EQUITY PLANS AND SHARE-BASED COMPENSATION

Stock Option Plan: The Company’s 2005 Stock Option Plan, as amended (the “Stock Option Plan”) provides for the grant of incentive or non-statutory stock options to the Company’s employees, directors and consultants. Upon recommendation of the Board of Directors, the stockholders approved increases in the total shares of common stock reserved for issuance under the Stock Option Plan at various times from 1,000,000 to 3,700,000 currently.

Restricted Stock Plan: The Company’s 2008 Restricted Stock Plan, as amended (the “Restricted Stock Plan”) was adopted by the Board of Directors and was approved by the stockholders on July 1, 2008. The Restricted Stock Plan initially reserved up to 750,000 shares of the Company’s common stock for restricted stock awards and restricted stock units to eligible employees, directors and consultants of the Company. Upon recommendation of the Board of Directors, the stockholders approved an increase in the total shares of common stock reserved for issuance under the Restricted Stock Plan from 750,000 to 2,550,000 shares.

The Stock Option Plan and the Restricted Stock Plan are administered by the Compensation Committee of the Board of Directors, which determines the terms of the option and share awards, including the exercise price, expiration date, vesting schedule and number of shares. The term of any incentive stock option granted under the Stock Option Plan may not exceed ten years, or 5 years for options granted to an optionee owning more than 10% of the Company’s voting stock. The exercise price of an incentive stock option granted under the Option Plan must be equal to or greater than the fair market value of the shares of the Company’s common stock on the date the option is granted. An incentive stock option granted to an optionee owning more than 10% of the Company’s voting stock must have an exercise price equal to or greater than 110% of the fair market value of the Company’s common stock on the date the option is granted. The exercise price of a non-statutory option granted under the Option Plan must be equal to or greater than 85% of the fair market value of the shares of the Company’s common stock on the date the option is granted.

Grants Outside Existing Equity Plans: Prior to the adoption of the Restricted Stock Plan, the Board of Directors granted 40,000 restricted stock awards in connection with an executive employment agreement. In July 2009, the Board of Directors granted an inducement award (as defined in NASDAQ Rule 5635(c) (4)) made outside of the existing Stock Option Plan for 200,000 stock options.

Share-Based Compensation: The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes this cost as an expense over the grant recipients’ requisite service periods for all awards made to employees, officers, directors and consultants.

The share-based compensation expense recognized in the Condensed Statements of Operations was as follows:



	For the years ended December 31,
	2013		2012		2011
Share-based compensation cost included in:
Research, development and manufacturing operations	$	228,120	$	304,013	$	302,101
Selling, general and administrative	393,385		620,302		1,270,506
Total share-based compensation cost	$	621,505	$	924,315	$	1,572,607

The following table presents share-based compensation expense by type:



	For the years ended December 31,
	2013		2012		2011
Type of Award:
Stock Options	$	311,965	$	443,103	$	768,703
Restricted Stock Units and Awards	309,540		481,212		803,904
Total share-based compensation cost	$	621,505	$	924,315	$	1,572,607

Stock Options: The Company recognized share-based compensation expense for stock options of $312,000 to officers, directors and employees for the year ended December 31, 2013 related to stock option awards ultimately expected to vest and reduced for estimated forfeitures. The weighted average estimated fair value of employee stock options granted for the years ended December 31, 2013, 2012 and 2011 was $0.49, $0.60 and $1.49 per share, respectively. Fair value was calculated using the Black-Scholes Model with the following assumptions:



	For the years ended December 31,
	2013		2012		2011
Expected volatility	97.3	%	101.3	%	97.9	%
Risk free interest rate	0.9	%	0.8	%	2.1	%
Expected dividends	—		—		—
Expected life (in years)	5.2		5.2		6.3

Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate of return is based on the yield of U.S. Treasury bonds with a maturity equal to the expected term of the award. Historical data is used to estimate forfeitures within the Company’s valuation model. The Company’s expected life of stock option awards is derived from historical experience and represents the period of time that awards are expected to be outstanding.

As of December 31, 2013, total compensation cost related to non-vested stock options not yet recognized was $304,000 which is expected to be recognized over a weighted average period of approximately 1.4 years. As of December 31, 2013, 1,312,028 shares were vested or expected to vest in the future at a weighted average exercise price of $1.95. As of December 31, 2013, 1,432,967 shares remained available for future grants under the Option Plan.

The following table summarizes stock option activity for grants made within the Stock Option Plan and outside the plan (shares in thousands):



	Stock Option Shares		Stock Options Weighted Average Exercise Price			Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Outstanding at January 31, 2011	1,516		$	5.14		8.32	$	527,463
Granted	1,295		1.88
Exercised	(57	)	(0.10		)		$	149,007
Forfeited	(1,308	)	4.96
Outstanding at December 31, 2011	1,446		$	2.58		8.77	$	4,437
Granted	45		0.80
Exercised	(14	)	0.68				$	14,081
Forfeited	(257	)	2.54
Outstanding at December 31, 2012	1,220		$	2.54		7.79	$	8,057
Granted	785		$	0.66
Exercised	(48	)	$	0.68			$	5,400
Forfeited	(409	)	$	2.04
Outstanding at December 31, 2013	1,548		$	1.78		7.81	$	51,160
Exercisable at December 31, 2013	596		$	3.21		6.39	$	12,742

Restricted Stock: In addition to the stock options discussed above, the Company recognized share-based compensation expense related to restricted stock grants of $310,000 for the year ended December 31, 2013. The weighted average estimated fair value of restricted stock grants for the years ended December 31, 2013, 2012 and 2011 was $0.62, $0.57 and $3.19, respectively.

Total unrecognized share-based compensation expense from unvested restricted stock as of December 31, 2013 was $14,000 which is expected to be recognized over a weighted average period of approximately 0.5 years. As of December 31, 2013, 14,745 shares were expected to vest in the future. As of December 31, 2013, 756,017 shares remained available for future grants under the Restricted Stock Plan.

The following table summarizes non-vested restricted stock and the related activity as of December 31, 2013 and for the years ended December 31, 2013, 2012 and 2011 (shares in thousands):



	Shares		Weighted Average Grant-Date Fair-Value
Non-vested at January 1, 2011	246		$	5.48
Granted	488		$	3.19
Vested	(212	)
Forfeited	(281	)
Non-vested at December 31, 2011	241		$	3.09
Granted	658		0.57
Vested	(646	)
Forfeited	(205	)
Non-vested at December 31, 2012	48		$	3.47
Granted	427		$	0.62
Vested	(453	)
Forfeited	(7	)
Non-vested at December 31, 2013	15		$	3.52