NOTE 5: STOCK-BASED COMPENSATION AND BENEFIT PLANS

Stock Compensation Expense Information

FASB ASC 718-10 requires measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. In June 2013, the Company’s shareholders approved an amendment to increase the number of shares reserved under the Amended and Restated 2006 Equity Incentive Plan to 1,720 and an amendment to increase the number of shares reserved under the Amended and Restated 2006 Non-Employee Director Stock Option Plan to 700. Compensation expense recognized for the issuance of warrants, stock options, restricted stock grants and stock bonuses for the three and nine months ended September 30, 2013 and 2012 was as follows:




		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2013		2012		2013		2012
Stock-based compensation costs included in:
Cost of sales	$	2	$	2	$	5	$	6
Sales and marketing expenses		10		20		29		61
Research and development expenses		9		7		24		46
General and administrative expenses		73		70		283		264
Total stock-based compensation expenses	$	94	$	99	$	341	$	377

At September 30, 2013, there was approximately $460 of total unrecognized compensation expense related to unvested share-based awards. Generally, this expense will be recognized over the next two years and will be adjusted for any future changes in estimated forfeitures.

Valuation Information for Stock-Based Compensation

For purposes of determining estimated fair value under FASB ASC 718-10, the Company computed the estimated fair values of stock options using the Black-Scholes model. The Company did not issue any stock options during the three months ended September 30, 2013 or 2012. The weighted average estimated fair value of stock options granted during the nine months ended September 30, 2013 and 2012 was $1.24 and $3.55 per share, respectively. The values set forth above were calculated using the following weighted average assumptions:




	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Expected life	n/a	n/a	4.26 years	4.18 years
Dividend yield	n/a	n/a	0%	0%
Expected volatility	n/a	n/a	94.6%	87.4%
Risk-free interest rate	n/a	n/a	0.6%	0.5 to 0.8%

The Company calculates the estimated expected life based upon historical exercise data. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company’s stock options. The Company uses historical closing stock price volatility for a period equal to the expected life of the respective award. The dividend yield assumption is based on the Company’s history and expectation of no future dividend payouts.

Stock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures. FASB 718-10-55 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company applied a pre-vesting forfeiture rate of 18.3% to 25.2% based on upon actual historical experience for all employee option awards. The Company continues to apply a zero forfeiture rate to those options granted to members of its board of directors.

In February 2013 and February 2012, the Company granted stock options for the purchase of an aggregate of 173 and 61 shares to two executive officers and certain key employees, respectively. In addition, each of the Company’s non-employee board members received stock options to purchase 20 and 7 shares of the Company’s stock in February 2013 and February 2012, respectively.

The Company issued 6 shares of restricted stock to a key employee in February 2012. The shares required both continued employment and achievement of certain performance targets by September 30, 2012. As of September 30, 2012, the performance targets had been achieved and the shares were issued to the employee. The weighted average fair value of the shares was based on the closing market price on the date of grant of $5.35. The fair market value of the grants totaled $32 and was recognized as stock compensation expense on a straight-line basis through September 30, 2012.

In February 2013 and February 2012, the Company issued 6 and 21 unregistered shares of its common stock, respectively, to a vendor in exchange for executive search services. The fair value of the shares was based on the closing price on the date issued, which totaled $10 and $114 and was recognized as compensation expense during the nine months ended September 30, 2013 and 2012 respectively. In addition during the first quarter of 2012, the Company issued a three-year warrant for the purchase of 30 shares of common stock at an exercise price of $8.75 to another vendor in exchange for public relations services. The fair value of the warrants was $2.35 per share based on the Black-Scholes model using an expected term of three years, a risk-free interest rate of 0.51% and a volatility rate of 87.4%. The total fair value of $71 was recognized as compensation expense during the nine months ended September 30, 2012 as the warrant was 100% exercisable upon issuance.

During the three and nine months ended September 30, 2013, the Company issued 13 and 35 shares of common stock, respectively, compared to 3 and 11 shares for the same periods in the prior year, to its non-employee board members. The shares were issued to the non-employee board members as part of their compensation for board service for the periods presented. In June 2012, the Company issued an aggregate of 6 shares of common stock to two key sales employees as a result of their achievement of certain performance goals outlined within the annual sales compensation plan. The weighted average fair value of the shares was based on the closing market price on the date of grant of $0.83 and $0.99 for the three and nine months ended September 30, 2013, respectively, compared to $0 and $4.08 for the same periods in the prior year. The fair value of the stock awards recognized as compensation expense totaled $11 and $46 for the three and nine months ended September 30, 2013, respectively, compared to $12 and $69 for the same periods in the prior year.

Stock options and warrants for the purchase of approximately 52 shares were cancelled or expired during the nine months ended September 30, 2013.

2007 Associate Stock Purchase Plan

In November 2007, the Company’s shareholders approved the 2007 Associate Stock Purchase Plan, under which 60 shares were originally reserved for purchase by the Company’s associates (employees). In June 2010, the Company’s shareholders approved an amendment to increase the number of shares reserved for issuance to 80. In June 2011, the Company’s shareholders approved an amendment to increase the number of shares reserved for issuance from 80 to 120. The purchase price of the shares under the plan was the lesser of 85% of the fair market value on the first or last day of the offering period. Offering periods were every six months ending on June 30 and December 31. Associates may designate up to ten percent of their compensation for the purchase of shares under the plan. Total shares purchased by associates under the plan through termination of the Associate Stock Purchase Plan totaled 96. In June 2013, the Company’s board of directors terminated the Associate Stock Purchase Plan effective July 1, 2013.

Registered Direct Offering

In March 2013, the Company sold a total of 868 units at a price of $1.80 per unit, each unit consisting of one share of common stock and one five-year warrant to purchase 0.50 of a share of common stock, with exercisability commencing six months and one day after issuance, at an exercise price of $2.73 per share, pursuant to a registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission in January 2013. The Company determined the warrants are permanent equity. The Company obtained approximately $1,374 in net proceeds as a result of this registered direct offering.

Reverse Stock Split

In November 2012, the Company’s board of directors approved a one-for-five reverse stock split of all outstanding common shares, which became effective December 14, 2012. A proportionate adjustment also was made to the Company’s outstanding derivative securities. All share and per share information in these financial statements are restated to reflect such reverse

stock split.

Employee Benefit Plan

In 2007, the Company began to offer a defined contribution 401(k) retirement plan for eligible associates. Associates may contribute up to 15% of their pretax compensation to the plan. There is currently no plan for an employer contribution match.