Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity

v2.4.0.8
Stockholders' Equity
9 Months Ended
Sep. 30, 2014
Stockholders' Equity [Text Block]

Note 8. Stockholders’ Equity

At September 30, 2014 and December 31, 2013, there were 500,000,000 shares of authorized common stock. Total common stock outstanding at September 30, 2014 and December 31, 2013, was 15,204,358 shares and 15,057,243 shares, respectively. At September 30, 2014, there were 2,152,174 stock warrants and 2,143,686 stock options outstanding, all totaling 19,500,218 of total stock and stock equivalents outstanding at September 30, 2014.

Registered Direct Offerings and Outstanding Warrants

October 21, 2013 Offering

On October 21, 2013, we completed an offering with certain institutional investors for the sale of 2,500,000 shares of our common stock and warrants to purchase a total of 1,250,000 shares of our common stock for aggregate gross proceeds, before deducting fees to the Placement Agent and other estimated offering expenses payable by us, of approximately $4.4 million (the “Oct. 2013 Offering”). The common stock and warrants were sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.5 shares of common stock. The purchase price was $1.75 per fixed combination. The warrants become exercisable nine months and one day following the closing date (October 21, 2013, i.e., exercisable beginning April 22, 2014) of the offering and will remain exercisable for 7.5 years from the date of issuance at an exercise price of $2.30 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The exercisability of some of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of our common stock. This limit may be increased to up to 9.99% upon no fewer than 60 days' notice.

We received net proceeds of approximately $4.0 million after payment of certain fees and expenses related to the Oct. 2013 Offering. The allocation of the proceeds from the offering, based on the relative fair value of the common stock and the warrants, resulted in the allocation of approximately $2.8 million of the net proceeds to the common stock sold and approximately $1.2 million of the net proceeds to the warrants, which was recorded to additional paid-in capital-stock and stock equivalents.

The value of the warrants issued was calculated by using the Black Scholes Valuation Model using the following assumptions: volatility 104%; risk-free interest rate of 2.01%; dividend yield of 0%, and expected term of 7.5 years. The volatility of the Company’s common stock was estimated by management based on the historical volatility of the trading history of the Company’s common stock. The risk-free interest rate was based on the Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the expected life of the warrants. The expected dividend yield was based on the Company’s current and expected dividend policy and the expected term is equal to the contractual life of the warrants.

July 22, 2010 Offering - Warrants Outstanding

On July 22, 2010, we completed an offering (the “July 2010 Offering”) with certain institutional investors for the sale of 2,069,992 shares of our common stock and warrants to purchase a total of 1,034,996 shares of our common stock for aggregate gross proceeds, before deducting fees to the Placement Agent and other estimated offering expenses payable by us, of approximately $13.7 million. The common stock and warrants were sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.5 shares of common stock. The purchase price was $6.60 per fixed combination. The warrants became exercisable nine months and one day following the closing date (July 28, 2010, i.e., exercisable beginning January 29, 2011) of the July 2010 Offering and will remain exercisable for seven years from the date of issuance at an exercise price of $9.00 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The exercisability of some of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of our common stock. This limit may be increased to up to 9.99% upon no fewer than 60 days' notice. All these warrants remain outstanding at September 30, 2014 and December 31, 2013.

Exercise of Warrants – Q3-14

On July 4, 2014, we issued 132,822 shares of our common stock upon the exercise of warrants issued in conjunction with the October 21, 2013 stock offering. We received $2.30 for each share issued or approximately $305,000.

Stock-based Compensation – Stock Options and Restricted Stock

Stock Plan

We have a stock-based compensation plan, the 2006 Stock Plan, to reward our officers, directors, employees and consultants for services rendered. On July 17, 2006, we amended this stock plan. We have reserved 2,500,000 shares of common stock for issuance under the stock plan. Other limitations are as follows:

(i)

No more than an aggregate of 1,250,000 shares can be granted for the purchase of restricted common shares during the term of the stock plan;

   
(ii)

The maximum number of shares of common stock with respect to which options may be granted to any one person during any fiscal year may not exceed 266,667 shares; and

   
(iii)

The maximum number of restricted shares that may be granted to any one person during any fiscal year may not exceed 166,667 common shares.

