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STOCK-BASED COMPENSATION
 9 Months Ended
Sep. 30, 2014
Notes to Financial Statements  
NOTE 7. STOCK-BASED COMPENSATION

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 trinomial 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 three and nine months ended September 30, 2014, we expensed $127,612 and $278,166, respectively, in stock-based compensation.

 

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

 

    Number of Options (in thousands)     Weighted Average Exercise Price  
             
Outstanding at December 31, 2013     2,467     $ 3.55  
                 
Granted     467     $ 3.88  
Exercised     (97 )   $ 2.16  
Cancelled     (163 )   $ 4.97  
Outstanding at September 30, 2014     2,674     $ 3.66  

 

The grant date fair value of options granted during the first nine 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 nine months ended September 30, 2014, we issued 25,518 common shares in exchange for 50,000 non-employee stock options and 24,482 common shares (via a stock swap). We issued 6,379 common shares in exchange for 12,500 employee stock options and 6,121 common shares (via a stock swap). We issued 35,000 common shares in exchange for 35,000 non-employee stock options. Net proceeds from the issuance of common shares along with the shares received in the stock swap exercises were $77,350 for the nine months ended September 30, 2014.