NOTE 8 — STOCKHOLDERS’ EQUITY

Preferred Stock

The Board of Directors, without further stockholder authorization, may issue from time to time up to 1,000,000 shares of the Company’s preferred stock. Of the 1,000,000 shares of preferred stock, 500,000 shares are designated as Series B Junior Participating Cumulative Preferred Stock. As of December 31, 2012 and 2011, none of the preferred stock was outstanding.

The Company has a stockholder rights plan under which one preferred stock purchase right was distributed on January 11, 1999 with respect to each share of common stock outstanding at the close of business on December 31, 1998. The rights provide, among other things, that in the event any person becomes the beneficial owner of 15% or more of the Company’s common stock while the rights are outstanding, each right will be exercisable to purchase shares of common stock having a market value equal to two times the then current exercise price of a right (initially $30.00). The rights also provide that, if on or after the occurrence of such event, the Company merges with any other corporation or 50% or more of its assets or earning power are sold, each right will be exercisable to purchase common stock of the acquiring corporation having a market value equal to two times the then current exercise price of such stock. The rights are subject to redemption at $0.001 per right at any time prior to the first date upon which they become exercisable to purchase common shares. The rights had an original expiration date of December 31, 2008, which was amended further extending the term to December 31, 2018.

Common Stock

At December 31, 2012, the Company had 33,248,000 shares of common stock issued with 31,284,000 shares outstanding. The Company currently has 50,000,000 shares of common stock authorized for issuance and 1,964,000 shares of common stock in its treasury.

Offering Agreement, Shelf Registration, and Securities Purchase Agreement

On December 23, 2010, the Company entered into a Controlled Equity Offering Agreement (the “Offering Agreement”) with Ascendiant, as sales agent. In accordance with the terms of the Offering Agreement, the Company was able to issue and sell up to 3,000,000 shares of its common stock under the 2010 Shelf Registration Statement with a fee of 3.75% of the gross proceeds in a series of transactions over time as the Company directed in privately negotiated transactions and/or any other method permitted by law, including sales deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1993. “At the market” sales include sales made directly on the NASDAQ Capital Market, the existing trading market for the Company’s common stock, or sales made to or through a market maker other than on an exchange.

During the year ended December 31, 2011, the Company sold approximately 2.2 million shares of common stock with gross proceeds of approximately $7.5 million and net proceeds of approximately $7.2 million, net of commissions and direct costs, through the Offering Agreement with Ascendiant.

On April 7, 2011, the Company entered into an agreement with Rodman & Renshaw, LLC (“Rodman & Renshaw”), pursuant to which Rodman & Renshaw arranged for the sale of shares of its common stock in a registered direct placement (the “April 2011 Registered Direct Placement”) pursuant to the 2010 Shelf Registration Statement with a fee of 4.5% of the aggregate gross proceeds. In addition, on April 7, 2011, the Company and certain institutional investors entered into a securities purchase agreement arranged by Rodman & Renshaw, pursuant to which the Company sold in an aggregate of 320,000 shares of the Company’s common stock in the April 2011 Registered Direct Placement with a purchase price of $5.60 per share for gross proceeds of approximately $1.8 million. The net proceeds to the Company from the April 2011 Registered Direct Placement totaled approximately $1.7 million. The costs associated with the April 2011 Registered Direct Placement of approximately $124,000 were paid in April 2011 upon the closing of the transaction. The shares of common stock sold in connection with the April 2011 Registered Direct Placement were issued pursuant to a prospectus supplement dated April 11, 2011 to the 2010 Shelf Registration Statement, which was filed with the SEC.

The transactions described above exhausted the securities available for sale under the Company’s 2010 Shelf Registration Statement.

