NOTE 13 – STOCK OPTION PLAN AND WARRANTS

EXERCISING OPTIONS AND WARRANTS

For the twelve months ended December 31, 2013, there were 2,287,730 stock warrants were exercised for cash and the Company issued 3,606,157 shares of Common Stock on the cashless exercise of warrants. Also during 2013, 91,400 stock options were exercised for cash while the Company issued 100,528 shares of common stock on the cashless exercise of stock options. In 2012, 490,424 stock warrants were exercised for cash and the Company issued 198,663 shares of Common Stock for the cashless exercise of warrants. Also during 2012, 14,600 stock options were exercised for cash while the Company issued 131,161 shares of Common Stock on the cashless exercise of options.

A summary of the status of the warrants issued by the Company as of December 31, 2013 and 2012 are as follows:

	12/31/13		12/31/12
	Number of Warrants	Weighted Average Exercise Price	Number of Warrants	Weighted Average Exercise Price
Outstanding at beginning of year	23,392,811	$1.46	23,752,669	$1.55
Granted	4,010,295	$1.18	650,000	$0.83
Exercised	(2,287,730)	$1.28	(490,424)	$0.62
Cashless Exercises	(8,082,535)	$1.43	(335,541)	$0.91
Expired and Cancelled	(344,576)	$0.88	(183,893)	$14.73
	16,688,265		23,392,811

Outstanding, end of period	16,688,265	$1.44	23,392,811	$1.46

Exercisable at end of period	16,688,265	$1.44	23,392,811	$1.46

As of December 31, 2013 and 2012, the Company had warrants outstanding to purchase 16,688,265 and 23,736,811 shares of the Company’s common stock, respectively, at prices ranging from $0.01 to $1.50 per share. These warrants expire at various dates through November 2018.

There were 4,010,295 warrants issued in 2013. As part of the August 20, 2013 transaction with Brightline Ventures I discussed above, the Company issued one additional warrant equal for every five warrants owned and not exercised as part of the Cashless Exercise Program. Thus, the Company issued an aggregate of 2,376,009 additional warrants at an exercise price of $1.25 per share (including 2,316,597 additional warrants that were issued to Brightline Ventures I) to the holders of $1.50 Warrants. On September 18, 2013, the Company entered into a private placement subscription agreement with Brightline Ventures I-C, LLC, pursuant to which it issued warrants to purchase 234,286 shares of common stock at an exercise price of $1.50 per share. Finally, On November 18, 2013, the Company completed a public offering of its Common Stock in which it issued warrants to purchase 1,400,000 shares of Common Stock at an exercise price of $1.00 per share.

On October 21, 2013, the Company issued warrants to purchase up to 30,000 shares of common stock in a private placement transaction to a business consultant who will be assisting the Company in various product placement matters as partial consideration for services being rendered. The per share exercise prices of the warrants will be determined based on the market price of the Company’s common stock if and when certain targets are met; the warrants are exercisable through October 21, 2018.

During 2012, there were 650,000 warrants issued to investors and for services rendered. The fair value of the warrants issued in 2012 did not have any reset provisions and were valued at $273,641 using the Black Scholes model. A portion of these warrants equal to 100,000, were valued at $40,508 and were attached to debt. These warrants were recorded as a debt discount upon issuance and were fully amortized upon conversion of the related notes in 2012. The other portion of warrants equal to 550,000, were valued at $233,133 using the Black Scholes model on the grant date. These warrants were issued for investor relations services. The fair value is being amortized straight line over the related requisite service period which resulted in $172,000 of expense during the year ended December 31, 2012.

STOCK OPTION PLAN

The Company’s Incentive Compensation Plan (the “Plan”) provides for the issuance of qualified options to all employees and non-qualified options to directors, consultants and other service providers.

A summary of the status of stock options issued by the Company as of December 31, 2013 and 2012 are as follows:

	12/31/13		12/31/12
	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	(28,000)	$2.18	(40,000)	$0.86
	9,583,762		7,728,877

Outstanding, end of period	9,583,762	$1.16	7,728,877	$1.01


Exercisable at end of period	9,536,262	$1.17	7,582,022	$1.03

At December 31, 2013, the aggregate intrinsic value of all outstanding options was $0 of which 9,536,262 outstanding options are currently exercisable at a weighted average exercise price of $1.17 and a weighted average remaining contractual term of 3.3 years.

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. 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.

	2013	2012
Weighted average fair value per option granted	$1.04	$0.38
Risk-free interest rate	0.65 - 0.81%	0.34 - 0.42%
Expected dividend yield	0.00%	0.00%
Expected lives	2.695	2.695
Expected volatility	99.79 - 108%	97.72 - 103%

During 2013, the Company granted 2,176,535 options to employees and recognized a total of $2,318,355 in stock compensation expense. During 2012, the Company granted 2,324,275 options to employees or advisors and recognized a total of $96,599 in stock based compensation related to the options granted above. The options granted to employees are 25% vested at the date of grant and 25% every 90, 180 and 270 days subsequent to the grant date. The expiration date of the options granted in both 2013 and 2012 is five years from the grant date.

As of December 31, 2013, the Company had reserved 8,416,238 shares of Common Stock to be issued upon the exercise of qualified options issued under the Plan. As of December 31, 2012 the Company had 10,271,123 shares available for grant under the Plan.

Stock options outstanding at December 31, 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	7,090,227
$1.51-$3.00	2,368,535	4.5	$1.67	2,321,035
$3.01-$5.00	125,000	4.6	$3.11	125,000
	9,583,762	3.3	$1.17	9,536,262

Stock options outstanding at December 31, 2012 are as follows:

		Weighted
		Average	Weighted
		Remaining	Average
	Options	Contractual	Exercise	Options
Range of Exercise Prices	Outstanding	Life	Price	Exercisable
$0.01-$1.50	5,435,202	3.9	$1.18	5,107,003
$1.51-$3.00	210,000	2.0	$1.49	210,000
	5,645,202	4.0	1.13	5,317,003

As of December 31, 2013 and 2012 the Company had unrecognized stock based compensation to be recognized in the following year of $22,103 and $77,595, respectively.