NOTE 5 - Stockholders’ Equity

Common Stock

On May 24, 2021, at a Special Stockholders Meeting, our stockholders approved an increase in the authorized shares of common stock from 12,000,000 to 24,000,000.

In January 2021, the Company closed a public offering of its securities in which it issued 1,711,783 shares of common stock at a price of $3.00 per share, resulting in net proceeds of approximately $4,532,445 after deducting underwriting commissions and other offering expenses payable by the Company. Pursuant to the Underwriting Agreement, the Company also issued to the Underwriter and its designees warrants to purchase 136,943 shares of common stock. Such warrants have a term of five years and an exercise price of $3.75 per share.

In February 2021, the Company issued 263,200 shares of common stock pursuant to the exercise of warrants issued in our January 2020 private placement.

In March 2021, the Company issued 119,000 shares of common stock in exchange for the conversion of 250 shares of Series D Convertible Preferred Stock, including 19,000 shares of common stock as in-kind payment of preferred stock dividends. Also in March 2021, the company issued 191,204 shares of common stock pursuant to the exercise of warrants issued in our April 2020 offering, and 21,591 shares of common stock issued pursuant to the cashless exercise of placement agent warrants.

In March 2021, the Company closed a public offering in which it issued 2,190,000 shares of common stock at a price of $4.445 per share, resulting in net proceeds to the Company of approximately $8,736,487 after deducting placement agent commissions and other offering costs payable by the Company. Pursuant to the Purchase Agreement, the purchasers severally agreed to vote the shares of common stock purchased under the Purchase Agreement in favor of any resolution presented to the stockholders of the Company for the purpose of obtaining approval of an increase in the authorized shares of the Company’s Common Stock from 12,000,000 to 24,000,000 shares (“Stockholder Approval”). In a concurrent private placement under the Purchase Agreement, the Company issued to the purchasers warrants (“Warrants”) to purchase an aggregate of 2,190,000 shares of Common Stock at an exercise price of $4.32 per share. Each Warrant became exercisable commencing May 24, 2021, the date the Company obtained Stockholder Approval, and will expire two years after the initial exercise date. The Company also issued to designees of the Placement Agent warrants to purchase up to 175,200 shares of Common Stock (the “Placement Agent Warrants”) constituting 8% of the aggregate number of shares of Common Stock sold in the public offering. The Placement Agent Warrants have substantially the same terms as the Warrants, except that the Placement Agent Warrants have an exercise price equal to 125% of the offering price per share (or $5.55625 per share). Upon any exercise of the Warrants for cash, we have also agreed to pay the Placement Agent warrants to purchase 8% of the number of shares of our Common Stock issued upon such exercise.

In March 2021, Company issued 1,500 shares of common stock valued at $4.99 per share to an investor relations firm previously engaged by the Company as partial compensation for services rendered.

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par value, of which 465 shares were issued and outstanding at September 30, 2022 and December 31, 2021.

In January 2020, the Company entered into a Securities Purchase Agreement with certain institutional investors (the “Institutional Private Placement”), pursuant to which the Company issued and sold 1,640 shares of the Company’s newly created Series D Convertible Preferred Stock (the “Series D Preferred Stock”) at an initial stated value of $1,000 per share. Dividends accrue at a rate of 9% per annum (subject to increase upon the occurrence (and during the continuance) of certain triggering events described therein) and are payable monthly in kind by the increase of the stated value of the Series D Preferred Shares by said amount. The holders of the Series D Preferred Shares have the right at any time to convert all or a portion of the Series D Preferred Shares (including, without limitation, accrued and unpaid dividends and make-whole dividends through the third anniversary of the closing date) into shares of the Company’s Common Stock at the conversion price then in effect, which is $2.50 (subject to adjustment for stock splits, dividends, recapitalizations and similar events and full ratchet price protection in the event the Company issues or sells, or is deemed to have issued or sold, shares of Common Stock for a consideration per share less than a price equal to the conversion price then in effect). Alternatively, a holder may at any time convert all, or any part, of its Series D Preferred Shares at an alternative conversion price equal to the lower of the applicable conversion price then in effect, and the greater of (x) $1.80 and (y) 85% of the average volume weighted average price (“VWAP”) of the Common Stock for a five-trading day period prior to such conversion. Upon the occurrence of certain triggering events, described in the Certificate of Designations, including, but not limited to payment defaults, breaches of transaction documents, failure to maintain listing on the Nasdaq Capital Market, and other defaults set forth therein, the Series D Preferred Shares would become subject to redemption, at the option of a holder, at a 125% premium to the underlying value of the Series D Preferred Stock being redeemed.

At September 30, 2022, there were 132 shares of Series D Preferred Stock outstanding, which if converted as of September 30, 2022, including the make-whole dividends, would result in the issuance of 87,267 shares of common stock.

Concurrent with the Institutional Private Placement, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued and sold to certain of its directors and the Company’s then largest stockholder 333 shares of the Company’s newly created Series E Convertible Preferred Stock (the “Series E Preferred Stock”) at an initial stated value of $1,000 per share. Dividends accrue at a dividend rate of 9% per annum and are payable monthly in kind by the increase of the stated value of the Series E Preferred Stock by said amount. The Series E Preferred Stock is initially convertible into 48,544 shares of common stock (subject to adjustment for stock splits, dividends, recapitalizations and similar events).

At September 30, 2022, 333 shares of Series E Preferred Stock were outstanding, which if converted as of September 30, 2022, including the make-whole dividends, would result in the issuance of 61,651 shares of common stock.

Stock Options

As of September 30, 2022, an aggregate of 450,617 shares of common stock were reserved for future issuance under the Company’s 2013 Equity Incentive Plan.

