COMPENSATION AND SERVICE WARRANTS AND OPTIONS

 

On November 30, 2012, the Company’s Board of Directors and a majority of the Company’s shareholders approved the Company’s 2012 Omnibus Incentive Plan (the “2012 Plan”). On January 11, 2013, the Board of Directors of the Company approved the Company’s 2013 Omnibus Incentive Plan (the “2013 Plan”). The 2013 Plan was approved by a majority of the Company’s shareholders on February 13, 2013 (collectively “The Plans”). The Plans enable the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units, phantom stock and dividend equivalent rights to associates, directors, consultants, and advisors of the Company and its affiliates, and to improve the ability of the Company to attract, retain, and motivate individuals upon whom the Company’s sustained growth and financial success depend, by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company.  Stock options granted under the Plan may be Non-Qualified Stock Options or Incentive Stock Options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986, except that stock options granted to outside directors and any consultants or advisers providing services to the Company or an affiliate shall in all cases be Non-Qualified Stock Options. The Plans are to be administered by the Board, which shall have discretion over the awards and grants thereunder. The option price must be at least 100% of the fair market value on the date of grant and if issued to a 10% or greater shareholder must be 110% of the fair market value on the date of the grant. The aggregate maximum number of shares of Common Stock for which stock options or awards may be granted pursuant to the Plans is 5,000,000 each, adjusted as provided in Section 11 of the Plan. The Plans expire on December 1, 2014 and December 1, 2015, respectively.

  

On March 27, 2014, the Company entered into a contract with Mr. Andrew Shapiro to serve as a member of the Company’s Board of Directors which was approved by the Board of Directors on April 17, 2014. The terms of the agreement require the Company to (1) issue options to Mr. Shapiro to purchase 400,000 shares of the Company’s common stock at a premium of $0.01 to the closing market price on the date of the Board of Directors approval to his appointment to the Company’s Board of Directors which vest immediately and expire seven years from date of issuance; (2) a Board fee of $100,000 payable in quarterly installments commencing 15 days from his appointment to the Company’s Board of Directors;(3) options to purchase 5,000 shares of the Company’s stock and a Nominal Fee, as defined, for every Board meeting attended and (4) an Additional Fee, as defined, for every committee meeting of the Board of Directors attended. The Nominal Fee and the Additional Fee may be paid in cash or in shares of Company’s common stock. The fair value of the options was estimated at $313,296 using the Black-Scholes valuation model and the following assumptions: (1) a weighted average expected volatility of 131.2% based on historical volatility; (2) a weighted average interest rate of 1.03% (3) a weighted average expected life of 3.5 years and (4) a zero dividend yield. The stock price was determined based on the closing market price on the date of the grant. The fair value of the options is recorded in compensation expense for the three months and six months ended June 30, 2014.

 

During the six months ended June 30, 2014, the Company issued options to purchase 125,000 shares of the Company’s common stock to employee Board members for attendance of Board of Directors meetings. The fair value of the options was estimated at $140,444 using the Black-Scholes valuation model and the following assumptions: (1) a weighted average expected volatility range of 129.9% – 141.2% based on historical volatility; (2) a weighted average interest rate range of 0.97% - 1.56% (3) a weighted average expected life of 3.5 -5 years and (4) zero dividend yield. The stock price was determined based on the closing price on the respective dates of the grant. Additionally, the Company accrued a Nominal Fee, as defined, pertaining to Board member attendance of these meetings of $42,000 as June 30, 2014. The fair value of the options is recorded in compensation expense for the three months and six months ended June 30, 2014.

 

On May 2, 2014, the Company obtained commitments through December 31, 2014 through January 2, 2015 from four shareholders to finance up to $6,250,000. In conjunction with the commitment, the Company issued warrants to purchase a total of 3,869,048 shares of the Company’s common stock at $1.05 per share which vest immediately and expire in five years to the four shareholders. The fair value of the warrants was estimated at $726,868 and recorded as operating expense for the three months and six months ended June 30, 2014 using the multinomial lattice valuation model. The stock price was determined based on the closing market price on the date of the commitment letter. In addition, the Company would be required to issue additional warrants to the shareholders in the event, the Company exercises the commitment. The commitment amount may be reduced by the issuance of long term debt or the sale of common stock during the remainder of calendar year 2014. The Company paid placement agents $131,250 in commissions which is also recorded as operating expense for the three months and six months ended June 30, 2014.

