NOTE 12. 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 either the Black-Scholes pricing model or the Monte Carlo simulation option pricing model 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. As of December 31, 2023, 3,623,613 warrants remain outstanding.

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 9), 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 value of these non-employee stock warrants granted during the years ended December 31, 2023 and 2022 totaled $560,998 and $27,540,584, respectively, and were determined using the Monte Carlo simulation and Black-Scholes option pricing models based on the following assumptions: 

The following table summarizes the changes in the Company’s outstanding warrants during the years ended December 31, 2023 and 2022:

Share-Based Compensation

On October 24, 2019, the Company’s 2019 Equity Incentive Plan (the “Plan”) went effective authorizing 1,282,823 shares of Company common stock for issuance as stock options and restricted stock units (“RSUs”) to employees, directors or consultants. The Plan was approved by the Company’s Board of Directors and the holders of a majority of the Company’s voting stock on September 9, 2019. In January 2022, the stockholders approved and ratified an amendment to increase the shares authorized under the Plan to 1,733,333. In June 2023, the stockholders approved and ratified an amendment to increase the shares authorized under the Plan to 3,500,000.

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

Stock Options

As of December 31, 2023 and December 31, 2022, the Company has granted stock options to acquire 1,692,473 and 1,086,813 shares of common stock under the Plan, respectively. As of December 31, 2023, the Plan had 1,014,828 vested options and 677,645 non-vested options. As of December 31, 2022, the Plan had 930,573 vested options and 173,009 non-vested options. The stock options are held by our officers, directors, employees, and certain key consultants.

For the years ended December 31, 2023 and 2022, the Company recorded in stock-based compensation expense $1,604,827 and $1,582,217, respectively, of share-based compensation related to stock options. The unrecognized compensation expense as of December 31, 2023 was $1,138,937 which will be recognized over periods ranging from 5 to 34 months.

On November 4, 2022, the Company’s Board of Directors approved for a total of 305,000 stock options having exercise prices ranging from $8.25 - $10.56 to be repriced at 110% ($2.39) and 100% ($2.17) of the current price of the Company’s stock for employees and Board members, respectively. The incremental fair value of the options as a result of the repricing was determined to be $55,859. Of this amount, $29,900 related to vested options and was recognized as compensation expense in 2022. The remaining $1,786 of unrecognized expense will be recognized over periods ranging from 3 to 9 months.

In applying the Black-Scholes options pricing model, assumptions used to compute the fair value of the stock options granted or repriced during the years ended December 31, 2023 and 2022 were as follows:

The following tables summarize the changes in the Company’s outstanding stock options during the years ended December 31, 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. During the year ended December 31, 2023, the Company granted 148,080 service based RSUs to executive officers and employees and no service based RSUs to directors. All RSUs granted in 2023 vest during various periods between November 2023 and January 2026. During the year ended December 31, 2022, the Company granted 281,667 service based RSUs to executive officers and employees and 140,000 service based RSUs to directors. All RSUs granted in 2023 vest during various periods between November 2023 and January 2026.

The following table summarizes RSU activity under the Plan for the years ended December 31, 2023 and 2022:

For the years ended December 31, 2023 and 2022, the Company recorded in stock-based compensation expense $641,043 and $1,426,178, respectively, of RSU based compensation. The fair value of RSUs granted during the years ended December 31, 2023, and 2022 was $174,062 and $1,112,725, respectively. As of December 31, 2023, total unrecognized compensation costs of RSUs granted and outstanding but not yet vested was $124,190 which is expected to be recognized over 24 months.

Executive Officers Stock Options and RSUs

The Company had 437,372 outstanding executive officers stock options exercisable at $0.7902 to $2.387 per share with a weighted average remaining contractual life of 7.51 years as of December 31, 2023, and 537,371 outstanding executive stock options exercisable at $0.7902 to $2.387 per share with a weighted average remaining contractual life of 5 years as of December 31, 2022. The Company had 98,080 unvested RSUs granted to executive officers with a remaining weighted average vesting period of 24 months as of December 31, 2023.  The Company had 200,000 unvested RSUs granted to executive officers with a remaining weighted average vesting period of 5 months as of December 31, 2022.

On January 1, 2022, the Company entered into an Employment Agreement with Jerry Wenzel to serve as the Company’s Chief Financial Officer for a two-year period.  Under the terms of the agreement, the Company granted Mr. Wenzel under the Plan stock options to acquire 66,667 shares of our common stock at an exercise price of $8.25 per share, repriced effective November 4, 2022 to an exercise price of $2.387 per share, and 16,667 RSUs.  The stock options vest in equal quarterly installments over a two-year period during the term of his Employment Agreement.  On November 4, 2022, Mr. Wenzel was granted 75,000 RSUs that vest June 1, 2023. The RSUs per share weighted average fair value at grant date was $2.17. On November 10, 2023, Mr. Wenzel was granted 50,000 RSUs that vested immediately. The RSUs per share weighted average fair value at grant date was $0.48. Mr. Wenzel was granted a total of 66,667 stock options that were vested as of December 31, 2023. None of the vested stock options have been exercised and no shares have been issued as of December 31, 2023. A total of 125,000 RSUs vested in 2023 and common shares were issued in the same amount.

On January 30, 2023, the Company entered into an Employment Agreement with David Gandini to continue to serve as the Company’s Chief Executive Officer through December 31, 2025. On February 23, 2023, Mr. Gandini was granted stock options to acquire 510,000 shares of our common stock at an exercise price of $2.32 per share. The options vest in equal quarterly installments over a period of 34 months. Mr. Gandini was granted a total of 50,000 stock options that were vested as of December 31, 2023. None of the vested stock options have been exercised and no shares have been issued as of December 31, 2023. On August 4, 2023, Mr. Gandini was granted 98,080 RSUs that vest January 1, 2026. The RSUs per share weighted average fair value at grant date was $1.53.