Shareholders' Equity

6 Months Ended

Jun. 30, 2011

Shareholders' Equity

6. Shareholders’ Equity

Common Stock

In June 2011, the Company received net proceeds of $26,403,389 (after $2,671,559 in commission and other cash basis offering expenses) from the sale of 3,524,239 shares of common stock at $8.25 per share, together with 1,762,118 five-year series R warrants to purchase common stock at $9.90 per share.  Additionally, the placement agents received 70,484 five-year warrants to purchase common stock at $9.90 per share.  Non-cash offering costs with an estimated fair value of $490,980 were incurred by the Company for the placement agent warrants and 5,000 stock options at $10.26 per share issued to a service provider.

During 2011, the Company received $413,088 (net of $68,204 in expenses) and issued 215,106 shares of common stock upon the exercise of stock purchase warrants, stock options and conversion of series B preferred stock.

In February 2010, the Company received net proceeds of $4,478,801 (after $1,110,199 in commission and other cash basis offering expenses) from the sale of 1,117,800 shares of common stock at a price of $5.00 per share, together with 372,600 five-year warrants to purchase common stock at $5.50 per share.  In addition, the placement agent received 29,160 five-year warrants to purchase common stock at $6.25 per share.  Non-cash offering costs with an estimated fair value of $121,634 were incurred by the Company for the placement agent warrants.

In February 2010, the Company issued 400,000 shares of its common stock together with 133,333 warrants to purchase its common stock at an exercise price of $5.50 per share and 100,000 warrants to purchase its common stock at an exercise price of $6.25 per share in connection with the purchase of the world-wide Medihoney license rights.

During 2010, the Company received $12,478 and issued 3,971 common stock shares upon the exercise of stock options and the conversion of series A and B preferred stock shares.

Stock Purchase Warrants

At June 30, 2011, the Company had warrants outstanding to purchase 3,065,702 shares of the Company’s common stock consisting of the following:

Series	Number of Warrants		Exercise Price		Expiration Date
J		267,858	$	6.16	May 31, 2013
K		389,064	$	9.60	April 1, 2013
L		6,250	$	3.12	March 31, 2014
N		100,000	$	6.25	February 22, 2015
O		331,900	$	5.50	February 22, 2015
P		4,695	$	6.25	February 16, 2015
Q		133,333	$	5.50	February 22, 2015
R		1,832,602	$	9.90	June 22, 2016
Total		3,065,702

In 2011, 224,063 series H, 94,351 series I, 10,000 series K, 40,700 series O and 24,465 series P warrants were exercised either on a for cash or cashless basis.  Also in 2011, 107,852 series H warrants expired and 1,832,602 series R warrants were issued in connection with the June 2011 stock sale.

Stock Options

The Company has a stock option plan under which options to purchase a maximum of 2,500,000 shares of common stock may be issued.  The plan permits the granting of both incentive stock options and nonqualified stock options to employees and directors of the Company and certain outside consultants and advisors to the Company.  The option exercise price may not be less than the fair market value of the stock on the date of the grant of the option.  The duration of each option may not exceed 10 years from the date of grant.  As of June 30, 2011, options to purchase 1,203,568 shares of the Company’s common stock were issued and outstanding under the plan and 1,266,213 shares were available for future grant.

The Company has previously granted nonqualified stock options to officers, directors, agents and employees outside of the stock option plan (“non-plan options”).  All non-plan options were granted at the fair market value at the date of grant.  As of June 30, 2011, non-plan options to purchase 168,501 shares of the Company’s common stock were issued and outstanding.

For the three and six months ended June 30, 2011 and 2010, the fair value of each option award was estimated at the date of grant using the Black-Scholes option pricing model.  The weighted-average assumptions used were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Risk-free interest rate		2.21	%		2.43	%		2.44	%		2.51	%
Volatility factor		109	%		78.6	%		107	%		78.9	%
Dividend yield		0	%		0	%		0	%		0	%
Expected option life (years)		6.25			6.25			6.25			6.25

The risk-free rate utilized represents the U.S. Treasury yield curve rate for the expected option life at the time of grant.  The volatility factor was calculated based on the Company’s historical stock price volatility equal to the expected life of the option at the grant date.  The dividend yield is 0% since the Company does not anticipate paying dividends in the near future.  Based on the Company’s historical experience of options that expire or are cancelled before becoming fully vested, the Company has assumed an annualized forfeiture rate of 1.0% for all options.  The Company will record additional expense if the actual forfeiture rate is lower than estimated, and will record a recovery of prior expense if the actual forfeiture rate is higher than estimated.

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2011 follows:

	Options			Weighted Average Exercise Price
Outstanding – January 1, 2011		1,203,600		$	5.07
Granted		185,500			6.31
Exercised		(14,593	)		3.19
Expired		(2,438	)		4.32
Outstanding – June 30, 2011		1,372,069		$	5.26
Expected to vest – June 30, 2011		1,358,348		$	5.26
Exercisable at June 30, 2011		1,095,874		$	5.18

During 2011, service based options of 85,500 and performance based options of 100,000 were granted to Company officers, directors, and employees.  The weighted average fair value per share of options granted during the six months ended June 30, 2011 was $5.26.

During the three and six months ended June 30, 2011 and 2010, stock option compensation expense was recorded as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Cost of sales	$	14,670	$	19,398	$	35,670	$	39,498
Selling, general and administrative expenses		228,872		229,739		456,758		377,632
Total stock option compensation expense	$	243,542	$	249,137	$	492,428	$	417,130

As of June 30, 2011, there was $647,055 of unrecognized compensation cost related to nonvested service based awards and $205,500 nonvested performance based awards granted under the plan.  These costs are expected to be recognized over the options’ remaining weighted average vesting period of 1.36 years for the service and 0.50 years for the performance based awards.

Restricted Common Stock

The Company has a restricted common stock plan under which 312,500 shares of common stock are reserved for issuance.  There are 219,125 shares available for issuance under the plan as of June 30, 2011.

In May 2011, 21,000 shares of restricted common stock were granted under the plan to non-employee members of the Company’s board of directors; 20,000 shares will vest one year from date of grant, and 1,000 shares vested immediately.  The fair market value at the date of grant determined by the quoted market price was $215,460, or $10.26 per share.  For the six months ended June 30, 2011, $44,460 of compensation expense was recorded for these grants.

In January 2011, 30,500 shares of restricted common stock were granted under the plan to Company employees on a performance basis which vest one year from date of grant if the performance conditions are met.  The fair market value at the date of grant determined by the quoted market price was $150,975, or $4.95 per share.  For the six months ended June 30, 2011, $75,488 was recorded in operating expense for these grants.

In May 2010, 20,000 shares of restricted common stock were granted under the plan to non-employee members of the Company’s board of directors that will vest one year from date of grant.  The fair market value at the date of grant determined by the quoted market price was $102,400, or $5.12 per share.  For the six months ended June 30, 2011 and 2010, $34,133 and $17,067 was recorded in operating expense for these grants, respectively.

Shares Reserved for Future Issuance

At June 30, 2011, the Company had reserved the following shares of common stock for future issuance:

Convertible preferred shares (series A – D)	284,635
Common stock options outstanding	1,372,069
Common stock options available for grant	1,266,213
Common stock warrants outstanding	3,065,702
Restricted common stock grants	50,500
Restricted common stock available for grant	219,125
Total common stock shares reserved	6,258,244