Quarterly report pursuant to sections 13 or 15(d)

Stock Based Compensation

v2.3.0.11
Stock Based Compensation
 9 Months Ended
Sep. 30, 2011
Stock Based Compensation [Abstract]  
Stock Based Compensation
3.
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.

On August 24, 2011, we granted an aggregate of 90,000 options from the Company's 2003 Outside Directors Stock Plan to our one newly elected director and our five re-elected directors at our Annual Meeting of Stockholders held on August 24, 2011.  The options granted were for a contractual term of ten years with vesting period of six months.  The exercise price of the options was $1.41 per share which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.  During 2010, 72,000 options were granted from the same plan to our six re-elected outside directors at the Company's September 29, 2010 Annual Meeting of Stockholders.

On July 25, 2011, we granted 300,000 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 300,000 shares of the Company's Common Stock at $1.57 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.  No employee options were granted during the nine months ended September 30, 2010.

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 options granted during the nine months ended September 30, 2011 and 2010 noted above and the related assumptions used in the Black-Scholes option model used to value the options granted were as follows:

   
Outside Director Stock Options Granted
 
   
September 30, 2011
  
September 30, 2010
 
Weighted-average fair value per share
 $.94  $1.12 
Risk -free interest rate (1)
  2.29%  2.52%
Expected volatility of stock(2)
  57.48%  60.69%
Dividend yield
 
None
  
None
 
Expected option life (3)
 
10.0 years
  
10.0 years
 
 
   
Employee Stock Options Granted
as of September 30, 2011
 
Weighted-average fair value per share
 $.89 
Risk -free interest rate (1)
  1.92%
Expected volatility of stock (2)
  60.02%
Dividend yield
 
None
 
Expected option life (3)
 
6.0 years
 

 
(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.

As of September 30, 2011, we had 2,030,833 employee stock options outstanding, of which 1,644,166 are vested.  The weighted average exercise price of the 1,644,166 outstanding and fully vested employee stock options is $2.09 with a remaining weighted contractual life of 1.98 years.  Additionally, we had 811,000 outstanding director stock options, of which 721,000 are vested.  The weighted average exercise price of the 721,000 outstanding and fully vested director stock options is $2.23 with a remaining weighted contractual life of 5.01 years.

The following table summarizes stock-based compensation recognized for the three and nine months ended September 30, 2011 and 2010 for our employee and director stock options.

Stock Options
 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
   
2011
  
2010
  
2011
  
2010
 
Employee Stock Options
 $53,000  $71,000  $205,000  $209,000 
Director Stock Options
  17,000   1,000   57,000   28,000 
Total
 $70,000  $72,000  $262,000  $237,000 

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 forfeitures.  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 September 30, 2011, we have approximately $331,000 of total unrecognized compensation cost related to unvested options, of which $75,000 is expected to be recognized in the remainder of 2011, $117,000 in 2012, $89,000 in 2013, and $50,000 in 2014.