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STOCKHOLDERS' EQUITY

12 Months Ended

Dec. 31, 2016

NOTE 8 - STOCKHOLDERS’ EQUITY

Preferred Stock

Our Company’s articles of incorporation authorize 25,000,000 shares of preferred stock with a par value of $0.0001. We designated 2,000,000 shares of preferred stock as Series A convertible preferred stock. The Series A convertible preferred stock is convertible into common stock at a ratio of one to one. Additionally, as long as there are a minimum of 900,000 shares of Series A convertible preferred stock outstanding, the holders of the Series A convertible preferred stock have the right to elect a majority of our Company’s Board of Directors. Finally, in all manners brought to a vote of the shareholders, the holders of the Series A convertible preferred stock have three votes to every one vote of common stock. As of December 31, 2016 and 2015, there were 1,917,720 shares of Series A convertible preferred stock outstanding which were issued to the founders of NuGene, Ali and Saeed Kharazmi. Ali and Saeed Kharazmi each own 50% of the outstanding Series A convertible preferred stock and are our Company’s Chairman of the Board and Director, respectively.

Common Stock

Our Company has Advisory Agreements with members of its Advisory Board. The terms of the individual Advisory Agreements vary and provide for up to 50,000 initial sign-on shares vesting for a maximum of an 18-month period, and up to 50,000 shares of common stock per annum issued on the anniversary of the effective date of the agreement. Expenses for the issuance of common stock for services related to these share issuances was recognized over the service period in which the shares are earned or over the respective vesting period, as applicable, and was calculated by multiplying the number of shares earned for the respective reporting period by the share price on the date earned, during the respective quarter , as quoted on the OTC Marketplace. Selling, general and administrative expenses (“SGA”) recognized in connection with the Advisory Agreements totaled $82,806 and $572,216 for the years ended December 31, 2016 and 2015, respectively.

2016 activity

On April 4, 2016, we issued a $275,000 face value note payable and 50,000 shares of our common stock to Gemini Master Fund, LTD (“Gemini”) pursuant to a Security Purchase Agreement dated March 30, 2016 (the date the funds were received by our Company).

In June 2016, Theodore Schwarz executed an Offer Letter whereby Mr. Schwarz agreed to become a member of our Company’s Board of Directors (the “Board”). Under the Offer Letter the Company has agreed to pay Mr. Schwarz $2,500 for each Board of Directors meeting attended. Additionally, Mr. Schwarz may be granted 500,000 shares of the Company’s common stock in the future that may vest at the rate of 166,666 shares per year, over a three-year period provided Mr. Schwarz continues to serve on the Board. The stock has not been issued as of December 31, 2016. The grant date fair value of the common stock was $330,000. The Company recognized stock based compensation of $55,000 for the year ended December 31, 2016.

In connection with the purchase of the Gemini note on October 28, 2016 (see Note 6), the new lender converted $62,428 of the outstanding note balance and $1,966 of interest expense into 331,413 shares of our common stock over the course of November and December 2016.

2015 activity

On March 31, 2015, we entered into a stock purchase agreement with a shareholder of our Company (the “Buyer”) resulting in the issuance of 50,000 shares of common stock to the Buyer for proceeds of $50,000. Under the agreement, we extended to the Buyer an option to purchase an additional 60,000 shares of common stock at $1 per share within 45 days of the Closing. On May 8, 2015, the Buyer exercised his option to purchase the remaining shares under the stock purchase agreement and accordingly, we issued the Buyer an additional 60,000 shares of our common stock for cash proceeds of $60,000. On April 20, 2015, our Company entered into a stock purchase agreement with an unaffiliated accredited investor for the sale of 27,273 shares of common stock at $1.10 per share, resulting in total cash proceeds of $30,000. On June 2, 2015, our Company entered into a stock purchase agreement with an unaffiliated accredited investor for the sale of 100,000 shares of common stock at $2.00 per share, resulting in total cash proceeds of $200,000.

During 2015, offered positions on our Company’s Board of Directors to two individuals, although one of the offers was later rescinded. In addition to annual cash stipends of $30,000, the candidates were granted a total of 200,000 shares of our Company’s common stock vesting 25% on the third, sixth, ninth and twelfth month following the inception of the proposed Board service. SGA totaling $164,416 was recognized in connection with these shares over the service periods in which the shares were earned and was calculated based on the average closing price per share of our common stock, during the respective quarter, as quoted on the OTC Marketplace.

