Quarterly report pursuant to Section 13 or 15(d)

NOTE 10. STOCK COMPENSATION

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NOTE 10. STOCK COMPENSATION
6 Months Ended
Sep. 30, 2011
Shareholders' Equity and Share-based Payments [Text Block]
NOTE 10. STOCK COMPENSATION

The following table summarizes share-based compensation expenses relating to shares and options granted and the effect on basic and diluted loss per common share during the three and six months ended September 30, 2011 and 2010:

   
Three Months Ended
September 30, 2011
   
Three Months Ended
September 30, 2010
   
Six Months Ended
September 30, 2011
   
Six Months Ended
September 30, 2010
 
                         
Total share-based compensation expense
 
$
224,031
   
$
680,665
   
$
448,062
   
$
1,298,168
 
                                 
Total share-based compensation expense included in net loss
 
$
224,031
   
$
680,665
   
$
448,062
   
$
1,298,168
 
                                 
Basic and diluted loss per common share
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.02
)

The following table breaks out the components of our share-based compensation expenses relating to shares and options granted and the effect on basic and diluted loss per common share during the three and six months ended September 30, 2011 and 2010.

   
Three Months Ended
September 30, 2011
   
Three Months Ended
September 30, 2010
   
Six Months Ended
September 30, 2011
   
Six Months Ended
September 30, 2010
 
Vesting of stock options
   
127,364
     
581,823
     
254,728
     
672,266
 
Incremental fair value of option modifications
   
--
     
2,175
     
--
     
497,013
 
Vesting expense associated with CEO restricted stock grant
   
96,667
     
96,667
     
193,334
     
128,889
 
Direct stock grants
   
--
     
--
     
--
     
--
 
Total share-based compensation expense
 
$
224,031
   
$
680,665
   
$
448,062
   
$
1,298,168
 
                                 
Total share-based compensation expense included in net loss
 
$
224,031
   
$
680,665
   
$
448,062
   
$
1,298,168
 
                                 
Basic and diluted loss per common share
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.02
)

All of the stock-based compensation expense recorded during the six months ended September 30, 2011 and 2010, which totaled $448,062 and $1,298,168, respectively, is included in payroll and related expense in the accompanying condensed consolidated statements of operations.  Stock-based compensation expense recorded during the three months ended September 30, 2011 had no impact on basic and diluted loss per common share and the stock-based compensation expense recorded during the three months ended September 30, 2010 increased basic and diluted loss per common share by $0.01.  Stock-based compensation expense recorded during the six months ended September 30, 2011 increased basic and diluted loss per common share by $0.01 and the stock-based compensation expense recorded during the six months ended September 30, 2010 increased basic and diluted loss per common share by $0.02.

On May 21, 2010, the Board of Directors of the Company amended the expiration terms of certain outstanding stock options such that all outstanding stock options of the Company shall have a term that is for not less than ten (10) years following the original date of grant. No other terms or features of the stock options were modified or amended. Stock options held by Mr. James Joyce, our Chief Executive Officer and Chairman of the Board of Directors, Dr. Richard Tullis, our Chief Science Officer and member of the Board of Directors, Mr. Franklyn Barry, a member of the Board of Directors, and Mr. Edward Broenniman, a member of the Board of Directors, were modified accordingly. Of the foregoing (i) options to purchase 2,231,100 shares held by Mr. Joyce were extended to February 23, 2015; (ii) options to purchase 867,175 shares held by Dr. Tullis were extended to February 23, 2015; (iii) options to purchase 308,725 shares held by Mr. Broenniman were extended to February 23, 2015; and (iv) options to purchase 264,550 shares held by Mr. Barry were extended to February 23, 2015.  All of the foregoing options are at an exercise price of $0.38 per share. The foregoing represents only a portion of the total options and shares owned by the directors and officers of the Company.

This option extension resulted in an additional charge of $491,377 in the three months ended June 30, 2010 based upon the change in the fair value resulting from the extension to the term of the options based upon the binomial lattice option valuation model.

In addition, in June 2009, we committed to issue 4,000,000 shares of restricted common stock to our Chief Executive Officer at a price per share of $0.29, which vests in equal installments over a thirty six month period commencing June 30, 2010.  As a result, we recorded a stock-based compensation charge of $32,222 in June to reflect the initial month’s vesting under that restricted share grant.

We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the six months ended September 30, 2011 was insignificant.

The expected volatility is based on the historic volatility. The expected life of options granted is based on the "simplified method" as described in the SEC's guidance due to changes in the vesting terms and contractual life of current option grants compared to our historical grants.

We did not issue any stock option grants in the six months ended September 30, 2011.  In the six months ended September 30, 2010, our Board of Directors granted the following stock options, all with an exercise price of $0.25 per share, the closing price of our common stock on that date (September 27, 2010):

To our CEO, an option to acquire an aggregate of 2,500,000 shares of our common stock. The option vested as to 1,000,000 shares on the grant date and will vest as to the remaining 1,500,000 shares one-third each year over three years on each anniversary of the grant date.  Unless earlier exercised or terminated, the option will expire September 27, 2020.

To our CSO, an option to acquire an aggregate of 1,000,000 shares of our common stock. The option vested as to 500,000 shares on the grant date and will vest as to the remaining 500,000 shares one year from the grant date.  Unless earlier exercised or terminated, the option will expire September 27, 2020.

To Mr. Franklyn S. Barry, Jr., one of the Company’s non-employee directors, an option to acquire an aggregate of 500,000 shares of our common stock. The option vested as to 250,000 shares on the grant date and will vest as to the remaining 250,000 shares one-third each year over three years on each anniversary of the grant date. Unless earlier exercised or terminated, the option will expire September 27, 2020.

To Mr. Edward G. Broenniman, another of our non-employee directors, an option to acquire an aggregate of 600,000 shares of our common stock.  The option vested as to 300,000 shares on the grant date and will vest as to the remaining 300,000 shares one-third each year over three years on each anniversary of the grant date.  Unless earlier exercised or terminated, the option will expire September 27, 2020.

To Mr. James Frakes, appointed as CFO on September 27, 2010, an option to acquire an aggregate of 500,000 shares of our common stock. The option vested as to 250,000 shares on the grant date and will vest as to the remaining 250,000 shares one year from the grant date.

To three employees, options to acquire an aggregate of 450,000 shares of our common stock. The options vested as to 225,000 shares on the grant date and will vest as to the remaining 225,000 shares one year from the grant date.

Options outstanding that have vested and are expected to vest as of September 30, 2011 are as follows:

   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term in Years
 
                   
Vested
   
17,316,893
   
$
0.33
     
6.39
 
Expected to vest
   
2,366,667
   
$
0.25
     
9.00
 
Total
   
19,683,560
                 

At September 30, 2011, there was approximately $1,131,277 of unrecognized compensation cost related to share-based payments, including the restricted stock grant, which is expected to be recognized over a weighted average period of 1.26 years.

On September 30, 2011, our stock options had a negative intrinsic value since the closing price on that date of $0.06 per share was below the weighted average exercise price of our stock options

In July 2011, our Board ratified a one year consulting agreement with a consultant to provide corporate advisory services. We agreed to pay the consultant a monthly fee of $5,000 in common stock.