9. Stockholders’ Equity

Stock Authorization

The Board of Directors is authorized to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series. Each such series of preferred stock shall have the number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges to be determined by the Board of Directors, including dividend rights, voting rights, redemption rights and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights. No preferred stock has been issued as of January 31, 2016.

Stock Repurchase Program

Our Board of Directors authorized the repurchase of up to $40.0 million of our common stock through a share repurchase program, which expired on April 30, 2015. Under this program, we used $5.5 million of cash in connection with the repurchase of 591,520 shares of our common stock (an average price of $9.31 per share).

Stock Option Plans

2011 Compensation and Incentive Plan.

In July 2011, our stockholders approved the adoption of our 2011 Compensation and Incentive Plan (the “2011 Plan”). Under the 2011 Plan, as amended in July 2013, the number of authorized shares of common stock is equal to 5,300,000 shares plus the number of shares that expired, terminated, surrendered or forfeited awards subsequent to July 20, 2011 under the Amended and Restated 2005 Equity Compensation and Incentive Plan (the “2005 Plan”). Following approval of the 2011 Plan, we terminated the 2005 Plan. The 2011 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units (“RSUs”), PSUs, deferred stock units (“DSUs”) and other equity based non-stock option awards as determined by the plan administrator, to officers, employees, consultants, and directors of the Company.

Effective February 1, 2014, SeaChange gave its non-employee members of the Board of Directors the option to receive DSUs in lieu of RSUs beginning with the annual grant for fiscal 2015. The number of units subject to the DSUs is determined as of the grant date and shall fully vest one year from the grant date. The shares underlying the DSUs are not vested and issued until the earlier of the director ceasing to be a member of the Board of Directors (provided such time is subsequent to the first day of the succeeding fiscal year) or immediately prior to a change in control. Commencing with fiscal 2016, we changed the policy regarding the timing of the equity grant from the first day of the applicable fiscal year to the date of our annual meeting of stockholders. To facilitate the transition, a partial year grant was made to our non-employee directors, effective February 1, 2015, and a full year grant was made to our non-employee directors, effective July 15, 2015.

We may satisfy awards upon the exercise of stock options or the vesting of stock units with newly issued shares or treasury shares. The Board of Directors is responsible for the administration of the 2011 Plan and determining the terms of each award, award exercise price, the number of shares for which each award is granted and the rate at which each award vests. In certain instances the Board of Directors may elect to modify the terms of an award. As of January 31, 2016, there were 1,971,896 shares available for future grant under the 2011 Plan.

Option awards may be granted to employees at an exercise price per share of not less than 100% of the fair market value per common share on the date of the grant. Stock units may be granted to any officer, employee, director, or consultant at a purchase price per share as determined by the Board of Directors. Option awards granted under the 2011 Plan generally vest over a period of one to four years and expire ten years from the date of the grant.

2015 Employee Stock Purchase Plan

In July 2015 we adopted the 2015 Employee Stock Purchase Plan (the “ESPP”). The purpose of the ESPP is to provide eligible employees, including executive officers of SeaChange, with the opportunity to purchase shares of our common stock at a discount through accumulated payroll deductions of up to 15%, but not less than one percent of their eligible compensation, subject to any plan limitations. Offering periods typically commence on October 1^st and April 1^st and end on March 31^st and September 30^th with the last trading day being the exercise date for the offering period. The first offering period under the ESPP commenced on October 1, 2015. On each purchase date, eligible employees will purchase our stock at a price per share equal to 85% of the closing price of our common stock on the exercise date, but no less than par value. The maximum number of shares of our common stock which will be authorized for sale under the ESPP is 1,150,000 shares. Stock-based compensation expense related to the ESPP was immaterial for fiscal 2016.

Stock-based Compensation

We use the provisions of the authoritative guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. The fair value of our stock options and PSUs, less expected forfeitures, is amortized over the awards’ vesting period on a graded vesting basis, whereas the RSUs and DSUs, less expected forfeitures, are amortized on a straight-line basis. We have applied the provisions of authoritative guidance allowing the use of a “simplified” method, in developing an estimate of the expected term of “plain vanilla” share options.

