11. Stock Based Compensation

Stock Option Plans

The Company’s 2004 Stock Option Plan and 2013 Equity Incentive Plan authorize the grant of options to employees and consultants for up to 3,948,533 shares of the Company’s common stock as of December 31, 2013. All options granted have a ten-year term and generally vest and become exercisable over four years of continued employment or service as defined in each option agreement. The Board of Directors determines the option exercise price and may designate stock options granted as either incentive or nonstatutory stock options. The Company generally grants stock options to employees with exercise prices equal to the estimated fair value of the Company’s common stock on the date of grant.

A summary of the Company’s employee stock option activity and related information follows:


	Shares			Weighted- average exercise price per share		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)
Outstanding at December 31, 2012		1,686,179		$	2.28		8.59	$	7,486
Granted		669,030			9.17
Canceled		(65,410	)		2.24
Exercised		(177,165	)		2.16

Outstanding at December 31, 2013		2,112,632		$	4.47		8.12	$	26,968

December 31, 2013:
Options vested and expected to vest		2,087,810		$	4.46		8.11	$	26,687
Options exercisable		872,414		$	2.48		7.39	$	12,875

The total fair value of stock options vested during the year ended December 31, 2013 was $920,000.

The following table summarizes information about the Company’s options outstanding at December 31, 2013:


	Options Outstanding				Options Exercisable
Exercise Price	Number of Shares		Weighted- Average Remaining Contractual Life in Years		Number of Shares		Weighted- Average Remaining Contractual Life in Years
$0.32 – 1.92		862,856		8.18		416,309		8.13
2.24 – 3.84		457,740		6.48		369,142		6.41
5.12 – 6.72		418,030		8.35		85,309		7.92
8.96 – 12.50		374,006		9.73		1,654		9.79

		2,112,632				872,414

The fair value of each employee option grant as of December 31 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

2013

2012

2011

Risk-free interest rates

1.05%–1.95%

0.85%–1.44%

2.2%–3.14%

Expected term (years)

6.25

Expected dividend yield

—

Volatility

57.0%–58.0%

54.0%–61.0%

73.0%

The risk-free interest rates are based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. For purposes of determining the expected term of the awards in the absence of sufficient historical data relating to stock-option exercises, the Company applies a simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award. The Company has not declared or paid any dividends and does not currently expect to do so in the foreseeable future. The Company based its expected volatility on the estimated volatility of similar companies whose share prices are publicly available.

Options granted during the years ended December 31, 2013, 2012, 2011 were granted at exercise prices that the Company’s board of directors believed to be equal to the fair value of the common stock underlying such options on the date of grant. Prior to completion of its initial public offering, the Company assessed its estimate of fair value of its common stock for financial reporting purposes given the Company’s improving financial performance and prospects, evolving belief that an initial public offering was increasingly viable and the generally improving conditions in the capital markets. Following this assessment, it was determined that for financial reporting purposes the fair value of the Company’s common stock was higher than the board of directors’ fair market value estimate for certain options previously granted. In 2013 and 2012, the Company granted options of 101,487 and 988,268, respectively, that were subsequently determined to be granted at exercise prices that were less than the estimated per share value of the underlying common stock on the date of grant. The valuations of these stock options were adjusted to reflect the increase in estimated fair value of the underlying stock options. The weighted-average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $5.30, $1.59 and $1.83, respectively.

The aggregate intrinsic value for options exercised during the years ended December 31, 2013, 2012 and 2011 was $681,000, $161,000 and $0, respectively, determined as of the date of option exercise.

Stock compensation expense for the years ended December 31 was as follows:


	2013		2012		2011
	(In thousands)
Cost of revenue	$	49	$	71	$	4
Research and development		273		204		26
Selling, general and administrative		823		470		213

Total stock-based compensation expense	$	1,145	$	745	$	243

At December 31, 2013, the total unrecognized compensation cost was approximately $4.1 million and will be recognized on a straight-line basis over the weighted-average remaining service period of approximately three years.