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 (the “2002 Plan”). Eligible persons under the 2002 Plan include certain officers and employees of the Company and directors of the Company. Under the 2002 Plan, 6,950,000 shares of common stock have been authorized for issuance. As of March 31, 2012, 2,393,000 shares of common stock have been issued pursuant to options that were exercised, 3,746,000 shares of common stock have been reserved for options that are outstanding, and 811,000 shares of common stock remain available for future grant.

Compensation cost related to stock options recognized in operating results during the three months ended March 31, 2012 and 2011, totaled approximately $583,000 and $220,000, respectively. The net impact to earnings for the periods ended March 31, 2012 and 2011 was $(0.02) and $(0.01) per basic and diluted share, respectively. At March 31, 2012, the Company had approximately $2.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements granted under our 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 lives 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 our stock option plans for the three months ended March 31, 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 Board of Directors accelerated the vesting period for options to purchase 95,833 shares of common stock held by Federico Pignatelli, the Company’s Chairman and 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 of Directors 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 during 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.

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 4,514,000 shares were not included in the computation of diluted loss per share for the three months ended March 31, 2012 as a result of their anti-dilutive effect.

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 Company’s Board of Directors 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 Company’s Board of Directors after its review of the Company’s financial performance, the expected results of future operations, availability of shares, and other factors that the Board of Directors may deem relevant. The Company’s dividend policy may be changed at any time by the Company’s Board of Directors, and there is no assurance, with respect to the amount or frequency, that any stock dividend will be declared in the future.

In March 2012, the Board of Directors declared a one-half percent stock dividend (the “March Stock Dividend”) payable March 30, 2012 to stockholders of record on March 15, 2012. The March Stock Dividend was deemed to be a special dividend. All stock information presented, other than that related to stock options and warrants, has been adjusted to reflect the effects of the March Stock Dividend.

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. The IR Warrants vest quarterly and will be revalued each period until the final vesting date. The holders may convert the IR Warrants into a number of shares, in whole or in part. The first tranche of IR Warrants expire on September 20, 2013. 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 as a performance bonus when the Company’s stock price closes at a price in excess of $6.00. The second tranche of IR Warrants were subsequently issued in April 2011 and will expire on April 11, 2014. The Company accounts for these non-employee stock warrants using the Black Scholes option pricing model. The Company has concluded that the vesting date is the ultimate final measurement date, and will revalue any unvested warrants at the end of each reporting period until that date. The Company recognized $25,000 and $96,000 of expense related to the IR Warrants, including the estimated cost associated with the second tranche of IR Warrants, during the quarters ended March 31, 2012 and 2011, respectively.