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 2015, resulting in the total number of shares that may be issued as of January 1, 2015 to be 3,970,000. As of March 31, 2015, there were 1,508,922 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 2,461,078 options outstanding at a weighted average exercise price of $1.59 at March 31, 2015. There were 1,027,992 non-vested stock options outstanding with a weighted average exercise price of $1.07 at March 31, 2015. As of March 31, 2015, there was $637,950 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 2.4 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 months ended March 31, 2015* using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended March 31, 2015

Risk free interest rate		1.68	%
Expected dividend yield		—	%
Expected volatility		99.2	%
Expected term **(in years)		6.25
Forfeiture rate ***		7.0	%

* There were no stock options issued for the three months ended March 31, 2014.

** 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 lack of historical exercises and the standard terms of the employee option grants, including, options are granted at-the-money, exercise is conditional only on performing service through the vesting dates, termination of service causes forfeiture of options, employees have a limited number of days to exercise options after termination of service, and options are non-transferable.

*** Forfeiture range represents 0% for directors and 21% for employees.

The following table summarizes the stock option activity for the 2006 Plan for the three months ended March 31, 2015:

	Number of Shares		Weighted Average Exercise Price		Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2014		2,833,604	$	1.62		7.9	$	-
Granted (Unaudited)		15,000	$	0.43		10.0	$	150
Exercised (Unaudited)		-	$	-		-		-
Expired (Unaudited)		(177,566)		2.86		4.9		—
Forfeited (Unaudited)		(209,960)	$	1.22		—		—
Outstanding, March 31, 2015 (Unaudited)		2,461,078	$	1.56		7.8	$	150
Exercisable, March 31, 2015 (Unaudited)		1,433,086	$	1.91		7.0	$	—

The weighted-average grant-date fair value of options granted during the year ended December 31, 2014 was $0.70. The weighted-average grant-date fair value of options granted during the three months ended March 31, 2015 was $0.43. The aggregate intrinsic value of outstanding options at December 31, 2014 and the options exercised during 2014 were $-0- and $7,605, respectively, which represents options whose exercise price was less than the closing fair market value of the Company’s common stock on December 31, 2014 of $0.32. No options were exercised during the three months ended March 31, 2015.

The following table provides additional information regarding options outstanding under the 2006 Plan as of March 31, 2015 (unaudited):

	Options Outstanding				Options Exercisable
Exercise Price	Number of Options		WA Remaining Contractual Term		Number of Options		WA Remaining Contractual Term
$0.43 to 0.99		655,890		9.3		111,050		9.3
1.00 to 1.99		1,441,980		7.9		956,536		7.7
2.00 to 2.99		201,708		6.4		204,000		6.4
3.00 to 3.99		51,500		3.3		51,500		3.3
7.00		110,000		2.2		110,000		2.2
		2,461,078		7.8		1,433,086		7.0

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

	Three Months Ended March 31,

	2014		2015
Cost of revenue	$	11,256	$	9,327
Research and development		13,197		11,546
Sales and marketing		15,749		10,544
General and administrative		144,567		75,833
Totals	$	184,769	$	107,250

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 $-0- for the three months ended March 31, 2014 and 2015, respectively, and is included in the above table.

The following table summarizes these awards to Mr. Bologna:

Type	Grant Date	Number of Awards	Intrinsic Value as of March 31, 2015		Exercise Price		Options Exercisable	Remaining Contractual Term
Restricted Shares of Common Stock	12/21/2011	270,000	$	—	$	1.20	—	6.75
Options	12/21/2011	600,000	$	—	$	1.20	600,000	6.75
Options	12/21/2011	300,000	$	—	$	1.20	300,000	6.75

Issuance of Warrants in Connection with the SWK Credit Agreement

Refer to Note 2 to these unaudited condensed consolidated financial statements for a description of the warrants issued in conjunction with the SWK Credit Agreement in July 2014 and the first amendment to the SWK Credit Agreement in February 2015.

Refer to Note 11 to these unaudited condensed consolidated financial statements for a description of the second amendment to the SWK Credit Agreement, dated April 3, 2015, pursuant to which the Company drew the remaining $2,000,000 of the Loan Commitment Amount and issued certain of the Lenders warrants to purchase an aggregate of 2,702,702 shares of Common Stock.