NOTE 9—STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has authorized the issuance of 10,000,000 shares of preferred stock, which may be issued from time to time in one or more series by the Board of Directors. In addition, the Board is authorized to set the rights, preferences, privileges and restrictions of these shares, including dividends rights, conversion rights, voting rights and liquidation preferences. These shares may have rights senior to those of the Company’s common stock holders. As of December 31, 2014 and 2013, the Company did not have any preferred shares outstanding.

Common Stock

The Company has authorized the issuance of 40,000,000 shares of common stock. As of December 31, 2014 and 2013, a total of 14,358,062 and 14,184,145 shares, respectively, were outstanding.

Stock Options and Warrants

The Company has a single stock-based compensation plan: the 2006 Equity Incentive Plan (“2006 Plan”), which was approved by the Company’s stockholders. As of December 31, 2014, options to purchase 980,000 shares were outstanding under the 2006 Plan, and a total of 206,000 shares were available for grant.

The 2006 Plan was approved by stockholders in June 2006, with 1,000,000 shares of the Company’s common stock authorized for issuance there-under. An additional 348,208 shares of the Company’s common stock were rolled into the 2006 Plan from the 2003 Plan. The 2006 Plan is intended to provide incentives to key employees, officers, directors and consultants who provide significant services to the Company. The exercise price is determined by the Compensation Committee, but must be at least equal to the fair market value of the common stock on the date of grant of such option. The Compensation Committee also establishes the vesting schedule for each option granted and the term of each option, which cannot exceed 10 years from the date of grant. In the event of termination, vested shares must be exercised within three months. The 2006 Plan also provides for 100% vesting of outstanding options upon a change of control of the Company.

 

The Company’s stock options vest on an annual or a monthly basis. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Options granted generally vest over a three-year period. Income tax effects of share-based payments are recognized in the financial statements for those awards which will normally result in tax deductions under existing tax law. Under current U.S. federal tax law, we would receive a compensation expense deduction related to non-qualified stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation expense for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2014, 2013 and 2012: risk-free interest rates of 1.56%, 1.81% and 0.91%, respectively, based on the U.S. Treasury yields in effect at the time of grant; expected dividend yields of 0% as the Company has not, and does not intend to, issue dividends; and expected lives of 3 to 7 years based upon the historical life of the Company’s options. For grants in 2014, 2013 and 2012, the expected volatility used ranged from 93% to 109% based on the Company’s historical stock price fluctuations for a period matching the expected life of the options.

A summary of stock option activity for the year ended December 31, 2014 is as follows (shares and aggregate intrinsic value in thousands):

 

		Shares				Wtd. Avg. Exercise Price				Wtd. Avg. Remaining Contractual Life				Aggregate Intrinsic Value
Outstanding at December 31, 2013			893			$	0.72
Granted during fiscal year 2014			280			$	1.31
Exercised during fiscal year 2014			(174	)		$	0.78
Expired during fiscal year 2014			(12	)		$	3.00
Forfeited during fiscal year 2014			(7	)		$	0.73
Outstanding at December 31, 2014			980			$	0.85				4.81 years			$	297
Vested and expected to vest			922			$	0.83				4.69 years			$	292
Exercisable at December 31, 2014			568			$	0.65				3.49 years			$	250

The aggregate intrinsic value in the stock option summary table above is based on our closing stock price of $1.09 per share as of December 31, 2014, which value would have been realized by the optionees had all options been exercised on that date.

During the quarter ended June 30, 2010, the Company established a wholly owned subsidiary in Hong Kong to serve as the base for the Company’s sales and marketing efforts of its proprietary line of verykool^® products in Asia-Pacific. It also established a wholly owned subsidiary of the Hong Kong entity in China for the purpose of designing and developing verykool^® products. The Company funded the combined operations of these entities with $1.0 million and agreed to invest up to $1.0 million in additional funding as needed. In order to provide incentives to the China development team, the Company granted a warrant exercisable for 38% of the equity ownership of the Hong Kong subsidiary to a management company for the benefit of the China employees. The total exercise price of the warrant was $1.00, with vesting to occur one-third upon the first anniversary of the warrant and the remaining two-thirds to vest on a monthly basis over the succeeding 24 months. The warrant had a 6-year life, but was not exercisable until May 5, 2013, the third anniversary of its issuance. However, on April 24, 2013, the memorandum of understanding underlying the warrant was terminated as a consequence of the departure of key management members, which resulted in immediate cancellation of the unexercised warrant.

 

The Company evaluated the warrant on its Hong Kong subsidiary in accordance with ASC 718-50 and concluded that because the warrants were issued to the management company for allocation at its discretion, the proper treatment of the warrants was as specified in ASC 505-50 as equity-based payments to non-employees in exchange for services. The Company also concluded that the estimated fair value of the warrant at the date of grant was $365,000. The Company recorded the expense for this warrant based upon its estimated fair value on a straight-line basis over the three year performance period. The amount of expense recorded during the years ended December 31, 2013 and 2012 was $40,000 and $122,000, respectively. No expense was recorded in the year ended December 31, 2014.

A summary of the status of the Company’s non-vested options at December 31, 2014, and changes during the year then ended are presented below (shares in thousands):

 

		Shares				Weighted-average grant-date fair value
Non-vested at December 31, 2013			276			$	0.58
Granted			280			$	0.93
Vested			(137	)		$	0.58
Forfeited			(7	)		$	0.58
Non-vested at December 31, 2014			412			$	0.82

The weighted-average per share grant-date fair values of options granted during 2014, 2013 and 2012 were $0.93, $0.58 and $0.54, respectively. During the year ended December 31, 2014, a total of 174,000 option shares were exercised and the Company received $137,000 in cash, or an average of $0.79 per share, from these exercises. There were no option exercises during the two years ended December 31, 2013. The unrecognized stock-based compensation expense for future periods as of December 31, 2014 is $277,000, which is expected to be recognized over a weighted-average period of approximately 1.7 years. Such amount may change as a result of future grants, forfeitures, modifications in assumptions and other factors. The total fair value of options that vested during 2014, 2013 and 2012 was $80,000, $68,000 and $110,000, respectively.

The following table summarizes share-based compensation expense for the years ended December 31 (in thousands):

 

		2014				2013				2012
Selling, general and administrative:
Non-employee directors		$	19			$	11			$	18
Officers			39				40				63
Others			28				18				28
Total SG&A			86				69				109
Research and development			—				40				122
Total share-based compensation expense before taxes			86				109				231
Related deferred income tax benefits			—				—				—
Share-based compensation expense		$	86			$	109			$	231