10. Stock-Based Compensation Plans

The Plan - In 2007, the Company adopted the 2007 Stock Incentive Plan, as amended (the “Plan”). The Plan provides for the grant of Incentive Stock Options, Nonqualified Stock Options, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Awards and other stock-based awards, or any combination of the foregoing to our key employees, non-employee directors and consultants. The total number of Shares reserved and available for grant and issuance pursuant to this Plan is 8,423,787 Shares, subject to the automatic annual Share increase as defined in the Plan. Under the Plan, the exercise price is determined by the compensation committee of the Board of Directors, and for options intended to qualify as qualified incentive stock options, may not be less than the fair market value as determined by the closing stock price at the date of the grant. Each option and award shall vest and expire as determined by the compensation committee. Options expire no later than ten years from the date of grant. All grants provide for accelerated vesting if there is a change of control, as defined in the Plan.

Stock option awards granted for the year 2013 were estimated to have a weighted average fair value per share of $0.47. Stock option awards granted for the year 2012 were estimated to have a weighted average fair value per share of $0.37. There were no stock options or compensation-based warrants granted in the years 2010 and 2009. Stock option and compensation-based warrant awards granted for the year 2008 were estimated to have a weighted average fair value per share of $0.86. There were no stock options or warrants granted prior to 2008. The fair value calculation is based on stock options and warrants granted during a period using the Black-Scholes option-pricing model on the date of grant. In addition, for all stock options and compensation-based warrants granted, exercise price was determined based on the fair market value as determined by the closing stock price at the date of the grant. For stock option and compensation-based warrants granted during 2008, 2011, 2012 and 2013 the following weighted average assumptions were used in determining fair value:

	2008			2011			2012			2013
Risk-free interest rate		3.10	%		2.30	%		0.78	%		1.58	%
Dividend yield		-	%		-	%		-	%		-	%
Expected volatility		80	%		163	%		185	%		189	%
Expected term in months		76			81			61			69

The Company determines the expected term of its stock option and warrant awards using the simplified method based on the weighted average of the length of the vesting period and the term of the exercise period. Expected volatility is determined by the volatility of the Company’s historical stock price over the expected term of the grant. The risk-free interest rate for the expected term of each option and warrant granted is based on the U.S. Treasury yield curve in effect at the time of grant.

Option activity under the Plan for the year ended December 31, 2013, was as follows:

					Weighted
			Weighted-		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Options		Price		Term		Value
					(In years)
Year Ended December 31, 2013
Outstanding at December 31, 2012		3,482,188	$	1.22		5.8
Granted		2,550,000	$	0.48		9.6
Exercised		-		-
Forfeited/expired		-		-
Outstanding at December 31, 2013		6,032,188	$	0.90		6.8	$	18,671,745
Vested and expected to vest December 31, 2013		6,032,188	$	1.22		5.8	$	18,671,745
Exercisable at December 31, 2013		4,848,298	$	1.0535		6.2	$	14,824,475

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2013. This amount changes based on the fair market value of the Company’s stock.

A summary of options outstanding and exercisable as of December 31, 2013:

		Options Outstanding						Options Exercisable
				Weighted
				Average		Weighted				Weighted
Range of Exercise		Number		Remaining		Average		Number		Average
Prices		Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price
				(Years)

$	0.30		56,771		4.3	$	0.30		56,771	$	0.30
$	0.33		125,000		7.5	$	0.33		89,583	$	0.33
$	0.35		25,000		8.3	$	0.35		25,000	$	0.35
$	0.39		25,000		8.8	$	0.39		25,000	$	0.39
$	0.46		2,500,000		9.6	$	0.46		1,423,611	$	0.46
$	0.53		20,000		7.1	$	0.53		13,333	$	0.53
$	0.54		25,000		9.3	$	0.54		-		-
$	0.90		730,417		4.3	$	0.90		715,000	$	0.90
$	1.40		2,500,000		4.8	$	1.40		2,500,000	$	1.40
$	1.95		25,000		9.8	$	1.95		-	$	1.95
			6,032,188		5.8	$	0.90		4,848,298	$	1.05

Warrant activity under the Plan for the year ended December 31, 2013, was as follows:

