NOTE 15. – EQUITY BASED COMPENSATION

On April 12, 2014, the stockholders of the Company approved the 22nd Century Group, Inc. 2014 Omnibus Incentive Plan (the “OIP”) and on April 29, 2017, the shareholders approved an amendment to the OIP to increase the number of shares available for issuance by 5,000,000 shares. 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 an aggregate of 10,000,000 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 the Company’s 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. As of June 30, 2017, we had available 3,949,765 shares remaining for future awards under the OIP.

During the three months ended June 30, 2017, the Company issued stock option awards from the OIP for 1,372,000, to eligible individuals having vesting periods ranging from one to three years from the date of the award. There were no equity awards from the OIP during the three months ended March 31, 2017. During the three and six months ended June 30, 2016, the Company issued stock option awards from the OIP for 90,000 shares and 1,724,037 shares, respectively. 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, 2017, the Company recorded compensation expense related to restricted stock and stock option awards granted under the OIP of $154,004 and $322,983, respectively, ($212,222 and $472,216 for the three and six months ended June 30, 2016, respectively). During the three and six months ended June 30, 2017, there were no issuances of stock to third-party service providers. During the three and six months ended June 30, 2016, the Company issued stock to third-party service providers in the amount of 10,000 shares and 15,811 shares, respectively, and during the three months ended June 30, 2016, the Company issued stock options in the amount of 100,000 shares to a third-party service provider. The Company had no equity based compensation expense related to third-party providers for the three and six months ended June 30, 2017. During the three and six months ended June 30, 2016, the Company recorded equity based compensation expense related to third-party providers in the amount of $8,000 and $30,873, respectively.

As of June 30, 2017, unrecognized compensation expense related to non-vested restricted shares and stock options amounted to approximately $2,390,000, which is expected to be recognized approximately as follows: $507,000, $828,000, $448,000 and $140,000 during 2017, 2018, 2019 and 2020, respectively. Approximately $467,000 of the unrecognized compensation expense relates to previously issued stock options, 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, 2017 and 2016:

	2017			2016
Risk-free interest rate (weighted average)		2.12	%		1.38	%
Expected dividend yield		0	%		0	%
Expected stock price volatility		90	%		90	%
Expected life of options (weighted average)		5.13 years			5.03 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, 2015 is as follows:

					Weighted
					Average
			Weighted		Remaining		Aggregate
	Number of		Average		Contractual		Intrinsic
	Options		Exercise Price		Term		Value
Outstanding at December 31, 2015		3,161,642	$	1.10
Granted in 2016		2,489,037	$	0.97
Outstanding at December 31, 2016		5,650,679	$	1.04
Granted in 2017		1,372,000	$	1.39
Exercised in 2017		(56,991)	$	0.72
Outstanding at June 30, 2017		6,965,688	$	1.12		7.3 years	$	4,681,882

Exercisable at June 30, 2017		3,663,334	$	1.11		6.2 years	$	2,611,378

There were stock options granted during the six months ended June 30, 2017 and 2016, to purchase a total of 1,372,000 shares and 1,824,037 shares, respectively. The weighted average grant date fair value of options issued during the six months ended June 30, 2017 was $0.97 ($0.64 for the six months ended June 30, 2016). The total fair value of options that vested during the six months ended June 30, 2017 amounted to $684,265 ($1,138,910 for the six months ended June 30, 2016). There were 56,991 options exercised during the six months ended June 30, 2017 and during the six months ended June 30, 2016 no options were exercised.