NOTE 14. 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 under ASC 718, 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

During March, April and May 2021, the Company issued through the Offering convertible notes payable with warrants, (see Note 9), to purchase up to 334,167 shares of our common stock at an exercise price of $9.00 per share. The warrants expire two years after the date of issuance.

On September 28, 2021 and March 30, 2022 the Company issued through the sale of the Debenture Original Warrants and New Warrants, (see Note 8), to purchase up to 406,504 and 101,626, respectively, shares of our common stock at an exercise price of $6.00 per share. The Original Warrants and New Warrants expire seven years after the date of issuance and were valued using the Monte Carlo simulation option pricing model at approximately $847,000 and $864,000, respectively.

On May 18, 2022, the Company issued through an underwritten public offering 4,705,884 (the "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, respectively. The Warrants expire five years from the date of issuance and were valued at approximately $5,700,000 using the Monte Carlo simulation option pricing model.

On August 3, 2022, the Company issued 10,000 warrants, in exchange for professional services rendered, to purchase common stock of the Company at an exercise price of $4.25 per warrant. The warrants expire three years from the date of issuance and were valued at approximately $6,000 using the Black Scholes option pricing model.

On September 28, 2022, the Company entered into a private investment in public equity offering (the “PIPE Offering”) pursuant to a Securities Purchase Agreement (the “Agreement”) and Registration Rights Agreement (the “Registration Rights Agreement”) where the Company agreed to issue Non-Prefunded and Prefunded PIPE Units consisting of one share of common stock and one non-tradeable warrant exercisable for one common share at a price of $1.35 per warrant (See Note 2). Pursuant to agreements related to the issuance of Debenture Original Warrants and New Warrants both warrants contain an adjustment provision (the “Adjustment”)  whereby upon a Dilutive Issuance (as defined in the Original Warrant and the New Warrant), the holder of such warrants shall be entitled to receive shares of common stock at an effective price per share that is less than the Exercise Price (as defined in the warrants), and such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price. Entering into the PIPE Offering initiated the Adjustment and an aggregate 1,750,225 warrants the (the “Armistice Warrants”) consisting of (i) 1,400,180 warrants pursuant to the Adjustment terms under the Original Warrant, and (ii) 350,045 warrants pursuant to the Adjustment terms of New Warrants. The additional issuance of the Original Warrants and New Warrants expire seven years from the date of original issuance on September 28, 2021, and March 30, 2022, respectively. The additional Original Warrants and New Warrants were valued at approximately $3,495,000 using the Monte Carlo simulation option pricing model.

As of September 30, 2022, the Convertible Debenture carries outstanding warrants in the form of Original Warrants and New Warrants of 2,258,355, in aggregate with a relative fair market value of the related stock warrants granted of approximately $5,200,000.

On September 30, 2022, the Company issued through the PIPE Offering 4,054,055 warrants (the “PIPE Warrants”) to purchase common stock of the Company at an exercise price of $1.35 per warrant. The PIPE Warrants expire seven years from the date of issuance and were valued at approximately $9,300,000 using the Monte Carlo simulation option pricing model.

Also on September 30, 2022, the Company issued through the PIPE Offering 2,128,378 Prefunded Warrants to purchase common stock of the Company at an exercise price of $0.001 per warrant. The Prefunded Warrants are exercisable immediately upon issuance and expire when exercised in full.

The Prefunded Warrants are classified as a component of permanent stockholders’ equity within additional paid-in capital and were recorded at the issuance date using a relative fair value allocation method. The Prefunded Warrants are equity classified because they (i) are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, (ii) are immediately exercisable, (iii) do not embody an obligation for the Company to repurchase its shares, (iv) permit the holders to receive a fixed number of shares of common stock upon exercise, (v) are indexed to the Company’s common stock and (vi) meet the equity classification criteria. In addition, such Prefunded Warrants do not provide any guarantee of value or return. The Company valued the Prefunded Warrants at issuance concluding the purchase price approximated the fair value and allocated net proceeds from the purchase proportionately to the common stock and Prefunded Warrants, of which $3,150,000 was allocated to the Prefunded Warrants and recorded as a component of Additional Paid-in-Capital.

The total outstanding balance of all stock warrants in the Company is 14,151,925 and 836,464 at September 30, 2022 and December 31 2021, respectively. There were 13,315,461 detached free-standing stock warrants granted during the nine-month period ended September 30, 2022, and 740,671 detached free-standing stock warrants granted during the nine-month period ended September 30, 2021. The fair value of these non-employee stock warrants granted during the nine-month periods ended September 30, 2022 and 2021 totaled $27,540,584 and $1,939,756, 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 nine-month periods ended September 30, 2022 and 2021:

⁽¹⁾ The September 30, 2022 Prefunded Warrants granted are exercisable immediately upon issuance and expire when exercised in full, thus having no definitive expiration date. As such, the Prefunded Warrants have been excluded from the Weighted Average Remaining Contractual Life calculations.

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 ratified a further authorization of shares of common stock for a total of 1,733,333 shares subject to the Plan.

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 September 30, 2022 and December 31, 2021, the Company has granted stock options to acquire 1,084,921 and 1,036,588 shares of common stock under the plan, respectively. As of September 30, 2022, the plan has 844,977 vested options and 256,712 non-vested options. As of December 31, 2021, the plan had 618,841 vested shares and 417,747 non-vested shares. The stock options are held by our officers, directors, employees, and certain key consultants. 

In total for the nine-months ended September 30, 2022 and 2021, the Company recorded in general and administrative expense $1,262,396 and $630,027, respectively, of share-based compensation expense related to stock options. The unrecognized compensation expense as of September 30, 2022, was approximately $1,371,614 for non-vested share-based awards to be recognized over periods of approximately one month to two years and four months.

In applying the Black-Scholes options pricing model, assumptions used to compute the fair value of the stock options granted during the nine-month periods ended September 30, 2022 and 2021 were as follows:

The following table summarizes the changes in the Company’s outstanding stock options during the nine-month periods ended September 30, 2022 and 2021:

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. In January and February 2022, the Company granted 16,667 service based RSUs to an executive officer and 25,000 service based RSUs to a director, respectively. All RSUs granted in 2022 vest the earlier of the expiration of any lock-up period that includes the securities of the Company owned by the Plan participant after the up list of the Company to a national exchange or January 1, 2023.  On January 12, 2022, 16,667 shares of the Company’s common stock were issued for the RSUs vested during 2021. On June 8, 2022, 16,667 shares of the Company’s common stock were issued to a consultant for RSUs vested in May 2022.

The following table summarizes RSU activity under the Plan for the nine-month periods ended September 30, 2022 and 2021:

In total for the nine-months ended September 30, 2022 and 2021, the Company recorded in general and administrative expense $960,430 and $308,361, respectively, of share-based compensation expense related to RSU’s. As of September 30, 2022, total estimated compensation costs of RSUs granted and outstanding but not yet vested was $257,118 which is expected to be recognized over the weighted average period of 3 months. 

Executive Officers Stock Options and RSUs

The Company has 357,542 and 823,482 outstanding executive officers stock options exercisable at $0.79 to $10.14 and $0.79 to $10.14 per share as of September 30, 2022 and December 31, 2021, respectively.  The Company has 57,626 and 61,919 unvested RSUs granted to executive officers as of September 30, 2022 and December 31, 2021, respectively.