Common Stock

On March 2, 2012, the Company issued 150,000 common stock shares at a price of $1.22 per share totaling $183,000 for consulting services.  The shares were valued based on the closing stock price for the date granted.

On February 1, 2012, the Company authorized 75,000 common stock shares at a price of $1.16 per share totaling $87,000 for investor relations consulting services.  In May 2012 the Company issued the common stock shares which were valued based on the closing stock price for the date granted.

On May 18, 2012, the Company issued 86,812 common stock shares at a price of $0.65 per share totaling $56,428 in share based compensation.  The issuance was pursuant to the Mobivity Acquisition Agreement Amendment #1 to the Secured Subordinated Promissory Note and due to the default on the Mobivity Note for the May 18th, 2012 extended quarterly payment.  The shares were valued based on the closing stock price for the date granted and constituted a late penalty payment to the note holder; not a principal or interest repayment.

On May 25, 2012, the Company issued 148,629 common stock shares at a price of $0.70 per share totaling $104,040 in share based compensation.  The issuance was pursuant to the Mobivity Acquisition Agreement Amendment #1 to the Secured Subordinated Promissory Note and due to the default on the Mobivity Note for the May 25th, 2012 penalty for failure to prepay final payment.  The shares were valued based on the closing stock price for the date granted and constituted a late penalty payment to the note holder; not a principal or interest repayment.

On September 10, 2012, the Company issued 3,368 shares of its common stock at a deemed value of $0.40 per share realizing $6,644 in additional security issuance derivative liability.  These shares were consideration owed to one old Note holder for the additional securities due under the original 10% Senior Secured Convertible Bridge note, and additional shares issued under the terms of the Allonge signed January 31, 2012 as consideration for the extension of the maturity date of the Note from February 2, 2012, to May 2, 2012.  The share consideration was valued based on the Monte Carlo simulation for both the Allonge granted on February 2, 2012 plus the Monte Carlo simulation for the additional shares issuance derivative liability, on September 10, 2012.  For more details concerning the inputs and background of the derivatives please see Note 6.

As of September 30, 2012, the Company has 23,218,117 common shares outstanding.

Stock-based Compensation

2010 Incentive Stock Option Plan

On December 24, 2010, the Company adopted the 2010 Incentive Stock Option Plan (“the 2010 Plan”), subject to shareholder approval within one year.  Shareholder approval was not obtained within one year, therefore incentive stock options granted under the 2010 Plan converted to non-qualified stock options.  The 2010 Plan permits the Company to grant up to 3,124,000 shares of common stock and options to purchase shares of common stock.  The 2010 Plan is designed to retain directors, executives and selected employees and consultants and reward them for making major contributions to the success of the Company.  These objectives are accomplished by making long-term incentive awards under the 2010 Plan thereby providing participants with a proprietary interest in the growth and performance of the Company.

The Company believes that such awards better align the interests of its employees with those of its shareholders.  Option awards are generally granted with an exercise price that equals the fair market value of the Company's stock at the date of grant.  These option awards generally vest based on four years of continuous service and have five-year or 10-year contractual terms.

A summary of option activity under the 2010 Plan as of September 30, 2012 and changes during the nine months then ended is presented below:

Expense Information

The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors based upon estimated fair values.   The Company recorded stock-based compensation in operating expenses for employees and directors totaling $104,561 and $100,551 for the three months ended September 30, 2012 and 2011, respectively.  The Company also recorded stock-based compensation in operating expenses for employees and directors totaling $314,990 and $303,913 for the nine months ended September 30, 2012 and 2011, respectively.

The Company vesting term for employees is a 4 year term and vest as follows; the first installment equaling 25% of the grant, shall become exercisable on the first anniversary of the date of the Option, and additional installments shall become exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.  As of September 30, 2012, the company had recorded $249,945 of employee stock based compensation and expects to expense approximately $760,000 of additional employee stock based compensation over the next 5 years.