The effect of recording stock-based compensation was as follows:

 

		For the Fiscal Years Ended January 31,
		2016				2015				2014
		(Amounts in thousands)
Stock-based compensation expense by type of award:
Stock options		$	1,257			$	1,036			$	453
Restricted stock units			1,203				1,607				1,907
Deferred stock units			607				500				—
Performance-based restricted stock units			475				77				599
Employee stock purchase plan			10				—				—
Total stock-based compensation		$	3,552			$	3,220			$	2,959

Since stock-based awards are expected to be made each year and vest over several years, the effects of applying authoritative guidance for recording stock-based compensation for the year ended January 31, 2016 are not indicative of future amounts.

Determining Fair Value

Stock Options

We record the fair value of most stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price, the expected option term, the risk-free interest rate over the option’s expected term, the expected annual dividend yield and the expected stock price volatility. The expected option term was determined using the “simplified” method for “plain vanilla” options. The expected stock price volatility was established using a blended volatility, which is an average of the historical volatility of our common stock over a period of time equal to the expected term of the stock option, and the average volatility of our common stock over the most recent one-year and two-year periods. The risk-free interest rate is based upon the U.S. treasury bond yield at the grant date, using a remaining term equal to the expected life. The expected dividend yield is 0%, as we have not paid cash dividends on our common stock since our inception.

The fair value of stock options granted was estimated at the date of grant using the following assumptions:

 

		For the Fiscal Years Ended January 31,
		2016		2015		2014
Expected term (in years)		6-7		6.5		5-7
Expected volatility (range)		40-45%		46%		44-46%
Weighted average volatility		42%		46%		45%
Risk-free interest rate		1.5-2.0%		1.7%		0.7-0.9%
Weighted average interest rate		1.6%		1.7%		0.8%
Expected dividend yield		0%		0%		0%

 

Market-Based Options

We have granted market-based options to newly appointed officers. These stock options have an exercise price equal to our closing stock price on the date of grant and will vest in approximately equal increments based upon the closing price of SeaChange’s common stock. We record the fair value of these stock options using the Monte Carlo simulation model, since the stock option vesting is variable depending on the closing price of our traded common stock. The model simulated the daily trading price of the market-based stock options’ expected terms to determine if the vesting conditions would be triggered during the term. As a result, the fair value was estimated to be $2.4 million for these stock options. As of January 31, 2016, $0.8 million remained unamortized on these market-based stock options, which will be expensed over the next 1.1 years, which represents the remaining weighted average amortization period.

The following table summarizes the stock option activity:

 

		For the Fiscal Years Ended January 31,
		2016								2015								2014
		Shares				Weighted average exercise price				Shares				Weighted average exercise price				Shares				Weighted average exercise price
Outstanding at beginning of period			1,626,421			$	7.77				1,502,176			$	9.77				1,917,448			$	10.35
Granted			612,678			$	6.44				500,000			$	7.23				12,500			$	10.10
Exercised			(28,740	)		$	6.74				—			$	—				(118,528	)		$	9.10
Forfeited/expired/cancelled			(1,017,682	)		$	8.13				(375,755	)		$	15.06				(309,244	)		$	13.78
Outstanding at end of period			1,192,677			$	6.80				1,626,421			$	7.77				1,502,176			$	9.77
Options exercisable at end of period			80,000			$	6.83				1,108,115			$	8.02				1,440,521			$	9.90
Weighted average remaining contractual term (in years)							8.10								4.72								3.93

The weighted-average fair valuation at grant date of stock options granted during the years ended January 31, 2016, 2015 and 2014, was $2.75, $3.39, and $1.53, respectively. As of January 31, 2016, the unrecognized stock-based compensation related to the unvested stock options was approximately $1.8 million, net of estimated forfeitures. Total unrecognized compensation cost will be adjusted for any future changes in estimated changes in forfeitures. This cost will be recognized over an estimated weighted average amortization period of 2.4 years.

