Note 11—Stock-Based Compensation Arrangements

In June 2004, the Company’s shareholders approved the adoption of the 2004 Employee Stock Compensation Plan (the 2004 Plan). The 2004 Plan provides for the award of nonqualified and incentive stock options, restricted stock, and stock awards to employees, directors, officers, and consultants of the Company. A total of 4,000,000 shares of the Company’s common stock had been reserved for award under the 2004 Plan At the Company’s 2011 annual meeting stockholders approved an amendment to the 2004 Employee, Director and Consultant Stock Plan increasing the aggregate number of shares of common stock which may be offered under the plan by an additional 2,000,000 shares.

On August 9, 2013, the Company’s shareholders’ approved the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Plan”). During the year ended December 31, 2014, the Company granted 137,000 stock options under the 2013 Plan. The 2013 Plan allows for the issuance of up to 8,860,000 additional shares of the Company’s common stock pursuant to awards granted under the 2013 Plan. Additionally, the 2013 plan allows for the issuance of up to a maximum of 2,435,500 additional shares of the Company’s common stock, pursuant to the cancellation, forfeiture, or expiry, of awards granted under the 2004 Plan and terminated on or after the 2013 plan approval on August 9, 2013. At December 31, 2014, the Company had recaptured 937,000 shares from the 2004 plan, leaving an aggregate of 6,165,100 shares of common stock available for grant under the 2013 Plan.

Stock Option Grants

It is the Company’s policy to grant stock options with an exercise price equal to the fair market value of the Company’s common stock at the grant date. Historically, the majority of the Company’s stock options have been granted in connection with the employee’s start date with the Company. In addition, the Company may grant stock options in recognition of promotion and/or performance.

Nonqualified and incentive stock options with a life of 10 years are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Options generally vest ratably over a period of three to five years based upon continuous service.

For purposes of determining the stock-based compensation expense for stock option awards in 2014 and 2013, the Black-Scholes option-pricing model was used with the following weighted-average assumptions:

	2014		2013
Risk-free interest rate	1.53	%	1.56	%
Expected life	5.73 years		5.73 years
Expected volatility	144.74	%	140.35	%
Dividend yield	0	%	0	%

Using these assumptions, the weighted average grant date fair value of options granted in 2014 and 2013 was $0.32 and $0.34, respectively.

Restricted Stock Awards

Holders of restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. Recipients of restricted stock awards are generally not required to pay any consideration to the Company for these restricted stock awards. The Company measures the fair value of the shares based on the last reported price at which the Company’s common stock traded on the date of the grant and compensation cost is recognized over the remaining service period. During each of the years ended December 31, 2014 and 2013, the Company granted no restricted stock awards.

Employee Stock Purchase Plan

Purchases made under the Company’s Employee Stock Purchase Plan are deemed to be compensatory because employees may purchase stock at a price equal to 85% of the fair market value of the Company’s common stock on either the first day or the last day of a calendar quarter, whichever is lower. During the years ended December 31, 2014 and 2013, employees purchased 134,935 and 111,113 shares, respectively, of common stock at a weighted-average purchase price of $0.24 and $0.28, respectively, while the weighted-average market value was $0.28 and $0.33 per share, respectively, resulting in compensation expense of $5,437 and $5,522, respectively.

The following table details stock option and restricted stock activity for the years ended December 31, 2014 and 2013.

	2014			2013
		Weighted Avg.			Weighted Avg.
		Exercise			Exercise
	Shares	Price		Shares	Price
Outstanding, beginning of period	5,884,050	$	0.43	2,302,000	$	1.06
Granted	137,000		0.35	4,693,800		0.38
Stock options exercised	––		0.00	(252,000)		0.32
Restricted stock exercised	––		0.00	(2,500)		0.00
Forfeited/Expired	(1,497,150)		0.53	(857,250)		1.87
Outstanding, end of period	4,523,900	$	0.39	5,884,050	$	0.43
Exercisable, end of period	1,645,161	$	0.43	588,750	$	0.89

The following table details further information regarding stock options and restricted stock outstanding and exercisable at December 31, 2014:

						Stock Options/Restricted Stock
	Stock Options/Restricted Stock Outstanding					Exercisable
			Weighted Avg.
			remaining	Weighted Avg.				Weighted Avg.
			contractual life	Exercise				Exercise
Range of Exercise Price:	Shares		(years)	Price		Shares		Price
$0.01–$1.00		4,474,900	8.51	$	0.38		1,596,161	$	0.39
$1.01–$2.00		45,000	3.25		1.40		45,000		1.40
$2.01–$3.00		––	––		––		––		––
$3.01–$4.00		––	––		––		––		––
$4.01–$5.00		4,000	0.93		4.10		4,000		4.10
		4,523,900	8.45	$	0.39		1,645,161	$	0.43
Aggregate intrinsic value	$	0				$	0

The aggregate intrinsic value in the preceding table is based on the last reported price at which the Company’s common stock traded on December 31, 2014, of $0.14.

The following table summarizes the status of the Company’s non-vested options for the years ended December 31, 2014 and 2013:

	2014			2013
		Weighted Avg			Weighted Avg
		Exercise			Exercise
	Shares	Price		Shares	Price
Non-vested options, beginning of year	5,295,300	$	0.38	925,050	$	0.42
Granted	137,000		0.35	4,693,800		0.38
Vested	(1,360,436)		0.38	(270,300)		0.48
Forfeited	(1,193,125)		0.38	(53,250)		0.51
Non-vested options, end of year	2,878,739	$	0.37	5,295,300	$	0.38

Total cost for stock-based compensation arrangements is as follows:

	Year Ended December 31,
	2014		2013
Stock option grants beginning of period	$	492,332	$	92,187
Stock-based arrangements during the period:
Stock option grants		1,166		100,638
Restricted stock issued:
Employee stock purchase plan		5,437		5,522
Director agreements		––		(540)
	$	498,935	$	197,807

As of December 31, 2014 and 2013, there was approximately $835,551 and $1,517,607 respectively, of total unrecognized compensation related to non-vested share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted average period of approximately 2.6 years.