Stock-Based Compensation

3 Months Ended

Mar. 31, 2012

Stock-Based Compensation

Stock-Based Compensation

Note 13.          Stock-Based Compensation

Options

At the annual shareholders meeting on September 8, 2008, a new stock option plan, the “2008 Stock Incentive Plan” (the “2008 Plan”), was voted on and became effective on January 1, 2009, which replaced two previous plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock Option Plan (the “Stock Option Plans”), thereby terminating both of the Stock Option Plans on December 31, 2008.

The 2008 Plan allows for incentive awards to eligible recipients consisting of:

·Options to purchase shares of common stock that qualify as incentive stock options within the meaning of the Internal Revenue Code;

·Non-statutory stock options that do not qualify as incentive options;

·Restricted stock awards; and

·Performance stock awards which are subject to future achievement of performance criteria or free of any performance or vesting.

The maximum number of shares reserved for issuance under the 2008 Plan was originally 5,000,000, and in July 2010 the Company’s shareholders approved an increase in the number of shares reserved for issuance to 10,000,000.  The exercise price shall not be less than 100% of the fair market value of one share of common stock on the date of grant, unless the participant owns more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company, in which case the exercise price shall then be 110% of the fair market value. The outstanding stock options generally vest over three years and have ten-year contractual terms.

During the three-month period ended March 31, 2012, stock options for the purchase of 1,100,000 shares of common stock were granted with a weighted average exercise price of $0.231 and weighted average fair value of $0.19 (2011: $0.35) per share and will vest from six-month and one day periods to three-year periods. During the three-month period ended March 31, 2012, 779,220 shares of restricted stock awards with a fair value of $0.25 per share were issued. The shares of restricted stock shall vest, subject to and upon the recipient’s achievement of key operational and financial performance milestones. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Cumulative catch-up adjustments are required in the event of any changes in the assessment of probabilities.

During the three-month period ended March 31, 2012, there was no exercise of outstanding stock options.

Prior to January 1, 2009, the Company had two stock options plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock Option Plan (the “Previous Stock Option Plans”), through which 15,000,000 shares and 300,000 shares were authorized, respectively.  Both Previous Stock Option Plans expired on December 31, 2008, however, options granted under the Previous Stock Option Plans that were outstanding as of the date of termination remain outstanding and subject to termination according to their terms.

As of March 31, 2012, stock options for the purchase of 4,112,834 and 90,200 shares of common stock, respectively, were outstanding in relation to the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Director’s Stock Option Plan.

As of March 31, 2012, there were outstanding non-plan options to purchase 1,990,000 shares of common stock. The non-plan options were issued to certain employees and non-employees of EGT Entertainment Holding as approved by our stockholders in September 2007 pursuant to the initial closing of the transactions under the Securities Purchase and Product Participation Agreement dated June 12, 2007 between us and EGT Entertainment Holding.

As of March 31, 2012, stock options for the purchase of 7,500,000 shares of common stock were outstanding under the 2008 Plan.Options granted under the 2008 Plan to purchase an aggregate of 1,418,613 shares of common stock contain provisions that prohibit the exercise of such options unless and until the number of shares of common stock that may be issued under the 2008 Plan has been increased in accordance with Section 711 of the NYSE Amex Company Guide by at least 1,418,613.

As of March 31, 2012, 10,493,033 stock options were exercisable with a weighted average exercise price of $1.10, a weighted average fair value of $0.20 and an aggregate intrinsic value of approximately $1.6 million. The total fair value of shares vested during the three-month period ended March 31, 2012 was approximately $461,000.

A summary of all current and expired plans as of March 31, 2012 and changes during the period then ended are presented in the following table:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2011	12,593,234		$	0.98	5.40	$	303
Granted	1,100,000		0.23		—	241
Exercised	—		—		—	—
Forfeited or expired	(200	)	1.75		—	—
Outstanding as of March 31, 2012	13,693,034		0.92		5.52	2,031
Exercisable as of March 31, 2012	10,493,033		1.10		4.43	1,560

Restricted Stock

	Number of shares		Weighted Average Fair Value at Grant Date		Weighted Average Remaining Contractual Life(in years)
Unvested balance as of December 31, 2011	—		$	—	—
Granted	779,220		0.25		—
Vested (1)	(194,805	)	0.25		—
Unvested balance as of March 31, 2012	584,415		$	0.25	0.75

(1)Vested shares included 194,805 shares of restricted common stock issued in 2012 for which final vesting is pending for approval by the Company’s Compensation Committee.

Recognition and Measurement

The fair value of each stock-based award to employees and non-employee directors is estimated on the measurement date which generally is the grant date while awards to non-employees are measured at the earlier of the performance commitment date or the service completion date using the Black-Scholes-Merton option-pricing model.  Option valuation models require the input of highly subjective assumptions, and changes in assumptions used can materially affect the fair value estimates.  The Company estimates the expected life of the award by taking into consideration the vesting period, contractual term, historical exercise data, expected volatility, blackout periods and other relevant factors. Volatility is estimated by evaluating the Company’s historical volatility data.  The risk-free interest rate on the measurement date is based on U.S. Treasury constant maturity rates for a period approximating the expected life of the award.  The Company historically has not paid dividends, nor does it expect to pay dividends in the foreseeable future and, therefore, the expected dividend rate is zero.

The following table summarizes the range of assumptions utilized in the Black-Scholes-Merton option-pricing model for the valuation of stock options granted during the three-month periods ended March 31, 2012 and 2011:

	2012				2011
Range of values:	Low		High		Low		High
Expected volatility	113.46	%	127.83	%	173.6	%	174.40	%
Expected dividends	—		—		—		—
Expected term (in years)	3.73		9.02		3.73		9.85
Risk free rate	0.63	%	1.95	%	1.56	%	3.43	%

For stock-based compensation accrued to employees and non-employee directors, the Company recognizes stock-based compensation expense for all service-based awards with graded vesting schedules on the straight-line basis over the requisite service period for the entire award.  Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered.  Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.

For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis over the requisite service period.

The Company estimates forfeitures and recognizes compensation cost only for those awards expected to vest assuming all awards would vest and reverses recognized compensation cost for forfeited awards when the awards are actually forfeited.

For awards with service conditions and graded vesting that were granted prior to the adoption of ASC 718, the Company estimates the requisite service period and the number of shares expected to vest, and recognizes compensation expense for each tranche on the straight-line basis over the estimated requisite service period.

Warrants

All previously issued warrants were expired by December 31, 2011. There were no warrants granted during the three-month period ended March 31, 2012.