7.      SHARE-BASED COMPENSATION

Share option plan

The Company sponsors a Share Option Plan (“Option Plan”) under which a maximum fixed reloading percentage of 10% of the issued and outstanding common shares of the Company may be granted to employees, directors, and service providers. Prior to April 1, 2008, options were granted with a per share exercise price, in Canadian dollars, equal to the closing market price of the Company’s shares of common stock on the Toronto Stock Exchange on the date immediately preceding the date of the grant. After April 1, 2008, options were granted with a per share exercise price, in U.S. dollars, equal to the closing price of the Company’s shares of common stock on The NASDAQ Global Market on the date of grant. Canadian dollar amounts reflected in the tables below, which approximates their U.S. dollar equivalents as differences between the U.S. dollar and Canadian dollar exchange rates for the periods reflected below are not material. Prior to January 2010, options granted under the Option Plan begin to vest after one year from the date of the grant, are exercisable in equal amounts over four years on the anniversary date of the grant, and expire eight years following the date of grant. After January 2010, options granted under the Option Plan begin to vest 25% on the first anniversary of the hiring date, with the balance vesting in monthly increments for 36 months following the first anniversary of hiring, and expire eight years following the date of grant. The current maximum number of shares of common stock reserved for issuance under the Option Plan is 9,160,135. As of December 31, 2014, 1,825,858 shares of common stock remain available for future grant under the Option Plan. A summary of option activity under the Option Plan as of December 31, 2014, and changes during such year is presented below. As described above, prior to April 1, 2008, exercise prices were denominated in Canadian dollars and in U.S. dollars thereafter. The weighted average exercise prices listed below are in their respective dollar denominations.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for all options that were in-the-money at December 31, 2014. The total fair value of stock options vested during the years ended December 31, 2014, 2013 and 2012 was $6.29 million, $4.73 million and $2.93 million, respectively. There were 6,000, zero and 2,655 stock options exercised for the year ended December 31, 2014, 2013 and 2012, respectively. Cash received from stock option exercises and the total intrinsic value of stock option exercises for the years ended December 31, 2014 and 2012 were immaterial and for the year ended December 31, 2013 were zero. As of December 31, 2014, there were 535,188 exercisable, in-the-money stock options based on the Company’s closing share price of $1.90 on The NASDAQ Global Market.

Share-based compensation expense related to the stock option plan of $1.7 million, $1.7 million and $1.4 million was recognized for the years ended December 31, 2014, 2013 and 2012, respectively. Total compensation cost related to non-vested stock options not yet recognized was $3.3 million as of December 31, 2014, which is expected to be recognized over the next 35 months on a weighted-average basis. The Company uses the Black-Scholes option pricing model to value options upon grant date, under the following weighted average assumptions:

The expected term represents the period that the Company’s stock options are expected to be outstanding and was determined based on the simplified method, which calculates the expected life as the average of the vesting term and the contractual term of the option. The Company’s historical stock option exercise data was impacted by a restructuring of its business in 2008. Because the Company does not have sufficient historical stock option exercise data to accurately estimate the expected term used for its valuation of stock options, the Company continues to use the simplified method to calculate the expected term of new stock option grants. As the Company accumulates more data and history related to the exercises of stock option awards, the Company will reassess its use of the simplified method to determine the expected term. The expected volatility is based on the historical volatility of the Company’s common stock for a period equal to the stock option’s expected life. The risk-free interest rate is based on the yield at the time of grant of a U.S. Treasury security with an equivalent expected term of the option. The Company does not expect to pay dividends on its common stock. The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.

Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on its historical experience.

Restricted share unit plan

The Company also sponsors a RSU Plan for non-employee directors that was established in 2005. The RSU Plan provides for grants to be made from time to time by the Board of Directors or a committee thereof. Each restricted stock unit granted will be made in accordance with the RSU Plan and terms specific to that grant and will be converted into one share of common stock less the cash payment provisions described below at the end of the grant period (not to exceed five years) without any further consideration payable to the Company in respect thereof. On June 6, 2014, the Company’s stockholders approved an increase of 500,000 shares in the number of shares of the Company’s common stock reserved for issuance under the RSU Plan. The current maximum number of common shares of the Company reserved for issuance pursuant to the RSU Plan is 966,666. As of December 31, 2014, 530,910 shares of common stock remain available for future grant under the RSU Plan. The fair value of the restricted share units has been determined to be the equivalent of the Company’s common share closing trading price on the date of grant as quoted on the NASDAQ Global Market.

