13.

Capital Stock and Stock-Based Compensation

Common Stock

February

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

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

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, 2019,

the Company had

preferred stock issued or outstanding.

Employee Stock Purchase Plan (as amended, the ESPP)

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

and

December

31.

May

16,

2019,

the stockholders of the Company approved an increase of

350,000

shares of common stock in the number of shares available for issuance under the ESPP. Following such amendment,

1,400,000

shares of common stock are authorized for issuance, of which

1,081,404

shares were issued as of

December 31, 2019.

There were

190,642

and

89,308

shares issued under the ESPP during the years ended

December 31, 2019

and

2018,

respectively. As of

December 31, 2019,

there were

318,596

shares available for issuance under the plan.

Third Amended and Restated

2000

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

May 25, 2011,

the stockholders of the company approved the Third A&R Plan, which such plan currently authorizes the grant of stock options and stock-based awards to officers, employees, non-employee directors and other key persons of the Company and its subsidiaries. The Third Amendment to the Third A&R Plan (the Amendment) was adopted by the Board of Directors on

April

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)

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

-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.

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

-day trading average price before each such date).

2019,

the Compensation Committee of the Board of Directors of the Company approved and granted deferred stock awards of Market Condition RSUs (the

2019

Market Condition RSUs) to certain members of the Company’s management team under the Third A&R Plan. The vesting of the

2019

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 the

2019

Market Condition RSUs grant date to the earlier of (i) the anniversary date of the grant or (ii) upon a change of control (measured relative to the NASDAQ Biotechnology index and based on the

-day trading average price before each such date).

As of

December 31, 2019,

the target number of these restricted stock units that

may

be earned is

529,491

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 has elected as an accounting policy to account for forfeitures for service-based awards as they occur, with

adjustment for estimated forfeitures.

Stock option and restricted stock unit activity under the Company’s Third A&R Plan for the years ended

December 31, 2018

and

2019

were as follows:

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

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
Granted		943,424			3.28		1,652,720			2.31		605,005			1.98
Exercised		(3,750	)		2.98		-			-		-			-
Vested (RSUs)		-			-		(813,762	)		3.29		(3,778	)		4.19
Cancelled / forfeited		(630,284	)		3.96		(482,270	)		3.42		(188,680	)		4.18
Balance at December 31, 2019		2,266,122		$	3.93		1,590,450		$	2.27		529,491		$	1.67

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,
	2019		2018
Basic		37,813,580		36,453,126
Dillutive effect of equity awards		-		-
Diluted		37,813,580		36,453,126

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

4,386,063

and

3,307,438

shares of common stock for the years ended

December 31, 2019

and

2018,

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,

2019

(Aggregate Intrinsic Value, in thousands):

			Options Outstanding								Options Exercisable
					Weighted								Weighted
					Average		Weighted						Average		Weighted
Range of			Number		Remaining		Average		Aggregate		Shares		Remaining		Average		Aggregate
Exercise			Outstanding at		Contractual Life		Exercise		Intrinsic		Exercisable at		Contractual Life		Exercise		Intrinsic
Price			Dec. 31, 2019		in Years		Price		Value		Dec. 31, 2019		in Years		Price		Value

$1.78	-	2.59		234,399		6.48	$	2.14	$	213		94,069		1.94	$	2.57	$	45
2.60	-	2.94		208,414		9.52		2.84		44		10,000		7.25		2.60		5
2.95	-	3.49		264,571		8.00		3.23		-		148,400		7.45		3.27		-
3.50	-	3.92		305,839		7.32		3.74		-		166,431		5.76		3.70		-
3.93	-	4.08		65,849		1.42		4.04		-		65,849		1.42		4.04		-
4.09	-	4.17		355,625		4.41		4.12		-		355,625		4.41		4.12		-
4.18	-	4.38		370,000		3.93		4.30		-		370,000		3.93		4.30		-
4.39	-	5.39		141,550		5.56		4.99		-		126,550		5.22		5.04		-
5.40	-	5.54		174,875		5.18		5.51		-		174,875		5.18		5.51		-
5.55	-	5.75		145,000		5.65		5.58		-		137,500		5.49		5.57		-
$1.78	-	5.78		2,266,122		5.95	$	3.93	$	257		1,649,299		4.70	$	4.28	$	50

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of

$3.05

as of

December

31,

2019,

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 year ended

December 31, 2019

was

not

material. The aggregated intrinsic value of options exercised for the year ended

December 31, 2018

was approximately

$2.6

million. The total number of in-the-money options that were exercisable as of

December 31, 2019

was

189,069.

For the year ended

December 31, 2019,

the total compensation costs related to unvested awards

not

yet recognized is

$3.7

million and the weighted average period over which it is expected to be recognized is approximately

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, 2019

and

2018

was allocated as follows:

	Year Ended December 31,
	2019		2018
	(in thousands)
Cost of product revenues	$	43	$	64
Sales and marketing		119		431
General and administrative		2,710		2,232
Research and development		162		167
Discontinued operations		-		150
Total stock-based compensation	$	3,034	$	3,044

The Company did

not

capitalize any stock-based compensation.

The weighted-average estimated fair value per share of stock options granted during

2019

and

2018

was

$1.40

and

$1.83,

respectively, using the Black Scholes option-pricing model with the following weighted-average assumptions:

	2019			2018
Volatility		48.11	%		43.28	%
Risk-free interest rate		2.12	%		2.84	%
Expected holding period (in years)		4.7			4.8
Dividend Yield		-	%		-	%

The weighted average fair value of the

2019

Market Condition RSUs during the year ended

December 31, 2019

was

$1.98.

The weighted average fair value of the

2018

Market Condition RSUs granted during the year ended

December 31, 2018

was

$4.19.

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:

	2019			2018

Volatility		58.96	%		44.02	%
Risk-free interest rate		1.99	%		2.27	%
Correlation coefficient		23.59	%		0.07	%
Dividend yield		-	%		-	%

The Company used historical volatility to calculate the expected volatility as of

December 31, 2019.

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

four

years and the contractual life is

ten

years.