NOTE 12 – 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. The Company reserved 18.0 million shares for issuance under the Plan, and as of September 30, 2013, the Company had 7,762,788 shares available for grant under the Plan.

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

	9/30/2013					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		(293,650	)	$	0.98		(230,600	)	$	1.09
Expired and Cancelled		(4,500	)	$	1.67		(40,000	)	$	0.86
		9,607,262					7,728,877

Outstanding, end of period		9,607,262		$	1.16		7,728,877		$	1.01


Exercisable at end of period		8,920,148		$	1.14		7,582,022		$	1.03

During the nine months ended September 30, 2013 the Company granted 2,176,535 options to employees valued at $2,270,121. Stock-based compensation expense for the three and nine months ended September 30, 2013 was $753,299 and $2,199,104, respectively.

Common Stock Issued to Directors

During the nine months ended September 30, 2013,, the Company issued 114,944 shares of common stock to its four non-executive directors (28,736 shares each). 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 (January 22, 2013).

As of September 30, 2013, the unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under the Plan was $116,149, of which $94,046 will be recognized in the fourth quarter of fiscal year 2013.

During the nine months ended September 30, 2012, the Company granted 2,196,775 options to employees valued at $1,541,479. The total fair value of options vested during the first nine months of 2012 was $1,032,267.

During the nine months ended September 30, 2012, the Company issued 238,800 shares of common stock to four of its non-executive directors (59,700 each). The Company recognized a total of expense of $160,000 related to these issuances. These shares were valued based on the closing price of the grant date (February 6, 2012).

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.

	9/30/2013
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 September 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		7,090,227		2.8	$	0.97		6,990,247
$	1.51-$3.00		2,382,035		4.5	$	1.67		1,794,901
$	3.01-$5.00		135,000		4.6	$	3.11		135,000
			9,607,262		3.3	$	1.17		8,920,148

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 $38,003 and $184,833 for the nine months ended September 30, 2013 and 2012, respectively. These options expire five years from the respective grant date.

Warrants

As of September 30, 2013, the Company has warrants outstanding to purchase 15,460,241, 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 September 2018. The summary of the status of the warrants issued by the Company as of September 30, 2013 and December 31, 2012 are as follows:

	9/30/2013					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		2,610,295		$	1.27		650,000		$	0.83
Exercised		(2,287,730	)	$	1.28		(490,424	)	$	0.62
Cashless Exercises		(7,995,763	)	$	1.44		(335,541	)	$	0.91
Expired and Cancelled		(242,812	)	$	0.89		(183,893	)	$	14.73
		15,460,241					23,376,250

Outstanding, end of period		15,460,241		$	1.47		23,376,250		$	1.46

Exercisable at end of period		15,460,241		$	1.47		23,376,250		$	1.46

Warrant exercises into common stock for the nine months ended September 30, 2013 and 2012 are discussed in Note 11 above.

As indicated above, there were 234,286 warrants issued to investors for the nine months ended September 30, 2013. During the comparable period in 2012, 650,000 warrants were issued to investors.

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, which are now fully vested, have a term of five years. The Company recognized expense relating to these warrants of $61,133 and $161,250 for the nine months ended September 30, 2013 and 2012, respectively.