NOTE 8 — STOCKHOLDERS’ EQUITY

Preferred Stock

The Board, without further stockholder authorization, may issue from time to time up to 1,000,000 shares of the Company’s preferred stock. Of the 1,000,000 shares of preferred stock, 500,000 shares are designated as Series B Junior Participating Cumulative Preferred Stock. As of December 31, 2014 and 2013, none of the preferred stock was outstanding.

The Company has adopted a stockholder rights plan under which one preferred stock purchase right was distributed on January 11, 1999 with respect to each share of common stock outstanding at the close of business on December 31, 1998 and with respect to each share of common stock issued by the Company since then. The rights expire on December 31, 2018. While the rights are outstanding, they provide, among other things, that in the event any person becomes the beneficial owner of at least 20% of common stock outstanding (subject to certain exceptions), each right will be exercisable to purchase shares of Company common stock having a market value equal to two times the then current exercise price of a right (initially $30.00). The rights also provide that, if on or after the occurrence of such event, the Company merges with any other corporation or 50% or more of its assets or earning power are sold, each right will be exercisable to purchase common stock of the acquiring corporation having a market value equal to two times the then current exercise price of such stock. The Board may, at its option, authorize and direct the redemption of all, but not less than all, of the then-outstanding rights at a redemption price of $0.001 per right, subject to adjustment for any stock split, stock dividend or transaction occurring after December 31, 1998.

Common Stock

At December 31, 2014, the Company had 58,115,000 shares of Company common stock issued and outstanding. The Company currently has 100,000,000 shares of Company common stock authorized for issuance. On July 18, 2014, the Company retired 1,963,500 shares of Company common stock held in treasury at that date. The Company recorded the cost of the treasury stock retired as a $2,000 reduction to common stock and a $16,397,000 reduction in additional paid in capital.

2014 common stock issuances

On November 7, 2014, the Company completed a private placement (the “November 2014 Private Placement”) with several institutional and individual investors, and certain of its directors and officers, under which the Company agreed to sell an aggregate of 14,162,873 unregistered shares of Company common stock at the price of $2.39 per share, the closing price of Company common stock on November 3, 2014, and warrants to purchase up to an aggregate of 9,205,862 unregistered shares of its common stock at an exercise price of $4.00 per share. Gross proceeds from the sale totaled $35.0 million, and net proceeds, after offering expenses of approximately $235,000, were approximately $34.8 million. The warrants become exercisable on May 7, 2015, six months after the closing of the private placement, and have a term of three years from the date of issuance. The Company is using the proceeds for working capital and general corporate purposes. In connection with the registration rights granted to these investors, the Company filed a registration statement on Form S-3 with the SEC, which was declared effective on December 12, 2014.

On July 22, 2014, the Company completed a private placement with several institutional and individual investors, and several of our directors and officers, wherein the Company sold 6,250,000 unregistered shares of Company common stock at a price of $1.92 per share (the closing price of Company common stock on July 18, 2014). Gross proceeds from the sale totaled $12.0 million, and net proceeds, after offering expenses of approximately $462,000, were approximately $11.5 million. The Company used the proceeds to repay the Company’s lines of credit with Comerica Bank and for working capital and general corporate purposes. In connection with the registration rights granted to these investors, the Company filed a registration statement on Form S-3 with the SEC, which was declared effective on September 18, 2014.

On February 10, 2014, the Company entered into a subscription agreement with Oracle Partners L.P., Oracle Institutional Partners, L.P., and Oracle Ten Fund Master, L.P., under which the Company offered an aggregate of 1,945,525 unregistered shares of Company common stock in a private placement at a price of $2.57 per share. Gross proceeds from the sale totaled $5.0 million and net proceeds, after offering expenses of approximately $188,000, totaled approximately $4.8 million. The Company used the proceeds for working capital and general corporate purposes.

