Stock-Based Compensation

3 Months Ended

Mar. 31, 2014

Stock-Based Compensation

NOTE 11. STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date based on the fair value of the award granted and recognized as expense using the graded-vesting method over the period in which the award is expected to vest. Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected to vest during the period. As stock-based compensation expense recognized in the results for the year is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

We record stock-based compensation expense (including stock options, restricted stock and employee stock purchase plan) to the same departments where cash compensation is recorded as follows (in thousands):

	Three months ended March 31,
	2014		2013
Costs of revenue	$	139	$	149
Selling and marketing		274		216
Research and development		269		131
General and administrative		366		279
Total stock-based compensation expense	$	1,048	$	775

We utilize the Black-Scholes model to determine the estimated fair value for grants of stock options. The Black-Scholes model requires the use of highly subjective and complex assumptions to determine the fair value of stock-based awards, including the option’s expected term, expected dividend yield, the risk-free interest rate and the price volatility of the underlying stock. The expected dividend yield is based on our historical dividend rates. Risk-free interest rates are based on U.S. treasury rates. Volatility is based on historical stock prices over a period equal to the estimated life of the option. Stock options are issued at the current market price on the date of grant and prior to December 31, 2013 were generally subject to a three-year vesting period with a contractual term of five years. Stock options issued subsequent to December 31, 2013 are generally subject to a four-year vesting period with a contractual term of ten years.

The grant date fair value of the restricted stock is calculated using the closing market price of the Company’s common stock on the grant date, with the compensation expense amortized over the vesting period of the restricted stock awards, net of estimated forfeitures.

We estimate the fair value of options granted under our employee stock-based compensation arrangements at the date of grant using the Black-Scholes model using the following weighted-average assumptions as follows:

	Three months ended March 31,
	2014			2013
Dividend yield		None			None
Volatility		64	%		54	%
Risk-free interest rate		1.97	%		0.60	%
Expected life (years)		5.6			4.0

During the three months ended March 31, 2014, we granted 920,000 stock options with exercise prices ranging from $8.02 to $10.19 and a weighted-average fair value of $5.06 and 293,000 restricted stock awards with a weighted-average fair value of $8.87.

As of March 31, 2014, there was $6.4 million of unrecognized compensation cost related to non-vested stock-based compensation awards granted under our stock-based compensation plans. The compensation cost is expected to be recognized over a weighted average period of 1.4 years.

In November 2013, our Chief Executive Officer had 398,505 options expire where the Company’s stock price exceeded the exercise price of the options. Also in November 2013, our Compensation Committee awarded 232,868 shares of restricted stock to our Chief Executive Officer. These transactions were accounted for as a modification and did not result in any additional fair market value because the market value of the restricted stock awarded approximated the market value of the expired options.