10.  STOCKHOLDERS’ EQUITY:

Common Stock - The Company has authorized 20,000,000 common shares with a $0.0001 par value. There were 11,017,388 shares issued and 11,061,414 outstanding at December 31, 2015 and 9,495,045 shares issued and 10,952,356 outstanding at December 31, 2014.

On October 1, 2014, the Company commenced a non-public equity offering of up to 3,650,807 units at $1.75 per unit (the “Units”).  Each Unit consists of one common share and one-half warrant, with each whole warrant exercisable at $2.00 per share.  The purchase price for the Units is payable in either cash, conversion of outstanding Series D preferred shares or certain outstanding promissory notes.  During the first half of 2015, the Company issued 50,285 shares of common stock and warrants to purchase 25,141 shares of common stock for cash proceeds of $88,000.

On March 13, 2015 the Company issued 15,000 common shares in exchange for consulting services valued at $25,500.

Preferred Stock - The Company has authorized 4,500,000 shares of Preferred Stock with a $0.0001 par value.  As holders of any series of preferred stock convert into common shares the preferred shares are no longer outstanding and become available for reissuance.  As of December 31, 2015 and December 31, 2014, there were no shares of Series B preferred outstanding.  As of the date of this report there are 200 shares of Series B preferred shares that were automatically converted to common shares but have not been converted by transfer agent.  As of December 31, 2015 and 2014, there were 178,924 Series D preferred shares outstanding.

Series D Preferred Stock - As of December 31, 2015 and December 31, 2014 there were 178,924 and 178,924 shares of Series D preferred stock outstanding, respectively.

Holders of Series D preferred stock accrue dividends at the rate per annum of $0.24 per share, payable on a quarterly basis. As dividends are accrued and payable quarterly on the Series D preferred stock, the Company paid dividends of $31,475 and $177,846 during the years ended December 31, 2015 and 2014, respectively.  As of December 31, 2015 the Company has dividends payable in accrued expenses of $42,942.

The holders of the Series D preferred stock have conversion rights equivalent to such number of fully paid and non-assessable shares of common stock as is determined by dividing the Series D original issue price of $3.00 by the then applicable conversion price. Each Series D Share will convert into one share of our common stock at any time at the option of the holder of the Series D Shares or will be converted at the option of the Company at any time the trading price of our common stock is at least $4.50 per share for ten consecutive trading days. The conversion ratio is subject to anti-dilution adjustments, including in the event that the Company issues equity securities at a price equivalent to or less than the conversion price in effect immediately prior to such issue.

The holders of Series D preferred stock have a liquidation preference over the holders of the Company’s common stock equivalent to the purchase price per share of the Series D preferred stock plus any accrued and unpaid dividends, whether or not declared, on the Series D preferred stock. A liquidation would be deemed to occur upon the happening of customary events, including transfer of all or substantially all of the Company’s common stock or assets or a merger, or consolidation. The Company believes that such liquidation events are within its control and therefore the Company has classified the Series D preferred stock in stockholders’ equity.

The holders of Series D preferred stock vote together as a single class with the holders of the Company’s common stock on all action to be taken by the Company’s stockholders. Each share of Series D preferred stock entitles the holder to the number of votes equal to the number of shares of common stock into which the shares of the Series D preferred stock are convertible as of the record date for determining stockholders entitled to vote on such matter.

Stock Options

On April 30, 2015, the Board of Directors approved the grant of 125,000 options to the former CEO of the Company, David Dworsky, in accordance with the terms of the 2011 Equity Incentive Plan, as amended.  The options vested immediately and have an exercise price of $1.50 per share, with an expiration date of five years from the grant date.  Mr. Dworsky forfeited his vested options of 93,750 and unvested options of 206,250 with an exercise price of $3.00 per share.

On April 30, 2015, the Board of Directors approved the grant of 100,000 options to an employee for continued consulting services, in accordance with the terms of the 2011 Equity Incentive Plan, as amended.  The options vested immediately and have an exercise price of $1.50 per share, with an expiration date of five years from the grant date.  The employee forfeited his vested options of 100,000 and unvested options of 100,000 with an exercise price of $2.00 per share.

On April 30, 2015, the Board of Directors approved the grant of 200,000 options to employees of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. One-half of the options vest immediately, with the remaining vesting on the one year anniversary of the grant date.  The options have an exercise price of $1.50 per share, with an expiration date of five years from the grant date.

