Note 8. Stockholders’ Equity

At March 31, 2014 and December 31, 2013, there are 500,000,000 shares of authorized common stock. Total common stock outstanding at March 31, 2014 and December 31, 2013, was 15,064,069 shares and 15,057,243 shares, respectively. At March 31, 2014 there were 2,284,996 stock warrants, 1,564,257 stock options outstanding and 7,467 total unvested shares of restricted stock, all totaling 18,920,789 of total stock and stock equivalents outstanding at March 31, 2014.

Registered Direct Offerings and Outstanding Warrants

October 21, 2013 Offering

On October 21, 2013 we completed an offering with certain institutional investors on 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 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 six 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 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 “Offering”) with certain institutional investors on 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 six months and one day following the closing date (July 28, 2010, i.e., exercisable beginning January 29, 2011) of the 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 March 31, 2014 and December 31, 2013.

Stock-based Compensation – Stock Options and Restricted Stock

Stock Plan

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

Total stock options outstanding at March 31, 2014 and December 31, 2013, were 1,564,257, of which 1,558,103 and 1,530,200 of these options were vested at March 31, 2014 and December 31, 2013, respectively. Stock option expense was approximately $40,000 and $102,000 for the three months ended March 31, 2014 and 2013, respectively.

Stock option transactions to the employees, directors, advisory board members and consultants are summarized as follows for the three months ended March 31, 2014:

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

Stock option transactions to the employees, directors, advisory board members and consultants are summarized as follows for the three months ended March 31, 2014:

The above tables include options issued and outstanding as of March 31, 2014 as follows:

The following table provides certain information with respect to the above-referenced stock options that are outstanding and exercisable at March 31, 2014:

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

The aggregate intrinsic value of stock options outstanding at March 31, 2014 and December 31, 2013 was $0, all of which related to vested awards. 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 ($2.69 and $1.45 per share) as of the close on March 31, 2104 and December 31, 2013, respectively).

Restricted Stock Award Activity

The following summarizes our restricted stock unit activity:

Scheduled vesting for outstanding restricted stock units at March 31, 2014 is as follows:

As of March 31, 2014 and December 31, 2013 there was approximately $1,100 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 resulting in all of the $1,100 of the compensation expected to be expensed in 2014, and the total unrecognized has a weighted average recognition period of 0.03 years.

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 term 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 the 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 does not include the estimate for future pre-vest forfeitures, as all of our grants will be fully earned within the next few months.

There were no stock options granted for the three months ended March 31, 2014 and the year ended December 31, 2013. Assumptions used in the Black Scholes option-pricing model for the year ended December 31, 2011 were as follows:

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. 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 March 31, 2014 and 2013, approximately $60,000 and $147,000, respectively, was recorded as total stock-based compensation. Stock-based compensation expense is recorded under the caption general and administrative expenses and research and development expenses in the accompanying consolidated statements of operations.