Note 5. Stockholders’ Equity

Preferred Stock

Our certificate of incorporation authorizes our Board of Directors to issue preferred stock, from time to time, on such terms and conditions as they shall determine. As of December 31, 2015 and June 30, 2016 there were no outstanding shares of our preferred stock.

During the six-months ended June 30, 2015 and 2016, we issued 799,825 and 824,581 shares of common stock in lieu of cash for salaries to officers and fees for service provided by consultants, resulting in a weighted-average grant date fair value of $292,825 and $275,232, respectively, which is recorded in selling general and administrative expense

During the six-months ended June 30, 2016, we issued 608,658 shares of common stock resulting in a grant date fair value of $213,875, to settle our accrued interest liability from our 2015 Unit Offering.

There were no shares issued for accrued interest during the six-months ended June 30, 2015.

During the six-months ended June 30, 2015 and 2016, we recorded an aggregate $700,655 and $491,440 in selling general and administrative expense related to the issuance of stock options. We issued options through our 2007 Equity Incentive Plan and outside of our 2007 Equity Incentive Plan.

On August 7, 2007, and as amended April 29, 2011, 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 Board’s 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. The term of the options may be up to 10 years.

On June 20, 2016, we recorded the issuance of options to purchase an aggregate 40,000 shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. The exercise price of $0.45 equals the price of our common stock on the grant date. The fair value of these options totaled $18,000 and was recorded as selling, general and administrative expense.

On March 21, 2016, our Board of Directors extended by five years the expiration of options to purchase 307,777 shares of our common stock issued to our Board of Directors and vendors in March 2011. The options were originally issued in exchange for unpaid obligations and now expire on March 21, 2021. The weighted-average fair value of the options resulted in additional $119,971 of selling, general and administrative expenses.

On June 24, 2015, we recorded the issuance of options to purchase an aggregate 40,000 shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. The exercise price of $0.38 equals the price of our common stock on the grant date. The fair value of these options totaled $15,200 and was recorded as selling, general and administrative expense.

Balance, June 30, 2015:	Options			Shares			Exercise				Weighted Average Price per
	Outstanding			Available			Price per share				share
Balances as of December 31, 2014		8,601,086			3,398,914			$0.23	–	1.89	$	0.44
Granted		940,000			(940,000	)		0.38	–	0.58		—
Expired		(200,000	)		200,000				0.58			0.58
Balance, June 30, 2015		9,341,086			2,658,914			$0.23	–	1.89	$	0.43

										Weighted
										Average
Balance, June 30, 2016:	Options		Shares			Exercise				Price per
	Outstanding		Available			Price per share				share
Balances as of December 31, 2015		10,241,086		1,758,914			$0.22	—	1.89	$	0.44
Granted		40,000		(40,000	)			0.45			0.45
Exercised		—		—							—
Balance, June 30, 2016		10,281,086		1,718,914			$0.22	—	1.89	$	0.44

During the six-months ended June 30, 2016, we issued options to purchase 484,077 shares of our common stock at exercise prices ranging between $0.33 – $0.45 per share to vendors and to our members of our board of directors, in lieu of 188,451 in accrued and unpaid fees. The weighted-average fair value of these options totaled $183,159 and is recorded as selling, general and administrative expenses.

During the six-months ended June 30, 2015, we issued options to purchase 1,463,818 shares of our common stock at exercise prices ranging between $0.33 – $0.36 per share to vendors and to our members of our board of directors, in lieu of $398,150 in accrued and unpaid fees. The weighted-average fair value of these options totaled $529,364 and is recorded as selling, general and administrative expenses.

The grant-date fair value of the previously issued options that vested during the six-months ended June 30, 2015 and 2016 was $156,091 and $170,310, respectively.

							Weighted
Balance, June 30, 2015:							Average
	Options		Exercise				Price per
	Outstanding		Price per share				share
Balance, December 31, 2014		17,965,291		$0.18	–	1.00	$	0.40
Granted		1,463,818		0.34	–	0.36		0.35
Expired		—			—			—
Balance, June 30, 2015		19,429,109		$0.18	–	1.00	$	0.40

								Weighted
								Average
Balance, June 30, 2016:	Options			Exercise				Price per
	Outstanding			Price per share				share
Balance, December 31, 2015		19,394,975			$0.18	–	1.00	$	0.40
Granted		484,077			0.33	–	0.45	$	0.38
Exercised		(60,000	)			0.25			0.25
Balance, June 30, 2016		19,819,052			$0.18	–	1.00	$	0.41

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 six-months ended June 30:

	2015								2016
	Non Plan				2007 Plan				Non Plan				2007 Plan
Risk free interest rate		1.83	–	2.23%		1.62	–	2.38%		1.77	–	1.91%		1.26	–	1.36%
Expected volatility		807	–	821%		326	–	807%		641	–	645%		311	–	315%
Expected dividend yield			—				—				—				—
Forfeiture rate			—				—				—				—
Expected life in years			7			3	–	7			7				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.

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.

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.