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STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2014

Under our 2012 equity incentive plan, our board of directors may grant options to purchase common shares to our key employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation – Stock Compensation, with option expense amortized over the vesting period based on the binomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. During the six months ended June 30, 2014, we expensed $150,554 in stock-based compensation.

Activity in our stock options during the period ended June 30, 2014 was as follows:

	Number Of Options (in thousands)			Weighted Average Exercise Price

Outstanding at December 31, 2013		2,467		$	3.55

Granted		373		$	3.84
Exercised		--		$	--
Cancelled		(19	)	$	4.14

Outstanding at June 30, 2014		2,821		$	3.58

The grant date fair value of options granted during the first six months of 2014 were estimated on the grant date using a trinomial lattice option-pricing model and the following assumptions: expected volatility of between 53% and 54%, expected term of between 3-5 years, risk-free interest rate of 0.6%, and expected dividend yield of 0%.

Expected volatility is based on a five year average of the historical volatility of the Company's stock. Previous to December 2013 we used a weighted average of our historical volatility combined with a peer group of companies’ volatility, which had openly traded stock options on the options market and weighted to percentages relative to our stock and the peer group at a 50%/50% weighting. The risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options. The Company uses historical data to estimate pre-vesting forfeiture rates.

During the six months ended June 30, 2014, we issued no common shares in exchange for stock options.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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