Note 3. Share-Based Payments

The Company has in place a 2010 Equity Incentive Plan and a 2008 Equity Incentive Plan. In general, these plans provide for stock-based compensation in the form of (i) Non-statutory Stock Options; (ii) Restricted Stock Awards; and (iii) Stock Appreciation Rights to the Company’s employees, directors and non-employees. The plans also provide for limits on the aggregate number of shares that may be granted, the term of grants and the strike price of option awards.

Stock-based compensation in the amount of $808,000 and $552,000 was recognized for the three months ended July 31, 2014 and 2013, respectively. Stock-based compensation expense was recognized as follows (in thousands):

	Three Months Ended July 31,
	2014	2013

General and administrative	543	419
Sales and marketing	154	63
Research and development	105	13
TOS cost of sales	2	8
POS cost of sales	4	49

Total stock-based compensation expense	808	552

Stock Option Grants

Black-Scholes assumptions used to calculate the fair value of options granted during the three months ended July 31, 2014 and 2013 were as follows (in thousands):

	Three Months Ended July 31,
	2014	2013

Expected term in years	2.5 - 6	6.0
Risk-free interest rates	0.95% to 2.24%	1.38% to 1.91%
Volatility	94.08% to 102.5%	96.4% to 100.6%
Dividend yield	0%	0%

The weighted average fair value of stock options granted during the three months ended July 31, 2014 and 2013 was $0.69 and $0.40, respectively. The Company’s stock options activity for the three months ended July 31, 2014 is as follows:

						Weighted
				Weighted		Average
		Directors		Average		Remaining	Aggregate
	Non-	and		Exercise		Contractual	Intrinsic
	Employees	Employees	Total	Price		Life (Years)	Value
Outstanding, May 1, 2014	765,000	22,586,037	23,351,037	$	1.01	7.5	$	985,000
Granted	80,000	135,000	215,000		1.01
Forfeited	-	(11,250)	(11,250)		0.49
Expired	(150,000)	(22,500)	(172,500)		1.12

Outstanding, July 31, 2014	695,000	22,687,287	23,382,287		1.01	7.3	$	739,000

Vested and expected to vest as of July 31, 2014	695,000	22,687,287	23,382,287		1.01	7.3	$	739,000

Exercisable as of July 31, 2014	396,042	14,299,785	14,695,827		0.88	6.2	$	701,000

Included in the balances outstanding in the table above are 3,000,000 options granted to the Company’s Chief Executive Officer and President which vest based on service criteria and 3,000,000 options granted to the Company’s Chief Executive Officer and President which vest based on performance criteria. The service-based conditions of these options provide for vesting to occur monthly over a period of three years. Since the straight-line method is not available for performance or market-based share-based payments, the 3,000,000 performance-based options will be expensed on an accelerated basis once the Company determines it is probable that the performance-based conditions will be met.

Stock Purchase Warrants

As of July 31, 2014 and April 30, 2014, the Company had warrants outstanding for the purchase of 3,276,667 shares of its common stock, all of which were exercisable. Of these warrants, 1,266,667 were issued in connection with the April 2011 Private Placement and 1,860,000 were issued in connection with the January 2013 Private Placement and are accounted for as liabilities as further discussed in Note 4. The remaining 150,000 warrants, with an exercise price of $1.00, are accounted for as equity instruments and expired on July 31, 2014. Activity related to these warrants, which expire at various dates through April 2016, is summarized as follows (dollars in thousands):

					Weighted
			Weighted		Average
	Number		Average		Remaining		Aggregate
	of		Exercise		Contractual		Intrinsic
	Shares		Price		Life (Years)		Value

Outstanding, May 1, 2014		3,276,667	$	0.61		2.9	$	984,333
Granted		-		-		-		-
Exercised		-		-		-		-
Expired		-		-		-		-

Outstanding, July 31, 2014		3,276,667	$	0.61		2.6	$	921,800

The warrants issued in connection with both the April 2011 Private Placement and January 2013 Private Placement contain certain exercise price reset provisions. Under these provisions, the exercise price of the warrants may be adjusted downward should the Company have future sales of its Common Stock for no consideration or for a consideration per share less than the Per Share Price (as such term is defined in the April 2011 Private Placement and January 2013 Private Placement). These exercise price reset provisions resulted in a downward adjustment to the exercise price of the warrants issued in the April 2011 Private Placement from $0.90 to $0.50.

The Company has accounted for the warrants issued in connection with the April 2011 Private Placement and January 2013 Private Placement as a liability based on the exercise price reset provisions described above. This liability, which is recorded at fair value on the accompanying consolidated balance sheets, totaled $0.8 million at the time of the close of the January 2013 Private Placement Agreement. As of July 31, 2014 and April 30, 2014, the fair value of these warrants was $1.86 million and $2.01 million, respectively. The change in fair value of these warrants has been, and will be, recognized as other income (expense) on the Company’s consolidated statements of operations. The fair value of these warrants was calculated by the Monte Carlo simulation valuation method. Assumptions used to calculate the fair value of these warrants were as follows:

	July 31,		April 30,
	2014		2014

Expected term in years		1.7 - 3.5		1.9 - 3.7
Risk-free interest rates		0.57%- 1.23%		0.4%- 1.17%
Volatility		92.9%- 107.2%		95%- 113%
Dividend yield		0%		0%

The Company estimated the volatility based upon the applicable look-back periods or historical volatility observed for the Company. For the Risk-free rate the Company used the yield on a T-bill with maturity closest to the expected time to the warrant expiration.

In addition to the assumptions above, the Company also takes into consideration whether or not the Company would participate in another round of financing and if that financing is registered or not and what that stock price would be for the financing at that time.

The Company will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise of the warrants, at which time the liability will be reclassified to stockholders' equity, or expiration of the warrants.

The Company has granted demand registration rights in connection with the investment in common shares and the common shares underlying the warrants for both the April 2011 Private Placement and January 2013 Private Placement. These rights include the requirement of the Company to file certain registration statements within a specified time period and to have these registration statements declared effective within a specified time period. If the Company is not able to comply with these registration requirements, the Company will be required to pay cash penalties equal to 1.0% of the aggregate Purchase Price paid by the investors for each 30-day period in which a Registration Default, as defined in the Securities Purchase Agreement, exists. These penalties are subject to a 10% limit of the aggregate Purchase Price paid by the investors. The Company may become subject to these penalty provisions if it fails to have a registration statement for the common shares declared effective, or to maintain the effectiveness of such registration statement. The total amount of potential penalties under this registration payment arrangement ranges from $50,000 to $130,000 for each 30-day period in which a registration default exists; however, as of July 31, 2014 and April 30, 2014, and through the date of this filing, the Company does not believe these penalties to be probable and accordingly, has not established an accrual for such registration payment arrangements.