Kartoon Studios, Inc. Quarterly report pursuant to sections 13 or 15(d)

Quarterly report pursuant to sections 13 or 15(d)

9. Stock Options

9. Stock Options

9 Months Ended

Sep. 30, 2012

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

The Company has adopted the provisions of Topic 718, Compensation, of the Accounting Standards Codification, which requires companies to measure the cost of services received in exchange for equity instruments based on the grant date fair value of those awards and to recognize the compensation expense over the requisite service period during which the awards are expected to vest.

On December 29, 2008, the Company adopted the Pacific Entertainment Corporation 2008 Stock Option Plan (the Plan), which provides for the issuance of qualified and non-qualified stock options to officers, directors, employees and other qualified persons. The Plan is administered by the Board of Directors of the Company or a committee appointed by the Board of Directors. The number of shares of the Companys common stock initially reserved for issuance under the Plan was 11 million. On September 2, 2011, the shareholders holding a majority of the Companys outstanding common stock adopted an amendment to the Companys 2008 Stock Option Plan to increase the number of shares of common stock issuable under the plan to 50 million.

On January 1, 2012, the Company issued a Stock Option Grant to the Vice President of Sales for the purchase of up to 25,000 shares of common stock, which is fully vested as of March 31, 2012, with a life of five years and an exercise price of $0.50.

On May 2, 2012, pursuant to an employment agreement with the Chief Financial Officer, the Company issued an option to purchase up to 200,000 shares of common stock. The option fully vests on December 31, 2014, has a five year term and an exercise price of $0.44.

On July 6 2012, the Company issued an option to purchase 100,000 shares of common stock pursuant to a services agreement with a consultant. The option is fully vested as of July 6, 2012, has a five year term and an exercise price of $0.44.

The Company used the Black-Scholes valuation model to estimate the grant date fair value of the options granted in 2012. The Company used the following assumptions for the 2012 valuations:

Risk-free interest rate		0.64-0.85%
Expected life in years		5
Dividend yield		0
Expected volatility		59.19-63.64%

The following schedule summarizes the changes in the Companys stock option plan for the nine months ended September 30, 2012:

					Weighted				Weighted
	Options Outstanding				Average				Average
	Number		Exercise		Remaining		Aggregate		Exercise
	of		Price		Contractual		Intrinsic		Price
	Shares		per Share		Life		Value		per Share
Balance at December 31, 2011		14,995,000	$	0.18-0.55	4.47 years			-	$	0.43
Options Granted		325,000	$	0.44-0.50	4.83 years			-	$	0.42
Options Exercised		-		-		-		-		-
Options Expired		-		-		-		-		-
Balance at September 30, 2012		15,320,000	$	0.18-0.55	4.05 years			-	$	0.44

Exercisable September 30, 2012		12,420,000	$	0.18-0.55	2.38 years			-	$	0.35

During the nine months ended September 30, 2012 and 2011 the Company recognized $192,049 and $385,137 in Stock Compensation expense, respectively.

- Definition

Tabular disclosure of components of a stock option or other award plan under which equity-based compensation is awarded to employees, typically comprised of the amount of unearned compensation (deferred compensation cost), compensation expense, and changes in the quantity and fair value of the shares (or other type of equity) granted, exercised, forfeited, and issued and outstanding pertaining to that plan. Disclosure may also include nature and general terms of such arrangements that existed during the period and potential effects of those arrangements on shareholders, effect of compensation cost arising from equity-based payment arrangements on the income statement, method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period, cash flow effects resulting from equity-based payment arrangements and, for registrants that accelerate vesting of out of the money share options, reasons for the decision to accelerate.

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