In February 2015, we entered into a six-month consulting agreement with an investor relations firm. In addition to a $27,000 retainer, the consulting agreement (as amended) called for the vesting of 110,000 shares of our common stock over the six-month term, issuable upon the conclusion of the agreement. On August 17, 2015, we issued the 110,000 shares of common stock owed to the investor relations firm. We recognized $167,092 of SGA in connection with the consulting agreement during the year ended December 31, 2015.

In March 2015, we purchased technology from an individual in exchange for 150,000 (as amended) shares of our common stock. The common stock was valued at the closing price per share of our common stock, on the date of issuance resulting in the recognition of $150,000 in SGA for the year ended December 31, 2015. During 2015, we issued 200,000 fully vested shares of our common stock to three consultants as compensation for services rendered. The common stock was valued at the closing price per share of our common stock, on the date of issuance, as quoted on the OTC Marketplace resulting in the recognition of $452,100 in stock based compensation for the year ended December 31, 2015.

Restricted Stock Awards

2016 activity

On March 17, 2016, we entered into a consulting agreement for services over one year. In connection with the agreement, we granted the consultant 200,000 shares of our fully vested common stock as consideration for the consultant’s services. The stock was issued on April 25, 2016. The grant date value of the restricted stock award was $128,000 and was recognized in full as stock based compensation for the year ended December 31, 2016.

On September 22, 2016, the Company entered into new compensation agreements and arrangements with two of its directors. As part of the agreements, our Chairman was granted 2,000,000 shares of our fully vested common stock. The stock has not been issued as of December 31, 2016. The grant date fair value of stock award was $1,420,000 and was immediately recognized as stock based compensation.

2015 activity

In November 2015, the Company entered into a consulting agreement with a third party for consulting services over six months. The Company agreed to pay the consultant 90,000 in shares of the Company’s restricted stock, which were issued over six months. The Company issued 30,000 shares of restricted stock in February 2016, and the remaining 60,000 shares were issued in June 2016, resulting in approximately $38,000 of stock based compensation expense for the year ended December 31, 2016.

Restricted Stock Units

In connection with the agreements the Company entered into with two of its directors, each director was granted restricted stock units for 2,000,000 shares of the Company’s common stock (“RSUs”). The RSUs vest at the rate of 33.33% each year anniversary of the issuance date (September 22, 2016). There is also 100% vesting upon a change in control of the Company.

The grant date fair value of the RSUs was $2,840,000. The Company recognized stock based compensation of $259,360 for the year ended December 31, 2016.

Common Stock Options

On August 14, 2015, we granted two employees an option to each purchase up to 1,000,000 shares of our common stock. The options have a strike price of $1.50 per share, have a term of five years from the date of grant, vest evenly over 24 months and have a cashless exercise feature. The fair value of these options was estimated using the Black-Scholes option-pricing model based on the following assumptions: expected dividend yield 0%, expected volatility 130%, risk-free interest rate 1.61% and expected life of 5 years. On May 2, 2016, we reduced the exercise price from $1.50 per share to $0.54 per share for these options. All other terms of the previous option agreements remained unchanged. We remeasured the options on the modification date using the Black-Scholes Model based on the following assumptions: expected dividend yield 0%, expected volatility 113%, risk-free interest rate 0.96% and expected life of 3 years. The incremental fair value of vested options was approximately $71,000 and was recognized immediately. The sum of the incremental compensation cost and the remaining unrecognized compensation cost for the unvested option shares was approximately $1.7 million on the modification date and will be amortized ratably over the remaining vesting period. We recognized $1,317,321 and $483,719 of Personnel expense as stock based compensation in connection with the vesting of the options during the years ended December 31, 2016 and 2015, respectively.

