Stock Options and Warrants

6 Months Ended

Jun. 30, 2011

Stock Options and Warrants

9.  Stock Options and Warrants

Stock Options - There were no stock option awards in 2010.  Total stock option expense for the year 2010 totaled $477,356.

In February of 2011 the Company made a stock option grant for services to purchase in the aggregate 20,000 shares of the Company’s common stock.  Terms of the stock option grant require, among other things, that the individual continues to provide services over the vesting period of the option, which is four years from the date that the option was granted.  The exercise price of the option is $0.53 a share, which was the closing price of the common stock at the date of grant.  The stock option grant was not for current management and officers of the Company.  The Company determined the fair value of the stock options granted using the Black Scholes model and expenses this value monthly based upon the vesting schedule of the stock option award.  For purposes of determining fair value, the Company used an average annual volatility of one hundred sixty six percent (166%), which was calculated based on the closing price of the Company’s stock over the preceding five years.  The risk free rate of interest used in the model was taken from a table of the market rate of interest for U. S. Government Securities for the date of the stock option award and the effective term.   The Company used the simplified method to determine the expected term of the options due to the lack of historical data.  The total value of the stock option granted was determined using this methodology to be $10,260, which is being expensed over the four years following the date of grant based on the stock option vesting schedule.

Total stock option expense for the first quarter of 2011 totaled $119,981.  Of this amount, $15,205 related to stock options for personnel involved in R&D activities and $104,776 related to stock options for management involved in general and administrative functions.

In June of 2011 the Company made two stock option grants to purchase in the aggregate 125,000 shares of the Company’s common stock for service as a director of the Company and for consulting services.    Terms of the stock option grant require, among other things, that the individual continues to provide services over the vesting period of the option, which is one year from the date of grant for the director service stock option and four years from the date of grant for the consulting service stock option.  The exercise price of the options is $0.33 a share, which was the closing price of the common stock at the date of grant.  The stock option grants were not for current management and officers of the Company.  The Company determined the fair value of the stock options granted using the Black Scholes model and expenses this value monthly based upon the vesting schedule of the stock option award.  For purposes of determining fair value, the Company used an average annual volatility of one hundred sixty two percent (162%), which was calculated based on the closing price of the Company’s stock over the preceding five years.  The risk free rate of interest used in the model was taken from a table of the market rate of interest for U. S. Government Securities for the date of the stock option award and the effective term.  The Company used the simplified method to determine the expected term of the options due to the lack of historical data.  The total fair value of the stock option granted was determined using this methodology to be $39,600, which is being expensed following the date of grant based on the stock option vesting schedule.

Total stock option expense for the second quarter of 2011 totaled $120,684.  Of this amount, $16,082 related to stock options for personnel involved in R&D activities and $104,602 related to stock options for management involved in general and administrative functions and directors.

Warrants -  There were no warrants for services granted in 2010 and there was no warrant expense for the year 2010.  There were no warrants for services granted in the first or second quarters of 2011 and there was no warrant expense for the first or second quarters 2011.  Warrants issued in connection with the sale of units of common stock were for cash value received and as such were not grants of compensation-based warrants.