Rosetta Stone 2011 Annual Report Download - page 53

Table of Contents
The following table presents the stock-based compensation expense for stock options and restricted stock included in the related financial statement line
items (in thousands):
Years Ended December 31,
2011 2010 2009
Included in cost of revenue:
Cost of product revenue $ 55 $ 39 $ 34
Cost of subscription and service revenue — — —
Total included in cost of revenue 55 39 34
Included in operating expenses:
Sales and marketing 1,932 774 999
Research and development 2,448 1,181 5,959
General and administrative 7,918 2,393 15,158
Total included in operating expenses 12,298 4,348 22,116
Total $ 12,353 $ 4,387 $ 22,150
In accordance with ASC topic 718, the fair value of stock-based awards to employees is calculated as of the date of grant. Compensation expense is then
recognized on a straight-line basis over the requisite service period of the award. We use the Black-Scholes pricing model to value our stock options, which
requires the use of estimates, including future stock price volatility, expected term and forfeitures. Stock-based compensation expense recognized is based on
the estimated portion of the awards that are expected to vest. Estimated forfeiture rates were applied in the expense calculation. The fair value of each option
grant is estimated on the date of grant using the Black Scholes option pricing model as follows:
Year Ended December 31,
2011 2010 2009
Expected stock price volatility 57% - 64% 58% - 66% 61%
Expected term of options 6 years 6 years 6 years
Expected dividend yield — — —
Risk-free interest rate 1.14% - 2.59% 1.14% - 2.59% 1.71% - 2.46%
Prior to the completion of our initial public offering in April 2009, our stock was not publicly quoted and we had a limited history of stock option
activity, so we reviewed a group of comparable industry-related companies to estimate our expected volatility over the most recent period commensurate with
the estimated expected term of the awards. In addition to analyzing data from the peer group, we also considered the contractual option term and vesting
period when determining the expected option life and forfeiture rate. Subsequent to the initial public offering, we continue to review a group of comparable
industry-related companies to estimate volatility, but also review the volatility of our own stock since the initial public offering. We consider the volatility of
the comparable companies to be the best estimate of future volatility. For the risk-free interest rate, we use a U.S. Treasury Bond rate consistent with the
estimated expected term of the option award.
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