Rosetta Stone 2014 Annual Report Download - page 36

Table of Contents
Sales commissions from non-cancellable web-based software subscription contracts are deferred and amortized in proportion to the revenue recognized
from the related contract.
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All stock-based awards, including employee stock option grants, are recorded at fair value as of the grant date and recognized as expense in the
statement of operations on a straight-line basis over the requisite service period, which is the vesting period.
As of December 31, 2014 and 2013, there were approximately $6.1 million and $6.8 million of unrecognized stock-based compensation expense
related to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.38 and 2.53 years, respectively.
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):
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
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Included in cost of revenue:
Cost of product revenue
$ 95
$ 109
$ 110
Cost of subscription and service revenue
13
66
178
Total included in cost of revenue
108
175
288
Included in operating expenses:
Sales and marketing
1,975
1,840
1,185
Research and development
958
1,460
1,547
General and administrative
3,721
5,766
4,989
Total included in operating expenses
6,654
9,066
7,721
Total
$ 6,762
$ 9,241
$ 8,009
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:
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Expected stock price volatility
63%-65%
64%-67%
64%-66%
Expected term of options
6 years
6 years
6 years
Expected dividend yield
—
—
—
Risk-free interest rate
1.46%-1.80%
0.75%-1.65%
0.60%-0.88%
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.
Given the nature of our granted stock options, we derive the estimated term of all stock options using a combination of peer company information and
the simplified method. 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. We believe the limited historical exercise data related to our stock options does not provide a reasonable basis on which to estimate the
expected term.
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