(6) Shareholders' Equity

(a) Common Stock and Warrants

During 2014 and 2013, the Company received proceeds of $304,788 and $822,969 in connection with the exercise of options and warrants representing 64,800 and 179,983 shares of common stock, respectively.

In May 2014, under an existing shelf registration statement, the Company sold 750,000 shares of common stock to a current institutional shareholder, Kevin Douglas and his related parties. Net proceeds from the offering were $3,278,250 which the Company intends to use for working capital and general corporate purposes.

During 2012 the Company sold, pursuant to the Company's effective registration statement filed with the SEC, equity in the Company as follows:

Date	Shares issued		Warrants issued		Unit price		Proceeds
July 30, 2012		589,227		117,846	$	2.97	$	1,745,549	*
August 28, 2012		1,900,000		380,000	$	2.97	$	5,229,201	**
October 3, 2012		1,250,000		250,000	$	4.49	$	5,275,750	***
Total		3,739,227		747,846			$	12,250,500

____________________

(*)		Net of fees of $4,455
(**)		Net of fees of $413,719
(***)		Net of fees of $336,750

Shares and warrants issued in the July 30, 2012 and August 28, 2012 sales were sold pursuant to the Company's currently effective shelf registration. Warrants issued in the July 30, 2012 and August 28, 2012 sales' are exercisable for a period of five years beginning on the closing date of the offering at an exercise price of $4.45 per share (150% of the aggregate offering price for a share of common stock and corresponding warrant).

The warrants issued in connection with the October 3, 2012 sale are exercisable for a period of five years beginning on the six-month anniversary of the closing date at an exercise price of $6.73 per share (approximately 150% of the aggregate offering price). The securities issued in the October 3, 2012 sale were not registered under the Securities Act of 1933, as amended, or any state securities laws, and were issued and sold in a private placement pursuant to Regulation D of the Securities Act. The Company subsequently filed a Form S-3 registration with the US Securities and Exchange Commission which was declared effective on December 26, 2012 that covers the resale of the shares by the purchaser and the shares issuable upon exercise of the warrants.

(b) Options and Warrants

(i) Employee Options

In 2008, the shareholders approved the Company's 2008 Equity Incentive Plan which provides for the granting of both incentive stock options at the fair market value at the date of grant and nonqualified stock options at the fair market value at the date of grant to employees or non-employees who, in the determination of the Board of Directors, have made or may make significant contributions to the Company in the future. The Company may also award stock appreciation rights, restricted stock, or restricted stock units under this plan. The Company initially reserved 750,000 shares of its common stock for issuance under this plan, and the Company's stockholders approved amendments to the 2008 Equity Incentive Plan to increase the number of shares issuable under the plan by 1,000,000 and 750,000 shares on June 13, 2013 and June 9, 2011, respectively. Options and other awards for 377,942 shares were available for issuance under this plan as of December 31, 2014.

At the discretion of the Board of Directors, options expire in ten years or less from the date of grant and are generally fully exercisable upon grant but in some cases may be subject to vesting in the future. Full payment of the exercise price may be made in cash or in shares of common stock valued at the fair market value thereof on the date of exercise, or by agreeing with the Company to cancel a portion of the exercised options.

The Company granted no employee options during 2012. The Company granted 499,700 fully vested options during 2013 and recorded share-based compensation of $1,431,620. The Company granted 209,750 fully vested options during 2014 and recorded share-based compensation of $483,915.The Company valued these grants using the Black-Scholes option pricing model with the following weighted average assumptions:

		2014		2013
Fair value on grant date	$	2.30		2.86
Expected dividend yield		-		-
Expected volatility		50	%	64	%
Risk free interest rate		1.68	%	1.62	%
Expected term of the option		5 years		5 years

Activity in stock options is summarized below:

						Weighted
				Weighted		Average
	Number of Shares			Average		Remaining	Aggregate
	Subject to			Exercise		Contractual	Intrinsic
	Option			Price		Term (Years)	Value
Balance at December 31, 2011		1,269,649		$	11.64	4.2

