Note 9. Stock-based Compensation

3 Months Ended

Mar. 31, 2015

Notes

Note 9. Stock-based Compensation

Note 9.  Stock-Based Compensation

Our Third Amended and Restated 1998 Stock Incentive Plan (“Plan”) authorizes the granting of incentive stock options to certain key employees and non-employees who provide services to the Company.  The Plan, as amended, provides for the granting of options for an aggregate 6,337,300 shares.  The options vest subject to management’s discretion.

Effective February 4, 2009, our Fourth Amended and Restated 1998 Directors Stock Plan (the “Director Plan”) provides an annual retainer of $60,000 to each non-employee director with the exception of the Audit Committee Chairman who is to receive $65,000.  The cash portion of the compensation of $30,000 ($35,000 for the Audit Committee Chairman) is paid 50% twice each year, with $30,000 of compensation paid in common stock of the Company once each year.  Prior to February 4, 2009, the Director Plan granted each non-employee outside director 30,000 options each year at an exercise price equal to the fair market value of the common stock at the date the option was granted.  The options vest according to a set schedule over a five-year period and expire upon the director’s termination, or after ten years from the date of grant.  The Director Plan, as amended, allows for an aggregate of 1,750,000 shares to be granted.

As of March 31, 2015, we had approximately 1.809.131 shares of common stock reserved for future issuance under these stock incentive plans.  Also, in connection with our appointment of a Chief Executive Officer in November 2014, we issued an inducement equity award in the form of a non-statutory stock option to purchase 1,400,000 shares of the Company’s stock.  This grant was outside the Company’s stock incentive plans, and was in accordance with the NASDAQ inducement grant exception found in NASDAQ Listing Rule 5635(c)(4).

Stock-based compensation cost is measured at the grant date based on the estimated value of the award granted, using the Black-Scholes option pricing model, and recognized over the period in which the award vests.  For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. 

The stock-based compensation expense has been allocated to the various categories of operating costs and expenses in a manner similar to the allocation of payroll expense as follows:

	Three Months Ended March 31,
	2015	2014
Cost of sales	$          6,857	$        15,312
Research and development	14,743	45,641
Selling, general and administrative	114,103	145,560
Total	$      135,703	$      206,513

During the three months ended March 31, 2015, we granted employees a total of 400,000 stock options at an exercise price of $0.36 per share, with one third vesting each year for the next three years.  The estimated weighted average grant date fair value per share of these stock options was $0.18, and our weighted average assumptions used in the Black-Scholes valuation model to determine this estimated fair value were as follows:

Expected volatility	65.45%
Expected dividends	0%
Expected term	7.24 Years
Risk-free interest rate	1.95%

Unrecognized stock-based compensation expense expected to be recognized over the estimated weighted-average amortization period of 1.15 years is approximately $1,013,000 as of March 31, 2015.

A summary of the time-based stock option awards as of March 31, 2015, and changes during the three months then ended, is as follows:

	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contract Term (Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2014	5,131,919	$	2.25	7.03
Granted	400,000		0.36
Exercised	-		-
Forfeited or expired	(240,001)		2.27
Outstanding at March 31, 2015	5,291,918	$	2.10	6.47	$	20,000
Exercisable at March 31, 2015	2,896,918	$	3.28	4.09	$	-

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $0.41 as of March 31, 2015, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.