NOTE 8 - OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK

Derivative Instruments - Warrants

The Company issued 5,000,000 warrants (“Samlyn warrants”) in connection with the December 22, 2011 private placement of 10,000,000 shares of common stock. The strike price of these warrants was $2.00 per share at the date of grant. These warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. These warrants were issued with a down-round provision whereby the exercise price would be adjusted downward in the event that additional shares of the Company's common stock or securities exercisable, convertible or exchangeable for the Company's common stock were issued at a price less than the exercise price. Therefore, the fair value of these warrants (based on observable inputs) was recorded as a liability in the balance sheet until they are exercised or expire or are otherwise extinguished. As discussed in Note 7, during the first quarter of 2013, the Company issued 3,756,757 shares of its common stock for gross proceeds of $5,560,000, which triggered a down-round adjustment in the strike price of the Samlyn warrants of $0.03 from $2.00 to $1.97.

The proceeds from the private placement were allocated between the Common Shares and the Warrants issued in connection with the Private Placement based upon their estimated fair values as of the closing date at December 22, 2011, resulting in the aggregate amount of $6,420,000 to the Stockholders' Equity and $3,580,000 to the warrant derivative. During 2012, the Company began using a binomial lattice model to value its warrant derivative liability. Based on the value estimated using the lattice model, a reclassification was recorded as of January 1, 2012 to increase Stockholder's Equity by $780,000 and decrease the warrant derivative liability by the same amount representing the decrease in fair value of the warrant at date of issuance. This adjustment was not considered by management to be material to the 2011 financial statements. As the fair value of the liability declined during such periods, during the three and six months ended June 30, 2013, the Company recorded other income of $155,000 and $650,000, respectively, and during the three and six months ended June 30, 2012, the Company recorded other income of $540,000 and $1,530,000, respectively.

Outstanding Stock Warrants

No warrants were issued during the six months ended June 30, 2013. A summary of the status of the warrants outstanding and exercisable at June 30, 2013 is presented below:

		Warrants Outstanding and Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price
$	0.75		139,340	2.54 years	$	0.75
$	0.78		213,402	2.88 years	$	0.78
$	0.80		124,481	2.79 years	$	0.80
$	1.00		212,000	2.38 years	$	1.00
$	1.15		461,340	8.11 years	$	1.15
$	1.97		5,000,000	3.72 years	$	1.97
$	2.00		54,367	3.38 years	$	2.00
			6,204,930

No compensation expense has been recognized for the vesting of warrants to consultants and other outside service providers in the accompanying statements of operations for the three and six months ended June 30, 2013. Compensation expense of $21,160 and $210,067, respectively has been recognized for the vesting of warrants to non-related parties for the three and six months ended June 30, 2012.

Outstanding Stock Options

The fair value of each of the Company's stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of the Company's common stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury Bond on the date the award is granted with a maturity equal to the expected term of the award.

The significant assumptions relating to the valuation of the Company's options issued for the six months ended June 30, 2013 and 2012 were as follows:

	2013			2012
Dividend Yield		0	%		0	%
Expected Life		5 - 10 years			5 -10 years
Expected Volatility		66 - 83	%		90.48	%
Risk Free Interest Rate		0.88%-2.57	%		1.74	%

A summary of the status and changes of the options granted under stock option plans and other agreements for the six month period ended June 30, 2013 is as follows:

				Weighted
				Average
				Exercise
	Shares			Price

Outstanding at December 31, 2012		15,455,470		$	1.04
Issued		460,867			1.21
Exercised		--			--
Forfeited		(338,222	)	$	1.73
Outstanding at June 30, 2013		15,578,115		$	1.03

During the six months ended June 30, 2013, the Company issued 460,867 options to purchase the Company's common stock with an exercise price of $1.15 - $1.58 and grant date fair value of $572,720. Sixty-five thousand granted options vested upon the grant date and the remainder of the options granted vest over a twelve-month period of time pursuant to the employee’s employment agreement. A summary of the status of the options outstanding at June 30, 2013 is presented below:

Options Outstanding					Options Exercisable
		Weighted	Weighted				Weighted
		Average	Average				Average
Number		Remaining	Exercise		Number		Exercise
Outstanding		Contractual Life	Price		Exercisable		Price

	7,358,277	5.42years	$	0.70		7,358,277	$	0.70
	3,205,134	2.63 years	$	0.83		3,205,134	$	0.83
	60,000	1.69 years	$	1.00		60,000	$	1.00
	300,000	6.07 years	$	1.15		0	$	1.15
	100,000	4.66 years	$	1.24		100,000	$	1.24
	115,000	4.98-4.99 years	$	1.35		69,167	$	1.35
	125,000	4.66 years	$	1.45		125,000	$	1.45
	330,000	3.96-8.96 years	$	1.55		146,667	$	1.55
	7,645	4.66 years	$	1.58		7,645	$	1.58
	3,077,059	9.48-9.53 years	$	1.66		1,574,732	$	1.66
	900,000	8.21 years	$	1.90		550,000	$	1.90
	15,578,115		$	1.03		13,196,622	$	0.92

At June 30, 2013, total compensation expense of $3,084,553for unvested options is to be recognized over the next thirty-seven months on a weighted average basis.

Compensation expense of $2,284,769 has been recognized for vesting of options for the six months ended June 30, 2013. The aggregate intrinsic value of the outstanding options as June 30, 2013 was $4,770,804.