In March 2022, the Company granted options to its non-employee directors to purchase up to an aggregate of 56,000 shares of common stock at a strike price of $2.50. As of September 30, 2022, 75% of such grants were fully vested and exercisable, and the remaining 25% will vest on December 31, 2022 subject to the directors remaining in our service through such date.

During the nine months ended September 30, 2022, the Company granted twelve employees options to purchase up to an aggregate of 228,973 shares of common stock in connection with their employment. The options have a strike price of $2.50 with vesting periods ranging from immediately upon issuance to three years beginning July 1, 2022, provided that the employees remain employed by the Company on such dates. In addition, the Company granted its President and CEO options to purchase up to 135,000 shares of common stock in connection with his employment. The options have a strike price of $2.50 and will vest in equal monthly installments over 36 months beginning March 2022, provided that the President and CEO remains employed by the Company on such dates.

Also, during the nine months ended September 30, 2022, the Company granted two consultants options to purchase up to an aggregate of 14,000 shares of common stock for services to be rendered. The options have a strike price of $2.50 and are fully vested.

The Company generally grants stock options to employees and directors at exercise prices equal to the fair market value of the Company’s stock on the grant date, The exercise prices will not be less than 100% of the fair market value of a share on the date of grant of the option.  Stock options are typically granted throughout the year and generally vest over a period from one to three years of service and expire five years from the grant date, unless otherwise specified. The Company recognizes compensation expense for the fair value of the stock options over the requisite service period for each stock option award.

Total stock-based compensation expense included in the statements of operations for the nine months ended September 30, 2022 and 2021 was $613,833 and $893,431 respectively, all of which is related to stock options.

The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted average assumptions for the nine months ended September 30, 2022 and 2021:

Schedule of Share Based Payments Award Stock Options Valuation Assumptions 

Option activity for the nine months ended September 30, 2022 and the year ended December 31, 2021 was as follows:

Schedule of Stock Option Activity 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the market price of our common stock for those awards that have an exercise price below the market price of our common stock. At September 30, 2022, no option had an exercise price below the $0.815 closing price of our common stock as reported on The Nasdaq Capital Market.

At September 30, 2022, there was $908,588 of unrecognized stock-based compensation expense related to unvested stock options with a weighted average remaining recognition period of 2.0 years.

Stock Appreciation Rights

On June 23, 2020, the board of directors (the “Board”) of the Company adopted the 2020 Stock Appreciation Rights Plan (the “Plan”). The purposes of the Plan are to: (i) enable the Company to attract and retain the types of employees, consultants, and directors (collectively, “Service Providers”) who will contribute to the Company’s long-range success; (ii) provide incentives that align the interests of Service Providers with those of the stockholders of the Company; and (iii) promote the success of the Company’s business. The Plan provides for incentive awards only in the form of stock appreciation rights payable in cash (“SARs”) and no shares of common stock are reserved or will be issued pursuant to the Plan.

SARs may be granted to any Service Provider. A SAR is the right to receive an amount equal to the Spread with respect to a share of the Company’s common stock (“Share”) upon the exercise of the SAR. The “Spread” is the difference between the exercise price per share specified in a SAR agreement on the date of grant and the fair market value per share on the date of exercise of the SAR. The exercise price per share will not be less than 100% of the fair market value of a share on the date of grant of the SAR. The administrator of the Plan will have the authority to, among other things, prescribe the terms and conditions of each SAR, including, without limitation, the exercise price and vesting provisions, and to specify the provisions of the SAR Agreement relating to such grant.

During the nine months ended September 30, 2022, the Company granted a total of 404,975 SARs to fifteen employees at exercise prices ranging from $1.30 to $2.50 with vesting periods ranging from immediately upon issuance to three years, beginning January 3, 2022, provided that the employees remain employed by the Company on such dates. The SARs expire on the fifth anniversary of the grant date.

Also, during the nine months ended September 30, 2022, the Company granted 406,887 SARs to our President and Chief Executive Officer at exercise prices ranging from $1.30 to $2.50. Of the SARs, 30,000 will vest equally over 36 months beginning March 2022, 194,940 will vest over 36 months beginning July 1, 2022, and 181,947will vest on March 15, 2025, in each case provided that the President and Chief Executive Officer remains an employee of the Company on such dates. The SARs will expire on the fifth anniversary of each of the grant dates.

On March 31, 2022, the Company granted 3,000 SARs to a consultant as partial compensation for services pursuant to a consulting agreement at an exercise price of $2.50. The SARs expire on the fifth anniversary of the grant date and are fully vested and exercisable.

The Company recognizes compensation expense and a corresponding liability for the fair value of the SARs over the requisite service period for each SAR award. The SARs are revalued at each reporting date in accordance with ASC 718 “Compensation-Stock Compensation”, and any changes in fair value are reflected in the Statement of Operations as of the applicable reporting date.

The fair value of SAR awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the nine months ended September 30, 2022 and the year ended December 31, 2021:

Schedule of Share Based Payments Award Stock Options Valuation Assumptions 

SARs activity for the nine months ended September 30, 2022 and the year ended December 31, 2021 was as follows:

Schedule of Stock Option Activity 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the market price of our common stock for those awards that have an exercise price below the market price of our common stock. At September 30, 2022, no SAR had an exercise price below the $0.815 closing price of our common stock as reported on The Nasdaq Capital Market.

At September 30, 2022, there was $1,128,615 of unrecognized stock-based compensation expense related to unvested SARs with a weighted average remaining recognition period of 2.38 years.

Warrants

Warrant activity for the nine months ended September 30, 2022 and the year ended December 31, 2021 was as follows:

Schedule of Warranty Activity