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9. Stock options and warrants | 12 Months Ended
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Dec. 31, 2012
Notes to Financial Statements |
Note 9. Stock options and warrants | The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs. Options vest and expire according to terms established at the grant date. Options The Company currently issues stock options to employees, directors and consultants under the 2004 Stock Option Plan (the Plan). The Company could issue options under the Plan to acquire up to 5,000,000 shares of common stock. In February 2006, the board approved an amendment to the Plan (approved by the Shareholders in May 2006), increasing the authorized shares by 2,000,000 shares to 7,000,000 shares. At December 31, 2012, 2,750,442 were available to be granted under the Plan. Prior to 2004, the Company granted 3,250,000 options outside the Plan to officers of the Company. On February 1, 2012, the Company issued 4,000,000 options to its Chief Financial Officer, valued at $1,207,193 using Black-Scholes-Merton calculation. The options have an exercise price of $0.25 per share, vest over a four year period, and expire ten years from date of grant. Twelve and a half percent vested immediately, twelve and a half percent will vest on the first anniversary date, and twenty-five percent will vest on the following three anniversary dates.
On May 18, 2012, the Company issued 850,000 options to its employees, valued at $242,963 using Black-Scholes-Merton calculation. The options have an exercise price of $0.30 per share, vesting immediately, and expire ten years from date of grant. On October 1, 2012, the Company issued 8,000 options to its employees, valued at $5,851 using Black-Scholes-Merton calculation. The options have an exercise price of $0.83 per share, vesting immediately, and expire ten years from date of grant. During the years ended December 31, 2012 and 2011, the Company recognized amortization expense of $1,904,887 and $1,802,134 respectively based upon the vesting of these options. Future compensation expense on the options which were not exercisable at December 31, 2012 is $5,229,090 which will be amortized as compensation cost in future periods. Employee options vest according to the terms of the specific grant and expire from 5 to 10 years from date of grant. Non-employee option grants to date are vested upon issuance. The weighted-average, remaining contractual life of employee options outstanding at December 31, 2012 was 8.1 years. Stock option activity for the period January 1, 2004 to December 31, 2012, was as follows:
|  | Weighted Avg. Options |  |  | Weighted Avg. Exercise Price |
Options, January 1, 2004 |  |  | 13,250,000 |  |  | $ | 0.11 |
Options granted |  |  | 1,172,652 |  |  |  | 1.03 |
Options exercised |  |  | – |  |  |  | – |
Options cancelled |  |  | – |  |  |  | – |
Options, December 31, 2004 |  |  | 14,422,652 |  |  |  | 0.18 |
Options granted |  |  | 2,085,909 |  |  |  | 0.92 |
Options exercised |  |  | – |  |  |  | – |
Options cancelled |  |  | (10,000,000 | ) |  |  | 0.10 |
Options, December 31, 2005 |  |  | 6,508,561 |  |  |  | 0.53 |
Options granted |  |  | 1,313,605 |  |  |  | 1.21 |
Options exercised |  |  | (2,860,000 | ) |  |  | 0.10 |
Options forfeited |  |  | (962,607 | ) |  |  | 0.84 |
Options cancelled |  |  | – |  |  |  | – |
Options, December 31, 2006 |  |  | 3,999,559 |  |  |  | 0.99 |
Options granted |  |  | 238,679 |  |  |  | 0.55 |
Options exercised |  |  | – |  |  |  | – |
Options forfeited |  |  | (49,793 | ) |  |  | 1.96 |
Options cancelled |  |  | – |  |  |  | – |
Options, December 31, 2007 |  |  | 4,188,445 |  |  | $ | 0.95 |
Options granted |  |  | 2,700,000 |  |  |  | 0.28 |