Approximately 25% of each RSU represents a contingent right to receive cash upon vesting, and the Company is required to deliver an amount in cash equal to the fair market value of such shares on the vesting date to facilitate the satisfaction of the non-employee directors’ U.S. federal income tax obligation with respect to the vested RSUs. The outstanding RSU awards are required to be re-measured at each reporting date until settlement of the award, and changes in valuation are recorded as compensation expense for the period. To the extent that the liability recorded in the balance sheet is less than the original award value, the difference is recognized in equity. The fair value of the outstanding RSUs on the reporting date is determined to be the closing trading price of the Company’s common shares on that date.

Upon vesting, RSUs of 110,104, 46,906 and 43,397 with a weighted average fair value of $3.47, $1.84 and $3.55 were converted into 110,104, 46,906 and 43,397 shares of common stock for the years ended December 31, 2014, 2013 and 2012, respectively. Pursuant to an October 2011 amendment to the Company’s RSU Plan, the Company withheld 27,528 shares of the 110,104 RSUs for the year ended December 31, 2014, 11,730 shares of the 46,906 RSUs for the year ended December 31, 2013 and 10,846 shares of the 43,397 RSUs for the year ended December 31, 2012. The Company delivered to non-employee directors cash totaling $95,653, $21,636 and $38,544, which was equal to the fair value of the shares withheld on the vesting date in order to facilitate satisfaction of the non-employee directors’ income tax obligation with respect to the vested RSUs for the years ended December 31, 2014, 2013 and 2012, respectively.

A summary of the RSU activity under the Company’s RSU Plan as of December 31, 2014, and changes during such year is presented below:

As of December 31, 2014, there was no unrecognized compensation cost related to unvested RSUs. The re-measurement of the outstanding RSUs together with the grant and conversion of the RSUs resulted in an additional $0.4 million, $0.2 million and a reduction of $0.5 million in share-based compensation expense recorded in general and administrative expenses in the consolidated statement of operations for the years ended December 31, 2014, 2013 and 2012, respectively.

Employee Stock Purchase Plan

The Company adopted an ESPP on June 3, 2010, pursuant to which a total of 900,000 shares of common stock were reserved for sale to employees of the Company. The ESPP is administered by the compensation committee of the board of directors and is open to all eligible employees of the Company. Under the terms of the ESPP, eligible employees may purchase shares of the Company’s common stock at six month intervals during 18-month offering periods through their periodic payroll deductions, which may not exceed 15% of any employee’s compensation and may not exceed a value of $25,000 in any calendar year, at a price not less than the lesser of an amount equal to 85% of the fair market value of the Company’s common stock at the beginning of the offering period or an amount equal to 85% of the fair market value of the Company’s common stock on each purchase date. The maximum aggregate number of shares that may be purchased by each eligible employee during each offering period is 15,000 shares of the Company’s common stock.

Fair value of shares purchases under the Company’s ESPP was estimated at subscription dates using a Black-Scholes valuation model, which requires the input of highly subjective assumptions including expected stock price volatility and expected term. The expected volatility is based on the historical volatility of the Company’s common stock for a period equal to the ESPP’s expected life, which is determined by length of time between the subscription date and the purchase date. The risk-free interest rate is based on the yield at the time of grant of a U.S. Treasury security with an equivalent expected term of the ESPP. The Company does not expect to pay dividends on its common stock.

For the year ended December 31, 2014, 2013 and 2012, expense related to this plan was $101,796, $149,674 and $184,960, respectively. Under the ESPP, the Company issued 76,811 shares to employees at a purchase price of $1.49 per share during the year ended December 31, 2014. The Company issued 38,934 and 35,895 shares to employees at a purchase price of $1.46 and $1.57 per share respectively for the year ended December 31, 2013. The Company issued 49,086 and 6,338 shares to employees at a purchase price of $3.33 and $2.82 per share respectively for the year ended December 31, 2012. As of December 31, 2014, there are 600,533 shares reserved for future purchases and there was $25,559 of unrecognized compensation cost related to the ESPP, which is expected to be recognized over an estimated weighted-average period of 0.7 year.