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12. STOCK OPTIONS AND WARRANTS | 12 Months Ended
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Dec. 31, 2012
Stock Options And Warrants |
NOTE 12. STOCK OPTIONS AND WARRANTS |
12. | STOCK OPTIONS AND WARRANTS
On August 10, 2011, the Company’s Board of Directors approved and caused the Company to adopt the Envision Solar International, Inc. 2011 Stock Incentive Plan (the “Plan”), which authorizes the issuance of up to 30,000,000 shares of the Company’s common stock pursuant to the exercise of stock options or other awards granted under the Plan. In 2008, the Board approved the 2008 equity Incentive Plan, which authorizes 6,108,571 shares under the plan. Exercise rights may not expire more than three months after the date of termination of the employee but may expire in less time as stipulated in the individual grant notice. For disability or death, the optionee or estate will generally have up to twelve months to exercise their options. For certain options the Company may have rights of first refusal for a stipulated period of time, under a separate stock restriction agreement, whereby if the holder exercise the options and then desires to sell the underlying shares, the Company has the right to repurchase such shares at a price to which the holder has agreed to sell them to a third party. In 2007, the Company authorized the 2007 Unit Option Plan when the Company was a limited liability company. Options granted under this plan were exchanged one for one for options of Envision Solar International, Inc. upon conversion to a corporation from an LLC. In March 2012, the Board of Directors effectively terminated the 2007 Plan. (See Note 1) Stock Options The Company follows the provisions of ASC Topic 718, “Compensation – Stock Compensation.” ASC Topic 718 establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued under the Company’s Stock Option Plans. The Company’s stock option compensation expense was $766,732 and $1,305,716 for the years ended December 31, 2012 and 2011, respectively, and there was $680,682 of total unrecognized compensation cost related to unvested options granted under the Company’s options plans as of December 31, 2012. This stock option expense will be recognized through December 2014. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock. In February 2010, the Company entered into a letter agreement with its Chief Executive Officer, pursuant to which the Officer agreed to terminate all of his options under Envision’s 2007 Unit Option Plan and 2008 Equity Incentive Plan upon the issuance to the Officer of a new option to purchase an aggregate of 9,162,856 shares of common stock under a new plan at an exercise price of $0.33 per share which options vest immediately upon the Company’s achievement of cumulative gross revenues of either (i) $15,000,000 during the fiscal year ended December 31, 2010 or (ii) $30,000,000 prior to December 31, 2014. From January 1, 2011 through December 31, 2011, the Company granted 16,582,856 stock options with a total valuation of $2,578,418 to certain executives and board members. Of these amounts, 9,162,856 were granted to Robert Noble, executive chairman, in exchange for the cancellation of 6,027,663 previously granted options per the terms of the earlier agreement executed by Mr. Noble and the Company and as discussed in the above paragraph. Per ASC Topic 718, this exchange of stock options was treated as a modification. The incremental value of $1,101,272, measured as the excess of the fair value of the modified award over the fair value of the original award immediately before the modification, and using the Black-Scholes option pricing model, will be amortized, along with the remaining unvested value of the original award, over the remaining vesting term of such modified options. From January 1 2012 through December 31, 2012, the Company issued 600,000 stock options under the plans with a total valuation of $101,632. We used the following assumptions for options granted in fiscal 2012 and 2011:
| 2012 | 2011
Expected volatility | 106.70% | 97.61%
Expected lives | 3 -5.5 Years | 5 -6.74 Years
Risk-free interest rate | 0.21% | 0.21%
Expected dividend yield | None | None
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics different from those of its traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk free interest rate is based upon quoted market yields for United States Treasury debt securities with a term similar to the expected term. The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation of future action surrounding dividends. Expected volatility was based on historical data for the trading of our stock on the open market. The expected lives for such grants were based on the simplified method for employees and directors. All options qualify as equity pursuant to ASC 815-40-25, “Contracts in Entity’s Own Equity.” Option activity for the years ended December 31, 2012 and 2011 under the 2008 and 2011 Plans is as follows:
|  | Number of Options |  |  | Weighted Average Exercise Price |
Outstanding at December 31, 2010 |  |  | 12,200,098 |  |  | $ | 0.45 |
Granted |  |  | 16,582,856 |  |  |  | 0.30 |
Exercised |  |  | – |  |  |  | – |
Forfeited |  |  | (6,027,663 | ) |  |  | 0.58 |
Expired |  |  | – |  |  |  | – |
Outstanding at December 31, 2011 |  |  | 22,755,291 |  |  | $ | 0.31 |
Exercisable at December 31, 2011 |  |  | 11,252,436 |  |  | $ | 0.30 |
Weighted average grant date fair value |  |  |  |  |  | $ | 0.16 |
Granted |  |  | 600,000 |  |  |  | 0.24 |
Exercised |  |  | – |  |  |  | – |
Forfeited |  |  | – |  |  |  | – |
Expired |  |  | (305,429 | ) |  |  | 0.33 |
Outstanding at December 31, 2012 |  |  | 23,049,862 |  |  | $ | 0.31 |
