Quarterly report pursuant to Section 13 or 15(d)

7. STOCK OPTION PLAN AND STOCK-BASED COMPENSATION

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7. STOCK OPTION PLAN AND STOCK-BASED COMPENSATION
9 Months Ended
Sep. 30, 2016
Notes to Financial Statements  
NOTE 7 - STOCK OPTION PLAN AND STOCK-BASED COMPENSATION

During the year ended December 31, 2010, the Company adopted a stock option plan entitled “The 2010 Stock Plan” (“2010 Plan”) under which the Company may grant options to purchase up to 5,000,000 shares of common stock.  On September 7, 2013, the 2010 plan was amended to increase the number of shares of common stock issuable under the 2010 Plan to 7,500,000.  As of September 30, 2016 and December 31, 2015, there were 250,000 and 250,000 options outstanding under the 2010 Plan, respectively.

 

During the year ended December 31, 2011, the Company adopted a non-qualified stock option plan entitled “2011 Non-Qualified Stock Plan” (“2011 Plan”) under which the Company may grant options to purchase 2,100,000 shares of common stock.  In December 2012, the 2011 Plan was amended to increase the number of shares of common stock issuable under the 2011 Plan to 12,000,000 shares.  During the period ended March 31, 2013, the 2011 Plan was amended to increase the number of shares of common stock issuable under the 2011 Plan to 17,500,000.  As of September 30, 2016 and December 31, 2015, there were 12,039,000 and 6,039,000 options outstanding under the 2011 Plan, respectively.

 

Under the terms of the stock plans, the Board of Directors shall specify the exercise price and vesting period of each stock option on the grant date. Vesting of the options is typically one to four years and the options typically expire in five to ten years.

 

In March 2015, the Board of Directors approved a grant of non-qualified stock options to the independent directors of the Company to purchase an aggregate of 384,000 shares of the Company’s common stock at an exercise price of $0.18. The options were allocated among the directors based on service in, and chairmanship of the Company’s committees and service as lead independent director. The options vest as of December 31, 2015, provided that the directors remain directors on that date and have attended at least 75% of the scheduled meetings of the Board and the committees on which such directors serve during the 2015 calendar year. In addition, during the period ended March 31, 2015, the Company granted incentive stock options to members of management and non-management of the Company to purchase an aggregate of 700,000 shares of the Company’s common stock at exercises prices ranging from $0.18 to $0.20 per share, all of which vested immediately. The Company also granted non-qualified stock options to consultants of the Company to purchase an aggregate of 625,000 shares of the Company’s common stock at an exercise price of $0.18, all of which vested immediately.

 

During the three months ended June 30, 2015, the Company granted a non-qualified stock option, to a consultant to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $0.20, which vested immediately.

 

On August 22, 2016, the Company granted 6,000,000 options to purchase its common shares to its new CEO as a part of his employment agreement.  The options consist of 3 separate tranches with different exercise prices and vest upon reaching certain milestones. All 6 million options have a five year life. The first 2,000,000 shares have an exercise price of $0.20 per share and vest upon the Company raising at least $1 million in financing. The second 2,000,000 shares carry an exercise price of $0.40 per share and vest upon the Company raising $5 million in financing. The third 2,000,000 shares carry an exercise price of $0.60 per share and vest upon the Company entering into a significant corporate alliance for substantial marketing and selling of the Company’s product portfolio.

 

In addition, the Company amended 1,500,000 stock options previously granted to the new CEO to extend the expiration date to August 22, 2026. These options were all previously vested.

The fair value of stock options granted or revalued for the nine months ended September 30, 2016 and 2015 was calculated with the following assumptions:

  2016   2015  
Risk-free interest rate     1.1 %     1.3% - 1.9 %
Expected dividend yield     0 %     0 %
Volatility factor     213 %     79 – 91 %
Expected life of option 5 years   4.60 to 10 years  

 

The weighted-average fair value of stock options granted during the nine month period ended September, 2016 and 2015, under the Black-Scholes option pricing model, was $0.06 and $0.14 per share, respectively.

 

The Company recognized $225,877 and $25,977 of stock-based compensation costs in the accompanying statement of operations for the three months ended September 30, 2016 and 2015, respectively.  The Company recognized $225,877 and $267,224 of stock-based compensation costs in the accompanying statement of operations for the nine months ended September 30, 2016 and 2015, respectively.  As of September 30, 2016, there was $244,634 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized in future periods. 

 

The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2016:

 

    Shares     Exercise Price per Share    

Weighted Average

Exercise Price per Share

 
Outstanding as of December 31, 2015     6,289,000     $ 0.10-1.21     $ 0.37  
      Granted     6,000,000     $ 0.20-0.60     $ 0.40  
      Exercised     -       -       -  
      Options forfeited/cancelled     -       -       -  
Outstanding as of September 30, 2016     12,289,000     $ 0.10-1.21     $ 0.39  

 

There were no stock option exercises during the three and nine months ended September 30, 2016 or September 30, 2015. 

 

 

The following table summarizes information about stock options that are vested or expected to vest at September 30, 2016: 

 

Vested or Expected to Vest   Exercisable Options  
        Weighted   Weighted           Weighted   Weighted      
        Average   Average           Average   Average      
        Exercise   Remaining   Aggregate   Number   Exercise   Remaining   Aggregate  
Exercise   Number of   Price Per   Contractual   Intrinsic   of   Price   Contractual   Intrinsic  
Price   Options   Share   Life (Years)   Value   Options   Per Share   Life (Years)   Value  
  $ 0.10       1,795,000     $ 0.10       1.00     $ -       1,795,000     $ 0.10       1.00     $ -  
    0.18       934,000       0.18       6.75       -       934,000       0.18       6.75       -  
    0.20       2,150,000       0.20       5.24       -       2,150,000       0.20       5.24       -  
    0.37       58,000       0.37       5.93       -       58,000       0.37       5.93       -  
    0.40       2,000,000       0.40       4.92       122,798       -       0.40       4.92       -  
    0.42       63,000       0.42       4.26       -       63,000       0.42       4.26       -  
    0.50       2,810,000       0.50       1.35       -       2,810,000       0.50       1.35       -  
    0.60       2,000,000       0.60       4.92       121,836       -       040       4.92       -  
    0.69       100,000       0.69       7.63       -       100,000       0.69       7.63       -  
    1.21       379,000       1.21       7.57       -       379,000       1.21       7.57       -  
  $ 0.10-1.21       12,289,000     $ 0.39       4.34     $ 244,634       8,289,000     $ 0.33       4.03     $ -  

 

The weighted-average remaining contractual life for stock options exercisable at September 30, 2016 is 4.34 years. At September 30, 2016, the Company has 5,461,000 and 7,250,000 options available for grant under the 2011 Plan and 2010 Plan, respectively. There was $244,634 and $0 intrinsic value for unvested, exercisable options at September 30, 2016 and December 31, 2015. There was $0 intrinsic value for fully vested exercisable options at September 30, 2016 and December 31, 2015. There were no options exercised in the three or nine months ended September 30, 2016 or September 30, 2015. No actual tax benefit was realized from stock option exercises during these periods.

 

As of September 30, 2016, the Company has 4,000,000 of unvested shares.