STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

From January 1, 2015 to June 30, 2015, three of the January 2014 Issuance note holders and one of the December 2013 Issuance note holders converted loan notes with principal balances totaling $290,000 and accrued interest of $1,063 into an aggregate of 58,213 shares of the Company’s common stock at a conversion price of $5.00 per share.

On January 21, 2015, Full Circle executed its option to cashlessly exercise 1,215,000 warrants in exchange for 660,263 common shares of the Company’s stock (See "Series C Warrants" below).

In January 2015, the Company issued 50,000 shares to Spector Group in satisfaction of architectural services performed for The Greenhouse. The shares were valued at approximately $114,000 and had been included in accrued stock payable at December 31, 2014.

Pursuant to the terms of the IPG APA, the Company will deliver to Seller 500,000 restricted shares of the Company’s common stock, which will vest over a one-year period. On the date of the agreement, March 26, 2015, the 500,000 shares had an initial fair value of $1,240,000, based on a closing price per share of the Company of $2.48 on March 26, 2015. Due to restrictions in the ability to trade the Company’s shares, a discount of fifteen percent (15%) was applied to the fair value of the shares the Company anticipates issuing to the Seller. After taking into consideration the illiquidity of the shares, approximately $1,054,000 was recorded to accrued stock payable as a component of the purchase price of the IPG Acquisition (See Note 4).

On August 4, 2014, pursuant to an agreement with Michael Feinsod, the Company’s Board of Directors (the “Board”) appointed Michael Feinsod as Chairman of the Board and approved a compensatory arrangement with Infinity Capital LLC ("Infinity Capital"), an investment management company Mr. Feinsod founded in 1999 (the “Feinsod Agreement”). Mr. Feinsod, who is a director of the Company, is deemed to be the beneficial owner of Infinity Capital. On April 28, 2015, pursuant to the Feinsod Agreement, the Company issued 1,000,000 shares of its stock to Infinity Capital as a result of the uplisting of the Company’s stock to the OTC Market's OTCQB on April 28, 2015. On the date of issue, the 1,000,000 shares had an initial fair value of $3,490,000, based on a closing price per share of the Company of $3.49 on April 27, 2015. Due to restrictions in the ability to trade the Company’s shares, a discount of fifteen percent (15%) was applied to the fair value of the shares. After taking into consideration the illiquidity of the shares issued, $2,966,500 and was recorded to share-based compensation, $1,000 was recorded to common stock (par value) and $2,965,500 was recorded to additional paid-in capital.

In connection with the Feinsod Agreement, the Company agreed to issue 150,000 shares of the Company's common stock to Infinity Capital on each of the first and second anniversary of the agreement, contingent upon Mr. Feinsod remaining as a member of the Board at each of those dates. As it is the Company's anticipation that Mr. Feinsod will remain a member of the Board through August 2016, during the three-months ended June 30, 2015, the Company recorded approximately $249,000 to share-based compensation, of which approximately $166,000 and $83,000 was recorded to accrued stock payable (current) and accrued stock payable (noncurrent), respectively. During the six months ended June 30, 2015, the Company recorded approximately $498,000 to share-based compensation, of which approximately $332,000 and $166,000 was recorded to accrued stock payable (current) and accrued stock payable (noncurrent), respectively.

On May 1, 2015, the Company and Full Circle entered into Amendment No. 2 to the Series C Warrants, pursuant to which Full Circle cashlessly exercised 160,000 warrants and received 100,000 shares of the Company’s common stock. On May 4, 2015, Full Circle exercised its remaining warrants under the Series C Warrants to purchase 25,000 shares of the Company’s common stock for $4.00 per share (See "Series C Warrants" below and Note 13).

On May 13, 2015, the Company hired two individuals from Next Big Crop ("NBC"), an unaffiliated entity serving the cannabis industry (the "NBC Consultants"). In connection with the hirings, the individuals will service the Company's new and existing clients. The Company did not purchase any existing client base from NBC and upon execution of employment agreements, granted these persons a total of 100,000 shares of the Company's common stock with a vesting date of January 1, 2016. On the date of grant, the 100,000 shares had an initial fair value of $311,000, based on a closing price per share of the Company of $3.11 on May 13, 2015. Due to restrictions in the ability to trade the Company’s shares, a discount of fifteen percent (15%) was applied to the fair value of the shares. After taking into consideration the illiquidity of the shares, the fair value was determined to be $264,350. During the three months ended June 30, 2015, the Company recorded $54,226 to share-based compensation and to accrued stock payable (current).