Options exercised |  |  | – |  |  |  | – |
Options forfeited |  |  | (2,287,220 | ) |  |  | 1.00 |
Options cancelled |  |  | – |  |  |  | – |
Options, December 31, 2008 |  |  | 4,601,225 |  |  | $ | 0.53 |
Options granted |  |  | 333,333 |  |  |  | 0.30 |
Options exercised |  |  | (83,333 | ) |  |  | 0.27 |
Options forfeited |  |  | – |  |  |  | – |
Options cancelled |  |  | – |  |  |  | – |
Options, December 31, 2009 |  |  | 4,851,225 |  |  | $ | 0.52 |
Options granted |  |  | 181,818 |  |  |  | 0.55 |
Options exercised |  |  | (195,555 | ) |  |  | 0.27 |
Options forfeited |  |  | – |  |  |  | – |
Options cancelled |  |  | – |  |  |  | – |
Options, December 31, 2010 |  |  | 4,837,488 |  |  | $ | 0.52 |
Options granted |  |  | 19,800,000 |  |  |  | 0.26 |
Options exercised |  |  | (77,778 | ) |  |  | 0.27 |
Options forfeited |  |  | (310,000 | ) |  |  | 0.76 |
Options cancelled |  |  | (181,818 | ) |  |  | 0.55 |
Options, December 31, 2011 |  |  | 24,067,892 |  |  | $ | 0.30 |
Options granted |  |  | 4,858,000 |  |  |  | 0.30 |
Options exercised |  |  | (776,667 | ) |  |  | 0.47 |
Options forfeited |  |  | (871,127 | ) |  |  | 0.98 |
Options, December 31, 2012 |  |  | 27,278,098 |  |  | $ | 0.27 |
The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest under the Plan as of December 31, 2012 were as follows:
|  |  | Outstanding Options |  |  | Exercisable Options |
Option Exercise Price Per Share |  |  | Shares |  |  | Life (Years) |  |  | Weighted Average Exercise Price |  |  | Shares |  |  | Weighted Average Exercise Price |
$ 0.21 - $ 0.99 |  |  |  | 27,196,679 |  |  | 8.1 |  |  | $ | 0.27 |  |  |  | 9,616,679 |  |  | $ | 0.29 |
$ 1.00 - $ 1.99 |  |  |  | 81,419 |  |  | 2.8 |  |  | $ | 1.36 |  |  |  | 81,419 |  |  | $ | 1.36 |
|  |  |  |  | 27,278,098 |  |  |  |  |  | $ | 0.27 |  |  |  | 9,698,098 |  |  | $ | 0.30 |
As of December 31, 2012 the market price of the Company’s stock was $0.98 per share. At December 31, 2012 the aggregate intrinsic value of the options outstanding was $19,438,106. Black-Scholes value of options During the years ended December 31, 2012 and 2011, the Company valued options for pro-forma purposes at the grant date using the Black-Scholes-Merton valuation model with the following average assumptions:
|  |  | 2012 |  |  |  | 2011 |
Expected life (years) |  |  | 5.0 – 7.0 |  |  |  | 6.00 |
Risk free interest rate |  |  | 0.62 – 1.27 | % |  |  | 1.95 | %
Volatility |  |  | 125% – 140 | % |  |  | 141.97 | %
Expected dividend yield |  |  | 0.00 | % |  |  | 0.00 | %
The weighted average fair value for options granted in 2012 and 2011 were $0.30 and $0.37, respectively.
Warrants The following table summarizes certain information about the Company’s stock purchase warrants.
|  | Warrants |  |  | Weighted Avg. Exercise Price |
Warrants outstanding, January 1, 2004 |  |  | 14,252,414 |  |  |  | 0.48 |
Warrants granted |  |  | 2,372,500 |  |  |  | 1.27 |
Warrants exercised |  |  | (960,500 | ) |  |  | 0.20 |
Warrants cancelled |  |  | – |  |  |  | – |
Warrants outstanding, December 31, 2004 |  |  | 15,664,414 |  |  |  | 0.62 |
Warrants granted |  |  | 5,198,574 |  |  |  | 1.16 |
Warrants exercised |  |  | (50,500 | ) |  |  | 0.99 |
Warrants cancelled |  |  | (20,000 | ) |  |  | 1.50 |
Warrants outstanding, December 31, 2005 |  |  | 20,792,488 |  |  |  | 0.75 |
Warrants granted |  |  | 3,624,894 |  |  |  | 1.28 |
Warrants exercised |  |  | (2,328,452 | ) |  |  | 0.68 |
Warrants cancelled |  |  | (1,191,619 | ) |  |  | 1.46 |
Warrants outstanding, December 31, 2006 |  |  | 20,897,311 |  |  | $ | 0.81 |
Warrants granted |  |  | 3,602,701 |  |  |  | 0.64 |
Warrants exercised |  |  | – |  |  |  | – |
Warrants cancelled |  |  | (6,580,984 | ) |  |  | 1.06 |
