NOTE 11. STOCK WARRANTS, STOCK OPTIONS AND RESTRICTED STOCK UNITS

The Company accounts for share-based compensation stock options and restricted stock units, and non-employee stock warrants, whereby costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, utilizing the Black-Scholes pricing or the Monte Carlo simulation option pricing models for stock options and warrants, and the closing price of our common stock on the grant date for restricted stock units. Unless otherwise provided for, the Company covers equity instrument exercises by issuing new shares. 

Stock Warrants

On March 30, 2022, the Company issued warrants to purchase up to 101,626 shares of common stock at $6 per share in exchange for a waiver of default penalties under the terms of a convertible debenture. The relative fair value of the warrants at the time of issuance was $864,000. The exercise price on the warrants was reduced to $1.35 per share in September 2022 in accordance with a down-round provision contained in the warrants. The warrants expire seven years after the date of issuance.

On May 18, 2022, the Company issued through an underwritten public offering 4,705,884 Offering Warrants, 424,116 Underwriter Warrants, and 141,177 Representative Warrants to purchase common stock of the Company at exercise prices of $4.25, $4.25 and $5.3125 per share, respectively. The warrants expire five years from the date of issuance and were valued using the Monte Carlo simulation option pricing model at approximately $5,700,000. The exercise price on the Offering Warrants and Underwriter Warrants was reduced to $2.125 per share in September 2022 in accordance with a down-round provision contained in those warrants.

In January 2023, the Company entered into a consulting agreement for professional services to be provided over a 6-month period in exchange for the issuance of 225,000 common shares and 225,000 warrants to purchase shares of common stock at $1.35 per share.  The warrants expire three years from the date of issuance. The warrants were valued at $162,481 using the Black-Scholes model on the date of issuance, which was recognized over the six-month term of the agreement. 

On March 9, 2023, in conjunction with the 2023 Debt Offering (see Note 8), the Company issued a total of 386,998 warrants to purchase shares of common stock at $2.52 per share. The warrants expire five years from the date of issuance. Total proceeds from the 2023 Debt Offering were allocated to the warrants based on their relative fair value, resulting in $398,517 allocated to the warrants after issuance costs.

The fair values of stock warrants granted during the nine-month periods ended September 30, 2023 and 2022 were determined based on the following assumptions:

The following tables summarize the changes in the Company’s outstanding warrants during the nine-month periods ended September 30, 2023 and 2022:

Stock-Based Compensation

On October 24, 2019, the Company’s 2019 Equity Incentive Plan (the “Plan”) became effective authorizing 1,282,823 shares of the Company’s common stock for issuance as stock options and restricted stock units (“RSUs”) to employees, directors or consultants. The Plan provisions provide automatically increasing the shares authorized for issuance under the Plan on February 1st of each year by 5% of the total number of shares of common stock outstanding on December 31st of the preceding year. In January 2022 and June 2023, the stockholders approved amendments to increase the shares authorized under the Plan to 1,733,333 and 3,500,000 shares, respectively. 

The Company generally determines the fair value of the share-based compensation expense on the grant date and recognizes the expense over the period of vesting or period that services will be provided.

Stock Options

At September 30, 2023 and December 31, 2022, the Company had outstanding stock options of 1,943,632 and 1,086,813, respectively, that were granted under the Plan.  In addition, there were 16,769 stock options outstanding at September 30, 2023 and December 31, 2022 that were not granted under the Plan.

In total for the nine months ended September 30, 2023 and 2022, the Company recorded $1,298,979 and $1,262,396, respectively, of share-based compensation expense related to stock options. In total for the three months ended September 30, 2023 and 2022, the Company recorded $456,524 and $335,940, respectively, of share-based compensation expense related to stock options. As of September 30, 2023, unrecognized compensation expense related to stock options was $1,388,411 which will be recognized over a weighted average period of 21 months.

The weighted average grant date fair value per option granted during the nine-month periods ended September 30, 2023 and 2022 was $1.88 and $2.07, respectively. The fair value was estimated at the grant date using the Black-Scholes option pricing model and the following assumptions:

The following tables summarize the changes in the Company’s outstanding stock options during the nine-month periods ended September 30, 2023 and 2022:

Restricted Stock Units

The Plan provides for the grant of RSUs.  RSUs are settled in shares of the Company’s common stock as the RSUs become vested.

The following tables summarize RSU activity under the Plan for the nine-month periods ended September 30, 2023 and 2022:

In total for the nine months ended September 30, 2023 and 2022, the Company recorded $537,695 and $1,010,430, respectively, in stock-based compensation expense related to RSUs. In total for the three months ended September 30, 2023 and 2022, the Company recorded $53,475 and $258,823, respectively, in stock-based compensation expense related to RSUs. As of September 30, 2023, total unrecognized compensation cost related to RSUs was $53,475 which will be recognized over a period of three months. 

Executive Officer Stock Options and RSUs

The Company had 980,705 and 537,371 outstanding stock options for executive officers as of September 30, 2023 and December 31, 2022, respectively, with exercise prices ranging from $0.79 to $2.39 per share. 

The Company had 200,000 unvested RSUs for executive officers as of December 31, 2022, of which 150,000 vested and 50,000 were cancelled during the nine months ended September 30, 2023. There were no unvested RSUs for executive officers at September 30, 2023.