NOTE 13 —STOCK-BASED COMPENSATION

Stock Incentive Plan — In July 2003, the Company implemented the 2003 Stock Incentive Plan (the “2003 Plan”), which provides for awards of incentive and non-qualified stock options, restricted stock and stock appreciation rights for its officers, employees, consultants and directors to attract and retain such individuals. Stock option grants under the Plan are granted with an exercise price at or above the fair market value of the underlying common stock at the date of grant, generally vest over a three to five year period and expire ten years after the grant date.

As established, there were 2,000,000 shares of common stock reserved and available for distribution under the Plan. In January 2009, the Company’s shareholders approved an amendment to the Plan to increase the number of shares available under the Plan from 2,000,000 to 12,000,000 and to establish the maximum number of shares issuable to any one individual in any particular year. As of March 31, 2013, 3,300,663 shares remain available for issuance under the Plan.

In October 2012, the Company’s shareholders approved the 2013 Incentive Compensation Plan (“2013 Plan”) which provides for awards of incentive and non-qualified stock options, restricted stock and stock appreciation rights for its officers, employees, consultants and directors to attract and retain such individuals. As of March 31, 2013, no shares had been issued under the 2013 Plan.

Stock based compensation expense for the years ended March 31, 2013 and 2012 amounted to $282,314 and $190,463, respectively, of which $51,075 and $32,107, respectively, is included in selling expense and $231,239 and $158,356, respectively, is included in general and administrative expense for the years ended March 31, 2013 and 2012, respectively. At March 31, 2013, total unrecognized compensation cost amounted to approximately $481,119, representing 3,886,182 unvested options. This cost is expected to be recognized over a weighted-average period of 2.22 years. There were no shares exercised during the years ended March 31, 2013 and 2012.

Stock Options — A summary of the options outstanding under the 2003 Plan is as follows:

	Years ended March 31,
	2013				2012
			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	Shares		Price		Shares		Price
Outstanding at beginning of year		6,330,599	$	0.74		4,570,850	$	0.92
Granted		1,800,166		0.30		1,837,349		0.32
Exercised		—		0.00		—		0.00
Forfeited		(10,000)		0.34		(77,600)		1.46

Outstanding at end of period		8,120,765	$	0.64		6,330,599	$	0.74

Exercisable at period end		4,248,958	$	0.94		2,736,600	$	1.28

Weighted average fair value of grants during the period			$	0.16			$	0.19

The following table summarizes activity pertaining to options outstanding and exercisable at March 31, 2013:

	Options Outstanding				Options Exercisable
			Weighted
			Average				Weighted
			Remaining				Average		Aggregate
Range of			Life in				Exercise		Intrinsic
Exercise Prices	Shares		Years		Shares		Price		Value
$0.01 — $0.25		631,400		5.57		631,400	$	0.22	$	55,351
$0.26 — $0.35		7,031,865		7.64		3,160,058		0.34		27,082
$1.01 — $2.00		68,000		4.84		68,000		1.82		—
$5.01 — $6.00		181,000		0.84		181,000		6.00		—
$6.01 — $7.00		17,000		3.99		17,000		6.36		—
$7.01 — $8.00		184,000		2.68		184,000		7.57		—
$8.01 — $9.00		7,500		3.86		7,500		9.00		—

		8,120,765		7.18		4,248,958	$	0.94	$	82,433

Total stock options exercisable as of March 31, 2013 were 4,248,958. The weighted average exercise price of these options was $0.94. The weighted average remaining life of the options outstanding was 7.18 years and of the options exercisable was 6.02 years.

