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13. STOCK OPTIONS AND WARRANTS

12 Months Ended

Dec. 31, 2014

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.

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 $457,152 and $435,028 for the years ended December 31, 2014 and 2013, respectively, and there was $23,551 of total unrecognized compensation cost related to unvested options granted under the Company’s options plans as of December 31, 2014. This stock option expense will be recognized through July 2016.

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.

From January 1, 2013 through December 31, 2013, the Company issued 1,000,000 stock options under the plan with a total valuation of $164,935.

From January 1, 2014 through December 31, 2014, the Company issued 600,000 stock options under the plans with a total valuation of $87,224.

We used the following assumptions for options granted in fiscal 2014 and 2013:

	2014	2013
Expected volatility	138.71%	128.75 -134.02%
Expected term	3-5.5 Years	5 -10 Years
Risk-free interest rate	1.52%	0.02%
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, 2014 and 2013 under the 2008 and 2011 Plans is as follows:

	Number of Options		Weighted Average Exercise Price
Outstanding at December 31, 2012		23,049,862	$	0.31
Granted		1,000,000		0.19
Exercised		–		–
Forfeited		–		–
Expired		–		–
Outstanding at December 31, 2013		24,049,862	$	0.30
Granted		600,000		0.19
Exercised		–		–
Forfeited		9,262,855		0.33
Expired		–		–
Outstanding at December 31, 2014		15,387,007	$	0.28
Exercisable at December 31, 2014		15,275,896	$	0.28
Weighted average grant date fair value			$	0.15

The following table summarizes information about employee stock options outstanding at December 31, 2014:

Options Outstanding								Options Exercisable
Range of Exercise Price		Number Outstanding at December 31, 2014	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value		Number Exercisable at December 31, 2014	Weighted Average Exercise Price		Aggregate Intrinsic Value
$	0.165-1.31	15,387,007	5.45 Years	$	0.28	$	–	15,275,876	$	0.28	$	–
		15,387,007	5.45 Years	$	0.28	$	–	15,275,876	$	0.28	$	–

As the Company’s stock price was lower than the weighted average exercise price at December 31, 2014, there is no aggregate intrinsic value of the options.

Options exercisable have a weighted average remaining contractual life of 5.45 years as of December 31, 2014.

Warrants

2014

During the twelve months ended December 31, 2014, pursuant to a private placement, the Company issued 20,186,725 warrants to purchase common stock which is based on the number of units sold in the private offering. These warrants have an exercise price of $0.15 per share and expire 3 years from the date of issuance.

As a part of the Company’s private placement, the Company effectively issued 428,499 warrants in the twelve months ended December 31, 2014 to the placement agents. These warrants, valued at $68,124, are exercisable for 3 years at an exercise price of $0.25 per share. The Company estimated the fair value of the warrants utilizing the Black-Scholes pricing model. The assumptions used in the valuation of 106,667 of these warrants include volatility of 138.71%, expected dividends of 0.0%, a discount rate of 1.52%, and expected term of 3 years. The assumptions used in the valuation of 66,666 of these warrants include volatility of 172.66%, expected dividends of 0.0%, a discount rate of 0.66%, and expected term of 3 years. The assumptions used in the valuation of 95,166 of these warrants include volatility of 171.32%, expected dividends of 0.0%, a discount rate of 0.66%, and expected term of 3 years. The assumptions used in the valuation of 160,000 of these warrants include volatility of 172.22%, expected dividends of 0.0%, a discount rate of 0.66%, and expected term of 3 years. There was no financial statement accounting effect for the issuance of these warrants as their fair value has been charged to Additional Paid-in-Capital as an offering cost and was offset by a credit to Additional Paid-in-Capital for their fair value when recording the issuance of these warrants.

As a fee to extend the term of the Gemini Master Fund convertible debt, the Company issued 1,500,000 common stock purchase warrants valued at $193,625 using the Black-Scholes valuation methodology, each with a three year term and $0.20 strike price, to the holder which was recorded as debt discount and will be amortized over the remaining term of the note. The assumptions used in the valuation of these options include volatility of 140.80%, expected dividends of 0.0%, a discount rate of 1.52%, and expected term of 3 years. (See Note 10)

As an inducement to Gemini Master Fund to convert the principal debt amount discussed above, the Company agreed to issue 3,727,778 common stock purchase warrants, each with a strike price of $0.20 and a three year term. These warrants were valued at $482,300 using the Black-Scholes valuation methodology and were expensed at the date of the transaction. The assumptions used in the valuation of these options include volatility of 140.80%, expected dividends of 0.0%, a discount rate of 1.52%, and expected term of 3 years. (See Note 10)

During the twelve months ended December 31, 2014, 6,475,101 warrants have expired.

2013

In connection with the private placement which occurred in 2013, purchasing stockholders were entitled to receive warrants to purchase shares of the Company equal to the number of units that were purchased. Based on the number of units sold, the Company issued 6,450,667 warrants to purchase one share of common stock for each warrant. The warrants have an exercise price of $0.20 per share and expire one year from the date of issuance.

Further, as a part of the Company’s private placement in 2013, the Company issued 645,067 warrants to the placement agents. These warrants, valued at $130,402, are exercisable for 5 years at an exercise price of $0.25. 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. The Company estimated the fair value of the warrants utilizing the Black-Scholes pricing model. The assumptions used in the valuation of these warrants include:

Assumptions
Expected term	5 yrs
Expected Volatility	130.96%
Risk free rate	0.14%
Expected Dividend Yield	0.00%

Warrant activity for the years ended December 31, 2014 and 2013 are as follows:

	Number of Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2012		7,806,155		$	0.44
Granted		7,095,734			0.20
Exercised		–			–
Forfeited		–			–
Expired		(5,050,349	)		0.52
Outstanding at December 31, 2013		9,851,540		$	0.23
Granted		25,843,002		$	0.43
Exercised		–			–
Forfeited		–			–
Expired		(6,475,101	)		0.20
Outstanding at December 31, 2014		29,219,441		$	0.18
Exercisable at December 31, 2014		29,219,441		$	0.18
Weighted average grant date fair value				$	0.13

Warrants exercisable have a weighted average remaining contractual life of 2.47 years as of December 31, 2014.