Note 11. Stockholders’ Equity

At December 31, 2012, there are 500,000,000 shares of authorized common stock. Total common stock outstanding at December 31, 2012 and December 31, 2011, was 12,526,240 and 12,427,220 shares, respectively. At December 31, 2012, there were 2,264 shares reserved for future issuance, 1,034,996 stock warrants, 1,639,842 stock options outstanding and 43,032 total unvested shares of restricted stock (of which 14,446 unvested restricted stock was issued but not vested at December 31, 2012 and therefore not considered in our total outstanding shares on the accompanying consolidated balance sheet), all totaling 15,246,374 of total stock and stock equivalents outstanding at December 31, 2012.

Sale of Unregistered Securities

During the twelve months ended December 31, 2012, we issued 855 shares of our Common Stock to replace 855 shares that had been mistakenly escheated by the state of Nevada from one of our shareholders, and subsequently sold by the state of Nevada for $1,733. The state of Nevada remitted the proceeds of this stock sale to us, and we issued these 855 common shares back to the shareholder.

Registered Direct Offering and Outstanding Warrants

On July 22, 2010, we completed an offering (the “Offering”) with certain institutional investors on the sale of 2,069,992 shares of our common stock and warrants to purchase a total of 1,034,996 shares of our common stock for aggregate gross proceeds, before deducting fees to the Placement Agent and other estimated offering expenses payable by us, of approximately $13.7 million. The common stock and warrants were sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.5 shares of common stock. The purchase price was $6.60 per fixed combination. The warrants became exercisable six months and one day following the closing date (July 28, 2010, i.e., exercisable beginning January 29, 2011) of the Offering and will remain exercisable for seven years from the date of issuance at an exercise price of $9.00 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The exercisability of some of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of our common stock. This limit may be increased to up to 9.99% upon no fewer than 60 days' notice.

We received net proceeds of approximately $12.6 million after payment of certain fees and expenses related to the Offering. The allocation of the proceeds from the offering, based on the relative fair value of the common stock and the warrants resulted in the allocation of approximately $9.0 million to the common stock and approximately $3.6 million to the warrants which was recorded to additional paid-in capital-stock and stock equivalents.

The value of the warrants issued was calculated by using the Black Scholes Valuation Model using the following assumptions: volatility 99%; risk-free interest rate of 2.38%; dividend yield of 0%, and expected term of 7 years. The volatility of the Company’s common stock was estimated by management based on the historical volatility of the trading history of the Company’s common stock. The risk-free interest rate was based on the Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the expected life of the warrants. The expected dividend yield was based on the Company’s current and expected dividend policy and the expected term is equal to the contractual life of the warrants.

Stock-based Compensation – Stock Options and Restricted Stock

Stock Plan

We have a stock-based compensation plan to reward for services rendered by officers, directors, employees and consultants. On July 17, 2006, we amended this stock plan. We have reserved 2,500,000 shares of common stock of our unissued share capital for the stock plan. Other limitations are as follows:

Total stock options outstanding at December 31, 2012 and 2011, were 1,639,842 and 1,674,065, respectively of which 1,523,536 and 1,345,541 of these options were vested at December 31, 2012 and 2011. Stock option expense was approximately $0.7 million and approximately $1.0 million for the years ended December 31, 2012 and 2011, respectively.

Stock option transactions to the employees, directors, advisory board members and consultants are summarized as follows for the year ended December 31, 2012:

Stock option transactions to the employees, directors, advisory board members and consultants are summarized as follows for the year ended December 31, 2011:

The above tables include options issued and outstanding as of December 31, 2012 as follows:

The following table provides certain information with respect to the above-referenced stock options that are outstanding and exercisable at December 31, 2012:

The following table provides certain information with respect to the above-referenced stock options that are outstanding and exercisable at December 31, 2011:

The aggregate intrinsic value of stock options outstanding at December 31, 2012 and 2011 was $0, all of which related to vested awards. Intrinsic value is calculated based on the difference between the exercise price of the underlying awards and the quoted price of our common stock as of the reporting date ($1.41 and $2.04 per share as of the close on December 31, 2012 and 2011, respectively).

Restricted Stock Award Activity

The following summarizes our restricted stock unit activity:

Scheduled vesting for outstanding restricted stock units at December 31, 2012 is as follows:

As of December 31, 2012 and 2011, there was $0.1 and $0.4 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements, respectively. This compensation is recognized on a straight line basis resulting in approximately $0.1 million of the compensation expected to be expensed in the next twelve months, and the total unrecognized has a weighted average recognition period of 1.0 years.

We use the historical volatility of our stock price since January 5, 2006, the date we announced that we were becoming a public company, to estimate the future volatility of our stock. At this time we do not believe that there is a better objective method to predict the future volatility of our stock. We estimate the term of our option awards based on the full term of the award. To date we have had very few exercises of our options, and those exercises have occurred just before the expiration date of the awards. Since the strike price of most of our outstanding awards is greater than the price of our stock, generally awards have expired at the end of the term. We estimate the effect of future forfeitures of our grants based on an analysis of historical forfeitures of unvested grants, as we have no better objective basis for that estimate. The expense that we have recognized related to our grants of options and restricted stock includes the estimate for future pre-vest forfeitures. We will adjust the actual expense recognized as future pre-vest forfeitures as they occur. We have estimated that 1.4% and 3.0% of our option and restricted stock grants respectively, will be forfeited prior to vesting.

There were no stock options granted for the twelve months ended December 31, 2012. Assumptions used in the Black Scholes option-pricing model for the year ended December 31, 2011 were as follows:

Stock-based compensation expense includes the expense related to (1) grants of stock options, (2) grants of restricted stock, (3) stock issued as consideration for some of the services provided by our directors and strategic advisory council members, and (4) stock issued in lieu of cash to pay bonuses to our employees and contractors. We record stock-based compensation expenses in the caption with all of our other general and administrative expenses. Grants of stock options and restricted stock are awarded to our employees, directors, consultants and board members, and we recognize the fair market value of these awards ratably as they are earned. The expense related to payments in stock for services is recognized as the services are provided.

During the years ended December 31, 2012 and 2011, approximately $1.0 million and $1.5 million respectively, were recorded as total stock-based compensation. Stock-based compensation expense is recorded under the caption general and administrative expenses in the accompanying consolidated statements of operations.

Common Stock reserved for Future Issuance

Common stock reserved for future issuance at December 31, 2012 consists of: