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

12 Months Ended

Dec. 31, 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 period ended December 31, 2011 we issued options to third-party consultants and our officers and members of our board of directors, as reflected in the following tables.

Third-party consultants:

2007 Plan		Exercise Price		Stock Price		Shares Purchasable		Fair Value		Vested
Conversion of accounts payable	(1)	$	0.35 - 0.45	$	0.30 - 0.45		839,459	$	279,792	$	279,792
Issued by Compensation Committee	(2)	$	0.41	$	0.41		565,000		231,650		231,650
Pursuant to an agreement	(3)	$	0.35 - 0.40	$	0.33 - 0.40		639,897		251,890		181,214
Total							2,044,356	$	763,332	$	692,655

(1)   During 2011 we issued Options to purchase an aggregate 839,459 shares of our common stock in exchange for the settlement of accrued and unpaid obligations totaling $168,903. (See Note 10.) Each option is fully vested upon issuance and expires ten years from the date of issuance.  The fair value of these options totaled $279,792 resulting in an additional $111,699 of selling, general and administrative expense.

(2)   On March 17, 2011, the Company’s Compensation Committee issued options pursuant to the Company’s 2007 Equity Incentive Plan to certain 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 565,000 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. Each option is fully vested upon issuance and expires ten years from the date of issuance.

(3)   On December 23, 2011, we entered into a month to month agreement with a consultant and in accordance with the agreement, issued an option to purchase 102,000 shares of our common stock at an exercise price of $0.35, the stock price on the grant date. 42,500 of the options vested immediately and the balance 59,500 vest monthly until July 2012.  The options are exercisable for ten years.  The aggregate fair value of these options total $33,660 and $14,025 was expensed as selling, general and administrative expense through December 31, 2011 and the remaining $19,635 will be expensed ratably through July 2012.

On August 31, 2011, we entered into a one-year agreement with a senior advisor and in accordance with the agreement, issued an option to purchase 250,000 shares of our common stock at an exercise price of $0.40, the stock price on the grant date. The options vest monthly over the one year term of the agreement and are exercisable for ten years.  The aggregate fair value of these options total $87,500 and $36,458 was expensed as selling, general and administrative expense through December 31, 2011 and the remaining $51,042 will be expensed ratably through July 2012.

Pursuant to the terms of an agreement with a senior advisor dated July 10, 2011, we granted options to purchase an aggregate 287,897 shares of our common stock to a consultant. These options are fully vested and are exercisable at prices ranging between $0.40 and $0.51 depending upon their respective dates of grant. The fair value of these option issuances was an aggregate $130,700 and was recorded as selling, general and administrative expense.

Officers and board of directors:

2007 Plan		Exercise Price		Stock Price		Shares Purchasable		Fair Value		Vested
Conversion of accounts payable	(4)	$	0.35 - 0.48	$	0.32 - 0.48		539,345	$	195,163	$	195,163
Issued by Compensation Committee	(5)	$	0.41		0.41		200,000		82,000		82,000
Pursuant to an agreement	(6)	$	0.35 - 0.42	$	0.35 - 0.42		158,334		64,117		55,917
							897,679	$	341,280	$	333,080

(4)   On December 30, 2011 we issued an option to purchase an aggregate 325,000 shares of our common stock to our board of directors at $0.35 per share, in lieu of $65,000 of accrued and unpaid obligations. Each option expires ten years from the date of issuance. The fair value of these options totaled $104,000 and was recorded as selling, general and administrative expense for the period ending December 31, 2011.

On April 2, 2011 we issued an option to purchase an aggregate 46,875 shares of our common stock to a board of directors at $0.35 per share, in lieu of $15,000 of accrued and unpaid obligations. Each option expires ten years from the date of issuance.  The fair value of these options totaled $22,500 and was recorded as selling, general and administrative expense for the period ending December 31, 2011.

On March 17, 2011 we issued an option to purchase an aggregate 167,470 shares of our common stock to our board of directors at $0.35 per share, in lieu of $40,000 of accrued and unpaid obligations.  Each option expires ten years from the date of issuance.  The fair value of these options totaled $68,663 and was recorded as selling, general and administrative expense for the period ending December 31, 2011.

