Stock-Based Compensation

6 Months Ended

Jun. 30, 2014

Stock-Based Compensation [Abstract]

Stock-Based Compensation

5.   Stock-Based Compensation

The stock-based compensation expense for the three and six months ended June 30, 2014 and 2013 reflects the fair value of the vested portion of options and warrants granted to employees, directors and eligible consultants. Stock-based compensation expense in the accompanying condensed consolidated statements of operations is as follows (in thousands):

	Three months ended  June 30,				Six months ended   June 30,
	2014		2013		2014		2013
Product research and development	$	92	$	58	$	360	$	118
Sales and marketing		76		194		251		385
General and administrative		175		501		804		836
Total stock based compensation expense	$	343	$	753	$	1,415	$	1,339

	Remaining unamortized expense at June 30, 2014
Stock-based compensation	$	1,657

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 1.9 years.

The fair value of stock-based awards 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.

Stock Options

We have adopted equity incentive plans for which stock options and restricted stock awards are available to grant to employees 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.

We had two equity incentive plans as of June 30, 2014:

●      The 1998 Non-Officer Stock Option Plan (the “1998 Plan”), which expired in June 2008; and

●      The 2006 Equity Incentive Plan, including the Swedish Sub-Plan to the 2006 Equity Incentive Plan, (the “2006 Plan”).

We also had one non-employee director stock option plan as of June 30, 2014:

●      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, 2014		1,600,583		$	5.22
Granted		335,000			7.09
Expired		(600	)		58.25
Outstanding at June 30, 2014		1,934,983		$	5.53

The aggregate intrinsic value of the 1,934,983 stock options that are outstanding, vested and expected to vest as of June 30, 2014 was $0.

For the three and six months ended June 30, 2014 and 2013, we recorded $0.3 million and $1.4 million and $0.6 million and $1.2 million, 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.

During the six months ended June 30, 2014, we granted options to purchase 325,000 shares of our common stock to employees and an option to purchase 10,000 shares of our common stock to a member of our board of directors with a grant date fair value of $1.2 million computed using the Black-Scholes option pricing model. The weighted-average grant date fair value of the options granted during the six months ended June 30, 2014 was $3.46 per share.

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

	For the six months ended
	June 30,  2014
Annual dividend yield	-
Expected life (years)	1.50 - 4.30
Risk-free interest rate	0.27% - 1.47%
Expected volatility	61% - 109%

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 June 30, 2014, we issued warrants to purchase up to an aggregate of 2,575,000 shares of our common stock to an accredited institutional investor and placement agent in connection with a private placement equity raise at an exercise price of $5.09 per share for a period of 18 months from the May 15, 2014 issuance date (see Note 9).

A summary of all warrant activity is set forth below:

	June 30, 2014
Outstanding and exercisable	Warrants			Weighted Average Exercise Price		Weighted Average  Remaining Contractual Life
January 1, 2014		828,573		$	2.39		2.06
Granted		2,575,000			5.09		-
Expired/cancelled		(20,000	)		4.05		-
Exercised		(28,500	)		2.85		-
Outstanding and exercisable, June 30, 2014		3,355,073		$	4.45		1.44

Outstanding Warrants to Purchase 
Common Stock as of June 30, 2014:

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
December 2010 Employee Warrants	12/3/2010	$	1.63	200,000	12/3/2015
February 2011 Legal Advisor Warrant	2/22/2011	$	2.50	80,000	2/22/2016
March  2011 Investor Warrants	3/9/2011	$	3.13	349,973	3/9/2016
March  2011 Investor Warrants	4/7/2011	$	3.13	34,100	4/7/2016
September 2011 Employee Warrant	9/12/2011	$	3.90	20,000	9/12/2014
May 2014 Agent Warrant	5/15/2014	$	5.09	75,000	11/15/2015
May 2014 Investor Warrant	5/15/2014	$	5.09	2,500,000	11/15/2015
Total Warrants Outstanding				3,355,073