Note 13 – Stock Compensation

Employee stock purchase plan

In 2005, the shareholders approved the 2005 Employee Stock Purchase Plan (“ESPP”). The ESPP provides the Company’s employees with the opportunity to purchase common stock through payroll deductions. Employees may purchase stock semi-annually at a price that is 85% of the fair market value at certain plan-defined dates. At December 31, 2016, the number of shares of common stock available for issuance was 300,000. As of December 31, 2018, the plan had not been implemented.

Incentive compensation plans

The 2017 Incentive Stock Plan (the “2017 Plan”) adopted and approved by the shareholders on May 25, 2017 provides for grants of common stock and options to purchase shares of common stock to employees, officers, directors and consultants. The 2017 Plan has an aggregate of 2.0 million shares. In 2018, there were 587,350 options granted from this plan. Vesting terms of the options range from immediate vesting to a ratable vesting period of 5 years. Option activity for the year ended December 31, 2018 is summarized as follows:



		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017			4,768,838	$	3.02
Options granted			587,350		1.78
Options exercised			(99,937)		0.98
Options forfeited			(66,667)		1.78
Options cancelled or expired			(511,164)		4.15
Outstanding at December 31, 2018			4,678,420	$	2.81		4.10	$	12,375
Vested or expected to vest at December 31, 2018	(1)		4,671,164	$	2.81		4.17	$	12,375
Exercisable at December 31, 2018			4,315,667	$	2.87		4.04	$	12,375

(1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options.

At December 31, 2018, there were 980,540 shares available for grant under the 2017 Plans. There are 100,428 shares available for grant under older plans.

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock on December 31, 2018 for the options that were in-the-money. As of December 31, 2018 there were 12,375 options that were in-the-money. The Company’s closing stock price was $1.03 as of December 31, 2018. The Company issues new shares of common stock upon exercise of stock options. The intrinsic value of the 2018 options exercised was $77 thousand.

Stock- based compensation

The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model. Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.

The following table summarizes the allocation of non-cash stock-based compensation to the Company’s expense categories for the years ended December 31, 2018 and 2017 (in thousands):



	Twelve Months Ended
	December 31,
	2018		2017

Cost of revenues	$	36	$	24
Research and development		95		97
Selling, general and administrative		479		507
Total stock compensation expense	$	610	$	628

At December 31, 2017, total unrecognized compensation costs related to stock options was approximately $0.5 million, net of estimated forfeitures. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 1.1 years.

The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:



	Twelve Months Ended
	December 31,
	2018			2017

Dividend yield		0	%	0	%
Risk free interest rates		2.16-2.75	%	0.71-1.65	%
Expected volatility		46.4 to 50.0	%	45.3 to 59.4	%
Expected term (in years)		3.5 to 4.75		3.5 to 5.0

The weighted average fair value per share for options granted in 2018 and 2017 was $1.70 and $0.86, respectively.

There were no dividends declared or paid in 2018 or 2017. The Company does not expect to pay dividends in the near future; therefore, it used an expected dividend yield of 0%. The risk-free interest rate used in the Black-Scholes option pricing model is based on the implied yield at the time of grant available on U.S. Treasury securities with an equivalent term. Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the equivalent term. The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.