Note 12.

Stock-Based Compensation

The Company effected a 1-for-4 reverse stock split of its common shares as of February 26, 2015. All historical share amounts and share price information presented below have been proportionally adjusted to reflect the impact of this reverse split.

At the annual shareholders meeting held on September 8, 2008, a new stock option plan, the 2008 Stock Incentive Plan, was voted on and became effective on January 1, 2009, which replaced two previous plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock Option Plan, thereby terminating both of the previous plans on December 31, 2008.

The 2008 Plan allows for incentive awards to eligible recipients consisting of:

	·	Options to purchase shares of common stock that qualify as incentive stock options within the meaning of the Internal Revenue Code;
	·	Non-statutory stock options that do not qualify as incentive options;
	·	Restricted stock awards; and
	·	Performance stock awards which are subject to future achievement of performance criteria or free of any performance or vesting.

The maximum number of shares reserved for issuance under the 2008 Plan was originally 312,500 shares, and in July 2010 the Company’s shareholders approved an increase in the number of shares reserved for issuance to 625,000 shares. At the annual shareholders meeting held on July 13, 2012, the Company’s shareholders approved a further increase in the number of shares reserved for issuance to 937,500 shares. At the annual shareholders meeting held on December 12, 2014, the Company’s shareholders approved a further increase in the number of shares reserved for issuance to 1,250,000 shares. The exercise price of options granted under the 2008 Plan shall not be less than 100% of the fair market value of one share of common stock on the date of grant, unless the participant owns more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company, in which case the exercise price shall then be 110% of the fair market value. The outstanding stock options generally vest over three years and have ten-year contractual terms.

During the nine-month period ended September 30, 2015, there were no grants of stock options or restricted stock awards and there were no exercises of outstanding stock options.

Prior to January 1, 2009, the Company had two stock options plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock Option Plan, through which 937,500 shares and 18,750 shares were authorized, respectively. Both of these previous plans expired on December 31, 2008. However, options granted under these previous plans that were outstanding as of the date of termination remain outstanding and subject to termination according to their terms.

As of September 30, 2015, stock options for the purchase of 229,377 shares and 4,376 shares of common stock, respectively, were outstanding in relation to the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Director’s Stock Option Plan.

As of September 30, 2015, stock options for the purchase of 536,848 shares of common stock were outstanding under the 2008 Plan.

As of September 30, 2015, stock options for the purchase of 736,851 shares of common stock were exercisable with a weighted average exercise price of $8.12, a weighted average fair value of $3.35 and an aggregate intrinsic value of approximately $43,000. The total fair value of shares vested during the nine-month period ended September 30, 2015 was approximately $40,000. As of September 30, 2015, an aggregate of 33,750 options granted under all plans were subject to vesting with a total compensation cost of approximately $23,000. The amount is expected to be recognized over 0.73 years.

A summary of all current and expired plans as of September 30, 2015 and changes during the period then ended are presented in the following table:

Options

					Weighted Average
					Remaining Contractual		Aggregate
	Number of		Weighted Average		Life		Intrinsic Value
	Options		Exercise Price		(in years)		(in thousands)
Outstanding as of December 31, 2014		785,032	$	8.02		5.42	$	46
Granted		—		—		—		—
Exercised		—		—		—		—
Forfeited or expired		(14,431)		5.98		—		—
Outstanding as of September 30, 2015		770,601		8.06		4.61		43
Exercisable as of September 30, 2015		736,851	$	8.12		4.47	$	43

Restricted Stock

					Weighted Average
			Weighted Average		Remaining
			Fair Value at		Contractual Life
	Number of shares		Grant Date		(in years)
Unvested balance as of December 31, 2014		7,500	$	4.84		1.41
Granted		—		—		—
Vested		(3,750)		—		—
Unvested balance as of September 30, 2015		3,750	$	4.84		0.66

Recognition and Measurement

The fair value of each stock-based award to employees and non-employee directors is estimated on the measurement date which generally is the grant date while awards to non-employees and restricted common stock with performance criteria are measured at the earlier of the performance commitment date or the service completion date using the Black-Scholes-Merton option-pricing model. Option valuation models require the input of highly subjective assumptions, and changes in assumptions used can materially affect the fair value estimates. The Company estimates the expected life of the award by taking into consideration the vesting period, contractual term, historical exercise data, expected volatility, blackout periods and other relevant factors. Volatility is estimated by evaluating the Company’s historical volatility data. The risk-free interest rate on the measurement date is based on U.S. Treasury constant maturity rates for a period approximating the expected life of the award. The Company historically has not paid dividends, nor does it expect to pay dividends in the foreseeable future and, therefore, the expected dividend rate is zero.

The following table summarizes the range of assumptions utilized in the Black-Scholes-Merton option-pricing model for the valuation of stock options granted during the nine-month periods ended September 30, 2015 and 2014.

	Nine-Month Period Ended September 30,
	2015						2014
Range of values	Low			High			Low			High
Expected volatility		71.85	%		80.91	%		73.03	%		76.27	%
Expected dividends		—			—			—			—
Expected term (in years)		4.78			8.11			3.73			9.11
Risk free rate		1.13	%		2.02	%		1.16	%		2.52	%

For stock-based compensation accrued to employees and non-employee directors, the Company recognizes stock-based compensation expenses for all service-based awards with graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.

For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis over the requisite service period.

The Company estimates forfeitures and recognizes compensation cost only for those awards expected to vest assuming all awards would vest and reverse recognized compensation cost for forfeited awards when the awards are actually forfeited.

For awards with service conditions and graded vesting that were granted prior to the adoption of ASC 718, the Company estimates the requisite service period and the number of shares expected to vest, and recognizes compensation expense for each tranche on the straight-line basis over the estimated requisite service period.