On January 13, 2014, the Board of Directors approved the grant of 94,000 options to employees of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. One-third of the options vest immediately, with the remaining vesting over a 2 year period.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

On January 16, 2014, the Board of Directors approved the grant of 40,000 options to the Company’s Directors for their 2013 service, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest immediately and have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

On February 1, 2014, the Board of Directors approved the grant of 50,000 options to an employee of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest ratably over a four year period.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

On April 4, 2014, the Board of Directors approved the grant of 4,000 options to employees of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. One-third of the options vest immediately, with the remaining vesting over a two year period.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

On June 19, 2014, the Board of Directors approved the grant of 10,000 options to the new Secretary of the Board. The options vest immediately.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

On June 19, 2014, the Board of Directors approved the grant of 100,000 options to an employee of the Company, in accordance with the terms of the 2011 Equity Incentive Plan, as amended. The options vest ratably over a three-year period.  The options have an exercise price of $3.00 per share, with an expiration date of five years from the grant date.

The fair value of each stock option granted was estimated on the date of grant using the Black Scholes option pricing model with the following assumptions:

Significant assumptions utilized in determining the fair value of our stock options included the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate.  In order to estimate the volatility rate at each issuance date, given that the Company has not established a historical volatility rate as it has minimal trading volume since we began trading in October 2013, management reviewed volatility rates for a number of companies with similar manufacturing operations to arrive at an estimated volatility rate for each option grant.  The term of the options was assumed to be five years, which is the contractual term of the options.  The risk-free interest rate was determined utilizing the treasury rate with a maturity equal to the estimated term of the option grant.  Finally, management assumed a zero forfeiture rate in 2014 as the options granted were either fully-vested upon the date of grant or had relatively short vesting periods.  In 2015, with Company changes and significant reduction in operations and personnel, management estimated a forfeiture rate of 25%.

For the years ended December 31, 2015 and 2014, the Company recorded stock-based compensation expense of $96,929 and $231,524, respectively.

As of December 31, 2015 and 2014 there was $6,690 and $308,041, respectively, of unrecognized compensation expense related to the issuance of the stock options.

Performance Stock Options

There were no performance stock options granted during the years ended December 31, 2015 and 2014.

See Note 5 for further discussion of the performance options.

Warrants

During 2015 the Company issued 25,141 warrants in connection with the private equity offering dated October 1, 2014 discussed above.  Each unit consisted of one share of Common stock and one-half warrant, with each whole warrant exercisable at $2.00 per share and grants the right to purchase a share of the Company’s common stock. The warrants expire three years from the date of issuance and are exercisable immediately.

During 2014 the Company issued 85,993 warrants during the year ended December 31, 2014 in connection with the Series D preferred stock unit offering. Each unit consisted of one share of Series D preferred stock and one-half warrant, with each whole warrant exercisable at $3.00 per share and grants the right to purchase a share of the Company’s common stock. All warrants outstanding in connection with the Series D unit offering expired in October 2015.

In 2014, the Company issued 283,329 warrants in connection with the non-public offering of unsecured notes and warrants up to $1,000,000. The warrants expire three years from the date of issuance and are exercisable immediately at $3.00 per share.

In 2014, the Company issued 432,995 warrants in connection with the non-public offering of unsecured notes and warrants up to $3,000,000.  The warrants expire three years from the date of issuance and are exercisable immediately at $3.00 per share.

In 2014, the Company issued 104,659 warrants in connection with the private equity offering dated October 1, 2014.  Each unit consisted of one share of Common stock and one-half warrant, with each whole warrant exercisable at $2.00 per share and grants the right to purchase a share of the Company’s common stock.  The warrants expire three years from the date of issuance and are exercisable immediately.

In 2014, the Company issued 550,438 warrants in connection with the conversion of unsecured notes payable into the private equity offering dated October 1, 2014.  The unsecured notes payable converted into one share of common stock plus one-half warrant for each $1.75 of the outstanding principal and accrued interest.  The warrants expire three years from the date of issuance and are exercisable immediately at $2.00 per share.

In 2014, the Company issued 603,742 warrants in connection with the conversion of Series D preferred shares into the private equity offering dated October 1, 2014.  The Series D preferred shares converted into one share of common stock plus one-half warrant for each $1.75 of the original purchase price.  The warrants expire three years from the date of issuance and are exercisable immediately at $2.00 per share.