Note 3

Stock-Based Compensation

The Company has a stock incentive plan, as amended (the “Plan”), under which stock options for 10,400,000 shares of the Company’s common stock may be granted. Grants under the Plan may be made to employees (including officers), directors, consultants, advisors or other independent contractors who provide services to the Company or its subsidiary.

The Company’s accounting for stock options or similar equity instruments requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on estimated fair values determined using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of operations.

During the three and nine months ended September 30, 2013 and 2012, the Company granted stock options to employees and non-employee directors as follows:

	For the three months ended September 30,			For the nine months ended September 30,
	2013	2012		2013		2012
Options granted during period	n/a		827,000		985,500		2,136,000
Weighted average exercise price	n/a	$	1.14	$	1.10	$	3.26
Weighted average grant date fair value	n/a	$	0.81	$	0.77	$	2.21

On April 15, 2013, the Company granted options for the purchase of an aggregate of 200,000 shares of its common stock to non-employee directors that vest only upon a change of control of the Company. Per the Notice of Grant, a change of control is defined as the sale, lease, exchange or other transfer of substantially all of the assets of the Company; or if any person not a shareholder on the date of grant becomes the beneficial owner, directly or indirectly, of 50% or more of the combined voting power of the Company’s outstanding securities other than through a traditional financing transaction; or a merger or consolidation to which the Company is a party should occur resulting in the shareholders of the Company having beneficial ownership of less than 50% of the combined voting power of the surviving company’s outstanding securities immediately following such a transaction. These grants expire on December 31, 2014. The vesting of these options is conditioned upon an event that has not yet occurred. As such, compensation expense for these options will not be recorded unless and until that event occurs and the vesting condition is met.

The fair value of each option award made to employees and directors during the three and nine months ended September 30, 2013 and 2012 was estimated on the date of grant using the Black-Scholes closed-form option valuation model utilizing the following assumptions. To determine the risk-free interest rate, the Company utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of the Company’s awards. The Company estimated the expected life of the options granted based on anticipated exercises in future periods. The expected dividends reflect the Company’s current and expected future policy for no payment of dividends on its common stock. The Company relies exclusively on the trading and price history of the Company’s stock in order to determine the expected volatility. The Company plans to continue to analyze the expected stock price volatility and expected term assumption at each grant date as more historical data for its common stock becomes available. Given the events of 2012 and the corporate restructuring that occurred in July 2012 that have negatively impacted the Company’s staffing levels, the estimated forfeiture rate was changed to 24% for the first six months of 2012 and the impact of this change in estimate was recognized as a cumulative catch-up and serves to reduce the stock-based compensation costs for the quarter ended June 30, 2012. In January 2013, the Company again reviewed its estimated forfeiture rate, based upon the adjusted staffing levels resulting from attrition in late 2012 and early 2013 and, effective at that date, modified its estimated forfeiture rate to 10%. Due to the limited amount of historical data available to the Company, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from the Company’s assumptions. The table below summarizes the assumptions utilized in estimating the fair value of the stock options granted during the three and nine months ended September 30, 2013 and 2012:

	For the three months ended September 30,			For the nine months ended September 30,
	2013	2012		2013		2012
Weighted average risk-free interest rate	n/a	0.69	%	0.69	%	0.74	%
Expected life of options	n/a	5 years		4.4 years		5 years
Expected dividend yield	n/a	0	%	0	%	0	%
Weighted average expected volatility	n/a	95.69	%	105.48	%	89.73	%

Options granted to employees and non-employee directors during the three and nine months ended September 30, 2013 and 2012, other than those granted to non-employee directors on April 15, 2013 more fully described above, vest as to 25% of the shares on each of the first, second, third and fourth anniversary of the vesting commencement date. Options granted to non-employee directors during the three months ended June 30, 2012 are exercisable and vest only upon a change in control of the Company, as defined above. Following the vesting periods, options are exercisable by employees until the earlier of 90 days after the employee’s termination with the Company or the ten-year anniversary of the initial grant, subject to adjustment under certain conditions and at the discretion of the Board of Directors. Following the vesting periods, options are exercisable by non-employee directors until the earlier of 180 days after they cease to be a member of the Board of Directors or the ten-year anniversary of the initial grant, subject to adjustment under certain conditions and at the discretion of the Board of Directors. As of January 2012, options that are forfeited or cancelled are not returned to the option pool and are, accordingly, no longer eligible for grant under the Plan.

The table below summarizes the compensation expense recorded by the Company for the three and nine months ended September 30, 2013 and 2012 in conjunction with option grants made to employees and non-employee directors:

	For the three months ended September 30,				For the nine months ended September 30,
	2013		2012		2013		2012
Stock-based compensation expense recorded during period	$	413,670	$	103,712		1,448,294	$	1,385,400
Total unrecognized compensation expense remaining	$	3,351,245	$	4,786,963	$	3,351,245	$	4,786,963
Remaining average recognition period (in years)		2.0		2.65		2.0		2.65

As a result of the Company’s 2012 restructuring activities, stock-based compensation recorded for the three and nine months ended September 30, 2012 reflects the reversal of stock compensation expense for unvested options that were forfeited during the periods and the impact of option modifications made for former executives and former Board members as a component of their resignations (see Note 8).

The table below summarizes options outstanding, options vested and aggregate intrinsic value as of September 30, 2013:

	As of
	September 30, 2013
Total options outstanding under the Plan		7,156,709
Weighted average remaining contractual life (in years)		6.01
Weighted average exercise price per share	$	3.52
Total options oustanding and vested		4,708,834
Total in-the-money options oustanding		3,882,624
Aggregate intrinsic value of in-the-money options outstanding	$	4,575,451
Total in-the-money options vested and outstanding		2,209,999
Aggregate intrinsic value of in-the-money options outstanding and vested	$	1,688,606

The aggregate intrinsic value is calculated as the difference between the exercise prices of the underlying awards and the quoted closing price of the common stock of the Company as of September 30, 2013 and only include those awards that have an exercise price below the quoted closing price, or in-the-money options.

During the three and nine months ended September 30, 2013, options for the purchase of 37,500 shares and 81,875 shares, respectively, were exercised at weighted average exercise prices of approximately $1.72 and $1.78 per share, respectively and had an aggregate intrinsic value at the dates of exercise of $28,425 and $49,912, respectively. During the three and nine months ended September 30, 2012, no options were exercised. During the three and nine months ended September 30, 2013, vested and unvested options for 367,500 shares and 822,986 shares, respectively, were forfeited by former employees. During the three and nine months ended September 30, 2012, unvested options for 519,100 and 605,600 shares, respectively, were forfeited by employees that resigned or were terminated during those periods.