2013 common stock issuances

On December 19, 2013, the Company entered into a subscription agreement with Oracle Ten Fund Master, LP under which the Company offered an aggregate of 340,000 unregistered shares of Company common stock in a private placement at a price of $1.80 per share. Gross proceeds from the sale totaled $612,000, and net proceeds, after offering expenses of approximately $30,000, totaled approximately $582,000. The Company used the proceeds for working capital and general corporate purposes.

On July 26, 2013, the Company filed a registration statement on Form S-3, File No. 333-190158 (“2013 Registration Statement”) with the SEC to register an indeterminate number of shares of Company common stock, preferred stock, and warrants with a total offering price not to exceed $5 million. The 2013 Registration Statement was declared effective by the SEC on September 19, 2013. On September 23, 2013, the Company entered into an agreement with Northland Securities, Inc. (“Northland”), pursuant to which Northland acted as placement agent in connection with the sale of 2,688,172 shares of its common stock at a price of $1.86 per share. Gross proceeds from the sale totaled $5 million, and net proceeds after offering expenses of $408,000, which included Northland’s fee, totaled approximately $4.6 million.

Stock dividends

The Board declared one-half percent stock dividends during each of the four quarters of 2013. The stock dividend declared during the quarter ended December 31, 2013 was payable December 30, 2013 to shareholders of record on December 16, 2013. The stock dividend declared during the quarter ended September 30, 2013 was payable September 13, 2013 to shareholders of record on August 30, 2013. The stock dividend declared during the quarter ended June 30, 2013 was payable June 28, 2013 to shareholders of record on June 14, 2013. The stock dividend declared during the quarter ended March 31, 2013 was payable March 29, 2013 to shareholders of record on March 15, 2013. All stock information presented, other than that related to stock options and warrants, has been adjusted to reflect the effects of stock dividends.

In February 2014, the Board announced a 2% annual stock dividend policy for 2014, payable in quarterly installments, and declared a one-half percent stock dividend payable March 28, 2014, to stockholders of record on March 14, 2014. No additional stock dividends were declared by the Board in 2014.

Stock dividends are discussed quarterly by the Board and management. The actual declaration of future stock dividends and the establishment of the record and payment dates are subject to final determination by the Board after its review of the Company’s financial performance, the expected results of future operations, availability of shares, and other factors that the Board may deem relevant. The Company’s dividend policy may be changed at any time by the Board, and there is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.

Stock repurchase program

On August 10, 2011, the Company announced that its Board authorized a stock repurchase program, pursuant to which the Company was authorized to repurchase up to an aggregate of 2,000,000 shares of the Company’s outstanding common stock. The stock repurchase program became effective on August 12, 2011 and expired on August 12, 2013. Pursuant to the stock repurchase program, the Company repurchased 133,365 shares of the Company’s common stock at a weighted average price of $1.73 during the year ended December 31, 2012.

Warrants

The Company issues warrants for the sale of its common stock as approved by its Board. Warrants to purchase up to an aggregate of 9,205,862 unregistered shares of Company common stock at an exercise price of $4.00 per share were issued in connection with the November 2014 Private Placement and are accounted for within stockholders’ equity on the consolidated balance sheets in accordance with GAAP. In addition to the aforementioned warrants issued in connection with common stock transactions, the Company has issued warrants in connection with strategic initiatives as follows:

On July 12, 2013, the Company entered into a strategic agreement with Valam, Inc. (“Valam”) to develop, market, and sell office-based laser systems to otolaryngologists (also known as “Ear, Nose, and Throat” or “ENT” doctors) (the “Valam Agreement”). The Valam Agreement provides the Company with an exclusive worldwide license to Valam’s ENT related patents and pending patents which complement the Company’s patent portfolio and support the Company’s launch into the ENT laser market beginning in late 2013. In connection with the Valam Agreement, the Company issued Valam a warrant to purchase up to 165,000 shares of Company common stock, at a modified price per share of $4.00 (the “Valam Warrant”), which is a decrease from the original agreed upon price per share of $6.00. The Valam Warrant is performance-based and vests as follows: 30,000 warrants upon the launch of the Company’s first ENT laser; 55,000 warrants upon the receipt of certain specified clearances required from the U.S. Food and Drug Administration (the “FDA”); 40,000 warrants upon achieving $5 million in ENT laser revenues for a 12-month period; and 40,000 warrants upon achieving $10 million in ENT laser revenues for a 12-month period. Vested warrants may be exercised with a cash payment, or on a cashless basis. The Valam Warrant expires on July 14, 2020. As of December 31, 2014 and 2013, in connection with the Valam warrant, 30,000 warrants have been earned and stock-based compensation costs of approximately $41,000 have been recognized.

