5. Severance Liability

On April 12, 2012, we entered into a separation agreement and a release with Robert Dilworth in connection with Mr. Dilworth's resignation as our Chief Executive Officer and as a member of our board of directors. Subject to the terms of the separation agreement, effective April 20, 2012 (the "Release Effective Date") we paid or provided Mr. Dilworth the following:

On the Release Effective Date, Mr. Dilworth's outstanding unvested options became fully vested and exercisable, and his outstanding vested option were modified to extend the exercise period. All options will remain exercisable until the earlier of (i) the expiration dates of each of such options or (ii) the date that is 30 months after the Release Effective Date. The number of shares of common stock issuable upon exercise of such outstanding options is 2,000,000. We recognized $172,800 of non-cash stock-based compensation expense during the three and six-month period ended June 30, 2012 as a result of the modification of Mr. Dilworth's outstanding stock options.

On the Release Effective Date, Mr. Dilworth was granted an option to purchase 500,000 shares of common stock at an exercise price of $0.20 per share. Such option has a term of 30 months from the date of grant and will vest and become exercisable at a rate of 62,500 shares per quarter commencing on July 1, 2012. We recognized $64,700 of non-cash stock-based compensation expense during the three and six-month periods ended June 30, 2012 as a result of the issuance of this stock option to Mr. Dilworth.

From May 2012 through April 2013, Mr. Dilworth will be paid $27,300 per month. From May 2013 through April 2014, Mr. Dilworth will be paid $13,600 per month. We recognized $54,600 of additional compensation expense as a result of Mr. Dilworth's salary continuation payments made during the three and six-month periods ended June 30, 2012. Also, we recognized $389,400 of additional compensation expense during the three and six-month periods ended June 30, 2012 that represents the present value of all future salary continuation payments due Mr. Dilworth subsequent to June 30, 2012. We reported $261,800 of these future severance payments as a component of current liabilities at June 30, 2012, with the balance as a component of long-term liabilities.

From May 2012 through October 2013, we will pay the premium costs to continue medical coverage for Mr. Dilworth and his spouse under the Employment Retirement Income Security Act of 1974. Such premiums will approximate $3,200 for May 2012 and June 2012, and will approximate $1,300 per month thereafter. We recognized $6,200 of additional benefits expense as a result of the continuation of Mr. Dilworth's medical coverage payments during the three and six-month periods ended June 30, 2012. Also, we recognized $19,100 of additional compensation expense during the three and six-month periods ended June 30, 2012 that represents the present value of all future medical premium payments we are obligated to pay on Mr. Dilworth's behalf subsequent to June 30, 2012. We reported $13,900 of these future medical premium payments as a component of current liabilities at June 30, 2012, with the balance as a component of long-term liabilities.

·	We paid Mr. Dilworth $15,000 as reimbursement for a portion of his legal fees in connection with negotiation of the separation agreement and the release.

Mr. Dilworth's participation in the Key Employee Severance Plan and the Director Severance Plan was automatically terminated on the Release Effective Date. In addition, the separation agreement contains confidentiality and non-disparagement provisions subject to the terms set forth therein. Pursuant to the terms of the release, Mr. Dilworth provided as of the Release Effective Date a release of claims in connection with his employment and resignation. As a result of the separation agreement, we incurred a one-time aggregate $721,800 additional operating expenses in the three and six-month periods ended June 30, 2012, as summarized above.

The following table sets forth the severance liability we recognized as of June 30, 2012 as a result of our separation agreement with Mr. Dilworth, which is comprised of the present value of the salary continuation payments due Mr. Dilworth and medical premium payments to be made on his behalf under such agreement subsequent to June 30, 2012:

Balance Sheet Classification	As of June 30, 2012
Current liability	$	275,700
Long term liability		132,800
	$	408,500

We discounted the aggregate remaining cash salary continuation payments and medical premiums to be paid on his behalf of $457,400 due Mr. Dilworth under the terms of the separation agreement using a 14.3% discount factor, with such factor representing our average cost of capital, which we derived by analyzing the costs we incurred in the various private placement transactions we have closed since 2004.