Stock Option Plan

9 Months Ended

Sep. 30, 2011

Stock Option Plan

7. Stock Option Plan

In March 2000, the Company adopted a Stock Option Plan (the “2000 Plan”) as approved by its board of directors. Under the 2000 Plan, the Company may grant options to acquire up to 1,600,000 shares of common stock. In connection with the adoption of the 2006 Employee, Director and Consultant Stock Plan, as further discussed below, the Company will grant no additional options under its 2000 Plan under which options to purchase 190,000 shares remained outstanding as of September 30, 2011. Although no more options may be granted under the 2000 Plan, the terms of the 2000 Plan continue to apply to all outstanding options. The Company also granted options to purchase 16,000 shares of common stock to two consultants which were granted under separate agreements outside of the 2000 Plan.

On October 26, 2006, the Board of Directors of the Company approved, and on May 1, 2007, reapproved the adoption of the 2006 Employee, Director and Consultant Stock Plan (the “2006 Stock Plan”). The stockholders approved the 2006 Stock Plan on June 1, 2007. The initial number of shares which may be issued from time to time pursuant to this Plan is 2,160,000 shares of common stock.  In addition, on the first day of each fiscal year of the Company during the period beginning in fiscal year 2008, and ending on the second day of fiscal year 2017, the number of shares that may be issued from time to time pursuant to the Plan shall be increased by 200,000 shares.  The initial number of shares available for issuance of 2,160,000 increased by 200,000 in 2008, 2009 2010 and 2011, resulting in the total number of shares that may be issued as of January 1, 2011 to be 2,960,000.  As of September 30, 2011, there were 963,069 options available to grant under the 2006 Stock Plan.

Employee options vest according to the terms of the specific grant and expire 10 years from the date of grant. Non-employee option grants to date vest typically over a 2 to 3 year period. The Company had 1,996,931 options outstanding at a weighted average exercise price of $3.77 at September 30, 2011. There were 785,572 non-vested stock options with a weighted average grant date fair value of $1.35 outstanding at September 30, 2011.  As of September 30, 2011, there was $1,216,434 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan.  That cost is expected to be recognized over a weighted-average period of 2.59 years.

The Company estimated share-based compensation expense for the three months ended September 30 using the Black-Scholes model with the following weighted average assumptions:

	2010			2011
Risk free interest rate		3.0	%		—
Expected dividend yield		—			—
Expected volatility		82	%		—
Expected term (in years)		6.25			—
Forfeiture rate		7.8	%		—

During the three months ended September 30, 2010, there were 281,500 option shares granted with a fair value of $1.90. The Company estimated the fair value using the Black-Scholes model with a risk free interest rate of 1.9%, expected volatility of 82%, and an expected term of 5.94 years.  During the nine months ended September 30, 2010, there were 381,500 option shares granted with an average fair value of $1.82. Also during the nine months ended September 30, 2010, the Company modified an award for a terminated employee by extending the term on 40,000 shares for an additional one year period expiring in April 2011.  The fair value of the modification was $1.06 per share and it was estimated using the Black-Scholes model with a risk free interest rate of 0.46% and expected volatility of 95%. For the three months ended September 30, 2011, there were no option shares granted.

The following table summarizes the stock option activity for the nine months ended September 30, 2011:

	Number of Shares			Weighted Average Exercise Price		Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2010		1,995,280		$	4.18		7.52	$	446,501
Granted (Unaudited)		295,000		$	2.27
Exercised (Unaudited)		(4,314	)	$	—
Forfeited (Unaudited)		(289,035	)	$	2.71
Outstanding, September 30, 2011 (Unaudited)		1,996,931		$	3.77		7.48	$	191,332
Exercisable, September 30, 2011 (Unaudited)		1,211,359		$	4.75		6.63	$	120,260

Information about stock-based compensation included in the results of operations for the three and nine months ended September 30, 2010 and 2011 are as follows:

	Three Months Ended  September 30,				Nine Months Ended  September 30,
	(Unaudited)				(Unaudited)
	2010		2011		2010		2011
Cost of revenue	$	78,916	$	61,395	$	138,100	$	208,672
Research and development		8,051		10,951		19,029		37,221
Sales and marketing		53,976		5,521		53,976		18,765
General and administrative		173,340		128,852		313,185		439,113
Totals	$	314,283	$	206,719	$	524,290	$	703,771