On April 26, 2013, the Company issued a warrant to Sun Dental Laboratories, LLC (“Sun Dental Labs”) to purchase up to 500,000 shares of Company common stock, at a price per share of $5.90 (the “Sun Dental Warrant”). The Sun Dental Warrant was performance-based and vested at a rate of 1,000 shares per each 3Shape A/S (“3Shape”) Trios intraoral scanner (“Trios IOS”) that Sun Dental Labs assists in selling in conjunction with the agreement. The Sun Dental Warrant expired on April 24, 2014. The Company recorded stock-based compensation expense of $0 and less than $1,000 related to the Sun Dental Warrant during the years ended December 31, 2014 and 2013.

On April 18, 2013, the Company issued to an investor relations firm a warrant (the “2013 IR Warrant”) to purchase up to 60,000 shares of Company common stock at a price per share of $5.10. The 2013 IR Warrant vests and becomes exercisable only if the closing price of Company common stock on NASDAQ reaches or exceeds $7.50 per share. In July 2014, the Company ceased its relationship with the investor relations firm and cancelled the 2013 IR Warrant. For the years ended December 31, 2014 and 2013, no stock-based compensation was recognized.

On March 23, 2013, the Company issued to a consultant two tranches of warrants to purchase up to 100,000 shares of Company common stock, at a price per share of $4.50 (the “CMR Warrant”). The first tranche of 50,000 warrants vests and becomes exercisable only if Company common stock closing price on NASDAQ reaches or exceeds $6.00 per share. The first tranche of 50,000 warrants was cancelled during the year ended December 31, 2014 and the second tranche of 50,000 warrants was cancelled during the year ended December 31, 2013. As of December 31, 2014 and 2013, no stock-based compensation had been recognized for the CMR Warrant.

On November 8, 2012, the Company issued to an investor relations consultant a warrant (the “2012 IR Warrant”) to purchase up to 50,000 shares of Company common stock, at a price per share of $2.50. The 2012 IR Warrant was subject to a vesting and exercisability condition which would have been met upon closing price of Company common stock on NASDAQ reaching or exceeding $7.00 per share by November 7, 2013. Furthermore, the 2012 IR Warrant called for immediate vesting of 25,000 shares upon early termination of the arrangement. The Company terminated the arrangement during the year ended December 31, 2013 and therefore recognized stock-based compensation of approximately $64,000 and issued 9,296 net shares of Company common stock pursuant to the 2012 IR Warrant during the same period.

During September 2010, the Company issued to three service providers who provide investor services a warrant (the “2010 IR Warrant”) to purchase an aggregate of 50,000 shares of Company common stock at a price per share of $0.74. Pursuant to the 2010 IR Warrant, the service providers were also entitled to a second tranche of 2010 IR Warrant to purchase an aggregate of 50,000 shares of Company common stock at a price per share of $0.74. The 2010 IR Warrant was fully exercised during the year ended December 31, 2012. In connection with the issuance of the 2010 IR Warrant, the Company recognized expenses of approximately $23,000 for the year ended December 31, 2012.

The Company also issued warrants to its lenders. See Note 5 — Lines of Credit and Other Borrowings for further discussion.

