10. STOCK COMPENSATION

9 Months Ended

Dec. 31, 2012

Note 10. Stock Compensation

STOCK COMPENSATION

The following table summarizes share-based compensation expenses relating to shares and options granted and the effect on basic and diluted loss per common share during the three and nine months ended December 31, 2012 and 2011:

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	December 30, 2012			December 30, 2011			December 31, 2012			December 31, 2011
Total share-based compensation expense	$	175,045		$	161,440		$	570,540		$	609,503
Total share-based compensation expense included in net loss	$	175,045		$	161,440		$	570,540		$	609,503
Basic and diluted loss per common share	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)

The following table breaks out the components of our share-based compensation expenses relating to shares and options granted and the effect on basic and diluted loss per common share during the three and nine months ended December 31, 2012 and 2011.

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	December 31, 2012			December 31, 2011			December 31, 2012			December 31, 2011
Vesting of stock options	$	77,421		$	64,773		$	258,468		$	319,503
Incremental fair value of option modifications		957			–			22,071			–
Vesting expense associated with CEO restricted stock grant		96,667			96,667			290,001			290,000
Direct stock grants		–			–			–			–
Total share-based compensation expense	$	175,045		$	161,440		$	570,540		$	609,503
Total share-based compensation expense included in net loss	$	175,045		$	161,440		$	570,540		$	609,503
Basic and diluted loss per common share	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)

 All of the stock-based compensation expense recorded during the nine months ended September 30, 2012 and 2011, which totaled $570,540 and $609,503, respectively, is included in payroll and related expense in the accompanying condensed consolidated statements of operations.  Stock-based compensation expense recorded during the three months ended December 31, 2012 and 2011 had no impact on basic and diluted loss per common share. Stock-based compensation expense recorded during the nine months ended December 31, 2012 had no impact on basic and diluted loss per common share and the stock-based compensation expense recorded during the nine months ended December 31, 2011 increased basic and diluted loss per common share by $0.01.

In July 2012, our Board of Directors approved a new Board Compensation Program (the “New Program”), which modifies and supersedes the 2005 Directors Compensation Program (the “2005 Program”) that was previously in effect. Under the New Program, in which only non-employee Directors may participate, an eligible Director will receive a grant of $15,000 worth of options to acquire shares of Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal year; however for the new non-employee directors, the exercise price for this initial grant, $0.076 per share, is based on the average of the closing bid prices of the Common Stock for the five trading days preceding the date of their appointment (July 24, 2012). These options will have a term of ten years and will be fully vested upon grant. In addition, each existing eligible Director will receive the same grant of $15,000 worth of options to acquire shares of Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal year; provided however that for this current grant only, all of such grants shall be made at an exercise price of $0.076 per share based on the average of the closing bid prices of the Common Stock for the five trading days preceding the date (July 24, 2012) of the appointment of two new directors to our Board of Directors.

At the beginning of each fiscal year, each Director eligible to participate in the New Program also will receive a grant of $20,000 worth of options valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal year. In addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each committee meeting attended and $1,000 for each formal Board meeting attended.

In the nine months ended December 31, 2012, our Board of Directors granted, to our four outside directors, ten year options to acquire an aggregate of 1,667,105 shares of our common stock, all with an exercise price of $0.076 per share.

In March 2012, our Chief Executive Officer and our Chief Financial Officer agreed to suspend the exercise of up to 12,588,243 of their stock options, which allowed us to utilize the shares underlying those stock options in capital raising activities while we presented our stockholders with a proposal to increase the number of authorized shares from 250,000,000 to 500,000,000. That proposal was approved by our stockholders at our Special Stockholders’ Meeting on June 4, 2012. Following that approval we extended their stock options by the 70 days, which equaled the number of days that they had unreserved their shares. We valued the change in fair value of their vested stock options due to this extension, and based on the change in fair value, recorded an increase to our stock based compensation expense in the quarter ended June 30, 2012 of $19,838. For their unvested options, we recorded an increase to fair value of $5,100, which will be expensed over the remaining vesting period of those options.

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to stock option grants utilizing the Binomial Lattice option pricing models at, and during the nine months ended December 31, 2012:

Risk free interest rate	1.44%
Average expected life	10 years
Expected volatility	117.5%
Expected dividends	None

We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the six months ended September 30, 2012 was insignificant.

The expected volatility is based on the historic volatility. The expected life of options granted is based on the "simplified method" as described in the SEC's guidance due to changes in the vesting terms and contractual life of current option grants compared to our historical grants.

Options outstanding that have vested and are expected to vest as of December 31, 2012 are as follows:

					Weighted
			Weighted		Average
			Average		Remaining
	Number of		Exercise		Contractual
	Shares		Price		Term in Years
Vested		19,079,126	$	0.29		3.87
Expected to vest		2,016,672	$	0.17		7.72
Total		21,095,798	$	0.28		4.24

A summary of stock option activity during the nine months ended December 31, 2012 is presented below:

	Amount		Range of Exercise  Price	Weighted Average Exercise  Price
Stock options outstanding at March 31, 2012		19,428,693	$0.21 - $0.41	$0.31
Exercised		–	$ –
Issued		1,667,105	$0.076	$0.076
Cancelled/Expired		–	–
Stock options outstanding at December 31, 2012		21,095,798	$0.076 - $0.41	$0.28
Stock options exercisable at December 31, 2012		19,079,126	$0.076 - $0.41	$0.29

At December 31, 2012, there was approximately $399,488 of unrecognized compensation cost related to share-based payments, including our Chief Executive Officer’s restricted stock grant, which is expected to be recognized over a weighted average period of 0.57 years.

On December 31, 2012, our stock options had a negative intrinsic value since the closing price on that date of $0.10 per share was below the weighted average exercise price of our stock options