Total stock options outstanding at September 30, 2014 and December 31, 2013, were 2,143,686 and 1,564,257, of which 1,564,257 and 1,530,200 of these options were vested at September 30, 2014 and December 31, 2013, respectively. Stock option expense was approximately $102,000 and $43,000 for the three months ended September 30, 2014 and 2013, respectively. Stock option expense was approximately $207,000 and $189,000 for the nine months ended September 30, 2014 and 2013, respectively.

On May 5, 2014, we granted 579,429 stock options to our employees, directors and consultants. These stock options vest over three years for employees and consultants, and over one year for our directors. The fair market value of each option was $1.79 on the grant date, based on (1) the strike price of $2.55, the price of our stock at the close of the market on the grant date; (2) the expected life of the grant of 5 years which is equal to the term of the grant, as historically grants have only been exercised just before the term expires; (3) the risk free rate of 1.68% which is based on the treasury yield curve for a 5 year term as published by the U.S. Treasury for the grant date; (4) volatility of 90.44%, as measured based on the expected life of the options, and (5) expected dividends of $0.0, as we have never issued dividends and we have no plans to ever issue dividends. Grants to our consultants were re-measured as of September 30, 2014, and the fair market value of each option was $1.55 on the measurement date. We estimated future pre-vest forfeitures to be 1.5%, based on historical information.

Stock option transactions to the employees, directors, advisory board members and consultants are summarized as follows for the nine months ended September 30, 2014:

          Weighted     Weighted  
    Options     Average     Average  
    Outstanding     Exercise     Grant Date  
                Fair  
          Price     Value  
                   
Beginning of the year   1,564,257   $ 11.16   $ 10.42  
Granted   579,429     2.55     1.79  
Exercised   -     -     -  
Forfeited   -   $ -   $ -  
Expired   -   $ -   $ -  
End of period   2,143,686   $ 8.83   $ 8.08  
                   
Options exercisable   1,564,257   $ 11.16   $ 10.42  

Stock option transactions to the employees, directors, advisory board members and consultants are summarized as follows for the year ended December 31, 2013:

          Weighted     Weighted  
    Options     Average     Average  
    Outstanding     Exercise     Grant Date  
                Fair  
          Price     Value  
                   
Beginning of the year   1,639,842   $ 11.46   $ 10.85  
Granted   -     -     -  
Exercised   -     -     -  
Forfeited   (7,250 ) $ 6.04   $ 5.51  
Expired   (68,335 ) $ 18.94   $ 16.90  
End of period   1,564,257   $ 11.16   $ 10.42  
                   
Options exercisable   1,530,200   $ 11.28   $ 10.73  

The above tables include options issued and outstanding as of September 30, 2014, as follows:

i)

A total of 255,202 non-qualified 10 year options have been issued, and are outstanding, to advisory board members at exercise prices ranging from $4.50 to $14.40 per share.

   
ii)

A total of 1,677,181 non-qualified 5 - 10 year options have been issued, and are outstanding, to our directors, officers and employees at exercise prices ranging from $2.55 to $23.85 per share. From this total, 820,396 options are held by the Chief Executive Officer who is also a director, with remaining contractual lives ranging from 1.2 years to 6.5 years. All other options issued to directors, officers and employees have a remaining contractual lives ranging from 1.8 years to 6.5 years.

   
iii)

A total of 211,303 non-qualified 5 - 10 year options have been issued, and are outstanding, to our consultants at exercise prices ranging from $2.55 to $15.30 per share.

The following table provides certain information with respect to the above-referenced stock options that are outstanding and exercisable at September 30, 2014:

    Stock Options Outstanding     Stock Options Vested  
    Weighted                 Weighted              
    Average                 Average              
    Remaining           Weighted     Remaining           Weighted  
    Contractual     Number     Average     Contractual     Number     Average  
    Life     of     Exercise     Life     of     Exercise  
    -Years     Awards     Price     -Years     Awards     Price  
Exercise                                    
Prices                                    
$2.55 - $5.00   4.53     762,766   $ 3.02     4.31     183,337   $ 4.50  
$5.01 - $12.90   4.36     782,584   $ 7.45     4.36     782,584   $ 7.45  
$13.50 -   1.56     358,336   $ 14.17     1.56     358,336   $ 14.17  
$19.20 -   1.37     240,000   $ 23.85     1.37     240,000   $ 23.85  
Total   3.62     2,143,686   $ 8.83     3.26     1,564,257   $ 11.16  