Stock Options

The Company currently has one stock-based compensation plan, the 2002 Stock Incentive Plan (as amended effective as of May 26, 2004, November 15, 2005, May 16, 2007, May 5, 2011, June 6, 2013, and October 30, 2014) (the “2002 Plan”), which will expire on May 5, 2019. Persons eligible to receive awards under the 2002 Plan include certain officers and employees of the Company, and directors of the Company, as well as consultants. As of December 31, 2014, a total of 9,250,000 shares have been authorized for issuance under the 2002 Plan, of which 2,993,000 shares of Company common stock have been issued pursuant to options that were exercised, 3,475,000 shares of Company common stock have been reserved for options that are outstanding, and 2,782,000 shares of Company common stock remain available for future grant.

Stock options may be granted as incentive or non-qualified options; however, no incentive stock options have been granted to date. The exercise price of options is at least equal to the market price of the stock as of the date of grant. Options may vest over various periods but typically vest on a quarterly basis over three years. Options expire after five years, ten years or within a specified time from termination of employment, if earlier. The Company issues new shares of Company common stock upon the exercise of stock options. The following table summarizes option activity:

The following table summarizes additional information for those options that are outstanding and exercisable as of December 31, 2014:

Cash proceeds, along with fair value disclosures related to grants, exercises, and vesting options, are as follows for the years ended December 31 (in thousands, except per share amounts):

On January 2, 2015, the Compensation Committee of the Board granted non-qualified stock options to purchase 1,365,702 shares of Company common stock to certain officers of the Company in connection with a new compensation plan for 2015 and 86,000 shares of Company common stock to members of the Dental Professional Advisory Board (“DPAB”) as consultants for the Company. These options were granted at an exercise price of $2.64, the closing market price of the Company’s stock on grant date. Options granted to certain officers of the Company expire ten years from grant date and vest as follows: (i) as to 50% of the options, one-fourth on the one-year anniversary of the grant date and the remaining three-fourths, ratably over the next thirty-six month period, commencing on the thirteenth month from grant date, and (ii) as to 50% of the options, upon achievement of specific annual Company performance criteria. Options granted to the DPAB fully vest and become exercisable upon the achievement of specified performance conditions, as defined in the consulting agreements, and expires five years from grant date.

On June 6, 2013, the Board granted stock options to purchase 350,000 shares of Company common stock to Alexander K. Arrow in connection with his appointment to President and Chief Operating Officer. These stock options were granted at an exercise price of $4.00 per share and vest and become exercisable in equal quarterly amounts over a four-year period beginning on June 6, 2014. During the year ended December 31, 2014, Mr. Arrow ceased employment with the Company and forfeited 306,250 unvested stock options. His stock options expire on February 28, 2016.

On May 7, 2012, the Board granted to a consultant non-qualified stock options to purchase 65,000 shares of Company common stock, at a price per share of $2.55, the closing market price of Company common stock on the grant date. The options fully vest and become exercisable upon the achievement of specified performance conditions, as defined in the consulting agreement with this consultant, and the option expires five years from the grant date. The consulting agreement was terminated and the options were cancelled during the year ended December 31, 2014.  As of December 31, 2014 and 2013, no stock-based compensation has been recognized in connection with these options.

Other Stock-Based Awards

On July 13, 2014, the Compensation Committee of the Board of the Company approved the Chief Executive Officer’s stock-based compensation consisting of non-qualified stock options to purchase 172,282 shares of Company common stock at an exercise price of $1.98 per share and 37,879 restricted stock units ("RSUs") valued at $1.98 per share. One-sixth of the stock options and one-sixth of the RSUs vested immediately, with the remaining five-sixths vesting ratably on a monthly basis over the twelve-month period ending on July 13, 2015. The fair value of the stock options of $1.31 per share was estimated using the Black-Scholes option-pricing model with assumptions of 3.6 years for expected term, 98.37% volatility and 1.65% risk-free interest rate.

On August 27, 2014, each non-employee director of the Company was granted 9,217 RSUs, totaling 36,868 RSUs valued at $2.17 per share, which vest over a 12-month period.