Stock-Based Compensation

Our stock-based compensation program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We consider our stock-based compensation programs critical to our operation and productivity. Currently, we grant options and restricted stock awards ("RSAs") from the 2005 Long-Term Incentive Plan ("2005 LTIP") and the 2010 Equity Compensation Plan (“2010 ECP”), approved by our shareholders on June 18, 2010. Option and restricted stock unit vesting periods are generally zero to three years.

On September 23, 2011, all unexpired stock options had their expiration term extended by 5 years from the date of grant. The extension of the termination period for these stock options increased the expected life of the options by approximately one year and accordingly increased the fair market value of these stock options by approximately $283,000, of which $117,000 was related to fully vested stock options and was recorded as a charge during the year ended December 31, 2011. The remaining $166,000 is being expensed over the remaining vesting periods.

On January 1, 2012, the number of shares of our common stock issuable under the 2010 ECP was increased by 100,357 shares due to the ever-green provision as part of the 2010 ECP. Additionally, effective February 29, 2012, our shareholders increased the number of shares of our common stock issuable under the 2010 ECP by 2.5 million shares. As of December 31, 2012, we had reserved under our 2005 LTIP 1.0 million shares of common stock for issuance and another 3,385,945 shares under our 2010 ECP.

On July 31, 2012, the company granted 445,500 RSAs, of which 296,505 were granted to our executive officers, certain of our senior management and our Board of Directors. These RSAs granted to our executive officers, certain of our senior management and our Board of Directors were subject to a 2012 performance target that was not met. As such, these RSAs did not vest. The remaining 148,995 RSAs were granted to the other members of the management team and vested on February 1, 2013 provided the grantee remained in the company’s employ on that date. Further, the company granted to non-management employees on July 31, 2012, 49,500 options to purchase the company’s common stock at $0.56 per share, the closing price of the stock on the grant date. The options fully vested on February 1, 2013 provided the grantee remained in the company’s employ on that date.

The following table summarizes the stock based compensation grants outstanding under our 2005 LTIP and 2010 ECP plans as of December 31, 2012:



	Options Outstanding	RSAs Outstanding	Options and RSAs Exercised	Available Shares	Total
2010 ECP	605,690	173,805	904,744	1,701,706	3,385,945
2005 LTIP	573,509	—	224,164	202,327	1,000,000
Total	1,179,199	173,805	1,128,908	1,904,033	4,385,945

The fair value of restricted stock units is determined using market value of the common stock on the date of the grant. The fair value of stock options is determined using the Black-Scholes-Merton valuation model. The use of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Under ASC 718, “Accounting for Stock Options and Other Stock Based Compensation,” forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. The forfeiture rate, which is estimated at a weighted average of 25% of unvested options outstanding, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

In 2011, we granted options to purchase 40,000 shares of common stock under the 2005 LTIP with an average exercise price of $2.05 per share. We also granted options to purchase 300,000 shares of common stock under the newly adopted 2010 ECP with an average exercise price of $2.93 per share.

We recorded stock-based compensation expense for all equity incentive plans of approximately $843,000 and $957,000 for the years ended December 31, 2012 and 2011, respectively.

At December 31, 2012, the aggregate intrinsic value of options outstanding under the 2005 LTIP and 2010 ECP plans was $0 with a weighted average remaining contractual term of 7.1 years, of which 896,101 of the outstanding options are currently exercisable with an aggregate intrinsic value of $0, a weighted average exercise price of $2.79 and a weighted average remaining contractual term of 6.9 years. There were no options exercised during the years ended December 31, 2012 and 2011. The total compensation cost at December 31, 2012 related to non-vested awards not yet recognized was approximately $444,000 that will be recognized over a weighted-average recognition period of 0.63 years. The total fair value of options vested during 2012 and 2011 was approximately $609,000 and $466,000, respectively. The weighted average fair value of options vested during 2012 was $2.28.

