Common Stock Options

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 6. Common Stock Options

Approval of the 2013 Long-Term Incentive Plan

On June 20, 2013, the Board of Directors (the “Board”) adopted, subject to receiving shareholder approval, the 2013 Long-Term Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the issuance of stock options of up to 20,000,000 shares (subject to adjustment) of the Company’s common stock to officers, directors, key employees and consultants of the Company. Options granted to employees under the Incentive Plan, including directors and officers who are employees, may be incentive stock options or non-qualified stock options; options granted to others under the Incentive Plan are limited to non-qualified stock options.

The Incentive Plan is administered by the Board or a committee designated by the Board. Subject to the provisions of the Incentive Plan, the Board has the authority to determine the officers, employees and consultants to whom options will be granted, the number of shares covered by each option, vesting rights and the terms and conditions of each option that is granted to them; however, no person may be granted in any of the Company’s fiscal year, options to purchase more than 2,000,000 shares under the Incentive Plan, and the aggregate fair market value (determined at the time the option is granted) of the shares with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year cannot exceed $100,000. Options granted pursuant to the Incentive Plan are exercisable no later than ten years after the date of grant.

The exercise price per share of common stock for options granted under the Incentive Plan will be the fair market value of the Company’s common stock on the date of grant, using the closing price of the Company’s common stock on the last trading day prior to the date of grant, except for incentive stock options granted to a holder of ten percent or more of the Company’s common stock, for whom the exercise price per share will not be less than 110% of the fair market value. No option can be granted under the Incentive Plan after June 20, 2023.

As of September 30, 2013, there were 19,960,000 shares available for grant.

Stock Option Activity

The following table summarizes stock option activity for the three months ended September 30, 2013.

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Balance June 30, 2013		350,000		$	0.72			$	-
Options granted		40,000		$	0.65
Options forfeited		(350,000	)	$	0.72
Options exercised		-			-
Balance September 30, 2013		40,000		$	0.65		10	$	-
Exercisable at September 30, 2013		20,000		$	0.65

The fair value of each stock option is estimated at the date of grant using the Black-Scholes option pricing model. The estimated weighted-average fair value of stock options granted during the nine month period ended September 30, 2013 was approximately $0.41 per share. Assumptions regarding volatility, expected term, dividend yield and risk-free interest rate are required for the Black-Scholes model. The volatility assumption is based on the Company’s historical experience. The risk-free interest rate is based on a U.S. treasury note with a maturity similar to the option award’s expected life. The expected life represents the average period of time that options granted are expected to be outstanding. The assumptions for volatility, expected life, dividend yield and risk-free interest rate are presented in the table below:

Weighted average risk-free interest rate		0.10	%
Expected life in years	5.25
Weighted average expected volatility		79.0	%
Expected dividend yield		0

During the three and nine month periods ended September 30, 2013, stock-based compensation expense of $8,792 and $9,622, respectively, was recognized as general and administrative expenses. There were 20,000 stock options vested and 20,000 unvested, during three and nine months ended September 30, 2013.  There was no stock compensation expense recognized in 2012. As of September 30, 2013, the Company had $6,873 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized by September 30, 2014.

The Company issues new shares when options are exercised.