Capital Stock

12 Months Ended

Dec. 31, 2018

14. Capital Stock

Common Stock

On February 5, 2008, the Company’s Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one preferred stock purchase right for each outstanding share of the Company’s common stock to shareholders of record as of the close of business on February 6, 2008. These rights were not initially exercisable and would trade with the shares of the Company’s common stock. The rights would become exercisable under various conditions according to the terms of the plan. The Shareholder Rights Plan expired, with no rights having become exercisable, in accordance with its terms on the close of business on February 6, 2018.

Preferred Stock

The Company’s Board of Directors has the authority to issue up to 5.0 million shares of preferred stock and to determine the price privileges and other terms of the shares. The Board of Directors may exercise this authority without any further approval of stockholders. As of December 31, 2018, the Company had no preferred stock issued or outstanding.

Employee Stock Purchase Plan (as amended, the ESPP)

In 2000, the Company approved the ESPP. Under this ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the period. Shares are issued under the ESPP for the six-month periods ending June 30 and December 31. On May 18, 2017, the stockholders of the Company approved an increase of 300,000 shares of common stock in the number of shares available for issuance under the ESPP. Following such amendment, 1,050,000 shares of common stock are authorized for issuance, of which 890,762 shares were issued as of December 31, 2018. There were 89,308 and 76,215 shares issued under the ESPP during the years ended December 31, 2018 and 2017, respectively.

Stock Option and Equity Incentive Plans

Third Amended and Restated 2000 Stock Option and Incentive Plan (as amended, the Third A&R Plan)

The Third Amendment to the Third A&R Plan (the Amendment) was adopted by the Board of Directors on April 2, 2018. Such Amendment was approved by the stockholders at the Company’s 2018 Annual Meeting of Stockholders. Pursuant to the Amendment, the aggregate number of shares authorized for issuance under the Third A&R Plan was increased by 3,400,000 shares to 20,908,929.

Restricted Stock Units with a Market Condition (the Market Condition RSUs)

On August 3, 2015, the Compensation Committee of the Board of Directors of the Company approved and granted deferred stock awards of Market Condition RSUs (the 2015 Market Condition RSUs) to certain members of the Company’s management team under the Third A&R Plan. The vesting of these 2015 Market Condition RSUs was cliff-based and linked to the achievement of a relative total shareholder return of the Company’s common stock from August 3, 2015 to the earlier of (i) August 3, 2018 or (ii) upon a change of control (measured relative to the Russell 3000 index and based on the 20-day trading average price before each such date). As of August 3, 2018, certain of the target total shareholder returns were achieved, and as a result, 69,667 of the 2015 Market Condition RSUs vested. The remaining 2015 Market Condition RSUs did not vest and were canceled.

On May 24, 2018, the Compensation Committee of the Board of Directors of the Company approved and granted deferred stock awards of Market Condition RSUs (the 2018 Market Condition RSUs) to certain members of the Company’s management team under the Third A&R Plan. The vesting of the 2018 Market Condition RSUs is based on a graded-vesting schedule (one third at the end of each year for three years) and linked to the achievement of a relative total shareholder return of the Company’s common stock from May 24, 2018 to the earlier of (i) May 24, 2019 or (ii) upon a change of control (measured relative to the NASDAQ Biotechnology index and based on the 20-day trading average price before each such date). As of December 31, 2018, the target number of these restricted stock units that may be earned is 116,944 shares; the maximum amount is 150% of the target number.

Stock-Based Payment Awards

The Company accounts for stock-based payment awards in accordance with the provisions of FASB ASC 718, which requires it to recognize compensation expense for all stock-based payment awards made to employees and directors including stock options, restricted stock units, Market Condition RSUs and employee stock purchases related to the ESPP.

The Company adopted ASU 2016-09 as of January 1, 2017. As a result of this adoption, the Company has elected as an accounting policy to account for forfeitures for service based awards as they occur, with no adjustment for estimated forfeitures. The Company recognized as of January 1, 2017, a cumulative effect adjustment of $0.1 million to reduce retained earnings as required under the modified retrospective approach.

Stock option and restricted stock unit activity under the Company’s Third A&R Plan for the years ended December 31, 2017 and 2018 were as follows:

		Stock Options			Restricted Stock Units			Market Condition RSU's
				Weighted
		Stock		Average	Restricted			Market
		Options		Exercise	Stock Units		Grant Date	Condition RSU's		Grant Date
		Outstanding		Price	Outstanding		Fair Value	Outstanding		Fair Value

Balance at December 31, 2016		4,096,818		3.94	1,072,653		3.15	182,150		4.81
	Granted	237,700		3.24	1,298,371		2.49	-		-
	Exercised	(143,391)		2.48	-		-	-		-
	Vested (RSUs)	-		-	(488,570)		3.08	-		-
	Cancelled / forfeited	(410,883)		3.93	(85,527)		3.05	(18,023)		4.81
Balance at December 31, 2017		3,780,244	$	3.95	1,796,927	$	2.69	164,127	$	4.81
	Granted	104,585		4.48	639,126		4.31	156,944		4.19
	Exercised	(1,696,255)		3.50	-		-	-		-
	Vested (RSUs)	-		-	(845,326)		2.88	(69,667)		4.81
	Cancelled / forfeited	(231,842)		4.96	(356,965)		2.84	(134,460)		4.63
Balance at December 31, 2018		1,956,732	$	4.25	1,233,762	$	3.36	116,944	$	4.19

The Company did not capitalize any stock-based compensation.