The following table provides certain information with respect to the above-referenced stock options that are outstanding and exercisable at December 31, 2013:

    Stock Options Outstanding     Stock Options Vested  
    Weighted                 Weighted              
    Average                 Average              
    Remaining           Weighted     Remaining           Weighted  
    Contractual     Number     Average     Contractual     Number     Average  
    Life     of     Exercise     Life     of     Exercise  
    -Years     Awards     Price     -Years     Awards     Price  
Exercise Prices                                    
$2.55 - $5.00   5.06     183,337   4.50     5.06     183,337   4.50  
$5.01 - $12.90   5.11     782,584   $ 7.45     5.03     748,527   $ 7.53  
$13.50 -   2.30     358,336   $ 14.17     2.30     358,336   $ 14.17  
$19.20 -   2.12     240,000   $ 23.85     2.12     240,000   $ 23.85  
Total   4.00     1,564,257   $ 11.16     3.94     1,530,200   $ 11.28  

The aggregate intrinsic value of stock options outstanding at September 30, 2014 and December 31, 2013, was $0. Intrinsic value is calculated based on the difference between the exercise price of the underlying awards and the quoted price of our common stock as of the reporting date ($2.30 and $1.45 per share as of the close on September 30, 2014 and December 31, 2013, respectively).

Restricted Stock Award Activity

          Weighted  
          Average  
          Grant  
    Number of     Date Fair  
    Units     Value  
Total awards outstanding at December 31, 2012   43,032   $ 6.49  
Units granted   -   $   -  
Units Exercised/Released   (28,739 ) $ 6.99  
Units Cancelled/Forfeited   -   $   -  
Total awards outstanding at December 31, 2013   14,293   $ 5.47  
Units granted   -   $   -  
Units Exercised/Released   (14,293 ) $ 5.47  
Units Cancelled/Forfeited   -   $   -  
Total awards outstanding at September 30, 2014   -   $   -  

As of September 30, 2014 and December 31, 2013, there was approximately $0 and $19,000 of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements, respectively. This compensation is recognized on a straight line basis and all of the compensation expected to be expensed in 2014, has been recognized as of September 30, 2014.

We use the historical volatility of our stock price over the number of years that matches the expected life of our stock option grants or we use the historical volatility of our stock price since January 5, 2006, the date we announced that we were becoming a public company, to estimate the future volatility of our stock. At this time we do not believe that there is a better objective method to predict the future volatility of our stock. We estimate the life of our option awards based on the full term of the award. To date we have had very few exercises of our options, and those exercises have occurred just before the expiration date of the awards. Since the strike price of most of our outstanding awards is greater than the price of our stock, generally awards have expired at the end of their term. We estimate the effect of future forfeitures of our grants based on an analysis of historical forfeitures of unvested grants, as we have no better objective basis for that estimate. The expense that we have recognized related to our grants of options and restricted stock includes the estimate for future pre-vest forfeitures. We will adjust the actual expense recognized due to future pre-vest forfeitures as they occur. We have estimated that 1.5% and 0% of our option and restricted stock grants respectively, will be forfeited prior to vesting.

Assumptions used in the Black Scholes option-pricing model for the nine months ended September 30, 2014, were as follows (there were no stock options granted in 2013 or 2012):

    Period  
    ended  
    9/30/2014  
       
       
Average risk-free interest rate   1.68%  
Average expected life- years   5  
Expected volatility   90.44%  
Expected dividends   0  

Stock-based compensation expense includes the expense related to (1) grants of stock options, (2) grants of restricted stock, (3) stock issued as consideration for some of the services provided by our directors and strategic advisory council members, and (4) stock issued in lieu of cash to pay bonuses to our employees and contractors. We record stock-based compensation expenses in the caption with all of our other general and administrative expenses and research and development expenses. Grants of stock options and restricted stock are awarded to our employees, directors, consultants and board members, and we recognize the fair market value of these awards ratably as they are earned. The expense related to payments in stock for services is recognized as the services are provided.

During the three months ended September 30, 2014 and 2013, approximately $0.1 million and $0.1 million respectively, were recorded as total stock-based compensation. During the nine months ended September 30, 2014 and 2013, approximately $0.2 million and $0.3 million, respectively, were recorded as total stock-based compensation. Stock-based compensation expense is recorded under the captions general and administrative expenses and research and development expenses in the accompanying consolidated statements of operations.