Annual report pursuant to section 13 and 15(d)

STOCK BASED COMPENSATION

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STOCK BASED COMPENSATION
 12 Months Ended
Dec. 31, 2012
STOCK BASED COMPENSATION [Abstract]  
Stock Based Compensation
NOTE 5
STOCK-BASED COMPENSATION
We follow FASB ASC 718, "Compensation – Stock Compensation" ("ASC 718") to account for stock-based compensation. ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

The Company has certain stock option plans under which it awards incentive and non-qualified stock options to employees, officers, and outside directors. Stock options granted to employees have either a ten year contractual term with one-fifth yearly vesting over a five year period or a six year contractual term with one-third yearly vesting over a three year period. Stock options granted to outside directors have a ten year contractual term with a vesting period of six months.

Giving effect to the reverse stock split, on September 13, 2012, we granted an aggregate of 15,000 options from the Company's 2003 Outside Directors Stock Plan to our five re-elected directors at our Annual Meeting of Stockholders. The options granted were for a contractual term of ten years with vesting period of six months. The exercise price of the options was $5.50 per share which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.

Giving effect to the reverse stock split, on July 25, 2011, we granted 60,000 Incentive Stock Options ("ISOs") from the 2010 Stock Option Plan to Mr. James Blankenhorn, our Chief Operating Officer, which allows for the purchase of up to 60,000 shares of the Company's Common Stock at $7.85 per share. Mr. Blankenhorn's employment with the Company became effective June 1, 2011. The options granted are for a term of six years from grant date with one-third yearly vesting over a three year period.

Upon the closing of the acquisition of SEC on October 31, 2011, Mr. Christopher Leichtweis ("Leichtweis"), a former officer and director of Homeland (now known as Timios National Corporation – "TNC"), was appointed a senior vice president of the Company and President of SEC pursuant to the terms of a four year employment agreement. In connection with Leichtweis' employment on October 31, 2011, we granted, after having given effect to the reverse stock split, Leichtweis a non-qualified stock option (the "Option") to purchase up to 50,000 shares of our Common Stock as reported on the Nasdaq on the grant date, which was $6.75. The Option has a term of 10 years from grant date, with 25% yearly vesting over a four-year period. The Option was granted in accordance with, and is subject to, the Non-Qualified Stock Option Agreement, dated October 31, 2011.

The Company estimates fair value of stock options using the Black-Scholes valuation model. Assumptions used to estimate the fair value of stock options granted include the exercise price of the award, the expected term, the expected volatility of the Company's stock over the option's expected term, the risk-free interest rate over the option's expected term, and the expected annual dividend yield. The fair value of the employee and director stock options granted and the related assumptions used in the Black-Scholes option pricing model used to value the options granted for fiscal year 2012, 2011, and 2010 were as follows after giving effect to the reverse stock split:

     Employee Stock Option Granted  
 
     For Year Ended  
 
  
2012(4)
   
2011
    
2010(4)
 
Weighted-average fair value per share
  
$
—
    
$
4.10
    
$
—
  
Risk -free interest rate (1)
   
—
      
1.29%-1.92
%
    
—
  
Expected volatility of stock (2)
   
—
      
58.72%-60.02
%
    
—
  
Dividend yield
    
—
    
None
      
—
  
Expected option life (in years) (3)
   
—
      
6.0
      
—
  
 
 
  
Outside Director Stock Option Granted
  
 
  
For Year Ended
  
 
  
2012
    
2011
    
2010
  
Weighted-average fair value per share
  
$
3.55
    
$
4.70
    
$
5.60
  
Risk -free interest rate (1)
   
1.75
%
    
2.29
%
    
2.52
%
Expected volatility of stock (2)
   
56.74
%
    
57.48
%
    
60.69
%
Dividend yield
  
None
    
None
    
None
  
Expected option life (in years) (3)
   
10.0
      
10.0
      
10.0
  
 
 
(1)
The risk-free interest rate is based on the U.S. Treasury yield in effect at the grant date over the expected term of the option.

 
(2)
The expected volatility is based on historical volatility from our traded Common Stock over the expected term of the option.

 
(3)
The expected option life is based on historical exercises and post-vesting data.

 
(4)
No employee option grants were made in 2012 and 2010.

After giving effect to the reverse stock split, as of December 31, 2012, we had 362,600 employee stock options outstanding, of which 285,100 are vested and the weighted average exercise price of the 285,100 outstanding and fully vested employee stock option is $10.30 with a remaining weighted contractual life of 1.9 years. Additionally, after giving effect to the reverse stock split, we had 166,200 outstanding director stock options, of which 154,200 are vested and the weighted average exercise price of the 154,200 outstanding and fully vested director stock option is $10.55 with a weighted remaining contractual life of 4.5 years.

The following table summarizes stock-based compensation recognized for the fiscal year 2012, 2011, and 2010 after giving effect to the reverse stock split.

  
Year Ended
  
 
  
2012
    
2011
    
2010
  
Employee Stock Options
  
$
140,000
    
$
246,000
    
$
276,000
  
Director Stock Options
    
51,000
      
99,000
      
67,000
  
Total
  
$
191,000
    
$
345,000
    
$
343,000
  

We recognized stock-based compensation expense using a straight-line amortization method over the requisite period, which is the vesting period of the stock option grant. ASC 718 requires that stock-based compensation expense be based on options that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We have generally estimated forfeiture rate based on historical trends of actual forfeiture. When actual forfeitures vary from our estimates, we recognize the difference in compensation expense in the period the actual forfeitures occur or when options vest. As of December 31, 2012, we have approximately $286,000 of total unrecognized compensation cost related to unvested options, of which $152,000 is expected to be recognized in 2013, $96,000 in 2014, with the remaining $38,000 in 2015.