Granted		-		$	-
Cancelled		(151,750	)	$	12.76
Exercised		-		$	-
Balance at December 31, 2012		1,117,899		$	9.03	3.7

Granted		499,700		$	5.26
Cancelled		(64,500	)	$	12.81
Exercised		(72,500	)	$	4.83
Balance at December 31, 2013		1,480,599		$	7.80	5.2

Granted		209,750		$	5.19
Cancelled		(104,750	)	$	7.83
Exercised		(14,800	)	$	5.56
Balance at December 31, 2014		1,570,799		$	7.49	5.2	$	199,000

All options are exercisable at December 31, 2014.

During 2014 and 2013, the Company received $82,288, and $322,475, respectively in proceeds from the exercise of options.

(ii) Warrants and Non-Employee Options

Activity in warrants is summarized below:

	Number of Shares Underlying
	Warrants and Non- Employee			Weighted Average
	Options Granted			Exercise Price
Balance at December 31, 2011		704,257		$	5.00 - 9.00

Exercised		-			-
Terminated		-			-
Issued		807,846			5.12
Balance at December 31, 2012		1,512,103		$	5.56

Exercised		(107,483	)		4.45
Terminated		(25,000	)		9.00
Issued		-			-
Balance at December 31, 2013		1,379,620		$	5.58

Exercised		(50,000	)		4.45
Terminated		-			-
Issued		24,000			6.58
Balance at December 31, 2014		1,353,620		$	5.64

In lieu of higher cash compensation, the Company has granted warrants and non-employee options to consultants. These warrants and non-employee options vest ratably over various terms ranging from 24 to 59 months. Non-employee five year options covering 24,000 and 60,000 shares were granted to consultants during 2014 and 2012, respectively that vest over 24 and 12 months, respectively. These non-employee options are valued at fair value at the time that the related services are provided using the Black Scholes option valuation method and marked to market quarterly using the Black-Scholes option valuation method. The Company incurred a charge (benefit) to operations of $32,428, $369,844, and $110,649, for 2014, 2013, and 2012, respectively in connection with these warrants and non-employee options.

During 2014 and 2013, the Company received $222,500, and $478,299, respectively in proceeds from the exercise of warrants.

Warrants and non-employee options generally expire from five to ten years from the date of issuance. At December 31, 2014, the number of warrants exercisable was 1,349,620 at a weighted average exercise price of $5.64 per share.

Warrants issued in connection with an equity offering in February 2010 were exercised in late February 2015 resulting in the issuance of 50,181 shares of common stock. These warrants had an exercise price of $5.00 per share. The shares issued in connection with these warrant exercises are included in the total shares of common stock outstanding on the front cover of this filing.

During 2014, the Company did not issue restricted stock to its directors or employees.

During 2013, the Company granted 282,900 shares of restricted stock to its directors and employees. Directors received 91,500 of these shares of restricted common stock. All the shares granted to the directors, as well as 3,400 shares granted to employees vested immediately upon grant. The remaining 188,000 shares vest ratably over the 36 months following grant. The market value per share on the date of grant was $3.70.

During, 2012 the Company granted 363,200 shares of restricted stock to its directors and employees. All of the 96,500 shares granted to the directors, as well as 5,100 shares granted to employees, vested immediately upon grant. The remaining 261,600 shares issued to employees vest ratably over 36 months following grant. The market value per share on the date of grant was $3.38.

In connection with these grants, as well as prior grants that are not yet fully vested, the Company charged $526,575, $2,545,060, and $873,888, to operations during 2014, 2013, and 2012, respectively. At December 31, 2014, 2013, 2012, 62,667, 611,692, and 218,733, respectively, of these grants remain unvested. In addition, at December 31, 2014, $231,867 remains to be charged to operations over the next 12 months relating to these grants.