The Company vesting term for directors is a 3 year term and vest as follows; in (3) equal annual installments of 33 1/3% of the Shares covered by this Option, the first installment to be exercisable on the first anniversary of the date of the Option, with an additional 33 1/3% of such Shares becoming exercisable on each of the 2 successive anniversary dates.  As of September 30, 2012, the company had recorded $65,045 of director stock based compensation and expects to expense approximately $113,000 of additional director stock based compensation over the next 9 years.

Valuation Assumptions

The Company uses the Black-Scholes option pricing model in determining its option expense.  The weighted-average estimated fair value of employee stock options granted during the nine months ended September 30, 2012 was $0.56 per share.  There were 682,500 options granted during the nine months ended September 30, 2012.  The ranges of assumptions used during the nine months ended September 30, 2012 are as follows:

The expected volatility is based on the weighted average of the historical volatility of publicly traded surrogates in the Company’s peer group.

The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of the Company’s employee stock options.

The dividend yield assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.

The expected life of the stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Warrants

During the nine months ended September 30, 2012, the Company issued warrants totaling 25,000 to non-employee consultants that include graded vesting terms.  As of September 30, 2012, 583,118 warrants were vested pursuant to four non-employee warrant agreements; three of which were granted during the prior year.  These warrants were valued using a Monte Carlo Simulation; the fair values of the warrants were estimated at the vesting date and are revalued at each subsequent reporting date.  At September 30, 2012, the Company recorded current derivative liabilities for the non-employee warrants totaling $91,720.  The change in fair value of the derivative liabilities for the nine months ended September 30, 2012 was a gain of $331,018, which was reported as other income/(expense) in the consolidated statements of operations.

On December 24, 2010 the company issued 700,000 warrants for consulting services.  The warrants vest over a 4 year term and vest as follows; the first installment equaling 25% of the grant, shall become exercisable on the first anniversary of the date of the Option, and additional installments shall become exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.

On January 10, 2011 the company issued 200,000 warrants for consulting services.  The warrants vest over a 4 year term and vest as follows; the first installment equaling 25% of the grant, shall become exercisable on the first anniversary of the date of the Option, and additional installments shall become exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.

On July 8, 2011 the company issued 5,000 warrants for consulting services.  The warrants vest over a 4 year term and vest as follows; the first installment equaling 25% of the grant, shall become exercisable on the first anniversary of the date of the Option, and additional installments shall become exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.

On February 1, 2012 the company issued 25,000 warrants for consulting services.  The warrants vest over a 1 year term and vest as follows; the warrants vest monthly commencing on the 1st monthly anniversary of the grant.

Valuation Assumptions

The Company uses a Monte Carlo simulation in determining the fair values of the warrants.   There were 25,000 warrants granted during the nine months ended September 30, 2012.  The Company periodically revalues these warrants as they vest.  The ranges of assumptions used during the nine months ended September 30, 2012 are as follows:

A summary of non-employee warrant activity during the nine months ended and as of September 30, 2012 is presented below:

As discussed in Note 6, the Company is obligated to issue warrants or shares pursuant to its Bridge Financing.  The number of warrants / shares issuable pursuant to the agreements is not known as of September 30, 2012.

During the year ended December 31, 2011, the Company issued warrants for the purchase of 688,669 shares of common stock at $2.00 per share in connection with its private placement discussed above under Common Stock.  The warrants are exercisable for four years from the date of issuance, and contain anti-dilution, or down round, price protection as long as the warrant remains outstanding.  In addition, the Company issued warrants for the purchase of 153,515 shares of common stock at $2.00 per share in connection with the conversion of its outstanding Notes with a principal amount of $210,000 discussed above in Note 6 under Bridge Financing.  The warrants are exercisable for four years from the date of issuance.  During the nine months ended September 30, 2012, the Company did not issue any additional warrants.  These warrants are shown below.  These warrants are included in the “Common Stock and Warrants” derivative value (see Note 5) as of September 30, 2012 and December 31, 2011.