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

6 Months Ended

Jun. 30, 2012

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, as amended April 29, 2011 (“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 2007 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.

During the six-month period ended June 30, 2012, we recorded the issuance of an option to purchase an aggregate 6,667 shares of our common stock to an 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 $0.34 per share, the price of our common stock on the grant date. The fair value of this option totaled $2,267 and was recorded as selling, general and administrative expense.

On April 27, 2009, in an effort to preserve the Company’s cash and reduce outstanding payables, the Board offered to third parties, officers and board members an option (“Option”) to purchase common stock in lieu of cash payment to reduce amounts owed by the Company. The Options were issued pursuant to the Company’s 2007 Equity Incentive Plan with an exercise price of $0.50 cents a share, an amount which was $0.20 per share above the $0.30 per share closing price of the Company’s common stock on April 27, 2009, and an expiration date of April 27, 2012. The Options issued to Board members Dennis P. Calvert and Kenneth R. Code were issued at an exercise price of $0.55 per share In consideration of the circumstances in which the Options were issued, and the fact that the price of the Company’s common stock is less than the strike price of the Options, the Board extended the expiration date of the Options by a period of seven years, to expire on April 27, 2019. The fair value of the Option totaled $684,171 and was recorded as selling, general and administrative expense.

During the six-month period ended June 30, 2012, a portion of the option to purchase 300,000 shares of common stock issued to our Chief Financial Officer in exchange for his services pursuant to the April 2012 extension of his engagement agreement vested, resulting in $35,000 of selling, general and administrative expense.

During the six-month period ended June 30, 2012, a portion of the unvested options issued to consultants vested, resulting in $235,783 of selling, general and administrative expense.

Activity for our stock options under the 2007 Plan for the six-month periods ended June 30, 2011 and 2012 is as follows:

As of June 30, 2011:	Options Outstanding		Shares Available			Price per share			Weighted Average Price per share
Balances as of 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		—		—			—			—
Expired		—		—			—			—
Balances as of June 30, 2011		5,953,125		5,712,337		$0.25	—	$1.89	$	0.49

As of June 30, 2012:	Options Outstanding		Shares Available			Price per share			Weighted Average Price per share
Balances as of December 31, 2011		7,739,258		4,260,742		$0.25	—	$1.89	$	0.45
Granted		306,667		(306,667	)	0.34	—	0.35		0.35
Exercised		—		—			—			—
Expired		—		—			—			—
Balances as of June 30, 2012		8,045,925		3,954,075		$0.25	—	$1.89	$	0.45

	2007 Plan
	2011			2012
Risk free interest rate	1.96	—	3.48%		1.96	%
Expected volatility	562	—	914%		906	%
Expected dividend yield		—			—
Forfeiture rate		—			—
Expected life in years	3	—	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 determine the expected term of plain vanilla options issued to employees and Directors 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.