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Stock-Based Compensation
 9 Months Ended
Sep. 30, 2012
Stock-Based Compensation [Abstract]  
Stock-Based Compensation
 
7. Stock-Based Compensation
 
We have three 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 was 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 September 30, 2012, 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 September 30, 2012:
 
 
      ●
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, 2012
    
19,324
    
$
92.19
  
Granted
    
1,505,000
      
4.29
  
Cancelled or expired
    
(8,124
) 
    
69.36
  
Exercised
    
---
      
---
  
Outstanding at September 30, 2012
    
1,516,200
    
$
5.06
  
 
   
For the Nine
   
Months Ended
September 30, 2012
     
 Annual dividend yield
    
--
 Expected life (years)
    
3.85
 Risk-free interest rate
    
0.43% - 0.58%
 Expected volatility
    
177% - 186%
 
The assumptions above were used to value stock options granted to employees and directors during the nine months ended September 30, 2012.
 
The aggregate intrinsic value of the 1,516,200 stock options that are outstanding, vested and expected to vest at September 30, 2012 is $0.
 
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.
 
During the three and nine months ended September 30, 2011, the Company recorded $17,000 and $87,000, respectively, of stock option expense related to the vesting of stock options.
 
We did not grant any options to purchase shares of our common stock to employees or members of our Board of Directors (Board) during the nine months ended September 30, 2011.
 
During the three and nine months ended September 30, 2012, we granted  45,000 and 1,145,000 options to purchase shares of our common stock to employees and  0 and 360,000 options to purchase shares of our common stock to members of our Board. The options have a 7-year life and 1/3 of the options are vested on the date of grant with the remaining to vest monthly over the remaining 24-months. During the three and nine months ended September 30, 2012, we recorded approximately $572,000 and $2.9 million, respectively, of stock based compensation expense related to vesting of such options.
 
Warrants
 
On December 3, 2010, we issued 120,000 warrants at an exercise price of $1.625 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 is to be amortized over 24 months. During the nine months ended September 30, 2012 and 2011, we recorded $25,000 and $74,000, respectively, of stock based compensation expense related to vesting of such warrants.
We issued 80,000 five-year stock purchase warrants at an exercise price of $2.50 per share to our legal advisor during the nine months ended September 30, 2011. We also issued 20,000 three-year stock purchase warrants at an exercise price of $2.00 per share in one of our US based employees during the nine months ended September 30, 2011. In addition, we issued 20,000 shares three-year stock purchase warrants at an exercise price of $4.05 per share to an engineering consultant during the nine months ended September 30, 2011. The warrants to purchase an aggregate of 120,000 shares of our common stock vested on the date of the grant. The vested warrant granted to our legal advisor has a fair value on the grant of $193,000 and is included in general and administrative expense for the nine months ended September 30, 2011. The vested warrant granted to our employee has a fair value on the date of the grant of $37,000 and is included in product research and development expense for the nine months ended September 30, 2011. The vested warrant granted to our engineering consultant has a fair value on the date of grant of $73,000 and is included in product research and development expense for the nine months ended September 30, 2011.
 
On April 25, 2011, Davisa Ltd. exercised warrants to purchase 50,000 shares of common stock. The Company recorded an additional $50,000 as stock based compensation to compensate Davisa Ltd. by waiving the $1.00 exercise price, and issued 50,000 shares of our common stock to Davisa Ltd. for services provided for the private placement of convertible notes and warrants in the March 2011 financing transaction.
On September 12, 2011, we issued 20,000 warrants at an exercise price of $3.90 per share to an employee. The fair value of the warrants was $75,000 on the date of grant, using the Black-Scholes option pricing model, which is to be amortized over 24 months. During the three months ended September 30, 2012 and 2011 we recorded $9,000 and $2,000, respectively, of stock based compensation expense related to vesting of such warrants. During the nine months ended September 30, 2012 and 2011 we recorded $28,000 and $2,000, respectively, of stock based compensation expense related to vesting of such warrants.
 
The stock-based compensation expense reflects the fair value of the vested portion of options and warrants for the recipients at the date of issuance plus the amortization of the unvested portion of the stock options and warrants. Stock-based compensation expense related to stock options and warrants in the accompanying consolidated statements of operations is as follows (in thousands):
 
 
 
   
Three months ended
September 30, 2011
    
Three months ended
September 30, 2012
  
Stock-based compensation
   $ 45     $ 606  
   
Nine months ended
September 30, 2011
    
Nine months ended
September 30, 2012
    
Remaining unamortized expense at
September 30, 2012
  
                Stock-based compensation
  
$
517
    
$
2,957
    
$
3,222
  
 
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 1.7 years.
 
See Note 5 for assumptions used to value warrants during the three and nine months ended September 30, 2011.
 
A summary of all warrant activity is set forth below:
 
   
September 30, 2012
  
Outstanding and exercisable
  
Warrants
    
Weighted Average Exercise Price
    
Weighted Average Remaining Contractual Life
  
January 1, 2012
    
5,405,606
    
$
0.57
      
3.56
  
   Issued
    
--
    
$
--
      
--
  
   Expired/forfeited
    
(62,384
 )     
1.25
      
--
  
   Exercised
    
(343,817
)
  
$
1.03
      
--
  
Outstanding and exercisable, September 30, 2012
    
4,999,405
    
$
1.60
      
1.63
  
 
On March 16, 2012, John Reardon, a member of our board of directors, exercised a warrant to purchase 200,000 shares of common stock using the net exercise provision allowed in the warrant and received 174,798 shares of our common stock.
 
During the nine months ended September 30, 2012, warrant holders (excluding members of our board of directors) exercised warrants to purchase 116,000 shares of common stock using the net exercise provision allowed in the warrant and received 79,050 shares of our common stock. Warrant holders exercised warrants to purchase 17,500 shares of common stock and paid a cash exercise price of $3.13 per share for a total exercise price of $54,775. In addition, a warrant holder exercised a warrant to purchase 72,469 shares of common stock and paid a cash exercise price of $1.38 per share for a total exercise price of $100,007.
 
The fair value of stock-based awards to employees and directors 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.
 
Below is a summary of Outstanding Warrants to Purchase
Common Stock as of September 30, 2012:
  
 
Description
  
Issue Date
    
Exercise Price
    
Shares
    
Expiration Date
  
                                 
August 2009 Employee Warrants
  
8/25/2009
     $ 0.50       240,000    
8/25/2016
  
January 2010 Investor Warrant
  
1/28/2010
     $ 1.00       40,000    
1/28/2013
  
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       2,312,362    
10/18/2013
  
October 2010 Employee Warrants
  
10/15/2010
     $ 1.38       1,400,000    
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
     $ 2.00       80,000    
2/22/2016
  
March  2011 Investor Warrants
  
3/9/2011
     $ 3.13       612,943    
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
                     4,999,405