Stockholders' Equity

Preferred Stock

Subsequent to the issuances of the preferred stock, the Company has undertaken a number of common stock offerings that impact the preferred stock conversion ratios. As of March 31, 2015, current Series A and B preferred stockholders holding 73,332 preferred shares are entitled to receive an aggregate of 123,114 shares (49,782 additional shares) of common stock upon conversion of their holdings, as a result of the conversion ratio adjustments. The number of shares issuable upon conversion is subject to further adjustment should the Company in the future undertake one or more offerings of its common stock at less than the prevailing market price.

The 49,782 incremental shares associated with the conversion ratio adjustment will be recorded to common stock upon conversion at par with the offset to additional paid in capital as all of the convertible preferred stock was issued prior to the November 16, 2000 effective date of certain provisions of Accounting Standards Codification 470 (formerly, Emerging Issues Task Force Issue No. 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments).

Common Stock

During the three months ended March 31, 2015, the Company issued 391,787 shares of common stock consisting of: 377,628 shares upon the exercise of stock purchase warrants and options for which the Company received $1,885,630; and 14,159 shares in connection with the vesting of 21,350 restricted share units.

Stock Purchase Warrants

At March 31, 2015, the Company had warrants outstanding to purchase shares of the Company's common stock consisting of the following:

Series	Number of Warrants		Exercise Price		Expiration Date
R		1,705,330	$	9.90	June 22, 2016
S		50,000	$	11.81	January 14, 2019
Total		1,755,330

During the three months ended March 31, 2015, a total of 326,933 warrants were exercised on a for cash basis consisting of 133,333 Series Q, 100,000 Series N, and 93,600 Series O warrants. A total of 326,933 shares of common stock were issued in connection with the warrant exercises. During the three months ended March 31, 2015, a total of 6,821 warrants were forfeited consisting of 4,634 Series O warrants and 2,187 Series P warrants.

Equity Based Compensation

Under the Equity Incentive Plan (the “EIP Plan”) the Company is authorized to issue 6,000,000 shares of common stock. The EIP Plan authorizes the Company to grant equity-based and cash-based incentive compensation in the form of stock options, stock appreciation rights, restricted shares, restricted share units, other share-based awards and cash-based awards, for the purpose of providing the Company's employees, non-employee directors and consultants with incentives and rewards for performance. At March 31, 2015, options to purchase 2,595,426 shares and 672,000 restricted share units were issued and outstanding under the EIP Plan and 1,805,895 shares were available for grant.

Stock Options

The EIP Plan permits the granting of both incentive and nonqualified stock options to employees and nonqualified stock options to non-employee directors and consultants of the Company. The option exercise price may not be less than the fair market value of the stock on the date of the grant of the option. The duration of each option may not exceed 10 years from the date of grant.

For the three months ended March 31, 2015 and 2014, the fair value of each option award was estimated at the date of grant using the Black-Scholes option-pricing model. The weighted-average assumptions used were as follows:

	Three Months Ended March 31,
	2015			2014

Risk-free interest rate		1.63	%		1.78	%
Volatility factor		46.0	%		63.2	%
Dividend yield		0	%		0	%
Expected option life (years)		5.77			5.89

The risk-free rate utilized represents the U.S. treasury yield curve rate for the expected option life at the time of grant. The volatility factor was calculated based on the Company's historical stock price volatility equal to the expected life of the option at the grant date. The dividend yield is 0% since the Company does not anticipate paying dividends in the near future. The simplified expected option life method is used to determine the expected option life for Company employees and directors while the contractual option life period is utilized for consultants.

Based on the Company's historical experience of options that were forfeited before becoming fully vested, the Company has assumed an annualized forfeiture rate of 1.0% for all options. The Company will record additional expense if the actual forfeiture rate is lower than estimated, and will record a recovery of prior expense if the actual forfeiture rate is higher than estimated.

A summary of the Company's stock option activity and related information for the three months ended March 31, 2015 is as follows:

	Options			Weighted Average Exercise Price

Outstanding – January 1, 2015		2,166,959		$	9.03
Granted		553,390		$	8.76
Forfeited		(30,280	)	$	12.25
Exercised		(94,143	)	$	3.97
Expired		(500	)	$	12.68

Outstanding – March 31, 2015		2,595,426		$	9.12
Expected to vest – March 31, 2015		2,569,472		$	9.12
Exercisable at March 31, 2015		1,796,759		$	8.55

During the three months ended March 31, 2015, the Company granted 395,390 service based options and 158,000 performance based options to Company employees. The weighted average fair value per share of options granted during the three months ended March 31, 2015 was $3.81.

During the three months ended March 31, 2015, 94,143 stock options were exercised on a for cash and cashless basis. A total of 50,695 shares of common stock were issued in connection with the stock option exercises. The intrinsic value of options exercised in 2015 was $409,402.

During the three months ended March 31, 2015 and 2014, stock option compensation expense was recorded as follows:

	Three Months Ended March 31,
	2015		2014
Cost of sales	$	72,703	$	85,177
Selling, general and administrative expenses		784,078		1,212,821
Research and development		46,789		20,786

Total stock option compensation expense	$	903,570	$	1,318,784

As of March 31, 2015, there was $2,311,012 of unrecognized compensation cost related to nonvested service based awards and $459,810 related to nonvested performance based awards. These costs are expected to be recognized over the options' remaining weighted average vesting period of 2.30 years and 0.76 years for the service and performance based awards, respectively.

Restricted Share Units

The Company has issued service, performance and market-based restricted share units to employees, consultants and directors of the Company. Expense for restricted share awards is amortized on a straight-line basis over the awards' vesting period. The fair value of service and performance awards are determined using the quoted market price of the Company's common stock on the date of grant, while market-based performance awards are valued using a binomial/lattice pricing model.

The following table summarizes the restricted share unit activity for the period:

	Number of Units			Weighted Average Fair Value
Unvested–January 1, 2015		651,883		$	8.47

Granted		47,500			8.69
Vested		(21,350	)		12.85
Forfeited		(6,033	)		10.75
Unvested–March 31, 2015		672,000		$	8.33

In connection with the vesting of restricted share unit awards during the three months ended March 31, 2015, 7,191 common stock shares with a fair value of $67,409 were withheld in satisfaction of employee tax withholding obligations.

During the three months ended March 31, 2015 and 2014, restricted share unit compensation expense was $652,741 and $674,916, respectively, and included in selling, general and administrative expense.

As of March 31, 2015, there was $2,516,096 of unrecognized compensation cost related to unvested restricted share units. These costs are expected to be recognized over the restricted shares units' remaining weighted average vesting period of 0.75 years.

In consideration of prior service, the Company accelerated the vesting of any unvested stock options and the restricted share units scheduled to vest in 2014 of a retiring director and extended the date to exercise vested stock options to 24 months (versus 90 days) from the date of retirement. An additional $48,536 of stock based compensation expense was recognized during the three months ended March 31, 2014 and included in selling, general and administrative expense in connection with the retirement.

Shares Reserved for Future Issuance

At March 31, 2015, the Company had reserved the following shares of common stock for future issuance:

Convertible preferred stock (series A – B)			73,332
Additional stock issuable related to conversion of preferred stock (series A – B)			49,782
Common stock options outstanding			2,595,426
Common stock warrants outstanding			1,755,330
Restricted share units outstanding			672,000
Common stock equivalents available for grant			1,805,895

Total common stock shares reserved			6,951,765