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Stock-Based Compensation

3 Months Ended

Mar. 31, 2015

5. Stock-Based Compensation

The stock-based compensation expense for the three months ended March 31, 2015 and 2014 reflects the estimated fair value of the vested portion of options granted to employees, directors and eligible consultants. In addition, on March 3, 2015, the Company issued to certain Swedish employees an aggregate of 265,000 immediately vested options to purchase shares of the Company’s common stock at an exercise price of $4.15 per share that expire on March 3, 2018. Under Sweden law, the employees are required to purchase the stock options from the Company that was recorded as stock-based compensation expense. The purchase price of the stock options was determined to be $0.70 per option for a total amount of $185,500. At the discretion of the Board of Directors, the Company absorbed the cost and recorded the amount as a bonus to these employees on date of grant. Stock-based compensation expense in the accompanying condensed consolidated statements of operations is as follows (in thousands):

	Three months ended March 31,
	2015		2014
Product research and development	$	223	$	268
Sales and marketing		106		175
General and administrative		269		629
Total stock-based compensation expense	$	598	$	1,072

		Remaining unrecognized expense at March 31, 2015
Stock-based compensation		$	1,180

The remaining unrecognized expense related to stock options will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period, which approximates 2.0 years.

The estimated 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, consultants and directors. Except for the 265,000 options issued to certain Swedish employees (see above), all employee, consultant 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.

As of March 31, 2015 we had two equity incentive plans:

	●	The 1998 Non-Officer Stock Option Plan (the “1998 Plan”), which expired in June 2008; and
	●	The 2006 Equity Incentive Plan, (the “2006 Plan”).

We also had one non-employee director stock option plan as of March 31, 2015:

●

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, 2015		1,709,400		$	4.92
Granted		575,000			3.55
Expired/forfeited		(3,200	)		86.25
Outstanding at March 31, 2015		2,281,200		$	4.46

The aggregate intrinsic value of the 2,281,200 stock options that are outstanding, vested and expected to vest as of March 31, 2015 was $83,000.

For the three months ended March 31, 2015 and 2014, we recorded $0.6 million and $1.1 million, respectively, of compensation expense related to the vesting of stock options, including options granted to certain Swedish employees, as described above. 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 three months ended March 31, 2015, we granted options to purchase 485,000 shares of our common stock to employees and options to purchase 90,000 shares of our common stock to four members of our board of directors with a grant date fair value of $0.6 million computed using the Black-Scholes option pricing model. The total options granted includes 265,000 options issued to certain Swedish employees, as described above. The weighted-average grant date fair value of the options granted during the three months ended March 31, 2015 was $3.55 per share.

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

		For the three months
		ended March 31, 2015

Annual dividend yield		-
Expected life (years)		1.50 - 4.24
Risk-free interest rate		0.47% - 1.41%
Expected volatility		70% - 72%

The 1998 Plan terminated effective June 15, 2008. 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

A summary of all warrant activity is set forth below:

	March 31, 2015
Outstanding and exercisable	Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
January 1, 2015		3,335,073	$	4.45		0.93
Granted		--		--		--
Expired/cancelled		--		--		--
Exercised		--		--		--
Outstanding and exercisable, March 31, 2015		3,335,073	$	4.45		0.69

Outstanding Warrants to Purchase Common Stock as of March 31, 2015:

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

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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