STOCK BASED COMPENSATION

12 Months Ended

Dec. 31, 2011

Stock Based Compensation

STOCK BASED COMPENSATION

NOTE 7. STOCK BASED COMPENSATION

The stock based compensation cost that has been charged against income by the Company was $138,859 and $182,321 for the years ended December 31, 2011 and 2010, respectively, for options previously awarded by the Company.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the table below.  Expected volatilities are based on management’s estimates given that the Company’s stock is not widely traded.  The Company uses historical data to estimate option exercise and employee terminations within the valuation model.  The expected term of options granted is based on the remaining contractual lives of the related grants.  The risk-free rate for periods within the contractual life of the options is based on the Federal Reserve’s risk-free interest rate based on zero-coupon government issues at the time of the grant.

The Company believes that such awards better align the interest of its employees with those of its shareholders.  Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on four years of continuous service and have 10-year contractual terms.  Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans pursuant to which such options have been granted).

In June 2011, we extended our consulting agreement for investor relations services.  The agreement was made effective as of April 15, 2011 and remains in effect until April 14, 2012.  We agreed to compensate the consultant with a monthly fee and reimbursement of expenses incurred in connection with and pursuant to the agreement.  The agreement may be terminated by either party at any time upon 30 days written notice.  In addition the Company granted the consultant warrants to purchase 25,000 shares of our common stock, with cashless exercise rights, at an exercise price of $1.75 per share. On May 10, 2011, the date of grant, 6,250 shares vested immediately and the remainder vest at 33 1/3% per year. The fair value of these warrants on the date of grant was $11,201.

Effective September 23, 2011, the Company’s Board of Directors approved the grant of 390,000 incentive stock options to certain employees, directors and officers of the Company in connection with the Company’s 2009 Stock Incentive Plan.  The 390,000 options vest in equal portions annually over four years and are exercisable for ten years. The exercise price of options to purchase 365,000 shares is $2.75 per share and their fair value on the issuance date was $267,579.  The exercise price of options to purchase 25,000 shares is $3.03 per share and their fair value on the issuance date was $16,012.

Stock option activity for the year ended December 31, 2011 is summarized as follows:

	Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (in Years)			Grant Date Fair Value
Outstanding at December 31, 2010		2,703,334		$	5.81			7.60		$	715,826
Options granted		390,000			2.77			10.00			283,591
Options exercised		(5,000	)		(.45	)		(7.94	)		(1,800	)
Options cancelled/forfeited/expired		(15,000	)		(.62	)		-			(6,622	)
Outstanding at December 31, 2011		3,073,334		$	5.46			7.00		$	990,995
Vested at December 31, 2011		1,847,902		$	8.20			6.21		$	365,798
Exercisable at December 31, 2011		1,847,902		$	8.20			6.21		$	365,798

A summary of the Company’s stock warrant activity and related information for the year ended December 31, 2011 is as follows:

	Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (in Years)			Grant Date Fair Value
Outstanding at December 31, 2010		1,773,457		$	14.24			1.96		$	172,973
Warrants granted		25,000			1.75			4.00			11,201
Warrants exercised		(190,000	)		(1.60	)		(1.64	)		(20,320	)
Warrants cancelled/forfeited/expired		(363,146	)		(26.02	)		-			(21,789	)
Warrants at December 31, 2011		1,245,311		$	12.48			1.41		$	142,065
Vested at December 31, 2011		1,169,278		$	13.23			1.35		$	122,150
Exercisable at December 31, 2011		1,169,278		$	13.23			1.35		$	122,150

The following table summarizes the assumptions used in assessing the above described option and warrant valuations:

	Year Ended			Year Ended
	December 31, 2011			December 31, 2010
Expected volatility		31-35	%		50-75	%
Expected dividends		0	%		0	%
Expected term (in years)		4			3-10
Risk-free rate		0.37-1.03	%		0.63-3.5	%