7. Common Stock

12 Months Ended

Dec. 31, 2013

Equity [Abstract]

Note 7 - Common Stock

On December 31, 2012, the Company had issued and outstanding Series B Preferred Stock with an aggregate liquidation value of $825,000 and none on December 31, 2013.  Prior to the redemption of the Series B Preferred, at the option of the holder, it could have been converted to common stock at a conversion price of $2.25 per share, however the Company redeemed the Series B Preferred stock prior to it being converted.   The preferred stock provided for cumulative dividends at the rate of 12% per annum on the liquidation value.  The Company redeemed the Series B Preferred Stock at the liquidation value on October 31, 2013.

On September 6, 2013, an employee exercised an option for 2,500 shares of common stock at a price of $.83 per share.  On September 11, 2013, an employee exercised an option for 30,000 shares of common stock at a price of $.36 per share.  On September 24, 2013, an employee exercised an option for 10,000 shares of common stock at a price of $.36 per share.  On September 27, 2013, an employee exercised an option for 1,000 shares of common stock at a price of $.95 per share.  On October 7, 2013, an employee exercised an option for 10,000 shares of common stock at a price of $.83 per share.  On December 2, 2013, an employee exercised an option for 15,000 shares of common stock at a price of $.95 per share.

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, 2013, the Company had the following employee stock options outstanding:

# Common Shares Represented	Exercise Price
33,500	$	.83
57,500		2.30
335,000		.36
415,000		.95
1,800,000		1.05
155,000351,00040,000		.90.58.68
270,500		1.30

As of December 31, 2013, options for 2,041,000 shares were exercisable.

The Company adopted the modified prospective method to account for stock option grants, 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.  The following assumptions were used for grants in 2011, 2012 and 2013:

Expected volatility	20% to 30%
Expected dividend yield	None
Expected term (in years)	5
Risk-free interest rate	3.56%  to 1.62%

The following table sets forth the number of options outstanding as of December 31, 2010, 2011, 2012 and 2013 and the number of options granted, exercised or forfeited during the years ended December 31, 2011, December 31, 2012 and December 31, 2013:

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
Stock options granted during the year ended 12/31/12	401,000
Stock options exercised during the year ended 12/31/12	(60,000)
Stock options forfeited during the year ended 12/31/12	(75,000)
Balance of employee stock options outstanding as of 12/31/12	3,266,500
Stock options granted during the year ended 12/31/13	273,000
Stock options exercised during the year ended 12/31/13	68,500
Stock options forfeited during the year ended 12/31/13	13,500
Balance of employee stock options outstanding as of 12/31/13	3,457,500

The following table sets forth the number of non-vested options outstanding as of December 31, 2010, 2011, 2012 and 2013, and the number of stock options granted, vested and forfeited during the years ended December 31, 2011, 2012 and 2013.

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
Stock options granted during the year ended 12/31/12	401,000
Stock options vested during the year ended 12/31/12	(600,000	)
Stock options forfeited during the year ended 12/31/12	(75,000	)
Balance of employee non-vested stock options outstanding as of 12/31/12	2,187,000
Stock options granted during the year ended 12/31/13	273,000
Stock options vested during the year ended 12/31/13	(1,031,000	)
Stock options forfeited during the year ended 12/31/13	(12,500	)
Balance of employee non-vested stock options outstanding as of 12/31/13	1,416,500

During 2013, employee stock options were granted for 273,000 shares, options for 68,500 shares were exercised and options for 13,500 shares were forfeited.  At December 31, 2013, the weighted average grant date fair value of non-vested options was $.95 per share and the weighted average grant date fair value of vested options was $.95 per share.  The weighted average grant date fair value of employee stock options granted during 2011 was $1.04, during 2012 was $.58 and during 2013 was $1.30.  Total compensation cost recognized for share-based payment arrangements was $105,659 with a tax benefit of $41,841 in 2011, $107,882 with a tax benefit of $42,732 in 2012 and $117,118 with a tax benefit of $46,390 in 2013.  As of December 31, 2013, total compensation cost related to non-vested options was $71,214, which will be recognized as compensation cost over the next six to 30 months.  No cash was used to settle equity instruments under share-based payment arrangements.