NOTE 4 – STOCK-BASED COMPENSATION

On November 13, 2007, the Board of Directors and a majority of the Company’s stockholders approved the SafeStitch Medical, Inc. 2007 Incentive Compensation Plan (the “2007 Plan”), which was amended on June 19, 2012 to increase the number of shares of Common Stock available for issuance to 5,000,000. Under the 2007 Plan, which is administered by the Compensation Committee, the Company may grant stock options, stock appreciation rights, restricted stock and/or deferred stock to employees, officers, directors, consultants and vendors up to an aggregate of 5,000,000 shares of Common Stock, which are fully reserved for future issuance. The exercise price of stock options or stock appreciation rights may not be less than the fair market value of the Company’s shares at the date of grant and, within any 12 month period, no person may receive stock options or stock appreciation rights for more than one million shares. Additionally, no stock options or stock appreciation rights granted under the 2007 Plan may have a term exceeding ten years.

The Company granted 1,693,500 and 813,500 stock options under the 2007 Plan during the six months ended June 30, 2013 and 2012, respectively. The Company issued 123,500 stock options to consultants during the six months ended June 30, 2013 and 218,000 stock options that were issued to consultants during the six months ended June 30, 2012. The options granted during 2013 were issued at an exercise price of $0.45 per share and had an estimated aggregate grant date fair value of $668,000. The options granted during 2012 were issued at an exercise price ranging from $0.65 to $0.85 per share and had an estimated aggregate grant date fair value of $441,000. The weighted average grant date fair value of the options granted during the six months ended June 30, 2013 and 2012 was $0.40 per share and $0.54 per share, respectively.

Total stock-based compensation recorded for the three and six months ended June 30, 2013 was $437,000 and $503,000, respectively. Total stock-based compensation recorded for the three and six months ended June 30, 2012 was $113,000 and $224,000, respectively. All stock-based compensation is included in selling, general and administrative costs and expenses. The fair values of options granted are estimated on the date of their grant using the Black-Scholes option pricing model based on the assumptions included in the table below. The fair value of the Company’s stock option awards is expensed over the vesting life of the underlying stock options using the graded vesting method, with each tranche of vesting options valued separately. Expected volatility is based on the historical volatility of the Common Stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield of U.S. Treasury bonds on the grant date with a maturity equal to the expected term of the stock option. The expected life of stock option awards granted to employees and non-employee directors is based upon the “simplified” method for “plain vanilla” options described in SEC Staff Accounting Bulletin No. 107, as amended by SEC Staff Accounting Bulletin No. 110. The expected life of all other stock option awards is the contractual term of the option. Forfeiture rates are based on management’s estimates. The fair value of each option granted during the six months ended June 30, 2013 and 2012 was estimated using the following assumptions.

	Six months ended June 30, 2013	Six months ended June 30, 2012
Expected volatility	98% - 136%	85.41% - 111.36%
Expected dividend yield	0.00%	0.00%
Risk-free interest rate	0.92% – 1.71%	1.02% – 1.98%
Expected life	5.5 – 10.0 years	5.5 – 10.0 years
Forfeiture rate	0% - 2%	0% - 2%

The following summarizes the Company’s stock option activity for the six months ended June 30, 2013:

	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2012	2,079,000	$	1.03	6.77
Granted	1,693,500	$	0.45	9.82
Exercised	–		–
Canceled or expired	(225,500)	$	1.14
Outstanding at June 30, 2013	3,547,000	$	0.75	7.94	$	0
Exercisable at June 30, 2013	2,429,875	$	0.82	7.37	$	0
Vested and expected to vest at June 30, 2013	3,520,218	$	0.75	7.90	$	0

910,000 of the 1,693,500 options granted during the first six months of the Company’s 2013 fiscal year were vested as of June 30, 2013. At June 30, 2013, there was approximately $387,500 of total unrecognized compensation cost related to non-vested employee and director share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.57 years.

No options were exercised during the three and six months ended June 30, 2013 and 2012.

No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.