(5)   On March 17, 2011, the Company’s Compensation Committee issued options pursuant to the Company’s 2007 Equity Incentive Plan to our Secretary and VP of Operations, consistent with management’s recommendations to the committee. In total, options to purchase an aggregate 200,000 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. Each option is fully vested upon issuance and expires ten years from the date of issuance.  The fair value of these options totaled $82,000 and was recorded as selling, general and administrative expense for the period ending December 31, 2011.

(6)   On August 18, 2011 we issued an option to purchase an aggregate 8,334 shares of our common stock to a new independent member of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an automatic issuance of an option to any new independent director. The option vests after a period of one year from the date of grant, expires ten years from the date of issuance, and is exercisable at $0.35 per share, the price of our common stock on the grant date. The fair value of this option totaled $2,917 and was expensed.

On June 14, 2011 we issued an option to purchase an aggregate 20,000 shares of our common stock to the existing members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an automatic issuance of an option at each proxy.  The option vests upon issuance, expires ten years from the date of issuance, and is exercisable at $0.39 per share, the price of our common stock on the grant date. The fair value of this option totaled $7,800and was expensed.

During March 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 and vest ratably from February 28, 2011 through January 31, 2012.  Through December 31, 2011, 120,000 options have vested.  The options are exercisable for ten years from its respective date of grant.  The fair value of these option issuances was an aggregate $53,400 and $49,300 was recorded as selling, general and administrative expense as of December 31, 2011. The $4,100 of fair value related to the remaining 10,000 options will be expensed January 2012.

During the period ended December 31, 2010 we issued the following options to:

Third-party consultants:

2007 Plan		Exercise Price		Stock Price		Shares Purchasable		Fair Value		Vested
Conversion of accounts payable	(7)	$	0.30	$	0.23		1,026,378	$	236,067	$	236,067
Issued by Compensation Committee	(8)	$	0.58	$	0.50		200,000		100,000		100,000
Pursuant to an agreement	(9)	$	0.22-0.40	$	0.25-0.45		327,507		106,686		106,686
Grand Total							1,553,885	$	442,753	$	442,753

(7)   During 2010 we issued Options to purchase an aggregate 1,026,378 shares of our common stock at $0.30 per share to some of our third party consultants in lieu of $215,276 of accrued and unpaid obligations. Each option is fully vested upon issuance and expires ten years from the date of issuance.  The fair value of these options totaled $236,067 resulting in an additional $20,791 of selling, general and administrative expense.

(8)   On February 1, 2010, the Company’s Compensation Committee issued an Option to purchase 200,000 shares of our common stock at $0.58 per share, pursuant to the Company’s 2007 Equity Incentive Plan to outside consultants and professionals who have and continue to provide services to the Company, consistent with management’s recommendations to the committee.  Each option is fully vested upon issuance and expires ten years from the date of issuance.  The fair value of these options totaled $100,000 recorded as selling, general and administrative expense as of December 31, 2010.

(9)   During the year ended December 31, 2010, we granted options to purchase an aggregate 280,007 shares of our common stock to a senior advisor, pursuant to the terms of our engagement agreement with him. These options are exercisable at various exercise prices ranging between $0.22 and $0.40 depending upon their respective dates of grant. Each option is fully vested upon issuance and is exercisable for ten years from its respective date of grant. The resulting aggregate fair value of $92,911 was recorded as selling, general and administrative expense as of December 31, 2010. On September 29, 2010, we granted options to purchase an aggregate 280,007 shares of our common stock to a consultant, pursuant to the terms of our engagement agreement with him. These options are exercisable at $0.30 and the stock price on the grant date was $0.29.  The option is fully vested upon issuance and is exercisable for ten years. The resulting aggregate fair value of $13,775 was recorded as selling, general and administrative expense as of December 31, 2010.

