NOTE 6 – STOCK-BASED COMPENSATION EXPENSE

The Company periodically grants options to employees, directors and consultants under the Company's 2005 Stock Option Plan (the "2005 Plan") and the Company's 2008 Equity Incentive Plan (the "2008 Equity Incentive Plan" and, together with the 2005 Plan, the "Plans"). The Company is required to make estimates of the fair value of the related instruments and recognize expense over the period benefited, usually the vesting period.

Stock Option Activity

A summary of stock option activity and related information for the nine months ended September 30, 2012 is presented below:

	Options		Weighted Average Exercise Price		Aggregate Intrinsic Value

Outstanding at January 1, 2012		1,833,582	$	7.02
Granted (1)		609,475		1.63
Exercised		—		—
Forfeited		—		—
Outstanding at September 30, 2012 (1)		2,443,057	$	5.68	$	—
Exercisable at September 30, 2012		1,948,677	$	5.66	$	—

(1)	Does not include 915,525 options subject to shareholder approval, which were granted on June 11, 2012 and which are described in more detail below.

On June 11, 2012, options to purchase an aggregate of 300,000 shares were granted to non-employee directors and options to purchase an aggregate of 1,200,000 shares were granted to employees.

The 300,000 options granted to non-employee directors vested 20% on the grant date and vest as to the remaining 80% nine months from the grant date, have a ten year life and have an exercise price of $1.65 per share. Of those options, 155,475 are exercisable commencing 6 months from the date of grant and 144,525 are exercisable on and after shareholder approval of an amendment to the Company's 2008 Equity Incentive Plan to increase the shares reserved under the plan to facilitate exercise. The option grants to non-employee directors, excluding grants that are subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, were valued on the date of grant at $128,328 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 0.35%, (2) expected life in years of 2.83, (3) expected stock volatility of 84.6%, and (4) expected dividend yield of 1.21%. The Company determined the options qualify as 'plain vanilla' under the provisions of SAB 107 and the simplified method was used to estimate the expected option life.

The 1,200,000 options granted to employees vested on the grant date, have a ten-year life and have an exercise price of $1.65 per share. Of those options, 429,000 are exercisable commencing 6 months from the date of grant and 771,000 are exercisable on and after shareholder approval of an amendment to the Company's 2008 Equity Incentive Plan to increase the shares reserved under the plan to facilitate exercise. The option grants to employees, excluding grants that are subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, were valued on the date of grant at $354,098 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 0.35%, (2) expected life in years of 2.83, (3) expected stock volatility of 84.6%, and (4) expected dividend yield of 1.21%. The Company determined the options qualify as 'plain vanilla' under the provisions of SAB 107 and the simplified method was used to estimate the expected option life.

In July 2012, the Company appointed a new non-employee director following the resignation of a non-employee director. In connection with the appointment, the Company granted stock options to purchase 25,000 shares of common stock at $1.18 per share with a fair value of 19,375 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of .82%, (2) expected life in years of 5.835, (3) expected stock volatility of 91.70%, and (4) expected dividend yield of 1.70%.

During the three and nine months ended September 30, 2012, the Company recognized $309,039 and $1,470,375, respectively, of stock compensation expense attributable to outstanding stock option grants, including current period grants and unamortized expense associated with prior period grants but excluding grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan. As of September 30, 2012, total unrecognized stock-based compensation expense related to non-vested stock options, excluding grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, was $1,606,125. The unrecognized expense is expected to be recognized over a weighted average period of 1.48 years and the weighted average remaining contractual term of the outstanding options and exercisable options at September 30, 2012 is 6.84 years and 6.76 years, respectively.

Shares available for issuance under the Plans as of September 30, 2012 totaled 150,277. The Company's board of directors adopted an amendment to the Company's 2008 Equity Incentive Plan to increase the shares reserved thereunder by 1,800,000 shares. The amendment to the 2008 Equity Incentive Plan is subject to approval by the Company's shareholders. Option grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan will be valued and accounted for at the time of shareholder approval of the amendment.

Restricted Stock Activity

During 2011, the Company granted to officers an aggregate of 45,000 shares of restricted stock, which shares vest over a period of three years. The fair value of $743,400 was determined based on the fair market value of the shares on the date of grant. This value is being amortized over the vesting period and, during the three and nine months ended September 30, 2012, $62,270 and $185,151, respectively, was amortized to expense. As of September 30, 2012, there was $420,326 of unrecognized compensation cost related to unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately 1.7 years.

Share-Based Compensation Expense

The following table reflects share-based compensation recorded by the Company for the three months ended September 30, 2012 and 2011:

	Three Months Ended September 30,
	2012		2011

Share-based compensation expense included in general and administrative expense	$	371,361	$	590,405
Earnings per common share effect of share-based compensation expense – basic and diluted	$	(0.01)	$	(0.02)

The following table reflects share-based compensation recorded by the Company for the nine months ended September 30, 2012 and 2011:

	Nine Months Ended September 30,
	2012		2011

Share-based compensation expense included in general and administrative expense	$	1,655,526	$	1,750,316
Earnings per common share effect of share-based compensation expense – basic and diluted	$	(0.05)	$	(0.06)