NOTE 16. SHARE-BASED COMPENSATION

As of September 30, 2014, the Company had one share-based compensation plan as described below. The compensation cost that had been charged against income for the plan was $1,779and $43,779 for the nine months ended September 30, 2014 and 2013, respectively. The related income tax benefit recognized was $605 and $14,885 for the nine months ended September 30, 2014 and 2013, respectively. A 100 % valuation allowance was assessed against the deferred tax assets derived from such tax benefit as of September 30, 2014 and 2013.

On November 4, 2010, the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan. On November 8, 2010, a total of 931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock shares were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share, of which shall vest as follows:

33 1/3% of the option grants vested one (1) month after the date of grant;

33 1/3% of the option grants vested twelve (12) months after the date of grant; and

33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.

On March 8, 2012, the Company’s Board of Directors increased the number of shares allocated to and authorized for use under the Plan from 1,000,000 shares to the maximum number of shares allowable pursuant to the terms of the Plan and granted 420,000 options under the Plan to independent directors, officers and key employees of the Company, of which included some new options and those re-granted after such options were forfeited by other former employees as a result of their resignations from the Company in accordance with the terms of their option agreements. All of the granted options vest as follows:

50 % of the options granted vested six (6) months after the date of the grant; and

50 % of the options granted vested twelve (12) months after the date of the grant.

On November 23, 2012, our Board of Directors allocated to and authorized to re-grant 150,000 options to a director of the Company after such options were forfeited by other former employees as a result of their resignations from the Company in accordance with the terms of their option agreements. All of the granted options vest as follows:

33 1/3% of the option grants vested one (1) month after the date of grant;

33 1/3% of the option grants vested twelve (12) months after the date of grant; and

33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.

The fair value of each option award was estimated on the date of grant using a Black-Scholes option pricing model that uses the assumptions noted in the following table. The model is based on the assumption that it is possible to set up a perfectly hedged position consisting of owning the shares of stock and selling a call option on the stock. Any movement in the price of the underlying stock will be offset by an opposite movement in the options value, resulting in no risk to the investor. This perfect hedge is riskless and, therefore, should yield the riskless rate of return. As the Black-Scholes option pricing model applies to stocks that do not pay dividends, we made an adjustment developed by Robert Merton to approximate the option value of a dividend-paying stock. Under this adjustment method, it is assumed that the Company’s stock will generate a constant dividend yield during the remaining life of the options.

The following tables reflect assumptions used to determine the fair value of the option award:

Options granted on November 8, 2010:

Exercisable Period	12/8/2010 - 11/8/2020	11/8/2011 - 11/8/2020	11/8/2012 - 11/8/2020
Risk-free Rate (%)	1.12	1.27	1.46
Expected Lives (years)	5.04	5.50	6.00
Expected Volatility (%)	46.10	44.49	43.04
Expected forfeitures per year (%)	0.00-55.00	0.00-55.00	0.00-55.00
Dividend Yield (%)	0.00	0.00	0.00

Options granted on December 15, 2010:

Exercisable Period	1/15/2011 - 12/15/2020		12/15/2011 - 12/15/2020		12/15/2012 - 12/15/2020
Risk-free Rate (%)		2.15		2.32		2.50
Expected Lives (years)		5.04		5.50		6.00
Expected Volatility (%)		46.15		44.52		43.09
Expected forfeitures per year (%)		0.00		0.00		0.00
Dividend Yield (%)		0.00		0.00		0.00

Options granted on March 8, 2012:

Exercisable Period	09/08/2012 - 03/08/2020		03/08/2013 - 03/08/2020
Risk-free Rate (%)		0.94		1.00
Expected Lives (years)		5.25		5.49
Expected Volatility (%)		45.91		45.22
Expected forfeitures per year (%)		0.00		0.00
Dividend Yield (%)		0.00		0.00

Options granted on November 23, 2012:

Exercisable Period	12/23/2012 - 11/8/2020		11/23/2013 - 11/8/2020		11/23/2014 - 11/8/2020
Risk-free Rate (%)		0.53		0.60		0.68
Expected Lives (years)		4.02		4.48		4.98
Expected Volatility (%)		37.43		46.48		46.45
Expected forfeitures per year (%)		0.00		0.00		0.00
Dividend Yield (%)		0.00		0.00		0.00

Fair value hierarchy of the above assumptions can be categorized as follows:

(1)

There were no Level 1 inputs.

(2)

Level 2 inputs include:

Risk-free rate- This rate is based on continuous compounding of publicly-available yields on U.S. Treasury securities with remaining terms to maturity consistent with the expected term of the options at the dates of grant.

Expected volatility- We did not have a historical trading history sufficient to develop an internal volatility rate for use in the model. As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility. In developing this model, no one company was weighted more heavily than another.

(3)

Level 3 inputs include:

Expected lives- The expected lives of options granted were derived from the output of the option valuation model and represented the period of time that options granted are expected to be outstanding.

Expected forfeitures per year- The expected forfeitures are estimated at the dates of grant and will be revised in subsequent periods pursuant to actual forfeitures, if significantly different from the previous estimates.

The estimates of fair value from the model are theoretical values of stock options and changes in the assumptions used in the model could result in materially different fair value estimates. The actual value of the stock options will depend on the market value of the Company’s common stock when the stock options are exercised.

A summary of option activity under the Plan as of September 30, 2014, and changes during the nine months ended September 30, 2014 are presented below:

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
Options	Shares		Price		Term		Value
Outstanding as of January 1, 2014		750,000	$	3.14
Granted		-	$	-
Exercised		-	$	-
Forfeited		(80,000)	$	4.40
Outstanding As of September 30, 2014		670,000	$	2.99		3.38 years	$	537,202
Exercisable As of September 30, 2014		620,000	$	2.88		3.40 years	$	533,629
Vested and expected to vest (1)		670,000	$	2.99		3.38 years

(1) Includes vested shares and unvested shares after a forfeiture rate is applied.

A summary of the status of the Company’s unvested shares as of September 30, 2014, and changes during the six months ended September 30, 2014, is presented below:

			Weighted-
			Average
			Grant-
			Date Fair
Unvested Shares	Shares		Value
Unvested as of January 1, 2014		50,000	$	3,573
Granted		-		-
Vested		-		-
Forfeited		-		-
Unvested As of September 30, 2014		50,000	$	3,573