Annual report pursuant to section 13 and 15(d)

9. Stock options and warrants

v2.4.0.6
9. Stock options and warrants
12 Months Ended
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.