Stock-Based Compensation

9 Months Ended

Sep. 30, 2014

Stock-Based Compensation [Abstract]

Stock-Based Compensation

5.   Stock-Based Compensation

The stock-based compensation expense for the three and nine months ended September 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  September 30,				Nine months ended   September 30,
	2014		2013		2014		2013
Product research and development	$	73	$	69	$	433	$	187
Sales and marketing		51		364		302		749
General and administrative		55		329		859		1,165
Total stock based compensation expense	$	179	$	762	$	1,594	$	2,101

	Remaining  unamortized  expense at  September 30,  2014
Stock-based compensation	$	965

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 September 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 September 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		365,000			6.77
Expired/forfeited		(142,494	)		11.74
Outstanding at September 30, 2014		1,823,089		$	5.02

The aggregate intrinsic value of the 1,823,089 stock options that are outstanding, vested and expected to vest as of September 30, 2014 was $0.

For the three and nine months ended September 30, 2014 and 2013, we recorded $0.2 million and $1.6 million and $0.7 million and $1.9 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 nine months ended September 30, 2014, we granted options to purchase 355,000 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 nine months ended September 30, 2014 was $3.35 per share.

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

	For the nine months
	ended September 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

In May 2014, we issued a warrant to an investor that may be exercised by November 15, 2015 to purchase up to an aggregate of 2,500,000 shares of our common stock at an exercise price of $5.09 per share.  Full exercise of the investor warrant will result in us receiving $12,725,000 in gross proceeds, excluding any placement agent fee paid as described below. The holder may exercise the warrant in whole or in part.   The terms of the investor warrant require that exercise may only be for cash and not a cashless basis unless, after November 15, 2014, there has been a failure to maintain the effective registration of the common shares issuable upon exercise of the investor warrant shares. We filed a registration statement with the SEC to register the common shares issuable upon exercise of the investor warrant that became effective on June 12, 2014. The exercise price of the investor warrant is subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions a “fundamental event” or “stock combination event” as provided for in the terms of the investor warrant. We have agreed to pay a placement agent fee of up to $600,000 in connection with exercises of the investor warrant.  In addition, we issued to the placement agent a warrant to acquire up to an aggregate of 75,000 shares of our common stock.  The agent warrant is subject to the same terms and provisions of the investor warrant described above. 

A summary of all warrant activity is set forth below:

	September 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		(40,000	)		3.98		--
Exercised		(28,500	)		2.85		--
Outstanding and exercisable, September 30, 2014		3,335,073		$	4.45		1.19

Outstanding Warrants to Purchase  Common Stock as of September 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
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						3,335,073