Stock-Based Compensation

Stock Options

American CareSource Holdings, Inc. has an Employee Stock Option Plan (the “Stock Option Plan”) for the benefit of certain employees, non-employee directors, and key advisors. On May 16, 2005, the stockholders approved the 2005 Stock Option Plan which (i) authorized options to purchase 749,776 shares and (ii) established the class of eligible participants to include employees, nominees to the Board of Directors of American CareSource Holdings and consultants engaged by American CareSource Holdings, limited to 16,667 shares of Common Stock underlying the one-time grant of a Non-Qualified Option to which non-employee directors or non-employee nominees of the Board of Directors may be entitled. Stock options granted under the Stock Option Plan may be of two types: (1) incentive stock options and (2) nonqualified stock options. The option price of such grants shall be determined by a Committee of the Board of Directors (the “Committee”), but shall not be less than the estimated fair value of the common stock at the date the option is granted. The Committee shall fix the terms of the grants with no option term lasting longer than ten years. The ability to exercise such options shall be determined by the Committee when the options are granted.

Over time this plan has been amended to increase the number of shares available to a total of 1,249,776 shares.

On May 19, 2009, the stockholders of the Company approved the 2009 Equity Incentive Plan (the “2009 Plan”). The purpose of the 2009 Plan is (a) to allow selected employees and officers of the Company to acquire and increase equity ownership in the Company, which will strengthen their commitment to the success of the Company, and to attract new employees, officers and consultants, (b) to provide annual cash incentive compensation opportunities that are competitive with other peer corporations, (c) to optimize the profitability and growth of the Company through incentives that are consistent with the Company’s goals, (d) to provide grantees an incentive for individual excellence, (e) to promote teamwork and (f) to attract and retain highly-qualified persons to serve as non-employee directors. The 2009 Plan allows for awards of non-qualified options, stock appreciation rights, restricted shares, performance units/shares, deferred stock, dividend equivalents and other stock-based awards up to 500,000 shares. The term of the 2009 Plan is ten years and all non-qualified options will be valued at not less than 100% of the market value of the Company’s stock on the date of grant.

Shares of common stock reserved for future grants under the Stock Option Plan and the 2009 Plan (the “Plans”) were 494,788 and 546,956 at December 31, 2012 and 2011, respectively.

Compensation expense related to all equity awards, including non-qualified stock options, restricted stock units and warrants, that has been charged against income for the years ended December 31, 2012 and 2011 was approximately $408,000 and $738,000, respectively.

The awards granted to employees and non-employee directors become exercisable over periods of up to five years. The fair value of each option award granted is estimated on the date of grant using the Black-Scholes-Merton valuation model that uses the assumptions noted in the following table. Volatility is calculated using an analysis of historical volatility. The Company believes that the historical volatility of the Company’s stock is the best method for estimating future volatility. The expected lives of options are determined based on the Company’s historical share option exercise experience. The Company believes the historical experience method is the best estimate of future exercise patterns currently available. The risk-free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options. The expected dividend yields are based on the approved annual dividend rate in effect and current market price of the underlying common stock at the time of grant.



	2012			2011
Weighted average grant date fair value	$	1.01		$	1.89
Weighted average assumptions used
Expected volatility	77.7		%	66.9		%
Expected lives (years)	6.2			6.1
Risk free interest rate	1.0		%	1.6		%
Forfeiture rate	20.5		%	20.5		%
Dividend rate	—			—

A summary of stock option activity is as follows:



	Options (thousands)		Weighted-Average Exercise Price
Outstanding at December 31, 2010	866		$	6.72
Granted	93		3.09
Forfeited	(55	)	6.33
Cancelled	(78	)	8.82
Exercised	(87	)	1.11
Outstanding at December 31, 2011	739		6.72
Granted	100		1.49
Forfeited	(33	)	5.11
Cancelled	(14	)	10.65
Exercised	—		—
Outstanding at December 31, 2012	792		6.06
Exercisable at December 31, 2012	519		$	7.20

As of December 31, 2012, the weighted average remaining contractual life of the options outstanding was 6.4 years and the weighted average remaining contractual life of the outstanding exercisable options was 5.4 years.

The following table summarizes information concerning outstanding and exercisable options at December 31, 2012:



(in thousands)	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding	Weighted Average Outstanding Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
Under $1.00	58	2.3	$	0.93	58	$	0.93
$1.00 - $2.00	104	9.7	$	1.48	2	$	1.53
$2.01 - $3.00	50	8.6	$	2.19	21	$	2.19
$3.01 - $4.00	1	8.6	$	3.72	—	$	3.72
$4.01 - $5.00	116	7.8	$	4.31	59	$	4.31
$5.01 - $6.00	162	5.0	$	5.54	156	$	5.55
$6.01 - $7.00	119	7.2	$	6.13	49	$	6.15
Greater than $7.01	182	5.2	$	12.94	174	$	12.72

The total intrinsic value of options outstanding at December 31, 2012 and 2011 was approximately $30,000 and $21,000, respectively. The total intrinsic value of the options that are exercisable at December 31, 2012 and 2011 was approximately $29,000 and $21,000, respectively. No options were exercised during the year ended December 31, 2012. The total intrinsic value of options exercised during the year ended December 31, 2011 was approximately $127,000.

Compensation expense related to non-qualified stock options charged to operations during 2012 was approximately $350,000. As of December 31, 2012, there was approximately $498,000 of total unrecognized compensation cost related to non-vested non-qualified stock options granted under the plan. The cost is expected to be recognized over a weighted average period of 3.2 years.

Restricted Stock Units

Under the 2009 Plan, the Company issued restricted stock units (“RSUs”) to certain employees and the Board of Directors during the twelve months ended December 31, 2009. As RSUs vest, they are convertible into shares of the Company’s common stock. The RSUs are valued at the market price of the Company’s stock on the measurement date, which is the date of grant. Compensation expense is recognized ratably over the vesting period. Our future estimated forfeiture rate on RSUs is 0% as the RSUs have been awarded primarily to members of our Board of Directors and members of senior management of the Company. No RSUs were issued during the twelve months ended December 31, 2012 and 2011.

A summary of RSU activity is as follows:



	RSUs		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2010	29		$	21.21
Forfeited	(6	)	$	5.58
Converted to common stock	(17	)	$	11.61
Outstanding at December 31, 2011	6		$	21.45
Forfeited	—		$	—
Converted to common stock	(2	)	$	21.53
Outstanding at December 31, 2012	4		$	21.40
Vested and convertible to common stock at December 31, 2012	4		$	21.06

Compensation expense related to RSUs charged to operations during 2012 and 2011 was approximately $37,000 and $108,000, respectively. As of December 31, 2012, there was approximately $49,000 of total unrecognized compensation cost related to non-vested RSUs granted under the plan. The cost is expected to be recognized over a weighted average period of 1.3 years.

Shares of common stock and common stock equivalents, along with earnings per share and other per share amounts, have been retroactively restated to reflect the 1-for-3 reverse stock split that occurred on September 4, 2012 for all periods presented.