Exercisable at December 31, 2012 |  |  | 13,887,006 |  |  | $ | 0.29 |
Weighted average grant date fair value |  |  |  |  |  | $ | 0.17 |
The following table summarizes information about employee stock options outstanding at December 31, 2012:
Options Outstanding |  |  | Options Exercisable |
Range of Exercise Price |  |  | Number Outstanding at December 31, 2012 |  | Weighted Average Remaining Contractual Life |  | Weighted Average Exercise Price |  |  | Aggregate Intrinsic Value |  |  | Number Exercisable at December 31, 2012 |  |  | Weighted Average Exercise Price |  |  | Aggregate Intrinsic Value |
$0.23 -1.31 |  |  |  | 23,049,862 |  | 7.77 Years |  | $ | 0.31 |  |  | $ | - |  |  |  | 13,887,006 |  |  | $ | 0.29 |  |  | $ | - |
|  |  |  |  | 23,049,862 |  | 7.77 Years |  | $ | 0.31 |  |  | $ | - |  |  |  | 13,887,006 |  |  | $ | 0.29 |  |  | $ | - |
As the Company’s stock price was lower than the weighted average exercise price at December 31, 2012, there is no aggregate intrinsic value of the options. Options exercisable have a weighted average remaining contractual life of 7.21 years as of December 31, 2012. Warrants 2012 In conjunction with the conversion of the Hickson convertible promissory note in March 2012 (See note 9), the Company paid a cash fee of $40,000 and an issuance of 68,966 warrants, each with a 5 year term and an exercise price of $0.29, for a total warrant valuation of $12,274 based on the Black-Scholes pricing model to Allied Beacon, the registered placement agent of the note. The assumptions used in the valuation of these warrants include volatility of 105.82%; expected dividends of 0.0%; a discount rate of 0.214%; and a term of 5 years. These fees were expensed to interest at the conversion date. Jay Potter, our director, was a registered representative of Allied Beacon. (See note 14) As a part of the Company’s private placement in 2012, the Company issued 210,000 warrants to Allied Beacon, the placement agents. These warrants, valued at $30,590, are exercisable for 5 years at an exercise price of $0.275. There was no financial statement accounting effects for the issuance of these warrants as the value has been fully charged to Additional Paid-in-Capital as an offering cost against the offering proceeds. Jay Potter, our director, was a registered representative of Allied Beacon. (See note 14) 2011 In connection with a private placement which occurred between 2010 and 2011, stockholders were entitled to receive warrants equal to the number of shares that were purchased. As of December 31, 2011, the Company had issued 4,906,430 in 2011 and 3,009,814 in 2010 for a total of 7,916,244 warrants to purchase stock based on the number of shares sold. The warrants have an exercise price of $0.50 per share and expire 2 years from the date of issuance. The Company has the right to call and repurchase the warrants at any time after the common stock of the Company has traded at a last sale price of one dollar ($1.00) or more per share for twenty (20) days in the public securities trading market where it is quoted (i.e. currently the OTC Bulletin Board), for a repurchase price of $0.01 per warrant. Each warrant holder will have a period of twenty (20) days from the date of notice of the call to exercise the warrant before it is repurchased by the Company. As a part of the private placement discussed above, the Company issued 413,306 warrants in 2011 and 300,980 warrants in 2010 to the placement agents. These warrants are exercisable for 5 years at an exercise price of $0.40. There was no financial statement accounting effects for the issuance of these warrants as the value has been fully charged to Additional Paid-in-Capital as an offering cost against the offering proceeds. In August 2011, the Company issued 600,000 warrants, each with a five year term and exercise price of $0.25, for investor relations and financial advisory services to a Company controlled by Jay Potter, our Director. These warrants, valued at $119,361 using the Black-Scholes valuation methodology, are being expensed over the six month term of the agreement. (See Note 14) In December 2011, and in conjunction with his resignation as Executive Chairman, the Company issued 1,138,120 warrants, each with a five year term and exercise price of $0.24 (market price at day of issuance) to Robert Noble in exchange for the cancellation of debts owed to Mr. Noble for vacation and deferred salary liabilities. These warrants were valued at $209,006 using the Black-Scholes valuation methodology and there was no gain or loss on the transaction. (See note 14) Warrant activity for the years ended December 31, 2012 and 2011 are as follows:
|  | Number of Warrants |  |  | Weighted Average Exercise Price |
Outstanding at December 31, 2010 |  |  | 3,479,147 |  |  | $ | 0.52 |
Granted |  |  | 7,057,856 |  |  |  | 0.43 |
Exercised |  |  | – |  |  |  | – |
Forfeited |  |  | – |  |  |  | – |
Expired |  |  | – |  |  |  | – |
Outstanding at December 31, 2011 |  |  | 10,537,003 |  |  | $ | 0.46 |
Exercisable at December 31, 2011 |  |  | 10,537,003 |  |  | $ | 0.46 |
Weighted average grant date fair value |  |  |  |  |  | $ | 0.19 |
Granted |  |  | 278,966 |  |  | $ | 0.28 |
Exercised |  |  | – |  |  |  | – |
Forfeited |  |  | – |  |  |  | – |
Expired |  |  | (3,009,814 | ) |  |  | 0.50 |
Outstanding at December 31, 2012 |  |  | 7,806,155 |  |  | $ | 0.44 |
Exercisable at December 31, 2012 |  |  | 7,806,155 |  |  | $ | 0.44 |
Weighted average grant date fair value |  |  |  |  |  | $ | 0.15 |
Warrants exercisable have a weighted average remaining contractual life of 1.45 years as of December 31, 2012.

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