Annual report pursuant to section 13 and 15(d)

9. Stock options and warrants

v2.3.0.11
9. Stock options and warrants
 12 Months Ended
Dec. 31, 2011
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
9.     
Stock options and warrants

The Company currently issues stock options to employees, directors and consultants under the 2004 Stock Option Plan (the Plan). The Company could issue options under the Plan to acquire up to 5,000,000 shares of common stock. In February 2006, the board approved an amendment to the Plan (approved by the Shareholders in May 2006), increasing the authorized shares by 2,000,000 shares to 7,000,000 shares. At December 31, 2011, 2,732,108 were available to be granted under the Plan. Prior to 2004, the Company granted 3,250,000 options outside the Plan to officers of the Company.

Employee options vest according to the terms of the specific grant and expire from 5 to 10 years from date of grant. Non-employee option grants to date are vested upon issuance. The weighted-average, remaining contractual life of employee options outstanding at December 31, 2011 was 8.5 years. Stock option activity for the years ended December 31, 2011 and 2010, which includes 3,250,000 options granted outside and prior to the adoption of the Plan, was as follows:

   
Weighted Avg.
Options
   
Weighted Avg.
Exercise Price
 
             
Options, January 1, 2004
   
13,250,000
   
$
0.11
 
Options granted              
   
1,172,652
     
1.03
 
Options exercised           
   
—
     
—
 
Options cancelled           
   
—
     
—
 
Options, December 31, 2004                                
   
14,422,652
     
0.18
 
Options granted                                                     
   
2,085,909
     
0.92
 
Options exercised                                                  
   
—
     
—
 
Options cancelled            
   
(10,000,000
)
   
0.10
 
Options, December 31, 2005                                 
   
6,508,561
     
0.53
 
Options granted                  
   
1,313,605
     
1.21
 
Options exercised               
   
(2,860,000
)
   
0.10
 
Options forfeited                 
   
(962,607
)
   
0.84
 
Options cancelled           
   
—
     
—
 
Options, December 31, 2006                                
   
3,999,559
     
0.99
 
Options granted                                                     
   
238,679
     
0.55
 
Options exercised                                                  
   
—
     
—
 
Options forfeited                                                    
   
(49,793
)
   
1.96
 
Options cancelled                                                   
   
—
     
—
 
Options, December 31, 2007                                    
   
4,188,445
   
$
0.95
 
Options granted                                                     
   
2,700,000
     
0.28
 
Options exercised                                                  
   
—
     
—
 
Options forfeited                                                    
   
(2,287,220
)
   
1.00
 
Options cancelled                                                   
   
—
     
—
 
Options, December 31, 2008                                  
   
4,601,225
   
$
0.53
 
Options granted                                                     
   
333,333
     
0.30
 
Options exercised                                                  
   
(83,333
) 
   
0.27
 
Options forfeited                                                    
   
—
     
—
 
Options cancelled                                                   
   
—
     
—
 
Options, December 31, 2009                                
   
4,851,225
   
$
0.52
 
Options granted                                                     
   
181,818
     
0.55
 
Options exercised                                                  
   
(195,555
) 
   
0.27
 
Options forfeited                                                    
   
—
     
—
 
Options cancelled                                                   
   
—
     
—
 
Options, December 31, 2010                                
   
4,837,488
   
$
0.52
 
Options granted                                                     
   
19,800,000
     
0.26
 
Options exercised                                                  
   
(77,778
) 
   
0.27
 
Options forfeited                                                    
   
(310,000
) 
   
0.76
 
Options cancelled                                                   
   
(181,818
) 
   
0.55
 
Options, December 31, 2011                                
   
24,067,892
   
$
0.30
 

The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest under the Plan as of December 31, 2011 were as follows:

     
Outstanding Options
   
Exercisable Options
 
Option
Exercise Price
Per Share
   
Shares
   
Life
 (Years)
   
