Employee Stock Options

The Company maintains two stock option plans. The first plan was initiated in the year 2000 and was established as a long term incentive plan for employees and consultants, including board of director members. The second plan was established in 2010 also as an incentive plan for officers, employees, non employee directors, prospective employees and other key persons. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a better alignment of their interests with those of the Company and its stockholders.

The Company considers employee stock options a component of the compensation package necessary to attract, retain and motivate key employees. The value of these options is dependent upon an increase in the Company’s stock price relative to the exercise price, which is determined on the date of grant. Due to declines in the Company’s stock price, the exercise prices of the options held by Messrs. Tienor, Sobieski and Koch exceeded the Company’s recent stock price to the extent that the Compensation Committee became concerned that their original incentive value had been substantially depleted. In order to restore the incentive value of the stock options held by these key executives, the Compensation Committee determined that it was in the best interests of the Company to modify Messrs. Tienor, Sobieski and Koch’s stock options based on the Company’s stock closing price on December 30, 2011.  The exercise price for Mr. Tienor was modified from $1.80 to $.14.  The exercise prices for Messrs. Sobieski and Koch were modified from $1.00 to $.14 per share.

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.

Transactions involving stock options issued to employees are summarized as follows:

The expected life of awards granted represents the period of time that they are expected to be outstanding.  We determine the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures.  We estimate the volatility of our common stock based on the calculated historical volatility of our own common stock using the trailing 24 months of share price data prior to the date of the award.  We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.  We have not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future.  Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation for those awards that are expected to vest. In accordance with ASC 718-10, we adjust share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience.

The following table summarizes the assumptions used to estimate the fair value of options granted during the year ended December 2012, using the Black-Scholes option-pricing model:

The total estimated fair value of the options granted during the year ended December 31, 2012 was $152,667. The total fair value of underlying shares related to options that vested during the years ended December 31, 2012 and 2011 was $85,041 and $26,887, respectively. Future compensation expense related to non-vested options is $38,446 as of December 31, 2012. The aggregate intrinsic value of the vested options was zero as of December 31, 2012 and 2011.

Total stock-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2012 and 2011 was $99,643 and $51,887, respectively.

Non-Employee Stock Options

Transactions involving options issued to non-employees are summarized as follows:

There were no non-employee stock options vested during the years ended December 31, 2012 and 2011.

Warrants

The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company.  These warrants were granted in lieu of cash compensation for services performed or financing expenses and in connection with placement of convertible preferred stock.

Transactions involving warrants are summarized as follows:

The Company issued 5,211,542 warrants to Series B preferred stockholders, 208,462 to an investment firm as partial compensation for services performed in connection with the private placement of the Company’s Series B Convertible Stock and 126,868 to former Convertible Senior Note holders during the year ended December 31, 2011.  During the third quarter of 2012, 3,115,390 Series B warrants were exercised at an exercise price of $0.13 per share. The Company did not issue any compensatory warrants during the years ended December 31, 2012.  

The purchase price of the warrants issued to Convertible Senior Note holders was adjusted from $3.41 to $3.00 per share and approximately 125,274 additional warrants were issued during the year ended December 31, 2011 in accordance with the anti-dilution protection provision of the Convertible Senior Notes Payable Agreement (the “Agreement”) dated October 27, 2005, upon the occurrence of certain events as defined in the Agreement.

In March 2011, the Company received proceeds of $1,000,000 from the sale of a product line and related assets. In connection with the sale, the Company was lent an additional $700,000. The Company used these proceeds to retire substantially all of its obligations under its $1.6 million senior convertible debenture due May 29, 2011 and to cancel 11,730,769 of related warrants.