5. Shareholders’ Equity.

Stock-Based Compensation. The Company’s stock-based compensation plans are administered by the Compensation Committee of the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award.

The following table summarizes the stock-based compensation expense which was recognized in the Company’s Statements of Operations for the years ended December 31, 2013 and 2012:

Year ended December 31	2013		2012
Cost of sales	$	22,000	$	93,000
Selling	176,000		104,000
Marketing	16,000		18,000
General and administrative	319,000		127,000
	$	533,000	$	342,000

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards with the following weighted average assumptions:

	2013		2012
Stock Options:
Expected life (years)	3.9		4.2
Expected volatility	52	%	71	%
Dividend yield	0	%	0	%
Risk-free interest rate	1.2	%	0.6	%

	2013		2012
Stock Purchase Plan Options:
Expected life (years)	1.0		1.0
Expected volatility	51	%	46	%
Dividend yield	0	%	0	%
Risk-free interest rate	0.2	%	0.1	%

The Company uses the straight-line attribution method to recognize expense for unvested options. The amount of stock-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company re-evaluates the forfeiture rate annually and adjusts it as necessary.

As of December 31, 2013, there was approximately $296,000 of total unrecognized compensation costs related to the outstanding stock options which is expected to be recognized over a weighted average period of 1.8 years.

Stock Options. Prior to 2013, the Company had stock options plans (the “1990 Plan” and the “2003 Plan”) for its employees and directors under which substantially all of the shares reserved for issuance had been issued. In May 2013, the Company’s shareholders approved the 2013 Omnibus Stock and Incentive Plan (the “2013 Plan”), which replaced the 2003 Plan. Options granted under the 2003 Plan will remain in effect until they are exercised or expire according to their terms. There are no options outstanding in the 1990 Plan. All current option grants are made under the 2013 Plan.

Under the terms of the 2013 Plan, the Company may grant up to 250,000 awards in a variety of instruments including incentive or non-qualified stock options to employees, consultants and directors generally at an exercise price at or above 100% of fair market value at the close of business on the date of grant. Stock options expire 10 years after the date of grant and generally vest over three years. The Company issues new shares of common stock when stock options are exercised.

The following table summarizes activity under the option plans:

	Plan Shares Available for Grant		Plan Options Outstanding		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balance at December 31, 2011	21		1,234,737		$	4.87
Reserved	500,000		—
Granted	(737,500	)	737,500		1.67
Cancelled - 2003 Plan	337,164		(337,164	)	3.77
Cancelled - 1990 Plan	—		(165,400	)	9.19

Balance at December 31, 2012	99,685		1,469,673		3.03

Reserved	250,000		—
Stock awards granted	(39,032	)	—
Granted	(115,000	)	115,000		2.49
Exercised	—		(38,165	)	1.84		$	20,810
Cancelled - 2003 Plan	(99,685	)	(263,666	)	3.64
Cancelled - 1990 Plan	—		(31,400	)	10.37

Balance at December 31, 2013	95,968		1,251,442		2.72

The number of options exercisable under the option plans was:

December 31, 2012		572,552
December 31, 2013		686,998

The following table summarizes information about the stock options outstanding at December 31, 2013:

	Options Outstanding				Options Exercisable
Ranges of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price Per Share		Number Exercisable	Weighted Average Exercise Price Per Share
$1.61 - $2.46	784,701	8.60 years	$	1.81	288,839	$	1.78
$2.79 - $4.22	324,741	6.78 years	3.67		256,159	3.58
$5.49	142,000	6.08 years	5.49		142,000	5.49
	1,251,442	7.84 years	$	2.72	686,998	$	3.22

Options outstanding under the option plans expire at various dates during the period from January 2013 through October 2023. Options outstanding at December 31, 2013 had a weighted average remaining life of 7.84 years and an aggregate intrinsic value of $722,000. Options exercisable at December 31, 2013 had a weighted average remaining life of 7.14 years and an aggregate intrinsic value of $275,000. The weighted average grant-date fair value of options granted during the years ended December 31, 2013 and 2012 were $1.01 and $0.90, respectively.

In December 2013, equity grants were made by the Company to the Board of Directors, pursuant to the 2013 Plan in the form of shares of common stock. The total number of shares granted to the Board of Directors was 39,032 during the year ended December 31, 2013. The shares were issued at $2.69 per share, based on the stock price on the date of grant, for a total value of $105,000, which is included in stock-based compensation.

Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan (the “Plan”) that enables employees to contribute up to 10% of their base compensation toward the purchase of the Company’s common stock at 85% of its market value on the first or last day of the year. During the years ended December 31, 2013 and 2012, employees purchased 56,000 and 76,000 shares under the Plan. At December 31, 2013, 179,000 shares are reserved for future employee purchases of common stock under the Plan. For the years ended December 31, 2013 and 2012, the Company recognized $34,000 and $33,000, respectively, of stock-based compensation expense related to the Plan.

Stock Repurchase Plans. On February 22, 2011, the Board of Directors authorized the repurchase of up to $15,000,000 of the Company’s common stock on or before January 31, 2012. On May 25, 2011, the Board amended the plan to increase the maximum share purchase amount from $15,000,000 to $20,000,000. The plan expired on January 31, 2012. The Company repurchased a total of 3,877,000 shares totaling $17,562,000 under this plan.

On July 18, 2013, the Company commenced a “modified Dutch auction” tender offer (“Tender Offer”) to purchase up to $12 million of its common stock. Under the terms of the Tender Offer, the Company’s shareholders had the opportunity to tender some or all of their shares at a price within the range of $2.15 to $2.35 per share. The Tender Offer expired on August 15, 2013. The Tender Offer resulted in the purchase of 929,051 shares at $2.35 per share, for an aggregate cost to the Company of approximately $2.2 million, excluding fees and expenses related to the Tender Offer.

On December 3, 2013, the Board of Directors authorized the repurchase of up to $5,000,000 of the Company’s common stock on or before December 3, 2015. The Plan allows the repurchases to be made in open market or privately negotiated transactions.