The following tables summarize the changes in shares of the Company's common stock issued and outstanding for the six months ended June 30, 2015 and 2014, respectively:



	2015	2014
Beginning balance	12,499,933	15,137,200
Re-acquired from stockholders	0	(1,750,000)
Issued to Spector Group for services	50,000	0
Issued to Infinity Capital upon uplisting of the Company's stock	1,000,000	0
Issued to Full Circle via cashless exercises (1)	760,263	0
Issued to Full Circle for cash consideration (1)	25,000	0
Issued in settlement of converted 12% Convertible Notes and accrued interest	58,213	51,733
Ending balance	14,393,409	13,438,933

(1) See "Series C Warrants" below and Note 13.

Options

On October 29, 2014, the Board authorized the adoption of the Company's 2014 Equity Incentive Plan (the “Incentive Plan”), which is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning the long term interests of participants in the Incentive Plan with those of the Company and the Company's stockholders. The Incentive Plan provides that up to 10 million shares of the Company's common stock may be issued under the Plan. On June 26, 2015, the Company's stockholders ratified the Incentive Plan.

Options granted consists of the following at June 30, 2015:



Options Granted	Exercise Price		Number of Options Granted	Weighted Average Life (in months)	Aggregated Intrinsic Value(1)
October 2014 Grant	$	3.70	125,000	36	$	—
Frichtel	3.75		300,000	34	—
NBC Consultants	3.11		200,000	34	—
	$	3.54	625,000	34.40


(1)	Amount represents the difference between the exercise price and the closing share price of the Company’s stock on the last trading day of the corresponding period, multiplied by the number of in-the-money options.

On May 1, 2015, the Company and Robert Frichtel entered into an Executive Employment Agreement (the “Frichtel Agreement”) and an Option Agreement (the “Frichtel Option Agreement”) in order to secure Mr. Frichtel’s continued employment as the Company’s Chief Executive Officer. Pursuant to the Frichtel Option Agreement, Mr. Frichtel received options to purchase 300,000 shares of the Company’s common stock at a price of $3.75 per share (which price was based on the closing price of the Company’s common stock on May 1, 2015), 100,000 of which vested upon execution of the Frichtel Agreement, and provided that Mr. Frichtel remains an employee of the Company on each date, 100,000 of which will vest on May 1, 2016, and the remaining 100,000 will vest on May 1, 2017. On the date of grant, these options had a fair value of approximately $848,500. For the three months ended June 30, 2015, the Company recorded $353,571 to share-based compensation expense and to additional paid-in capital. The remaining $494,922 in unrecognized compensation cost at June 30, 2015 will be recognized over the remaining vesting periods.

In connection with the Company's hiring of the NBC Consultants as full-time employees, the Company granted the individuals options to purchase a total of 200,000 shares of the Company's common stock. Provided that both individuals remain employees of the Company through each date, 100,000 will vest on May 13, 2016, and 100,000 will vest on May 13, 2017. On the date of grant, these options had a fair value of approximately $466,900. For the three months ended June 30, 2015, the Company recorded $46,053 to share-based compensation expense and to additional paid-in capital. The remaining unrecognized compensation of $420,876 at June 30, 2015 will be recorded on a straight-line basis over the remaining vesting period.

As noted above, on October 29, 2014, the Company granted certain employees options to purchase the Company's common stock (the "October 2014 Grant"). At that time, the Incentive Plan had not been approved by the Company's shareholders. These options, which vested immediately on the grant date, were valued at approximately $169,700 on June 26, 2015, the day the Company's shareholders approved the Incentive Plan, which the Company recorded as share-based compensation expense and additional paid-in capital.

