NOTE 13. 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 the Black-Scholes 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.

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 will be recognized over the 6-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 values of stock warrants granted during the three-month periods ended March 31, 2023 and 2022 were determined using the Black-Scholes option pricing model based on the following assumptions:

The following table summarizes the changes in the Company’s outstanding warrants during the three-month periods ended March 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 the Company’s 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 an amendment to increase the shares authorized under the Plan to 1,733,333.  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.  There are currently 2,581,947 shares authorized for issuance under the Plan, consisting of the 1,733,333 shares as authorized on January 7, 2022, plus 848,614 shares added per the automatic increase on February 1, 2023.

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

At March 31, 2023 and December 31, 2022, the Company had outstanding stock options of 1,936,813 and 1,086,813, respectively, that were granted under the Plan.  In addition, there were 16,769 stock options outstanding at March 31, 2023 and December 31, 2022 that were not granted under the Plan.

In total for the three months ended March 31, 2023 and 2022, the Company recorded $385,968 and $492,441, respectively, of share-based compensation expense related to stock options. Unrecognized compensation expense as of March 31, 2023 was $2,304,873 which will be recognized over a weighted average period of 22.5 months.

In applying the Black-Scholes options pricing model, assumptions used to compute the fair value of stock options granted during the three-month periods ended March 31, 2023 and 2022 were as follows:

The following table summarizes the changes in the Company’s outstanding stock options during the three-month periods ended March 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. 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. Those RSUs vested in November 2022 and 41,667 shares of the Company’s common stock were issued. On January 12, 2022, 16,667 shares of the Company’s common stock were issued for RSUs vested during 2021.

The following table summarizes RSU activity under the Plan for the three-month periods ended March 31, 2023 and 2022:

In total for the three months ended March 31, 2023 and 2022, the Company recorded $312,945 and $442,784, respectively, in stock-based compensation expense related to RSUs. As of March 31, 2023, total unrecognized compensation cost related to RSUs was $303,025 which will be recognized over a weighted average period of 5.7 months. 

Executive Officers Stock Options and RSUs

The Company had 980,705 and 537,371 outstanding stock options for executive officers as of March 31, 2023 and December 31, 2022, respectively, with exercise prices ranging from $0.79 to $2.39 per share.  The Company had 150,000 and 200,000 unvested RSUs granted to executive officers as of March 31, 2023 and December 31, 2022, respectively.