Note 9 – Shareholders’ Equity (Deficit)

Common Shares Issued on Exercise of Warrants

During the nine months ended September 30, 2022, the Company temporarily reduced the exercise price of certain warrants issued as part of the Company’s $2.00 private offering, described below, from $3.00 per share to $2.00 per share. The Company received proceeds of approximately $1.6 million on the exercise of 779,000 warrants for the purchase of 779,000 shares of common stock, at exercise price of $2.00 per share.

Common Shares Issued on Private Offerings

During the nine months ended September 30, 2022, the Company received net proceeds of approximately $1.6 million on the sale of 540,002 shares of common stock at $3.00 per share, as part of its private offerings. As part of the Company’s $3.00 private offering, each participating shareholder received a warrant to purchase up to fifty percent (50%) of the number of common shares purchased, at $4.00 per share, and which expires on December 31, 2023. As such, the Company issued 270,001 warrants during the period.

During the nine months ended September 30, 2021, the Company received net proceeds of approximately $5.2 million on the sale of 2,597,500 shares of common stock at $2.00 per share, as part of its private offerings. As part of the Company’s $2.00 private offering, each participating shareholder is entitled to a warrant to purchase up to fifty percent (50%) of the number of common shares purchased, at $3.00 per share, and which expires on December 31, 2022.

Common Shares Issued for Financing Costs

On May 16, 2022, and on September 30, 2022, the Company entered into amendments (see Note 7) to extend the call provisions in its senior secured convertible notes, in exchange for issuing its senior convertible note holders an aggregate of 518,082 shares of common stock with a fair value of approximately $1.6 million at the date of grant, or $3.00 per common share. The $1.6 million was recorded as a financing cost, a component of other expense, in the accompanying condensed statements of operations.

Common Shares Issued for Services

During the nine months ended September 30, 2022, the Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants provided business development, sales promotion, introduction to new business opportunities, strategic analysis and sales and marketing activities. In addition, the Company issued shares to a director for board service. During the nine months ended September 30, 2022, the Company issued 436,250 shares of common stock, with a fair value of approximately $1.3 million at date of grant related to the consulting agreements.

During the nine months ended September 30, 2021, the Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants provided business development, sales promotion, introduction to new business opportunities, strategic analysis and sales and marketing activities. In addition, the Company issued shares to a director for board service. During the nine months ended September 30, 2021, the Company issued 841,500 shares of common stock, with a fair value of approximately $1.7 million at date of grant.

Summary of Restricted Stock Units

On May 17, 2022, the Company granted an aggregate of 200,000 restricted stock units (RSU) to its employees and executives pursuant to the Company’s 2022 Stock Incentive Plan, with an aggregate fair value of $600,000, based on the Company’s current private offering price. The RSUs vest on the earlier of twelve months from the date of grant, or a strategic transaction including the Company being acquired, an initial public offering, or a liquidity event more than $10 million. As of September 30, 2022, no shares of common stock were issued. During the nine months ended September 30, 2022, the Company recognized $225,000 of compensation expense relating to vested RSUs. As of September 30, 2022, the aggregate amount of unvested compensation related to RSUs was approximately $375,000 which will be recognized as an expense as the options vest in future periods through May 17, 2023.

Summary of Warrants

A summary of warrants for the nine months ended September 30, 2022 is as follows:

 Summary of Warrants

During the nine months ended September 30, 2022, the Company received proceeds of approximately $1.6 million on the exercise of 779,000 warrants for the purchase of 779,000 shares of common stock, at exercise price of $2.00 per share.

During the nine months ended September 30, 2022, the Company recognized $80,000 of compensation expense relating to vested warrants that were granted for services in prior periods. As of September 30, 2022, the aggregate amount of unvested compensation related to warrants was approximately $13,000 which will be recognized as an expense as the warrants vest in future periods through December 2022.

