Note 17—Share-Based Payments

Under its 2002 Stock Award and Incentive Plan (“the Plan”), which incorporated its Third Amended and Restated 1995 Stock Option Plan, the Company has reserved shares of its common stock for issuance upon the exercise of options granted under the Plan, as well as for the awarding of other securities. Under the Plan, employees (including officers), non-employee directors and independent consultants may be granted options to purchase shares of common stock and other securities (Note 15). The vesting of these options and other securities may vary, but typically vest on a step-up basis over a maximum period of 4 years. Restricted shares typically vest in the same manner, with the exception of certain awards vesting over one to two years. Share-based compensation expense is recognized on a straight-line basis over the requisite service period. As of December 31, 2016, 2,378,630 shares were available for future grant. Additional shares may become available to the extent that options or shares of restricted stock presently outstanding under the Plan terminate or expire.

Restricted Stock

Under the Plan, share-based compensation payments may include the issuance of shares of restricted stock. Restricted stock award grants are based upon employment contracts, which vary by individual and year, and are subject to vesting conditions. Non-employee directors each receive grants of restricted stock at a value of $100,000 annually which vest after one year – this amount is prorated if a director is appointed within the year. In addition, at the discretion of Management and approval of the Board, non-executive employees also may receive restricted stock awards, which occurs approximately once per year.

During 2014, the Company issued a total of 610,143 shares of restricted stock; of which 531,993 shares of restricted stock (with performance based vesting measures) were issued to two executive officers and were subsequently forfeited based upon the Company not meeting certain financial targets for the year. A total of 78,150 shares were granted to its non-employee directors. The Company cancelled 12,658 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also during 2014, certain employees, including an executive officer, surrendered an aggregate of 51,877 shares of restricted stock at a value of less than $0.1 million to cover income taxes due on the vesting of restricted shares. As of December 31, 2014, 568,057 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $3.7 million.

During 2015, the Company issued a total of 734,823 shares of restricted stock; of which 660,968 shares of restricted stock (with performance based vesting measures) were issued to two executive officers. Of the 660,968 shares, a total of 612,221 were subsequently forfeited based upon the Company not meeting certain financial targets for the year. A total of 73,855 shares were granted to its non-employee directors. The Company cancelled 51,633 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also during 2015, certain employees, including an executive officer, surrendered an aggregate of 52,024 shares of restricted stock for $0.4 million to cover income taxes due on the vesting of restricted shares. As of December 31, 2015, 411,409 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $2.7 million.

During 2016, the Company issued a total of 648,351 shares of restricted stock; of which 583,178 shares of restricted stock (with performance based vesting measures) were issued to two executive officers. Of the 583,178 shares, all were subsequently forfeited based upon the Company not meeting certain financial targets for the year. A total of 65,173 shares were granted to its non-employee directors. The Company cancelled 24,822 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also during 2016, certain employees, including an executive officer, surrendered an aggregate of 50,719 shares of restricted stock for $1.5 million to cover income taxes due on the vesting of restricted shares. As of December 31, 2016, 196,453 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $1.4 million.

The following table summarizes the restricted stock award activity, annually, for the years ended December 31, 2014, 2015 and 2016:

	Restricted and Performance Based Stock Awards (RSA)
	Number of Shares			Weighted Average Fair Value

Outstanding, December 31, 2013		721,752		$	6.88
Awarded		610,143			6.72
Released		(219,187	)		7.99
Forfeited		(544,651	)		6.61
Outstanding, December 31, 2014		568,057			6.54
Awarded		734,823			6.81
Released		(227,616	)		6.60
Forfeited		(663,855	)		6.77
Outstanding, December 31, 2015		411,409			6.61
Awarded		648,351			7.00
Released		(255,307	)		6.68
Forfeited		(608,000	)		6.88
Outstanding, December 31, 2016		196,453			7.01

As of December 31, 2016, there was $0.8 million of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average period of 0.85 years.

The following table summarizes the total share-based compensation expense and related tax benefits recognized (in thousands):

	Year Ended December 31,
	2014		2015		2016

Restricted stock compensation expense	$	1,473	$	1,562	$	1,621
Excess tax benefit related to restricted stock compensation		—		—		548

Stock Options

Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite service period. For the three years in the period ending December 31, 2016, the Company incurred no expense related to stock options previously awarded.

The Company uses the Black-Scholes method of valuation for share-based option awards. In valuing the stock options, the Black-Scholes model incorporates assumptions about stock volatility, expected term of stock options, and risk free interest rate. The valuation is reduced by an estimate of stock option forfeitures.

Stock option activity pursuant to the Plan is summarized as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding, December 31, 2013	127,144		$	20.20
Cancelled	(52,144	)		19.50
Outstanding, December 31, 2014	75,000			20.69
Cancelled	(75,000	)		20.69
Outstanding, December 31, 2015	—			—

There has been no stock option activity since December 31, 2015.

Non-Employee Stock Warrants

In 2012, the Company granted 1,500,000 stock warrants with an exercise price of $16.28 per share and a five year term to a third party as partial consideration for the exclusive right to use certain recognition technology in connection with the Company’s toy products. The exercise price of the 2012 stock warrants is equal to the volume-weighted average price of the Company’s common stock over the five trading days preceding the date of grant. All warrants vested upon grant and are exercisable over the term of the warrants. At December 31, 2014, 2015 and 2016 all such stock warrants remained outstanding with an exercise price of $16.28 per share and an expiration date of September 12, 2017.

The Company measures the fair value of the warrants granted on the measurement date. The fair value of the 2012 stock warrant is capitalized as an intangible asset and will be amortized to expense in the consolidated statements of operations when the related product is released and the related net sales are recognized, which commenced in the third quarter of 2013.