10. STOCK OPTIONS

3 Months Ended

Mar. 31, 2014

Notes to Financial Statements

Note 10. STOCK OPTIONS

10.           Stock Options

The Company adopted a stock option plan ("Plan").  The purpose of this Plan is to  provide  additional  incentives  to  key  employees, officers, directors and consultants  of  the  Company  and its subsidiaries in order to help attract and retain  the  best  available  personnel  for  positions  of  responsibility  and otherwise promote the success of its business.  It is intended that options issued under this Plan constitute non-qualified stock options. The general terms of awards under the option plan are that 100% of the options granted will vest the year following the grant.  The maximum term of options granted is 5 years.

The Company may issue stock options and stock bonuses for shares of its common stock to provide incentives to directors, key employees and other persons who contribute to the success of the Company.  The exercise price of all incentive options are issued for not less than fair market value at the date of grant.

The following table summarizes the Company’s stock option activity for the year ended December 31, 2013 and the three month period ended March 31, 2014:

	Number of shares	Exercise price per share	Weighted average exercise price
Balance, December 31, 2012	999,000	$1.50 – 2.45	$1.96
Granted	233,000	$1.21 – 1.50	$1.27
Cancelled or expired	(68,000)	$3.60	$3.60
Balance, December 31, 2013	1,164,000	$1.21 – 2.45	$1.73
Granted	212,000	$1.00	$1.00
Cancelled or expired	(113,000)	$2.25	$2.25
Balance, March 31, 2014	1,263,000	$1.21 – 2.45	$1.56
Exercisable, March 31, 2014	921,000	$1.21 – 2.45	$1.69

The fair value of each option grant is calculated using the following weighted average assumptions:

	2014			2013
Expected life – years		5.0			5.0
Interest rate		0.78	%		0.36 – 0.63	%
Volatility		58.0	%		51 – 63	%
Dividend yield		--	%		--	%
Weighted average fair value of options granted	$	0.36		$	0.36 – $0.38

During the three months ended March 31, 2014 the Company granted 85,000 options to consultants that resulted in $6,161 in expenses this quarter.  During the same period, 127,000 options were granted to employees, resulting in $9,205 in expenses this quarter.  Options granted in previous quarters resulted in additional expenses in the amount of $1,871 for consultants and $3,456 for employees during the quarter ended March 31, 2014.  No stock options were exercised during the period.

During the three months ended March 31, 2013 the Company granted 55,000 options to consultants that resulted in $4,150 in expenses.  During the same period, 128,000 options were granted to employees, resulting in $9,674 in expenses this quarter.  Options granted in previous quarters resulted in additional expenses in the amount of $3,609 for consultants and $6,437 for employees during the quarter ended March 31, 2013.  No stock options were exercised during the period.