NOTE 14 – STOCK OPTION PLAN AND WARRANTS

STOCK OPTION PLAN

The Company’s Incentive Compensation Plan (the “Plan”) provides for the issuance of qualified options to all employees and non-qualified options to directors, consultants and other service providers.

A summary of the status of stock options outstanding under the Plan as of December 31, 2015 and 2014 is as follows:

	12/31/2015					12/31/2014
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Outstanding at beginning of year		11,033,675		$	1.05		9,583,762		$	1.16
Granted		6,299,600		$	0.29		2,372,800		$	0.58
Exercised		-					-		$	-
Expired and Cancelled		(6,230,000	)	$	0.77		(922,887	)	$	0.99
		11,103,275					11,033,675

Outstanding, end of period		11,103,275		$	0.78		11,033,675		$	1.05


Exercisable at end of period		10,328,925		$	0.82		11,033,675		$	1.05

At December 31, 2015 the aggregate intrinsic value of all outstanding options was $0 of which 10,328,925 outstanding options are currently exercisable at a weighted average exercise price of $0.82. At December 31, 2014 the aggregate intrinsic value of all outstanding options was $0 of which 11,033,675 outstanding options were exercisable at a weighted average exercise price of $1.05

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model. This model uses the assumptions listed in the table below for stock options granted in 2015. Expected volatilities are based on the historical volatility of the Company’s stock. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

	12/31/2015	12/31/2014
Weighted average fair value per option granted	$0.14 - $0.36	$0.31 - $0.50
Risk-free interest rate	1.00% - 1.54%	0.86 - 1.75%
Expected dividend yield	0.00%	0.00%
Expected lives	2.688 - 3.000	2.6875
Expected volatility	86.22% - 120.51%	82.11 - 98.91%

During the year ended December 31, 2015, the Company granted 6,299,600 options to employees at a weighted average exercise price of $0.29 per share valued at $1,845,892. Stock- based compensation expense from options for the year ended December 31, 2015 was $570,560. During the year ended December 31, 2014 the Company granted 2,372,800 options to employees at a weighted average exercise price of $0.58 and recognized a total of $935,097 in stock compensation expense. The options granted to employees are 25% vested on the date of grant and 25% every 90, 180 and 270 days subsequent to the grant date with the exception of 3,300,000 options granted to Anthony Saguto in May 2015 which vested in 15 equal installments over give years commencing four months after the grant date. When Mr. Saguto resigned in November 2015, 2,860,000 of his unvested options were cancelled.

The expiration date of the options granted in both 2015 and 2014 is five years from the grant date.

During the years ended December 31, 2015 and December 31, 2014, there were no stock options exercised for cash or on a cashless basis.

As of December 31, 2015, the Company had reserved 6,896,725 shares of common stock to be issued upon the exercise of qualified options issued under the Plan. As of December 31, 2014 the Company had 6,966,325 shares available for grant under the Plan.

WARRANTS

As of December 31, 2015 and 2014, the Company had warrants outstanding to purchase 50,957,780 shares of the Company’s common stock,, at prices ranging from $0.35 to $1.00 per share. These warrants expire at various dates through December 2020. The summary of the status of the warrants issued by the Company as of December 31, 2015 and 2014 are as follows:

	12/31/2015					12/31/2014
	Number of Warrants			Weighted Average Exercise Price		Number of Warrants			Weighted Average Exercise Price
Outstanding at beginning of year		16,446,351		$	1.45		16,688,265		$	1.44
Granted		87,825,204		$	0.42		-		$	-
Exercised		(53,095,204	)	$	0.66		-		$	-
Cashless Exercises		-			-		-		$	-
Expired and Cancelled		(218,571	)	$	0.66		(241,914	)	$	0.87
		50,957,780		$	0.52		16,446,351			-

Outstanding, end of period		50,957,780		$	0.52		16,446,351		$	1.44

Exercisable at end of period		50,957,780		$	0.52		16,446,351		$	1.44

Due to the anti- dilution provisions of some of the warrants outstanding before the January 8, 2015 transaction, the exercise price on 15,512,057 warrants was reduced to $0.35 and the number of shares of common stock into which the warrants became exercisable was adjusted such that the warrants were then exercisable into 54,400,204 shares of common stock.

The fair values for the Company’s derivative liabilities related to the Warrants (5 year warrants at $0.35, $0.45, and $0.64, with a full reset feature) issued is $130,028. The derivative instruments were valued as of December 31, 2015 with the following assumptions:

- The Holder would automatically exercise the warrants at a stock price above the exercise price with the target exercise price dropping as expiration approaches,

- The projected annual volatility was based on the Company’s historical volatility between 148% and 193%,

- An event of default would occurred 5% of the time, increasing to 0.10% per month,

- Dilutive/Full Reset events projected to occur based on future projected capital needs (future financings are projected going forward as of December 2015) resulting in the weighted conversion price dropping from the initial conversion price (no reset events have occurred).

