Stock-Based Compensation

6 Months Ended

Jun. 30, 2013

NOTE 2. Stock-Based Compensation

The Company has two equity incentive plans: the 2006 Equity Incentive Plan (“2006 Plan”) and the 2003 Stock Option Plan (“2003 Plan”). Each of the plans was approved by our stockholders. As of June 30, 2013, options to purchase 631,000 shares and 12,000 shares were outstanding under the 2006 Plan and the 2003 Plan, respectively, and a total of 717,000 shares are available for grant under the 2006 Plan. There are no options available for grant under the 2003 Plan.

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. Such amount may change as a result of additional grants, forfeitures, modifications in assumptions and other factors. 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. During the three and six months ended June 30, 2013, we recorded an expense of $25,000 and $52,000, respectively, related to options previously granted. During the three and six months ended June 30, 2012, we recorded an expense of $27,000 and $57,000, respectively, related to options previously granted. Under current U.S. federal tax law, we 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 that results in a deferred tax asset and a corresponding deferred tax benefit in our consolidated statements of operations.

During the six months ended June 30, 2013, the Company did not grant any stock options. During the six months ended June 30, 2012, the Company granted a stock option on 10,000 shares. The fair value of the option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 0.91% 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, declare dividends; and an expected life of 4 years based upon the historical life of options. The expected volatility used in the calculation was 109% based on the Company’s historical stock price fluctuations for a period matching the expected life of the options. As of June 30, 2013, there was $15,000 of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over the remaining weighted-average period of 0.21 years.

A summary of option activity under all of the above plans as of March 31, 2013 and changes during the three months then ended is presented in the table below (shares in thousands):


	Shares		Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Life
Outstanding at December 31, 2012		643	$	0.90		4.63
Granted		—	$	—		—
Exercised		—	$	—		—
Forfeited		—	$	—		—

Outstanding at June 30, 2013		643	$	0.90		4.13

Vested and expected to vest		643	$	0.90		4.13
Exercisable at June 30, 2013		610	$	0.91		4.09

A summary of the status of the Company’s non-vested options at June 30, 2013 and changes during the six months then ended is presented below (shares in thousands):


	Shares			Weighted-average grant-date fair value
Non-vested at December 31, 2012		139		$	0.50
Granted		—		$	—
Vested		(106	)	$	0.49
Forfeited		—		$	—

Non-vested at June 30, 2013		33		$	0.51

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. During the three and six months ended June 30, 2013, we recorded an expense of $10,000 and $40,000, respectively, related to this warrant. During the three and six months ended June 30, 2012, we recorded an expense of $30,000 and $60,000, respectively, related to this warrant. Because the warrant was fully amortized and cancelled, there will be no further amortization expense in future periods.

The Company’s stock-based compensation is classified in the same expense line items as cash compensation. Information about stock-based compensation included in the unaudited results of operations for the three and six months ended June 30, 2013 and 2012 is as follows (in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2013		2012		2013		2012
Officer compensation	$	15	$	16	$	31	$	32
Non-employee directors		4		5		9		10
Sales, general and administrative		6		6		12		15
Research and development		10		30		40		60

Total stock option/warrant expense, included in total operating expenses	$	35	$	57	$	92	$	117

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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