The following tables summarize the changes in options outstanding and exercisable for the three months ended June 30, 2015:



	Outstanding	Exercisable
Beginning balance	—	—
Granted/ Vested	625,000	100,000
Exercised	—	—
Canceled or forfeited	—	—
Ending balance	625,000	100,000

Fair Value of Options Granted

Fair value is generally based on independent sources such as quoted market prices or dealer price quotations. To the extent certain financial instruments trade infrequently or are non-marketable securities, they may not have readily determinable fair values. The Company estimated the fair value of the Company's options using a Black-Scholes option pricing model and available information that management deems most relevant. The following assumptions were used to derive the value of the options granted during the six months ended June 30, 2015:



	Frichtel			NBC Consultants			October 2014 Grant
Grant date	5/1/2015			5/13/2015			6/26/2015
Stock price on Grant date (1)	$	3.75		$	3.11		$	2.10
Exercise price (2)	$	3.75		$	3.11		$	3.70
Risk-free interest rate (3)	0.97		%	0.97		%	1.09		%
Expected dividend yield (4)	0.00		%	0.00		%	0.00		%
Expected term (in years) (5)	3			3			3
Expected volatility (6)	133		%	132		%	126		%

(1) Closing price of the Company’s stock on the valuation date;

(2) Price at which the security can be purchased by exercising prior to expiration;


(3)	Risk-free interest rate is based on the U.S. Government Securities Treasury Bill constant maturity rate on the date of issuance;


(4)	The Company has not historically declared dividends;


(5)	Expected term of the security based on the respective expiration dates; and


(6)	Statistical measure (standard deviation) of the Company’s stock price to change over time.

Warrants

Warrants consists of the following at June 30, 2015:



Warrant Name	Exercise Price		Warrants Outstanding	Weighted Average Life of Outstanding Warrants in Months	Date of Expiration
Series A	$	10.00	973,000	13	7/31/2016
Series B	5.00		42,700	40	10/31/2018
Evans	4.40		600,000	16	10/21/2016
Spector	4.40		150,000	16	12/12/2016
IPG ($4.50)	4.50		250,000	33	3/26/2018
IPG ($5.00)	5.00		250,000	33	3/26/2018
Castro	3.75		20,000	22	4/24/2017
PLR	3.49		20,000	22	4/27/2017
10% Notes	1.08		162,500	18	12/1/2016
	$	6.46	2,468,200	18.91

Series C Warrants

On January 21, 2014, the Company issued to Full Circle, for $500,000, fully-vested warrants which allow Full Circle to purchase up to 1,000,000 shares of the Company’s common stock at any time on or prior to January 21, 2017 at a price of $5.50 per share. As part of the $500,000 proceeds from the warrant being issued to Full Circle, $100,000 was retained by Full Circle to cover legal and deal related expenses of future financing transactions, which was recorded as deferred financing costs (See Note 7). On September 24, 2014, the Company and Full Circle entered into Amendment No. 1 to the SPA, which changed the exercise price of the warrants issuable to $4.00 per share of the Company’s common stock, and increased the amount of warrants issuable to 1,400,000 warrants to purchase shares of the Company’s common stock.

On January 21, 2015, Full Circle executed its option to cashlessly exercise 1,215,000 warrants in exchange for 660,263 common shares of the Company’s stock (see Note 13). On May 1, 2015, the Company and Full Circle entered into Amendment No. 2 to the Series C Warrants, pursuant to which Full Circle cashlessly exercised 160,000 warrants and received 100,000 shares of the Company’s common stock. On May 4, 2015, Full Circle exercised its remaining 25,000 warrants under the Series C Warrants to purchase 25,000 shares of the Company’s common stock for $4.00 per share. The Company issued a total of 760,263 shares of the Company's common stock to Full Circle in exchange for Full Circle's cashless exercise of 1,375,000 warrants, and issued 25,000 shares of the Company's common stock to Full Circle in exchange for Full Circle's exercise of 25,000 warrants for cash consideration of $100,000. There are no more warrants under the Series C Warrants outstanding (See Note 13).