Warrants outstanding, December 31, 2007 |  |  | 17,919,028 |  |  | $ | 0.67 |
Warrants granted |  |  | 3,931,708 |  |  |  | 0.42 |
Warrants exercised |  |  | (1,064,650 | ) |  |  | 0.50 |
Warrants cancelled |  |  | (10,386,083 | ) |  |  | 0.56 |
Warrants outstanding, December 31, 2008 |  |  | 10,400,003 |  |  | $ | 0.70 |
Warrants granted |  |  | 5,247,276 |  |  |  | 0.36 |
Warrants exercised |  |  | – |  |  |  | – |
Warrants cancelled |  |  | (2,300,515 | ) |  |  | 0.95 |
Warrants outstanding, December 31, 2009 |  |  | 13,346,764 |  |  | $ | 0.52 |
Warrants granted |  |  | 14,058,032 |  |  |  | 0.32 |
Warrants exercised |  |  | – |  |  |  | – |
Warrants cancelled |  |  | (4,425,728 | ) |  |  | 0.53 |
Warrants outstanding, December 31, 2010 |  |  | 22,979,068 |  |  | $ | 0.52 |
Warrants granted |  |  | 29,781,916 |  |  |  | 0.30 |
Warrants exercised |  |  | (224,000 | ) |  |  | 0.47 |
Warrants cancelled |  |  | (3,430,704 | ) |  |  | 0.56 |
Warrants outstanding, December 31, 2011 |  |  | 49,106,280 |  |  | $ | 0.32 |
Warrants granted |  |  | 9,273,316 |  |  |  | 0.31 |
Warrants exercised |  |  | (12,039,846 | ) |  |  | 0.29 |
Warrants cancelled |  |  | (4,134,243 | ) |  |  | 0.49 |
Warrants outstanding, December 31, 2012 |  |  | 42,205,507 |  |  | $ | 0.31 |
During the year ended December 31, 2012, the Company granted warrants to consultants to purchase 1,850,000 shares of its common stock. The warrants have an exercise price of $0.30 per share, fully vested and will expire in two to three years from grant date. Total fair value of the warrant amounted to $517,777 using the Black-Scholes Merton valuation model with the following average assumptions: risk-free interest rate of 0.23% to 0.39%; dividend yield of 0%; volatility of 111%; and an expected life of three years. During the year ended December 31, 2012, the Company granted 7,423,316 warrants to acquire share of its common stock in connection of its issuance of convertible notes. The warrants have an average exercise price of $0.29 per share, fully vested, and will expire in two to three years from date of grant. (See Note 5) During the years ended December 31, 2012 and 2011, the Company recognized amortization expense of $165,539 and $438,827 respectively based upon the vesting of warrants granted to employees and $641,747 and $411,888 respectively based upon the vesting of warrants granted to consultants. Future compensation expense on the warrants which were not exercisable at December 31, 2012 is $310,578. At December 31, 2012 the price of the Company’s common stock was $0.98 per share and the aggregate intrinsic value of the warrants outstanding was $28,411,354.
|  |  | Outstanding Warrants |  |  | Exercisable Warrants |
Warrant Exercise Price Per Share |  |  | Shares |  |  | Life (Years) |  |  | Weighted Average Exercise Price |  |  | Shares |  |  | Weighted Average Exercise Price |
$ 0.30 - $ 0.99 |  |  |  | 41,705,507 |  |  | 1.4 |  |  | $ | 0.30 |  |  |  | 40,338,840 |  |  | $ | 0.30 |
$ 1.00 - $ 1.99 |  |  |  | 500,000 |  |  | 1.5 |  |  | $ | 1.00 |  |  |  | 500,000 |  |  | $ | 1.00 |
|  |  |  |  | 42,205,507 |  |  |  |  |  | $ | 0.31 |  |  |  | 40,838,840 |  |  | $ | 0.31 |
Included in the table above are 4,412,500 warrants at an exercise price of $0.25 per share. Based upon these warrant agreements, the exercise price may be reduced if the Company sells equity to any person or entity at a price per share or conversion price or exercise price per share which shall be less than the Warrant exercise price in respect of the Warrant Shares then in effect. The reset of the warrant exercise price gives rise to the characterization of these instruments as derivative liabilities. See Note 7.

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