6.  Stock options and warrants

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs.  Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.  Options vest and expire according to terms established at the grant date.

Options

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 March 31, 2012, 2,750,442 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.

On February 1, 2012, the Company issued 4,000,000 options to its Chief Financial Officer. The options have an exercise price of $0.25 per share, vest over a four year period, and expire ten years from date of grant. Twelve and a half percent vested immediately, twelve and a half percent will vest on the first anniversary date, and twenty-five percent will vest on the following three anniversary dates.

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 March 31, 2012 was 8.5 years. Stock option activity for the period January 1, 2012 to March 31, 2012, was as follows:

The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest under the Plan as of March 31, 2012 were as follows:

During the three months ended March 31, 2012, the Company amortized $517,761 of compensation cost based on the vesting of the options. Future unamortized compensation expense on the outstanding options at March 31, 2012 is $6,270,721.

Black-Scholes-Merton value of options

During the three months ended March 31, 2012 and 2011, the Company valued options for pro-forma purposes at the grant date using the Black-Scholes-Merton pricing model with the following average assumptions:

Warrants

During the period ended March 31, 2012, the Company granted warrants to consultants to purchase 600,000 shares of its common stock.  The warrants have an average exercise price of $0.26/share, vesting immediately and will expire in two to three years from grant date.  Total fair value of the warrant amounted to $123,734 using the Black-Scholes Merton valuation model with the following average assumptions: risk-free interest rate of 0.23% to 0.37%; dividend yield of 0%; volatility of 112%; and an expected life of two to three years.  During the period ended March 31, 2012, the Company recognized amortization expense of $123,734 based upon vesting of the warrants.

During the period ended March 31, 2012, the Company granted issued 5,959,216 warrants to acquire shares 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 4).

The following table summarizes certain information about the Company’s stock purchase warrants from January 1, 2012 to March 31, 2012:

During the three months ended March 31, 2012, The Company amortized $240,422 of the compensation based on the vesting of these warrants. Future unamortized compensation expense on the outstanding warrants at March 31, 2012 is $369,512.