IPG Warrants

In connection with the IPG APA, the Company issued to IPG fully-vested warrants to purchase 250,000 shares of the Company’s common stock at a conversion price of $4.50 per share, (the "IPG $4.50 Warrants"), and warrants 250,000 shares of the Company’s common stock at a conversion price of $5.00 per share (the "IPG $5.00 Warrants") (collectively, the "IPG Warrants"). The IPG Warrants are subject to customary adjustments in the event of reclassification of the Company, consolidation of the Company, merger, subdivision of shares of the Company’s common stock, combination of shares of the Company’s common stock or payment of dividends in the form of the Company’s common stock. The IPG Warrants expire three years after their initial issuance date. On the date of grant, the IPG $4.50 Warrants and the IPG $5.00 Warrants had fair values of approximately $421,000 and $412,000, respectively, based on the Black-Scholes pricing model, which was included in the purchase price of IPG (See Note 4).

Castro & PLR Warrants

On April 24, 2015, the Company and Rafael Castro entered into a one-year contract whereby Mr. Castro would provide the Company with services to raise capital. In connection with the Company's agreement with Mr. Castro, the Company granted Mr. Castro warrants to purchase 20,000 shares of the Company's common stock at an exercise price of $3.75 per share with a term of 2 years. These warrants will vest over the service term and had a fair value of approximately $49,400 on the date of grant.

On April 27, 2015, the Company and Porter, LeVay & Rose, Inc. ("PLR") entered into a one-year contract whereby PLR would provide the Company with investor relations services. In connection with the Company's agreement with PLR, the Company granted PLR warrants to purchase 20,000 shares of the Company's common stock at an exercise price of $3.49 per share with a term of 2 years. These warrants will vest over the service term and had a fair value of approximately $46,000 on the date of grant.

In connection with the Castro and PLR Warrants, for the three months ended June 30, 2015, the Company recorded $17,454 to share-based compensation expense and additional paid-in capital. The Company will revalue the warrants at each reporting period and recognize the remaining unrecognized compensation cost on a straight-line basis over the remaining contract periods.

10% Warrants

On May 7, 2015, the Company initiated a private placement pursuant to the 10% Agreement between the Company and certain accredited investors. Each investor was granted 10% Warrants (See Note 10). The 10% Warrants are exercisable for a period of eighteen (18) months after grant date and have an exercise price of $1.08 per share. As of June 30, 2015, the Company had 162,500 10% Warrants outstanding to various investors (See Note 10).

The following tables summarize the changes in warrants issued and outstanding for the six months ended June 30, 2015 and 2014, respectively:



	2015		2014
Beginning balance	3,165,700		983,600
Issued to Full Circle (Series C)	—		1,400,000
Issued to placement agent (Series B)	—		32,100
Issued to IPG	500,000		—
Issued for services (Castro and PLR)	40,000		—
Issued in connection with private placement debt (10% Warrants)	162,500		—
Converted by Full Circle via cashless conversion option	(1,375,000	)	—
Converted by Full Circle for cash consideration	(25,000	)	—
Ending balance	2,468,200		2,415,700

Fair Value of Warrants

Fair value is generally based on independent sources such as quoted market prices or dealer price quotations. To the extent certain financial instruments trade infrequently or are non-marketable securities, they may not have readily determinable fair values. The Company estimated the fair value of the Company's warrants using a Black-Scholes option pricing model and available information that management deems most relevant. The following assumptions were used to derive the value of the warrants issued during the six months ended June 30, 2015:



	Castro			PLR			10% Notes (Weighted Average)
Grant date	4/24/2015			4/27/2015			6/1/2015
Stock price on Grant date (1)	$	3.75		$	3.49		$	2.87
Exercise price (2)	$	3.75		$	3.49		$	1.08
Risk-free interest rate (3)	0.54		%	0.54		%	0.45		%
Expected dividend yield (4)	0.00		%	0.00		%	0.00		%
Expected term (in years) (5)	2			2			1.5
Expected volatility (6)	134		%	134		%	130		%

(1) Closing price of the Company’s stock on the valuation date;

(2) Price at which the security can be purchased by exercising prior to expiration;


(3)	Risk-free interest rate is based on the U.S. Government Securities Treasury Bill constant maturity rate on the date of issuance;


(4)	The Company has not historically declared dividends;


(5)	Expected term of the security based on the respective expiration dates; and


(6)	Statistical measure (standard deviation) of the Company’s stock price to change over time.