Note 11 - Share-based Compensation

Options

At our Annual Meeting of Shareholders during the year ended December 31, 2013, our shareholders approved an amendment to our 2010 Stock Plan to increase the number of shares of common stock reserved thereunder by 2,000,000 shares to a total of 5,000,000 shares. The exercise price of the options are established by the Board of Directors on the date of grant and are generally equal to the market price of the stock on the grant date. The Board of Directors may determine the vesting period for each new grant. Options issued are exercisable in whole or in part for a period as determined by the Board of Directors of up to ten years from the date of grant.

During the year ended December 31, 2013, our 2003 Stock Plan expired and no further awards are allowed under that plan.

We estimated the fair value of each option award at the grant date by using the Black-Scholes option pricing model with the following range of assumptions for awards:

	For the Year Ended
		December 31,			December 31,
	2013				2012

Dividend yield			0	%	0	%
Expected volatility, in years			90	%	125	%
Risk-free interest rates			1.4% to 2.8	%	0.8% to 0.9	%
Expected lives, in years			5 to 10		5

For options awarded during the years ended December 31, 2013 and 2012, the weighted average fair value per share on grant date was $0.54 and $0.72, respectively.

During the years ended December 31, 2013 and 2012, we awarded options to purchase 3,085,000 and 300,000 shares, respectively of our common stock at a weighted average exercise price of $0.54 and $0.72 per share, respectively to employees, directors and consultants. The right to exercise these options is either immediately on the date of award or based on (i) service time and (ii) in certain instances the optionee’s achievement of specific objectives. We estimate the fair value on the date of grant for the service time-vested options awarded during the year and amortized that fair value over the service time requirement. For those option awards that vest on the optionee’s achievement of certain objectives, until it is probable that the optionee will achieve the specific objective, the award is not earned and the fair value of the option is not estimated nor charged to operating expenses. We use the Black-Scholes option pricing model to estimate fair value of each option awarded.

During the years ended December 31, 2013 and 2012, an aggregate of approximately $529,500 and $445,900 was recognized in operating expenses in relation to options.

The following table summarizes our stock option activity for the periods presented:

		Weighted-
	Number	Average
	of Shares	Exercise
	Issuable	Price

Balance, January 1, 2012	5,886,261	$	1.11
Granted	300,000	$	0.72
Exercised	-		-
Cancelled	(476,136)	$	1.15
Balance, December 31, 2012	5,710,125	$	1.10
Granted	3,085,000	$	0.54
Exercised	(300)		0.88
Cancelled	(1,292,404)	$	0.36
Balance, December 31, 2013	7,502,421	$	1.00

The following table summarizes options outstanding at December 31, 2013:

			Weighted-		Weighted-
	Number		Average		Average	Aggregate
	of Shares		Exercise		Remaining	Intrinsic
	Issuable		Price		Term (Years)	Value

Exercisable		3,692,421	$	1.02	3.5	$	11,000
Not vested		3,810,000	$	0.99	6.7	$	35,000
Balance, December 31, 2013:		7,502,421	$	1.00	5.1	$	46,000

Warrants

From time to time, we compensate consultants, advisors and investors with warrants to purchase shares of our common stock, in lieu of cash payments. Net share settlement is available to warrant holders.

The following table sets forth our warrant activity during the periods presented:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price

Balance, January 1, 2012		5,452,141	$	1.18
Granted		22,048,510		0.67
Exercised		-		-
Cancelled		(147,500)		2.25
Balance, December 31, 2012		27,353,151	$	0.76
Granted		14,875,004		0.60
Exercised		(300)		0.88
Cancelled		(632,200)		1.56
Balance, December 31, 2013		41,595,655	$	0.69

During the years ended December 31, 2013 and 2012, pursuant to our 8% convertible promissory notes, we issued warrants to purchase 14,875,004 and 17,820,470 shares, respectively of our common stock at an initial exercise price of $0.60 per share. These warrants had fair values on their dates of issuances of approximately $334,100 and $443,300, respectively which were recorded as a credit to derivative liabilities and a charge to debt discount associated with our 8% convertible promissory notes. See Notes 7 and 8 for further discussion of these warrants. The estimated fair value of the warrants was computed by a third party using Monte Carlo simulation models.

During the year ended December 31, 2012 we issued warrants to purchase 166,675 shares of our common stock at exercise prices of $0.60 to the holders of our 10% convertible debentures pursuant to their amended terms. Since the fair value of those warrants was initially recorded as a derivative liability and charged to other expenses in our statement of operation upon the amendment of the debentures, upon issuance of the warrants, the fair value of approximately $57,000 was charged to the derivative liability and credited to equity. See Notes 6 and 7 for further discussion of these warrants.

During the year ended December 31, 2012 we issued warrants to purchase 300,000 shares of our common stock to consultants and advisors at weighted average exercise prices of $0.82 per share. These warrants had a fair value of approximately $78,600 at the date of grant which was charged to our statement of operations. For the warrants issued during the year ended December 31, 2012, we estimated the fair value of these warrants at their grant dates by using the Black-Scholes option pricing model with the following range of assumptions: (i) no dividend yield, (ii) expected volatility of between 100% and 118%, (iii) risk-free interest rates of between 0.4% and 0.6%, and (iv) expected lives of three to five years.

During the year ended December 31, 2012, we issued warrants to purchase 3,761,365 shares of our common stock at an exercise price of $1.00 to the holders of our 10% convertible preferred stock pursuant to the terms of the agreement. When it was probable we would be required to issue these warrants, their fair value was estimated to be $2.4 million, which was recorded as a derivative liability and a charge to other expense in our statement of operations. We estimated the initial fair value of these warrants by using the Black-Scholes option pricing model with the following assumptions - (i) no dividend yield, (ii) an expected volatility of 110%, (iii) a risk-free interest rate 0.6%, and (iv) an expected life of fifty-one months. See Notes 7 and 8 for further discussion of these warrants. Upon issuance of the warrants, the derivative liability of $1.8 million was eliminated and a credit to equity was made.

In addition, the fair value of a previously issued warrant which is being amortized over a service period spanning multiple reporting periods, was revalued using the Black-Scholes option pricing model, at the end of each reporting period. During the year ended December 31, 2012, we reduced the fair value by approximately $157,800 and recorded a credit in our statement of operations.