On July 18, 2016, we granted our Chief Executive Office a stock option to acquire 2,352,619 shares of our common stock with a 10 year term, which represented approximately 5% of our fully-diluted issued and outstanding shares on the date of grant. The exercise price of the option was $0.61 per share, which was the closing price for the Company stock at the date of issuance, and will vest ratably monthly over 3 years, with 100% vesting upon a change in control of the Company. In accordance with the employment agreement, the Chief Executive Officer will be issued stock options to acquire 5% of our fully-diluted issued and outstanding shares through our next significant financing transaction or series of significant financing transactions. The grant date fair value of the option was calculated by using the Black-Scholes Model based on the following assumptions: expected dividend yield 0%, expected volatility 97%, risk-free interest rate 1.27% and expected life of 6 years. The grant date fair value of this option was $1,126,899 and will be amortized ratably over the vesting period. We recognized $156,514 of Personnel expense as stock based compensation in connection with the vesting of the options during the year ended December 31, 2016.

A summary of the stock options activity for the years ended December 31, 2016 and 2015 is as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Contractual Life
Outstanding as of December 31, 2014		-	$	-		-
Granted		2,000,000		0.54		5
Outstanding as of December 31, 2015		2,000,000	$	0.54		4.62
Granted		2,352,619		0.61		10
Outstanding as of December 31, 2016		4,352,619		0.58		6.82
Options vested		1,660,086	$	0.55		4.78

Stock based compensation associated with stock options was $1,473,835 and $483,719 for the years ended December 31, 2016 and 2015, respectively. Unamortized stock based compensation expense amounted to $1,770,273 as of December 31, 2016, and will be amortized over approximately 3 years.

Common Stock Warrants

Our Company has issued warrants to purchase shares of our common stock to accredited investors and consultants as compensation for services rendered, as well as, in conjunction with the purchase of our common stock. A summary of the Company’s warrants activity and related information as of December 31, 2016 is provided below.

In connection with the agreements the Company entered into with two of its directors, we issued a fully vested warrant with a ten year term to each director to purchase shares of common stock equal to the greater of 1,000,000 shares or 2.5% of the issued and outstanding common shares of the Company during the first 24 months immediately following the issuance. On the date of issuance, each director was issued a warrant to purchase 1,008,367 shares of common stock at an exercise price of $0.71 per share, which was the closing price for the Company stock at the date of issuance. On December 30, 2016, the warrants to purchase shares of common stock were increased by 8,205 shares of common stock for each director at an exercise price of $0.36 per share, which was the closing price for the stock at the date of issuance. The aggregate grant date fair value of these warrants was calculated by using the Black-Scholes Model based on the following assumptions: expected dividend yield 0%, expected volatility 102%, risk-free interest rate 1.63% and expected life of 10 years. The grant date fair value of these warrants was $1,291,292 and the entire fair value was recorded as Personnel expense as of December 31, 2016.

In connection with the Advances (see Note 6), the Company issued warrants to purchase 770,883 shares of our common stock at an exercise price $0.60 per share with a 5 year term. The relative fair value of the warrants compared to the Advances was $295,541, which was recorded as a component of stockholders’ deficit with the offset recorded as a discount on the Advances. The fair value of the warrants was determined using the Black-Scholes Model based on the following weighted average assumptions: common stock price on date of grant $0.74, expected dividend yield 0%, expected volatility 98%, risk-free interest rate 1.1% and expected life of 5 years.

In connection with the 5% Convertible Note, the Company issued warrants with a 7 year term to purchase 1,428,572 shares of our common stock at an exercise price per share equal to the lower of (a) $0.47; or (b) 75% of the closing bid price of the common stock on the effective date of the Company’s first public offering following the issuance date. The Company determined that the warrants are a derivative requiring bifurcation in accordance with the provisions of ASC 815. The warrants were valued at inception using the Monte Carlo simulation (see Note 6) at $579,450 and recorded as a loss on the consolidated statements of operations.

In connection with the 9% Convertible Note (see Note 6), the Company issued warrants to purchase 222,916 shares of our common stock at an exercise price $0.60 per share with a 4 year term. The relative fair value of the warrants compared to the 9% Convertible Note was $56,737, which was recorded as a component of stockholders’ deficit with the offset recorded as a discount to the 9% Convertible Note. The fair value of the warrants was determined using the Black-Scholes Model based on the following assumptions: common stock price on date of grant $0.50, expected dividend yield 0%, expected volatility 97%, risk-free interest rate 1.12% and expected life of 4 years.

