Note 8 - Stock Options and Warrants

12 Months Ended

Dec. 31, 2011

Notes To Financial Statements

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

8.  Stock Options and Warrants

Stock Options:

During 2011, 100,000 options were issued to consultants, and we recognized $7,280 of expense related to these options and 2,231,792 existing options for employees were cancelled and reissued changing the exercise price and expiration date, we recognized $29,766 of expense related to these options. During 2010, 13,750,000 options were issued to consultants, advisors, directors, employees and two former employees, and we recognized $127,693 of expense related to these options.

We recognized $112,874 in 2010 of employee options expense, related to previously issued options.  No more costs remain to be recognized for these options.

Directors, officers and consultants exercised no options in 2011 and 245,000 options in 2010 via an incentive program.  See “ Stock Option and Warrant Exercise Incentive” below for more details about 2010 stock option and warrant exercises.

Stock option activity for the years ended December 31, 2010 and December 31, 2011 are summarized as follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)		Grant Date Fair Value
Outstanding at December 31, 2009		6,603,404		$	0.31		1.98	$	1,527,990
Options granted		13,750,000			0.04		0.89		127,693
Options exercised		(3,495,000	)		0.04		0.20		73,179
Options cancelled/expired		(12,171,667	)		0.10		-		662,316
Outstanding at December 31, 2010		4,686,737		$	0.26		2.67	$	920,188
Vested at December 31, 2010		4,686,737		$	0.26		2.67	$	920,188
Exercisable at December 31, 2010		4,686,737		$	0.26		2.67	$	920,188
Outstanding at December 31, 2010		4,686,737		$	0.26		2.67	$	920,188
Options granted		2,331,792			0.05		4.87		114,800
Options exercised		-			-		-		-
Options cancelled/expired		(3,376,737	)		0.32		-		796,138
Outstanding at December 31, 2011		3,641,792		$	.07		3.84	$	238,850
Vested at December 31, 2011		3,641,792		$	.07		3.84	$	238,850
Exercisable at December 31, 2011		3,641,792		$	.07		3.84	$	238,850

Options reserved for the Director, employee and consultant stock option plan but not issued (16,950,000) are not included in the table above. This stock may be utilized for other purposes if not used for the plans. The weighted-average remaining contractual life of the options is 3.84 years.

Stock warrants:

During 2010, 2,137,000 warrants were issued together with private placement sales of 2,137,000 shares of stock.  The total purchase price for private placement stock and warrants was recognized as the cost to purchase the stock with convertible debt, and dilutive issuance issued to Warrant Strategies. During 2011, 3,332,831 warrants were issued together with private placement sales of 2,666,667 shares of stock. On November 5, 2011, Amarillo Biosciences, Inc. sold 2,666,667 private placement shares at $0.03 per share along with 1,000,000 warrants exercisable at $0.03 per share.  The relative fair value of the 1,000,000 warrants was estimated to be $22,826 using the Black-Scholes option pricing model based on the following assumptions: estimated dividend yield 0%, expected volatility 197%, risk free interest rate 0.25%, and expected life of 3 years. The Base Share Price for this dilutive issuance was $0.03 per share.

No warrants were exercised in 2011 or 2010.

A summary of the Company's stock warrant activity and related information for the years ended December 31, 2010 and December 31, 2011 is as follows:

	2011						2010
	Warrants			Price Range			Warrants			Price Range
Outstanding Beg. of Year		8,457,359		$	0.10-0.20			18,320,359		$	0.10-0.20
Granted		3,332,831			0.03-0.04			2,137,000			0.10
Cancelled/Expired		(3,060,000	)		(0.20	)		(12,000,000	)		(0.10	)
Exercised		-			-			-			-
Outstanding End of Year		8,730,190		$	0.03-0.10			8,457,359			0.10-0.20
Exercisable End of Year		8,730,190		$	0.03-0.10			8,457,359			0.10-0.20

The weighted-average remaining contractual life of the warrants outstanding at December 31, 2011 is 1.45 years.

