Quarterly report pursuant to Section 13 or 15(d)

Stock-Based Compensation

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Stock-Based Compensation
 9 Months Ended
Sep. 30, 2011
Stock-Based Compensation
4.
Stock-Based Compensation

At September 30, 2011, we have instruments outstanding under three stock-based compensation plans;  the Amended and Restated Stock Option and Restricted Stock Purchase Plan (the Amended Plan), the 1996 Stock Incentive Plan (the 1996 Plan), and the Third Amended and Restated 2002 Stock Incentive Plan (the 2002 Plan).  Currently, under the 2002 Plan, we may grant incentive stock options, nonqualified stock options, and restricted stock awards to full-time employees and directors, and nonqualified stock options and restricted stock awards may be granted to our consultants and agents.  Total shares authorized under each plan are 2 million shares, 1.5 million shares and 10 million shares, respectively.  Although instruments are still outstanding under the Amended Plan and the 1996 Plan, these plans have expired and no new grants may be made from them.  Under all three plans, the exercise price of each stock option is greater than or equal to the closing market price of our common stock on the day prior to or the date of the grant.
 
Stock options granted under the Amended Plan, the 1996 Plan and the 2002 Plan generally vest on an annual basis over one to four years.  Outstanding stock options under the plans, if not exercised, generally expire ten years from their date of grant or 90 days from the date of an optionee’s separation from employment with the Company.  We issue new shares of our common stock upon exercise of stock options.

Stock-based payments to employees and directors, including grants of stock options, are recognized in the consolidated statement of operations based on their estimated fair values.  The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model.  Expected volatilities are based on the Company’s historical volatility, which management believes represents the most accurate basis for estimating expected volatility under the current circumstances.  Neoprobe uses historical data to estimate forfeiture rates.  The expected term of stock options granted is based on the vesting period and the contractual life of the options.  The risk-free rate is based on the U.S. Treasury yield in effect at the time of the grant.

Compensation cost arising from stock-based awards is recognized as expense using the straight-line method over the vesting period.  Restricted shares generally vest upon occurrence of a specific event or achievement of goals as defined in the grant agreements.  We record compensation expense related to grants of restricted stock based on management’s estimates of the probable dates of the vesting events.

For the three-month periods ended September 30, 2011 and 2010, our total stock-based compensation expense was approximately $1.8 million and $249,000, respectively.  For the nine-month periods ended September 30, 2011 and 2010, our total stock-based compensation expense was approximately $3.1 million and $552,000, respectively.  Stock-based compensation expense for the first nine months of 2011 included approximately $1.5 million of expense related to the separation of our former President and CEO, David C. Bupp.  (See Note 7.)  We have not recorded any income tax benefit related to stock-based compensation in any of the three-month or nine-month periods ended September 30, 2011 and 2010.
 
A summary of the status of our stock options as of September 30, 2011, and changes during the nine-month period then ended, is presented below:

   
Nine Months Ended September 30, 2011
  
   
Number of
Options
    
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Life
  
Aggregate
Intrinsic
Value
  
Outstanding at beginning of period
     5,734,500     $ 0.58          
Granted
     281,000       3.56          
Exercised
     (2,341,333 )     0.36          
Forfeited
     (2,667 )     0.85          
Expired
     —       —          
Outstanding at end of period
     3,671,500     $ 0.95  
4.1 years
   $ 7,600,768  
                           
Exercisable at end of period
     2,707,200     $ 0.53  
2.4 years
   $ 6,573,347  

A summary of the status of our unvested restricted stock as of September 30, 2011, and changes during the nine-month period then ended, is presented below:

   
Nine Months Ended
September 30, 2011
  
   
Number of
Shares
    
Weighted
Average
Grant-Date
Fair Value
  
Unvested at beginning of period
     2,374,500     $ 1.07  
Granted
     872,000       3.46  
Vested
     (1,000,000 )     1.15  
Forfeited
     (686,000 )     0.80  
Unvested at end of period
     1,560,500     $ 2.46  

In April 2011, 1,000,000 shares of restricted stock vested related to the separation of Mr. Bupp.

As of September 30, 2011, there was approximately $1.7 million of total unrecognized compensation cost related to unvested stock-based awards, which we expect to recognize over remaining weighted average vesting terms of 1.9 years.