Note 6. Stock options and warrants:

Stock options:

The Company currently provides stock-based compensation to employees, directors and consultants, both under the Company's 2002 Stock Incentive Plan, as amended (the "Plan"), and non-qualified options and warrants issued outside of the Plan. The Company estimates the fair value of the share-based awards on the date of grant using the Black-Scholes option-pricing model (the "Black-Scholes model"). Using the Black-Scholes model, the value of the award that is ultimately expected to vest is recognized over the requisite service period in the statement of operations. Option forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company attributes compensation to expense using the straight-line single option method for all options granted.

The Company's determination of the estimated fair value of share-based payment awards on the date of grant is affected by the following variables and assumptions:

·	The grant date exercise price - the closing market price of the Company's common stock on the date of the grant;
·	Estimated option term - based on historical experience with existing option holders;
·	Estimated dividend rates - based on historical and anticipated dividends over the life of the option;
·	Term of the option - based on historical experience, grants have lives of approximately 3-5 years;
·	Risk-free interest rates - with maturities that approximate the expected life of the options granted;
·	Calculated stock price volatility - calculated over the expected life of the options granted, which is calculated based on the daily closing price of the Company's common stock over a period equal to the expected term of the option; and
·	Option exercise behaviors - based on actual and projected employee stock option exercises and forfeitures.

The Company recognized total expenses for stock-based compensation during the three-month periods ended March 31, as follows:

	2013		2012

Stock options to employees and directors	$	483,625	$	197,402
Stock options to consultants for:
Investor relations activities		-		20,227
APPY1 activities		597		1,491
Animal health activities		-		2,876

Total stock-based compensation	$	484,222	$	221,996

The above expenses are included in the accompanying Statements of Operations for the periods ended March 31, in the following categories:

	Three Months Ended
	2013		2012

Selling, general and administrative expenses	$	483,625	$	220,505
Research and development expenses		597		1,491

Total stock-based compensation	$	484,222	$	221,996

During the three months ended March 31, 2013 and 2012, respectively, no options were exercised.

Stock incentive plan options:

The Company currently provides stock-based compensation to employees, directors and consultants under the Plan. During the three months ended March 31, 2012, no stock options were granted under the Plan. The Company utilized assumptions in the estimation of fair value of stock-based compensation for the three months ended March 31, 2013 as follows:

	2013

Dividend yield		0%
Expected price volatility		127-128%
Risk free interest rate		0.72-0.76 %
Expected term	5 years

Operating expenses for the three month periods ended March 31, 2013 and 2012, include $470,000 and $193,000, respectively, for the value of the stock options issued under the Plan.

A summary of stock option activity under the Plan for options to employees, officers, directors and consultants, for the three months ended March 31, 2013, is presented below:

	Shares Underlying Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value

Outstanding at January 1, 2013		707,940		$	13.98
Granted		474,270			2.09
Exercised		-			-
Forfeited		(6,644	)		2.43

Outstanding at March 31, 2013		1,175,566		$	9.25		9.05	$	85,200

Exercisable at March 31, 2013		261,506		$	33.15		6.72	$	10,400

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company's closing stock price on March 31, 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders been able to, and in fact had, exercised their options on March 31, 2013.

During the three months ended March 31, 2013, 474,270 options were granted under the Plan to employees, officers, directors and consultants with a weighted average exercise price at grant date of $2.09 per option. Included in the 474,270 options issued, the non-employee directors were granted a total of 168,000 options at an average exercise price of $2.19 per share of which majority vest quarterly over a one-year period, officers were granted 292,000 options at an average exercise price of $2.04 per share vesting over a twenty-four month period and employees were granted 14,270 options at an average exercise price of $2.04 per share which vest over a twenty-four month period following grant. All options granted under the Company's 2002 Stock Incentive Plan expire ten years from the grant date.

