NOTE 13 – STOCK-BASED COMPENSATION PLAN AND WARRANTS

The Company’s Incentive Compensation Plan (the “Plan”), which was last amended and restated with shareholder approval in December 2012, provides for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units and cash incentive awards.

A summary of the status of stock options under the Plan as of June 30, 2013 and December 31, 2012 is as follows:

	6/30/2013					12/31/2012
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Outstanding at beginning of year		7,728,877		$	1.01		5,645,202		$	1.10
Granted		2,176,535		$	1.67		2,354,275		$	0.80
Exercised		(267,400	)	$	1.01		(230,600	)	$	1.09
Expired and Cancelled		-		$	-		(40,000	)	$	0.86
		9,638,012					7,728,877

Outstanding, end of period		9,638,012		$	1.16		7,728,877		$	1.01


Exercisable at end of period		8,402,265		$	1.11		7,582,022		$	1.03

During the six months ended June 30, 2013, the Company granted 2,176,535 options valued at $2,270,121. Stock-based compensation expense for the three and six months ended June 30, 2013 was $676,932 and $1,407,986, respectively.

As of June 30, 2013, the unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under the Plan was $874,963, of which $852,861 will be recognized in each of the remaining fiscal 2013 quarters.

During the six months ended June 30, 2012, the Company granted 2,196,775 options valued at $898,651. The total fair value of options vested during the first six months of 2012 was $190,112.

During the first and second quarters of 2013, two former employees exercised 91,400 stock options and the Company received proceeds of $77,734. Also during this period the Company issued 89,115 shares of Common Stock on the cashless exercise of 176,000 stock options.

For the three months ended March 31, 2012, no options were exercised. For the three months ended June 30, 2012, an employee exercised 2,500 options with the Company receiving proceeds of $1,625.

During the first and second quarters of 2012 the Company did not issue any shares of common stock on the cashless exercise of stock options.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model. This model uses the assumptions listed in the table below for stock options granted in 2013. Expected volatilities are based on the historical volatility of the Company’s stock. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

	6/30/13


Weighted average fair value per option granted	$1.04
Risk-free interest rate	0.65 - 0.81%
Expected dividend yield	0.00%
Expected lives	2.695
Expected volatility	99.79 - 108%

Stock options outstanding at June 30, 2013 are as follows:

		Weighted
		Average	Weighted
		Remaining	Average
	Options	Contractual	Exercise	Options
Range of Exercise Prices	Outstanding	Life	Price	Exercisable
$0.01-$1.50	7,116,477	2.8	$0.97	7,016,497
$1.51-$3.00	2,386,535	4.5	$1.67	1,250,768
$3.01-$5.00	135,000	4.6	$3.11	135,000
	9,638,012	3.3	$1.17	8,402,265

On January 1, 2013 the Company issued 114,944 shares of common stock to its four non-executive directors (28,736 shares each) – Mark Hershhorn, Brian Israel, Morris Garfinkle and Edward Smith III. The Company recognized a total expense of $200,002 related to these issuances. These shares were valued based on the closing price on the grant date. As of June 30, 2013, the Company had reserved 18.0 million shares for issuance under the Plan. As of June 30, 2013, the Company had 7,762,788 million shares available for grant under the Plan.

During 2011, the board of directors formed an Advisory Committee to consult and advise the Company on matters relating to the marketing and development of the Company’s products. The Company granted 30,000 options to each of the eight Advisory Committee members at that time. The options vest as follows: vest one third at the grant date, one third on the first anniversary of the grant date and one third on the second anniversary of the grant date. During 2012, the Company added a member to the Advisory Committee and also granted this person 30,000 options. The vesting schedule is the same. The Company recognized an expense relating to these options of $27,665 and $13,285 for the six months ended June 30, 2013 and 2012, respectively. These options expire five years from the respective grant date.

Warrants

As of June 30, 2013, the Company has warrants outstanding to purchase 20,552,568, shares of the Company’s common stock, at prices ranging from $0.01 to $1.50 per share. These warrants expire at various dates through February 2017. There were no warrants issued in the six month period ended June 30, 2013. There were 650,000 warrants issued in the six months ended June 30, 2012. The summary of the status of the warrants issued by the Company as of June 30, 2013 and December 31, 2012 are as follows:

	6/30/2013					12/31/2012
	Number of Warrants			Weighted Average Exercise Price		Number of Warrants			Weighted Average Exercise Price
Outstanding at beginning of year		23,376,250		$	1.46		23,736,108		$	1.55
Granted		-		$	-		650,000		$	0.83
Exercised		(2,125,847	)	$	1.34		(490,424	)	$	0.62
Cashless Exercises		(617,844	)	$	0.90		(335,541	)	$	0.91
Expired and Cancelled		(79,991	)	$	0.92		(183,893	)	$	14.73
		20,552,568					23,376,250

Outstanding, end of period		20,552,568		$	1.49		23,376,250		$	1.46

Exercisable at end of period		20,552,568		$	1.49		23,376,250		$	1.46

During the first quarter of 2013, several investors participated in a warrant exercise program that resulted in the exercise of 1,756,088 warrants into 1,756,088 shares of the Company’s common stock. The warrant program, which was open to all holders of $1.50 warrants, allowed those warrant holders to exercise their warrants for a $1.25 strike price during February 2013. The conversion of these warrants raised $2,195,110 of gross proceeds for the Company.

Also during the first quarter of 2013, in addition to the warrant exercise program, investors exercised 82,753 warrants and the Company received proceeds of $30,511. During the quarter ended June 30, 2013, investors exercised 287,006 warrants and the Company received proceeds of $180,369. During the first and second quarters of 2013 the Company issued 318,490 shares of common stock on the cashless exercise of 617,844 warrants.

During the first and second quarters of fiscal 2012, there were no warrants exercised either on a cash or cashless basis.

On February 17, 2012, we entered into an Investment Banking Agreement (“Investment Banking Agreement”) with Legend Securities, Inc. (“Legend”), pursuant to which Legend agreed to provide business advisory services to us for a period of up to eighteen months with our ability to further extend the term of the Investment Banking Agreement for an additional six months.

In exchange for Legend’s services, we agreed to pay Legend the sum of $10,000 per month and to issue Legend a warrant for the purchase of 550,000 shares of the Company’s Common Stock (the “Legend Warrants”) at an exercise price of $0.71 per share. The Legend Warrants vested as follows: 91,666 of the Legend Warrants vested on the date of the agreement and then 91,666 of the Legend Warrants vested each ninety (90) day period thereafter. The Legend Warrants have a term of five years. The Company recognized an expense relating to these warrants of $61,133 and $0 for the six months ended June 30, 2013 and 2012, respectively.