					Weighted
			Weighted-		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Warrants		Price		Term		Value
					(In years)
Year Ended December 31, 2013
Outstanding at December 31, 2012		85,620	$	0.90		0.9	$	-
Granted		-		-
Exercised		-		-
Forfeited/expired		(75,620)		0.90
Outstanding at December 31, 2013		10,000	$	0.90		4.3	$	31,000
Vested and expected to vest December 31, 2013		10,000	$	0.90		0.9	$	31,000
Exercisable at December 31, 2013		10,000	$	0.90		0.9	$	31,000

A summary of warrants outstanding and exercisable as of December 31, 2013:

		Warrants Outstanding						Warrants Exercisable
				Weighted
				Average		Weighted				Weighted
Range of Exercise		Number		Remaining		Average		Number		Average
Prices		Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price
				(Years)

$	0.90		10,000		4.3	$	0.90		10,000	$	0.90
			10,000		4.3	$	0.90		10,000	$	0.90

Stock Option Grants - Total stock option expense for the year 2012 totaled $63,385.

In April of 2013, the Company made a stock option grant to purchase 25,000 shares of the Company’s common stock for service as a director of the Company. Terms of the stock option grant require, among other things, that the individual continues to provide services over the vesting period of the option, which is one year from the date of grant for the director service stock option. The exercise price of the option is $0.54 a share, which was the closing price of the common stock at the date of grant being approved. The Company determined the fair value of the stock option granted using the Black Scholes model and expenses this value monthly based upon the vesting schedule of the stock option award. For purposes of determining fair value, the Company used an average annual volatility of one hundred seventy five percent (175%), which was calculated based on the closing price of the Company’s stock over the preceding five years. The risk free rate of interest used in the model was taken from a table of the market rate of interest for U. S. Government Securities for the date of the stock option award and the effective term. The Company used the simplified method to determine the expected term of the options due to the lack of historical data. The total fair value of the stock option granted was determined using this methodology to be $12,975, which is being expensed following the date of grant based on the stock option vesting schedule.

In August of 2013 the Company made stock option grants to management and officers to purchase in the aggregate 2,500,000 shares of the Company’s common stock. The previous grant of stock options to management and officers was made in 2008. Terms of the stock option grants require that the individuals continue employment with the Company over the vesting period of the option, fifty percent (50%) of which vested upon the date of the grant of the stock options and fifty percent (50%) of which will vest evenly over 3 years from the date that the options were granted. The exercise price of the option is $0.46 a share, which was the closing price of the common stock at the date of the grants being approved. The Company determined the fair value of the stock option granted using the Black Scholes model and expenses this value monthly based upon the vesting schedule of the stock option award. For purposes of determining fair value, the Company used an average annual volatility of one hundred eighty nine percent (189%), which was calculated based on the closing price of the Company’s stock over the preceding five years. The risk free rate of interest used in the model was taken from a table of the market rate of interest for U. S. Government Securities for the date of the stock option awards and the effective term. The Company used the simplified method to determine the expected term of the options due to the lack of historical data. The total value of stock options granted to management and officers was determined using this methodology to be $1,125,000, half of which was expensed at the date of grant and the balance will be expensed straight-line over the next three years based on the stock option service period.

In October of 2013, the Company made a stock option grant to purchase 25,000 shares of the Company’s common stock for service as a director of the Company. Terms of the stock option grant require, among other things, that the individual continues to provide services over the vesting period of the option, which is one year from the date of grant for the director service stock option. The exercise price of the option is $1.95 a share, which was the closing price of the common stock at the date of grant being approved. The Company determined the fair value of the stock option granted using the Black Scholes model and expenses this value monthly based upon the vesting schedule of the stock option award. For purposes of determining fair value, the Company used an average annual volatility of two hundred forty five percent (245%), which was calculated based on the closing price of the Company’s stock over the preceding five years. The risk free rate of interest used in the model was taken from a table of the market rate of interest for U. S. Government Securities for the date of the stock option award and the effective term. The Company used the simplified method to determine the expected term of the options due to the lack of historical data. The total fair value of the stock option granted was determined using this methodology to be $48,550, which is being expensed following the date of grant based on the stock option vesting schedule.

Total stock option expense for the year 2013 totaled $704,480. Of this amount, $32,879 related to stock options for personnel involved in R&D activities and $671,601 related to stock options for outside directors and officers and management of the Company. As of December 31, 2013, total unrecognized compensation cost related to unexpensed stock option awards amounted to $547,691.

Warrant Grants - There were no warrants for services granted in 2013 and there was no warrant expense for the year 2013. There were no warrants for services granted in the year 2012 and there was no warrant expense for the year 2012.