STOCK OPTIONS

12 Months Ended

Dec. 31, 2014

Notes to Financial Statements

STOCK OPTIONS

For options issued and outstanding during the years ended December 31, 2014 and 2013, the Company recorded additional paid-in capital and non-cash compensation expense of $1,046,454 and $714,547, respectively, each net of estimated forfeitures.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the options. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the consolidated financial statements, to estimate option exercise and employee termination within the valuation model. The expected term of options granted under the Company’s stock plans, all of which qualify as “plain vanilla,” is based on the average of the contractual term (generally 10 years) and the vesting period (generally 24 to 42 months) as permitted under SEC Staff Accounting Bulletin Nos. 107 and 110. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option. Restricted stock grants are valued based on the closing market price for the Company’s Common Stock on the grant date.

The assumptions used principally for options granted to employees in the years ended December 31, 2014 and 2013 were as follows:

	2014		2013
Risk-free interest rate %		1.45 - 1.90		0.10 - 2.71
Expected dividend yield		—		—
Expected term in years		4.5 - 6.5		1 - 10
Forfeiture rate % (excluding fully vested options)		7.5 - 15		15
Expected volatility %		81 - 121		129 - 141

In December 2014, the Company issued stock options to purchase 475,000 shares of our Common Stock to its new CEO and CFO that contain certain stock price level attainment conditions that must be achieved before the stock options are permitted to vest. In calculating the compensation expense for these stock option grants, we utilize a binomial lattice-based valuation model. Assumptions utilized in the model, which are evaluated and revised, as necessary, to reflect market conditions and experience, were as follows:

	2014
Interest rate %		2
Weighted average interest rate		—
Dividend yield		—
Expected volatility		1.05
Weighted Average volatility		—
Expected life in years		6.5

A summary of option activity under the Company’s stock plans and options granted to officers of the Company outside any plan as of December 31, 2014 and changes during the year then ended is presented below:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2014		1,455,432		$	4.40		—		—
Granted		662,950			1.94		—		—
Forfeited or expired		(1,078,482	)		4.92		—		—
Outstanding at December 31, 2014		1,039,900		$	3.00	8.82 years		$	—
Exercisable at December 31, 2014		527,667		$	3.90	8.10 years		$	—

The weighted-average grant-date fair value of options granted during the year ended December 31, 2014 was $3.05 per share. As of December 31, 2014, there was approximately $616,000 of total unrecognized compensation expense related to non-vested share-based option arrangements. With the exception of the unrecognized share-based compensation related to certain restricted stock grants to officers and employees that contain performance conditions related to United States Food and Drug Administration (FDA) approval for our CGM system or the sale of the Company, unrecognized compensation is expected to be recognized over the next 12 months.