Note 4 – Stock Options

The Company maintains the 2000 Stock Incentive Plan as amended (“the 2000 Plan”) that has reserved 2,250,000 shares of the Company’s common stock for issuance pursuant to stock options or restricted stock. Options issued under the Plan have a term ranging from five to seven years from the date of grant and have a vesting period ranging from immediately upon issuance to three years from the date of grant. The options are exercisable for a period of 90 days after termination. As of August 31, 2012 and November 30, 2011, there were 63,089 and 99,292 shares outstanding under the 2000 Plan, respectively. No further options will be issued under the 2000 Plan.

The Company also maintains the 2006 Stock Incentive Plan (the “2006 Plan”) under which it has reserved 1,000,000 shares of the Company’s common stock for issuance pursuant to stock options, restricted stock, stock-appreciation rights (commonly referred to as “SARs”) and stock awards (i.e. performance shares and performance units). As of August 31, 2012 and November 30, 2011, there were 727,988 and 509,127 shares issued, but not yet exercised, under the 2006 plan, respectively. As of August 31, 2012, there were 157,685 shares available for future issuance under the 2006 plan.

The Company also maintains the 2012 Equity Incentive Plan (the “2012 Plan”) which became effective December 1, 2011 as approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting on July 10, 2012. The 2012 Plan originally reserved 1,500,000 shares of the Company’s common stock for issuance pursuant to stock options, restricted stock, SARs, and other stock awards (i.e. performance shares and performance units). In May 2012, the Board of Directors approved an amendment to the Plan to increase the number of shares of the Company’s common stock reserved for issuance under the 2012 Plan to 2,500,000 shares. As of August 31, 2012, there were 1,500,000 shares granted under the 2012 plan and 1,000,000 shares available for future issuance.

Service-based vesting condition options

The fair value of each option award is estimated on the date of the grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock over the most recent period commensurate with the expected life of the Company’s stock options. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted to employees is calculated, in accordance with the “simplified method” for “plain vanilla” stock options allowed under GAAP. Expected dividends are based on the historical trend of the Company not issuing dividends.

Variables used to determine the fair value of the options granted for the three and nine months ended August 31, 2012 and August 31, 2011 are as follows:

Stock option activity for options with only service-based vesting conditions for the nine months ended August 31, 2012, was as follows:

The weighted average grant date fair value of options granted during the nine months ended August 31, 2012 and August 31, 2011 was $1.55 and $2.14, respectively.

The aggregate intrinsic value represents the total value of the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options that would have been received by the option holders had all option holders exercised their options on either November 30, 2011 or August 31, 2012, as applicable. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s stock.

During the nine months ended August 31, 2012, there were 33,562 options exercised using the net exercise method included as part of the original terms of each award. Under the net exercise method, the option holders surrendered 26,749 options to cover the total cost of exercising the stock options resulting in 6,813 net common shares being issued. The result of a smaller number of shares being issued to the option holder caused less dilution and fewer shares used from the option plan. There were 11,751 options exercised during the nine months ended August 31, 2011.

Significant option groups outstanding and exercisable at August 31, 2012 and related price and contractual life information are as follows:

A summary of the status of the Company’s non-vested shares as of August 31, 2012, and changes during the nine months ended August 31, 2012, is presented below:

As of August 31, 2012, there was approximately $401,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2000 Plan, the 2006 Plan and the 2012 Plan. The cost is expected to be recognized over a weighted-average period of 2.4 years as of August 31, 2012. The total fair value of shares vested during the nine months ended August 31, 2012 was approximately $1,052,000. In October 2012, the Company elected to accelerate certain advisory board options.

Performance and market-based vesting condition options

Variables used to determine the fair value of options with performance-based and market-based vesting conditions granted during the nine months ended August 31, 2012 are as follows:

The Company did not grant any new performance or market-based vesting condition options during the three months ended August 31, 2012.

Stock option activity for options with performance-based and market-based vesting conditions for the nine months ended August 31, 2012, was as follows:

The weighted average grant date fair value of performance and market-based vesting conditions options granted during the three and nine months ended August 31, 2012 was $0 and $1.28, respectively. The Company did not grant any new performance or market-based vesting condition options during the three months ended August 31, 2012.

During the nine months ended August 31, 2012, the Company granted 213,334 options that begin to vest based on the achievement of certain share prices of the Company’s common stock at certain future dates. For market-based vesting condition options, accounting principles do not require that the market condition be met in order for the compensation cost to be recognized. Fair value of these options has been determined using a binomial model and is being recognized over the requisite service period, regardless if the market condition will be met. As of August 31, 2012 there was approximately $131,400 of total unrecognized compensation cost related to the non-vested market-based vesting condition options.

The remaining 956,666 options granted to executives and consultants during the nine months ended August 31, 2012 require certain performance targets to be met before vesting can occur. Management has deemed these performance targets to be improbable as of August 31, 2012 and thus no compensation cost has been recognized through this date. The Company will reevaluate the probability of achieving these targets on a quarterly basis, and adjust compensation expense accordingly. In addition, any compensation expense as a result of consultant options, will be re-measured on a quarterly basis, over the period the service is being provided to the Company. As of August 31, 2012 there was approximately $1,512,000 of total unrecognized compensation cost related to the non-vested performance-based vesting condition options. If the performance conditions are not achieved by a certain date as specified in each option agreement, no compensation expense associated with these performance based options will be recognized. Total unrecognized compensation cost may fluctuate from quarter to quarter as performance based options issued to consultants are marked to market over the requisite service period.