6. 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 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 additional 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 year ended December 31, 2011.

During year ended December 31, 2011, the Company granted options to purchase 300,000 shares of the Company’s common stock to non-employees that vested immediately, and granted options to purchase 350,000 shares of the Company’s common stock to employees that vest ratably over a three year period.

During the year ended December 31, 2011, the Company 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 determined that as of June 30, 2012, it was probable that the performance conditions associated with the performance-based vesting were to be met in July 2012 with the closing of the second tranche convertible notes. Therefore, the related expense was recorded in the year ended December 31, 2012.

During the year ended December 31, 2012, the Company granted options to employees to purchase 355,000 shares of the Company’s common stock, which vest ratably over a three year period and granted options to purchase 112,500 shares of the Company’s common stock to non-employee directors that vest quarterly over one year.

During the year ended December 31, 2012, the Company issued an aggregate of 2,083,338 shares of restricted common stock to Garden State Securities, Inc. and JFS Investments, Inc. in exchange for certain investor relations and related consulting services to the Company. These shares vested immediately but are restricted from being sold for a period of six months from the date of issuance. The issuance of these shares resulted in $464,000 of compensation expense in the year ended December 31, 2012.

As of December 31, 2012, there were 674,156 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		$	0.21
Granted	1,500		0.15
Exercised	—		—
Forfeited	(1,254	)	0.23
Expired	—		—
Cancelled	(173	)	0.24
Outstanding, December 31, 2011	5,602		$	0.21
Granted	468		0.17
Exercised	—		—
Forfeited	(3	)	0.55
Expired	—		—
Cancelled	(475	)	0.24
Outstanding, December 31, 2012	5,592		$	0.21	3.21	$	6,500
Exercisable, December 31, 2012	4,948		$	0.21	2.44	$	5,500

Stock-Based Compensation Expense

The Company recorded employee compensation expense of $80,000 and $148,000 in the years ended December 31, 2012 and 2011, respectively. The Company also recorded non-employee compensation expense of $464,000 related to the issuance of restricted common shares during the year ended December 31, 2012,. As of December 31, 2012, the Company had $64,000 of total unrecognized compensation cost related to its unvested options, which is expected to be recognized over a weighted average period of 1.68 years.

The weighted average fair value of options issued during the years ended December 31, 2012 and 2011 was estimated using the Black-Scholes model and was $0.16 and $0.10 respectively.

	Year Ended December 31,
	2012	2011
Expected life (years)	5.00 – 6.00	1.00 – 6.00
Interest rate	0.19 – 0.69%	0.27 – 2.65%
Volatility	204.1 – 216.2%	107.2 – 169.0%
Expected dividend yield	None	None
Value of option granted	$0.12 – 0.17	$0.01 – 0.13

The expected life was calculated in 2012 and 2011 using the simplified method. The risk-free interest rate is based upon 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 December 31, 2012 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 in 2012 or 2011. At December 31, 2012, 294,461 shares were reserved for future issuance under the Purchase Plan.