NOTE 14 – 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, 2014 and December 31, 2013 is as follows:

	6/30/2014					12/31/2013
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Outstanding at beginning of year		9,583,762		$	1.16		7,728,877		$	1.01
Granted		2,069,300		$	0.57		2,176,535		$	1.67
Exercised		-		$	-		(293,650	)	$	0.98
Expired and Cancelled		(160,000	)	$	1.36		(28,000	)	$	2.18
		11,493,062					9,583,762

Outstanding, end of period		11,493,062		$	1.05		9,583,762		$	1.16

Exercisable at end of period		10,420,912		$	1.11		9,536,262		$	1.17

During the six months ended June 30, 2014 the Company granted 2,069,300 options valued at $1,024,170. Stock-based compensation expense for the three and six months ended June 30, 2014 was $363,560 and $614,719, respectively. As of June 30, 2014, the unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under the Plan was $382,406 and will be recognized in each of the remaining fiscal 2014 quarters.

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 $1,435,467, respectively.

During the six months ended June 30, 2014, there were no stock options exercised either for cash or on a cashless basis.

During the six months ended June 30, 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.

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 2014. 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.

	6/30/2014
Weighted average fair value per option granted	$	0.4968
Risk-free interest rate		1.75	%
Expected dividend yield		0.00	%
Expected lives		2.688
Expected volatility		98.91	%

Stock options outstanding at June 30, 2014 are as follows:

				Weighted
				Average		Weighted
				Remaining		Average
		Options		Contractual		Exercise		Options
Range of Exercise Prices		Outstanding		Life		Price		Exercisable
$	0.01-$1.50		9,099,527		2.5	$	0.75		8,027,377
$	1.51-$3.00		2,268,535		3.5	$	1.67		2,268,535
$	3.01-$5.00		125,000		3.6	$	3.11		125,000
			11,493,062		2.7	$	1.06		10,420,912

Warrants

As of June 30, 2014, the Company has warrants outstanding to purchase 16,491,351 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 November 2018. The summary of the status of the warrants issued by the Company as of June 30, 2014 and December 31, 2013 are as follows:

	6/30/2014					12/31/2013
	Number of Warrants			Weighted Average Exercise Price		Number of Warrants			Weighted Average Exercise Price
Outstanding at beginning of year		16,688,265		$	1.44		23,392,811		$	1.46
Granted		-		$	-		4,010,295		$	1.18
Exercised		-		$	-		(2,287,730	)	$	1.28
Cashless Exercises		-		$	-		(8,082,535	)	$	1.43
Expired and Cancelled		(196,914	)	$	0.74		(344,576	)	$	0.88
		16,491,351					16,688,265

Outstanding, end of period		16,491,351		$	1.44		16,688,265		$	1.44

Exercisable at end of period		16,491,351		$	1.44		16,688,265		$	1.44

There were no warrants granted during the six months ended June 30, 2014. Also during this period there were no warrants exercised either for cash or on a cashless basis.

For the six months ended June 30, 2013, there were no warrants granted to investors.

During the three months ended March 31, 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, other investors exercised 82,753 warrants and received 82,753 shares of common stock with the Company receiving 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.