7. Stock Option Plans

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 is to grant no additional options under its 2000 Plan under which options to purchase 190,000 shares remained outstanding as of December 31, 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 December 31, 2011, there were 1,089,154 options available for 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 1,870,845 options outstanding at a weighted average exercise price of $3.67 at December 31, 2011. There were 502,372 non-vested stock options with a weighted average grant date fair value of $1.85 outstanding at December 31, 2011. As of December 31, 2011, there was $359,930 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 2.19 years.

Except for the certain grants of restricted common stock and common stock options containing market conditions as described below, the Company estimated share-based compensation expense for the years ended December 31, 2010 and 2011 using the Black-Scholes model with the following weighted average assumptions:

	Year Ended December 31,
	2010			2011
Risk free interest rate		1.64-3.0%			1.25-2.89%
Expected dividend yield		—			—
Expected volatility		77.6-82.0%			97.5-122.2%
Expected term **(in years)		5.5-6.25			43.0-6.25
Forfeiture rate		6.9	%		7.0	%

** Expected term is calculated using SAB 107 Simplified Formula. Management has concluded that the use of the simplified method for calculating the expected term of its common stock option grants is appropriate.

The following table summarizes the stock option activity for the 2000 Plan and the 2006 Stock Plan for the year ended December 31, 2011:

	Number of Shares			Weighted Average Exercise Price		Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2010		1,995,280		$	4.20		7.647	$	436,791
Granted		557,250			1.96
Exercised		(3,126	)		1.35
Expired		(170,375	)		7.64
Forfeited		(508,183	)		2.42
Outstanding, December 31, 2011		1,870,846		$	3.67		7.40	$	66,976
Exercisable, December 31, 2011		1,368,474		$	4.33		6.82	$	37,366

The weighted-average grant-date fair value of options granted during the years ended December 31, 2010 and 2011 was $1.80 and $1.47, respectively.

The following table provides additional information in regards to options outstanding as of December 31, 2011:

		Options Outstanding				Options Exercisable
Exercise Price		Number of Options		WA Remaining Contractual Term		Number of Options		WA Remaining Contractual Term
$	1.32		80,000		9.9548		—		—
	1.35		278,755		7.4579		207,588		7.4579
	1.66		74,750		9.7851		—		0.0000
	1.67		107,500		9.8042		—		0.0000
	2.21		100,000		8.3422		25,000		8.3422
	2.25		135,000		9.2813		135,000		9.2813
	2.35		80,500		8.9293		80,500		8.9293
	2.71		192,126		8.5339		113,098		8.5339
	3.05		160,728		6.7132		147,231		6.7132
	3.15		43,132		6.4613		43,132		6.4613
	3.24		11,500		6.3737		10,785		6.3737
	3.80		11,500		6.2587		10,785		6.2587
	4.29		11,500		5.6482		11,500		5.6482
	7.00		583,855		5.4374		583,855		5.4374
			1,870,846		7.4025		1,368,474		6.8226

Stock-based compensation expense was classified in the results of operation as follows:

	Year Ended December 31,
	2010		2011
Cost of revenue	$	176,005	$	226,108
Selling and marketing expense		85,172		25,494
General and administrative expense		398,973		446,211
Research and development expense		20,118		25,403
Totals	$	680,268	$	723,616

Thomas Bologna was appointed Chief Executive Officer of the Company on December 21 of 2011 and in connection with his appointment, Mr. Bologna was awarded stock options outside of the 2006 Stock Plan. Pursuant to the employment agreement between the Company and Mr. Bologna, dated December 21, 2011, and in reliance on NASDAQ Listing Rule 5636(c), the Company granted Mr. Bologna (i) a stock option to purchase 600,000 shares of the Company’s common stock, which vests monthly over 36 months from the date of grant, subject to his continued employment with the Company, (ii) a stock option to purchase 300,000 shares of the Company’s common stock, which vests in two equal installments on the first day of the 18th and 36th calendar months from the date of grant, subject to his continued employment with the Company, or if earlier, the date on which the 30-day trailing average closing price of the Company’s common stock equals or exceeds $1.80, and (iii) 270,000 shares of restricted common stock of the Company, which vest on the date on which the 30-day trailing average closing price of the Company’s common stock equals or exceeds $2.40. The exercise price of the stock options is $1.20 per share, the closing price of the Company’s common stock on the day prior to the date of grant. The expense recognized in connection with these grants was approximately $12,000 for the year ended December 31, 2011.

Since the restricted common stock grant vests upon attainment of a target price for the Company’s common stock and each tranche of the 300,000 share common stock option grant can vest sooner than the stated vesting dates based upon attainment of a target price for the Company’s common stock, these awards are deemed to include market conditions for purposes of determining the valuation and accounting for the awards. Accordingly, the fair value of the restricted stock grant and each tranche of the 300,000 share common stock option grant that Mr. Bologna received was determined using a Monte-Carlo simulation model to simulate the Company’s stock prices in the future that would trigger or not trigger the market conditions. The model used the following significant assumptions: a risk free rate ranging from .1664% - .4152%, terms ranging from 1.45 – 1.95 years, starting price equal to the grant date fair value of the Company’s common stock of $1.20, exercise price equal to the market condition and volatility equal of 75%. The restricted common stock awards of 270,000 shares had a fair value per unit on grant date of $0.87 and a derived service period of .98 years. The options that vest in June 2013 had a fair value per unit on grant date of $.38 and a median service period of 1.45 years, the options that vest in December of 2014 had a fair value per unit on grant date of $.48 and a median service period of 2.95 years. The options that vest over three years that were priced using the Black-Scholes model had a volatility of 122.2% a discount rate of 1.18%, an exercise price of $1.20 a share and an expected term of 3 years. For these awards containing market conditions, the compensation amount will be attributed over the service date unless vesting occurs sooner due to achieving the market condition.