Note 10 - 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. In addition, during the three months ended March 31, 2014 the board approved an additional 2,000,000 shares to be available for award under the 2010 Stock Plan, subject to shareholder approval, which brought the total available for award under the 2010 Stock Plan to 7,000,000 shares. The exercise price of an option is established by the Board of Directors on the date of grant and is 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.

During the three months ended March 31, 2014, we awarded options to purchase 175,000 shares of our common stock at a weighted average exercise price of $0.54 to an employee and two of our directors. The right to exercise these options is on the date of award. We estimated the fair value of these options to be approximately $102,500 and which was charged to expense in our statement of operations during the period. We use the Black-Scholes option pricing model to estimate the fair values, with the following range of assumptions: (i) no dividend yield, (ii) expected volatility of 90%, (iii) risk-free interest rates of 1.5%, and (iv) expected lives of five years.

Certain options awarded prior to the three months ended March 31, 2014 are amortized over vesting periods encompassing the three months ended March 31, 2014, and we charged to operating expenses approximately $49,500 during the three months ended March 31, 2014.

The following table summarizes our stock option activity for the three months ended March 31, 2014:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable	Price

Balance, January 1, 2014	7,502,421	$	1.00
Granted	175,000		0.54
Exercised	(23,693)		0.88
Cancelled	(162,532)		0.88
Balance, March 31, 2014	7,491,196	$	1.00

The following table summarizes options outstanding at March 31, 2014:

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

Exercisable	4,081,196	$	0.98	3.9	$	191,000
Not vested	3,410,000		1.03	6.4		452,400
Balance, March 31, 2014:	7,491,196	$	1.00	5.0	$	643,400

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 three months ended March 31, 2014:

		Weighted-
	Number	Average
	of Shares	Exercise
	Issuable	Price

Balance, January 1, 2014	41,595,655	$	0.69
Granted	5,310,901		0.74
Exercised	(83,768)		0.60
Cancelled	(1,235,309)		0.89
Balance, March 31, 2014	45,587,479	$	0.69

The following table sets forth the warrants outstanding at March 31 2014:

		Weighted-
	Number	Average
	of Shares	Exercise
	Issuable	Price

10% convertible debenture - bonus warrants	305,566	$	0.60
10% convertible preferred stock – warrants	3,761,365		1.00
8% convertible promissory notes – warrants	37,846,375		0.60
Consultants	3,674,173		1.17
Total	45,587,479	$	0.69

During the three months ended March 31, 2014, pursuant to our 8% convertible promissory notes, we issued warrants to purchase 5,150,901 shares of our common stock pursuant to our issuance and sale of our 8% convertible promissory notes, at an initial exercise price of $0.60 per share. These warrants had fair values on their dates of issuances of approximately $391,400 which was recorded as a credit to derivative liabilities and a charge to debt discount associated with our 8% convertible promissory notes. See Notes 6 and 7 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 three months ended March 31, 2014, we issued a warrant to purchase 160,000 shares of our common stock at an exercise price of $1.20 in payment of amounts due a consultant. We estimated the fair value of this warrant to be approximately $84,700, which was charged to expense in our statement of operations during the period. We used the Black-Scholes option pricing model to estimate the fair value, with the following range of assumptions: (i) no dividend yield, (ii) expected volatility of 90%, (iii) risk-free interest rate of 0.8%, and (iv) an expected life of three years.

In addition, the fair value of a previously issued warrant which is being amortized over a service period spanning multiple reporting periods, is revalued using the Black-Scholes option pricing model, at the end of each reporting period. During the three months ended March 31, 2014, we decreased the fair value by approximately $14,900 and recorded a charge in our statement of operations.