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 options 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 $172,700 of non-cash stock-based compensation expense during 2012, as a result of the modification of Mr. Dilworth’s outstanding stock options. No expense was recognized during the nine-month period ended September 30, 2013 as a result of the modifications.

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 2012 as a result of the issuance of this stock option to Mr. Dilworth. No expense was recognized during the nine-month period ended September 30, 2013 as a result of the issuance.

From May 2012 through April 2013, Mr. Dilworth was paid $27,300 per month. From May 2013 through April 2014, Mr. Dilworth will be paid $13,600 per month. During the three-month period ended June 30, 2012, we recognized $433,700 compensation expense related to Mr. Dilworth’s separation agreement, which we recorded as a liability. Such amount represented the present value of the future salary and medical insurance (discussed below) continuation payments due Mr. Dilworth under the terms of the separation agreement. During the three and nine-month periods ended September 30, 2013, we made salary continuation payments aggregating $36,600 and $172,900, respectively, to Mr. Dilworth. As of September 30, 2013, the aggregate present value of the remaining future salary and medical insurance coverage continuation payments due Mr. Dilworth was $92,300, which was reported as a current liability. All interest expense associated with the salary and medical insurance continuation payments made are charged to general and administrative expenses as incurred. During the three and nine-month periods ended June 30, 2013, we incurred interest charges of $4,200 and $18,100 respectively.

From May 2012 through October 2013, we paid the premium costs to continue medical coverage for Mr. Dilworth and his spouse under the Employment Retirement Income Security Act of 1974. Such premiums aggregated $5,800 for May 2012 and June 2012, and will approximate $1,300 per month thereafter. During the three and nine-month periods ended September 30, 2013 we made medical insurance coverage continuation payments of $3,800 and $11,000 respectively. During the three and nine-month periods ended September 30, 2013, we incurred interest charges of $100 and $700, respectively.

·	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 recognized an aggregate $721,800 of additional operating expenses, as summarized above of which all such expense was recognized contemporaneously with the consummation of Mr. Dilworth’s separation agreement during the second quarter of 2012.

We estimated the fair value of each stock-based award set forth above, which were included as part of Mr. Dilworth’s separation agreement during 2012, using a binomial model with the assumptions set forth in the following table:

	Estimated Volatility			Annualized Forfeiture Rate			Expected Option Term (Years)		Estimated Exercise Factor		Risk-Free Interest Rate			Dividends
Modified options		70% - 157	%		0.00	%		0.25 – 2.5		10		0.08% - 0.29	%		—
New option		157	%		0.00	%		2.5		10		0.29	%		—

Expected volatility is based on the historical volatility of our common stock over the expected option term period ended on the last business day of each respective quarterly reporting period. The estimated forfeiture rate was set to zero as Mr. Dilworth is not obligated to perform any services for us under the terms of the separation agreement. The expected term was based on the actual expiration date of each of the options in the separation agreement. The estimated exercise factor was based on an analysis of historical data; historical exercise patterns; and a comparison of historical and current share prices. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury issues with remaining terms equivalent to our expected term on our stock-based awards. We do not anticipate paying dividends on our common stock for the foreseeable future.

We discounted the initial aggregate remaining cash salary continuation payments due Mr. Dilworth and medical premiums to be paid on his behalf of $458,600 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.

On July 17, 2013 we entered into a separation agreement and release with a former vice president-level employee who left the Company on June 7, 2013. Subject to the terms of the separation agreement, which became effective on July 17, 2013 (the “Effective Date”), we accrued $75,700 of severance liability at June 30, 2013, of which, $47,800 remained outstanding as of September 30, 2013.

The following table summarizes the salary continuation and medical coverage payments during the nine-month period ended September 30, 2013.

	Compensation			Medical Coverage			Total
Balance at December 31, 2012	$	250,100		$	12,300		$	262,400
Separation agreement entered into in 2013		60,000			15,700			75,700
Accrued interest		18,100			700			18,800
Payments		(197,200	)		(19,600	)		(216,800	)
Balance at September 30, 2013	$	131,000		$	9,100		$	140,100