NOTE 10

SHARE-BASED COMPENSATION

Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.

Options

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of awards granted. The following assumptions were used for option awards during the six months ended June 30, 2013. There were no option awards granted during the six months ended June 30, 2012:

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Expected Dividend Yield – because we do not currently pay dividends, the expected dividend yield is zero;

•

Expected Volatility in Stock Price – volatility based our own trading activity was used to determine expected volatility;

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Risk-free Interest Rate – reflects the average rate on a United States Treasury bond with maturity equal to the expected term of the option; and

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Expected Life of Awards – because we have minimal experience with the exercise of options or warrants for use in determining the expected life for each award, we used the option’s contractual term as the expected life.

The weighted-average assumptions used in the option pricing model for stock option grants were as follows for the six months ended June 30, 2013:

	2013
Expected Dividend Yield	0.00%
Expected Volatility of Stock Price	119.9%
Risk-Free Interest Rate	1.86%
Expected Life	10 years
Weighted Average Fair Value at Grant Date	$0.15/share

In total, the Company recorded $157,784 and $86,618 of stock-based compensation expense for the three month periods ended June 30, 2013 and 2012, respectively and $313,789 and $277,239 of stock-based compensation expense for the six month periods ended June 30, 2013 and 2012, respectively, related to employee and board member stock options and stock and warrants issued to nonemployees. As of June 30, 2013, $483,436 of unrecognized compensation expense related to non-vested share-based awards remains to be recognized over a period of approximately 3 years.

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares, which was also approved by the Company’s shareholders, and to include the independent Board members in the plan in lieu of continuing the previous practice of granting warrants each quarter to independent board members for services. At June 30, 2013, there were 2,261,650 shares of common stock reserved for issuance under the Plan. The Plan is intended to permit stock options granted to employees 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 that are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are typically granted at an exercise price equal to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and are typically exercisable up to 10 years.

The following table summarizes all stock option activity of the Company for the six months ended June 30, 2013:

	Number of		Weighted Average
	Options		Exercise Price

Outstanding, December 31, 2012		6,867,500	$	0.66

Granted		1,250,000	$	0.15

Forfeited		379,150	$	0.59

Outstanding, June 30, 2013		7,738,350	$	0.57

Exercisable, June 30, 2013		5,671,600	$	0.63

Warrants

Warrants are issued to third parties as payment for services and in conjunction with the issuance of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for warrants granted for the six months ended June 30:

	2013			2012
Expected Dividend Yield		-			-
Expected Volatility in Stock Price		123.9	%		31.57	%
Risk-Free Interest Rate		1.47	%		0.78	%
Expected Life of Awards, Years		6.83			4.5

The following table represents the Company’s warrant activity for the six months ended June 30, 2013:

				Weighted Average				Weighted Average
	Number of			Grant Date		Weighted Average		Remaining
	Warrants			Fair Value		Exercise Price		Contractual Life (Years)

Outstanding, December 31, 2012		12,857,926				$	0.41		7.28
Granted		315,689		$	0.12	$	0.06
Exercised		-		$		$
Expired/Forfeited		(1,318,263	)	$		$	1.06

Outstanding, June 30, 2013		11,855,352				$	0.22		7.56

Exercisable, June 30, 2013		11,805,352				$	0.22		7.55

The Company issued 195,689 warrants for services during the six months ended June 30, 2013 at exercise prices ranging from $0.05 to $0.23 per share, exercisable over 10 years from the grant date. All of the warrants vested immediately. The fair value of the warrants was calculated as of the date of the grant utilizing the Black-Scholes option pricing model and assumptions as detailed above. The total amount of the fair value was $20,060 and was recorded as noncash share-based compensation expense when vesting occurred. The Company also issued 20,000 warrants associated with a private placement offering of the Company’s common stock at an exercise price of $0.35. The fair value of the private placement warrants was $3,502. In addition, the Company issued 100,000 warrants associated with a private placement offering of the Company’s Shareholder Notes at an exercise price of $0.10 and a fair value of $1,930.