31, 2013, 2012, and 2011 is summarized below:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (In millions)
December 31, 2011
Options outstanding		3,267,838	$	6.61		5.53	$	1.3
Options vested and expected to vest using estimated forfeiture rates		3,151,950		6.62		5.44		1.3
Options exercisable		2,377,683		6.99		4.61		0.8

December 31, 2012
Options outstanding		3,155,631	$	6.65		5.24	$	3.5
Options vested and expected to vest using estimated forfeiture rates		3,019,979		6.67		5.17		3.4
Options exercisable		2,329,987		6.91		4.69		2.5

December 31, 2013
Options outstanding		3,227,167	$	7.78		5.46	$	9.9
Options vested and expected to vest using estimated forfeiture rates		2,994,044		7.61		5.41		9.6
Options exercisable		1,774,546		6.67		4.95		7.5

Additional information regarding options outstanding as of December 31, 2013 is as follows:


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$ 2.70 - $3.81	25,630	5.20	$	2.84	25,630	$	2.84
3.85 - 3.85	600,000	5.87		3.85	600,000		3.85
4.17 - 6.11	417,541	4.97		5.49	335,700		5.49
6.12 - 6.39	378,000	5.55		6.20	145,265		6.18
6.41 - 8.61	437,184	4.77		7.48	361,832		7.58
8.71 - 9.20	153,712	3.92		9.13	122,119		9.11
9.53 - 9.53	850,000	6.18		9.53	0		0.00
10.24 - 14.80	250,100	5.72		13.79	69,000		14.02
15.12 - 15.12	15,000	3.62		15.12	15,000		15.12
16.57 - 16.57	100,000	3.74		16.57	100,000		16.57

$2.70 - $16.57	3,227,167	5.46	$	7.78	1,774,546	$	6.67

Summary of Restricted Stock Units

RSU activity for the years ended December 31, 2013, 2012, and 2011 was as follows:


	Number of Shares			Weighted Average Grant Date Fair Value		Fair Value of Released RSU’s (In thousands)
Outstanding at January 1, 2011		417,923
Awarded		243,908		$	6.61
Released		(159,384	)			$	1,163
Forfeited		(94,682	)

Outstanding at December 31, 2011		407,765

Awarded		555,911			6.64

Released		(203,519	)				1,128

Forfeited		(51,506	)

Outstanding at December 31, 2012		708,651

Awarded		294,150			7.12

Released		(303,882	)				2,806

Forfeited		(30,863	)

Outstanding at December 31, 2013		668,056

Information regarding RSU’s at December 31, 2013, 2012, and 2011 is summarized below:


	Number of Shares		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (In millions)		Fair Value (In millions)
December 31, 2011
RSUs outstanding		407,765		0.95	$	2.1	$	2.1
RSUs vested and expected to vest using estimated forfeiture rates		336,454		0.92	$	1.7

December 31, 2012
RSUs outstanding		708,651		1.09	$	4.9	$	4.9
RSUs vested and expected to vest using estimated forfeiture rates		588,170		1.05	$	4.0

December 31, 2013
RSUs outstanding		668,056		0.91	$	6.9	$	6.9
RSUs vested and expected to vest using estimated forfeiture rates		583,711		0.89	$	6.1

The aggregate intrinsic value is calculated as the market value as of the end of the reporting period.

Summary of Restricted Stock Awards

Restricted stock award activity for the years ended December 31, 2013, 2012, and 2011 was as follows:


	Number of Shares			Weighted Average Grant Date Fair Value		Total Fair Value of Awards Released (In thousands)
Outstanding at January 1, 2011		18,000		$	5.59
Awarded		30,000			6.61
Released		(21,000	)		5.74	$	159
Forfeited		(9,000	)		6.61

Outstanding at December 31, 2011		18,000			6.61
Awarded		57,750			5.70
Released		(31,750	)		6.72		171
Forfeited		0

Outstanding at December 31, 2012		44,000			5.34
Awarded		44,000			14.09
Released		(44,000	)		5.34		676
Forfeited		0


Outstanding at December 31, 2013		44,000			14.09

Stock-based Compensation

Valuation and amortization method — The Company uses the Black-Scholes-Merton option pricing model (“Black-Scholes model”), single-option approach to determine the fair value of stock options and ESPP shares. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. Stock-based compensation expense recognized at fair value includes the impact of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises the estimates if necessary, in subsequent periods if actual forfeitures differ from these estimates. 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 actual and projected employee stock option exercise behaviors that impact the expected term, the Company’s expected stock price volatility over the term of the awards, risk-free interest rate, and expected dividends.

Expected term — The Company estimates the expected term of options granted by calculating the average term from the Company’s historical stock option exercise experience. The expected term of ESPP shares is the length of the offering period. The Company used the simplified method approved by the SEC to determine the expected term for options granted prior to December 31, 2007.

Expected volatility — The Company estimates the volatility of its common stock taking into consideration its historical stock price movement and its expected future stock price trends based on known or anticipated events.

Risk-free interest rate — The Company bases the risk-free interest rate that it uses in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

Expected dividend — The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option-pricing model.

Forfeitures — The Company is required to estimate future forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.

The assumptions used to value option grants and shares under the ESPP are as follows:


	Options			Employee Stock Purchase Plan
	2013	2012	2011	2013	2012	2011
Expected life (in years)	4.9	4.5	4.5	0.5	0.5	0.5
Interest rate	0.8%	0.7%	0.8%	0.1%	0.1%	0.2%
Volatility	70%	70%	72%	67%	62%	45%
Dividend yield	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%

Total stock-based compensation recognized in the consolidated statements of operations is as follows:


	Year Ended December 31,
	2013		2012		2011
Income Statement Classifications	(In thousands)

Sales and marketing	$	747	$	547	$	526
Research and development		1,040		756		825
General and administrative		2,857		1,843		2,204

Total	$	4,644	$	3,146	$	3,555

As of December 31, 2013, there was $6.8 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options, restricted stock awards and RSU’s granted to the Company’s employees and directors. This cost will be recognized over an estimated weighted-average period of approximately 3.31 years for options, 0.43 years for restricted stock awards and 1.57 years for RSU’s. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.