(2) Basis of Presentation (Tables)

6 Months Ended

Jun. 30, 2014

Schedule of Stock Options, Valuation Assumptions

The fair value of each option granted was estimated on the date of grant using the Black-Scholes Merton option pricing model (Black-Scholes model) with the following weighted-average assumptions.

Black-Scholes Model Assumptions	2014	2013
Risk-free interest rate (1)	2.48%	0.66%
Expected volatility (2)	184.8%	189.1%
Dividend yield (3)	0.0%	0.0%
Expected life (4)	7.2 years	4.5 years

(1)	The risk-free interest rate is based on US Treasury debt securities with maturities similar to the expected term of the option.
(2)	Expected volatility is based on historical volatility of the Company’s stock factoring in daily share price observations.
(3)	No cash dividends have been declared on the Company’s common stock since the Company’s inception, and the Company currently does not anticipate paying cash dividends over the expected term of the option.
(4)	The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plan and represents the period of time that stock option awards granted are expected to be outstanding. The expected term assumption incorporates the contractual term of an option grant, which is usually ten years, as well as the vesting period of an award, which is generally pro rata vesting over two years.

Summary of stock option activity

Summary of stock option activity under the 2003 Plan for the six months ended June 30, 2014 issued to employees, non-employee members of the Board of Directors and consultants is as follows:

Fiscal Year and Activity	Weighted- Average Exercise Price		Number of Options
Outstanding December 31, 2013	$	0.14		25,422,347

Fiscal 2014 activity
Granted		-		-
Exercised		0.03		(796,000	)
Cancelled		0.30		(1,628,355	)
Outstanding June 30, 2014		0.14		22,997,992

Reserved for future issuance at June 30, 2014 (the 2003 Plan expired on August 29, 2013)				-

Summary of 2003 Plan stock options outstanding

The following table summarizes additional information about the 2003 Plan stock options outstanding at June 30, 2014:

Issued and Outstanding							Exercisable
Type of Option and Range of Exercise Prices	Number of Options		Weighted- Average Remaining Contractual Life (Yrs)		Weighted- Average Exercise Price		Number of Options		Weighted- Average Price
Nonqualified Stock Options $0.30 (1) (4)		25,000		1.2		0.30		25,000		0.30
Incentive Stock Options $0.15 - $4.05 (2)		649,300		3.3		0.98		649,300		0.98
Incentive Stock Options $0.03 - $0.30 (3) (4)		22,323,692		7.1		0.11		22,323,692		0.11
Total		22,997,992		7.0	$	0.14		22,997,992	$	0.14

(1)	Initially issued to directors below fair value during the period of February 2004 through September 2005.
(2)	Issued to consultants at fair value.
(3)	Issued to directors and employees at fair value, or above fair value for those individuals with greater than 10% beneficial ownership.
(4)	The exercise price reflects the repricing of stock options as approved by the Compensation Committee on April 24, 2010, and subsequent issuances at fair value on date of grant.

Summary of 2009 Stock Compensation Plan

The following is a summary of the number and type of awards granted to, or exercised or forfeited by, employees, non-employee members of the Board of Directors and consultants pursuant to the Company’s 2009 Stock Compensation Plan for the six months ended June 30, 2014:

Fiscal Year and Activity	Weighted- Average Grant or Exercise Price Per Share		Number of Shares
Reserved for future issuance as of December 31, 2013				185,000

Fiscal 2014 activity:
Common stock awards	$	-		-
Restricted stock awards		-		-
Restricted stock rights		-		-
Non-qualified stock options		-		-
Issued during 2014		-		-

Reserved for future issuance as of June 30, 2014				185,000

Stock options or restricted stock rights outstanding				-

Schedule of Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. For financial statement purposes, depreciation is provided on the straight-line method over the estimated useful life of the asset ranging from 3 to 10 years.

	(Unaudited)
Asset (Useful Life)	June 30, 2014		December 31, 2013
Software (3 years)	$	84,224	$	84,224
Computer equipment (3 - 5 years)		329,861		329,861
Furniture and fixtures (7 - 10 years)		231,033		231,033
Equipment (7 - 10 years)		80,727		80,727
Fixed assets, gross		725,845		725,845
Less accumulated depreciation		688,157		670,827
Fixed assets, net	$	37,688	$	55,018

Schedule of Intangible assets

Therefore, there was no impairment expense during the six months ended June 30, 2014, or 2013.

	Six months ended June 30, 2014
	Beginning Period Cost		Additions		Reductions		Net Book Value
Intangibles with finite lives:
Patent acquisition costs	$	315,855	$	0	$	12,065	$	303,790

- Definition

Tabular disclosure of components of a stock option or other award plan under which equity-based compensation is awarded to employees, typically comprised of the amount of unearned compensation (deferred compensation cost), compensation expense, and changes in the quantity and fair value of the shares (or other type of equity) granted, exercised, forfeited, and issued and outstanding pertaining to that plan. Disclosure may also include nature and general terms of such arrangements that existed during the period and potential effects of those arrangements on shareholders, effect of compensation cost arising from equity-based payment arrangements on the income statement, method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period, cash flow effects resulting from equity-based payment arrangements and, for registrants that accelerate vesting of out of the money share options, reasons for the decision to accelerate.

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- Definition

Tabular disclosure of an equity-based arrangement (such as stock or unit options and stock or unit awards) with an individual employee, which is generally an employment contract between the entity and a selected officer or key employee containing a promise by the employer to pay certain equity-based awards at future dates, sometimes including a period after retirement, upon compliance with stipulated requirements. This type of arrangement is distinguished from broader based employee benefit plans as it is usually tailored to the employee. Disclosure also typically includes the amount of related compensation expense recognized during the reporting period, the number of shares or units issued during the period under such arrangements, and the carrying amount as of the balance sheet date of the related liability.

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Applied Visual Sciences, Inc. 10-Q