Quarterly report pursuant to sections 13 or 15(d)

6. Stock options and warrants

6. Stock options and warrants

9 Months Ended

Sep. 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 September 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 September 30, 2011 was 8.6 years. Stock option activity for the period January 1, 2011 to September 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		(241,818	)		0.97
Outstanding at September 30, 2011		22,117,892		$	0.30		8.6	$	2,000
Vested and exercisable at September 30, 2011		4,517,892		$	0.51		5.6	$	2,000

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

	Outstanding Options				Exercisable Options
Option Exercise Price Per Share	Shares	Life (Years)	Weighted Average Exercise Exercise Price		Shares	Weighted Average Exercise Price
$0.21 - $ 0.99	21,790,346	8.6	$	.29	4,190,346	$	0.46
$1.00 - $ 1.99	327,546	3.6		1.25	327,546		1.25
	22,117,892	8.6	$	0.30	4,517,892	$	0.51

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 $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 nine months ended September 30, 2011, the Company amortized $919,289 of compensation cost based on the vesting of the options. Future unamortized compensation expense on the outstanding options at September 30, 2011 is $5,923,000.

Black-Scholes-Merton value of options

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

	September 30,
	2011	2010

Expected life (years)	6.0	5.5
Risk free interest rate	1.95%	3.63%
Volatility	134.82%	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 nine months ended September 30, 2011 was $0.39.

Warrants

The following table summarizes certain information about the Company’s stock purchase warrants from January 1, 2011 to September 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		19,533,020			0.30
Exercised		(224,000	)		0.47
Forfeited or expired		(1,735,877	)		0.61
Outstanding at September 30, 2011		40,552,211		$	0.33		1.3	$	—
Vested and exercisable at September 30, 2011		40,552,211		$	0.33		1.3	$	—

	Outstanding Warrants				Exercisable Warrants
Warrant Exercise Price Per Share	Shares	Life (Years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$0.25 - $ 0.99	39,552,211	1.3	$	0.31	39,552,211	$	0.31
$1.00 - $ 1.99	1,000,000	1.7	$	1.00	1,000,000	$	1.00
$2.00 - $ 2.70	—	—	$	—	—	$	—
	40,552,211	1.3	$	0.33	40,552,211	$	0.33

- 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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