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STOCK OPTIONS AND WARRANTS

9 Months Ended

Sep. 30, 2013

NOTE 12 – STOCK OPTIONS AND WARRANTS

During 1999, the Board of Directors (“Board”) of the Company adopted, with the approval of the stockholders, a Stock Option Plan. In 2000, the Board superseded that plan and created a new Stock Option Plan, pursuant to which it is authorized to grant options to purchase up to 1.5 million shares of common stock. On December 17, 2003, the Board, with approval of the stockholders, superseded this plan and created the 2003 Stock Option Plan (the “Plan”). Under the Plan the Company is authorized to grant options to purchase up to 18,000,000 shares of common stock to the Company’s employees, officers, directors, consultants, and other agents and advisors. The Plan is intended to permit stock options granted to employees under the Plan to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan, which are not intended to qualify as Incentive Stock Options, are deemed to be non-qualified options (“Non-Statutory Stock Options”). As of September 30, 2013, there are 16,925,996 options that have been issued and exercised, 1,000,000 options that have been issued and are unexercised and 74,004 options that are available to be issued under the Plan.

The Plan is administered by a committee of the Board of Directors (“Stock Option Committee”) which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan.

In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock for which an employee may exercise Incentive Stock Options under all plans of the company shall not exceed $1,000,000 per calendar year. If any employee shall have the right to exercise any options in excess of $100,000 during any calendar year, the options in excess of $100,000 shall be deemed to be Non-Statutory Stock Options, including prices, duration, transferability and limitations on exercise.

The Company issued non-statutory stock options pursuant to contractual agreements to non-employees. Options granted under the agreements are expensed when the related service or product is provided.

Effective October 8, 2012, the Company entered into a three year agreement with the Vice Chairman of the Board of the Company, with an annual compensation of $200,000 per year. In addition, upon execution of the agreement the Company has agreed to issue options to the Vice Chairman to purchase 5% of the shares of the Company’s fully diluted common stock at an exercise price of $.05 per share, subsequent to the Company receiving funding of $2.5 million. The Company has raised the $2.5 million in funding and on June 25, 2013, the Company issued the Vice Chairman 19 million options in satisfaction of the 5% of the shares of the Company’s fully diluted common stock clause. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 146.1%, risk-free interest rate of 2.6% and expected option life of ten years. The fair value of options issued was $3,767,700 which was expensed immediately.

Effective October 16, 2012, the Company entered into a three year agreement with the President and Chief Executive Officer of the Company with an annual compensation of $200,000 per year. In addition, upon execution of the agreement the Company has agreed to issue options to the President to purchase 5% of the shares of the Company’s fully diluted common stock at an exercise price of $.05 per share, subsequent to the Company receiving funding of $2.5 million and on June 25, 2013, the Company issued the President and Chief Executive Officer 19 million options in satisfaction of the 5% of the shares of the Company’s fully diluted common stock clause. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 146.1%, risk-free interest rate of 2.6% and expected option life of ten years. The fair value of options issued was $3,767,700 which was expensed immediately.

On January 22, 2013, the Company issued options to an employee to purchase 1 million shares of the Company’s common stock at an exercise price of $.05, with a term of ten years. The options vest as follows: 250,000 immediately, 250,000 in one year and 500,000 in two years The Company used the Black- Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 222%, risk-free interest rate of 1.9% and expected option life of ten years. The fair value of options issued was $99,972 of which $25,000 was expensed immediately and the remainder is being expensed over the vesting terms. The total expense for the three and nine months ended September 30, 2013 was $12,599 and $59,367.

On February 25, 2013, the Company issued options to an employee to purchase 500,000 shares of the Company’s common stock at an exercise price of $.05, with a term of ten years. The options vest as follows: 200,000 in one year, 200,000 in two years and 100,000 in three years. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 259%, risk-free interest rate of 1.9% and expected option life of ten years. The fair value of options issued was $89,998. The options were cancelled during the three months ended June 30, 2013. The total expense recognized of $5,000 was reversed upon cancellation of the options.

On March 13, 2013, the Company issued an option to purchase 2 million shares of the Company’s common stock at an exercise price of $.05, with a term of ten years, to a member of the Board of Directors. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 235%, risk-free interest rate of 2.0% and expected option life of ten years. The fair value of the option issued was $439,963 of which $219,982 was expensed immediately and the remainder will be expensed over one year. The total expense for the three and nine months ended September 30, 2013 was $55,447 and $341,122.

On May 4, 2013, the Company issued an option to purchase 2 million shares of the Company’s common stock at an exercise price of $.05, with a term of ten years, to the a member of the Board of Directors. The options vest 50% immediately and 50% on May 4, 2014. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 235%, risk-free interest rate of 1.78% and expected option life of ten years. The fair value of the option issued was $460,000 of which $230,000 was expensed immediately and the remainder will be expensed over one year. The total expense for the three and nine months ended September 30, 2013 was $57,973 and $323,890.

On September 30, 2013, the Company issued an option to purchase 1 million shares of the Company’s common stock at an exercise price of $.15, with a term of ten years, to the Company’s Chief Operating Officer. The options vest 50% after the first year and 50% at the end of 24 months. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of ranging from 268.4% to 272.8%, risk-free interest rate of 1.39% and expected option life of ten years. The fair value of the option issued was $99,840. No expense was recognized for the three and nine months ended September 30, 2013.

A summary of incentive stock option transactions for employees since December 31, 2011 is as follows:

						Weighted Average
	Option/Warrant			Exercise		Exercise
	Shares			Price		Price
Outstanding, December 31, 2011		6,390,000		$	0.00125	$	0.00125

Granted		15,000,000			0.05 - 0.15		0.06
Transferred from non-employee options		200,000			0.05		-
Exercised		(5,823,333	)		0.00125 - 0.15		-
Expired/Returned		-			-		-

Outstanding, December 31, 2012		15,766,667			0.00125 to 0.10		0.06

Granted		44,500,000			0.05 - 0.15		0.04
Exercised		(900,000	)		0.00125		-
Expired/Returned		(500,000	)		0.05		-

Outstanding, September 30, 2013		58,866,667			$0.05 to $0.15	$	0.05

Exercisable, September 30, 2013		50,116,667			$0.05 to $0.15	$	0.06

Weighted Average Remaining Life, Exercisable, September 30, 2013 (years)		9.6

The following tables summarize non-employee stock option/warrant activity of the Company since December 31, 2011:

							Weighted Average
	Option/Warrant			Exercise			Exercise
	Shares			Price			Price
Outstanding, December 31, 2011		15,585,996			$0.00125 to $0.20		$	0.01

Granted		72,422,221			0.05 to 0.10			0.08
Transferred to employee options		(200,000	)		(0.05	)		-
Exercised		(5,000,996	)		0.00125			-
Expired		-			-			-

Outstanding, December 31, 2012		82,807,221			0.00125 to 0.20			0

Granted		38,144,444			0.10 to 0.15			0.03
Exercised		(3,435,000	)		0.00125 - 0.07			-
Expired		-			-			-

Outstanding, September 30, 2013		117,516,665			$0.01 to $.20		$	0.10

Exercisable, September 30, 2013		117,516,665			$0.01 to $.20		$	0.10

Weighted Average Remaining Life, Exercisable, September 30, 2013 (years)		6.8