In June 2011, the Company entered into a securities purchase agreement (the “June 2011 Securities Purchase Agreement”) with certain institutional investors (the “June 2011 Purchasers”) under which the Company sold an aggregate of 1,625,947 shares of the Company’s common stock at a price of $5.55 per share, together with five-year warrants to purchase 812,974 shares of its common stock having an exercise price of $6.50 per share (the “June 2011 Warrants”). The June 2011 Warrants were not exercisable for six months following their issuance. Gross proceeds from the offering totaled approximately $9 million, and net proceeds to the Company, after commissions and other offering expenses of approximately $622,000, totaled approximately $8.4 million. The Company used the proceeds for working capital and general corporate purposes. In connection with the June 2011 Securities Purchase Agreement, the Company entered into an agreement with Rodman & Renshaw in which Rodman & Renshaw agreed to act as the Company’s exclusive placement agent for the offering and the Company paid Rodman & Renshaw fees totaling approximately $451,000, and reimbursed expenses of $50,000. The commissions and expenses paid to Rodman and Renshaw were included in the offering expenses.

The common stock and the June 2011 Warrants were offered and sold, and the common stock issuable upon exercise of the June 2011 Warrants were offered, pursuant to exemptions from registration set forth in section 4(2) of the 1933 Act and Rule 506 of Regulation D promulgated under the 1933 Act. As such, the common stock, the June 2011 Warrants, and the common stock issuable upon exercise of the June 2011 Warrants was not permitted to be re-offered or resold absent either registration under the 1933 Act or the availability of an exemption from the registration requirements.

The June 2011 Securities Purchase Agreement was subject to a registration rights agreement whereby the Company would have incurred penalties of up to 3.0% of the offering proceeds if it was unable to file a registration statement by July 19, 2011. The Company filed a registration statement on Form S-3 with the SEC to register the Registerable Securities (File No. 333-175664) on July 19, 2011 which was declared effective by the SEC on August 25, 2011, thereby satisfying the registration rights agreement.

On August 2, 2011, the Company repurchased 90,000 of the June 2011 Warrants for $99,900, or $1.11 per underlying share, plus expenses of $30,000.

Additional Warrants

On November 8, 2012, the Company issued warrants to purchase up to 50,000 shares of the Company’s common stock to an investor relations consultant, at a price per share of $2.50. The warrants vest and become exercisable only if the Company’s common stock closing price on NASDAQ reaches or exceeds $7.00 by November 7, 2013. The warrant expires November 7, 2015. As of December 31, 2012, no stock-based compensation has been recognized. The Company will reassess whether achievement of the contingent exercise provision is probable on a quarterly basis and recognize stock-based compensation when it is probable that the market performance requirement will be achieved.

In May 2012, the Company issued warrants to purchase up to 80,000 shares of the Company’s common stock to Comerica Bank at a price per share of $2.83, which was subsequently reduced to $2.00. See Note 5 — Lines of Credit and Other Borrowings for further discussion.

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 year ended December 31, 2012. In connection with the issuance of the IR Warrants, the Company recognized expenses of approximately $23,000 and $273,000 for the years ended December 31, 2012 and 2011, respectively.

In May 2010, the Company granted warrants to purchase an aggregate of 101,694 shares of its common stock to MidCap Financial, LLC, and Silicon Valley Bank at a price per share of $1.77, which was subsequently reduced to $0.84. See Note 5 — Lines of Credit and Other Borrowings for further discussion.

Stock Options

As of December 31, 2012, a total of 6,950,000 shares have been authorized for issuance under the Company’s 2002 Stock Incentive Plan, of which 2,498,000 shares have been issued for options which have been exercised, 3,860,000 shares have been reserved for options that are outstanding, and 592,000 shares are available for the granting of additional options.

Stock options may be granted as incentive or nonqualified options; however, no incentive stock options have been granted to date. The exercise price of options is at least equal to the market price of the stock as of the date of grant. Options may vest over various periods but typically vest on a quarterly basis over three years. Options expire after five years, ten years or within a specified time from termination of employment, if earlier. The Company issues new shares of common stock upon the exercise of stock options. The following table summarizes option activity:

The following table summarizes additional information for those options that are outstanding and exercisable as of December 31, 2012:

Cash proceeds, along with fair value disclosures related to grants, exercises, and vesting options, are as follows for the years ended December 31 (in thousands, except per share amounts):

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 December 31, 2012, 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.

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.