Stockholders’ Equity and Employee Stock Option Plans

(a) Tax Benefit Preservation Plan

On April 22, 2016, the Company announced that its Board of Directors (the “Board”) had adopted a Tax Benefit Preservation Plan (the “Tax Plan”) pursuant to which the Board authorized and declared a dividend distribution of one right (a “Right”) for each outstanding share of common stock of the Company to stockholders of record as of the close of business on May 6, 2016. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, par value $0.01 per share, exercisable, except in certain circumstances, in the event that a person or group of affiliated or associated persons obtain beneficial ownership of 4.99% or more of the outstanding shares of the Company's common stock. The complete terms of the Rights are set forth in the Tax Plan, dated as of April 22, 2016, between the Company and Computershare Inc., as rights agent, and filed with the Securities and Exchange Commission on April 26, 2016. By adopting the Plan, the Board is helping to preserve the value of certain deferred tax benefits, including those generated by net operating losses (collectively, the “Tax Benefits”), which could be lost in the event of an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). The Plan reduces the likelihood that changes in the Company’s investor base will have the unintended effect of limiting the Company’s use of its Tax Benefits. The Board has established procedures to consider requests to exempt certain acquisitions of the Company’s securities from the Plan if the Board determines that it is in the best interests of the Company. Until they become exercisable, the Rights are inseparable from and trade with the Company's shares of common stock. The Rights have a de minimus fair value. The Tax Plan expires April 25, 2019.

(b) Stock Option Programs

The Company grants equity compensation awards under the 2016 Equity Incentive Plan (the "2016 Plan") and the 2016 Inducement Equity Incentive Plan (the "2016 Inducement Plan"). Prior to adoption of these Plans in 2016, the Company granted equity compensation awards under the 1997 Stock Plan (the “1997 Plan”), which was terminated as of October 4, 2016. A more detailed description of each of the Plans can be found below.

Stock option and other equity compensation grants are designed to reward employees, officers, directors, and certain non-employee consultants for their long-term contribution to the Company, to align their interest with those of the Company's stockholders in creating stockholder value, and to provide incentives for them to remain with the Company. The number and frequency of equity compensation grants is based on competitive practices, operating results of the Company, and accounting regulations.

Historically, the Company has issued new shares upon the exercise of stock options. However, treasury shares are also available for issuance, although the Company does not currently intend to use treasury shares for this purpose.

2016 Equity Incentive Plan

In October 2016, the Company adopted the 2016 Equity Incentive Plan (the "2016 Plan") for employees, officers, directors, and non-employee consultants. In setting the initial share reserve under the 2016 Plan of 500,000 shares, the Company considered the number of outstanding awards and forecasted grants under the Plan. In addition to the initial share reserve of 500,000 shares, the 2016 Plan also includes any shares subject to awards under the 1997 Plan that, after the termination of the 1997 Plan, expire or otherwise terminate without having vested or without having been exercised in full and any shares issued pursuant to awards granted under the 1997 Plan that are forfeited to or repurchased by the Company.

As of December 31, 2017, there were a total of 1.1 million shares of Common Stock reserved for issuance under the 2016 Plan, of which 892,629 were subject to outstanding awards and 187,982 shares remained available for new awards under the Plan. Stock options granted under the 2016 Plan generally have a term of 10 years, and the exercise price of said stock options is determined by the Board of Directors (or a Committee of the Board of Directors), and, except for limited circumstances, will be at least equal to 100% of the fair market value per share of common stock on the date of grant (or at least 110% of such fair market value for an incentive stock option granted to a stockholder with greater than 10% voting power of all stock). RSUs, Performance Units, and Performance Shares issued by the Company under the 2016 Plan generally vest ratably over 2 to 3 years. In addition, certain of these awards have additional financial-based performance requirements that must be met before vesting can occur. Awards with performance-based vesting conditions expire no later than the 5 year anniversary of the grant date if the performance criteria have not been met.

