NOTE 18. - STOCK BASED COMPENSATION

On October 21, 2010, the Company established the 2010 Equity Incentive Plan (“EIP”) for officers, employees, directors, consultants and advisors to the Company and its affiliates, which consisted of 4,250,000 shares of common stock. During the first quarter of 2014, the Company issued restricted stock awards from the EIP for 850,000 restricted shares to employees and directors that vested on January 27, 2015. All awards were valued at the closing price of the Company’s common stock on the measurement date of the award. Subsequent to this issuance of restricted stock, there are no shares remaining to be issued from the EIP.

On April 12, 2014, the stockholders of the Company approved the 22nd Century Group, Inc. 2014 Omnibus Incentive Plan (the “OIP”). The OIP allows for the granting of equity and cash incentive awards to eligible individuals over the life of the OIP, including the issuance of up to 5,000,000 shares of the Company’s common stock pursuant to awards under the OIP. The OIP has a term of ten years and is administered by the Compensation Committee of our Board of Directors to determine the various types of incentive awards that may be granted to recipients under this plan and the number of shares of common stock to underlie each such award under the OIP.

During the three months ended June 30, 2015, the Company issued 61,643 stock option awards from the OIP, and during the three months ended March 31, 2015, the Company issued restricted stock and stock option awards from the OIP for 20,000 shares and 1,559,999 shares, respectively, to eligible individuals having vesting periods ranging from six months to one year from the award date. All restricted stock awards were valued at the closing price of the common stock on the NYSE MKT on the measurement date of the award, and all stock option awards were valued using the Black-Scholes option-pricing model on the date of the award.

For the three and six months ended June 30, 2015, the Company recorded compensation expense related to restricted stock and stock option awards granted under the EIP and OIP of $331,773 and $685,860, respectively, ($637,365 and $994,049 for the three and six months ended June 30, 2014, respectively). During the three months ended March 31, 2015, the Company also issued restricted stock and stock options to third-party service providers in the amount of 189,196 and 100,000, respectively. There were no issuances of stock or stock options to third party service providers during the three months ended June 30, 2015. The Company recorded equity based compensation related to the third-party providers for the three and six months ended June 30, 2015 in the amount of $25,885 and $134,218, respectively, ($0 during the three and six months ended June 30, 2014).

As of June 30, 2015, unrecognized compensation expense related to non-vested restricted shares and stock options amounted to approximately $1,017,000, which is expected to be recognized approximately as follows: $615,000, $292,000, and $39,000 during 2015, 2016 and 2017, respectively. $71,000 of the unrecognized compensation expense relates to the 100,000 stock options awarded to a third-party service provider, with the vesting of such stock options being based on the achievement of a certain milestone, and the attainment of such milestone cannot be determined at this time.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for the six months ended June 30, 2015 and 2014:

	2015			2014
Risk-free interest rate (weighted average)		1.50	%		1.80	%
Expected dividend yield		0	%		0	%
Expected stock price volatility		90	%		90	%
Expected life of options (weighted average)		8.66 years			10 years

The Company estimated the expected volatility based on data used by a peer group of public companies. The expected term was estimated using the contract life of the option. The risk-free interest rate assumption was determined using yield of the equivalent U.S. Treasury bonds over the expected term. The Company has never paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. Therefore, the Company assumed an expected dividend yield of zero.

A summary of all stock option activity since December 31, 2012 is as follows:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding at December 31, 2012		465,000	$	0.69
Granted in 2013		215,000	$	0.80
Exercised in 2013		(20,000)	$	0.26
Outstanding at December 31, 2013		660,000	$	0.74
Granted in 2014		300,000	$	2.61
Exercised in 2014		(70,000)	$	0.69
Outstanding at December 31, 2014		890,000	$	1.38
Reinstated in 2015		50,000	$	0.69
Granted in 2015		1,721,642	$	1.08
Outstanding at June 30, 2015		2,661,642	$	1.17		8.0 years	$	148,800

Exercisable at June 30, 2015		790,000	$	1.10		7.4 years	$	135,600

There were 1,721,642 stock options granted during the six months ended June 30, 2015 (300,000 options were granted during the six months ended June 30, 2014). The weighted average grant date fair value of options issued during the six months ended June 30, 2015 was $0.59 ($2.07 for the six months ended June 30, 2014). The total fair value of options that vested during the six months ended June 30, 2015 amounted to $206,500 ($103,250 for the six months ended June 30, 2014). During the six months ended June 30, 2014, 50,000 options were exercised for cash proceeds of $34,500. No options were exercised during the six months ended June 30, 2015.