CAPITAL STOCK

9 Months Ended

Sep. 30, 2014

Notes to Financial Statements

CAPITAL STOCK

4. CAPITAL STOCK

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions for options granted in the three and nine months ended September 30, 2013 and 2014.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2014		2013	2014
Risk-free interest rate		0.87%		1.24%	0.54%		1.07%
Expected lives		3.2 years		3.4 years	3.4 years		3.3 years
Expected volatility		44%		44%	51%		46%
Expected dividend yield		0%		0%	0%		0%

A summary of the Company's stock option plans, excluding options to purchase fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split is as follows:

		Year Ended December 31, 2013					Nine Months Ended September 30, 2014
		Options		Weighted Average Exercise Price			Options	Weighted Average Exercise Price
Outstanding at beginning of period			1,245,161		$	11.054	1,321,232		$	10.386
	Granted at market		275,654		$	7.532	32,000		$	11.202
	Cancelled		(166,286	)	$	11.437	(217,666	)	$	17.819
	Exercised		(33,297	)	$	6.488	(129,580	)	$	6.862
Outstanding at end of period			1,321,232		$	10.386	1,005,986		$	9.258
Exercisable at end of period			939,458		$	11.556	731,992		$	9.860

The estimated fair value of stock options granted during the nine months ended September 30, 2013 and 2014 was computed to be approximately $206 thousand and $117 thousand, respectively. The amount is amortized ratably over the vesting period of the options. The per share weighted average estimated fair value of options granted during the nine months ended September 30, 2013 and 2014 was computed to be approximately $2.96 and $3.68, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2013 and 2014 was approximately $42 thousand and $516 thousand, respectively. The cash proceeds from options exercised during the nine months ended September 30, 2013 and 2014 were approximately $161 thousand and $889 thousand, respectively.

The following table summarizes information about stock options outstanding and exercisable at September 30, 2014, excluding outstanding options to purchase an aggregate of 39.6 fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split with a weighted average remaining contractual life of 1.09 years, a weighted average exercise price of $10.56 and exercise prices ranging from $4.40 to $22.50. The Company intends to issue whole shares only from option exercises.

	Options Outstanding						Options Exercisable
Exercise Prices	Number of Options Outstanding at September 30, 2014		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Number of Options Exercisable at September 30, 2014		Weighted Average Exercise Price
$  2.70 - $  6.90		248,794		6.16	$	5.621		212,049		$	5.461
$  6.91 - $  7.36		198,366		9.14	$	7.359		43,112		$	7.357
$  7.37 - $  8.76		164,248		7.89	$	8.459		92,750		$	8.441
$  8.77 - $12.40		178,227		3.33	$	9.283		168,530		$	9.820
$12.41 - $22.50		216,351		2.12	$	15.321		215,551		$	15.330
$  2.70 - $22.50		1,005,986		5.66	$	9.258		731,992		$	9.860

As of September 30, 2014, there was approximately $734 thousand of total unrecognized compensation cost related to outstanding stock options. That cost is expected to be recognized over a weighted average period of 1.8 years, with approximately $108 thousand to be recognized in the three months ending December 31, 2014 and all the cost to be recognized as of September 2018, assuming all options vest according to the vesting schedules in place at September 30, 2014. As of September 30, 2014, the aggregate intrinsic value of outstanding options was approximately $4.5 million and the aggregate intrinsic value of exercisable options was approximately $3.0 million.

On March 26, 2014, the Company issued 63,572 shares to Robert B. Grieve. Ph.D., who is currently the Company's Executive Chair, pursuant to an employment agreement between Dr. Grieve and the Company effective as of March 26, 2014 (the "Grieve Employment Agreement"). The shares were issued in five tranches and are subject to time-based vesting and other provisions outlined in the Grieve Employment Agreement. All shares are to vest in full as of April 30, 2017.

On March 26, 2014, the Company issued 110,000 shares to Mr. Wilson pursuant to an employment agreement between Mr. Wilson and the Company effective as of March 26, 2014 (the "Wilson Employment Agreement"). The shares were issued in four equal tranches and are subject to time-based vesting and other provisions outlined in the Wilson Employment Agreement. The first tranche vested on September 26, 2014, and each of the three remaining tranches is to vest on the succeeding March 26 until all shares are vested in full as of March 26, 2017. On May 6, 2014, the Company issued an additional 130,000 shares to Mr. Wilson following a vote of approval on the issuance by the Company's stockholders. The shares were issued in ten equal tranches, five of which are subject to vesting based on the achievement of certain stock price targets as defined and further described in the Wilson Employment Agreement and five of which are subject to vesting based on certain "Adjusted EBITDA" targets as defined and further described in the Wilson Employment Agreement.

The Company’s Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), places restrictions (the "Transfer Restrictions") on the transfer of the Company’s stock that could adversely effect the Company’s ability to utilize its domestic Federal Net Operating Loss Position. In particular, the Transfer Restrictions prevent the transfer of shares without the approval of the Company’s Board of Directors if, as a consequence of such transfer, an individual, entity or groups of individuals or entities would become a 5-percent holder under Section 382 of the Internal Revenue Code of 1986, as amended, and the related Treasury regulations, and also prevents any existing 5-percent holder from increasing his or her ownership position in the Company without the approval of the Company’s Board of Directors. Any transfer of shares in violation of the Transfer Restrictions (a "Transfer Violation") shall be void ab initio under the Company’s Certificate of Incorporation and Company’s Board of Directors has procedures under the Company’s Certificate of Incorporation to remedy a Transfer Violation including requiring the shares causing such Transfer Violation to be sold and any profit resulting from such sale to be transferred to a charitable entity chosen by the Company’s Board of Directors in specified circumstances.