The 2016 Plan also allows for the issuance of stock purchase rights and options that are immediately exercisable through execution of a restricted stock purchase agreement. Shares purchased pursuant to a stock purchase agreement may (but are not required to) be subject to vesting conditions, and the shares acquired may not be transferred by the participant until the vesting conditions (if any) are satisfied. In the event of termination of employment, the Company, at its discretion, may repurchase unvested shares at a price equal to the original issuance price. In addition, the 2016 Plan allows for the issuance of stock appreciation rights (“SARs”), restricted stock units (“RSUs”), and Performance Units and Performance Shares. SARs are rights to receive, in cash or shares of the Company's common stock, as designated on the grant date, the appreciation in fair market value of common stock between the exercise date and the date of grant. SARs may be granted alone or in tandem with options. The exercise price of a SAR will be at least equal to 100% of the fair market value per share of common stock on the date of grant. RSUs, Performance Units, and Performance Shares are awards that result in a payment to a participant, generally in the form of an issuance of shares of the Company's common stock, at such time as specified performance goals or other vesting criteria are achieved or the awards otherwise vest.

2016 Inducement Equity Incentive Plan

On April 20, 2016, the Company filed a Registration Statement on Form S-8 with the Securities and Exchange Commission to register 250,000 shares of common stock to be issued pursuant to the 2016 Inducement Plan. The purpose of the Inducement Plan is to facilitate the Company's ability to attract and retain the best available new hires by providing an inducement to such individual entering into employment with the Company or subsidiary of the Company. The Inducement Plan permits the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, and performance shares, each with terms similar to those governed by the previously discussed 2016 Plan. Each award under the Inducement Plan is intended to qualify as an employment inducement award under NASDAQ Listing Rule 5635(c)(4).

As of December 31, 2017, there were a total of 235,000 shares of Common Stock reserved for issuance under the 2016 Inducement Plan, of which 89,000 were subject to outstanding awards and 146,000 shares remained available for new awards under the Plan.

1997 Stock Plan (terminated October 4, 2016)

During 1997, the Company adopted the 1997 Stock Plan for employees, officers, directors, and non-employee consultants, which was amended and restated in May 2004, and further amended and restated in April 2013. During 2013, the Board determined that it was in the best interest of the Company and the stockholders to amend and restate the Plan. In setting the share reserve under the amended Plan, the Company considered the number of outstanding awards and forecasted grants under the Plan. As of March 31, 2013 a total of 2,097,283 shares of its Common Stock were reserved for issuance under the Plan, of which 550,540 shares were subject to outstanding awards and 1,546,743 shares remained available for new awards under the Plan. Upon approval of the amended Plan by the shareholders, the total number of shares issuable under the Plan after March 31, 2013, was reduced from 2,097,283 to 1,090,540, including the 550,540 shares subject to current outstanding awards plus an additional 540,000 shares for future new awards. In determining the size of the share reserve, the Company took into account historical grant practices and the rate of granting equity awards (“burn rate”). As discussed above, the 1997 Plan was terminated on October 4, 2016. As of the termination date, all outstanding awards granted under the 1997 Plan were transferred to the 2016 Plan. However, they will continue to be governed by the terms of the 1997 Plan.

Under the 1997 Plan, incentive stock options to purchase shares of common stock were eligible to be granted at not less than 100% of the fair market value. Options granted from May 6, 2003 to March 31, 2013, generally have a term of 5 years from the date of grant. All other options granted generally have a term of 10 years. The exercise price of stock options granted under the 1997 Plan is determined by the Board of Directors (or a Committee of the Board of Directors), but were at least equal to 100% of the fair market value per share of common stock on the date of grant (or at least 110% of such fair market value for an incentive stock option granted to a stockholder with greater than 10% voting power of all stock). Options generally vested ratably over four years.

