Stock Based Compensation

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Stock Based Compensation

Note 5: Stock-Based Compensation

The Company has historically granted stock options to certain vendors and employees. On January 26, 2011, the Company granted 384,000 stock options at a strike price of $0.25 that vest equally over a four year period. The grant date fair value of the awards was $54,736 (net of estimated forfeitures of 10%) which was determined using a Black-Scholes option pricing model using the following assumptions: volatility of 68%, risk-free rate of return of 2.4%, stock price of $0.25 and expected term of 6.25 years. The options expire in 2021.

The volatility used was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. The risk free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.

Stock option awards are expensed on a straight-line basis over the requisite service period. During the three and nine months ended September 30, 2011, the Company recognized expense of $11,790 and $34,947, respectively, associated with stock option awards. There was no stock option expense recognized during the three and nine months ended September 30, 2010. At September 30, 2011, future stock compensation expense (net of estimated forfeitures) not yet recognized was $139,432 and will be recognized over a weighted average remaining vesting period of 1.7 years. The following summarizes stock option activity for the nine months ended September 30, 2011:

	Number of Units		Weighted- Average Exercise Price		Weighted- Average Fair Value		Weighted- Average Remaining Contractual Term (in years)
Outstanding at December 31, 2010		960,000	$	0.25	$	0.16		-
Grants		384,000		0.25		0.16		-
Forfeitures		-		-		-		-
Exercises		-		-		-		-
Outstanding at September 30, 2011		1,344,000	$	0.25	$	0.16		8.9
Exerciseable at September 30, 2011		233,333	$	0.25	$	0.16		8.8

The intrinsic value of the Company’s stock options outstanding was $1,048,320 at September 30, 2011.

Note 6: Warrants

On March 23, 2011, in connection with a consulting agreement, the Company issued 800,000 warrants to purchase common stock at an exercise price of $0.625 per share with a term of 5 years. The warrants were fully vested at the date of grant and the Company recognized an expense of $73,768 equal to the grant date fair value of the warrants using the following assumptions: volatility of 68%; risk-free interest rate of 2.07%; and expected term of 5 years. The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on March 23, 2016 and have a remaining contractual life of 4.5 years as of September 30, 2011. The intrinsic value of the Company’s warrants outstanding was $324,000 at September 30, 2011.