Stock-Based Compensation

3 Months Ended

Mar. 31, 2013

Stock-Based Compensation [Abstract]

Stock-Based Compensation

5.  Stock-Based Compensation

We have several approved stock option plans for which stock options and restricted stock awards are available to grant to employees, consultants and directors. All employee and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options, as vesting for all outstanding option grants is based only on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.

Stock Options

As of March 31, 2013, we had two equity incentive plans:

	●	The 1998 Non-Officer Stock Option Plan (the 1998 Plan), which expired in June 2008 ;
	●	The 2006 Equity Incentive Plan (the 2006 Plan).
We also had one non-employee director stock option plan as of March 31, 2013:
	●	The 2001 Non-Employee Director Stock Option Plan (the Director Plan) which expired in March 2011.

A summary of the combined activity under all of the stock option plans is set forth below:

	Number of Options Outstanding			Weighted Average Exercise Price
Outstanding at January 1, 2013		1,715,200		$	5.04
Granted		15,000			5.97
Cancelled or expired		(200	)		125.00
Exercised		(38,456	)		4.33
Outstanding at March 31, 2013		1,691,544		$	5.05

On March 11, 2013, the Board approved the increase of the number of common stock authorized for issuance as incentive stock options under the 2006 Plan by 2 million shares.

The aggregate intrinsic value of the 1,691,544 stock options that are outstanding, vested and expected to vest at March 31, 2013 is $2.4 million.

               On March 19, 2013, the Company received an aggregate of $167,000 from two employees in connection with the exercise of stock options into 38,456 shares of common stock.  The intrinsic value related to the options exercised was $58,000 on the date of exercise.

For the three months ended March 31, 2013 and 2012, the Company recorded $576,000 and $0, respectively, of compensation expense related to the vesting of stock options. The fair value of the stock-based compensation was calculated  using the Black-Scholes option pricing model as of the date of grant of the stock option.

We granted an option to purchase 15,000 shares of our common stock to an employee during the three months ended March 31, 2013 with a grant date fair value of $80,000 computed using the Black-Scholes option pricing model. We did not grant any options to purchase shares of our common stock to employees or members of our Board of Directors during the three months ended March 31, 2012.

See below for assumptions used in the valuation of stock options:

	For the three months
	ended March 31, 2013
Annual dividend yield		-
Expected life (years)		4.3
Risk-free interest rate		0.65%
Expected volatility		154%

The 1998 Plan terminated effective June 15, 2008 and the Director Plan terminated effective March 2011. Although we can no longer issue stock options out of the plans, the outstanding options at the date of termination will remain outstanding and vest in accordance with their terms. Options granted under the Director Plan vested over a one to four-year period, expire five to seven years after the date of grant and have exercise prices reflecting market value of the shares of our common stock on the date of grant. Stock options granted under the 1998 and 2006 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.

Warrants

During the three months ended March 31, 2013, certain warrant holders exercised their warrants under the cash and net cash provisions, as defined in the agreements. See Note 3 for details of such exercises and number of common stock shares issued.

On December 3, 2010, we issued 120,000 warrants at an exercise price of $1.63 per share to an employee. The fair value of the warrants was $198,000 on the date of grant, using the Black-Scholes option pricing model, which has been amortized to expense over 24 months. During the three months ended March 31, 2012, we recorded $25,000 of stock based compensation expense related to vesting of such warrants.

On September 12, 2011, we issued 20,000 three-year stock purchase warrants to an employee at an exercise price of $3.90 per share with a vesting period over 24 months. The warrant granted to an employee had a fair value on the date of grant of $75,000. This amount is expensed over the vesting period and $10,000 and $9,000 of expense related to this warrant is included in product research and development expense for the three months ended March 31, 2013 and 2012, respectively. The fair value of stock-based compensation related to the issuance of warrants is calculated using the Black-Scholes option pricing model as of the grant date of the underlying warrant.

The stock-based compensation expense for the three months ended March 31, 2013 and 2012 reflects the fair value of the vested portion of options and warrants granted to directors, employees and non-employees. Stock-based compensation expense in the accompanying consolidated statements of operations is as follows (in thousands):

	2013		2012
Product research and development	$	60	$	10
Sales and marketing		196		24
General and administrative		330		--
Stock compensation expense	$	586	$	34

	Remaining unamortized expense at March 31, 2013
Stock-based compensation	$	3,060

The remaining unamortized expense related to stock options and warrants will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period which approximates 3.0 years.

The fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term and forfeiture rate of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior, as well as expected behavior on outstanding options. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of our stock price. These factors could change in the future, which would affect fair values of stock options granted in such future periods, and could cause volatility in the total amount of the stock-based compensation expense reported in future periods.

A summary of all warrant activity is set forth below:

	March 31, 2013
Outstanding and exercisable	Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
January 1, 2013		4,704,636		$	1.61		1.41
Issued		--			--		--
Expired/forfeited		(40,000	)		1.00		--
Exercised		(590,094	)		1.17		--
Outstanding and exercisable, March 31, 2013		4,074,542		$	1.69		1.15

During the three months ended March 31, 2013, warrant holders (excluding our CFO) exercised warrants to purchase 270,094 shares of common stock using the net exercise provision allowed in the warrant and received 198,512 shares of our common stock.

On February 26, 2013, David Brunton, our CFO, exercised warrants to purchase 320,000 shares of common stock using the net exercise provision allowed in the warrant and received 266,228 shares of our common stock.

Below is a summary of Outstanding Warrants to Purchase Common Stock as of March 31, 2013:
Description	Issue  Date	Exercise Price		Shares	Expiration Date
August 2009 Employee Warrants	8/25/2009	$	0.50	80,000		8/25/2016
2007 Debt Extension Warrants	9/22/2010	$	1.00	16,000		9/22/2015
September 2010 Repricing Warrant	9/28/2010	$	1.38	4,000		9/28/2013
October 2010 Repricing Warrants	10/18/2010	$	1.38	2,078,433		10/18/2013
October 2010 Employee Warrants	10/15/2010	$	1.38	920,000		10/15/2013
December 2010 Employee Warrants	12/3/2010	$	1.63	200,000		12/3/2015
January 2011 Employee Warrant	1/21/2011	$	2.00	20,000		1/21/2014
February 2011 Legal Advisor Warrant	2/22/2011	$	2.50	80,000		2/22/2016
March  2011 Investor Warrants	3/9/2011	$	3.13	602,009		3/9/2016
March  2011 Investor Warrants	4/7/2011	$	3.13	34,100		4/7/2016
May 2011 Consultant Warrant	5/17/2011	$	4.05	20,000		5/17/2014
September 2011 Employee Warrant	9/12/2011	$	3.90	20,000		9/12/2014
Total Warrants Outstanding				4,074,542