In November 2007, the Company adopted the 2007 Stock Option and Incentive Plan (“the 2007 Plan”) authorizing the issuance of up to 10 million shares of the Company’s common stock as awards to selected employees, directors and consultants of the Company and its affiliates, in the form of incentive stock options, non-qualified stock options, and stock awards. In June 2010, the Company adopted the 2010 Stock Option and Incentive Plan (“the 2010 Plan”) authorizing the issuance of up to 5 million shares of the Company’s common stock to employees, directors and consultants of the Company and its affiliates, as incentive stock options and non-qualified stock options. The 2010 Plan was amended in April 2012 to authorize the issuance of an additional 2.5 million shares. After receiving a recommendation from the Remunerations and Nominations Committee, the Company's Board of Directors determines the number of shares, the term, the frequency and date, the type, the exercise periods, and any performance criteria pursuant to which stock option awards may be granted and the restrictions and other terms and conditions of each grant of restricted shares in accordance with the terms of the 2007 and 2010 Plans.

 

As discussed further in Note 20, in December of 2012 the Company’s Board of Directors authorized a Special Committee of independent directors to conduct a review of the Company’s past stock issuances and stock option grants to determine that they were in accordance with the relevant incentive plans. The Special Committee found that three option awards – one under the 2007 Plan, and two under the 2010 Plan – exceeded the applicable plan caps on the number of shares covered by an award issued to a single recipient in a particular year. Specifically, a 2009 award to the chief executive officer exceeded the cap in the 2007 Plan by 1.6 million shares, a 2011 award to the chief executive officer exceeded the cap in the 2010 Plan by 2.5 million shares, and a 2011 award to another officer exceeded the cap in the 2010 Plan by 250 thousand shares.

 

It is the Company’s intention that the option awards that exceeded the caps will be cancelled and appropriate alternative compensation packages will be developed for the affected employees. These awards were determined to be reasonable compensation at the time, and were an important incentive component of the employees' compensation packages (see Note 20 – Subsequent Events).

 

The information below includes the stock options, as discussed above, which the Company intends to cancel, because they are outstanding at December 31, 2012.

 

Stock Option Awards – In 2009, the Board of Directors awarded 4.6 million stock options to officers and employees, and an additional 100 thousand options to two former outside directors of the Company at exercise prices ranging from $0.14 - $0.16 per share. In 2010, the Company granted 800 thousand options to outside consultants at an exercise price of $0.45 per share, under the 2010 Plan. In January 2011, the Company granted 750 thousand stock options to one of its executive officers at an exercise price of $0.46 per share, with graded vesting over three years, and in June 2011, the Company granted 3 million stock options to its Chief Executive Officer, with graded vesting over seven years. In 2012, the Company granted 1.4 million stock options to five of its executive officers, with cliff vesting after three years.

 

The exercise price of each option is the market price of the Company’s stock for the last sale prior to the grant date, converted to U.S. dollars using the exchange rate in effect on the grant date. The options generally expire after a period not to exceed ten years, except in the event of termination, whereupon vested options must be exercised generally within three months, or upon death or disability, in which cases the vested options must be exercised within twelve months, but in all cases the exercise date may not exceed the expiration date.

 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The resulting fair value is recorded as share-based compensation expense on either a straight line or a graded basis depending on the vesting terms, over the option vesting period, ranging from six months to seven years. The fair value of the options granted to former directors, in the amount of $14 thousand was charged to expense as of the grant date. The fair value of options granted to nonemployees is initially measured at grant date and remeasured each quarter until the vesting date, which is the measurement date for share-based compensation issued to nonemployees.

 

The weighted average fair value per share for options granted during 2012 and 2011 was $1.51 and $0.72, respectively. The fair values were estimated using the following range of assumptions:

 

		Year Ended December 31,
		2012		2011
Expected volatility (1)		54.13 – 58.75%		156.67 – 167.79%
Expected term (2)		6.50 years		6.00 – 7.25 years
Risk-free interest rate (3)		0.94 – 1.60%		1.93 – 2.19%
Dividend yield		-		-

 

In determining expected volatility, the Company uses historical volatility data for comparable companies because the period of active trading history of its own stock is less than the expected term of the options. In 2012, the Company refined its estimate of expected volatility, by adjusting the entities previously identified as comparable based on the growth and stage of the Company. This resulted in a lower volatility, which is consistent with the Company’s own stock price history. The Company made this determination in the fourth quarter for all grants issued in 2012. The effect on each of the previous three quarters in 2012 was not material to the quarterly or annual financial statements.

 

A summary of stock option activity for the year ended December 31, 2012 is as follows:

 

		Options			Weighted average exercise price			Weighted average remaining contractual term
		(in thousands)
Outstanding at January 1, 2012			8,822		$	0.43		8.43 years
Granted			1,375			2.77
Exercised			(1,849)			0.29
Forfeited			(30)			0.16
Outstanding at December 31, 2012			8,318			0.85		7.82 years
Exercisable at December 31, 2012			3,443			0.16		6.59 years
Options expected to vest			8,318			0.85		7.82 years

 

During the years ended December 31, 2012 and 2011, the Company recognized share-based compensation expense related to stock options of $1.4 million and $0.9 million, respectively, which is included in general and administrative expenses in the statements of operations. The total income tax benefit recognized in the income statement for share-based compensation costs was $351 thousand and $0 for 2012 and 2011, respectively. At December 31, 2012 there was $3.1 million of unrecognized share-based compensation expense. The weighted average period for this cost to be recognized is 1.6 years. As discussed above and in Note 20, stock compensation expense in future periods will increase due to the alternative compensation packages put in place or to be put in place for the two affected executives.

 

The aggregate intrinsic value of the stock options exercisable at December 31, 2012 and 2011 was $15.0 million and $5.2 million, respectively. The aggregate intrinsic value of options exercised during 2012 and 2011 was $5.7 million and $114 thousand, respectively. The aggregate intrinsic value of options expected to vest at December 31, 2012 was $30.6 million. This includes options issued in excess of plan limits discussed above, until such time as alternative compensation is determined.

 

For awards that are expected to result in a tax deduction, a deferred tax asset is recorded in the period in which share-based compensation is recognized. Any corporate income tax benefit realized upon exercise of a stock option award in excess of that previously recognized in earnings (referred to as an excess tax benefit) is presented in the consolidated statements of cash flows as a financing cash flow. Realized excess tax benefits are credited to additional paid-in-capital in the consolidated balance sheet and statement of changes in stockholders’ equity. Realized shortfall tax benefits (amounts which are less than that previously recognized in earnings) are first offset against the cumulative balance of excess tax benefits, if any, and then charged directly to income tax expense.

 

The Company sponsors a defined contribution 401(k) plan, which covers all U.S. employees. The Company’s matching contribution to the plan was $219 thousand in 2012. The Company did not offer an employer match in 2011.

 

In 2012, the Company adopted a non-compensatory stock purchase plan to facilitate the purchase of the Company’s common stock by employees and directors, at a purchase price equal to the average market value over the five trading days preceding the purchase date. The maximum aggregate dollar amount of shares which can be purchased under the plan in any quarter may not exceed $0.5 million. During 2012, employees and directors purchased 9,964 shares under the plan.