Note 10. Stock-based Compensation

9 Months Ended

Sep. 30, 2015

Notes

Note 10. Stock-based Compensation

Note 10.  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 633,730 shares.  The options vest subject to management’s discretion.

As of September 30, 2015, we had approximately 116,541 shares of common stock reserved for future issuance under the Plan.  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 140,000 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).

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 3,000 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 175,000 shares to be granted.  This Director Plan terminated effective August 31, 2015.

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 September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Cost of sales	$          5,142	$        12,968	$        18,855	$        43,592
Research and development	12,711	38,549	40,165	129,831
Selling, general and administrative	97,456	125,627	320,742	424,397
Total	$      115,309	$      177,144	$      379,762	$      597,820

During the nine months ended September 30, 2015, we granted employees a total of 114,250 stock options at a weighted average exercise price of $3.27 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 $1.55, and our weighted average assumptions used in the Black-Scholes valuation model to determine this estimated fair value were as follows:

Expected volatility	63.25%
Expected dividends	0%
Expected term	7.24 years
Risk-free interest rate	1.88%

Unrecognized stock-based compensation expense expected to be recognized over the estimated weighted-average amortization period of 1.81 years is approximately $725,000 as of September 30, 2015.

A summary of the time-based stock option awards as of September 30, 2015, and changes during the nine 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	513,193	$	22.46	7.03
Granted	114,250		3.27
Exercised	-		-
Forfeited or expired	(103,501)		37.81
Outstanding at September 30, 2015	523,942	$	15.24	6.82	$	7,245
Exercisable at September 30, 2015	229,647	$	28.02	3.87	$	-

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $1.85 as of September 30, 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.