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CAPITAL STOCK

12 Months Ended

Dec. 31, 2014

CAPITAL STOCK

Stock Option Plans

The Company has two stock option plans which authorize granting of stock options and stock purchase rights to employees, officers, directors and consultants of the Company to purchase shares of common stock. In 1997, the board of directors adopted the 1997 Stock Incentive Plan (the "1997 Plan") and terminated two prior option plans. All shares that remained available for grant under the terminated plans were incorporated into the 1997 Plan, including shares subsequently cancelled under prior plans. In May 2012, the stockholders approved an amendment to the 1997 Plan allowing for an increase of 250,000 shares and an annual increase through 2016 based on the number of non-employee directors serving as of the Company's Annual Meeting of Stockholders, subject to a maximum of 45,000 shares per year. In May 2003, the stockholders approved a new plan, the 2003 Equity Incentive Plan, which allows for the granting

of options for up to 239,050 shares of the Company's common stock. The number of shares reserved for issuance under both plans as of December 31, 2014 was 212,026.

The stock options granted by the board of directors may be either incentive stock options ("ISOs") or non-qualified stock options ("NQs"). The exercise price for options under all of the plans may be no less than 100% of the fair value of the underlying common stock for ISOs or 85% of fair value for NQs. Options granted will expire no later than the tenth anniversary subsequent to the date of grant or three months following termination of employment, except in cases of death or disability, in which case the options will remain exercisable for up to twelve months. Under the terms of the 1997 Plan, in the event the Company is sold or merged, outstanding options will either be assumed by the surviving corporation or vest immediately.

There are four key inputs to the Black-Scholes model which the Company uses to estimate fair value for options which it issues: expected term, expected volatility, risk-free interest rate and expected dividends, all of which require the Company to make estimates. The Company's estimates for these inputs may not be indicative of actual future performance and changes to any of these inputs can have a material impact on the resulting estimated fair value calculated for the option. The Company's expected term input was estimated based on the Company's historical experience for time from option grant to option exercise for all employees in 2012, 2013 and 2014; the Company treated all employees in one grouping in all three years. The Company's expected volatility input was estimated based on the Company's historical stock price volatility in 2012, 2013 and 2014. The Company's risk-free interest rate input was determined based on the U.S. Treasury yield curve at the time of option issuance in 2012, 2013 and 2014. The Company's expected dividends input were 4.3% in 2012, zero in 2013 and zero in 2014. Weighted average assumptions used in 2012, 2013 and 2014 for each of these four key inputs are listed in the following table:

	2012	2013	2014
Risk-free interest rate	0.38%	0.75%	1.21%
Expected lives	3.0 years	3.4 years	3.4 years
Expected volatility	57%	46%	43%
Expected dividend yield	4.3%	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,
		2012					2013					2014
		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of period			1,448,675		$	10.425		1,245,161		$	11.054		1,321,232			$	10.386
	Granted at Market		137,950		$	9.534		275,654		$	7.532		134,800			$	16.398
	Cancelled		(118,330	)	$	11.373		(166,286	)	$	11.437		(218,926	)		$	17.786
	Exercised		(223,134	)	$	5.863		(33,297	)	$	6.488		(162,855	)		$	7.234
Outstanding at end of period			1,245,161		$	11.054		1,321,232		$	10.386		1,074,251			$	10.110
Exercisable at end of period			971,029		$	12.129		939,458		$	11.556		729,175			$	9.800

