Stock Options

9 Months Ended

Sep. 30, 2014

Notes to Financial Statements

Stock Options

Stock Option Program Description

 As of September 30, 2014, the Company had two equity compensation plans, the 1996 Stock Option Plan (the “1996 Plan”) and the 2006 equity compensation plan (the “2006 Plan”). The 1996 Plan has expired for the purposes of issuing new grants. However, the 1996 Plan will continue to govern awards previously granted under that plan. The 2006 Plan has been approved by the Company’s shareholders. Equity compensation grants are designed to reward employees and executives for their long term contributions to the Company and to provide incentives for them to remain with the Company. The number and frequency of equity compensation grants are based on competitive practices, operating results of the company, and government regulations.

 The maximum number of shares issuable over the term of the 1996 Plan was limited to 65 million shares (without giving effect to subsequent stock splits). Options granted under the 1996 Plan typically have an exercise price of 100% of the fair market value of the underlying stock on the grant date and expire no later than ten years from the grant date. On August 27, 2013, the Board of Directors of Enova Systems approved amendments to Enova's 2006 Equity Compensation Plan (a) to increase the number of shares authorized for issuance from 3,000,000 shares to 9,000,000 shares and (b) to increase the number of shares of common stock that may be issued to an individual in any calendar year from 500,000 shares to 5,000,000 shares. Of the 9,000,000 shares reserved for issuance under the amended 2006 Plan, 3,750,000 and 0 were granted in the nine months ended September 30, 2014 and 2013 and 30,000 shares were available for grant as of September 30, 2014. Options granted under the 2006 Plan have terms of between three and ten years and generally vest and become fully exercisable from one to three years from the date of grant or vest according to the price performance of our shares.

 On May 23, 2014, the Board approved the grant to (x) John Micek of an option to purchase 2,000,000 shares of the Common Stock of Enova at an exercise price of $0.02 per share, (y) to each of the other three Board members of Enova other than Mr. Micek of an option to purchase 500,000 shares of the Common Stock of Enova at an exercise price of $0.02 per share and (z) a contractor of an option to purchase 250,000 shares of the Common Stock of Enova at an exercise price of $0.02 per share. The vesting of all such options was made conditional upon the Board approving, and Enova entering into definitive agreements covering and thereafter consummating, (w) a sale of Enova's equity for cash consideration in an amount of no less than $1 Million in one transaction or a series of related transactions or (x) a sale of all or substantially all of Enova's assets or (y) the acquisition of Enova by another entity by means of a merger, share exchange, tender offer or other similar transaction or (z) the acquisition by Enova of another entity by means of a merger, share exchange, tender offer or other similar transaction, whereby the stockholders of Enova prior to any such transaction under (y) or (z) no longer own a majority of the voting stock of Enova after such transaction. Concurrently with the grant of these options, the vesting provisions of Mr. Micek's August 27, 2013, option grant previously disclosed were modified to conform to the aforementioned vesting criteria.

 Stock-based compensation expense related to stock options was $18,000 and $10,000 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, the total compensation cost related to non-vested awards not yet recognized is $58,000. The remaining period over which the future compensation cost is expected to be recognized is 27 months.

The following table summarizes information about stock options outstanding and exercisable at September 30, 2014:

	Number of Share Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value(1)
Outstanding at December 31, 2013		5,210,000	$	0.12		2.72	$	—
Granted		3,750,000	$	0.02		2.65	$	—
Exercised		—	$	—		—	$	—
Forfeited or Cancelled		69,000	$	1.26		—	$	—
Outstanding at September 30, 2014		8,891,000	$	0.07		2.23	$	—
Exercisable at September 30, 2014		679,000	$	0.63		2.11	$	—
Vested and expected to vest (2)		8,891,000	$	0.07		2.23	$	—

(1)	Aggregate intrinsic value represents the value of the closing price per share of our common stock on the last trading day of the fiscal period in excess of the exercise price multiplied by the number of options outstanding or exercisable, except for the “Exercised” line, which uses the closing price on the date exercised.
(2)	Number of shares includes options vested and those expected to vest net of estimated forfeitures.

 The exercise prices of the options outstanding at September 30, 2014 ranged from $0.02 to $4.35. The Company’s policy is to issue shares from its authorized shares upon the exercise of stock options.

 Unvested share activity for the nine months ended September 30, 2014 is summarized below:

	Unvested Number of Options			Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2013		4,535,000		$	0.02
Granted		3,750,000		$	0.01
Vested		(72,000	)	$	0.07
Forfeited		—		$	—
Unvested balance at September 30, 2014		8,213,000		$	0.01

 The fair values of all stock options granted are estimated on the date of grant using the Black-Scholes option-pricing model. Options granted during the nine months ended September 30, 2014 and 2013 were 3,750,000 and 4,400,000, respectively.  

 The estimated fair value of grants of stock options to nonemployees of the Company is charged to expense in the financial statements. These options vest in the same manner as the employee options granted under each of the option plans as described above.