STOCK OPTIONS

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Note 10. STOCK OPTIONS

In March 2003, the Company’s shareholders approved its 2003 Stock Option and Incentive Plan (the “2003 Plan”). Pursuant to the 2003 Plan, the Company’s Board of Directors (or its committees and/or executive officers delegated by the Board of Directors) may grant incentive and nonqualified stock options, restricted stock, and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors. As of December 31, 2012, the maximum aggregate number of shares that may be authorized for issuance under the 2003 Plan for all periods is 1,600,000 shares. As of December 31, 2012, there were 311,250 restricted shares of Common Stock issued and options to purchase an aggregate of 821,250 shares of Common Stock outstanding under the 2003 Plan and 422,750 shares available for future grants.

In May 2008, the Company’s shareholders approved the 2008 Equity Compensation Plan (the “2008 Plan”). The 2008 Plan provides for grants of incentive stock options to employees and nonqualified stock options and restricted stock to employees, consultants and non-employee directors of the Company. In July 2010, the Company’s shareholders approved an amendment to the 2008 Plan to increase the maximum number of shares of Common Stock available under the Plan by 2,000,000 shares to 4,700,000 shares.  In June 2012, the Company’s shareholders approved an amendment to the 2008 Plan to increase the maximum number of shares available under the Plan by 5,300,000 shares to 10,000,000 shares.  As of December 31, 2012, there were restricted shares of Common Stock issued and options to purchase an aggregate of 4,442,239 shares of Common Stock outstanding under the 2008 Plan and 5,427,761 shares available for future grants.

The tables below show the remaining shares available for future grants for each plan and the outstanding shares.

	Stock Option Plans
	2003			2008
Shares Available For Issuance:
Total reserved for stock options and restricted stock		1,600,000			10,000,000
Restricted stock issued net of cancellations		(311,250	)		(2,568,906	)
Stock options granted		(1,544,491	)		(2,545,000	)
Add back options cancelled before exercise		678,491			541,667
Options cancelled by plan vote		-			-
Remaining shares available for future grants		422,750			5,427,761
							Not Pursuant to a Plan
Total granted		1,544,491			2,545,000			3,100,000
Less: Options cancelled		(678,491	)		(541,667	)		(1,383,334	)
Options exercised		(356,000	)		(130,000	)		(666,666	)
Shares outstanding, before restricted stock		510,000			1,873,333			1,050,000
Restricted stock issued, net of cancellations		311,250			2,568,906			284,844
Outstanding shares at December 31, 2012		821,250			4,442,239			1,334,844

Share-Based Compensation - Options

For options issued and outstanding during the years ended December 31, 2012, 2011 and 2010, the Company recorded additional paid-in capital and non-cash compensation expense of $938,537, $836,866 and $164,810, respectively, each net of estimated forfeitures.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the options. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the consolidated financial statements, to estimate option exercise and employee termination within the valuation model. The expected term of options granted under the Company’s stock plans, all of which qualify as “plain vanilla,” is based on the average of the contractual term (generally 10 years) and the vesting period (generally 24 to 42 months) as permitted under SEC Staff Accounting Bulletin Nos. 107 and 110. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option. Restricted stock grants are valued based on the closing market price for the Company’s Common Stock on the grant date.

The assumptions used principally for options granted to employees in the years ended December 31, 2012 and 2011 were as follows:

	2012			2011
Risk-free interest rate		0.92% - 2.05	%		1.80% - 3.47	%
Expected dividend yield		—			—
Expected term	6.5 years			6.5 years
Forfeiture rate (excluding fully vested options)		15	%		15	%
Expected volatility		131% - 142	%		137% - 142	%

A summary of option activity under the Company’s stock plans and options granted to officers of the Company outside any plan as of December 31, 2012 and changes during the year then ended is presented below:

Options:	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2012		3,395,103		$	1.68
Granted		700,000		$	1.66
Exercised		(237,666	)	$	0.94
Forfeited or expired		(424,105	)	$	3.76
Outstanding at December 31, 2012		3,433,332		$	1.47	6.11 years	$	885,300
Exercisable at December 31, 2012		2,241,332		$	1.06	5.48 years	$	885,300

The weighted-average grant-date fair value of options granted during the year ended December 31, 2012 was $1.66 per share. As of December 31, 2012, there was approximately $2,097,000 of total unrecognized compensation expense related to non-vested share-based option arrangements. With the exception of the unrecognized share-based compensation related to certain restricted stock grants to officers and employees that contain performance conditions related to United States Food and Drug Administration (FDA) approval for Symphony or the sale of the Company, unrecognized compensation is expected to be recognized over the next 12 months.