Note 9. Stock-Based Compensation and Other Employee Benefit Plans

6 Months Ended

Jun. 30, 2011

Compensation and Employee Benefit Plans [Text Block]

Note 9. Stock-Based Compensation and Other Employee Benefit Plans

2007 Equity Incentive Plan

On August 7, 2007, our Board of Directors adopted the BioLargo, Inc. 2007 Equity Incentive Plan (“2007 Plan”) as a means of providing our directors, key employees and consultants additional incentive to provide services. Both stock options and stock grants may be made under this plan. The Compensation Committee administers this plan. The plan allows grants of common shares or options to purchase common shares. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. The Compensation Committee may at any time amend or terminate the plan.

On April 29, 2011, a majority of our stockholders consented to an amendment to our 2007 Equity Incentive Plan to increase the maximum aggregate number of shares of our Common stock reserved for issuance under the plan from 6,000,000 shares to 12,000,000 shares. This amendment was disclosed in the Information Statement filed by the Company on May 2, 2011, and was effective as of June 14, 2011.

During the six-month period ended June 30, 2011, we granted options to purchase an aggregate 130,000 shares of our common stock to our Chief Financial Officer, pursuant to the terms of our engagement agreement with him. These options are exercisable at exercise prices ranging between $0.41 and $0.42 depending upon their respective dates of grant. The fair value of these option issuances was an aggregate $53,400 and $20,600 was recorded as selling, general and administrative expense as of June 30, 2011 as 50,000 options vested as of June 30, 2011. The $32,800 of fair value related to the remaining 80,000 options will be expensed ratably over the remaining eight month vesting schedule. The options are exercisable for ten years from its respective date of grant.

On April 21, 2011, in an effort to preserve our cash and reduce outstanding payables, we issued an Option to a consultant to purchase an aggregate 36,585 shares of our common stock in exchange for the settlement of accrued and unpaid obligations totaling $10,000. The option expires five years from the date of issuance. The option is exercisable at $0.45 per share and the fair value of this option totaled $16,463 resulting in an additional $6,463 of selling, general and administrative expense.

On March 17, 2011, in an effort to preserve our cash and reduce outstanding payables, the Board offered to third parties and board members the opportunity to convert outstanding payable amounts into an option (“Option”) to purchase common stock in lieu of cash payment. We issued Options to purchase an aggregate 260,904 shares of our common stock in exchange for the settlement of accrued and unpaid obligations totaling $71,980. Of this amount we issued an option to purchase an aggregate 167,470 shares of our common stock to our board of directors at $0.41 per share, an option to purchase an aggregate 68,433 share of our common stock to a third-party consultants at $0.41 per share, and an option to purchase 25,000 shares of our common stock to a third-party consultant at $0.45 per share. Each option expires five years from the date of issuance. The fair value of these options totaled $107,970 resulting in an additional $35,990 of selling, general and administrative expense.

On March 17, 2011, the Company’s Compensation Committee issued options pursuant to the Company’s 2007 Equity Incentive Plan to certain employees, outside consultants and professionals who have and continue to provide services to the Company, consistent with management’s recommendations to the committee. In total, options to purchase an aggregate 765,000 shares of the Company’s common stock were issued, at an exercise price of $0.41 per share, the closing price of the Company’s common stock on the date of grant. Of the options issued, 200,000 were issued to our officer Joseph Provenzano, Secretary and VP of Operations, and the remaining 565,000 were issued to third party service providers and consultants for their respective roles within the Company. The aggregate fair value of this option grant was $313,650 and it is included as selling, general and administrative expenses.

During the six-month periods ended June 30, 2010 and 2011 we recorded an aggregate $462,000 and $496,373 in option compensation expense related to options issued pursuant to the 2007 Plan.

Activity for our stock options under the 2007 Plan for the six-month period ended June 30, 2011 is as follows:

								Weighted
								Average
	Options		Shares					Price per
	Outstanding		Available			Price per share		share
Balances, December 31, 2010		4,797,223		1,202,777		$	0.25 – 1.89	$	0.51
Amendment to increase		—		6,000,000			—		—
Granted		1,490,440		(1,490,440	)	$	0.39 – 0.51	$	0.43
Exercised		—		—			—		—
Canceled		—		—			—		—
Balances, June 30, 2011		6,287,663		5,712,337		$	0.25 – $1.89	$	0.51

	2007 Plan
Risk free interest rate		1.96 – 3.48	%
Expected volatility		562 – 914	%
Expected dividend yield		—
Forfeiture rate		—
Expected life in years		3 – 5

Expected price volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. Expected volatility is derived from the historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future volatility.

Following the SEC guidance, we use the “shortcut” method to determine the expected term of plain vanilla options issued to employees and Directors. The expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.

The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S Treasury yield as determined by the U.S. Federal Reserve. We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future.

We recognize compensation expense for stock option awards on a straight-line basis over the applicable service period of the award, which is the vesting period. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. Historically, we have not had significant forfeitures of unvested stock options granted to employees and Directors. A significant number of our stock option grants are fully vested at issuance or have short vesting provisions. Therefore, we have estimated the forfeiture rate of our outstanding stock options as zero.