NOTE 19. - 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 the authorization of 5,000,000 shares thereunder. On April 29, 2017, the stockholders 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 December 31, 2017, the Company had available 2,933,956 shares remaining for future awards under the OIP.

During the year ended December 31, 2017, the Company issued stock option awards from the OIP for 2,692,000 shares to eligible individuals having vesting periods ranging from one to three years from the date of the award. During the year ended December 31, 2016, the Company issued stock option awards from the OIP for 2,389,037 shares to eligible individuals having vesting periods ranging from six months to three and one-half years from the date of the awards. All stock option awards were valued using the Black-Scholes option-pricing model on the date of the award, and all restricted stock awards were valued at the closing price of the Company’s common stock on the NYSE American on the date of the award.

For the years ended December 31, 2017, 2016 and 2015, the Company recorded compensation expense related to stock option and restricted stock awards of $941,650, $880,509 and $1,326,393, respectively. During the year ended December 31, 2017, there were no issuances of stock or stock options to third-party service providers. During the year ended December 31, 2016, the Company issued restricted stock in the amount of 15,811 shares and issued stock options in the amount of 100,000 shares to a third-party service provider. The Company recorded equity-based compensation expense related to the third-party providers for the years ended December 31, 2017, 2016 and 2015 in the amount of $0, $30,873 and $280,362, respectively, and does not include equity-based compensation under the Crede Consulting Agreement in the amount of $0, $0, and $1,978,785 for the years ending December 31, 2017, 2016 and 2015, respectively.

As of December 31, 2017, unrecognized compensation expense related to non-vested restricted shares and stock options amounted to approximately $3,886,000 which is expected to be recognized approximately as follows: $1,595,000, $951,000 and $569,000 during 2018, 2019 and 2020, respectively. Approximately $771,000 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 years ended December 31, 2017, 2016 and 2015:

	2017			2016			2015
Risk-free interest rate (weighted average)		2.05	%		1.31	%		1.60	%
Expected dividend yield		0	%		0	%		0	%
Expected stock price volatility		90	%		90	%		90	%
Expected life of options (weighted average)		5.56 years			4.87 years			8.96 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		Weighted Average Remaining		Aggregate
	Number of Options		Average Exercise Price		Contractual Term		Intrinsic Value

Outstanding at December 31, 2015		3,161,642	$	1.10
Granted 2016		2,489,037	$	0.97
Outstanding at December 31, 2016		5,650,679	$	1.04
Granted in 2017		2,692,000	$	1.76
Exercised in 2017		(85,988)	$	0.79
Expired in 2017		(100,000)	$	1.43
Outstanding at December 31, 2017		8,156,691	$	1.28		7.3 years	$	11,533,400

Exercisable at December 31, 2017		3,617,670	$	1.10		5.8 years	$	6,151,390

There were stock options granted during the years ended December 31, 2017 and 2016, to purchase a total of 2,692,000 and 2,489,037 shares, respectively. The weighted average grant date fair value of options issued during the years ended December 31, 2017 and 2016 was $1.28 and $0.66, respectively. The total fair value of options that vested during years ended December 31, 2017 and 2016 amounted to $750,265 and $1,242,110, respectively. During the year ended December 31, 2017, 85,988 options were exercised on a cashless basis resulting in the issuance of 51,927 shares of the Company’s common stock. No options were exercised during the year ended December 31, 2016.