Officers and board of directors

2007 Plan		Exercise Price		Stock Price		Shares Purchasable		Fair Value		Vested
Conversion of accounts payable	(10)	$	0.30	$	0.23		746,203	$	171,627	$	171,627
Issued by Compensation Committee	(11)	$	0.58 to	$	0.50		660,000		330,000		330,000
Pursuant to an agreement	(12)	$	0.23 - 0.50	$	0.23 - 0.50		140,000		53,400		53,400
							1,546,203	$	555,027	$	555,027

(10)   On August 4, 2010, in an effort to preserve our cash and reduce outstanding payables, the Board offered to officers and board members the opportunity to convert outstanding payable amounts into an option (“Option”) to purchase common stock in lieu of cash payment. The Option may be exercised at $0.30 cents a share, and are issued pursuant to our 2007 Equity Incentive Plan, and expire five years from the date of issuance. We issued Options to purchase an aggregate 746,203shares of our common stock in exchange for the settlement of accrued and unpaid obligations totaling $149,240.  Of this amount we issued an option to an officer to purchase 496,203 shares of our common stock at $0.30 per share in lieu of $99,240 in unpaid salary obligations that were incurred in fiscal year 2009, an option to our board of directors to purchase 250,000 shares of our common stock at $0.33 per share in lieu of $50,000 in unpaid salary obligations that were incurred in fiscal year 2010,

(11)   On February 1, 2010, the Company’s Compensation Committee issued options pursuant to the Company’s 2007 Equity Incentive Plan to certain officers 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 660,000 shares of the Company’s common stock were issued, at an exercise price of $0.575 per share, which price was $0.075 more than the $0.50 closing price of the Company’s common stock on the date of grant.  The options are fully vested upon issuance and expire 10 years from the date of grant. With one exception, the options issued expire ten years from the date of grant (the option issued to Mr. Code expires five years from the date of grant).

(12)   During the year ended December 31, 2010, we granted options to purchase an aggregate 120,000 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 various exercise prices ranging between $0.24 and $0.50 depending upon their respective dates of grant, and resulted in an aggregate fair value of $45,400 and was recorded as selling, general and administrative expense as of December 31, 2010. Each option is fully vested upon grant and is exercisable for ten years from its respective date of grant.

On June 11, 2010 we issued an option to purchase an aggregate 20,000 shares of our common stock to the existing members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an automatic issuance of an option at each proxy.  The option vests upon issuance, expires ten years from the date of issuance, and is exercisable at $0.40 per share, the price of our common stock on the grant date. The fair value of this option totaled $8,000and was expensed.

During the years ended December 31, 2010 and 2011 we recorded an aggregate $925,800 and $1,144,928 in selling general and administrative expense related to options issued pursuant to the 2007 Plan.

Activity for our stock options under the 2007 Plan for the years ended December 31, 2010 and 2011 is as follows:

	Options		Shares					Weighted Average
	Outstanding		Available			Price per share		Price per share
Balances as of December 31, 2009		1,697,135		4,302,865		$	0.28 – 1.89	$	0.75
Granted		3,100,088		(3,100,088	)		0.23 – 0.50		0.38
Exercised		—		—			—		—
Canceled		—		—			—		—
Balances as of December 31, 2010		4,797,223		1,202,777		$	0.23 – 1.89	$	0.51
Amendment to increase		—		6,000,000			—		—
Granted		2,942,035		(2,942,035	)		0.35		0.35
Exercised		—		—			—		—
Canceled		—		—			—		—
Balances, December 31, 2011		7,739,258		4,260,742		$	0.23 – $1.89	$	0.42

The following table summarizes the stock options issued under the 2007 Equity Plan outstanding at December 31, 2011.

