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, 2016 and 2015 is as follows:

	12/31/2016					12/31/2015
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Outstanding at beginning of year		11,103,275		$	0.78		11,033,675		$	1.05
Granted		3,020,134		$	0.03		6,299,600		$	0.29
Exercised		-					-
Expired and Cancelled		(4,012,386	)	$	0.88		(6,230,000	)	$	0.77
Outstanding, end of period		10,111,023		$	0.53		11,103,275		$	0.78

Exercisable at end of period		8,600,956		$	0.61		10,328,925		$	0.82

At December 31, 2016 the aggregate intrinsic value of all outstanding options was $0 of which 8,600,956 outstanding options are currently exercisable at a weighted average exercise price of $0.61. At December 31, 2015 the aggregate intrinsic value of all outstanding options was $0 of which 10,328,925 outstanding options were exercisable at a weighted average exercise price of $0.82.

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 2016 and 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. Compensation expense recorded in 2016 and 2015 was $160,906 and $414,882, respectively.

	2016		2015
Weighted average fair value per option granted		$0.0298		$0.14 - $0.36
Risk-free interest rate		1.20%		1.00% - 1.54%
Expected dividend yield		0.00%		0.00%
Expected lives		2.7		2.688 - 3.000
Expected volatility		201.10%		86.22% - 120.51%

On May 17, 2016, each non-executive member of the Board (Morris Garfinkle, Dan Jeffery and Edward B. Smith III) was granted pursuant to the Plan an option to purchase an aggregate 1,006,711 shares of common stock (the equivalent of $30,000 based on the common stock’s closing price of $0.0298 on the grant date) for a total of 3,020,134 shares of common stock at an exercise price of $0.0298 per share. These stock options vest 25% on date of grant and 25% every 90, 180 and 270 days subsequent to the grant date and expire ten years after the date of the grant. As of December 31, 2016, the unrecognized compensation cost related to all non- vested share- based compensation arrangements granted under the Plan was $40,440.

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. Stock- based compensation expense from options for the year ended December 31, 2015 was $570,560. 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 The expiration date of the options granted in 2015 is five years from the grant date.

During the years ended December 31, 2016 and December 31, 2015, there were no stock options exercised for cash or on a cashless basis.

As of December 31, 2016, the Company had reserved 29,888,977 shares of common stock to be issued upon the exercise of qualified options issued under the Plan.

WARRANTS

The Company and the holders of all of the Company’s issued and outstanding warrants (the “Warrants”) as of December 12, 2016 entered into agreements effective December 12, 2016 (the “Exchange Agreements”) pursuant to which they exchanged (the “Exchange”) their Warrants (which were initially exercisable for an aggregate of 52,752,869 shares of the Company’s common stock, par value $0.00005 per share (the “Common Stock”)) for an aggregate of 53,097,601 shares of Common Stock (which is the equivalent to the issuance of approximately one share of Common Stock for each Warrant exchanged). The holders of the shares of Common Stock received in exchange for the Warrants are prohibited from selling or otherwise transferring the shares of Common Stock until March 11, 2017. The foregoing description of the Exchange Agreements is qualified in its entirety by reference to the full text of the form of the Exchange Agreement, a copy of which is filed as Exhibit 10.1 to the Form 8-K Filed on December 12, 2016 and is incorporated by reference herein.

As of December 31, 2015, the Company had warrants outstanding to purchase 50,957,780 shares of the Company’s common stock, at prices ranging from $0.35 to $0.64 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, 2016 and 2015 are as follows:

	12/31/2016					12/31/2015
	Number of Warrants			Weighted Average Exercise Price		Number of Warrants			Weighted Average Exercise Price
Outstanding at beginning of year		50,957,780		$	0.52		16,446,351		$	1.44
Granted		6,750,000		$	0.64		87,825,204		$	0.42
Exercised or Exchanged for Common Shares		(57,707,780	)	$	0.53		(53,095,204	)	$	0.66
Cashless Exercises		-		$	-		-			-
Expired and Cancelled		-		$	-		(218,571	)	$	0.66
Outstanding, end of period		-		$	-		50,957,780		$	0.52

Exercisable at end of period		-		$	-		50,957,780		$	0.52

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:

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

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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 $12,959,654. 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.

On March 2 2016, the Company issued a warrant to acquire 400,000 shares of the Common Stock, at an exercise price of $0.64 per share to Jonathan Kahn in conjunction with his $100,000 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 March 11, 2016, the Company issued a warrant to acquire 400,000 shares of the Common Stock, at an exercise price of $0.64 per share to an accredited investor in conjunction with their $100,000 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 March 17, 2016, the Company issued a warrant to acquire 400,000 shares of the Common Stock, at an exercise price of $0.64 per share to an entity controlled by Morris Garfinkle in conjunction with its $100,000 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 March 17, 2016, the Company issued a warrant to acquire 200,000 shares of the Common Stock, at an exercise price of $0.64 per share to an entity controlled by Dan Jeffery in conjunction with its $50,000 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 April 7, 2016, the Company issued two warrants to acquire a total of 400,000 shares of the Common Stock, at an exercise price of $0.64 per share to two accredited investors in conjunction with their total of $100,000 note investments. 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 April 8, 2016, the Company issued a warrant to acquire 2,000,000 shares of the Common Stock, 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.

On April 22, 2016, the Company purchased 4,610,178 warrants from their holders for an aggregate price of $122,805.

On April 28, 2016 the Company issued a warrant to acquire 150,000 shares of the Common Stock, at an exercise price of $0.64 per share to an entity controlled by Dan Jeffery in conjunction with its $50,000 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 July 14, 2016, the Company issued a warrant to acquire 2,000,000 shares of the Common Stock, 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.

On July 21, 2016, the Company issued a warrant to acquire 600,000 shares of the Common Stock, at an exercise price of $0.64 per share to an accredited investor in conjunction with their $300,000 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 November 4, 2016, the Company issued a warrant to acquire 200,000 shares of the Common Stock, at an exercise price of $0.64 per share to an accredited investor in conjunction with their $100,000 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 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.