4. Stock-Based Compensation

Stock Option Plans

In May 2005, the Company’s shareholders approved the 2005 Stock Incentive Plan (the “2005 Plan”). Incentive stock options are issuable only to employees of the Company, while non-qualified stock options may be issued to non-employee directors, consultants and others, as well as to employees. Under the 2005 Plan, the per share exercise price of incentive stock options may not be less than the fair market value of the common stock on the date the option is granted. The 2005 Plan provides that the Company may not grant non-qualified stock options at an exercise price less than 85% of the fair market value of the Company’s common stock.

In June 2013, the Company’s shareholders approved the 2013 Stock Incentive Plan (the “2013 Plan”). The 2013 Plan allows for an additional 11,382,600 incentive stock options which may be issued to non-employee directors, consultants and others, as well as to employees. Under the 2013 Plan, the per share exercise price of incentive stock options may not be less than the fair market value of the common stock on the date the option is granted. The 2013 Plan provides that the Company may not grant non-qualified stock options at an exercise price less than 85% of the fair market value of the Company’s common stock.

The Company grants stock options to its non-employee directors. New non-employee directors receive an initial grant of an option to purchase shares of the Company’s common stock that generally vest in quarterly installments over three years. Once the initial grant has fully vested, non-employee directors (other than the Chairman of the Board) receive an annual grant of an option to purchase additional shares of the Company’s common stock that generally will vest in four equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 45,000 shares of the Company’s common stock that generally vests in four equal quarterly installments. All such options have an exercise price equal to the fair market value of the Company’s common stock on the date of grant.

During the three months ended September 30, 2013, the Company granted options to employees to purchase 5,050,000 shares of the Company’s common stock, which vest ratably over a three year period. Certain of these grants were issued to former employees to replace 502,000 options that were cancelled during the three months ended September 30, 2013. These grants were accounted for as modifications of previously issued stock options during the quarter. Additionally, the Company granted 589,000 options to non-employee directors that vest quarterly over a one year period.

During the year ended December 31, 2012, the Company granted options to employees to purchase 355,000 shares of the Company’s common stock, which vest ratably over a three year period and granted options to purchase 112,500 shares of the Company’s common stock to non-employee directors that vest quarterly over one year.

During the year ended December 31, 2011, the Company granted options to purchase 565,000 shares of the Company’s common stock to employees with performance-based vesting. Management determined that as of June 30, 2012, it was probable that the performance conditions associated with the performance-based vesting were to be met in July 2012 with the closing of the second tranche convertible notes. Therefore, the related expense was recorded in the nine months ending
September 30, 2012.

During the year ended December 31, 2012, the Company issued an aggregate of 2,083,338 shares of restricted common stock to Garden State Securities, Inc. and JFS Investments, Inc. in exchange for certain investor relations and related consulting services provided to the Company. During the nine months ended September 30, 2013, the Company issued an aggregate of 416,668 shares of common stock resulting in $56,250 of compensation expense. These shares vested immediately but are restricted from being sold for a period of six months from the date of issuance. The contract with Garden State Securities, Inc. and JFS Investments, Inc. terminated in February 2013. No further stock issuances will occur under this agreement.

As of September 30, 2013, there were 1,819,000 shares of common stock available to be granted under the 2005 Plan, and 5,743,000 shares of common stock available to be granted under the 2013 Plan.

The following is a summary of option activity under all plans (in thousands, except per option data):

	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding, December 31, 2012	5,592		$	0.21	3.2	$	6,500
Granted	5,639		0.09
Exercised	—		—
Cancelled	(502	)	0.16
Forfeited	(643	)	0.10
Expired	—		—
Outstanding, September 30, 2013	10,086		0.15		6.1	$	0
Exercisable, September 30, 2013	5,528		0.20		2.4	$	0

Stock-Based Compensation Expense

The Company recorded compensation expense related to stock options of $76,000 and $102,000 in the three and nine months ended September 30, 2013, respectively, as compared to $12,000 and $65,000 in the three and nine months ended September 30, 2012, respectively. The Company also recorded compensation expense of $0 and $56,000 related to the issuance of restricted common shares during the three and nine months ended September 30, 2013, respectively, as compared to $123,000 and $368,000 in the three and nine months ended September 30, 2012, respectively. As of September 30, 2013, the Company had $401,000 of total unrecognized compensation cost related to its unvested options, which is expected to be recognized over a weighted average period of 1.93 years.

The weighted average fair value of options issued, as estimated using the Black-Scholes model, was $0.08 and $0.16 during the nine months ended September 30, 2013 and 2012, respectively. The assumptions used were as follows:

	Grants Issued in:
	2013	2012
Expected life (years)	3.00-6.00	5.00-6.00
Risk free rate	0.73-1.67%	0.19-0.69%
Volatility	195.75-217.52%	204.1-216.2%
Expected dividend yield	None	None
Value of options granted	$0.07-0.09	$0.12-0.17

Stock Purchase Plan

The Company has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for all eligible employees whereby shares of the Company’s common stock may be purchased at six-month intervals at 95% of the average of the closing bid and ask prices of the Company’s common stock on the last business day of the relevant plan period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period, subject to certain additional limitations. There was no activity during the three and nine months ended September 30, 2013 or 2012. At September 30, 2013, 294,461 shares were reserved for future issuance under the Purchase Plan.