STOCK-BASED COMPENSATION

The following table summarizes stock-based compensation costs for the years ended December 31, 2012, 2011 and 2010:



	Twelve Months Ended
	December 31,
	2012		2011		2010
Employee stock-based compensation in:
Cost of revenue	$	22,804	$	12,227	$	138,444
Selling and distribution	—		—		1,118,221
General and administrative	605,349		723,034		1,297,927
Research and development	40,239		79,259		245,664
Total employee stock-based compensation in operating expenses	645,588		802,293		2,661,812
Total employee stock-based compensation	$	668,392	$	814,520	$	2,800,256

During the year ended December 31, 2012, stock based compensation included $48,187 related to the accelerated vesting of certain stock options as a result of the reduction in force in the first quarter of 2012. During the year ended December 31, 2011, stock based compensation included $152,317 related to the accelerated vesting of certain stock options upon the acceptance by the FDA of the Company's preterm birth indication NDA in accordance with the original stock option agreements. During the year ended December 31, 2010, stock-based compensation expense in the amount of $1,400,000 for the acceleration and modification of the vesting of stock options and restricted shares was recognized as a result of the Actavis Transactions and is reflected in the total stock-based compensation reported in the amounts shown above. Stock based compensation for consultants amounted to $107,457, $143,342, and $483,893 for 2012, 2011 and 2010, respectively. No tax benefit has been recognized due to net tax losses during the periods presented.

As of December 31, 2012, total unamortized share-based compensation cost related to non-vested stock options was $271,174 which is expected to be recognized over the remaining vesting period of the outstanding options, up to the next 38 months. In December 2012, $194,530 was credited to stock compensation related to the forfeiture of unvested options. The Company selected the Black-Scholes option pricing model as the most appropriate model for determining the estimated fair value for share-based awards. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, and expected dividends.

The assumptions used to value options granted are as follows:



	2012		2011		2010
Risk free interest rate	0.82	%	2.11	%	1.38	%
Expected term	4.75 years		4.75 years		4.75 years
Dividend yield	—		—		—
Expected volatility	93.57	%	92.72	%	92.45	%

The Company estimated the volatility of its stock based on expected volatility of the Company’s stock which includes consideration of historical volatility in accordance with guidance in ASC 718 and SAB 110 (Expensing Employee Stock Options). The Company did not consider implied volatility because there are no comparable options traded on its stock. The risk-free interest rate assumption is based upon observed interest rates appropriate for the estimated term of the employee stock options. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts on Common Stock.

The expected term of employee stock options represents the weighted-average period that employees are expected to hold the options before exercise. The Company derived the expected term assumption based on the Company’s historical settlement experience, while giving consideration to options that have life cycles less than the contractual terms and vesting schedules in accordance with guidance in ASC 718,“Share Based Payment”, formerly SFAS 123(R) and SAB 110.

Stock Option Plans -

In May of 2008, the Company adopted the 2008 Long-term Incentive Plan (“2008 Plan”) which provides for the grant of stock options, stock appreciation rights and restricted stock to certain designated employees of the Company, Non-Employee directors of the Company and certain other persons performing significant services for the Company as designated by the Compensation Committee of the Board of Directors.Six million shares of Common Stock have been reserved for issuance under the 2008 Plan.

In October 1996, the Company adopted the 1996 Long-term Performance Plan (“1996 Plan”) which provides for the grant of stock options, stock appreciation rights and restricted stock to certain designated employees of the Company, non-employee directors of the Company and certain other persons performing significant services for the Company as designated by the Compensation/Stock Option Committee of the Board of Directors. Upon approval of the 2008 Plan, the Company stopped granting options under the 1996 Plan.

The Company’s stock options have a maximum term of ten years from the date of grant. Options granted prior to 2006 have a ten year term. Since 2006, the Company has been granting stock options with a seven year term. Options generally vest over a four-year period, with 25% vesting on each of the first four anniversaries of the date of grant. The 2007 annual option grant to employees vested 25% of the grant upon the grant date with the balance to vest equally over the next three years. The 2008 annual grant vests over 4 years. The Company’s general policy is to issue new shares upon the exercise of stock options.

A summary of the status of the Company’s two stock option plans as of December 31, 2012, 2011, and 2010 is presented below:



	2012			2011			2010
			Weighted-			Weighted-			Weighted-
			Average			Average			Average
			Exercise			Exercise			Exercise
	Shares		Price	Shares		Price	Shares		Price
Outstanding at beginning of year	5,104,215		$2.51	6,334,029		$2.56	5,960,304		$2.70
Granted	835,000		0.66	1,035,000		2.67	1,048,000		1.07
Exercised	—		—	(1,685,014	)	1.60	(59,375	)	1.33
Forfeited	(1,988,025	)	2.85	(579,800	)	4.69	(614,900	)	3.37
Outstanding at end of year	3,951,190		$1.90	5,104,215		$2.51	6,334,029		$2.56
Options exercisable at year end	2,429,940			3,556,965			5,326,029

The weighted average grant date fair values of options granted in 2012, 2011 and 2010 was $0.46, $1.32and $0.74 per share, respectively.

The weighted average exercise price and the weighted average remaining contractual life of the outstanding options expected to vest at December 31, 2012 amounted to $1.90 and 3.17 years, respectively.

The aggregate intrinsic value of options outstanding, options expected to vest and options exercisable at December 31, 2012, 2011 and 2010, were $0, $2,921,350 and $3,551,801, respectively. The intrinsic value of options exercised in 2012, 2011 and 2010, respectively, were $0, $2,515,708, and $44,764. Our current policy is to utilize shares held in treasury to settle option exercises and issue new shares for restricted stock grants.

During the year ended December 31, 2011, certain stock options were accelerated upon the acceptance by the FDA of the Company's preterm birth NDA in accordance with the original stock option agreements which resulted in an incremental expense of $152,317. During the year ended December 31, 2010, the vesting of all unvested options and restricted shares was accelerated upon the completion of the Actavis Transactions which resulted in an incremental expense of $1,299,519. In addition, the normal expiration terms for those employees who were terminated as a result of the Actavis Transactions was extended from 90 days to approximately 270 days or March 31, 2011. The Company recorded a charge of $57,470 related to this modification. Lastly, two executives were provided with an extension of their vested options which resulted in an expense of $469,237.

Restricted stock grants consist of grants of the Company’s Common Stock that may vest in the future. The Board has set a one, two, or four year vesting period for most of the issued restricted shares except annual grants to independent Directors which vest at the next annual meeting of stockholders. The fair value of each restricted share grant is equal to the market price of the Company’s Common Stock at the date of grant. Expense relating to restricted shares is at the closing price amortized ratably over the vesting period.

A summary of the Company’s restricted stock activity and related information for 2012 is as follows:



	2012			2011			2010
	Shares		Weighted Average Grant Date Fair Value	Shares		Weighted Average Grant Date Fair Value	Shares		Weighted Average Grant Date Fair Value
Unvested at beginning of period	34,880		$3.44	112,148		$1.07	337,039		$1.55
Granted	176,468		0.68	34,880		3.44	112,148		1.07
Vested	(34,880	)	0.68	(112,148	)	3.44	(290,109	)	1.07
Forfeited	—		—	—		—	(46,930	)	3.92
Unvested at December 31, 2012	176,468		$0.68	34,880		$3.44	112,148		$1.07

As of December 31, 2012, there was $37,440 of total unrecognized compensation costs related to non-vested restricted share-based compensation. The remaining cost is expected to be recognized over a weighted average period of .4 years. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was $0.0 million, $0.2 million and $0.1 million, respectively.