As of September 30, 2022, the outstanding and exercisable warrants have an intrinsic value of $200,000 and $200,000, respectively. The aggregate intrinsic value was calculated as the difference between the estimated market value of $3.00 per share as of September 30, 2022, and the exercise price of the outstanding warrants.

Summary of Options

A summary of stock options for the nine months ended September 30, 2022 is as follows:

 Summary of Options

Information relating to outstanding options at September 30, 2022, summarized by exercise price, is as follows:

Summary of Outstanding Options Exercise Price 

On May 9, 2022, the Employment Agreement with Steve Handy, the Company’s Chief Financial Officer and Director of Operations was ratified, confirmed, and approved. The Employment Agreement is for a two-year period with an initial base salary of $220,000 per annum and increased by 5% on the first anniversary of the Employment Agreement. The Employment Agreement includes a cash severance provision of $100,000 if Mr. Handy’s employment is terminated without cause. The Company granted Mr. Handy stock options to purchase 100,000 shares of common stock under the Company’s 2022 Stock Incentive Plan, at an exercise price of $2.00 per common share, with a vesting period of two years, and an expiration period of five years. The total fair value of these options at grant date was approximately $220,000, which was determined using a Black-Scholes-Merton option pricing model with the following assumptions: fair value of our stock price of $3.00 per share, based on the Company’s current private offering price, the expected term of three years, volatility of 108%, dividend rate of 0%, and risk-free interest rate of 2.81%.

During the nine months ended September 30, 2022, the Company granted employees and advisory board members aggregate options to purchase 145,000 shares of common stock under the Company’s 2022 Stock Incentive Plan, at exercise prices ranging between $2.00 to $3.00 per common share, with vesting periods between immediate to twelve months, and an expiration period of five years. The total fair value of these options at grant date was approximately $449,000, which was determined using a Black-Scholes-Merton option pricing model with the following weighted average assumptions: fair value of our stock price of $4.03 per share, based on the most recent private valuation report, and valuation discussions with our former underwriters pursuant to our recently withdrawn initial public offering, and the Company’s current private offering price, the expected term of three years, volatility of 111%, dividend rate of 0%, and risk-free interest rate of 2.51%.

During the nine months ended September 30, 2022, the Company recognized approximately $2.0 million of compensation expense relating to vested stock options. As of September 30, 2022, the aggregate amount of unvested compensation related to stock options was approximately $4.8 million, which will be recognized as an expense as the options vest in future periods through May 2025.

As of September 30, 2022, the outstanding and exercisable options have an intrinsic value of $4.6 million and $1.9 million, respectively. The aggregate intrinsic value was calculated as the difference between the estimated market value of $3.00 per share as of September 30, 2022, and the exercise price of the outstanding options.

Note 8 – Shareholders’ Equity

Shareholders’ Equity (Deficit) 

The following description summarizes the material terms of our capital stock.

Our authorized capital stock consists of 100,000,000 shares of common stock, $0.0001 par value, and 1,000,000 shares of preferred stock, 1 share of which is designated as Series A preferred stock, $0.0001 par value. The rights, preferences and privileges of preferred stock may be designated from time to time by our board of directors. As of December 31, 2021, there were 32,405,146 shares of our common stock issued and outstanding and one (1) share of Series A preferred stock issued and outstanding. The one (1) share of Series A preferred stock is held by Jonathan Destler, our Chief Executive Officer and director.

Undesignated Preferred Stock

Under the terms of our Certificate of Incorporation, our board of directors is authorized to issue shares of our undesignated preferred stock in one or more series without shareholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.

The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a shareholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible future acquisitions and other corporate purposes, will affect, and may adversely affect, the rights of holders of common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until our board of directors determines the specific rights attached to that preferred stock. The effects of issuing preferred stock could include one or more of the following:

Once our board of directors approves the rights and preferences for a series of preferred stock, we will file a Certificate of Designation for such series of preferred stock with the Delaware Secretary of State formally establishing such rights and preferences.

