13. Stock Options and Warrants

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

13. Stock Options and Warrants

Employee Stock Options

The following table summarizes the changes in the options outstanding at June 30, 2013, and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.

Range of Exercise Prices		Number Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Number Exercisable		Weighted Average Exercise Price
$	$.01 - 0.25		1,775,000	$	0.15		9.07		1,762,500	$	0.15
$	4.00		2,347,926	$	4.00		8.50		1,879,173	$	4.00
			4,122,926				8.74		3,641,673

A summary of the Company’s stock awards for options as of June 30, 2013 and changes for the six months ended June 30, 2013 is presented below:

	Stock Options			Weighted Average Exercise Price
Outstanding, December 31, 2012		4,747,926		$	1.48
Granted		—			—
Exercised		—			—
Expired/Cancelled		(625,000	)		0.16
Outstanding, June 30, 2013		4,122,926			2.34
Exercisable, June 30, 2013		3,641,673			2.14

The weighted-average fair value of stock options granted to employees during the six months ended June 30, 2012 and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes-Merton (“Black-Scholes”) option pricing model are as follows:

	June 30, 2012
Significant assumptions (weighted-average):
Risk-free interest rate at grant date		0.35% to 1.61%
Expected stock price volatility		105%
Expected dividend payout		-
Expected option life (in years)		3.0 to 10.0
Expected forfeiture rate		-
Fair value per share of options granted	$	0.46

No stock options were granted to employees during the six months ended June 30, 2013.

The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award.

We estimate the volatility of our common stock based on the calculated historical volatility of similar entities in industry, in size and in financial leverage whose share prices are publicly available. We base the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. We have not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes-Merton option valuation model.

There were no options issued or exercised during the six months ended June 30, 2013 and 2012, respectively.

Total stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the three and six months ended June 30, 2013 amounted to $342,135 and $702,495 and for the three and six months ended June 30, 2012 amounted $1,098,161 and $1,858,459,respectively, net of tax effect. None of the options outstanding and unvested as of June 30, 2013 had any intrinsic value.

Warrants

The following table summarizes the changes in the warrants outstanding at June 30, 2013, and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These warrants were issued in lieu of cash compensation for services performed or financing expenses and in connection with the private placements and merger.

Range of Exercise Prices		Number Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Number Exercisable		Weighted Average Exercise Price
$	0.15		1,200,000	$	0.15		3.64		1,200,000	$	0.15
$	0.33		3,071,542	$	0.33		2.86		3,071,542	$	0.33
$	0.45		2,566,664	$	0.45		4.41		2,566,664	$	0.45
$	0.75 - 0.86		10,780,000	$	0.75		3.60		10,780,000	$	0.75
$	1.00		92,500	$	1.00		1.74		92,500	$	1.00
$	1.58		45,000	$	1.58		8.75		45,000	$	1.58
$	2.00		2,529,200	$	2.00		3.60		2,529,200	$	2.00
$	2.45 - 2.60		800,000	$	2.51		3.51		800,000	$	2.51
$	3.00		750,000	$	3.00		3.46		750,000	$	3.00
$	3.20		350,000	$	3.20		3.43		350,000	$	3.20
$	3.75		100,000	$	3.75		3.64		100,000	$	3.75
			22,284,906				3.59		22,284,906

A summary of the Company’s stock awards for warrants as of June 30, 2013 and changes for the six months ended June 30, 2013 is presented below:

	Options and Warrants			Weighted Average Exercise Price
Outstanding, December 31, 2012		22,218,240		$	1.01
Granted		1,266,666			0.17
Exercised		—			—
Expired/Cancelled		(1,200,000	)		0.63
Outstanding, June 30, 2013		22,284,906			0.96
Exercisable, June 30, 2013		22,284,906			0.96

Total non-employee stock-based compensation expense in connection with warrants recognized in the consolidated statement of operations for the three months and six months ended June 30, 2013 and 2012 was$75,000 and $75,000 and $0 and $2,720,764, respectively, net of tax effect.

On March 14, 2013, in conjunction with the $20,000 equity investment, an investor agreed to exchange their respective series A and B warrants to purchase an aggregate of 400,000 shares of common Stock each at an exercise price of seventy-five cents ($.075) per share for (i) a new series A warrant to purchase an aggregate of 600,000 shares of Common Stock at an exercise price of fifteen cents ($0.15) per share and (iii) a new series B warrant to purchase an aggregate of 600,000 shares of Common Stock at an exercise price of fifteen cents ($0.15) per share. The new securities issued to the February 2012 Investor was issued in accordance with Section 3(a)(9) under the Securities Act. The Company recognized the fair market value net of $75,000 as an expense.

The Company issued 1,584,200 compensatory warrants to non-employees during the six months ended June 30, 2012. The Company recognized the fair market value of $2,720,764 as an expense.

The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants, respectively; dividend yield of zero percent for all periods; expected volatility is 105%; risk-free interest rate from a range of .12% to 2.08%; expected lives ranging from one years to ten years. Total non-employee stock-based compensation expense in connection with warrants recognized for the six months ended June 30, 2013 and 2012 was $0 and $2,720,764, respectively, net of tax effect.