Intrinsic value is defined as the difference between the market price on the date of exercise and the grant date price. The aggregate intrinsic value for options outstanding was $0.1 million, $0.1 million and $4.5 million as of January 31, 2016, 2015 and 2014, respectively. The aggregate intrinsic value of vested shares and share options expected to vest as of January 31, 2016, 2015 and 2014 was $0.1 million, $0.1 million and $4.4 million, respectively.

Cash received from employees as a result of employee stock option exercises during fiscal 2016 and fiscal 2014 was $0.2 million and $1.1 million, respectively. There were no stock options exercised in fiscal 2015. The total intrinsic value of options exercised during the years ended January 31, 2016 and 2014 was approximately $14,000 and $0.3 million, respectively.

 

The following table summarizes information about stock options outstanding and exercisable as of January 31, 2016:

 

		Options Outstanding												Options Exercisable
		Number outstanding				Weighted average remaining contractual terms (years)				Weighted average exercise price				Number exercisable				Weighted average exercise price
Range of exercise prices
$6.05 to $6.05			412,677				7.72			$	6.05				—			$	—
$6.74 to $6.74			75,000				2.96			$	6.74				75,000			$	6.74
$7.00 to $7.48			700,000				8.90			$	7.24				—			$	—
$8.15 to $8.15			5,000				3.42			$	8.15				5,000			$	8.15
			1,192,677				8.10			$	6.80				80,000			$	6.83

Stock Units (RSUs, DSUs and PSUs)

We record stock-based compensation expense associated with stock units using the market value of our stock on the date of grant, less forfeitures, and amortize over the awards’ vesting period on a straight-line basis for awards with only a service condition and graded vesting basis for awards that include both a performance and service condition.

The following table summarizes the stock unit activity:

 

		For the Fiscal Years Ended January 31,
		2016								2015								2014
		Shares				Weighted average grant date fair value				Shares				Weighted average grant date fair value				Shares				Weighted average grant date fair value
Nonvested at beginning of period			435,306			$	8.91				446,468			$	9.81				552,980			$	10.51
Awarded			904,344			$	6.46				314,057			$	8.60				146,411			$	11.15
Vested			(277,373	)		$	6.89				(287,485	)		$	9.83				(205,928	)		$	12.61
Forfeited/expired/cancelled			(9,232	)		$	8.42				(37,734	)		$	10.01				(46,995	)		$	9.93
Nonvested at end of period			1,053,045			$	7.34				435,306			$	8.91				446,468			$	9.81

As of January 31, 2016, the unrecognized stock-based compensation related to the unvested RSUs and DSUs was $2.5 million. This cost will be recognized over an estimated weighted average amortization period of 2.3 years.

In fiscal 2016, the Company granted an aggregate of 301,192 PSUs to employees. The target number of PSUs granted to an employee represents the right to receive a corresponding number of shares of our common stock, subject to adjustment depending on SeaChange’s total shareholder return (“TSR”) for the period between February 1, 2016 and January 31, 2019 measured against the TSR of the common stock of the companies comprising the S&P SmallCap 600 Index (collectively referred to as the “SeaChange Relative TSR Percentile Rank”). The number of shares of our common stock that these employees are entitled to receive at January 31, 2019 ranges from 0% to 150% of the target PSU award. If the SeaChange Relative TSR Percentile Rank relative to the companies in the S&P SmallCap 600 Index is less than the 25^th percentile, the target grant is forfeited.

We record the fair value of these PSUs using the Monte Carlo simulation model since the vesting is variable depending on the SeaChange Relative TSR Percentile Ranking. We recognize stock compensation expense related to the PSUs ratably over the required service period based on the estimate that it is probable that the measurement criteria will be achieved and the targeted number of shares will vest. If there is a change in the estimate of the number of shares that are probable of vesting, we will cumulatively adjust compensation expense in the period that the change in estimate is made. The fair value of the granted PSUs was estimated to be $2.1 million and will be expensed over the next 3 years.