In connection with the 10% Convertible Note (see Note 6), the Company issued warrants to purchase 77,778 shares of our common stock at an exercise price $0.50 per share with a 4 year term. The relative fair value of the warrants compared to the 10% Convertible Note was $22,616, which was recorded as a component of stockholders’ deficit with the offset recorded as a discount to the 10% Convertible Note. The fair value of the warrants was determined using the Black-Scholes Model based on the following assumptions: common stock price on date of grant $0.41, expected dividend yield 0%, expected volatility 97%, risk-free interest rate 1.86% and expected life of 4 years.

On August 14, 2015, we granted a five-year fully vested warrant to purchase up to 150,000 shares of our common stock to each of two consultants as compensation for financial services rendered. The warrants have a strike price of $2.00 per share and have a cashless exercise feature. The fair value of the warrants was estimated to be $377,327 using the Black-Scholes option-pricing model based on the following assumptions: expected dividend yield 0%, expected volatility 130%, risk-free interest rate 1.61%, and expected life of 5 years and is included in SGA as stock based compensation in the accompanying statement of operations.

On August 14, 2015, we granted a three-year fully vested warrant to purchase up to 50,000 shares of our common stock to a former consultant of our Company in satisfaction of amounts previously owed to him. The warrant has a strike price of $1.50 per share and has a cashless exercise feature. The fair value of the warrants was estimated to be $55,821 using the Black-Scholes option-pricing model based on the following assumptions: expected dividend yield 0%, expected volatility 130%, risk-free interest rate 1.08%, and expected life of 3 years and is included in SGA as stock based compensation in the accompanying statement of operations.

On December 11, 2015, we entered into a service agreement (the “SA”) with KBHJJ, LLC (“KBHJJ”). KBHJJ will provide media awareness services to the Company over the five-year life of the SA. In consideration for these services, our Company agreed to compensate KBHJJ as follows:

The grant of a two-year warrant to purchase up to 1,350,000 shares at an exercise price of $0.001 per share of the Company’s Common Stock vested as follows: 450,000 shares upon execution of the agreement; 450,000 shares upon the six-month anniversary of the SA; and 450,000 shares upon the one-year anniversary of the SA, contingent upon the completion of certain conditions.

Payment of $50,000 upon execution of the SA.

Payment of $50,000 due January 4, 2016.

Up to 500,000 shares of the Company’s Common Stock that can be earned over the first 18 months of the SA, contingent on hitting benchmarks defined in the SA.

We recognized $567,000 of SGA as stock based compensation in connection with the SA in the accompanying statements of operations in the year ended December 31, 2015.

In connection with the 10% 2015 Note, the Company issued a five-year warrant to purchase up to 61,111 shares of its common stock to the Note holder. The exercise price of the warrant is $1.50 per share, subject to adjustments provided in the warrant agreement (but in no event at an exercise price below $0.50 per share). The Company accounted for warrants to be issued in connection the 2015 Advances under similar terms as the warrant granted for the 10% 2015 Note.

In connection with the warrants expected to be issued in connection with the 2015 Advances and the 10% 2015 Note, we have estimated a relative fair value of $138,333 using the Black-Scholes option pricing model based on the following weighted average assumptions:

Total 2015 Advances and 10% 2015 Note face value	$	471,111
Warrants to be issued		256,172
Term		5 years
Strike price	$	1.50
Fair market value	$	0.95
Expected volatility		128	%
Risk-free interest rate		1.56	%

We have a warrant outstanding held by an investor to purchase up to 500,000 shares of our common stock at a price of $2.50 per share through December 26, 2020, exercisable beginning on December 26, 2015.

Stock Warrants Outstanding as of December 31, 2016
Exercise		Warrants		Remaining		Warrants
Price		Granted		Life (Years)		Exercisable
$	0.001		1,350,000		0.94		900,000
$	0.36		16,570		10.0		16,570
$	0.47		1,428,572		6.82		1,428,572
$	0.50		77,778		3.96		77,778
$	0.60		993,799		4.46		993,799
$	0.71		2,016,734		9.73		2,016,734
$	1.50		306,172		3.56		306,172
$	2.00		300,000		3.62		300,000
$	2.50		500,000		3.99		500,000
$	0.72		6,989,625		5.68		6,539,625