Effective January 1, 2015 the Company entered into a consulting agreement with Jeffery Consulting Group, LLC pursuant to which Jeffery Consulting will provide assistance with operational improvements including manufacturing processes, strategic and tactical advice with respect to the Company’s sales and marketing initiatives, and provide customer introductions and strategic sales opportunities. In consideration of services rendered by Jeffery Consulting, the Company issued a warrant to purchase 1,250,000 shares of common stock at $0.35 per share. The warrant vested 500,000 shares upon the mutual execution of this agreement, and 250,000 shares each at the three month, six month, and nine month anniversaries of this agreement. The fair value of the warrants issued is estimated on the date of grant using the Black- Scholes valuation model. The assumptions used in the model included the historical volatility of the Company’s stock of 84.52%, and the risk- free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 1.07%. In 2015 the Company recognized compensation expense of $249,635. The Company also agreed to accrue $5,000 per month which becomes payable to Jeffery Consulting once the Company has raised $3 million in additional capital.

On February 9, 2015, Edward B. Smith III and Morris Garfinkle were issued warrants exercisable for 31,000,000 and 5,500,000 shares of common stock, respectively, in consideration of the services to be provided to the Company as Chief Executive Officer of the Company and Chairman of the Board, respectively. The exercise price of these warrants is $0.45 per share. The fair value of the warrants issued is estimated on the date of grant using the Black- Scholes valuation model. The assumptions used in the model included the historical volatility of the Company’s stock of 81.99%, and the risk- free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 0.85%. In 2015 the Company recognized compensation expense of $3,749,259.

On April 29, 2015, the Company sent a proposal to all warrant holders (as of September 30, 2014) an offer to participate in a warrant exchange program whereby each warrant holder will be able to 1) exchange their warrants for common stock, on a cashless basis, at a reduced exercise price of $0.00005 per share, 2) if applicable, receive the right to 17.5% more warrants and a two year extension on all of their warrants in return for waiving their anti- dilution rights on a one- time basis for the exchange, or 3) elect to take advantage of (1) and (2) by (i) exchanging a portion of their Warrants that they so designate for shares of Common Stock in accordance with the applicable terms in (1) and (ii) the remainder of the Warrant not exchanged will be retained and amended pursuant to the applicable provisions of (2). As of April 29, 2015 there were 55,334,490 warrants outstanding that were eligible to participate in the proposal inclusive of 38,888,147 warrants associated with anti- dilution provisions resulting from the January 8, 2015 private placement.

The results of this exchange were warrant holders elected to receive 52,110,896 shares of Common Stock under alternative (1). The Company recorded a loss on exchange of warrants in the amount of $12,959,660. Warrant holders elected to receive 318,750 additional warrants under alternative (2). Finally, warrant holders elected to receive a combination of 974,826 shares of Common Stock and 73,125 warrants under alternative (3). The Company recognized a warrant expense of $259,662.

On May 14, 2015 the Company entered into a consulting agreement with E.B. Smith Jr. (father of the Company’s CEO and largest shareholder, Edward B. Smith III) pursuant to which E.B. Smith Jr. will provide advice with respect to the Company’s marketing initiatives, provide customer introductions and investigating strategic transactions. In consideration of services rendered by E.B. Smith Jr., the Company issued warrants to purchase 750,000 shares of common stock at $0.35 per share. The warrants vested 450,000 shares upon the mutual execution of this agreement and then in 150,000 share increments at the three month and six month anniversaries of this agreement. The fair value of the warrants issued is estimated on the date of grant using the Black- Scholes valuation model. The assumptions used in the model included the historical volatility of the Company’s stock of 104.65%, and the risk- free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 1.6%. In 2015 the Company recognized an expense of $117,642.

On May 14, 2015 the Company entered into a consulting agreement with Terme Bancorp pursuant to which Terme Bancorp will provide advice with respect to the Company’s marketing initiatives, provide customer introductions and investigating strategic transactions. In consideration of services rendered by Terme Bancorp, the Company issued warrants to purchase 1,250,000 shares of common stock at $0.35 per share. The warrants vested 750,000 shares upon the mutual execution of this agreement and then in 250,000 share increments at the three month and six month anniversaries of this agreement. The fair value of the warrants issued is estimated on the date of grant using the Black- Scholes valuation model. The assumptions used in the model included the historical volatility of the Company’s stock of 104.65%, and the risk- free rate for periods within the expected life of the warrant based on the U.S. Treasury yield curve in effect of 1.60%. In 2015 the Company recognized an expense of $197,075.

On October 2, 2015, the Company issued a warrant to acquire 250,000 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share to an accredited investor in conjunction with their $250,000 note investment. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti- dilution protection and entitled to registration rights.

On December 23, 2015, the Company issued a warrant to acquire 500,000 shares of the Company’s common stock, par value, $0.00005 per share, at an exercise price of $0.64 per share to an accredited investor in conjunction with their $500,000 note investment. The Warrants expire on the fifth anniversary of their issuance, may be exercised on a cashless basis, are subject to full ratchet price anti- dilution protection and entitled to registration rights.

Details of other warrants issued during 2014 and 2015 are included in footnote #10 (Preferred Stock) and #13 (Common Stock).

During the year ended December 31, 2015, there were no warrants exercised for cash.

During the year ended December 31, 2014, there were no warrants exercised for cash or on a cashless basis and no warrants were granted or exercised.