Capital Stock

3 Months Ended

Mar. 31, 2019

13. Capital Stock

Common Stock

The Company has 80.0 million shares of common stock authorized for issuance. As of March 31, 2019, the Company had 37.7 million shares of common stock issued and outstanding.

Preferred Stock

The Company’s Board of Directors has the authority to issue up to 5.0 million shares of preferred stock and to determine the price, privileges and other terms of the shares. The Board of Directors may exercise this authority without any further approval of stockholders. As of March 31, 2019, the Company had no preferred stock issued or outstanding.

Employee Stock Purchase Plan (as amended, the ESPP)

In 2000, the Company approved the ESPP. Under this ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the period. Shares are issued under the ESPP for the six-month periods ending June 30 and December 31. As of March 31, 2019, 1,050,000 shares of common stock are authorized for issuance, of which 890,762 shares were issued. There were no shares issued under the ESPP during the three months ended March 31, 2019 and 2018, respectively.

Stock Option and Equity Incentive Plans

Third Amended and Restated 2000 Stock Option and Incentive Plan (as amended, the Third A&R Plan)

The Third Amendment to the Third A&R Plan (the Amendment) was adopted by the Board of Directors on April 2, 2018. Such Amendment was approved by the stockholders at the Company’s 2018 Annual Meeting of Stockholders. Pursuant to the Amendment, the aggregate number of shares authorized for issuance under the Third A&R Plan was increased by 3,400,000 shares to 20,908,929.

Restricted Stock Units with a Market Condition (the Market Condition RSUs)

On May 24, 2018, the Compensation Committee of the Board of Directors of the Company approved and granted deferred stock awards of Market Condition RSUs (the 2018 Market Condition RSUs) to certain members of the Company’s management team under the Third A&R Plan. The vesting of the 2018 Market Condition RSUs is based on a graded-vesting schedule (one third at the end of each year for three years) and linked to the achievement of a relative total shareholder return of the Company’s common stock from May 24, 2018 to the earlier of (i) May 24, 2019 or (ii) upon a change of control (measured relative to the NASDAQ Biotechnology index and based on the 20-day trading average price before each such date). As of March 31, 2019, the target number of these restricted stock units that may be earned is 94,444 shares; the maximum amount is 150% of the target number.

On March 7, 2019, the Compensation Committee of the Board of Directors of the Company approved and granted deferred stock awards of Market Condition RSUs (the 2019 Market Condition RSUs) to certain members of the Company’s management team under the Third A&R Plan. The vesting of the 2019 Market Condition RSUs is based on a graded-vesting schedule (one third at the end of each year for three years) and linked to the achievement of a relative total shareholder return of the Company’s common stock from March 7, 2019 to the earlier of (i) March 7, 2020 or (ii) upon a change of control (measured relative to the NASDAQ Biotechnology index and based on the 20-day trading average price before each such date). As of March 31, 2019, the target number of these restricted stock units that may be earned is 75,514 shares; the maximum amount is 150% of the target number.

Stock-Based Payment Awards

The Company accounts for stock-based payment awards in accordance with the provisions of FASB ASC 718, which requires it to recognize compensation expense for all stock-based payment awards made to employees and directors including stock options, restricted stock units, Market Condition RSUs and employee stock purchases related to the ESPP. The Company has elected as an accounting policy to account for forfeitures for service based awards as they occur, with no adjustment for estimated forfeitures.

Stock option and restricted stock unit activity under the Company’s Third A&R Plan for the three months ended March 31, 2019 was as follows:

		Stock Options			Restricted Stock Units			Market Condition RSU's
				Weighted
		Stock		Average	Restricted			Market
		Options		Exercise	Stock Units		Grant Date	Condition RSU's		Grant Date
		Outstanding		Price	Outstanding		Fair Value	Outstanding		Fair Value

Balance at December 31, 2018		1,956,732	$	4.25	1,233,762	$	3.36	116,944	$	4.19
	Granted	559,909		3.80	383,827		3.67	75,514		4.16
	Exercised	(2,500)		3.25	-		-	-		-
	Vested (RSUs)	-		-	(439,875)		3.26	-		-
	Cancelled / forfeited	(75,000)		4.66	(95,509)		2.83	(22,500)		4.19
Balance at March 31, 2019		2,439,141	$	4.13	1,082,205	$	3.56	169,958	$	4.18

The weighted average fair value of the options granted under the Third A&R Plan during the three months ended March 31, 2019 was $1.58. There were no options granted under the Third A&R Plan during the three months ended March 31, 2018. The following assumptions were used to estimate the fair value, using the Black-Scholes option pricing model, of stock options granted during the three months ended March 31, 2019:

	Three Months Ended
	March 31,
	2019
Volatility	45.58	%
Risk-free interest rate	2.44	%
Expected holding period (in years)	4.73	years
Dividend yield	-	%

The weighted average fair value of the 2019 Market Condition RSUs which were granted under the Third A&R Plan during the three months ended March 31, 2019 was $4.16. There were no Market Condition RSUs granted under the Third A&R Plan during the three months ended March 31, 2018. The following assumptions were used to estimate the fair value, using a Monte-Carlo valuation simulation, of the Market Condition RSUs granted during the three months ended March 31, 2019:

	Three Months Ended
	March 31,
	2019
Volatility	48.00	%
Risk-free interest rate	2.50	%
Correlation coefficient	0.27	%
Dividend yield	-	%

The Company used historical volatility to calculate the expected volatility for each grant as of the grant date. Historical volatility was determined by calculating the mean reversion of the daily adjusted closing stock price. The risk-free interest rate assumption is based upon observed U.S. Treasury bill interest rates (risk-free) appropriate for the term of the Company’s stock options and Market Condition RSUs. The expected holding period of stock options represents the period of time options are expected to be outstanding and is based on historical experience. The vesting period ranges from one to four years and the contractual life is ten years. The correlation coefficient, used to value the Market Condition RSUs, represents the way in which entities move in relation to the NASDAQ Biotechnology index as a whole.

Stock-based compensation expense related to stock options, restricted stock units, Market Condition RSUs and the ESPP for the three months ended March 31, 2019 and 2018 was allocated as follows:

		Three Months Ended
		March 31,
		2019		2018
		(in thousands)

Cost of revenues	$	13	$	11
Sales and marketing		(7)		124
General and administrative		551		697
Research and development		34		30
Discontinued operations		-		150
Total stock-based compensation	$	591	$	1,012

The Company did not capitalize any stock-based compensation.

Earnings per share

Basic earnings per share is based upon net income divided by the number of weighted average common shares outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options, restricted stock units and Market Condition RSUs into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted earnings per share consists of the following:

	Three Months Ended
	March 31,
	2019	2018

Basic	37,644,684	35,462,989
Effect of assumed conversion of employee and director stock options, restricted stock units and Market Condition RSUs	-	-
Diluted	37,644,684	35,462,989

Excluded from the shares used in calculating the diluted earnings per common share in the above table are options, restricted stock units and Market Condition RSUs of approximately 3,691,304 and 4,899,228 shares of common stock for the three months ended March 31, 2019 and 2018, respectively, as the impact of these shares would be anti-dilutive.