Quarterly report pursuant to sections 13 or 15(d)

5. Stock Options and warrants

v2.4.0.8
5. Stock Options and warrants
9 Months Ended
Sep. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]  
Note 5. 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 from time to time sometimes 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 September 30, 2013, 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.

 

The following table summarizes certain information about the Company’s stock purchase options from January 1, 2013 to September 30, 2013:

 

Options   Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2013     27,278,098     $ 0.27                  
Granted     207,819     $ 1.17                  
Exercised     (115,000 )   $ 0.60                  
Forfeited or expired                            
Outstanding at September 30, 2013     27,370,917     $ 0.27       7.3     $ 27,285,752  
Vested and exercisable at September 30, 2013     5,606,280     $ 0.34       6.6     $ 5,233,233  

 

The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest under previously granted options as of September 30, 2013 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       27,081,679       7.3     $ 0.26       5,481,679     $ 0.32  
  $ 1.00 - $ 1.99       289,238       6.6       1.22       124,601       1.27  
          27,370,917       7.3     $ 0.27       5,606,280     $ 0.34  

 

The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), holders of options to purchase shares of common stock in the aggregate of 22,742,018 shares, each signed a declaration providing additional restriction on conditions under which they could exercise vested options to purchase stock. Specifically, the CEO and CFO are restricted from exercising options (“Restricted Options”) until the Company has authorized additional shares in its articles of incorporation such that the execution of the Restricted Options could not cause outstanding shares to exceed the current authorized shares on a fully diluted basis. In the absence of this restriction, the total exercisable shares as of September 30, 2013 would be 13,646,280. The Board of Directors has approved a proposal to amend the Company’s Articles of Incorporation to increase the number of authorized shares of the Company’s common stock from 200 million to 300 million. The Company’s shareholders are scheduled to vote on this proposal in December 2013.

 

From April up to September 2013, options to acquire 115,000 shares of common stock were exercised resulting in net proceeds of $19,500. Included in the exercise was issuance of 50,000 shares of common stock valued at $49,000 pursuant to an exercise of options and accounted for as partial settlement of unpaid fees recorded in prior years.

 

In July 2013, the Company issued options to purchase 36,364 shares of common stock to consultants with an estimated fair value of approximately $25,000 using the Black-Scholes-Merton calculation. The options are exercisable at $1.10/share, vest over a period of one year and expire in two years from the date of grant. During the period ended September 30, 2013, the Company recognized compensation costs of $16,592 based on the fair value of options that vested.

 

From July up to September 2013, the Company issued options to purchase 171,455 shares of common stock to employees, officers and members of the Board of Directors with an estimated fair value of approximately $176,000 using the Black-Scholes-Merton calculation. The options are exercisable at $1.09/share up to $1.71/share, vest over a period of one year and expire in ten years from the date of grant. During the period ended September 30, 2013, the Company recognized compensation costs of $48,796 based on the fair value of options that vested.

 

During the nine months ended September 30, 2013, the Company amortized $1,238,909 of compensation cost based on the vesting of the options granted to employees, directors and consultants in current and prior periods. Future unamortized compensation expense on the unvested outstanding options at September 30, 2013 is approximately $4,021,000.

 

To compute compensation expense, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes-Merton option pricing model for employees, and calculated the fair value of each option award at the end of the period for non-employees. Volatility rate was determined using the Company’s historical stock price based on the expected term of the option. The expected term of options granted represents the period of time that options are expected to be outstanding. The Company estimated the expected term of stock options by using the simplified method. The expected forfeiture rates are based on the historical forfeiture experiences. To determine the risk-free interest rate, the Company utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of the Company’s awards. The Company has not declared a dividend on its common stock since its inception and has no intentions of declaring a dividend in the foreseeable future and therefore used a dividend yield of zero.

 

Warrants

 

In March 2013, pursuant to a settlement of debt agreement, the Company granted a consultant a warrant to purchase 150,000 shares of its common stock with an exercise price of $0.30 per share, vesting immediately and expiring in two years from grant date (see Note 8 below). The fair value of the warrant amounted to $129,622 using the Black-Scholes Merton valuation model with the following average assumptions: risk-free interest rate of 0.26%; dividend yield of 0%; volatility of 132%; and an expected life of two years.

 

During the nine months ended September 30, 2013, warrants to acquire 22,753,662 shares of common stock were exercised resulting in net proceeds of $6,533,600. During the nine months ended September 30, 2013, the Company amortized $72,930 and $85,227 of compensation cost based on the vesting of the warrants granted to an employee and a consultant in prior years respectively. Future unamortized compensation expense on the outstanding unvested warrants at September 30, 2013 is approximately $199,000.

 

The following table summarizes certain information about the Company’s stock purchase warrants from January 1, 2013 to September 30, 2013:

 

Warrants   Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2013     42,205,507     $ 0.31                  
Granted     150,000       0.30                  
Exercised     (22,753,662 )     0.30                  
Forfeited or expired     (1,407,523 )     0.34                  
Outstanding at September 30, 2013     18,194,322     $ 0.33       2.0     $ 17,185,387  
Vested and exercisable at September 30, 2013     17,310,988     $ 0.33       1.7     $ 16,328,553  

  

      Outstanding Warrants     Exercisable Warrants  
Warrant Exercise
Price Per Share
    Shares     Life
(Years)
    Weighted
Average
Exercise Price
    Shares     Weighted
Average
Exercise Price
 
  $ 0.25 - $ 0.99       17,694,322       2.0     $ 0.31       16,810,988     $ 0.31  
  $ 1.00 - $ 1.99       500,000       1.0       1.00       500,000       1.00  
          18,194,322       2.0     $ 0.33       17,310,988     $ 0.33