Quarterly report pursuant to sections 13 or 15(d)

Stock Based Compensation

v2.4.0.8
Stock Based Compensation
 9 Months Ended
Sep. 30, 2013
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 statement of operations 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 vesting period of six months.

On September 12, 2013, we granted an aggregate of 18,000 options from the Company’s 2003 Outside Directors Stock Plan to our five re-elected directors and one new director 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 $2.79 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.

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, 2013 and 2012 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, 2013
    
September 30, 2012
  
Weighted-average fair value per share
  
$
1.96
    
$
3.55
  
Risk -free interest rate (1)
   
2.92
%
    
1.75
%
Expected volatility of stock (2)
   
58.88
%
    
56.74
%
Dividend yield
  
None
    
None
  
Expected option life (3)
 
10.0 years
    
10.0 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, 2013, we had an aggregate of 227,600 employee stock options outstanding (from the 2004 and 2010 Stock Option Plans), of which 207,600 are vested.  The weighted average exercise price of the 207,600 outstanding and fully vested employee stock options is $10.03 with a remaining weighted contractual life of 1.5 years.  Additionally, we had an aggregate of 163,200 outstanding director stock options (from the 2003 Outside Directors Stock Plans), of which 145,200 are vested. The weighted average exercise price of the 145,200 outstanding and fully vested director stock options is $10.22 with a remaining weighted contractual life of 4.8 years.  Pursuant to the reverse stock split effective October 15, 2013, the number of shares and exercise prices for all options outstanding as of September 30, 2013, have been restated to reflect the reverse stock split.
 
The following table summarizes stock-based compensation recognized for the three and nine months ended September 30, 2013 and 2012 for our employee and director stock options:

 
  
Three Months Ended
    
Nine Months Ended
  
Stock Options
  
September 30,
    
September 30,
  
 
  
2013
    
2012
    
2013
    
2012
  
Employee Stock Options
  
$
22,000
    
$
34,000
    
$
58,000
    
$
106,000
  
Director Stock Options
    
4,000
      
4,000
      
21,000
      
29,000
  
Total
  
$
26,000
    
$
38,000
    
$
79,000
    
$
135,000
  

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 rates based on historical trends of actual forfeitures.  When actual forfeitures vary from our estimates, we recognize the difference in stock-based compensation expense in the period the actual forfeitures occur or when options vest.  As of September 30, 2013, we have approximately $104,000 of total unrecognized compensation cost related to unvested options, of which $40,000 is expected to be recognized in 2013, with the remaining $64,000 in 2014.