Quarterly report pursuant to sections 13 or 15(d)

6. Stock options and warrants

6. Stock options and warrants

6 Months Ended

Jun. 30, 2011

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

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 June 30, 2011, 2,672,108 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 of which 250,000 are still outstanding.

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 June 30, 2011 was 8.8 years. Stock option activity for the period January 1, 2011 to June 30, 2011, was as follows:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2011		4,837,488		$	0.53
Granted		17,600,000			0.25
Exercised		(77,778	)		0.27
Forfeited or expired		(181,818	)		0.55
Outstanding at June 30, 2011		22,177,892		$	0.31		8.8	$	2,948,467
Vested and exercisable at June 30, 2011		4,577,892		$	0.54		5.7	$	308,467

The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest under the Plan as of June 30, 2011 were as follows:

	Outstanding Options				Exercisable Options
			Weighted			Weighted
Option		Life	Average Exercise			Average Exercise
Exercise Price Per Share	Shares	(Years)	Exercise Price		Shares	Price
$0.21 - $ 0.99	21,790,346	8.9	$	.29	4,190,346	$	0.46
$1.00 - $ 1.99	327,546	3.9		1.25	327,546		1.25
$2.00 - $ 2.26	60,000	0.1		2.26	60,000		2.26
	22,177,892	8.8	$	0.31	4,577,892	$	0.54

On January 29, 2011, the Company issued 17,600,000 options to Cecil Bond Kyte, its chairman and chief executive officer. The options have an exercise price of $.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 six months ended June 30, 2011, the Company amortized $565,248 of compensation cost based on the vesting of the options. Future unamortized compensation expense on the outstanding options at June 30, 2011 is $6,277,041.

Black-Scholes-Merton value of options

During the six months ended June 30, 2011 and 2010, the Company valued options at the grant date using the Black-Scholes-Merton pricing model with the following average assumptions:

	June 30,
		2011	2010

Expected life (years)		6.0	5.5
Risk free interest rate		1.95%	3.63%
Volatility		135.00%	129.95%
Expected dividend yield		0.00%	0.00%

The weighted average fair value for options granted in 2010 was $0.53. The weighted average fair value for options granted during the six months ended June 30, 2011 was $0.38.

Warrants

The following table summarizes certain information about the Company’s stock purchase warrants from January 1, 2011 to June 30, 2011:

Warrants	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2011		22,979,068		$	0.40
Granted		16,681,888			0.30
Exercised		(224,000	)		0.47
Forfeited or expired		(1,735,877	)		0.61
Outstanding at June 30, 2011		37,701,079		$	0.34		1.5	$	3,078,230
Vested and exercisable at June 30, 2011		37,701,079		$	0.34		1.5	$	3,078,230

	Outstanding Warrants				Exercisable Warrants
Warrant			Weighted			Weighted
Exercise Price		Life	Average Exercise			Average Exercise
Per Share	Shares	(Years)	Price		Shares	Price
$0.30 - $ 0.99	36,701,079	1.5	$	0.33	36,701,079	$	0.33
$1.00 - $ 1.99	1,000,000	2.0	$	1.00	1,000,000	$	1.00
$2.00 - $ 2.70	—	—	$	—	—	$	—
	37,701,079	1.5	$	0.34	37,701,079	$	0.34

- Definition

Tabular disclosure of warrants or rights issued. Warrants and rights outstanding are derivative securities that give the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue to entice investors by a higher return potential. The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months. Disclose the title of issue of securities called for by warrants and rights outstanding, the aggregate amount of securities called for by warrants and rights outstanding, the date from which the warrants or rights are exercisable, and the price at which the warrant or right is exercisable.

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