7. Stock Options, Restricted Stock and Warrants

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 December 31, 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 through 2014, resulting in the total number of shares that may be issued as of January 1, 2014 to be 3,770,000. As of September 30, 2014, there were 811,589 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 two- to three-year period. The Company had 2,799,888 options outstanding at a weighted average exercise price of $1.63 at September 30, 2014. There were 1,612,301 non-vested stock options outstanding with a weighted average exercise price of $1.15 at September 30, 2014. As of September 30, 2014, there was $1,064,174 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 2.5 years.

Except for 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 and nine months ended September 30, 2013 and 2014 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2014		2013				2014
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Risk free interest rate		1.37	%	1.78-1.91	%		0.90-1.40	%		1.78-1.91	%
Expected dividend yield		—		—			—	%		—	%
Expected volatility		107.4	%	98.4-103.3	%		102.1-107.4	%		98.4-103.3	%
Expected term **(in years)		5.0		5.5-6.0			5.0-6.0	%		5.5-6.0
Forfeiture rate		7.0	%	7.0	%		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 nine months ended September 30, 2014:

			Weighted
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Life (Years)	Value
Outstanding, December 31, 2013		2,288,076	$	1.83	8.4	$	1,082
Granted (Unaudited)		755,250	$	0.88	9.8		—
Exercised (Unaudited)		(20,000)	$	1.16	7.8		7,605
Expired (Unaudited)		(13,211)		1.36	8.5		—
Forfeited (Unaudited)		(210,227)	$	1.13	—		—
Outstanding, September 30, 2014 (Unaudited)		2,799,888	$	1.63	8.0	$	—
Exercisable, September 30, 2014 (Unaudited)		1,187,587	$	2.29	6.7	$	—

The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2013 was $1.60 and $1.41, respectively. The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2014 was $0.70 and $0.70, respectively.

The following table provides additional information regarding options outstanding under the 2006 Plan as of September 30, 2014 (unaudited):

		Options Outstanding				Options Exercisable
				WA				WA
				Remaining				Remaining
		Number of		Contractual		Number of		Contractual
Exercise Price		Options		Term		Options		Term
$	0.88		712,125		9.8		24,439		9.8
	1.00 to 1.99		1,572,763		8.3		694,813		7.7
	2.00 to 2.99		297,500		6.9		250,835		6.7
	3.00 to 3.99		71,000		3.8		71,000		3.8
	4.29		11,500		2.9		11,500		2.9
	7.00		135,000		2.7		135,000		2.7
			2,799,888		8.1		1,187,587		6.7

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	( Unaudited )
	2013		2014		2013		2014
Cost of revenue	$	12,600	$	12,164	$	40,984	$	36,341
Research and development		8,075		1,373		26,833		38,461
Sales and marketing		6,493		4,905		19,466		51,318
General and administrative		74,293		32,157		208,022		533,130
Totals	$	101,461	$	50,599	$	295,305	$	659,250

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, as amended, 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 vested in 2012, 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 $44,531 and $44,531 for the three months ended September 30, 2013 and 2014, respectively, and was $133,592 and $133,592 for the nine months ended September 30, 2013 and 2014, respectively, and is included in the above table.

The following table summarizes these awards to Mr. Bologna:

					Intrinsic
					Value as of						Remaining
					September 30,				Options		Contractual
Type	Grant Date		Number of Awards		2014		Exercise Price		Exercisable		Term
Restricted Shares of Common Stock		12/21/2011		270,000	$	186,300	$	—		—		7.2
Options		12/21/2011		600,000	$	—	$	1.20		550,000		7.2
Options		12/21/2011		300,000	$	—	$	1.20		300,000		7.2

On March 12, 2014, the Company granted 62,500 shares of restricted common stock, with a value of $86,250, to a vendor in connection with a contract for services. The shares vest monthly in equal installments from April 2014 through December 2014. At September 30, 2014, 41,667 shares had vested. The expense recognized in connection with this grant was $ 28,750 and $57,500 for the three and nine months ended September 30, 2014 , respectively, and is included in general and administrative expense in the stock-based compensation table above.

On July 30, 2014, the Company issued an Initial Warrant to purchase up to 681,090 shares of common stock in connection with the SWK Credit Agreement, and the warrant was recorded as an equity warrant in the balance sheet. The warrant is exercisable , in whole or in part and from time to time, from the date of issuance until and including July 30, 2020 at an exercise price of $0.936 per share, subject to adjustment. The warrant was valued at $ 414,239, or approximately $0.61 per covered share, using a Black-Scholes pricing model with the following assumptions: 2.01% risk free rate, 0% dividend, 101.5% volatility, and six-year expected life. The proceeds received pursuant to the SWK Credit Agreement were allocated to the liability for debt, a debt issuance discount and $377,140 to additional paid-in capital for the warrant. Pursuant to the SWK Credit Agreement, upon funding of the second tranche of the commitment under the agreement, the Company will be required to issue a second warrant to the lenders under the SWK Credit Agreement. The number of common shares that could be purchased under the second warrant will be calculated if and when the Company draws the second tranche of funding. On September 9, 2014, SWK Funding LLC, the initial lender and agent, assigned a portion of the Initial Warrant consisting of the right to purchase 200,321 shares of common stock to SG-Financial, LLC.