Quarterly report pursuant to sections 13 or 15(d)

Stock Option Plan and Stock-based Compensation

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Stock Option Plan and Stock-based Compensation
9 Months Ended
Sep. 30, 2011
Notes to Financial Statements  
Stock Option Plan and Stock-based Compensation

STOCK OPTION PLAN AND STOCK-BASED COMPENSATION

The 2010 Stock Plan

The Company adopted a stock option plan entitled “The 2010 Stock Plan” (2010 Plan) under which the Company may grant options to purchase up to 5,000,000 shares of common stock. As of September 30, 2011, there were 78,400 options outstanding under the 2010 Plan.

During the year ended December 31, 2010, the Company granted options to purchase 78,400 shares of common stock with an exercise price of $1.85 to a consultant. The options began vesting January 1, 2011 at a rate of 9,800 options per quarter until the final vesting date of October 1, 2012. Stock-based compensation relating to this grant was $2,252 for the nine month period ending September 30, 2011 and the unrecognized compensation at September 30, 2011 was $3,957. The options have a contractual life of 4.83 years.

On January 19, 2011, the Company granted options to purchase 421,237 shares of common stock with an exercise price of $0.25 to a consultant. The options began vesting March 1, 2011 at a rate of 20,059 per month. As of March 31, 2011, 20,059 options were vested. On April 6, 2011 the Company terminated its engagement with this consultant effective May 6, 2011. An additional 40,118 of the consultant’s options had vested as of the termination date, and the remaining 361,060 options were canceled. The total options vested at the date of termination were 60,177 which have a fair value of $0.21 and an estimated remaining life of 9.75 years. The total stock-based compensation for these options of $12,785 was expensed over the consultant’s service period of approximately 4 months. Stock-based compensation relating to this grant was $12,785 for the nine month period ending September 30, 2011 and there is no unrecognized compensation or options outstanding under the grant at September 30, 2011.

The 2011 Stock Plan

The Company adopted a non-qualified stock option plan entitled “2011 Non-Qualified Stock Plan” (2011 Plan) under which the Company may grant options to purchase 2,100,000 shares of common stock. As of September 30, 2011, there were 1,500,000 options outstanding under the 2011 Plan.

On September 15, 2011, the Company granted options to purchase 1,500,000 shares of common stock to a consultant with an exercise price of $0.10 and immediate vesting of 562,500 shares. Beginning December 15, 2011, the remaining shares will vest at 93,750 shares per quarter. The options have a fair value of $0.20 per share and an estimated remaining life of 5 years. Stock-based compensation relating to this grant was $114,377 for the three and nine month periods ending September 30, 2011 and the unrecognized compensation at September 30, 2011 was $190,630.

The Company used the Black-Scholes option-pricing model to determine the fair value of the option grants and the related compensation expense. The Company recorded $116,296 and $129,414 in compensation expense for the three and nine month periods ended September 30, 2011, respectively, related to the non-employee options. The Company measures and recognizes compensation expense as they vest for stock-based awards issued to non-employees over the service period.

Expected volatility for the options issued during the three and nine months ended September 30, 2011 was 90%. The Company does not have a history of market prices of their common stock, and as such volatility is estimated using historical volatilities of similar public entities.

The risk-free interest rate used for each grant is equal to the U.S. Treasury yield in effect at the time of grant for instruments with a similar expected life. The risk-free interest rate was 0.60% for grants made during the three month period ending March 31, 2011 and 0.28% for grants made during the three month period ending September 30, 2011.

The intrinsic value for fully vested, exercisable options was $82,463 at September 30, 2011 based on the Company’s latest valuation of its common stock of $0.2466.

    Shares     Weighted Average Exercise Price  
Outstanding, December 31, 2010   78,400   $1.85 
Granted   1,921,237    0.13 
Exercised   —      —   
Options forfeited/cancelled   (421,237)   0.25 
Outstanding, September 30, 2011   1,578,400   $0.19