Capital Stock

9 Months Ended

Sep. 30, 2014

13. 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. Initially, these rights will not be exercisable and will trade with the shares of the Company’s common stock. Under the Shareholder Rights Plan, the rights generally will become exercisable if a person becomes an “acquiring person” by acquiring 20% or more of the common stock of the Company or if a person commences a tender offer that could result in that person owning 20% or more of the common stock of the Company. If a person becomes an acquiring person, each holder of a right (other than the acquiring person) would be entitled to purchase, at the then-current exercise price, such number of shares of preferred stock which are equivalent to shares of the Company’s common stock having a value of twice the exercise price of the right. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the right.

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 September 30, 2014, 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. Under this plan, 750,000 shares of common stock are authorized for issuance of which 558,456 shares were issued as of September 30, 2014. During the nine months ended September 30, 2014 and 2013, the Company issued 31,116 and 27,305 shares, respectively, of the Company’s common stock under the ESPP. There were no shares issued under the ESPP during the three months ended September 30, 2014 and 2013.

Stock-Based Payment Awards

The Company accounts for stock-based payment awards in accordance with the provisions of ASC 718, Compensation – Stock Compensation, which requires that compensation expense is recognized for all stock-based payment awards made to employees and directors including stock options, restricted stock units and employee stock purchases related to the ESPP.

Stock option and restricted stock unit activity under the Company’s Third Amended and Restated 2000 Stock Option and Incentive Plan (as amended, the “2000 Plan”) for the nine months ended September 30, 2014 was as follows:

		Stock Options			Restricted Stock Units
				Weighted
		Stock		Average	Restricted
		Options		Exercise	Stock Units		Grant Date
		Outstanding		Price	Outstanding		Fair Value

Balance at December 31, 2013		6,690,845	$	3.42	463,973	$	4.32
	Granted	993,000		4.14	116,400		4.12
	Exercised	(535,413)		3.00	-		-
	Vested (RSUs)	-		-	(233,098)		-
	Cancelled / forfeited	(832,263)		4.69	(40,878)		4.36
Balance at September 30, 2014		6,316,169	$	3.40	306,397	$	4.30

The weighted average fair value of the options granted under the 2000 Plan during the three months ended September 30, 2014 was $2.64, using the Black Scholes option-pricing model. There were no stock options granted during the three months ended September 30, 2013. The weighted average fair value of the options granted under the 2000 Plan during the nine months ended September 30, 2014 and 2013 was $2.20 and $2.64, respectively. The following assumptions were used to estimate the fair value of stock options granted during the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Volatility	56.96	%	-	%	56.83	%	57.20	%
Risk-free interest rate	1.90	%	-	%	1.79	%	1.18	%
Expected holding period (in years)	5.93		-		5.75		5.64
Dividend Yield	-	%	-	%	-	%	-	%

The Company used historical volatility to calculate the expected volatility as of September 30, 2014. 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 is based on historical experience. The vesting period ranges from one to four years and the contractual life is ten years.

Stock-based compensation expense related to stock options, restricted stock units and the ESPP for the three and nine months ended September 30, 2014 and 2013 was allocated as follows:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2014		2013		2014		2013
		(in thousands)

Cost of product revenues	$	36	$	39	$	94	$	91
Sales and marketing		100		47		244		130
General and administrative		463		632		1,160		1,685
Research and development		16		16		36		33
Discontinued operations		-		29		-		61
Total stock-based compensation	$	615	$	763	$	1,534	$	2,000

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 and restricted stock units 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:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013

Basic	32,341,586	30,574,815	32,079,744	30,154,788
Effect of assumed conversion of employee and director stock options and restricted stock units	1,073,271	-	1,017,268	1,607,678
Diluted	33,414,857	30,574,815	33,097,012	31,762,466

Excluded from the shares used in calculating the diluted earnings per common share in the above table are options to purchase approximately 2,449,873 and 6,316,169 shares of common stock for the three months ended September 30, 2014 and 2013, respectively, as the impact of these shares would be anti-dilutive. Excluded from the shares used in calculating the diluted earnings per common share in the above table are options to purchase approximately 2,535,314 and 2,541,300 shares of common stock for the nine months ended September 30, 2014 and 2013, respectively, as the impact of these shares would be anti-dilutive.