Capital Stock

6 Months Ended

Jun. 30, 2015

13. Capital Stock

Common Stock

On February 5, 2008, the Company’s Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one preferred stock purchase right for each outstanding share of the Company’s common stock to shareholders of record as of the close of business on February 6, 2008. Initially, these rights will not be exercisable and will trade with the shares of the Company’s common stock. Under the Shareholder Rights Plan, the rights generally will become exercisable if a person becomes an “acquiring person” by acquiring 20% or more of the common stock of the Company or if a person commences a tender offer that could result in that person owning 20% or more of the common stock of the Company. If a person becomes an acquiring person, each holder of a right (other than the acquiring person) would be entitled to purchase, at the then-current exercise price, such number of shares of preferred stock which are equivalent to shares of the Company’s common stock having a value of twice the exercise price of the right. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the right.

Preferred Stock

The Company’s Board of Directors has the authority to issue up to 5.0 million shares of preferred stock and to determine the price privileges and other terms of the shares. The Board of Directors may exercise this authority without any further approval of stockholders. As of June 30, 2015, the Company had no preferred stock issued or outstanding.

Employee Stock Purchase Plan (as amended, the “ESPP”)

In 2000, the Company approved the ESPP. Under this ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the period. Shares are issued under the ESPP for the six-month periods ending June 30 and December 31. Under this plan, 750,000 shares of common stock are authorized for issuance of which 611,369 shares were issued as of June 30, 2015. During the three months ended June 30, 2015 and 2014, the Company issued 26,181 shares and 31,116 shares, respectively, of the Company’s common stock under the ESPP.

Third Amended and Restated 2000 Stock Option and Incentive Plan (as amended, the “Third A&R Plan”)

The Second Amendment to the Third A&R Plan (the “Amendment”) was adopted by the Board of Directors on April 3, 2015. Such Amendment was approved by the stockholders at the Company’s 2015 Annual Meeting. The Amendment made the following change to the Third A&R Plan:

The aggregate number of shares authorized for issuance under the Third A&R Plan was increased by 2,500,000 shares to 17,508,929.

Stock-Based Payment Awards

The Company accounts for stock-based payment awards in accordance with the provisions of FASB ASC 718, which requires it to recognize compensation expense for all stock-based payment awards made to employees and directors including stock options, restricted stock units and employee stock purchases related to the ESPP.

Stock option and restricted stock unit activity under the Company’s Third A&R Plan for the six months ended June 30, 2015 was as follows:

		Stock Options			Restricted Stock Units
				Weighted
		Stock		Average	Restricted
		Options		Exercise	Stock Units		Grant Date
		Outstanding		Price	Outstanding		Fair Value

Balance at December 31, 2014		6,263,112	$	3.42	306,397	$	4.30
	Granted	863,000		5.51	254,685		5.56
	Exercised	(1,710,681)		3.04	-		-
	Vested (RSUs)	-		-	(237,188)		-
	Cancelled / forfeited	(246,055)		4.01	-		-
Balance at June 30, 2015		5,169,376	$	3.87	323,894	$	5.30

The weighted average fair value of the options granted under the Third A&R Plan during the three months ended June 30, 2015 and 2014 was $2.08 and $2.20, respectively. The weighted average fair value of the options granted under the Third A&R Plan during the six months ended June 30, 2015 and 2014 was $2.21 and $2.19, respectively. The following assumptions were used to estimate the fair value of stock options granted during the three and six months ended June 30, 2015 and 2014:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Volatility	39.35	%	57.16	%	41.08	%	56.83	%
Risk-free interest rate	1.70	%	1.80	%	1.72	%	1.78	%
Expected holding period (in years)	5.28	years	5.79	years	5.52	years	5.75	years
Dividend yield	-	%	-	%	-	%	-	%

The Company used historical volatility to calculate the expected volatility as of June 30, 2015 and 2014. Historical volatility was determined by calculating the mean reversion of the daily adjusted closing stock price. The risk-free interest rate assumption is based upon observed U.S. Treasury bill interest rates (risk-free) appropriate for the term of the Company’s stock options. The expected holding period of stock options represents the period of time options are expected to be outstanding and is based on historical experience. The vesting period ranges from one to four years and the contractual life is ten years.

Stock-based compensation expense related to stock options, restricted stock units and the ESPP for the three and six months ended June 30, 2015 and 2014 was allocated as follows:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2015		2014		2015		2014
		(in thousands)

Cost of revenues	$	15	$	30	$	36	$	58
Sales and marketing		107		74		194		144
General and administrative		548		356		997		697
Research and development		22		12		45		20
Total stock-based compensation	$	692	$	472	$	1,272	$	919

On April 28, 2015, the Company announced the appointment of James Green to its Board of Directors and the retirement of Robert Dishman from our Board of Directors. As part of Dr. Dishman’s retirement, the Company (i) awarded an unrestricted stock award to Dr. Dishman on April 28, 2015, having an aggregate cash value of $80,000, (ii) accelerated the vesting of all outstanding stock options and restricted stock units that were unvested as of April 28, 2015, and (iii) extended the post-retirement option exercise period for each option to the earlier to occur of the respective scheduled expiration date or April 28, 2016. Total compensation expense recognized as part of general and administrative expenses for the three and six months ended June 30, 2015, as part of these modifications, was approximately $0.1 million.

The Company did not capitalize any stock-based compensation.

Earnings per share

Basic earnings per share is based upon net income divided by the number of weighted average common shares outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options and restricted stock units into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted earnings per share consists of the following:

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014

Basic	33,569,180	32,045,314	33,240,467	31,946,654
Effect of assumed conversion of employee and director stock options and restricted stock units	1,456,470	900,618	-	988,801
Diluted	35,025,650	32,945,932	33,240,467	32,935,455

Excluded from the shares used in calculating the diluted earnings per common share in the above table are options to purchase approximately 1,264,875 and 2,477,884 shares of common stock for the three months ended June 30, 2015 and 2014, respectively, as the impact of these shares would be anti-dilutive. Excluded from the shares used in calculating the diluted earnings per common share in the above table are options to purchase approximately 5,169,376 and 2,578,743 shares of common stock for the six months ended June 30, 2015 and 2014, respectively, as the impact of these shares would be anti-dilutive.