Weighted
 Average Exercise
 Price
   
Shares
   
Weighted
 Average Exercise
 Price
 
$ 0.21 - $ 0.99
     
23,740,346
   
8.6
   
$
0.29
     
6,140,346
   
$
0.40
 
$ 1.00 - $ 1.99
     
327,546
   
3.4
   
$
1.25
     
327,546
   
$
1.25
 
         
24,067,892
         
$
0.30
     
6,467,892
   
$
0.45
 

As of December 31, 2011 the market price of the Company’s stock was $0.37 per share. Future compensation expense on the options which were not exercisable at December 31, 2011 is $5,581,289. At December 31, 2011 the aggregate intrinsic value of the options outstanding was $2,501,667.

 During the year ended December 31, 2011, the Company granted 17,600,000 options to Cecil Bond Kyte, its chairman and chief executive officer. The options have an exercise price of $0.25 per share, vest over a five year period, and expire ten years from date of grant.   Twenty percent of the options shall vest on each of the first five anniversary dates.  In the event of a change of control of the Company, all unvested options shall vest on the date of the change of control.  During the year ended December 31, 2011, the Company amortized $1,252,942 of compensation cost based on the vesting of the options.  Future unamortized compensation expense on the outstanding options at December 31, 2011 is $5,581,289. 

During the year ended December 31, 2011, the Company granted 2,200,000 options to certain of its director and officers. The options have an exercise price of $0.30 per share, vest immediately and expire ten years from date of grant. The options were valued at $541,134 or $0.25 per share using Black-Scholes-Merton valuation model and were expensed at the time of grant.  The options have an exercise price of $0.30 per share, vesting immediately and expire in ten years from date of grant.

During the year ended December 31, 2011, the Company recognized amortization expense of $8,058 based upon its vesting of option granted to an employee in prior years.

Black-Scholes value of options

During the years ended December 31, 2011 and 2010, the Company valued options for pro-forma purposes at the grant date using the Black-Scholes-Merton valuation model with the following average assumptions:

   
2011
 
2010
                 
Expected life (years)
   
6.00
     
5.50
 
Risk free interest rate
   
1.95
%
   
3.63
%
Volatility                     
   
141.97
%
   
129.95
%
Expected dividend yield
   
0.00
%
   
0.00
%

The weighted average fair value for options granted in 2011 and 2010 were $0.37 and $0.53, respectively.

Warrants

The following table summarizes certain information about the Company’s stock purchase warrants (including the warrants discussed in Note 9).

   
Warrants
   
Weighted Avg.
Exercise Price
 
Warrants outstanding, January 1, 2004
   
14,252,414
     
0.48
 
Warrants granted
   
2,372,500
     
1.27
 
Warrants exercised
   
(960,500
)
   
0.20
 
Warrants cancelled
   
   —
     
  —
 
Warrants outstanding, December 31, 2004
   
15,664,414
     
0.62
 
Warrants granted
   
5,198,574
     
1.16
 
Warrants exercised
   
(50,500
)
   
0.99
 
Warrants cancelled
   
(20,000
)
   
1.50
 
Warrants outstanding, December 31, 2005
   
20,792,488
     
0.75
 
Warrants granted
   
3,624,894
     
1.28
 
Warrants exercised
   
(2,328,452
)
   
0.68
 
Warrants cancelled
   
(1,191,619
)
   
1.46
 
Warrants outstanding, December 31, 2006
   
20,897,311
   
$
0.81
 
Warrants granted
   
3,602,701
     
0.64
 
Warrants exercised
   
—
     
—
 
Warrants cancelled
   
(6,580,984
)
   
1.06
 
Warrants outstanding, December 31, 2007
   
17,919,028
   
$
0.67
 
Warrants granted
   
3,931,708
     
0.42
 
Warrants exercised
   
(1,064,650
) 
   
0.50
 
Warrants cancelled
   
(10,386,083
)
   
