NOTE 5 - STOCK OPTIONS

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

NOTE 5 - STOCK OPTIONS

NOTE 5 – STOCK OPTIONS

We previously reported that in January 2014 we extended the term of 7.5 million stock options granted to our President and CEO, Thom Kidrin, from March 31, 2014 to March 31, 2016. We have now learned that this disclosure was incorrect inasmuch as the approval of the extension was premised on the erroneous supposition that Mr. Kidrin’s options were only 18 month options and were expiring on March 31, 2014, when in fact they were five (5) year options expiring in September 2017. The options in question were granted pursuant to the terms of Mr. Kidrin’s Employment Agreement dated as of August 30, 2012, which was filed as Exhibit 10.2 to our Annual Report on Form 10-K for the ended December 31, 2012, which clearly states that the options had a term of five (5) years.

We reported in the Form 10-K for the year ended December 31, 2012 and in subsequent periods that Mr. Kidrin’s options were for an eighteen-month period, which was predicated on the execution of an option agreement of similar term. We inadvertently executed two versions of an option agreement in March 2013, one having a five-year term and one having an eighteen month term without realizing that there were two versions. The five-year version was maintained in our files, but we erroneously provided only the eighteen-month version to our independent auditor and prepared our financial statements and disclosures based upon an eighteen-month option term for Mr. Kidrin. We continued to erroneously rely on the wrong document until September 2014.

Accordingly, to the extent that the Board extended the options in January 2014, such extension was premised upon a mistake of fact and the Board action was taken in error. Indeed, because even the purported extension would, if effective, shorten the five year term of Mr. Kidrin’s options, such action would have been contrary to the Board’s intent. However, in the Annual Report for 2012 and in each periodic report since that date, the options were erroneously described as 18 month options expiring in March 2014 and our two most recent quarterly reports reported the erroneous extension. The disclosure came to light as we reviewed our disclosures as a result of the lawsuit described below, and located the March 2013 version of the option agreement. Inasmuch as disclosing the options as 18 months versus five years did not impact in any way our assets or retained earnings, it had an impact of approximately 10% on our income statement, (an overstatement of net income by approximately $169,330 for 2012; no impact on net income for 2013; and an understatement of net income by approximately $1,119,860 for each of the first two quarters of 2014). Management believes that this is non-cash book entry is not indicative in any way as to the health of the company. However, in an abundance of caution, we are evaluating whether to restate our annual reports for 2012 and 2013 and all periodic reports commencing in 2013. As required by this Item, upon learning of the erroneous disclosures (i.e. 18 month options vs. 5 year options and the now redundant extension), our executive officers brought the matter to the attention of our independent auditor.

During the nine months ended September 30, 2014, the Company issued 450,000 options to the Company’s directors. The directors, Bernard Stolar, Robert Fireman and Edward Gildea each received 100,000 options for serving as board members in 2014. Edward Gildea joined the board on January 10, 2014 and received an additional 150,000 options for joining the Company’s board.

No stock options or warrants were exercised during the nine months ended September 30, 2014.

During the nine months ended September 30, 2013, the Company issued 4,535,714 warrants as part of the offering of the senior secured convertible notes. During the nine months ended September 30, 2013, 800,000 warrants were exercised for cash proceeds of $120,000. During the nine months ended September 30, 2013, 100,000 stock options were exercised for cash proceeds of $11,000. During the nine months ended September 30, 2013, 900,000 stock options were exercised through a cashless exercise of options resulting in the issuance of 639,606 shares of common stock.

During the six months ended June 30, 2014, the Company recorded an option expense of $66,451, equal to the estimated fair value of the options at the date of grants. The fair market value was calculated using the Black-Scholes options pricing model, assuming approximately 0.93% risk-free interest, 0% dividend yield, 210% volatility, and expected life of 5 years for the Director’s options.

Stock Warrants and Options
Stock warrants/options outstanding and exercisable on September 30, 2014 are as follows:
Exercise Price per Share		Shares Under Option/warrant		Remaining Life in Years
	Outstanding
$	1.00		4,535,714		3.46
$	0.19		200,000		3.25
$	0.155		200,000		4.25
$	0.15		737,500		0.25
$	0.14		250,000		4.47
$	0.115		300,000		3.08
$	0.11		150,000		0.55
$	0.070		7,500,000		3.0
$
	Exercisable
$	1.00		4,535,714		3.46
$	0.19		200,000		3.25
$	0.15		737,500		0.25
$	0.115		300,000		3.08
$	0.11		150,000		0.55
$	0.070		7,500,000		3.0