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 months ended March 31, 2014 and 2013 was as follows:



		Three Months Ended
		March 31,
		2014		2013
Stock-based compensation costs included in:
Cost of sales	$	-	$	2
Sales and marketing expenses		9		9
Research and development expenses		7		9
General and administrative expenses		68		139
Total stock-based compensation expenses	$	84	$	159

At March 31, 2014, there was approximately $371 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 weighted average estimated fair value of stock options granted during the three months ended March 31, 2014 and 2013 was $0.79 and $1.24 per share, respectively. The values set forth above were calculated using the following weighted average assumptions:



	Three Months Ended
	March 31,
	2014	2013
Expected life	3.97 Years	3.97 Years
Dividend yield	0%	0%
Expected volatility	94.3%	94.6%
Risk-free interest rate	1.3%	1.3%

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 24.2% 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 January 2014 and February 2013, the Company granted stock options for the purchase of an aggregate of 320 and 173 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 60 and 20 shares of the Company’s stock in January 2014 and February 2013, respectively.

Stock options and warrants for the purchase of approximately 76 shares were cancelled or expired during the three month period ended March 31, 2014.

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.