Stock-Based Compensation

9 Months Ended

Sep. 30, 2014

Note 8. Stock-Based Compensation

We account for stock-based compensation in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) topic 718, Compensation-Stock Compensation (“ASC 718”), which established accounting for stock-based awards exchanged for employee services. Stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period of the award. All of our stock-based compensation is accounted for as an equity instrument.

The following table summarizes compensation costs related to our stock-based awards (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013

Cost of revenue	$	4	$	6	$	14	$	17
Selling, general and administrative		227		285		716		860
Research and development		41		43		131		127
Total stock-based compensation		272		334		861		1,004
Tax effect on stock-based compensation		—		—		—		—
Net effect on net income (loss)	$	272	$	334	$	861	$	1,004

As of September 30, 2014, the unamortized compensation costs related to unvested stock options granted to employees under our stock option plan was approximately $1.3 million, net of estimated forfeitures of $46,000. These costs will be amortized on a straight-line basis over a weighted-average period of approximately 2.6 years and will be adjusted for subsequent changes in estimated forfeitures. We elected not to capitalize any stock-based compensation to inventory as of September 30, 2014 due to the immateriality of the amount.

We estimate the fair value of stock options using the Black-Scholes valuation model. There were 200,000 and 60,000 stock options granted with weighted average grant date fair values of $1.08 and $1.21 in the three months ended September 30, 2014 and 2013, respectively. There were 252,000 and 60,000 stock options granted with weighted average grant date fair values of $1.09 and $1.21 in the nine months ended September 30, 2014 and 2013, respectively. The fair value of our stock options granted to employees for the three and nine months ended September 30, 2014 was estimated using the following weighted-average assumptions:

	Three Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2014

Expected term (in years)		4.4			4.3
Volatility		62.26	%		63.10	%
Expected dividend		0	%		0	%
Risk-free interest rate		1.86	%		1.88	%

The following table summarizes the stock option transactions during the nine months ended September 30, 2014 (in thousands, except per share data):

Stock Options	Shares			Weighted- average Exercise Price		Weighted- average Remaining Contractual Life (in years)		Aggregate Intrinsic Value

Balance as of January 1, 2014		2,671		$	3.29		6.71	$	893
Granted		252			2.26
Exercised		(112	)		1.21
Canceled and expired		(73	)		5.18
Balance as of September 30, 2014		2,738		$	3.23		6.72	$	585

Options vested and expected to vest as of September 30, 2014		2,738		$	3.23		6.72	$	585

Options exercisable as of September 30, 2014		1,688		$	3.52		5.44	$	505

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $2.44 on September 30, 2014, which would have been received by the option holder had all option holders exercised their options on that date.

Restricted stock awards

A summary of activity related to restricted stock awards for the nine months ended September 30, 2014 is presented below:

Stock Awards	Shares			Weighted-Average Grant Date Fair Value
Non-vested as of January 1, 2014		241,232		$	3.44
Granted		55,044		$	2.18
Vested		(48,420	)	$	4.66
Non-vested as of September 30, 2014		247,856		$	2.92

As of September 30, 2014, the unamortized compensation costs related to unvested restricted stock awards was approximately $514,000, which is to be amortized on a straight-line basis over a weighted average period of approximately 1.2 years.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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