Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity

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Stockholders' Equity
 9 Months Ended
Sep. 30, 2011
Stockholders' Equity [Text Block]

Note 8. Stockholders’ Equity

At September 30, 2011 there are 500,000,000 shares of authorized common stock. Total common stock outstanding at September 30, 2011 and December 31, 2010 was 12,399,883 and 12,345,840, respectively. At September 30, 2011, there were 13,578 shares reserved for future issuance, 1,034,996 stock warrants, 133,808 unvested restricted stock shares (of which 50,075 shares were issued but not outstanding as of September 30, 2011) and 1,724,149 stock options outstanding, all totaling 15,306,414 of total stock and stock equivalents outstanding at September 30, 2011.

Stock Options and Restricted Stock Grants

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:

(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, 2011 were 1,724,149 of which 1,392,106 of these options were vested at September 30, 2011. Stock option expense was approximately $0.2 million and approximately $0.6 million for the three months ended September 30, 2011 and 2010, respectively and $0.8 million and $1.9 million for the nine months ended September 30, 2011 and 2010, respectively.

Stock option transactions to the employees, directors, advisory board members and consultants are summarized as follows for the nine months ended September 30, 2011 were as follows:

    2011  
Beginning of the year   1,772,348  
Granted   87,887  
Exercised   -  
Forfeited   (2,750 )
Expired   (133,336 )
End of period   1,724,149  
Options exercisable   1,392,106  

The above table includes options issued as of September 30, 2011 as follows:

i).

A total of 340,204 non-qualified 5-10 year options have been issued, and are outstanding, to advisory board members at exercise prices of $4.50 to $14.40 per share.

   
ii).

A total of 1,161,986 non-qualified 5-10 year options have been issued, and are outstanding, to our directors, officers and employees at exercise prices of $5.42 to $23.85 per share. From this total, 665,088 options are outstanding to the Chief Executive Officer who is also a director, with remaining contractual lives of 4.2 to 9.5 years. All other options issued have a remaining contractual life ranging from 4.8 to 9.5 years.

   
iii).

A total of 221,959 non-qualified 5-10 year options have been issued, and are outstanding, to our consultants at exercise prices of $6.30 to $19.20 per share.

 

The following table provides certain information with respect to the above-referenced stock options that are outstanding and exercisable at September 30, 2011:

    Stock Options Outstanding     Stock Options Vested  
    Weighted                    
    Average                    
    Remaining                 Weighted  
    Contractual Life     Number of     Number of     Average  
Exercise Prices   - Years     Awards     Awards     Exercise Price  
$4.50 - $7.50   7.4     656,428     409,987   $  5.90  
$7.51 - $11.50   5.8     398,857     313,255   $  9.56  
$11.51-$16.50   4.3     362,196     362,196   $  14.16  
$16.51-$23.85   3.9     306,668     306,668   $  22.84  
Total   5.8     1,724,149     1,392,106   $  12.60  

The aggregate intrinsic value of stock options outstanding at September 30, 2011 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 ($2.57 per share as of the close on September 30, 2011).

Restricted Stock Award Activity

The following summarizes our restricted stock unit activity:

          Weighted  
          Average  
          Grant  
          Date Fair  
    Number of Units     Value  
Total unvested awards outstanding at December 31, 2010   83,911   $  7.19  
Units granted   86,273   $  5.31  
Units Vested/Released   (35,459 ) $  6.93  
Units forfeited   (917 ) $  8.66  
Total unvested awards outstanding at September 30, 2011   133,808   $  6.07  

 

Scheduled vesting for outstanding restricted stock units at September 30, 2011 is as follows:
 

    Year Ended December              
    31,              
    2011     2012     2013     2014     Thereafter     Total  
Scheduled vesting—restricted stock units   13,759     77,017     28,739     14,293     --     133,808  

As of September 30, 2011, there was $0.6 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight line basis resulting in approximately $0.38 million of the compensation expected to be expensed in the next twelve months, and the total unrecognized has a weighted average recognition period of 1.58 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 includes the estimate for future pre-vest forfeitures. We will adjust the actual expense recognized as future pre-vest forfeitures occur. We have estimated that 1.5% and 3.8% 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, 2011 and the year ended December 31, 2010 were as follows:

    Period ended     Year ended  
    9/30/2011     12/31/2010  
Average risk-free interest rate   3.35%     3.53%  
Average expected life- years   10     10  
Expected volatility   94.32%     99.08%  
Expected dividends   0%     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. 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, 2011 and 2010, approximately $0.4 million and $0.7 million was recorded as stock-based compensation, respectively and $1.1 million and $2.3 million for the nine months ended September 30, 2011, was recorded as total stock-based compensation, respectively.

Common Stock reserved for Future Issuance

Common stock reserved for future issuance at September 30, 2011 consists of:

    Shares of        
    Common        
    Stock     Amount  
Stock-based compensation   13,578   $  34,750  

Stock Warrants

On July 22, 2010 we completed an offering (the “Offering”) with certain institutional investors on the sale of 2,069,992 shares of its common stock and warrants to purchase a total of 1,034,996 shares of its 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) 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.