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Stock-Based Compensation
9 Months Ended
Sep. 30, 2011
Stock-Based Compensation 
Stock-Based Compensation

Note 7. Stock-Based Compensation

 

The Company recorded $0.9 million and $0.8 million of stock-based compensation expense for the three months ended September 30, 2011 and 2010, respectively. The Company recorded $2.5 million and $2.3 million of stock-based compensation expense for the nine months ended September 30, 2011 and 2010, respectively. The expense relating to stock-based awards is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, net of expected forfeitures, as of September 30, 2011 was $4.4 million and is expected to be recognized as expense over a weighted average period of approximately 2.17 years.

 

The Company presents the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise of stock options as financing cash flows in the condensed consolidated statements of cash flows. For the three and nine months ended September 30, 2011 and 2010, there were no such tax benefits associated with the exercise of stock options due to the Company’s loss position.

 

Common Stock Options and Restricted Stock

 

A summary of the option and restricted stock unit activity under the Company’s Amended and Restated 2000 Stock Option and Equity Incentive Plan (Amended 2000 Plan) and 2010 Equity Incentive Plan (2010 Plan), referred to collectively as the “Plans,” is presented below (in thousands, except exercise price):

 

 

 

 

 

Options Outstanding

 

 

 

Available
for Grant

 

Number of
Shares

 

Weighted
Average
Exercise
Prices

 

Balance at December 31, 2010

 

3,650

 

5,594

 

$

4.64

 

Additional shares authorized under the 2010 Plan

 

500

 

—

 

—

 

Options granted

 

(120

)

120

 

$

5.94

 

Options cancelled

 

2

 

(323

)

$

3.86

 

Options exercised

 

—

 

(200

)

$

3.51

 

Balance at March 31, 2011

 

4,032

 

5,191

 

$

4.76

 

Options granted

 

(334

)

334

 

$

5.92

 

Options cancelled

 

—

 

(242

)

$

7.67

 

Options exercised

 

—

 

(251

)

$

3.62

 

Balance at June 30, 2011

 

3,698

 

5,032

 

$

4.75

 

Options granted

 

(121

)

121

 

$

5.18

 

Options cancelled

 

3

 

(90

)

$

6.64

 

Options exercised

 

—

 

(55

)

$

1.67

 

Balance at September 30, 2011

 

3,580

 

5,008

 

$

4.76

 

 

On June 30, 2011, the Company’s executive vice president of engineering resigned from the Company and agreed to act as a consultant for an indefinite period.  As compensation for the consulting services, an option to purchase 675,000 shares of the Company’s common stock granted to the executive vice president on June 26, 2009, of which the unvested and unexercised portion would have otherwise terminated by its terms following the termination of employment with the Company, will remain in effect and continue to vest in accordance with its vesting terms during the term of the consulting agreement.  The Company accounts for this option as a variable award and the fair value compensation expense will be recognized each period over the remaining vesting term of the option. As a result of the option modification, the Company recognized $0.2 million of stock-based compensation expense during the quarter and nine months ended September 30, 2011.

 

A summary of restricted stock award and restricted stock unit activity for grants outside of the Plans is presented below (in thousands, except fair value):

 

 

 

Number of
Shares

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested shares at March 31, 2011 and December 31, 2010

 

31

 

$

1.60

 

Vested

 

(16

)

$

1.60

 

Non-vested shares at September 30, 2011 and June 30, 2011

 

15

 

$

1.60

 

 

The Company also has awarded shares to new employees outside the Plans and may continue to do so outside the 2010 Plan, as a material inducement to the acceptance of employment with the Company. These grants must be approved by the compensation committee of the board of directors, a majority of the independent directors or an authorized executive officer, as specified under the Listing Rules of the Nasdaq Stock Market.

