Options and Equity Warrants

The Equity Plan effective May 1, 2004, authorizes the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and other stock awards. A maximum of 8,000,000 shares of common stock is reserved for potential issuance pursuant to awards under the Equity Plan of 2004. Unless sooner terminated, the Equity Plan of 2004 will continue in effect for a period of 10 years from its effective date.

The Equity Incentive Plan of 2007, effective June 20, 2007, authorizes the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and other stock awards. A maximum of 9,000,000 shares of common stock is reserved for potential issuance pursuant to awards under the Equity Incentive Plan of 2007. Unless sooner terminated, the Equity Incentive Plan of 2007 will continue in effect for a period of 10 years from its effective date.

The Equity Incentive Plan of 2009, effective June 24, 2009, authorizes the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and other stock awards. A maximum of 15,000,000 shares of common stock is reserved for potential issuance pursuant to awards under the Equity Incentive Plan of 2009. Unless sooner terminated, the Equity Incentive Plan of 2009 will continue in effect for a period of 10 years from its effective date.

The Equity Plan of 2004 and the Equity Incentive Plans of 2007 and 2009 are administered by the Board of Directors. The Plans provide for awards to be made to such Officers, other key employees, non-employee Directors, consultants and advisors of the Company and its subsidiaries as the Board may select.

Stock options awarded under the Plans may be exercisable at such times (not later than 10 years after the date of grant) and at such exercise prices (not less than fair market value at the date of grant) as the Board may determine. The Board may provide for options to become immediately exercisable upon a "change in control”, which is defined in the Plans to occur upon any of the following events: (a) the acquisition by any person or group, as beneficial owner, of 20% or more of the outstanding shares or the voting power of the outstanding securities of the Company; (b) either a majority of the Directors of the Company at the annual stockholders meeting has been nominated other than by or at the direction of the incumbent Directors of the Board, or the incumbent Directors cease to constitute a majority of the Company’s Board; (c) the Company’s stockholders approve a merger or other business combination pursuant to which the outstanding common stock of the Company no longer represents more than 50% of the combined entity after the transaction; (d) the Company’s stockholders approve a plan of complete liquidation or an agreement for the sale or disposition of all or substantially all of the Company’s assets; or (e) any other event or circumstance determined by the Company’s Board to affect control of the Company and designated by resolution of the Board as a change in control.

The fair value of each option and equity warrant award is estimated on the date of grant using a Black-Scholes-Merton pricing option valuation model. Expected volatility is based on the historical volatility of the price of the Company’s stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option and equity warrant. The Company uses historical data to estimate expected dividend yield, life and forfeiture rates. The expected life of the options and equity warrants was estimated based on historical option and equity warrant holders' behavior and represents the period of time that options and equity warrants are expected to be outstanding. The fair values of the options and equity warrants granted, were estimated based on the following weighted average assumptions:



	Year Ended December 31,
	2013	2012	2011
Risk-free interest rate	0.14%-1.40%	0.61%- 0.86%	0.83%- 2.24%
Expected dividend yield	0	0	0
Expected life	1-5 years	5 years	5 years
Expected volatility	89.727%-118.22%	108.76%-112.35%	104.29%-105.91%
Weighted average grant date fair value for options and equity warrants issued	$0.14 per option/warrant for 4,120,000 options/equity warrants	$0.23 per option/warrant for 1,499,000 options/equity warrants	$0.26 per option/warrant for 1,310,000 options/equity warrants

For stock options or equity warrants granted to employees and non-employees, the Company measures fair value of the equity instruments utilizing the Black-Scholes-Merton pricing method. The Company amortizes such cost over the related period of service.

The exercise price of all stock options and equity warrants granted was equal to or greater than the fair market value of the underlying common stock on the date of the grant.

Stock option activity during the years ended December 31, 2011, 2012 and 2013 is as follows:

Stock option activity for employees:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contracted Term (Years)	Aggregate Intrinsic Value
Outstanding January 1, 2011	7,222,480		$	2.35	6.21	—
Granted	1,030,000		0.41		9.51	—
Forfeited	—		—		0	—
Outstanding December 31, 2011	8,252,480		$	2.11	5.75	—
Granted	1,199,000		0.45		9.51	—
Forfeited	(10,000	)	1.30		5.50	—
Outstanding December 31, 2012	9,441,480		$	1.90	5.35	—
Granted	1,170,000		0.36		9.49	—
Forfeited	—		—		0	—
Outstanding December 31, 2013	10,611,480		$	1.73	4.92	—
Vested and expected to vest at December 31, 2013	10,086,480		$	1.79	4.55	—
Exercisable at December 31, 2013	10,086,480		$	1.79	4.55	—

The weighted-average grant-date fair value of employee options granted during the year 2013 was $222,000 for 1,170,000 options at $0.19 per option, the year 2012 was $284,000 for 1,199,000 options at $0.24 per option and during the year 2011 was $293,000 for 1,030,000 options at $0.28 per option.

