11.

EMPLOYEE STOCK OPTIONS

On August 3, 2017, upon approval of the Company’s board of directors, the Company issued outside its 2015 Equity Plan, 5,210,000 options to purchase the Company’s common stock to officers, directors and employees for services provided. Jay Nussbaum was issued 2,000,000 options, Felicia Hess was issued 1,200,000 options, Dan Erdberg was issued 1,140,000 options, Kendall Carpenter was issued 275,000 options, Directors David Aguilar, Mike Haas and General Wayne Jackson were issued 100,000 , 10,000 and 10,000 options, respectively. The remaining 475,000 options were issued to employees and consultants. These stock options immediately vested, are exercisable at an exercise price of $1.00 per share and expire on August 3, 2021. During the nine months ended September 30, 2017, $3,489,058 compensation expense was recognized on these 5,210,000 options.

One June 1, 2015, the Company issued an option award to an employee for 37,500 shares vesting over three years with an exercise price of $10.80 and expiration date of May 4, 2019. During the nine months ended September 30, 2017 and 2016, $46,353 and $101,141 compensation expense was recognized on these 37,500 options, respectively.

On January 9, 2017, the Company issued an option to purchase 100,000 shares of common stock with an exercise price of $2.90 per share to a director. The option vests 50,000 after one year from grant date and another 50,000 two years from grant date with an expiration date of four years from grant date provided that the Director is still providing service to the Company. During the nine months ended September 30, 2017, $96,794 compensation expense was recognized on these 100,000 options.

The Company used the Black-Scholes option pricing model to estimate the fair value on the date of grant of the 5,310,000 options granted during the nine months ended September 30, 2017.

The following table summarizes the assumptions used to estimate the fair value of the 5,310,000 stock options granted during the nine months ended September 30, 2017 on the date of grant.

	2017

Expected dividend yield		0	%
Expected volatility		95-100	%
Risk-free interest rate		1.50-1.52	%
Expected life of options		2.50-4.00 years

Under the Black-Scholes option pricing model, the fair value of the 5,310,000 options granted during the nine months ended September 30, 2017 is estimated at $3,663,231 on the date of grant. During the nine months ended September 30, 2017, $3,585,852 compensation expense was recognized on these 5,310,000 options.

During 2016, the Company granted 65,000 common stock options to employees for service provided. Of these, 50,000 options were granted to two employees and were immediately vested with an exercise price of $2.91 and the expiration date is April 27, 2019. One of these employees terminated and did not exercise her 10,000 options resulting in the expiration of the option. Another 5,000 options were immediately vested and were granted with an exercise price of $3.77 and the expiration date is July 29, 2019. Another employee received 10,000 options with two-year vesting and an exercise price of $3.00 and an expiration date of December 6, 2019. The employee who received 5,000 options in July 2016 was terminated and did not exercise his options resulting in the expiration of a total of 5,000 options. The Company recognized $107,941 in compensation for the first nine months ended September 30, 2016 on these options.

The Company used the Black-Scholes option pricing model to estimate the fair value on the date of grant of the 10,000 stock-based awards that continue to vest during the nine months ended September 30, 2017.

The following table summarizes the assumptions used to estimate the fair value of the 10,000 outstanding stock options granted during 2016 on the date of grant:

	2016

Expected dividend yield		0	%
Expected volatility		102	%
Risk-free interest rate		1.24-1.38	%
Expected life of options		2.00-2.50 years

Under the Black-Scholes option price model, fair value of the options granted during 2016 is estimated at $16,889 on the date of grant. During the nine months ended September 30, 2017, $9,353 compensation expense was recognized on these 10,000 options.

The following table represents stock option activity as of and for the nine months ended September 30, 2017:

	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Contractual Life in Years		Aggregate Intrinsic Value
Outstanding – December 31, 2016		442,500		$	5.81	$	1.72
Exercisable – December 31, 2016		407,500		$	5.57	$	1.65	$	0
Granted		5,310,000		$	1.04
Cancelled or Expired		(7,500	)	$	4.18
Outstanding – September 30, 2017		5,745,000		$	1.40		3.57	$	0
Exercisable – September 30, 2017		5,622,500		$	1.35		3.63	$	0