During the three months ended March 31, 2013, a total of 6,644 options that were granted under the Plan to employees were forfeited, of which all were unvested. The options were exercisable at an average of $2.43 per share and were forfeited upon the employees' terminations from the Company. During the three months ended March 31, 2012, a total of 119,721 options that were granted under the Plan to employees, including an officer, were forfeited, 4,667 of which were vested and 115,054 were unvested. The options were exercisable at an average of $4.60 per share and were forfeited upon the employees' terminations from the Company.

The total fair value of stock options granted to employees, directors and consultants that vested and became exercisable during the three months ended March 31, 2013 and 2012, was $532,000 and $1,142,000, respectively. Based upon the Company's experience, approximately 85% of the outstanding nonvested stock options, or approximately 777,000 options, are expected to vest in the future, under their terms.

A summary of the activity of nonvested options under the Plan to acquire common shares granted to employees, officers, directors and consultants during the three months ended March 31, 2013 is presented below:

Nonvested Shares	Nonvested Shares Underlying Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value

Nonvested at January 1, 2013		508,435		$	3.70	$	3.07
Granted		474,270			2.09		1.78
Vested		(62,001	)		10.55		8.58
Forfeited		(6,644	)		2.43		2.04

Nonvested at March 31, 2013		914,060		$	2.41	$	2.03

At March 31, 2013, based upon employee, officer, director and consultant options granted under the Plan to that point, there was approximately $1,150,000 of additional unrecognized compensation cost related to stock options that will be recorded over a weighted average future period of approximately one year.

Subsequent to March 31, 2013, a total of 10,000 stock options were granted to a newly hired employee exercisable at the then fair market value of $1.99, per share, vesting over a three year period annually in arrears. Additionally, effective as of May 1, 2013, in connection with the appointment of a new non-employee director, 41,333 stock options were granted, exercisable at the then fair market value of $1.75 per share, and vesting over a three-year period in arrears of the date of the grant for 24,000 of the options and in three equal installments on May 1, July 1 and October 1, 2013, respectively, for the remaining 17,333 options.

Other common stock purchase options and warrants:

As of March 31, 2013, in addition to the stock incentive plan options discussed above, the Company had outstanding 598,006 non-qualified options and warrants in connection with offering warrants, officers' employment and investor relations consulting that were not issued under the Plan.

During the three month periods ended March 31, 2013 and 2012, respectively, no stock options were granted outside of the Plan.

Operating expenses for the three months ended March 31, 2013 and 2012, include approximately $14,000 and $29,000, respectively, for the value of the non-qualified options and warrants.

Following is a summary of outstanding options and warrants that were issued outside of the Plan for the three months ended March 31, 2013:

	Shares Underlying Options / Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value

Outstanding at January 1, 2013		598,507		$	5.01
Granted		-			-
Exercised		-			-
Forfeited		(501	)		54.00

Outstanding at March 31, 2013		598,006		$	4.97	4.37	$	-

Exercisable at March 31, 2013		289,673		$	7.59	4.47	$	-

In June 2012, the Company completed a $12.2 million public offering of securities and in connection with that offering, granted the underwriter warrants to purchase a total of 305,000 shares of common stock. These warrants which are included in the above table are not exercisable until June 2013 at an exercise price of $2.50 per share, and expire in June 2017. Included at March 31, 2013 in the 598,006 total outstanding options and warrants are 572,505 non-compensatory rights granted in connection with public offerings and 25,501 rights issued under compensatory arrangements.

The total fair value of stock options previously granted to an investor relations consulting firm and to certain officers that vested and became exercisable during the three months ended March 31, 2013 and 2012, was $14,178 and $56,033, respectively.

A summary of the activity of nonvested, non-qualified options and warrants granted outside of the Plan in connection with employment and investor relations consulting services during the three months ended March 31, 2013, is presented below:

Nonvested Shares	Nonvested Shares Underlying Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value

Nonvested at January 1, 2013		8,332		$	3.42	$	2.84
Granted		-			-		-
Vested		(5,000	)		3.42		2.84
Forfeited		-			-		-

Nonvested at March 31, 2013		3,332		$	3.42	$	2.84

At March 31, 2013, there was approximately $8,000 in unrecognized cost for non-qualified options that will be recorded over a weighted average future period of less than one year.