0.56
 
Warrants outstanding, December 31, 2008
   
10,400,003
   
$
0.70
 
Warrants granted
   
5,247,276
     
0.36
 
Warrants exercised
   
—
     
—
 
Warrants cancelled
   
(2,300,515
)
   
0.95
 
Warrants outstanding, December 31, 2009
   
13,346,764
   
$
0.52
 
Warrants granted
   
14,058,032
     
0.32
 
Warrants exercised
   
—
     
—
 
Warrants cancelled
   
(4,425,728
)
   
0.53
 
Warrants outstanding, December 31, 2010
   
22,979,068
   
$
0.52
 
Warrants granted
   
29,781,916
     
0.30
 
Warrants exercised
   
(224,000
) 
   
0.47
 
Warrants cancelled
   
(3,430,704
)
   
0.56
 
Warrants outstanding, December 31, 2011
   
49,106,280
   
$
0.32
 

In August 2011, the Company granted a warrant to an employee to purchase 2,000,000 shares of its common stock pursuant to an employment agreement.  The warrant is exercisable at $0.30/share, vests over five years and will expire in ten years from grant date.  Total fair value of the warrant was determined to be $486,202 at the date of grant using a Black-Scholes Merton valuation model with the following assumptions: risk-free interest rate of 2.05%; dividend yield of 0%; volatility of 126%; and an expected life of seven years.  During the year ended December 31, 2011, the Company recognized amortization expense of $69,457 based upon vesting of the warrants.

In December 2011, the Company granted a warrant to an employee to purchase 1,000,000 shares of its common stock pursuant to a separation agreement.  The warrant is exercisable at $0.30/share, vest immediately and will expire in ten years from grant date.  Total fair value of the warrant was determined to be $369,370 at the date of grant using a Black-Scholes Merton valuation model with the following assumptions: risk-free interest rate of 1.89%; dividend yield of 0%; volatility of 196%; and an expected life of ten years.  During the year ended December 31, 2011, the Company recognized the full value of the warrant.

During the year ended December 31, 2011, the Company granted warrants to consultants to purchase 1,850,000 shares of its common stock.  The warrants have an average exercise price of $0.31/share, vests over a period up to three years and will expire in one to ten years from grant date.  Total fair value of the warrant amounted to $463,898 using the Black-Scholes Merton valuation model with the following average assumptions: risk-free interest rate of 0.71%; dividend yield of 0%; volatility of 136%; and an expected life of four years.  During the year ended December 31, 2011, the Company recognized amortization expense of $411,888 based upon vesting of the warrants.

During the year ended December 31, 2011, the Company granted issued 24,931,916 warrants to acquire share of its common stock in connection of its issuance of convertible notes.  The warrant is exercisable at $0.25/share, fully vested, and will expire in two years for date of grant.  See Note 5.

At December 31, 2011 the price of the Company’s common stock was $0.37 per share and the aggregate intrinsic value of the warrants outstanding was $3,512,888.

     
Outstanding Warrants
   
Exercisable Warrants
 
Warrant
 Exercise Price Per Share
   
Shares
   
Life
 (Years)
   
Weighted
 Average Exercise
 Price
   
Shares
   
Weighted
 Average Exercise
 Price
 
$ 0.30 - $ 0.99
     
48,106,280
   
 1.9
   
$
0.30
     
46,106,280
   
$
0.30
 
$ 1.00 - $ 1.99
     
1,000,000
   
 1.5
   
$
1.00
     
1,000,000
   
$
1.00
 
         
49,106,280
         
$
0.32
     
47,106,280
   
$
0.32
 

Included in the table above are 8,322,500 warrants at an  exercise price of $0.25 per share.  Based upon these warrant agreements, the exercise price may be reduced if the Company sells equity to any person or entity at a price per share or conversion price or exercise price per share which shall be less than the Warrant exercise price in respect of the Warrant Shares then in effect.  The reset of the warrant exercise price gives rise to the characterization of these instruments as derivative liabilities.  (See note 7).