The total estimated fair value of stock options granted during the years ended December 31, 2012, 2013 and 2014 were computed to be approximately $402 thousand, $701 thousand and $712 thousand, respectively. The amounts are amortized ratably over the vesting periods of the options. The weighted average estimated fair value of options granted during the years ended December 31, 2012, 2013 and 2014 was computed to be approximately $2.92, $2.54 and $5.28, respectively. The total intrinsic value of options exercised during the years ended December 31, 2012, 2013 and 2014 was $1.1 million, $42 thousand and $737 thousand, respectively. The cash proceeds from options exercised during the years ended December 31, 2012, 2013 and 2014 was $263 thousand, $161 thousand and $1.2 million.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2014, excluding outstanding options to purchase an aggregate of 37.4 fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split with a weighted average remaining contractual life of 0.89 years, a weighted average exercise price of $10.55 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 December 31, 2014		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Number of Options Exercisable at December 31, 2014		Weighted Average Exercise Price
$ 2.70 - $ 7.29		246,696		5.92	$	55.631		220,240	$	5.498
$ 7.30 - $ 8.34		231,546		8.67	$	7.490		84,020	$	7.669
$ 8.35 - $ 9.73		214,800		5.06	$	8.647		150,408	$	8.685
$ 9.74 - $15.80		186,682		3.41	$	12.481		178,480	$	12.440
$15.81 - $22.50		194,527		6.33	$	18.250		96,027	$	18.374
$ 2.70 - $22.50		1,074,251		5.98	$	10.110		729,175	$	9.800

As of December 31, 2014, there was $1.2 million of total unrecognized compensation expense related to outstanding stock options. That cost is expected to be recognized over a weighted-average period of 2.0 years with all cost to be recognized by the end of December 2018, assuming all options vest according to the vesting schedules in place at December 31, 2014. As of December 31, 2014, the aggregate intrinsic value of outstanding options was $8.7 million and the aggregate intrinsic value of exercisable options was $6.1 million.

Employee Stock Purchase Plan (the "ESPP")

Under the 1997 Employee Stock Purchase Plan, the Company is authorized to issue up to 375,000 shares of common stock to its employees, of which 374,169 had been issued as of December 31, 2014. Employees of the Company who are expected to work at least 20 hours per week and five months per year are eligible to participate. Under the terms of the plan, employees can choose to have up to 10% of their annual base earnings withheld to purchase the Company's common stock. During the period from January 1, 2012 to June 30, 2013, the Company's ESPP had a five-year offering period and six-month accumulation periods ending on each June 30 and December 31. The purchase price of stock on June 30 and December 31 was 85% of the fair market value at purchase.

Beginning on July 1, 2013, the Company's ESPP had a 27-month offering period and three-month accumulation periods ending on each March 31, June 30, September 30 and December 31. The purchase price of stock on March 31, June 30, September 30 and December 31 was the lesser of (1) 85% of the fair market value at the time of purchase and (2) the greater of (i) 95% of the fair market value at the beginning of the applicable offering period or (ii) 65% of the fair market value at the time of purchase. In addition, participating employees may purchase shares under the ESPP at the beginning of an applicable offering period for a purchase price of stock equal to 95% of the fair market value at such time or at 5 pm on a day other than March 31, June 30, September 30 and December 31 during the applicable offering period for a purchase price of stock equal to 95% of the fair market value at purchase.

Since July 1, 2013, the Company has estimated the fair values of stock purchase rights granted under the ESPP using the Black-Scholes pricing model and the following weighted average assumptions:

	2013	2014
Risk-free interest rate	0.21%	0.23%
Expected lives	1.3 years	1.3 years
Expected volatility	34%	34%
Expected dividend yield	0%	0%

For the years ended December 31, 2012, 2013 and 2014, the weighted-average fair value of the purchase rights granted was $1.45, $1.28 and $2.61 per share, respectively.

Restricted Stock Issuance

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 were 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 were subject to vesting based on certain "Adjusted EBITDA" targets as defined and further described in the Wilson Employment Agreement. All shares subject to vesting based on "Adjusted EBITDA" vested based on the Company’s 2014 performance and one of five tranches based on the achievement of certain stock price targets had vested as of December 31, 2014.

Restrictions on the transfer of Company stock

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 affect 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 Certificate of Incorporation, and the Company’s Board of Directors has procedures under the 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.