7. Stock Option Plans

In March 2000, the Company adopted a Stock Option Plan (the “2000 Stock Plan”) as approved by its Board of Directors. Under the 2000 Stock Plan, the Company granted 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 the 2000 Stock Plan. Under the 2000 Stock Plan, there were no options to purchase shares of the Company’s common stock that remained outstanding as of June 30, 2013. Prior to March 2007, 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 Stock 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 the 2006 Stock Plan was 2,160,000 shares of common stock. Also, the 2006 Stock Plan includes the number of shares subject to purchase under options issued under the 2000 Stock Plan, where the options expired on or after October 18, 2006, subject to a maximum of 210,000 additional options. 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 2006 Stock Plan is increased by the lesser of (i) 200,000 shares or equivalent, after determination of the effect of any stock split, stock dividend, combination or similar transactions as set forth in the 2006 Stock Plan, (ii) 5% of the number of outstanding shares of common stock of the Company on such date or (iii) an amount determined by the Board of Directors of the Company. The initial number of shares available for issuance of 2,160,000 increased by 210,000 for options issued under the 2000 Stock Plan expiring after October 2006 and by 200,000 in 2008, 2009, 2010, 2011, 2012 and 2013, resulting in the total number of shares that may be issued as of January 1, 2013 to be 3,570,000. As of June 30, 2013, there were 2,004,610 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 typically vest over a 2 to 3 year period. The Company had 1,565,390 options outstanding at a weighted average exercise price of $2.09 at June 30, 2013. There were 792,252 non-vested stock options outstanding with a weighted average grant date fair value of $1.39 at June 30, 2013. As of June 30, 2013, there was $613,208 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Stock Plan. That cost is expected to be recognized over a weighted-average period of 3.19 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 three months ended June 30, 2012 and 2013 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended June 30,
	2012			2013
	(Unaudited)			(Unaudited)
Risk free interest rate		0.88	%		0.90-1.40	%
Expected dividend yield		—			—
Expected volatility		71.86	%		102.16-102.99	%
Expected term **(in years)		6.25			6.25
Forfeiture rate		7.0	%		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 given the Company’s lack of history of option exercises.

The following table summarizes the stock option activity for the 2006 Plan for the six months ended June 30, 2013:

	Number of Shares		Weighted Average Exercise Price		Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2012		1,749,310	$	2.12		8.32	$	151,919
Granted (Unaudited)		255,000	$	1.38		9.81		—
Exercised (Unaudited)		(834)	$	—		—		—
Expired (Unaudited)		(135,135)		2.75		6.68		11,166
Forfeited (Unaudited)		(302,951)	$	1.39		—		66,495
Outstanding, June 30, 2013 (Unaudited)		1,565,390	$	2.09		8.04	$	134,268
Exercisable, June 30, 2013 (Unaudited)		773,138	$	2.81		6.87	$	61,477

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2012 and 2013 was $1.47 and $1.38, respectively.

The following table provides additional information regarding options outstanding under the 2006 Plan as of June 30, 2013 (Unaudited):

		Options Outstanding				Options Exercisable
Exercise Price		Number of Options		WA Remaining Contractual Term		Number of Options		WA Remaining Contractual Term
$	1.00 to 1.99		1,169,390		8.81		389,699		8.02
	2.00 to 2.99		178,500		7.45		165,939		7.49
	3.00 to 3.99		71,000		5.07		71,000		5.08
	4.00 to 4.99		11,500		4.15		11,500		4.15
	7.00		135,000		3.94		135,000		3.94
			1,565,390		8.04		773,138		6.87

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

	Three Months Ended June 30,				Six Months Ended June 30,
	( Unaudited )				( Unaudited )
	2012		2013		2012		2013
Cost of revenue	$	17,547	$	14,898	$	34,237	$	28,384
Research and development		9,943		8,916		12,423		18,758
Sales and marketing		13,693		(4,427)		28,060		12,973
General and administrative		155,193		69,134		446,664		133,729
Totals	$	196,376	$	88,521	$	521,384	$	193,844

Thomas Bologna was appointed Chief Executive Officer of the Company on December 21, 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 $103,332 and $44,531 for the three months ended June 30, 2012 and 2013, respectively, and was $335,665 and $89,061 for the six months ended June 30, 2012 and 2013, respectively. These expense amounts are included in the above table.

Since the restricted shares of 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 shares of common 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. 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.

The following table summarizes these awards to Mr. Bologna:

Type	Grant Date	Number of Awards		Intrinsic Value as of June 30, 2013		Exercise Price		Options Exercisable		Remaining Contractual Term
Restricted Shares of Common Stock	12/21/2011		270,000	$	86,400	$	—		—		8.5
Options	12/21/2011		600,000	$	192,000	$	1.20		300,000		8.5
Options	12/21/2011		300,000	$	96,000	$	1.20		300,000		8.5

During the first quarter of 2012, Mr. Bologna’s stock award of 300,000 shares met the conditions for vesting in that the 30-day trailing average closing price of the Company’s common stock exceeded $1.80. The Company recognized expense of $129,000 for the vesting of this tranche of options for Mr. Bologna’s stock awards during the quarter ended March 31, 2012. As of June 30, 2013, the accelerated vesting conditions for the 600,000 share stock option grant and the 270,000 restricted shares of common stock had not been met.