Earnings per share

Basic earnings per share is based upon net income divided by the number of weighted average common shares outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options, restricted stock units and Market Condition RSUs into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted earnings per share consists of the following:

	Year Ended
	December 31,
	2018	2017

Basic	36,453,126	34,753,325
Effect of assumed conversion of employee and director stock options, restricted stock units and Market Condition RSUs	-	-
Diluted	36,453,126	34,753,325

Excluded from the shares used in calculating the diluted earnings per common share in the above table are options, restricted stock units and Market Condition RSUs of approximately 3,307,438 and 5,741,298 shares of common stock for the years ended December 31, 2018 and 2017, respectively, as the impact of these shares would be anti-dilutive.

The Company’s policy is to issue stock available from its registered but unissued stock pool through its transfer agent to satisfy stock option exercises and vesting of the restricted stock units.

The following table summarizes information concerning currently outstanding and exercisable options as of December 31, 2018 (Aggregate Intrinsic Value, in thousands):

		Options Outstanding						Options Exercisable
			Weighted						Weighted
			Average		Weighted				Average		Weighted
	Range of	Shares	Remaining		Average		Aggregate	Shares	Remaining		Average		Aggregate
	Exercise	Outstanding at	Contractual Life		Exercise		Intrinsic	Exercisable at	Contractual Life		Exercise		Intrinsic
	Price	Dec. 31, 2018	in Years		Price		Value	Dec. 31, 2018	in Years		Price		Value

$	2.28-3.29	204,476	4.74	$	2.71	$	96	160,851	3.89	$	2.66	$	84
	3.30-3.49	175,200	8.83		3.33		-	58,400	8.83		3.33		-
	3.50-3.92	159,037	5.95		3.68		-	114,452	4.41		3.64		-
	3.93-4.08	79,019	2.42		4.04		-	79,019	2.42		4.04		-
	4.09-4.17	402,325	5.41		4.12		-	402,325	5.41		4.12		-
	4.18-4.26	49,000	5.75		4.21		-	49,000	5.75		4.21		-
	4.27-4.38	350,000	4.88		4.31		-	350,000	4.88		4.31		-
	4.39-5.39	146,550	6.65		4.95		-	121,550	6.09		5.05		-
	5.40-5.54	203,625	6.18		5.51		-	144,375	6.18		5.51		-
	5.55-5.75	187,500	6.77		5.58		-	125,625	6.43		5.56		-
$	2.28-5.75	1,956,732	5.79	$	4.25	$	96	1,605,597	5.26	$	4.26	$	84

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $3.18 as of December 31, 2018, which would have been received by the option holders had all option holders exercised their options as of that date. The aggregate intrinsic value of options exercised for the years ended December 31, 2018 and 2017 was approximately $2.6 million and $0.1 million, respectively. The total number of in-the-money options that were exercisable as of December 31, 2018 was 160,851.

For the year ended December 31, 2018, the total compensation costs related to unvested awards not yet recognized is $3.2 million and the weighted average period over which it is expected to be recognized is 2.12 years.

Valuation and Expense Information under Stock-Based-Payment Accounting

Stock-based compensation expense related to stock options, restricted stock units, Market Condition RSU’s and the employee stock purchase plan for the years ended December 31, 2018 and 2017 was allocated as follows:

		Year Ended
		December 31,
		2018		2017
	(in thousands)

Cost of revenues	$	64	$	61
Sales and marketing		431		488
General and administrative		2,232		2,695
Research and development		167		139
Discontinued operations		150		117
Total stock-based compensation	$	3,044	$	3,500

The Company did not capitalize any stock-based compensation.

The weighted-average estimated fair value per share of stock options granted during 2018 and 2017 was $1.83 and $1.32, respectively, using the Black Scholes option-pricing model with the following weighted-average assumptions:

	Year Ended
	December 31,
	2018		2017
Volatility	43.28	%	41.63	%
Risk-free interest rate	2.84	%	2.03	%
Expected holding period (in years)	4.83	years	5.41	years
Dividend yield	-	%	-	%

The weighted average fair value of the 2018 Market Condition RSUs which were granted under the Third A&R Plan during the year ended December 31, 2018 was $4.19. There were no Market Condition RSUs granted during the year ended December 31, 2017. The following assumptions were used to estimate the fair value, using a Monte-Carlo valuation simulation, of the Market Condition RSUs granted during the year ended December 31, 2018:

	Year Ended
	December 31,
	2018
Volatility	44.02	%
Risk-free interest rate	2.27	%
Correlation coefficient	0.07	%
Dividend yield	-	%

The Company used historical volatility to calculate the expected volatility as of December 31, 2018. Historical volatility was determined by calculating the mean reversion of the daily adjusted closing stock price. The risk-free interest rate assumption is based upon observed U.S. Treasury bill interest rates (risk-free) appropriate for the term of the Company’s stock options. The expected holding period of stock options represents the period of time options are expected to be outstanding and were based on historical experience. The vesting period ranges from one to four years and the contractual life is ten years.

Stock-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2018 and 2017 is recognized on awards as they vest and following the adoption of ASU 2016-09 in January 2017, is not reduced for annualized estimated forfeitures