8.	STOCK-BASED COMPENSATION

Stock Options and Awards

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 this program, 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 four years and expire from five to ten years from the date of grant. Restricted stock generally vests over one year. RSUs generally vest over three years. Awards granted other than an option or stock appreciation right reduce the common stock shares available for grant under the program by 1.75 shares for each share issued.


	September 30,
	2014
Common stock shares available for grant		2,599,060
Common stock options outstanding		3,278,096
Restricted stock awards outstanding		35,364
Restricted stock units outstanding		543,391

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 September 30, 2014, 557,738 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 nine months ended September 30, 2014 are listed below. Shares purchased under the ESPP for the nine months ended September 30, 2013 are 36,921. 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.


	Nine Months
	Ended
	September 30,
	2014
Shares purchased under ESPP		38,298
Average price of shares purchased under ESPP	$	9.95
Intrinsic value of shares purchased under ESPP	$	107,000

Summary of Standard Stock Options

The following table sets forth the summary of standard option activity under the Company’s stock option plans for the nine months ended September 30, 2014 and year ended December 31, 2013:


	Nine Months Ended September 30, 2014			Year Ended December 31, 2013
Beginning outstanding balance		3,227,167			3,155,631
Granted		331,380			1,058,700
Exercised		(194,269	)		(956,633	)
Forfeited and cancelled		(136,182	)		(30,531	)

Ending outstanding balance		3,228,096			3,227,167

Aggregate intrinsic value of options exercised	$	1,099,000		$	5,774,000
Weighted average fair value of options granted		5.53			5.63

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 these standard stock options outstanding at September 30, 2014 and December 31, 2013 is summarized below:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (In millions)
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
September 30, 2014
Options outstanding		3,228,096	$	8.25		4.92	$	5.0
Options vested and expected to vest using estimated forfeiture rates		3,083,395		8.14		4.88		5.0
Options exercisable		1,973,156		7.14		4.46		4.6

Summary of Market Condition Based Stock Options

In 2014 the Company began granting options that are subject to both time-based vesting and a market condition. For these options, the closing price of the Company stock must exceed a certain level for a number of trading days within a specified timeframe or the options will be cancelled before the seven year life of the options. The following table sets forth the summary of the market-based option activity under the Company’s stock option plans for the nine months ended September 30, 2014:


	Nine Months
	Ended
	September 30,
	2014
Beginning outstanding balance		0
Granted		50,000
Exercised		0
Forfeited and cancelled		0

Ending outstanding balance		50,000

Aggregate intrinsic value of options exercised	$	0
Weighted average fair value of options granted		5.71

Information regarding these market condition based stock options outstanding at September 30, 2014 is summarized below:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (In millions)
September 30, 2014
Options outstanding		50,000	$	11.94		6.40	$	0.0
Options vested and expected to vest using estimated forfeiture rates		44,490		11.94		6.40		0.0
Options exercisable		0		0.00		0.00		0.0

Summary of Restricted Stock Units

RSU activity for the nine months ended September 30, 2014 and year ended December 31, 2013 was as follows:


	Nine Months Ended September 30, 2014			Year Ended December 31, 2013
Beginning outstanding balance		668,056			708,651
Awarded		215,630			294,150
Released		(292,636	)		(303,882	)
Forfeited		(47,659	)		(30,863	)

Ending outstanding balance		543,391			668,056

Weighted average grant date fair value of RSUs granted	$	11.85		$	7.12
Total fair value of RSUs released		3,261,000			2,806,000
Total fair value of RSUs remaining unvested		4,662,000			6,934,000

Information regarding RSUs outstanding at September 30, 2014 and December 31, 2013 is summarized below:


	Number of Shares		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (In millions)		Fair Value (In millions)
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
September 30, 2014
RSUs outstanding		543,391		0.95	$	4.7	$	4.7
RSUs vested and expected to vest using estimated forfeiture rates		471,343		0.91		4.0

Summary of Restricted Stock Awards

Restricted stock award activity for the nine months ended September 30, 2014 and year ended December 31, 2013 was as follows:


	Nine Months Ended September 30, 2014			Year Ended December 31, 2013
Beginning outstanding balance		44,000			44,000
Awarded		35,364			44,000
Released		(44,000	)		(44,000	)
Forfeited		0			0

Ending outstanding balance		35,364			44,000

Weighted average grant date fair value of restricted stock awarded	$	10.97		$	14.09
Total fair value of restricted stock awards released		483,000			676,000

Stock Plan Assumptions

The assumptions used to value option grants under the Company’s stock plans were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Standard Stock Options
Expected life (in years)		4.7			4.7			4.7			4.9
Volatility		57	%		64	%		57	%		68	%
Interest rate		1.5	%		1.3	%		1.4	%		0.8	%
Dividend yield		N/A			N/A			N/A			N/A


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014		2014
Market Condition Based Stock Options
Expected life (in years)		N/A		7.0
Volatility		N/A		66	%
Interest rate		N/A		2.2	%
Dividend yield		N/A		N/A


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Employee Stock Purchase Plan
Expected life (in years)		0.5			0.5			0.5			0.5
Volatility		46	%		69	%		43	%		67	%
Interest rate		0.1	%		0.8	%		0.1	%		0.1	%
Dividend yield		N/A			N/A			N/A			N/A

Compensation Costs

Total stock-based compensation recognized in the condensed consolidated statements of income and comprehensive income is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(In thousands)				(In thousands)
Statement of Income Classifications
Sales and marketing	$	230	$	223	$	784	$	496
Research and development		265		231		1,008		807
General and administrative		636		795		2,266		2,135

Total	$	1,131	$	1,249	$	4,058	$	3,438

As of September 30, 2014, there was $7.2 million related to stock options, restricted stock awards, and RSUs of unrecognized compensation cost, adjusted for estimated forfeitures, granted to the Company’s employees and directors. This cost will be recognized over an estimated weighted-average period of approximately 2.95 years for standard options, 3.42 years for market condition based options, 1.51 years for RSUs, and 0.68 years for restricted stock awards. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.