NOTE 3—STOCK-BASED AWARDS AND PER SHARE INFORMATION

Stock-Based Compensation

The Company currently has one stock-based compensation plan, the 2002 Stock Incentive Plan, as amended (the “2002 Plan”). Eligible persons under the 2002 Plan include certain officers, employees, and directors of the Company, as well as consultants. Under the 2002 Plan, 6,950,000 shares of common stock have been authorized for issuance. As of September 30, 2012, 2,498,000 shares of common stock have been issued pursuant to options that were exercised, 3,701,000 shares of common stock have been reserved for options that are outstanding, and 751,000 shares of common stock remain available for future grant.

Compensation cost related to stock options recognized in operating results during the three months ended September 30, 2012 and 2011 was $357,000 and $324,000, respectively. The net impact to earnings for those periods was $(0.01) and $(0.01) per basic and diluted share, respectively. Compensation cost related to stock options recognized in operating results during the nine months ended September 30, 2012 and 2011, was $1.3 million and $1.0 million, respectively. The net impact to earnings for those periods was $(0.04) and $(0.03) per basic and diluted share, respectively. At September 30, 2012, the Company had $2.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements granted under the Company’s existing plans. The Company expects that cost to be recognized over a weighted-average period of 1.2 years.

The following table summarizes the income statement classification of compensation expense associated with share-based payments (in thousands):

The Black-Scholes option valuation model is used in estimating the fair value of traded options. This option pricing model requires the Company to make several assumptions regarding the key variables used to calculate the fair value of its stock options. The risk-free interest rate used is based on the U.S. Treasury yield curve in effect for the expected lives of the options at their dates of grant. Since July 1, 2005, the Company has used a dividend yield of zero as it does not intend to pay cash dividends on its common stock in the foreseeable future. The most critical assumption used in calculating the fair value of stock options is the expected volatility of the common stock. Management believes that the historic volatility of the common stock is a reliable indicator of future volatility, and accordingly, a stock volatility factor based on the historical volatility of the common stock over a period of time is used in approximating the estimated volatility of new stock options. The expected term is estimated by analyzing the Company’s historical share option exercise experience over a five year period. Compensation expense is recognized using the straight-line method for all stock-based awards. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations. Forfeitures are estimated at the time of the grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates.

The stock option fair values were estimated using the Black-Scholes option-pricing model with the following assumptions:

A summary of option activity under the Company’s stock option plan for the nine months ended September 30, 2012 is as follows:

Cash proceeds along with fair value disclosures related to grants, exercises and vesting options are provided in the following table (in thousands, except per share amounts):

On March 2, 2012, the Company’s Board of Directors (the “Board”) accelerated the vesting period for options to purchase 95,833 shares of common stock held by Federico Pignatelli, the Company’s Chief Executive Officer (“CEO”). The options were originally granted in December 2011 at $2.58 per share with monthly vesting over four years. The Board accelerated the vesting period to March 2, 2012, in part due to the CEO’s continued commitment to maintain his annual salary of one dollar for the year ending December 31, 2012. Accelerating the vesting period of the common stock options resulted in the Company recognizing unamortized compensation cost of approximately $183,000 in March 2012. The transaction did not result in any additional compensation cost primarily as the effects of the decrease in the expected term and volatility offset the effects of the difference between the stock price and the option price on the date the vesting of the common stock options were modified.

On May 7, 2012, the Board granted a non-qualified stock option to purchase 65,000 shares of the Company’s common stock to a consultant, at a price per share of $2.55, the closing market price of the Company’s common stock on the grant date. The option fully vests and becomes exercisable upon the achievement of certain specified performance conditions, as defined in the consulting agreement with this consultant, and the option expires five years from the grant date. As of September 30, 2012, the Company believes there is a remote probability of achieving the required performance conditions and, accordingly, no stock-based compensation has been recognized. The Company will reassess whether achievement of the performance conditions is probable on a quarterly basis and recognize stock-based compensation when it is probable that the performance conditions will be achieved.

Warrants

During September 2010, the Company issued warrants (the “IR Warrants”) to purchase an aggregate of 50,000 shares of common stock at a price per share of $0.74 to three service providers who provide investor relations services. Pursuant to the agreement, the service providers were also entitled to a second tranche of IR Warrants to purchase an aggregate of 50,000 shares of common stock at a price per share of $0.74. The IR Warrants were fully exercised during the nine months ended September 30, 2012. In connection with the issuance of the IR Warrants, the Company recognized expenses of nil and approximately $23,000 for the three and nine months ended September 30, 2012, respectively, and expenses of approximately $16,000 and $226,000 for the three and nine months ended September 30, 2011, respectively.

During May 2012, the Company issued warrants to purchase up to 80,000 shares of the Company’s common stock at an exercise price of $2.83 per share to Comerica Bank in connection with two revolving credit facilities entered into on May 24, 2012. The Company reduced the exercise price of the Comerica Warrants from $2.83 to $2.00 per share on August 6, 2012. See Note 8 – Lines of Credit and Other Borrowings for further discussion.

Net Loss Per Share—Basic and Diluted

Basic net loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. In computing diluted net loss per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities.

Outstanding stock options and warrants to purchase 4,504,000 shares were not included in the computation of diluted loss per share for the three and nine months ended September 30, 2012 as a result of their anti-dilutive effect. For the same 2011 periods, anti-dilutive outstanding stock options and warrants to purchase 4,588,000 shares were not included in the computation of diluted loss per share.

Stock Dividends

The Company intends to pay a 2% annual stock dividend, in quarterly installments, for the year ending December 31, 2012. Stock dividends are discussed quarterly by the Board and management. The actual declaration of future stock dividends and the establishment of the record and payment dates are subject to final determination by the Board after its review of the Company’s financial performance, the expected results of future operations, availability of shares, and other factors that the Board may deem relevant. The Company’s dividend policy may be changed at any time by the Board, and there is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.

The Board declared special one-half percent stock dividends during each of the first three quarters of 2012. The stock dividend declared during the quarter ended September 30, 2012 was payable September 28, 2012 to shareholders of record on September 14, 2012, the stock dividend declared during the quarter ended June 30, 2012 was payable June 25, 2012 to shareholders of record on June 8, 2012, and the stock dividend declared during the quarter ended March 31, 2012 was payable March 30, 2012 to shareholders of record on March 15, 2012. The Board deems these three stock dividends to be special dividends and there is no assurance, with respect to amount or frequency, that any stock dividend will be declared again in the future. All stock information presented, other than that related to stock options and warrants, has been adjusted to reflect the effects of these stock dividends.

Stock Repurchase Program

On August 10, 2011, the Board authorized a stock repurchase program, pursuant to which the Company may repurchase up to an aggregate of 2,000,000 shares of the Company’s outstanding common stock. During the three and nine months ended September 30, 2012, the Company repurchased 133,365 shares at an average price of $1.73.

Stock repurchase activities during the three and nine months ended September 30, 2012 are provided in the following table: