(6) Shareholders' Equity

(a) Common Stock and Warrants

During 2013, the Company received proceeds of $822,969 in connection with the exercise of options and warrants representing 179,983 shares of common stock.

During 2012 the Company sold, pursuant to the Company's effective registration statement filed with the SEC, equity in the Company as follows:

Date	Shares issued	Warrants issued	Unit price		Proceeds
July 30, 2012	589,227	117,846	$	2.97	$	1,745,549	*
August 28, 2012	1,900,000	380,000	$	2.97	$	5,229,201	**
October 3, 2012	1,250,000	250,000	$	4.49	$	5,275,750	***
Total	3,739,227	747,846			$	12,250,500

____________________

(*)	Net of fees of $4,455
(**)	Net of fees of $413,719
(***)	Net of fees of $336,750

Shares and warrants issued in the July 30, 2012 and August 28, 2012 sales were sold pursuant to the Company's currently effective shelf registration. Warrants issued in the July 30, 2012 and August 28, 2012 sales' are exercisable for a period of five years beginning on the closing date of the offering at an exercise price of $4.45 per share (150% of the aggregate offering price for a share of common stock and corresponding warrant).

The warrants issued in connection with the October 3, 2012 sale are exercisable for a period of five years beginning on the six-month anniversary of the closing date at an exercise price of $6.73 per share (approximately 150% of the aggregate offering price). The securities issued in the October 3, 2012 sale were not registered under the Securities Act of 1933, as amended, or any state securities laws, and were issued and sold in a private placement pursuant to Regulation D of the Securities Act. The Company subsequently filed a Form S-3 registration with the US Securities and Exchange Commission which was declared effective on December 26, 2012 that covers the resale of the shares by the purchaser and the shares issuable upon exercise of the warrants.

(b) Options and Warrants

(i) Employee Options

In 2008, the shareholders approved the Company's 2008 Equity Incentive Plan which provides for the granting of both incentive stock options at the fair market value at the date of grant and nonqualified stock options at the fair market value at the date of grant to employees or non-employees who, in the determination of the Board of Directors, have made or may make significant contributions to the Company in the future. The Company may also award stock appreciation rights, restricted stock, or restricted stock units under this plan. The Company initially reserved 750,000 shares of its common stock for issuance under this plan, and 611,692 options and other awards were available for issuance under this plan as of December 31, 2013.

At the discretion of the Board of Directors, options expire in ten years or less from the date of grant and are generally fully exercisable upon grant but in some cases may be subject to vesting in the future. Full payment of the exercise price may be made in cash or in shares of common stock valued at the fair market value thereof on the date of exercise, or by agreeing with the Company to cancel a portion of the exercised options.

The Company granted no employee options during 2012 and 2011. The Company granted 499,700 fully vested options during 2013 and recorded share-based compensation of $1,431,620. The Company valued these 2013 grants using the Black-Scholes option pricing model with the following weighted average assumptions:

Fair value on grant date	$	2.86
Expected dividend yield		--
Expected volatility		64	%
Risk free interest rate		1.62	%
Expected term of the option		5 years

Activity in stock options is summarized below:

					Weighted
			Weighted		Average
	Number of		Average		Remaining	Aggregate
	Subject to		Exercise		Contractual	Intrinsic
	Option		Price		Term (Years)	Value
Balance at January 1, 2011	1,734,199		$	11.64	4.3	$	281,600

Granted	-		$	20.43
Cancelled	(379,550	)	$	3.72
Exercised	(85,000	)	$	9.48
Balance at December 31, 2011	1,269,649		$	11.64	4.2	$	-

Granted	(151,750	)	$	12.76
Cancelled	-		$	-
Exercised	-		$	-
Balance at December 31, 2012	1,117,899		$	9.03	3.7	$	4,250

Granted	499,700		$	5.26
Cancelled	(64,500	)	$	12.81
Exercised	(72,500	)	$	4.83
Balance at December 31, 2013	1,480,599		$	7.80	5.2	$	399,000

All options are exercisable at December 31, 2013.

During 2011 an employee was to make a payment of $276,750 for exercising 75,000 options but instead he forfeited 29,270 options which would have been exercisable at a fair market value of $276,896 and delivered the difference in cash.

During 2013 and 2011, the Company received $322,475 and $39,744, respectively in net proceeds from the exercise of options.

(ii) Warrants and Non-Employee Options

Activity in warrants is summarized below:

	Number of Shares Underlying
	Warrants and Non-Employee		Weighted Average
	Options Granted		Exercise Price
Balance at January 1, 2011	708,909		$	5.00 - 9.00

Exercised	(4,652	)		5.64
Terminated	-			-
Issued	-			-
Balance at December 31, 2011	704,257		$	5.00 - 9.00

Exercised	-			-
Terminated	-			-
Issued	807,846			5.12
Balance at December 31, 2012	1,512,103		$	5.56

Exercised	(107,483	)		4.45
Terminated	(25,000	)		9.00
Issued	-			-
Balance at December 31, 2013	1,379,620		$	5.58

Warrants and non-employee options generally expire from five to ten years from the date of issuance. At December 31, 2013, the number of warrants exercisable was 1,365,870 at a weighted average exercise price of $5.60 per share.

The Company granted a total of 60,000 non-employee options to two consultant's during 2012 at a weighted average exercise price of $3.95. These grants vest ratably over 24 months from the date of grant. These non-employee options and previously granted warrants were valued at fair value at the time that the related services are provided using the Black-Scholes method and marked to market quarterly using the Black Scholes method. The Company incurred a charge (benefit) of $174,320 $4,690 and ($16,974), for 2013, 2012, and 2011, respectively in connection with these non-employee options.

During 2013 and 2011, the Company received $472,819 and $26,233 in net proceeds from the exercise of warrants.

During 2013, the Company granted 282,900 shares of restricted stock to its directors and employees. Directors received 91,500 of these shares of restricted common stock. All the shares granted to the directors, as well as 3,400 shares granted to employees vested immediately upon grant. The remaining 188,000 shares vest ratably over the 36 months following grant. The market value per share on the date of grant was $3.70.

During, 2012 the Company granted 363,200 shares of common stock to its directors and employees. All of the 96,500 shares granted to the directors, as well as 5,100 shares granted to employees, vested immediately upon grant. The remaining 261,600 shares issued to employees vest ratably over 36 months following grant. The market value per share on the date of grant was $3.38.

During 2011, the Company granted 63,000 and 139,000 shares of common stock to directors and employees respectively. The market price of each share on the date of grant was $5.20. All of the shares granted to the directors, as well as 3,000 shares granted to certain employees, vested immediately upon grant. The remaining 136,000 shares issued vest ratably over the next 36 months.

In connection with these grants, as well as prior grants that are not yet fully vested, the Company charged $2,545,060, $873,888 and $719,811 to operations during 2013, 2012 and 2011 respectively.

At December 31, 2013, 2012 and 2011, 611,692, 218,733 and 90,667 respectively, of these grants remain unvested. In addition, at December 31, 2013, $758,000 remains to be charged to operations over the next 24 months relating to these grants.