			Weighted			Currently Exercisable
			Average	Weighted		Number of
Options			Remaining	Average		Shares at	Weighted
Outstanding at			Contractual	Exercise		December 31,	Average
December 31, 2011	Exercise Price		Life	Price		2010	Exercise Price
20,000	$	0.40	6	$	0.40	20,000	$	0.40
605,000	$	0.94 – 1.03	6	$	0.97	105,000	$	0.94
50,000	$	1.89	6	$	1.89	50,000	$	1.89
110,000	$	0.35 – 1.65	7	$	1.04	110,000	$	1.04
120,000	$	0.28 - 0.50	7	$	0.40	120,000	$	0.40
20,000	$	0.33	0.25	$	0.33	20,000	$	0.33
557,035	$	0.50	1	$	0.50	557,035	$	0.50
155,100	$	0.55	1	$	0.55	155,100	$	0.55
30,000	$	0.57	8	$	0.57	30,000	$	0.57
30,000	$	0.45 – 0.50	8	$	0.48	30,000	$	0.48
200,000	$	0.50	8	$	0.50	200,000	$	0.50
660,000	$	0.50	6	$	0.50	600,000	$	0.50
50,000	$	0.25 – 0.40	8	$	0.35	50,000	$	0.35
1,820,081	$	0.30	4	$	0.30	1,820,081	$	0.30
30,000	$	0.24 - 0.35	9	$	0.27	30,000	$	0.27
280,007	$	0.22 - .40	9	$	0.32	280,007	$	0.32
30,000	$	0.40 – 0.50	9	$	0.44	30,000	$	0.44
10,000	$	0.42	9	$	0.42	10,000	$	0.42
765,000	$	0.41	9	$	0.41	765,000	$	0.41
260,902	$	0.41 – 0.45	4	$	0.42	260,902	$	0.42
120,000	$	0.41	9	$	0.41	120,000	$	0.41
46,875	$	0.48	5	$	0.48	46,875	$	0.48
20,000	$	0.39	10	$	0.39	20,000	$	0.39
36,585	$	0.45	10	$	0.45	36,585	$	0.45
231,078	$	0.43 – 0.51	10	$	0.47	231,078	$	0.47
65,153	$	0.35 – 0.40	10	$	0.38	65,153	$	0.38
250,000	$	0.40	10	$	0.40	83,333	$	0.40
1,136,442	$	0.35	10	$	0.35	1,116,807	$	0.35
7,739,258	$	0.33 – 1.89	7	$	0.46	7,552,956	$	0.46

Options issued outside of the 2007 Equity Incentive Plan

On August 12, 2011, we entered into an agreement with Steven V. Harrison whereby we retained Mr. Harrison to serve as our Director of International Ventures and Business Development. Mr. Harrison is formerly a member of our Board of Directors. In addition to salary, Mr. Harrison will receive an option to purchase 800,000 shares of common stock for $1.00 per share, which shares will vest on a monthly basis over a period of four years and expire 10 years from the issue date. Should Mr. Harrison’s agreement terminate, no further shares will vest.  The fair value of this option totaled $304,000 and through the year ended December 31, 2011 we recorded $25,333 as consulting expense and the remaining fair value of $278,667 will be expensed ratably through August 31, 2015.

	Options				Weighted Average
	Outstanding		Price per share		Price per share
Balances as of December 31, 2009		10,825,234	$	0.18 – 0.99		$	0.38
Granted		46,250		0.30			0.30
Exercised		—		—			—
Canceled		—		—			—
Balances as of December 31, 2010		10,871,484	$	0.18 – 0.99		$	0.38
Granted		800,000	$	1.00		$	1.00
Exercised		—		—			—
Canceled		—		—			—
Balances as of, December 31, 2011		11,671,484	$	0.25 – $1.89		$	0.43

The following table summarizes the stock options issued outside of the 2007 Equity Incentive Plan outstanding at December 31, 2011.

					Weighted					Currently Exercisable
					Average		Weighted			Number of
Options					Remaining		Average			Shares at		Weighted
Outstanding at					Contractual		Exercise			December 31,		Average
December 31, 2011		Exercise Price			Life		Price			2011		Exercise Price
	7,733,259		$	0.18		5		$	0.18		7,733,259		$	0.18
	2,400,000		$	0.99		1		$	0.99		2,400,000		$	0.99
	691,975		$	0.55		0.25		$	0.55		691,975		$	0.55
	46,250		$	0.30		4		$	0.30		46,250		$	0.30
	800,000		$	1.00		10		$	1.00		66,667		$	1.00
	11,671,484		$	0.18 – 1.00		4		$	0.43		11,671,484		$	0.43

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. The following methodology and assumptions were used to calculate share based compensation for the year ended December 31, 2011:

	2010						2011
	Non Plan			2007 Plan			Non Plan			2007 Plan
Risk free interest rate		1.55	%		1.55 – 2.76			1.03-3.48	%		2.24	%
Expected volatility		724	%		915	%		724	%		906	%
Expected dividend yield		—			—			—			—
Forfeiture rate		—			—			—			—
Expected life in years		5			7			5			7

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.