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Note 9. Stockholders' Equity

Common Stock

As part of two contracts entered into during the six months ended October 31, 2013, the Company issued restricted stock to two firms as part of their fees for services. The fair value of the stock issued was set up as a prepaid expense and is being amortized over the service period of the contract. On June 27, 2013, the Company issued one firm 317,143 shares of its common stock valued at $0.35 per share (based on recent sales of shares by the Company) to an investor relations firm pursuant to a service agreement with two service components, one for three months and one for 12 months. The $111,000 of expense is being recognized in two pieces, $90,000 over 12 months and $21,000 over three months. On July 24, 2013, the Company issued the second firm 300,000 shares of its common stock valued at $0.35 per share (based on recent sales of shares by the Company) to a business development consultant pursuant to a six month consulting agreement. The $105,000 of expense is being recognized over the service period of the contract.

Warrants

A summary of the Company's warrant activity during the six months ended October 31, 2013 is presented below:

						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
Warrants		Shares				Price				Term				Value
Balance Outstanding, April 30, 2013			9,090,292			$	0.45
Granted			9,199,236				0.33
Exercised			-				-
Forfeited			(40,000	)			0.50
Expired			-				-
Balance Outstanding, October 31, 2013			18,249,528			$	0.40				4.6			$	196,123
Exercisable, October 31, 2013			18,249,528			$	0.40				4.6			$	196,123

The Company issued 1,115,026 warrants to a placement agent as a fee related to prior investments. There was no accounting effect for this warrant issuance.

Certain of the Company's warrants contain price protection. The Company evaluated whether the price protection provision of the warrant would cause derivative treatment. In its assessment, the Company determined that since its shares are not readily convertible to cash due to a thinly trading market, the warrants are excluded from derivative treatment.

On September 26, 2013, warrants were issued in connection with a financing more fully described in Note 7  with a relative fair value of $389,565 were issued for 100% of the number of shares of common stock that could be purchased at the conversion price at closing or 6,736,842. The warrants have a five-year term and are exercisable for cash if an outstanding registration statement is in effect within 90 days of closing.  Also, as a placement agent fee, the Company paid $207,500 and issued 1,347,368 five year warrants with an exercise price of $0.3325, valued at $94,316. The warrants and fees paid were recorded as a debt issue cost asset and are being amortized over the debt term (See Note 7).

Stock Incentive Plan and Stock Option Grants to Employees and Directors

Immediately following the closing of the Reverse Merger, on March 13, 2012, the Company adopted the 2012 Equity Incentive Plan (the "Plan") that provides for the grant of 2,500,000 shares (increased to 5,600,000 shares effective September 28, 2012, to 8,000,000 shares effective January 16, 2013 and to 9,300,000 on May 14, 2013) in the form of incentive stock options, non-qualified stock options, restricted shares, stock appreciation rights and restricted stock units to employees, consultants, officers and directors. On January 16, 2013, 1,291,167 options were modified to be Plan options. There was no accounting effect for such modifications. As of October 31, 2013, there were no shares remaining under the Plan for future issuance.

During the three months ended July 31, 2013, the Company granted to employees 1,536,211 stock options, all of which were under the Plan, having an exercise price of $0.35 per share. 200,000 of these options vest pro rata over two years on each anniversary date, 545,000 of these options vest pro rata over three years on each anniversary date and 791,211 vest over 7 months starting June 30, 2013. All options expire five years from grant date. The total fair value of stock options granted to employees during the three months ended July 31, 2013 was $184,345, which is being recognized over the respective vesting periods. The Company recorded compensation expense of $148,608 for the three months ended July 31, 2013, in connection with outstanding employee stock options. The Company recorded compensation expense of $52,701 for the three months ended July 31, 2012, in connection with outstanding employee stock options.

During the three months ended October 31, 2013, the Company granted to employees 327,500 stock options, all of which were under the Plan, having an exercise price of $0.35 per share. All of these options vest ratably over three years and expire five years from the grant date. The total fair value of stock options granted to employees during the three months ended October 31, 2013 was $39,300, which is being recognized over the respective vesting periods. The Company recorded compensation expense of $147,226 for the three months ended October 31, 2013, in connection with outstanding employee stock options. The Company recorded compensation expense of $99,360 for the three months ended October 31, 2012, in connection with outstanding employee stock options.

The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of the Company's stock price over the expected term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors which are subject to ASC Topic 718 requirements. These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award. The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted to employees during the three months ended October 31, 2013:

		October 31,
Assumptions		2013
Expected life (years)		3.5
Expected volatility		46.7%
Weighted-average volatility		46.7%
Risk-free interest rate		0.38%
Dividend yield		0.00%

The Company utilized the simplified method to estimate the expected life for stock options granted to employees. The simplified method was used as the Company does not have sufficient historical data regarding stock option exercises. The expected volatility is based on the average of the expected volatilities from the most recent audited financial statements available for comparative public companies that are deemed to be similar in nature to the Company. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant. Dividend yield is based on historical trends. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.

A summary of the Company's stock option activity for employees and directors during the six months ended October 31, 2013 is presented below:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
Options		Shares				Price				Term				Value
Balance Outstanding, April 30, 2013			7,344,381			$	0.35
Granted			1,863,711			$	0.35
Exercised			-
Forfeited			(45,000	)		$	0.35
Expired			-
Balance Outstanding, October 31, 2013			9,163,092			$	0.35				4.0			$	-
Exercisable, October 31, 2013			2,050,332			$	0.35				3.8			$	-

The weighted-average grant-date fair value of options granted to employees during the three months ended October 31, 2013 was $0.12.

As of October 31, 2013, there was $509,425 of total unrecognized compensation costs related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 4 years.

Stock Option Grants to Non-Employees

There were no stock options granted to non-employees during the six months ended October 31, 2013. The Company recorded compensation expense of $1,496 for the six months ended October 31, 2013 in connection with non-employee stock options. No expense was recorded during the same periods in 2012.

The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted to non-employees during the three months ended October 31, 2013:

		October 31,
Assumptions		2013
Expected life (years)		NA
Expected volatility		NA
Weighted-average volatility		NA
Risk-free interest rate		NA
Dividend yield		NA

A summary of the Company's stock option activity for non-employees during the six months ended October 31, 2013 is presented below:

Weighted

Average

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

Options

Shares

Price

Term

Value

Balance Outstanding, April 30, 2013

270,000

$

0.35

Granted

-

Exercised

-

Forfeited

-

Expired

-

Balance Outstanding, October 31, 2013

270,000

$

0.35

3.7

$

-

Exercisable, October 31, 2013

58,333

N/A

N/A

N/A