Stock Options

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Note 9. Stock Options

Stock Option Program Description

For the year ended December 31, 2012 the Company had two equity compensation plans, the 1996 Stock Option Plan (the “1996 Plan”) and the 2006 equity compensation plan (the “2006 Plan”). The 1996 Plan has expired for the purposes of issuing new grants. However, the 1996 Plan will continue to govern awards previously granted under that plan. The 2006 Plan has been approved by the Company’s Shareholders. Equity compensation grants are designed to reward employees and executives for their long term contributions to the Company and to provide incentives for them to remain with the Company. The number and frequency of equity compensation grants are based on competitive practices, operating results of the Company, and government regulations.

The maximum number of shares issuable over the term of the 1996 Plan was limited to 65 million shares (without giving effect to subsequent stock splits). Options granted under the 1996 Plan typically have an exercise price of 100% of the fair market value of the underlying stock on the grant date and expire no later than ten years from the grant date. The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which 270,000 and 1,405,000 were granted in 2012 and 2011, respectively.

Stock-based compensation expense related to stock options was $171,000 and $368,000 for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, the total compensation cost related to non-vested awards not yet recognized is $21,000. The remaining period over which the future compensation cost is expected to be recognized is 29 months.

Stock-based compensation expense recognized in the Statement of Operations for the years ended December 31, 2012 and 2011 has been based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If the actual number of forfeitures differs from that estimated by management, additional adjustments to compensation expense may be required in future periods.

The following is a summary of changes to outstanding stock options during the fiscal year ended December 31, 2012 and 2011: 

	Number of Share Options			Weighted Average Exercise Price	Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value(1)
Outstanding at December 31, 2010	1,393,000		$	2.06	6.92	$	267,000
Granted	1,405,000		$	0.30	6.13	$	—
Exercised	(36,000	)	$	0.63	—	$	—
Forfeited or Cancelled	(233,000	)	$	2.36	—	$	—
Outstanding at December 31, 2011	2,529,000		$	1.07	6.09	$	—
Granted	270,000		$	0.08	3.96	$	—
Exercised	—		$	—	—	$	—
Forfeited or Cancelled	(1,989,000	)	$	1.11	—	$	—
Outstanding at December 31, 2012	810,000		$	0.64	4.06	$	—
Exercisable at December 31, 2012	574,000		$	0.86	4.36	$	—
Vested and expected to vest(2)	810,000		$	0.64	4.06	$	—

(1) Aggregate intrinsic value represents the value of the closing price per share of our common stock on the last trading day of the fiscal period in excess of the exercise price multiplied by the number of options outstanding or exercisable, except for the “Exercised” line, which uses the closing price on the date exercised.

(2) Number of shares includes options vested and those expected to vest net of estimated forfeitures.

During 2011, the Company issued 36,000 shares of common stock for $23,000 in cash related to 36,000 options exercised. During 2012 and 2011, the Company granted 270,000 and 1,405,000 options for fair value of $13,500 and $329,000, respectively. During 2012 and 2011, 1,989,000 and 233,000 options were forfeited.

At December 31, 2012, there were 2,111,000 shares available for grant under the 2006 plan. The exercise prices of the options outstanding at December 31, 2012 ranged from $0.07 to $4.35. The weighted-average grant date fair value of the options granted during the years ended December 31, 2012 and 2011 was $0.05 and $0.23, respectively. 

Unvested share activity for the year ended December 31, 2012 is summarized below:

	Unvested Number of Options			Weighted-Average Grant Date Fair Value
Unvested balance at December 31, 2011		1,403,000		$	0.26
Granted		270,000		$	0.05
Vested		(917,000	)	$	0.19
Forfeited		(519,000	)	$	0.29
Unvested balance at December 31, 2012		236,000		$	0.04

The Company settles employee stock option exercises with newly issued common shares. The table below presents information related to stock option activity for the fiscal years ended December 31, 2012 and 2011:

	Years Ended December 31,
		2012		2011
Total intrinsic value of stock options exercised	$	—	$	25,000
Cash received from stock option exercises	$	—	$	23,000
Gross income tax benefit from the exercise of stock options	$	—	$	—

Valuation and Expense Information

The fair value of stock-based awards to officers and employees is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is calculated by using the SAB 107 “simplified method” of estimating the expected term which is derived by taking the average of the time to vesting and the full term of the option. The risk-free rate selected to value any particular grant is based on the bond equivalent yields that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

The fair values of all stock options granted during the fiscal years ended December 31, 2012 and 2011 were estimated on the date of grant using the following range of assumptions:

	Years Ended December 31,
	2012			2011
Expected life (in years)		1.5- 6.5			2.5- 6.5
Average risk-free interest rate		1.66	%		1.63	%
Expected volatility		108% - 136%			107% - 132%
Expected dividend yield		0	%		0	%
Forfeiture rate		3	%		3	%

The estimated fair value of grants of stock options to nonemployees of the Company is charged to expense, if applicable, in the financial statements. These options vest in the same manner as the employee options granted under each of the option plans as described above.