12. Stock-Based Compensation

On August 5, 2003, the Company established a stock option plan (the "Plan"). Under the Plan, the Company grants stock options to key employees, directors and consultants of the Company. For all grants prior to September 12, 2005 and grants to employees of the Company after September 12, 2005, the vesting period is 30% on the first anniversary of the grant date, an additional 30% on the second anniversary and the remaining 40% on the third anniversary. Options expire between five and ten years from the date of grant.

For grants to non-employee consultants of the Company after September 12, 2005, the vesting period is between one to three years, subject to the fulfillment of certain conditions in the individual stock option grant agreements, or 100% upon the occurrence of certain events specified in the individual stock option grant agreements. Options authorized for issuance under the Plan total 17,000,000 after giving effect to an amendment to the Plan approved at the Annual Meeting of the Stockholders of the Company on June 2, 2006. At June 30, 2012, 8,478,000 shares of common stock were available for issuance.

Prior to adoption of the Plan, the Company made restricted stock grants. During 2003 all existing restricted stock grants were converted to stock options. The converted options maintained the same full vesting period as the original restricted stock grants.

Accounting for Employee Awards

The Company's results of operations for the three months ended June 30, 2012 and 2011 include share-based employee compensation expense totaling $55,317 and $154,618 respectively. The Company's results of operations for the six months ended June 30, 2012 and 2011 include share-based compensation expense totaling $115,132 and $304,864 respectively. Such amounts have been included in the statement of operations in general and administrative and research and development expenses. No income tax benefit has been recognized in the statement of operations for share-based compensation arrangements as the Company has provided for a 100% valuation allowance on its deferred tax assets.

Employee stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite vesting service period for the entire portion of the award.

Accounting for Non-Employee Awards

Stock compensation expenses related to non-employee options were $(4,565) and $15,560 for the three months ended June 30, 2012 and 2011, respectively. Stock compensation expenses related to non-employee options were $26,794 and $67,303, for the six months ended June 30, 2012 and 2011, respectively. Such amounts have been included in the statement of operations in general and administrative and research and development expenses.

 

Summary of Stock Compensation Expense Recognized

Total stock-based compensation recognized by the Company in the three and six months ended June 30, 2012 and 2011, and the period from inception (March 19, 2001) to June 30, 2012 is as follows:

					Cumulative from March 19, 2001 (Inception) to     June 30, 2012
	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
Statement of operations line item: General and administrative:
Payroll	$ 34,848	$132,821	$  74,165	$259,023	$     2,569,565
Consulting and other professional fees	(727)	11,529	22,495	47,178	809,018
Research and development:
Payroll	20,469	21,797	40,967	45,841	1,013,016
Consulting and other professional fees	(3,838)	4,031	4,299	20,125	1,327,956
Total	$  50,752	$170,178	$141,926	$372,167	$     5,719,555

Summary of Stock Option Transactions

There were 170,000 stock options granted at an exercise price of $0.38 with a fair value of $47,589 and 75,000 stock options granted at an exercise price of $0.48 with a fair value of $26,835 during the six months ended June 30, 2012. There were 130,000 stock options granted at an exercise price of $1.84 and a fair value of $180,326, 100,000 stock options granted at an exercise price of $1.25 and a fair value of $91,334, and 20,000 stock options granted at an exercise price of $1.22 and a fair value of $17,915 during the six months ended June 30, 2011.

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The Company took into consideration guidance under Accounting Standards Codification ("ASC") 718, "Compensation-Stock Compensation" and Staff Accounting Bulletin ("SAB") 107 when reviewing and updating assumptions. The expected volatility is based upon historical volatility of the Company's stock. The expected term is based upon the simplified method as allowed under SAB 107.

 

The assumptions made in calculating the fair values of options are as follows:

 

The following table summarizes the employee and non-employee share-based transactions:

	2012		2011
	Number of Options	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise  Price
Outstanding at January 1	7,646,795	$       1.05	8,076,795	$       1.01
Granted	245,000	0.41	250,000	1.55
Exercised	-	-	(75,000)	0.24
Cancelled	(50,000)	1.59	(89,000)	1.16
Outstanding at June 30	7,841,795	$       1.03	8,162,795	$       1.03

 

The following table summarizes information about stock options outstanding as of June 30, 2012 and December 31, 2011.

	Number of Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at June 30, 2012	7,841,795	$      1.03	4.5 years	$  47,664
Exercisable at June 30, 2012	7,176,795	$      1.03	4.0 years	$  47,664
Outstanding at December 31, 2011	7,646,795	$      1.05	4.8 years	$  83,611
Exercisable at December 31, 2011	6,911,795	$      1.02	4.4 years	$  83,611

                                                                                                                                                      

The total intrinsic value of the options exercised was $94,250 for the six months ended June 30, 2011. There were no options exercised in the three months and six months ended June 30, 2012, or the three months ended June 30, 2011. The weighted average fair value of the options vested was $0.93 and $0.84 for the six months ended June 30, 2012 and 2011, respectively.

A summary of the Company's unvested shares as of June 30, 2012 and changes during the six months ended June 30, 2012 is presented below:

	2012
	Number of  Options	Weighted Average Fair Value at Grant Date
Unvested at January 1, 2012	735,000	$      0.92
Granted	245,000	$      0.30
Vested	(274,000)	$      0.93
Cancelled	(41,000)	$      1.15
Unvested at June 30, 2012	665,000	$      0.68

 

As of June 30, 2012 and December 31, 2011, there was $294,097 and $397,593 of total unrecognized compensation cost, respectively, related to all unvested stock options, which is expected to be recognized over a weighted average vesting period of 1.6 years.