Quarterly report pursuant to Section 13 or 15(d)

6. Stock Options and Warrants

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6. Stock Options and Warrants
6 Months Ended
Jun. 30, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Options and Warrants

Common stock issued for services

 

During the six months ended June 30, 2017, the Company issued a total of 15,940,227 shares of common stock for services valued at $442,865, including 5,000,000 shares of common stock issued to the Company’s CEO as part of an employment agreement, 3,000,000 shares of common stock issued to a consultant, and 7,940,227 shares of common stock issued to employees. The fair value of the shares was based on the closing price of the Company’s common stock on the date the shares were granted, which ranged from $0.022 per share to $0.0355 per share. For the three and six months ended June 30, 2017, total fair value of shares granted of $174,685 and $442,685, respectively, is included in general and administrative expense. During the six months ended June 30, 2016, the Company did not issue any shares of common stock for services.

 

Options

 

On February 14, 2017, the Company granted options to purchase 5,000,000 shares of common stock with an exercise price of $0.05 to the Company’s CEO as part of an employment agreement. Options exercisable into 1,000,000 shares of common stock vested immediately and the options exercisable into 4,000,000 shares of common stock will vest monthly over 48 months beginning on February 14, 2018. The fair value of these options was determined to be $160,416.

 

On May 8, 2017, the Company granted options to purchase 450,000 shares of common stock with an exercise price of $0.05 to the Company’s employees. The options vested immediately. The fair value of these options was determined to be $18,861.

 

The Company used the Black-Scholes-Merton option-pricing models with the following assumptions to calculate fair value :

 

    February 14, 2017 May 8, 2017  
Expected volatility     173% 194%  
Risk-free interest rate     2.47% 2.39%  
Expected dividend yield     0% 0%  
Expected life     10 years 10 years  

 

The expected volatility is based on historical volatility of the Company’s stock. The expected life of the options was based on the term of the options. The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future. For the six months ending June 30, 2016, the Company had no stock options requiring an assessment of value.

 

During the three months ended June 30, 2017 and 2016, the Company recorded compensation costs of $27,990 and $11,942, respectively, relating to the vesting of stock options. During the six months ended June 30, 2017 and 2016, the Company recorded compensation costs of $66,194 and $23,883, respectively, relating to the vesting of stock options.  As of June 30, 2017, the aggregate value of unvested options was $116,387, which will continue to be amortized as compensation cost as the options vest over terms ranging from one to four years, as applicable.

 

The stock option activity for the six months ended June 30, 2017 is as follows:

 

    Number of
Options
    Weighted
Average
Exercise Price
    Weighted
Average
Remaining
Contractual
Term
 
Balance outstanding, December 31, 2016     900,000     $ 0.17       4.67  
Granted     5,450,000       0.05       9.65  
Exercised                  
Forfeited/expired     (750,000 )     0.15        
Balance outstanding, June 30, 2017     5,600,000     $ 0.06       9.60  
Exercisable, June 30, 2017     1,933,332     $ 0.07       9.53  

 

At June 30, 2017, the Company’s outstanding and exercisable options had no intrinsic value.

 

Warrants

 

On February 14, 2017, pursuant to the employment agreement with the Company CEO, warrants exercisable into 3,000,000 shares of common stock issued to the Company’s CEO in 2015 were deemed fully vested and the exercise price of the warrants was reduced from $0.25 per share to $0.05 per share. The Company determined the expense related to this modification was $13,023 and is included in general and administrative expense.

 

On January 20, 2017, the Company issued warrants exercisable into 350,000 shares of common stock for services. The fair value of warrants issued for services was determined to be $9,378. The Company recorded the full $9,378 in general and administrative expense since it determined that the award is a certainty and the service performance and its future benefit are not assured in this arrangement.

 

For the six months ending June 30, 2017 and 2016, the fair value of warrant awards was estimated using the Black-Scholes-Merton option-pricing model with the following assumptions:

 

    June 30, 2017     June 30, 2016  
Expected volatility     171%       121%  
Risk-free interest rate     1.5%       1.08%  
Expected dividend yield     0%       0%  
Expected life     2.5 years       3 years  

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected life of the exercise feature of the warrants was based on the remaining term of the warrants. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.

 

During the three months ended June 30, 2017 and 2016, the Company recorded compensation costs of $19,569 and $22,527, respectively, relating to the vesting of stock warrants. During the six months ended June 30, 2017 and 2016, the Company recorded compensation costs of $19,569 and $76,388, respectively, relating to the vesting of stock warrants. As of June 30, 2017, the aggregate value of unvested warrants was $0.

 

A summary of the Company’s warrant activity during the six months ended June 30, 2017 is presented below:

 

    Number of
Warrants
    Weighted
Average
Exercise Price
    Weighted
Average
Remaining
Contractual
Term
 
Balance outstanding, December 31, 2016     46,958,072     $ 0.11       2.13  
Granted     350,000       0.01       2.81  
Exercised     (1,850,000 )     0.01       2.30  
Forfeited/expired     (885,875 )     0.09        
Balance outstanding, June 30, 2017     44,572,197       0.10       1.66  
Exercisable, June 30, 2017     44,572,197     $ 0.10       1.66  

 

At June 30, 2017, the Company’s outstanding warrants had an intrinsic value of $348,480.