Note 7. Stock-Based Compensation

The Company recorded approximately $1.0 million of stock-based compensation expense for each of the three months ended June 30, 2014 and 2013. The Company recorded approximately $2.5 million and $1.8 million of stock-based compensation expense for the six months ended June 30, 2014 and 2013, respectively. The expense relating to stock options 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 June 30, 2014 was $4.5 million related to stock options and is expected to be recognized as expense over a weighted average period of approximately 2.24 years. The expense related to restricted stock units is recognized over a three-to-five year vesting period and is based on the fair value of the underlying stock on the dates of grant. The unamortized compensation cost, net of expected forfeitures, as of June 30, 2014 was $1.3 million related to restricted stock units and is expected to be recognized as expense over a weighted average period of approximately 2.71 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 six months ended June 30, 2014 and 2013, 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 activity under the Company’s Amended and Restated 2000 Stock Option and Equity Incentive Plan (Amended 2000 Plan) and Amended and Restated 2010 Equity Incentive Plan (Amended 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, 2013	422		6,727		$	3.86
Additional shares authorized under the Amended 2010 Plan	500		—		—
Restricted stock units granted	(499	)	—		—
Options granted	(49	)	49		$	4.69
Options cancelled	60		(60	)	$	3.42
Options exercised	—		(300	)	$	3.58
Options expired	(60	)	—		3.42
Balance at March 31, 2014	374		6,416		$	3.89
Additional shares authorized under the Amended 2010 Plan	1,500		—		—
Restricted stock units granted	(9	)	—		—
Options cancelled	4		(4	)	$	5.21
Options exercised	—		(52	)	$	1.61
Options expired	(4	)	—		$	5.21
Balance at June 30, 2014	1,865		6,360		$	3.91

At the Company’s 2014 Annual Meeting of Stockholders held on June 3, 2014, the Company’s stockholders approved an increase of 1,500,000 shares reserved for issuance under the Amended 2010 Plan.

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

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, 2013	3,178		$	4.42
Granted	118		$	5.22
Cancelled	(40	)	$	4.47
Exercised	(32	)	$	3.88
Balance at March 31, 2014	3,224		$	4.46
Granted	125		$	3.87
Exercised	(20	)	$	1.55
Balance at June 30, 2014	3,329		$	4.45

A summary of restricted stock unit activity is presented below (in thousands, except fair value):

	Number of Shares		Weighted Average Grant-Date Fair Value
Non-vested shares at December 31, 2013	27		$	4.46
Granted	499		$	4.62
Vested	(122	)	$	4.62
Non-vested shares at March 31, 2014	404		$	4.61
Granted	9		$	4.62
Vested	(5	)	$	4.62
Non-vested shares at June 30, 2014	408		$	4.61

The following table summarizes significant ranges of outstanding and exercisable options as of June 30, 2014 (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 - $3.23	2,683	2.90	$	2.63	$	1,430	1,807	2.33	$	2.40	$	1,362
$3.24 - $4.20	2,439	4.41	$	3.78	—		1,374	3.77	$	3.76	—
$4.21 - $5.61	3,627	3.80	$	4.90	—		2,625	2.01	$	5.04	—
$5.62 - $6.50	940	2.59	$	5.98	—		764	2.33	$	5.98	—
	9,689	3.58	$	4.09	$	1,430	6,570	2.50	$	4.15	$	1,362

As of June 30, 2014, the Company had 9.4 million shares subject to outstanding options fully vested and expected to vest, after estimated forfeitures, with a remaining contractual life of 3.47 years, weighted average exercise price of $4.10 and aggregate intrinsic value of $1.4 million.

The total fair value of shares subject to outstanding options vested during the six months ended June 30, 2014 and 2013 calculated using the Black-Scholes valuation method was $1.5 million and $1.6 million, respectively. The total intrinsic value of employee stock options exercised during the six months ended June 30, 2014 and 2013 was $0.7 million and $0.6 million, respectively.

Valuation Assumptions and Expense Information

The fair value of the Company’s share-based payment awards for the three and six months ended June 30, 2014 and 2013 was estimated on the grant date using a Black-Scholes valuation option-pricing model with the following assumptions:

	Three Months Ended June 30,		Six Months Ended June 30,
Employee stock options:	2014	2013	2014	2013
Risk-free interest rate	1.6% - 1.7%	0.5% - 0.8%	1.5% – 1.7%	0.5% – 0.8%
Volatility	55.9% – 56.7%	58.0% – 58.3%	55.9% – 57.5%	58.0% – 59.1%
Expected life (years)	4.0-5.0	4.0	4.0-5.0	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 historical volatility of the Company’s stock price over the expected term of the options. 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 2,000,000 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 offering period under the ESPP. On February 28, 2014, approximately 140,000 shares of common stock were issued at an aggregate purchase price of $434,000 under the ESPP. As of June 30, 2014, there were approximately 920,000 shares authorized and unissued under the ESPP.