Derivative Liabilities:

In 2008, the Company sold preferred stock with attached warrants. As of December 31, 2009, there were 12,447,999 of these warrants outstanding. These warrants contain an anti-dilution ratchet provision. The Company is at risk of triggering the warrant anti-dilution provisions in the future if stock is sold below $0.10 per share to any non-exempt parties.  Holders of options and warrants prior to January 8, 2008 plus officers, directors and consultants under stock plans approved by outside board of director members are exempt from the anti-dilution provisions. In 2010, a Director of the Company purchased 12,000,000 of these warrants from the holder, along with their outstanding shares of stock in the Company, for $200,000. In December 2010, the Company agreed to buy the 12,000,000 warrants from the Director for $200,000. A verbal agreement was reached for the purchase price, with interest at 0.43% per annum in December 2010, which was formally executed as a promissory note in January 2011.The warrants were retired due to the purchase by the Company. As of December 31, 2010, 447,999 of the warrants with the anti-dilution provision remained outstanding. A new warrant was issued to Warrant Strategies, Inc. on November 7, 2011. On November 5, 2011, Amarillo Biosciences, Inc. sold 2,666,667 private placement shares at $0.03 per share along with 1,000,000 warrants exercisable at $0.03 per share.  The Base Share Price for this dilutive issuance was $0.03 per share.  ABI sent a Dilutive Issuance Notice to Warrant Strategies, Inc. on November 7, 2011.  The notice was sent pursuant to the Series A Common Stock Purchase Warrant dated June 16, 2009, Section 3(b), “…the Exercise Price shall be reduced to equal the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise price issuable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price prior to such adjustment.

ABI issued a new Purchase Warrant dated November 7, 2011 reflecting the new Warrant Share amount of 1,493,330 shares and an adjusted Exercise Price of $0.03 per share.  The new warrant was sent to Warrant Strategies, Inc. and return of the old warrant was requested.

The anti-dilution provision was determined by management to be an embedded derivative, and was recognized as a liability in accordance with ASC 815 as of January 1, 2009. The Company measures the fair value of the liability at the end of each reporting period, with changes in value recorded as part of other income or expense.

The fair value of warrants with embedded derivative feature was estimated at December 31, 2011 with the binomial Black-Scholes option-pricing model using the following assumptions: probability of anti-dilution ratchet of 75%; a probable reset share price of $0.0202; dividend yield 0.0%; expected volatility of 197.99%, risk-free interest rate of 0.25% and expected life of approximately 1.03 years (the remaining term of the warrants). The fair value of the 1,493,330 outstanding warrants was $46,461 .

Due to the purchase described above, 12,000,000 warrants were retired in December 2010. Consequently, the fair value of these warrants was $0. The decrease in the fair value of the liability for these warrants was recorded as part of the change in fair value of the derivative liability.

Net derivative gains for 2011 were $36,468. In 2010, the derivative gain was $1,668,336.

Stock Option and Warrant Exercise Incentive:

In November 2009, the Board approved an incentive to encourage option and warrant holders (“Holders”) to exercise their options or warrants. Holders were allowed, for a limited time, to exercise up to one-third of the options or warrants they held, at an exercise price of $0.10 per share and, for each option or warrant so exercised, two additional options or warrants were converted to cashless options or warrants, and deemed exercised immediately on a cashless basis with an exercise price of $0.10. The Board extended the exercise incentive until January 22, 2010.

The Company determined that this was a modification of equity instruments, and accounted for the inducement under ASC Topic 718. For option and warrant holders who accepted the inducement and exercised their instruments under the terms noted above, an incremental fair value of the inducement was determined using the Black-Scholes option pricing model, with the following assumptions: dividend yield 0.0%, expected volatility of 147-216%, risk free interest rate 0.14 - 2.37%, and expected life of 0.13-5.36 years.  The Company recognized $4,457 of expense related to the inducement in 2010.

The activity resulting from the exercise of warrants and options under this incentive is as follows:

	Options/Warrants Exercised 2010		Common Stock Issued		Release of Reserved into Available Shares		Net Cash to Company
Options		245,000		152,258		92,742	$	8,200
Warrants		-		-		-		-
Total		245,000		152,258		92,742	$	8,200