The following summarizes activity pertaining to the Company’s unvested options for the years ended March 31, 2013 and 2012:

			Weighted
			Average
			Exercise
	Shares		Price
Unvested at March 31, 2011		2,688,100	$	0.34

Granted		1,837,349		0.32
Canceled or expired		(16,250)		0.35
Vested		(915,200)		0.34

Unvested at March 31, 2012		3,593,999	$	0.34

Granted		1,800,166		0.30
Canceled or expired		(8,750)		0.34
Vested		(1,513,608)		0.33

Unvested at March 31, 2013		3,871,807	$	0.32

The fair value of each award under the Plan is estimated on the grant date using the Black-Scholes option pricing model and is affected by assumptions regarding a number of complex and subjective variables. The use of an option pricing model also requires the use of a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends, and expected term. Expected volatility is based on the Company’s historical volatility and the volatility of a peer group of companies over the expected life of the option. The expected term and vesting of the options represents the estimated period of time until exercise. The expected term was determined using the simplified method available under current guidance. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The Company has not paid dividends on its common stock in the past and does not plan to pay any dividends on its common stock in the near future. Current authoritative guidance also requires the Company to estimate forfeitures at the time of grant and revise these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its expectation of future experience while considering its historical experience.

The fair value of options at grant date was estimated using the Black-Scholes option pricing model utilizing the following weighted average assumptions:

	March 31,
	2013			2012
Risk-free interest rate		0.67% - 0.89	%		0.89	%
Expected option life in years		5.5 - 6.25			6.04
Expected stock price volatility		65	%		65	%
Expected dividend yield		0	%		0	%

Warrants — The Company has entered into various warrant agreements.

2011 Warrants issued in connection with the Series A Preferred Stock

The 2011 Warrants issued in connection with the Series A Preferred Stock have an exercise price of $0.38 per share, subject to adjustment, and are exercisable for a period of five years. The exercise price of the 2011 Warrants is equal to 125% of the conversion price of the Series A Preferred Stock.

The Company accounted for the 2011 Warrants issued in June 2011 in the consolidated financial statements as a liability at their initial fair value of $487,022 and accounted for the 2011 Warrants issued in October 2011 as a liability at their initial fair value of $780,972. Changes in the fair value of the 2011 Warrants will be recognized in earnings for each subsequent reporting period. At March 31, 2013 and 2012, the fair value of the 2011 Warrants was included in the balance sheet under the caption Warrant liability of $795,374 and $1,098,108, respectively. For the years ended March 31, 2013 and 2012, the Company recorded a gain for the change in the value of the 2011 Warrants of $302,734 and $109,767, respectively.

The fair value of the warrants is a Level 3 fair value under the valuation hierarchy and was estimated using the Black-Scholes option pricing model utilizing the following assumptions:

	March 31, 2013			March 31, 2012
Risk-free interest rate		0.36	%		1.07	%
Expected option life in years		3.25			4.25
Expected stock price volatility		.40	%		.55	%
Expected dividend yield		0	%		0	%

Warrants to Purchase Common Stock Issued to Senior Note Holders

In connection with the issuance of senior notes in November 2006, the Company entered into warrant agreements granting the right to purchase 213,600 shares of the Company’s common stock at an exercise price of $8.00 per share at any time through March 31, 2012. These warrants were recorded at fair value and accounted for as a discount to the face value of the senior notes and a credit to additional paid-in capital in the amount of $706,944. This discount was fully recognized over the adjusted term of the senior notes with a charge to interest expense and a credit to senior notes payable. The warrants were not exercised prior to their expiration on March 31, 2012.

The following is a summary of the Company’s outstanding warrants for the periods presented:

			Weighted
			Average
			Exercise
			Price
	Warrants		Per Warrant
Warrants outstanding and exercisable, March 31, 2011		1,926,814	$	6.72

Granted		11,754,087		0.38
Exercised		—		—
Forfeited		(263,600)		7.24

Warrants outstanding and exercisable, March 31, 2012		13,417,301	$	1.16

Granted		—		—
Exercised		—		—
Forfeited		(1,543,214)		6.53

Warrants outstanding and exercisable, March 31, 2013		11,874,087	$	0.46