The following table summarizes information about stock options activity for our 2005 LTIP and 2010 ECP plans during the years ended December 31, 2012 and 2011:



	2012				2011
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding, beginning of year	1,358,717		$	2.81	1,223,159		$	3.74
Granted	49,500		$	0.56	340,000		$	2.83
Forfeited or expired	(229,018	)	$	3.09	(204,442	)	$	6.61
Exercised	—		$	—	—		$	—
Outstanding, end of year	1,179,199		$	2.66	1,358,717		$	2.81
Exercisable, end of year	896,101		$	2.79	629,043		$	3.03

The weighted average grant date fair value of options granted during 2012 and 2011 were $0.49 and $2.83, respectively. No option or warrant exercises occurred under any share-based payment arrangements during the years ended December 31, 2012 or 2011.

As part of the merger with Vertro on March 1, 2012, we had 118,842 options which were not part of the existing plans. During 2012, 8,020 of these options with a weighted average exercise price of $32.15 expired. At December 31, 2012, we had 110,822 options outstanding and exercisable under this plan with a weighted average exercise price of $69.00. The weighted average fair value of these options is $0, and their aggregate intrinsic value is also $0. The weighted average remaining contractual life of the outstanding and exercisable options is 2.16 years.

The following table summarizes information about stock options outstanding as of December 31, 2012, which includes 605,590 2010 ECP options and 573,509 2005 LTIP options:



Range of Exercise Price	Shares	Weighted Average Remaining Contractual Life ( Years)	Weighted Average Exercise Price
$0.00 – $3.00	1,128,949	2.49	$	7.20
$3.01 - $9.99	50,250	6.66	5.52
Total	1,179,199	7.13	$	2.66

In accordance with ASC 718, the fair values of options granted prior to adoption and determined for purposes of disclosure under ASC 718 have not been changed. There were 49,500 options granted during the year ended December 31, 2012. The fair value of options granted during the year ended December 31, 2012 and 2011 was estimated assuming the following weighted averages:



	2012		2011
Expected life (in years)	3.15		4.90
Volatility	174.2	%	163.4	%
Risk free interest rate	0.30	%	1.96	%
Dividend yield	—	%	—	%

Expected volatility is based on the historical volatility of our common stock over the period commensurate with or longer than the expected life of the options. The expected life of the options is based on the vesting schedule of the option in relation to the overall term of the option. The risk free interest rate is based on the market yield of the U.S. Treasury Bill with a term equal to the expected term of the option awarded. We do not anticipate paying any dividends so the dividend yield in the model is zero.

The following table summarizes our RSA activity for 2012:



	RSAs		Weighted Average Fair Value
Outstanding, beginning of year	322,276		$	1.73
Granted	1,271,008		$	0.78
Forfeited	(316,715	)	$	0.59
Vested	(1,102,764	)	$	1.13
Outstanding, end of year	173,805		$	0.70

Deferred Compensation and Stock Compensation

During the year ended December 31, 2011, our executive officers, certain of our senior management and our board of directors, voluntarily elected to defer a portion of their compensation. The amount of the deferred compensation was approximately $418,000 for our executive officers and senior management and $72,000 for our board of directors. As an incentive for officers, management and directors to participate in the elected deferrals, we granted them RSAs with a fair value equal to the amount of the deferred compensation, with the exception of the board of directors as they received approximately $36,000 in RSA’s. We paid approximately $15,000 of these deferred amounts in 2012 with the remaining amounts paid in our common stock. The RSAs vested upon the earlier of payment of the deferred compensation or one year from the date of grant. The number of RSAs granted in conjunction with the deferred compensation program was 326,291 for the year ended December 31, 2011 and were granted at an exercise price ranging from $1.09 per share to $2.94 per share on the date of each grant. As of December 31, 2011, none of the shares of restricted stock granted in connection with these elected deferrals were issued. Of these amounts, approximately $573,000 was recorded as stock compensation expense. No deferrals of compensation were made in 2012.