NOTE 10. STOCK OPTIONS AND WARRANTS

On July 11, 2011, at the Company’s Annual Meeting of Stockholders, the stockholders approved an amendment to increase the number of shares reserved under the 2004 Equity Incentive Plan to a total of 70,974,213 shares. Additionally, an annual increase in the number of shares reserved under the plan was approved and certain prior increases in the number of shares reserved for issuance under the plan were ratified. The purpose of the 2004 Plan is to provide a means by which eligible recipients of stock awards may be given the opportunity to benefit from increases in the value of the common stock through granting of incentive stock options (ISO), non-statutory stock options, stock purchase awards, stock bonus awards, stock appreciation rights, stock unit awards and other stock awards. As amended, there are 52,615,266 shares of common stock available for future awards under the 2004 Plan at August 31, 2011.

Stock Options

Generally accepted accounting principles for stock options requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements, is measured based on the grant date fair value of the award, and requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period), net of estimated forfeitures. The estimation of forfeitures requires significant judgment, and to the extent actual results or updated estimates differ from the current estimates, such resulting adjustment will be recorded in the period estimates are revised. No income tax benefit has been recognized for stock-based compensation arrangements and no compensation cost has been capitalized in the accompanying condensed consolidated balance sheet.

A summary of stock option activity for the nine-month period ended August 31, 2011 is presented below:

						Weighted
				Weighted		Average
	Shares			Average		Remaining	Aggregate
	Under			Exercise		Contractual	Intrinsic
	Option			Price		Life	Value

Outstanding at November 30, 2010		13,148,947		$	0.0178	3.9 years	$	-
Granted		5,250,000		$	0.0092
Exercised		-		$	-
Expired		(40,000	)	$	0.5600

Outstanding at August 31, 2011		18,358,947		$	0.0141	3.7 years	$	-

Exercisable at August 31, 2011		12,981,447		$	0.0161	3.2 years	$	-

On July 11, 2011, the Board of Directors granted an option to each of the five directors to purchase one million shares of the Company’s common stock at $.0092 per share. The options vest quarterly over one year and expire five years after grant. On July 11, 2011, the Board of Directors also granted an option to an employee to purchase 250,000 shares of the Company’s common stock at $.0092 per share. This option vests monthly over three years and expires five years after grant. On June 28, 2010, the Board of Directors granted an option to each of the five directors to purchase one million shares of the Company’s common stock at $.008 per share. These options vest quarterly over one year and expire five years after grant. The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of stock options granted during the nine months ended August 31, 2011 was $0.0087. The weighted-average assumptions used for options granted during the nine months ended August 31, 2011 were risk-free interest rate of 1.5%, volatility of 170%, expected life of 5.0 years, and dividend yield of zero. The weighted-average fair value of stock options granted during the nine months ended August 31, 2010 was $0.0075. The weighted-average assumptions used for options granted during the nine months ended August 31, 2010 were risk-free interest rate of 1.8%, volatility of 165%, expected life of 5.0 years, and dividend yield of zero. The assumptions employed in the Black-Scholes option pricing model include the following. The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding prior to exercise. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related stock options. The dividend yield represents anticipated cash dividends to be paid over the expected life of the stock options.

For the three-month periods ended August 31, 2011 and 2010, the Company reported compensation expense related to stock options of $9,545 and $10,821, respectively. For the nine-month periods ended August 31, 2011 and 2010, the Company reported compensation expense related to stock options of $29,421 and $39,447, respectively. As of August 31, 2011, there was $41,906 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 1.0 years. The intrinsic values at August 31, 2011 are based on a closing price of $0.0080.

In October 2010, Xenogenics adopted the 2010 Stock Incentive Plan (the 2010 Plan) which authorized the granting of stock awards to employees, directors, and consultants. As originally adopted, the 2010 Plan provided that the number of shares of common stock that could be issued pursuant to stock awards could not exceed 5,000,000 shares of common stock. On February 3, 2011, the 2010 Plan was amended such that the number of shares of common stock that could be issued pursuant to stock awards could not exceed 8,000,000 shares of common stock. The purpose of the 2010 Plan is to provide a means by which eligible recipients of stock awards may be given the opportunity to benefit from increases in the value of the common stock through granting of incentive stock options (ISO), non-statutory stock options, stock bonus awards, stock appreciation rights, and rights to acquire restricted stock. Incentive stock options may be granted only to employees. The exercise price of each ISO granted under the plan must equal 100% of the market price of the Company’s stock on the date of the grant. A 10% stockholder shall not be granted an incentive stock option unless the exercise price of such option is at least 110% of the fair market value of the common stock on the date of the grants and the option is not exercisable after the expiration of five years from the date of the grant. The Board, in its discretion, shall determine the exercise price of each nonstatutory stock option. An option’s maximum term is 10 years.

In November 2010, Xenogenics granted an option to a prospective executive officer to purchase an aggregate of 2,500,000 shares of its common stock, exercisable at $0.246 per share of common stock and having an expiration date in November 2015. The option to acquire 500,000 of the shares vested on the grant date and the remaining 2,000,000 shares vest in the future upon the achievement of specified milestones. The fair value of these options was estimated to be $576,250, or $0.2305 per share, as estimated using the Black-Scholes option-pricing model, using a risk-free interest rate of 1.23%, volatility of 165%, expected life of five years, and dividend yield of zero.

In March 2011, Xenogenics granted options to prospective officers and to the members of its scientific advisory board to purchase an aggregate of 3,000,000 shares of its common stock, exercisable at $0.246 per share of common stock and having a term of approximately five years. 50% of the options vested immediately and the remaining 50% vest upon the closing of a Qualified Financing, which means a single sale, or a related series of sales in a single transaction, by Xenogenics of its common stock (or common stock equivalents) in which the aggregate gross proceeds (before costs and commissions) received by Xenogenics are equal to or exceed $5,000,000. The fair value of these options was estimated to be $692,700, or $0.2309 per share, as estimated using the Black-Scholes option-pricing model, using a risk-free interest rate of 2.20%, volatility of 165%, expected lives of five years, and dividend yield of zero.

For the three months and nine months ended August 31, 2011, Xenogenics reported stock-based compensation expense for these options of $163,745 and $794,797, respectively. As of August 31, 2011, there is approximately $335,000 of unrecognized compensation cost related to stock-based payments that will be recognized over a weighted average period of approximately 1.1 years.

Stock Warrants

In connection with the issuance of common stock, preferred stock, notes payable, and debentures, and as compensation for services provided, the Company has issued warrants to purchase shares of the Company’s common stock. The Company did not issue warrants during the nine months ended August 31, 2011 or 2010.

A summary of stock warrant activity for the nine-month period ended August 31, 2011 is presented below:

						Weighted
				Weighted		Average
	Shares			Average		Remaining	Aggregate
	Under			Exercise		Contractual	Intrinsic
	Warrants			Price		Life	Value

Outstanding at November 30, 2010		22,837,991		$	0.5915	1.7 years	$	-
Issued		-		$	-
Exercised		(965,000	)	$	1.0900
Expired		(10,934,961	)	$	0.3579

Outstanding at August 31, 2011		10,938,030		$	0.7810	3.2 years	$	-