The 1997 Plan also allowed for the issuance of stock purchase rights and options that were immediately exercisable through execution of a restricted stock purchase agreement. Shares purchased pursuant to a stock purchase agreement generally vested ratably over 4 years. In the event of termination of employment, the Company, at its discretion, may repurchase unvested shares at a price equal to the original issuance price. In addition, the 1997 Plan allowed for the issuance of stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), and restricted stock units (“RSUs”). SARs are rights to receive, in cash or shares of the Company's common stock, as designated on the grant date, the appreciation in fair market value of common stock between the exercise date and the date of grant. To date, the Company has only issued SARs that can be settled in shares of the Company's common stock. SARs may be granted alone or in tandem with options. The exercise price of a SAR will be at least equal to 100% of the fair market value per share of common stock on the date of grant. SARs issued by the Company generally vest in equal, annual installments over 4 years, and expire on the 5 year anniversary of the grant date. RSUs and RSAs are awards that result in a payment to a participant, generally in the form of an issuance of shares of the Company's common stock, at such time as specified performance goals or other vesting criteria are achieved or the awards otherwise vest. RSUs and RSAs issued by the Company generally vest in equal, annual installments over 4 years. In addition, certain of these RSU and RSA grants have additional financial-based performance requirements that must be met before vesting can occur. RSUs and RSAs with performance-based vesting conditions expire no later than the 5 year anniversary of the grant date if the performance criteria have not been met.

The following table summarizes stock award activity under all plans for the years ended December 31, 2017 and 2016:



			Options Outstanding
	Shares Available for Grant		Number Outstanding		Weighted-Average Exercise Price Per Share
BALANCE AT DECEMBER 31, 2015	517,505		285,536		$	24.72
New plan shares approved	750,000		—		—
Unissued shares eliminated from plan	(13,346	)	—		—
Options granted	(275,250	)	275,250		5.07
RSUs granted	(460,209	)	—		—
Options and stock appreciation rights cancelled	54,914		(54,914	)	25.50
RSUs cancelled	29,211		—		—
BALANCE AT DECEMBER 31, 2016	602,825		505,872		$	13.94
Options granted	(20,000	)	20,000		7.18
RSUs granted	(454,783	)	—		—
Options and stock appreciation rights cancelled	100,150		(100,150	)	23.92
RSUs cancelled	105,790		—		—
Balance at DECEMBER 31, 2017	333,982		425,722		$	11.28

The total intrinsic value of options and SARs exercised during the years ended December 31, 2017 and 2016 was approximately $0 and $0, respectively, as no options or SARs were exercised during this time. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.

The following table provides additional information regarding RSU and RSA activity for the years ended December 31, 2017 and 2016:



	Number of Shares Nonvested and Outstanding		Weighted-Average Grant Date Fair-Value
BALANCE AT DECEMBER 31, 2015	64,714		$	14.45
RSUs granted	307,770		5.21
RSUs vested and released	(23,993	)	14.31
RSUs cancelled	(17,328	)	17.06
BALANCE AT DECEMBER 31, 2016	331,163		$	5.74
RSUs granted	454,783		4.88
RSUs vested and released	(136,928	)	6.22
RSUs cancelled	(93,112	)	5.31
BALANCE AT DECEMBER 31, 2017	555,906		$	4.99

The fair value of each RSU and RSA granted to employees was estimated on the date of grant by multiplying the number of shares granted times the fair market value of the Company's stock on the grant date.

The total intrinsic value of RSUs and RSAs vested and released during the years ended December 31, 2017 and 2016 was approximately $685,400 and $118,000, respectively. The intrinsic value of vested and released RSUs and RSAs is calculated by multiplying the fair market value of the Company's stock on the vesting date by the number of shares vested. As of December 31, 2017, the number of RSUs and RSAs outstanding was 555,906, with a total intrinsic value of $3.1 million. The intrinsic value of the outstanding RSUs and RSAs is calculated based on the market value of the Company's closing stock price of $5.54 as of December 29, 2017, the last market trading day of 2017.

The following table provides additional information for significant ranges of outstanding and exercisable stock options and SARs as of December 31, 2017:



Exercise Price Range	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price per Share		Aggregate Intrinsic Value
$4.51	20,000	8.38	$	4.51	$	20,600
5.22	182,000	8.74	5.22		58,240
5.45 - 9.10	31,500	8.81	7.01		675
9.11	73,000	7.45	9.11		—
9.15 - 23.70	81,590	6.03	21.29		—
$24.20 - $32.50	37,632	4.77	30.24		—
Outstanding	425,722	7.64	$	11.28	$	79,515
Vested and expected to vest	418,607	7.64	$	11.35	$	77,790
Exercisable	345,103	7.43	$	12.41	$	57,168

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company's closing stock price of $5.54 as of December 29, 2017, which would have been received by the option holders had all option holders exercised their options as of that date.