Common Stock

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Common Stock

Note 7: Common Stock

During 2010, certain unrelated warrant holders with warrants for the purchase of 50,000 shares exercised, pursuant to the cashless exercise provision of the warrants, and received 6,818 shares of common stock.

On December 31, 2010 and December 31, 2011, the Company had issued and outstanding Series B Preferred Stock with a liquidation value of $825,000, which, at the option of the holder may be converted to common stock at a conversion price of $2.25 per share. The preferred stock provides for cumulative dividends at the rate of 12% per annum on the liquidation value. The Company, at its option, may redeem the Series B Preferred Stock at the liquidation value.

The Company has an incentive stock option plan for key employees, officers and directors. The options are generally exercisable three years after the date of grant and expire ten years after the date of grant. The option prices are the fair market value of the stock at the date of grant. At December 31, 2011, the Company had the following employee stock options outstanding:

# Common Shares Represented	Exercise Price
40,000	$    .55
46,000	.83
58,500	2.30
395,000	.36
481,000	.95
1,800,000	1.05
180,000	.90

As of December 31, 2011, options for 539,500 shares were exercisable.

The Company adopted the modified prospective method of adoption, which does not require restatement of prior periods. Under the modified prospective method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption, net of an estimate of expected forfeitures. Compensation expense is based on the estimated fair values of stock options determined on the date of grant and is recognized over the related vesting period, net of an estimate of expected forfeitures.

The Company estimates the fair value of its option awards on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on external data while all other assumptions are determined based on the Company’s historical experience with stock options. No options were granted in 2009. The following assumptions were used for grants in 2010 and 2011:

Expected volatility 30%

Expected dividend yield None

Expected term (in years) 5

Risk-free interest rate 3.01%

The following table sets forth the number of options outstanding as of December 31, 2008, 2009, 2010 and 2011 and the number of options granted, exercised or forfeited during the years ended December 31, 2009, December 31, 2010 and December 31, 2011:

Balance of employee stock options outstanding as of 12/31/08	650,250
Stock options granted during the year ended 12/31/09	0
Stock options exercised during the year ended 12/31/09	0
Stock options forfeited during the year ended 12/31/09	(20,000)
Balance of employee stock options outstanding as of 12/31/09	630,250
Stock options granted during the year ended 12/31/10	491,000
Stock options exercised during the year ended 12/31/10	0
Stock options forfeited during the year ended 12/31/10	(20,750)
Balance of employee stock options outstanding as of 12/31/10	1,100,500
Stock options granted during the year ended 12/31/11	2,000,000
Stock options exercised during the year ended 12/31/11	(50,000)
Stock options forfeited during the year ended 12/31/11	(50,000)
Balance of employee stock options outstanding as of 12/31/11	3,000,500

The following table sets forth the number of non-vested options outstanding as of December 31, 2008, 2009, 2010 and 2011, and the number of stock options granted, vested and forfeited during the years ended December 31, 2009, December 31, 2010 and December 31, 2011.

Balance of employee non-vested stock options outstanding as of 12/31/08	543,500
Stock options granted during the year ended 12/31/09	0
Stock options vested during the year ended 12/31/09	(78,500)
Stock options forfeited during the year ended 12/31/09	(20,000)
Balance of employee non-vested stock options outstanding as of 12/31/09	445,000
Stock options granted during the year ended 12/31/10	491,000
Stock options vested during the year ended 12/31/10	0
Stock options forfeited during the year ended 12/31/10	0
Balance of employee non-vested stock options outstanding as of 12/31/10	936,000
Stock options granted during the year ended 12/31/11	2,000,000
Stock options vested during the year ended 12/31/11	(445,000)
Stock options forfeited during the year ended 12/31/11	(30,000)
Balance of employee non-vested stock options outstanding as of 12/31/11	2,461,000

During 2011, employee stock options were granted for 2,000,000 shares, 50,000 were exercised and 50,000 shares were forfeited. At December 31, 2011, the weighted average grant date fair value of non-vested options was $1.02 per share and the weighted average grant date fair value of vested options was $.62 per share. The weighted average grant date fair value of employee stock options granted during 2010 was $.95 and during 2011 was $1.04. Total compensation cost recognized for share-based payment arrangements was $50,910 with a tax benefit of $20,165 in 2009, $42,157 with a tax benefit of $16,698 in 2010 and $105,659 with a tax benefit of $41,841 in 2011. As of December 31, 2011, total compensation cost related to non-vested options was $203,430, which will be recognized as compensation cost over the next 30 months. No cash was used to settle equity instruments under share-based payment arrangements.