Unvested stock option activity for employees:



	Number of Options		Weighted Average Exercise Price		Average Remaining Contracted Term (Years)	Aggregate Intrinsic Value
Outstanding January 1, 2011	50,555		$	1.33	7.60	—
Granted	140,000		0.33		9.93	—
Vested	(42,222	)	0.95		7.38	—
Forfeited	—		—		0	—
Outstanding December 31, 2011	148,333		$	0.49	9.52	—
Granted	509,708		0.43		9.52	—
Vested	(131,668	)	0.36		9.04	—
Forfeited	(10,000	)	1.30		5.50	—
Outstanding December 31, 2012	516,373		$	0.45	9.43	—
Granted	595,000		0.24		9.20	—
Vested	(586,373	)	0.38		9.26	—
Forfeited	—		—		0	—
Outstanding December 31, 2013	525,000		$	0.29	8.38	—

The weighted-average grant-date fair value of employee unvested stock options granted during the year 2013 was $100,000 for 595,000 options at $0.24 per option, during the year 2012 was $120,558 for 509,708 options at $0.24 per option and during the year 2011 was $24,000 for 140,000 options at $0.17 per option.

Stock option activity for non-employees during the year:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contracted Term (Years)	Aggregate Intrinsic Value
Outstanding January 1, 2011	2,848,432		$	2.03	5.80	—
Granted	280,000		0.27		9.88	—
Exercised	—		—		—	—
Forfeited	—		—		—	—
Outstanding December 31, 2011	3,128,432		$	1.87	5.25	—
Granted	300,000		0.29		9.50	—
Exercised	—		—		—	—
Forfeited	—		—		—	—
Outstanding December 31, 2012	3,428,432		$	1.73	4.71	—
Granted	850,000		0.56		9.53	—
Exercised	—		—		—	—
Forfeited	(150,000	)	2.00		—	—
Outstanding December 31, 2013	4,128,432		$	1.48	5.01	—
Vested and expected to vest at December 31, 2013	3,657,599		$	1.86	4.53	—
Exercisable at December 31, 2013	3,657,599		$	1.86	4.53	—

The weighted-average grant-date fair value of non-employee options granted during the year 2013 was $131,000 for 850,000 options at $0.15 per option, during the year 2012 was $59,922 for 300,000 options at $0.20 per option and during the year 2011 was $51,000 for 280,000 options at $0.18 per option.

Unvested stock option activity for non-employees:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contracted Term (Years)	Aggregate Intrinsic Value

Outstanding January 1, 2011	102,084		$	2.63	3.54	—
Granted	200,000		0.21		10.00	—
Vested	(45,834	)	2.81		1.50	—
Forfeited	—		—		—	—
Outstanding December 31, 2011	256,250		$	0.71	8.50	—
Granted	300,000		0.29		9.50	—
Vested	(345,828	)	0.53		7.95	—
Forfeited	—		—		—	—
Outstanding December 31, 2012	210,422		$	0.40	9.68	—
Granted	470,833		0.25		9.61	—
Vested	(210,422	)	0.40		—	—
Forfeited	—		—		—	—
Outstanding December 31, 2013	470,833		$	0.25	9.61	—

The impact on the Company’s results of operations of recording stock-based compensation for the year ended December 31, 2013 was to increase general and administrative expenses by approximately $376,000 and had no effect on earnings per share, for the year ended December 31, 2012 was to increase general and administrative expenses by approximately $356,000 and had no effect on earnings per share, and for year ended December 31, 2011 was to increase general and administrative expenses by approximately $377,000 and had no effect on earnings per share.

As of December 31, 2013 and 2012, there was $177,000 and $232,000, respectively, of unrecognized stock-based compensation cost related to options granted under the Equity Incentive Plans. Stock-based compensation related to options granted under the Equity Incentive Plans will be recorded over the vesting period which is typically one year or upon reaching agreed upon company and/or individual performance milestones being met which is indefinite.