Note 11 - Stock-based Compensation

In accordance with ASC Topic 718, stock-based compensation cost is estimated at the grant date, based on the estimated fair value of the awards, and recognized as expense ratably over the requisite service period of the award for awards expected to vest.

Stock Incentive Plans

Under the Broadcast International, Inc. 2004 Long-term Incentive Plan (the "2004 Plan"), the board of directors may issue incentive stock options to employees and directors and non-qualified stock options to consultants of the company. Options generally may not be exercised until twelve months after the date granted and expire ten years after being granted. Options granted vest in accordance with the vesting schedule determined by the board of directors, usually ratably over a three-year vesting schedule upon anniversary date of the grant. Should an employee terminate before the vesting period is completed, the unvested portion of each grant is forfeited. We have used the Black-Scholes valuation model to estimate fair value of our stock-based awards, which requires various judgmental assumptions including estimated stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. The number of unissued stock options authorized under the 2004 Plan at December 31, 2013 was 4,319,411.

The Broadcast International, Inc. 2008 Equity Incentive Plan (the "2008 Plan") has become our primary plan for providing stock-based incentive compensation to our eligible employees and non-employee directors and consultants of the company. The provisions of the 2008 Plan are similar to the 2004 Plan except that the 2008 Plan allows for the grant of share equivalents such as restricted stock awards, stock bonus awards, performance shares and restricted stock units in addition to non-qualified and incentive stock options. We continue to maintain and grant awards under our 2004 Plan which will remain in effect until it expires by its terms. The number of unissued shares of common stock reserved for issuance under the 2008 Plan was 363,200 at December 31, 2013.

Stock Options

We estimate the fair value of stock option awards granted beginning January 1, 2006 using the Black-Scholes option-pricing model. We then amortize the fair value of awards expected to vest on a straight-line basis over the requisite service periods of the awards, which is generally the period from the grant date to the end of the vesting period. The Black-Scholes valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest rate and expected option term. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. The risk-free interest rate was based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award was granted with a maturity equal to the expected term of the stock option award. The expected option term is derived from an analysis of historical experience of similar awards combined with expected future exercise patterns based on several factors including the strike price in relation to the current and expected stock price, the minimum vest period and the remaining contractual period.

There were no options issued during the year ending December 31, 2013. The fair values for the options granted in 2012 were estimated at the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:

	Year Ended December 31,2012
Risk free interest rate	1.65%
Expected life (in years)	10.0
Expected volatility	78.97%
Expected dividend yield	0.00%

The weighted average fair value of options granted during the year ended December 31, 2012 was $0.27.

Warrants

We estimate the fair value of issued warrants on the date of issuance as determined using a Black-Scholes pricing model. We amortize the fair value of issued warrants using a vesting schedule based on the terms and conditions of each associated underling contract, as earned. The Black-Scholes valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest rate and warrant expected exercise term. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. The risk-free interest rate was based on the yield curve of a zero-coupon U.S. Treasury bond on the date the warrant was issued with a maturity equal to the expected term of the warrant.

The fair values for the warrants granted in 2013 and 2012 were estimated at the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:

	Year Ended December 31,
	2013	2012
Risk free interest rate	0.65%	1.16%
Expected life (in years)	4.42	5.7
Expected volatility	90.68%	82.79%
Expected dividend yield	0.00%	0.00%

The weighted average fair value of warrants granted during the years ended December 31, 2013 and 2012, was $0.05 and $0.23, respectively.

Results of operations for the years ended December 31, 2013 and 2012 includes $25,388 and $283,693, respectively, of non-cash stock-based compensation expense. Restricted stock units and options issued to directors vest immediately. All other restricted stock units, options and warrants are subject to applicable vesting schedules. Expense is recognized proportionally as each award or grant vests.

The $25,388 non-cash stock-based compensation expense for the year ended December 31, 2013 was a result of the vesting of unexpired options and warrants issued prior to January 1, 2013.

For the year ended December 31, 2012 we recognized $283,692 of stock based compensation as follows: (i) $65,500 for 390,133 restricted stock units issued to 5 members of the board of directors, (ii) $833 for 50,000 options granted to 4 employees and (iii) $217,359 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2012.

The following table summarizes option and warrant activity during the years ended December 31, 2013 and 2012.

	Options and Warrants Outstanding			Weighted Average Exercise Price

Outstanding at December 31, 2011		20,440,551		$	1.10
Options granted		50,000			0.37
Warrants issued		24,817,900			0.33
Expired		(252,669	)		1.31
Forfeited		(1,658,919	)		1.31
Exercised		--			--

Outstanding at December 31, 2012		43,396,863		$	0.54
Options granted		--			--
Warrants issued		850,000			0.25
Expired		(643,094	)		0.55
Forfeited		(535,633	)		1.42
Exercised		--			--

Outstanding at December 31, 2013		43,068,136		$	0.47

The following table summarizes information about stock options and warrants outstanding at December 31, 2013.

		Outstanding						Exercisable
				Weighted Average Remaining		Weighted Average				Weighted Average
	Range of Exercise Prices	Number Outstanding		Contractual Life (years)		Exercise Price		Number Exercisable		Exercise Price
$	0.17-0.95		40,024,414		3.34	$	0.42		39,941,081	$	0.42
	1.00-1.59		2,709,222		2.69		1.04		2,694,555		1.04
	2.25-4.00		334,500		1.94		2.52		334,500		2.52
$	0.17-4.00		43,068,136		3.29	$	0.48		42,970,136	$	0.47

There were no options exercised for the years ended December 31, 2013 and 2012. There was no intrinsic value of options and warrants available and exercisable for the years ended December 31, 2013 or 2012.

Restricted Stock Units

For the years ended December 31, 2013 and 2012, 686,667 and 390,133 restricted stock units were awarded, respectively. The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is recognized in accordance with the vesting schedule. All of the restricted stock units vested during the year they were awarded.

The following is a summary of restricted stock unit activity for the years ended December 31, 2013 and 2012:

	Restricted Stock Units			Weighted Average Grant Date Fair Value

Outstanding at December 31, 2011		2,550,000			1.25
Awarded at fair value		390,133			0.17
Canceled/Forfeited		--			--
Settled by issuance of stock		--			--
Outstanding at December 31, 2012		2,940,133		$	1.11
Awarded at fair value		686,667			0.08
Canceled/Forfeited		(275,000	)		1.36
Settled by issuance of stock		(258,553	)		0.82
Outstanding at December 31, 2013		3,093,247		$	0.88
Vested at December 31, 2013		3,093,247		$	0.88

The 686,667 restricted stock units valued at $51,500 awarded in the year ended December 31, 2013, were issued to 5 members of the board of directors for services rendered prior to 2013 and had been included as director fee expenses in the year ended December 31, 2012.

The impact on our results of operations for recording stock-based compensation for the years ended December 31, 2013 and 2012 is as follows:

	For the years ended
	December 31,
	2013		2012

General and administrative	$	25,388	$	185,478
Research and development		--		98,214

Total	$	25,388	$	283,692

Total unrecognized stock-based compensation was $29,294 at December 31, 2013, which we expect to recognize during the year ended December 31, 2014, in accordance with vesting provisions.