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Shareholders' Equity

12 Months Ended

Dec. 31, 2016

(6) Shareholders’ Equity

(a) Common Stock and Warrants

During 2015 and 2014, the Company received $548,475 and $222,500, respectively in proceeds from the exercise of warrants. The Company received no proceeds from the exercise of options and warrants during 2016.

(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 258,082 options and other awards were available for issuance under this plan as of December 31, 2016.

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 209,750 fully vested options during 2014 and recorded share-based compensation of $483,915. The Company granted 204,000 fully vested options during 2015 and recorded share-based compensation of $483,133. The Company granted 85,250 fully vested options during 2016 and recorded share-based compensation of $67,531. The Company valued these grants using the Black-Scholes option pricing model with the following weighted average assumptions:

	2016			2015			2014
Fair value on grant date	$	0.79		$	2.37		$	2.30
Expected Dividend yield		-			-			-
Expected volatility		47	%		50	%		50	%
Risk free interest rate		1.93	%		1.80	%		1.68	%
Expected term of the option		5 years			5 years			5 years

Activity in stock options is summarized below:

	Number of Shares			Weighted Average		Weighted Average Remaining Contractual		Aggregate Intrinsic
	Subject to Option			Exercise Price		Term (Years)		Value
Balance at December 31, 2013		1,480,599		$	7.80		5.2

Granted		209,750		$	5.19
Cancelled		(104,750	)	$	7.83
Exercised		(14,800	)	$	5.56
Balance at December 31, 2014		1,570,799		$	7.49		5.2

Granted		204,000		$	5.26
Cancelled		(367,793	)	$	7.70
Exercised		-		$	-
Balance at December 31, 2015		1,407,006		$	7.11		6.2

Granted		85,250		$	1.83
Cancelled		(200,390	)	$	5.89
Exercised		-		$	-
Balance at December 31, 2016		1,291,866		$	6.96		5.3	$	-

All options are exercisable at December 31, 2016.

During 2014, the Company received $82,288 in proceeds from the exercise of options. In 2016 and 2015, the Company did not received 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 Options Granted			Weighted Average Exercise Price
Balance at December 31, 2013		1,379,620		$	5.58

Exercised		(50,000	)		4.45
Terminated		-			-
Issued		24,000			6.58
Balance at December 31, 2014		1,353,620		$	5.64

Exercised		(137,174	)		4.73
Terminated		(426,083	)		6.09
Issued		-			-
Balance at December 31, 2015		790,363		$	5.56

Exercised		-			-
Terminated		-			-
Issued		-			-
Balance at December 31, 2016		790,363		$	5.56

In lieu of higher cash compensation, the Company has granted warrants and non-employee options to consultants. These warrants and non-employee options vest ratably over various terms ranging from 12 to 59 months. Non-employee five year options covering 24,000 shares were granted to consultants during 2014 that vested over a period of 12 months. These non-employee options are valued at fair value at the time that the related services are provided using the Black-Scholes option valuation model and marked to market quarterly using the Black-Scholes option valuation model. The Company incurred a charge to operations of $10,007 and $32,428 for 2015 and 2014, respectively in connection with these warrants and non-employee options. There were no such charges in 2016.

Warrants and non-employee options generally expire from five to ten years from the date of issuance. At December 31, 2016, all warrants and non-employee options outstanding were exercisable.

During 2016, 2015 and 2014, the Company did not issue restricted stock to its directors and employees.

In connection with prior grants or restricted stock to its directors and employees the Company charged $231,876 and $526,574, to operations during 2015 and 2014, respectively. There were no such charges during the year ended December 31, 2016. In addition, at December 31, 2016 all prior grants have vested.