Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

4.             Stock-Based Compensation

Stock Option Plans

In May 2005, the Company’s shareholders approved the 2005 Stock Incentive Plan (the “2005 Plan”).  Incentive stock options are issuable only to employees of the Company, while non-qualified stock options may be issued to non-employee directors, consultants and others, as well as to employees.  Under the 2005 Plan, the per share exercise price of incentive stock options may not be less than the fair market value of the common stock on the date the option is granted.  The 2005 Plan provides that the Company may not grant non-qualified stock options at an exercise price less than 85% of the fair market value of the Company’s common stock.

The Company grants stock options to its non-employee directors.  New non-employee directors receive an initial grant of an option to purchase 45,000 shares of the Company’s common stock that generally vest in quarterly installments over three years.  Once the initial grant has fully vested, non-employee directors (other than the Chairman of the Board) receive an annual grant of an option to purchase 22,500 shares of the Company’s common stock that generally will vest in four equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 45,000 shares of the Company’s common stock that generally vests in four equal quarterly installments. All such options have an exercise price equal to the fair market value of the Company’s common stock on the date of grant.

As a result of employee terminations in 2011, options held by terminated employees to purchase a total of 173,000 shares of common stock with an exercise price of $0.24 per share were cancelled, but were replaced by the Company with new options, all of which were immediately vested, to purchase 173,000 shares of common stock at an exercise price of $0.24 per share.  The Company recorded an additional $2,000 in stock compensation expense related to these grants during the three months ended March 31, 2011.

As a result of the workforce reduction that occurred during the three months ended March 31, 2010, options held by terminated employees to purchase a total of 498,000 shares of common stock with an exercise price of $0.24 per share were cancelled, but were, as part of the Company’s overall severance arrangement with the terminated employees, replaced by the Company with new options to purchase 498,000 shares of common stock at an exercise price of $0.24 per share.  These new options were fully vested upon grant and expire one year from the date of grant. The Company recorded an additional $37,000 in stock compensation expense related to these grants during the three months ended March 31, 2010.

During the three months ended March 31, 2011, the Company granted options to purchase 100,000 shares of the Company’s common stock to a non-employee that vested immediately, and granted options to purchase 200,000 shares of the Company’s common stock to an employee that vest ratably over a three year period.

During the three months ended June 30, 2011, the Company granted options to purchase 200,000 shares of the Company’s common stock to non-employees that vested immediately, granted options to purchase 565,000 shares of the Company’s common stock to employees with performance-based vesting, and granted options to purchase 112,500 shares of the Company’s common stock to non-employee directors which vest quarterly over one year.  Management has determined it is probable that the performance conditions associated with the performance based vesting will be met therefore the related expense is being recognized over a one year period.

As of June 30, 2011, there were 564,000 shares of common stock available to be granted under the 2005 Plan.

The following is a summary of option activity under all plans (in thousands, except per option data):

	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding, December 31, 2010	5,529		$	0.24
Granted	1,350		0.15
Exercised	—		—
Forfeited	(1,004	)	0.25
Expired	—		—
Cancelled	(173	)	0.24
Outstanding, June 30, 2011	5,702		$	0.19	2.73	$	7
Exercisable, June 30, 2011	4,109		$	0.22	2.75	$	7

Stock-Based Compensation Expense

The Company recorded compensation expense of $63,000 and $93,000 in the three and six months ended June 30, 2011, as compared to $95,000 and $174,000 in the three and six months ended June 30, 2010.  As of June 30, 2011, the Company had $109,000 of total unrecognized compensation cost related to its unvested options, which is expected to be recognized over a weighted average period of 0.72 years.

The weighted average fair value of options issued, as estimated using the Black-Scholes model, was $0.12 and $0.11 during the three months ended June 30, 2011 and 2010, respectively, and was $0.11 and $0.08 during the six months ended June 30, 2011 and 2010, respectively.  The assumptions used were as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2011	2010	2011	2010
Expected life (years)	5.50–6.00	1.00 – 6.00	1.00 – 6.00	1.00 – 6.00
Risk free rate	2.20–2.65%	0.39–2.27%	0.27–2.65%	0.39–2.27%
Volatility	116.7–121.6%	86–250%	107.2–132.1%	86–250%
Expected dividend yield	None	None	None	None
Value of options granted	$0.12–0.13	$0.02–0.14	$0.01–0.13	$0.02–0.14

The expected life was calculated in 2011 and 2010 using the simplified method. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the expected term.  Expected volatility is based exclusively on historical volatility data of the Company’s common stock.  The Company estimates an expected forfeiture rate by analyzing historical forfeiture activity and considering how future forfeitures are expected to differ from historical forfeitures.  The Company expects that all outstanding options at June 30, 2011 will fully vest over their requisite service period.  Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

Stock Purchase Plan

The Company has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for all eligible employees whereby shares of the Company’s common stock may be purchased at six-month intervals at 95% of the average of the closing bid and ask prices of the Company’s common stock on the last business day of the relevant plan period.  Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period, subject to certain additional limitations.  There was no activity during the three or six months ended June 30, 2011 or 2010.  At June 30, 2011, 294,461 shares were reserved for future issuance under the Purchase Plan.