NOTE 10 - OPTIONS

On March 24, 2011 (the “Plan Adoption Date”), the Board of Directors voted to adopt the 2011 Stock Incentive Plan (the “Plan”), subject to stockholder approval at the Company’s 2011 annual stockholders’ meeting. The Plan and the conditional option grants previously approved by the Compensation Committee were ratified by the Company’s stockholders on October 31, 2011 at the 2011 annual meeting.

The Plan permits the granting of stock options (including incentive stock options as well as nonstatutory stock options), stock appreciation rights, restricted and unrestricted stock awards, restricted stock units, performance awards, other stock-based awards or any combination of the foregoing. Under the terms of the Plan, upon stockholder approval, up to 5,000,000 shares of the Company’s common stock will be granted.

Certain stock option grants were conditionally made subject to stockholder approval of the Plan. Accordingly, on October 31, 2011 after stockholder approval was received, the following stock options were granted for 2011:

1,470,000 options with an exercise price of $2.59 to certain members of management and directors. These options can be exercised within ten years from the Plan Adoption Date once they become exercisable. These options became exercisable in accordance with the following schedule: (a) 25% of the options became exercisable on the first anniversary of the Plan Adoption Date (the "Initial Vesting Date"), and (b) 6.25% of the options became exercisable on the date three months after the Initial Vesting Date and on such date every third month thereafter, through the fourth anniversary of the Plan Adoption Date. The fair value of the warrants was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 125.22%, risk free interest rate of 2.17%, and expected term of 9.5 years. The fair value of the options was $1,767,017.

30,000 options with an exercise price of $2.59 to the Company’s CFO for three months of service in 2011 in accordance with the terms of his employment agreement. All of these options are exercisable for ten years from the Plan Adoption Date. 100% of the options became exercisable on June 24, 2011, which was three months after the Plan Adoption Date. The fair value of the warrants was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 125.22%, risk free interest rate of 2.17%, and expected term of 9.5 years. The fair value of the options was $36,062.

120,000 options with an exercise price of $2.27 to the Company’s CFO for nine months of service in 2011 and three months of service in 2012 in accordance with the terms of his employment agreement. All of these options are exercisable for ten years from the Plan Adoption Date. These options became exercisable in accordance with the following schedule: 25% of the options became exercisable on the date three months after the Plan Adoption Date and on such date every third month thereafter, through the first anniversary of Plan Adoption Date. The fair value of the options was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 125.22%, risk free interest rate of 2.17%, and expected term of 9.5 years. The fair value of the options was $144,892.

In accordance with the above vesting periods, $110,439 and $110,439 were recorded as part of operating expense-stock compensation for the 1,620,000 options above for the three months ended September 30, 2013 and 2012, respectively; and $331,316 and $367,539 were recorded as part of operating expense-stock compensation for the 1,620,000 options above for the nine months ended September 30, 2013 and 2012, respectively.

On January 9, 2012, the Company granted 1,300,000 options with an exercise price of $1.22 to certain members of management and directors. These options can be exercised within ten years from the grant date once they become exercisable. The options become exercisable in accordance with the schedule below: (a) 25% of the options become exercisable on the first anniversary of the grant date (such date is the initial vesting date), and (b) 6.25% of the options become exercisable on the date three months after the initial vesting date and on such date every third month thereafter, through the fourth anniversary of the grant date. The fair value of the options was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 124.81%, risk free interest rate of 1.98 %, and expected term of 10 years. The fair value of the options was $1,516,435. In accordance with the vesting periods, $94,777 and $94,777 were recorded as part of operating expense-stock compensation for the 1,300,000 options above for the three months ended September 30, 2013 and 2012, respectively; and $284,332 and $284,332 were recorded as part of operating expense-stock compensation for the 1,300,000 options above for the nine months ended September 30, 2013 and 2012, respectively.

On April 1, 2012, the Company granted 120,000 options with an exercise price of $1.49 to its CFO per his employment agreement. These options can be exercised within ten years from the grant date once they become exercisable. The options become exercisable every 3 months starting from grant date for the one year service period from April 1, 2012. The fair value of the options was calculated using the Black-Scholes options pricing model using the following assumptions: volatility of 124.50%, risk free interest rate of 2.23%, and expected term of 10 years. The fair value of the options was $170,967. In accordance with the vesting periods, $0 and $42,742 were recorded as part of operating expense-stock compensation for the 120,000 options above for the three months ended September 30, 2013 and 2012, respectively; and $42,742 and $85,483 were recorded as part of operating expense-stock compensation for the 120,000 options above for the nine months ended September 30, 2013 and 2012, respectively.

As of September 30, 2013, the Company had 1,676,250 outstanding vested stock options with a weighted average remaining term over 8.65 years. As of September 30, 2013, the Company had 1,363,750 unvested stock options with a weighted average remaining term over 7.95 years. Unrecorded stock-based compensation expense was $1,515,626 as of September 30, 2013.

The following table summarizes the Company’s stock option activity:

					Weighted Average
	Number of		Weighted Average		Remaining
	Options		Exercise Price		Life in Years		Fair Value
Outstanding, December 31, 2012		3,040,000	$	1.95		8.61		3,635,372
Exercisable, December 31, 2012		883,125	$	2.43		8.35		1,082,249

Granted
Forfeited
Exercised

Outstanding, September 30, 2013		3,040,000	$	1.95		7.86		3,635,372
Exercisable, September 30, 2013		1,676,250	$	2.09		7.79		2,024,969