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.

During the six months ended June 30, 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 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 and six months ended June 30, 2014 are amortized over vesting periods encompassing the three and six months ended June 30, 2014. We charged to operating expenses approximately $274,300 and $345,200 during the three and six months ended June 30, 2014, respectively.

The following table summarizes our stock option activity for the six months ended June 30, 2014:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price

Balance, January 1, 2014		7,502,421	$	1.00
Granted		175,000		0.54
Exercised		(186,225)		0.88
Cancelled		(313,068)		1.06
Balance, June 30, 2014		7,178,128	$	1.00

The following table summarizes options outstanding at June 30, 2014:

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

Exercisable		3,768,128	$	0.97		3.7	$	100,000
Not vested		3,410,000		1.03		6.1		258,000
Balance, June 30, 2014		7,178,128	$	1.00		4.8	$	358,000

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 six months ended June 30, 2014:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price

Balance, January 1, 2014		41,595,655	$	0.69
Granted		7,435,901		0.70
Exercised		(155,568)		0.60
Expired		(1,333,066)		0.90
Cancelled pursuant to Tender Offer		(46,245,524)		0.67
Balance, June 30, 2014		1,297,398	$	1.09

The following table sets forth the warrants outstanding at June 30 2014:

			Weighted-
	Number		Average
	of Shares		Exercise
	Issuable		Price

10% convertible debenture - bonus warrants		183,337	$	0.60
10% convertible preferred stock – warrants		611,250		1.00
Consultants		502,811		1.37
Total		1,297,398	$	1.09

During the six months ended June 30, 2014, we issued warrants to purchase 7,275,901 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. The following ranges of assumptions were used for the simulation models: (i) no dividend yield, (ii) expected volatility of 45%, (iii) risk-free interest rate of 0.2%, and (iv) an expected life of approximately one and one-half years.

During the six months ended June 30, 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 approximately three years.

In addition, the fair value of a previously issued warrant which was 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 three and six months ended June 30, 2014, we decreased the fair value by approximately $14,900 and recorded a charge in our statement of operations. 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 approximately 0.8%, and (iv) an expected life of less than one year.

Tender Offer to Exchange Warrants for Shares of Common Stock

During June 2014, we extended an offer to exchange for shares of our common stock any and all of our outstanding warrants from the holders thereof (the “Tender Offer”). Each warrant holder was provided with the terms of the Tender Offer regarding their outstanding warrants. For every $10 of value attributed to the warrant, we offered to exchange 14.17707 shares of our common stock. The value of the warrants was derived from third parties using Monte Carlo simulation models and the Black-Scholes Option Pricing Model. The Tender Offer expired at 11:59P.M. on June 16, 2014.

Of the warrants to purchase 47.7 million shares of our common stock subject to the Tender Offer, warrants to purchase 46.2 million shares of our common stock were tendered with fair value of $4.9 million and exchanged for 35.5 million shares with a fair value on date of issuance of $24.8 million. The warrants were cancelled upon tender. See note 5.