 

A summary of the inducement grant option activity is presented below (in thousands, except exercise price):

 

 

 

Options Outstanding

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Prices

 

Balance at December 31, 2010

 

4,812

 

$

2.92

 

Exercised

 

(52

)

$

1.55

 

Balance at March 31, 2011

 

4,760

 

$

2.93

 

Granted

 

400

 

$

6.06

 

Cancelled

 

(2

)

$

1.50

 

Exercised

 

(152

)

$

1.55

 

Balance at June 30, 2011

 

5,006

 

$

3.22

 

Cancelled

 

(36

)

$

1.55

 

Exercised

 

(47

)

$

1.54

 

Balance at September 30, 2011

 

4,923

 

$

3.25

 

 

The following table summarizes significant ranges of outstanding and exercisable options and inducement grants, excluding restricted stock award and restricted stock unit activity, as of September 30, 2011 (in thousands, except contractual life and exercise price):

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Price

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual
Life
(in Years)

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
value

 

Number
Exercisable

 

Weighted
Average
Remaining
Contractual
Life (in
Years)

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
value

 

$1.50 - $2.50

 

3,656

 

3.43

 

$

1.69

 

$

7,208

 

1,766

 

3.42

 

$

1.69

 

$

3,484

 

$2.51 - $5.00

 

2,935

 

4.01

 

$

4.18

 

224

 

1,818

 

3.69

 

$

4.11

 

102

 

$5.01 - $7.50

 

2,693

 

4.70

 

$

5.87

 

—

 

1,606

 

4.16

 

$

5.86

 

—

 

$7.51 - $15.00

 

647

 

1.42

 

$

8.63

 

—

 

647

 

1.42

 

$

8.63

 

—

 

 

 

9,931

 

3.81

 

$

4.01

 

$

7,432

 

5,837

 

3.49

 

$

4.36

 

$

3,586

 

 

As of September 30, 2011, the Company had 9.3 million shares subject to outstanding options fully vested and expected to vest, after estimated forfeitures, with a remaining contractual life of 3.77 years, weighted average exercise price of $4.03 and aggregate intrinsic value of $6.9 million.

 

The total fair value of shares subject to outstanding options vested during the nine months ended September 30, 2011 and 2010 calculated using the Black-Scholes valuation method was $1.2 million and $1.3 million, respectively. The total intrinsic value of employee stock options exercised during the nine months ended September 30, 2011 and 2010 was $2.2 million and $1.8 million, respectively.

 

Options to purchase 5.8 million and 5.0 million shares with weighted average exercise prices of $4.36 and $4.84 per share were exercisable at September 30, 2011 and 2010, respectively.

 

Valuation Assumptions and Expense Information

 

The fair value of the Company’s share-based payment awards for the three and nine months ended September 30, 2011 and 2010 was estimated on the grant date using a Black-Scholes valuation method and an option-pricing model with the following assumptions:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Employee stock options:

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

0.2% – 0.7%

 

1.3% – 1.4%

 

0.2% – 1.7%

 

1.3% – 2.1%

 

Volatility

 

40.7% – 61.3%

 

63.4% – 63.5%

 

40.7% – 63.8%

 

63.0% – 72.7%

 

Expected life (years)

 

4.0

 

4.0

 

4.0

 

4.0

 

Dividend yield

 

0%

 

0%

 

0%

 

0%

 

 

The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the combination of: 1) four-year historical volatility and 2) implied volatility of the Company’s stock price. The expected term of options granted was derived from historical data based on employee exercises and post-vesting employment termination behavior. A dividend yield of zero is applied because the Company has never paid dividends and has no intention to pay dividends in the near future.

 

The stock-based compensation expense recorded is adjusted based on estimated forfeiture rates. An annualized forfeiture rate has been used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. The stock-based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.

 

Employee Stock Purchase Plan

 

In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan (ESPP). A total of 2.0 million shares of common stock have been reserved for issuance under the ESPP. The ESPP, which is intended to qualify under Section 423 of the Internal Revenue Code, is administered by the board of directors or the compensation committee of the board of directors. The ESPP provides that eligible employees may purchase up to $25,000 worth of the Company’s common stock annually over the course of two six-month offering periods. The purchase price to be paid by participants is 85% of the price per share of the Company’s common stock either at the beginning or the end of each six-month offering period, whichever is less. On September 1, 2010, the Company commenced the first six month offering period under the ESPP. On February 29, 2011, approximately 149,000 shares of common stock were issued at an aggregate purchase price of $581,000 under the ESPP.  On August 31, 2011, approximately 164,000 shares of common stock were issued at an aggregate purchase price of $558,000 under the ESPP.