 

On May 14, 2014, the Company’s Board of Directors authorized the issuance of options to purchase 2,178,000 shares of the Company’s common stock to 36 employees and two consultants of the Company. The fair value of the options was estimated at $1,570,910 using the Black-Scholes valuation model and the following assumptions: (1) a weighted average expected volatility of 130.7% based on historical volatility; (2) a weighted average interest rate of 1.00% (3) a weighted average expected life of 4 years and (4) a zero dividend yield. The stock price was determined based on the closing market price on the date of the grant.

 

In conjunction with the offer to exchange derivative liability warrants for non derivative liability warrants during the quarter ended June 30, 2014, 9,431,418 warrants were exchanged and 2,513,568 inducement warrants were issued as further described in Note 10. The fair value of the non derivative liability warrants was estimated at $1,377,851 and the inducement warrants were estimated at $368,688, respectively, both using the multinomial lattice model. The premium warrant fair value is recorded as Other Expense for the three and six months ended June 30, 2014.

 

The assumptions used in connection with the valuation of warrants using the multinomial lattice model were as follows:

  

		June 30, 2014
Number of shares underlying the warrants			18,421,746
Exercise price		$	1.00 - $1.05
Volatility			87.83	%
Risk free interest rate			1.62	%
Expected dividend yield			0.0	%
Expected warrant life (years)			4.84 - 5.00
Stock price		$	0.81

 

As of June 30, 2014, there are 7,324,665 options outstanding of which 2,196,665 options are exercisable. As of December 31, 2013, there were 4,943,665 options outstanding of which 2,154,665 were exercisable. The aggregate intrinsic value of the options outstanding as of June 30, 2014 and December 31, 2013 based on a closing price of $0.81 and $1.25, respectively, was $46,500 and $118,800, respectively. As of June 30, 2014, there was $3,662,800 of unrecognized expense that will be recognized over 4.85 years.

 

The Company recognized compensation cost related to the options and warrants for the three months and six months ended June 30, 2014 and 2013 of $1,895,291, $2,782,260, $2,415,131 and $3,307,423, respectively. 

 

The following table accounts for the Company’s Plans option activity through June 30, 2014:

 

		Number of Shares				Weighted  Average   Exercise Price
Options outstanding at January 1, 2014			4,943,665			$	1.43
Options granted			2,718,000			$	1.02
Options exercised			—			$	—
Options canceled/forfeited			(337,000)			$	1.44
Options outstanding at June 30, 2014			7,324,665			$	1.27

 

Options outstanding as of June 30, 2014:
Range of Exercise Price		Number Outstanding		Weighted   Average   Contractual Life   (in years)		Weighted Average   Exercise Price
$0.50 - $1.61		7,324,665		4.44		$	1.27
Options outstanding as of December 31, 2013:
Range of Exercise Price		Number Outstanding		Weighted Average Contractual Life (in years)		Weighted Average Exercise Price
$0.50 - $1.61		4,943,665		4.09		$	1.43

 

The following table accounts for the Company’s warrant activity for the period of January 1, 2014 through June 30, 2014:

 

		Number of  Shares			Weighted  Average   Exercise Price
Warrants outstanding at January 1, 2014			37,895,137		$	1.42
Warrants granted			6,382,616		$	1.03
Warrants exercised			(959,000)		$	0.69
Warrants canceled/forfeited			—			—
Warrants outstanding at June 30, 2014			43,318,753		$	1.38

  

The number of warrants exercisable as of June 30, 2014 was 43,301,953 and 37,873,337 were exercisable as of December 31, 2013.

 

Warrants outstanding as of June 30, 2014:
				Weighted Average
				Contractual Life		Weighted Average
Range of Exercise Price		Number Outstanding		(in years)		Exercise Price
$1.00 - $30.00		43,318,753		3.27		$	1.38

 

Warrants exercisable as of June 30, 2014:
				Weighted Average
				Contractual Life		Weighted Average
Range of Exercise Price		Number Outstanding		(in years)		Exercise Price
$1.00 - $30.00		43,301,953		3.51		$	1.38

 

Warrants outstanding as of December 31, 2013:
				Weighted Average
				Contractual Life		Weighted Average
Range of Exercise Price		Number Outstanding		(in years)		Exercise Price
$0.50 - $51.50		37,895,137		3.69		$	1.42

 

Warrants exercisable as of December 31, 2013:
				Weighted Average
				Contractual Life		Weighted Average
Range of Exercise Price		Number Outstanding		(in years)		Exercise Price
$1.00 - $51.50		37,873,337		3.69		$	1.42