Series A Preferred Stock; Common Stock

Voting

Except as set forth below, each holder of Series A preferred stock has the same rights as holders of common stock and shall be entitled to notice of any shareholders’ meeting. They shall also be entitled to vote with the holders of common stock, and not as a separate class, except as may otherwise be required by law. Except as set forth below, each shareholder shall be entitled to one (1) vote for each share of stock outstanding. Except as set forth below or otherwise provided by the law of the State of Delaware, any corporate action to be taken shall be authorized by a majority of the votes cast by the shareholders. There are no cumulative rights to voting.

Each share of Series A preferred stock is entitled to the number of votes equal to 110% of the number of votes of the common stock issued and outstanding.

Additionally, for as long as any shares of Series A preferred stock are outstanding, the holders of Series A preferred stock shall be entitled to elect one director, or the Series A Director.

Protective Provisions

For as long as any shares of Series A preferred stock are outstanding, we must obtain the approval of at least a majority of the holders of the outstanding shares of preferred stock, voting as a separate class, to:

Dividends

Subject to the rights of the preferred shareholders set forth in “Protective Provisions”, our board of directors shall have full power and discretion, to determine out of legally available funds what, if any, dividends or distributions shall be declared and paid. Dividends may be paid in cash, in property, or in shares of common stock. Shares of common stock and Series A preferred stock are treated equally and ratably, on a per share basis, with respect to any dividend or distribution from us. If a dividend is paid in the form of shares of common stock or rights to acquire common stock, the holders of common stock and Series A preferred stock shall both receive common stock or rights to acquire common stock. No dividends shall be declared or payable in the form of Series A preferred stock.

Liquidation Rights

If there is a liquidation, dissolution or winding up of the Company, holders of our common stock and Series A preferred stock would be entitled to share in our assets remaining after the payment of liabilities equally and ratably, on a per share basis.

Conversion

Voluntary Conversion: Each share of Series A preferred stock shall be convertible into one fully paid and nonassessable share of common stock at the option of the holder.

Other Provisions

Holders of our common stock and Series A preferred stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock or Series A preferred stock.

Common shares issued on private offerings

During the years ended December 31, 2021 and 2020, the Company received net proceeds of $5.2 million and $2.5 million on the sale of 2,597,500 and 1,269,250 shares of common stock, respectively, at $2.00 per share, as part of its private offerings. As part of the Company’s $2.00 private offering, each participating shareholder is entitled to a warrant to purchase up to fifty percent (50%) of the number of common shares purchased, at $3.00 per share, and which expires on December 31, 2022.

Common shares issued for services

The Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants provided business development, sales promotion, introduction to new business opportunities, strategic analysis and sales and marketing activities. During the year ended December 31, 2021, the Company issued 851,488 shares of common stock, with a fair value of $1.7 million at date of grant, or $2.05 per common share, to Consultants. During the year ended December 31, 2020, the Company issued 57,500 shares of common stock, with a fair value of $115,000 at date of grant, or $2.00 per common share, to Consultants.

Summary of Warrants

A summary of warrants for the years ended December 31, 2021 and 2020, is as follows:

Summary of Warrants

Information relating to outstanding warrants at December 31, 2021, summarized by exercise price, is as follows:

Summary of Outstanding Warrants Exercise Price

During the year ended December 31, 2021, the Company issued warrants exercisable into an aggregate of 5,299,985 shares of common stock. The weighted-average remaining contractual life of warrants outstanding and exercisable at December 31, 2021 was 2.06 years. As of December 31, 2021, the outstanding and exercisable warrants have an intrinsic value of $8.2 million and $7.9 million, respectively. The aggregate intrinsic value was calculated as the difference between the estimated market value of $6.00 per share as of December 31, 2021, and the exercise price of the outstanding warrants.

Warrants Issued in Private Offering

In conjunction with the sale of the common shares issued as part of the Company’s $2.00 private offering, each participating shareholder is entitled to purchase up to fifty percent (50%) of the number of common shares purchased, at $3.00 per share. The original warrant term of eighteen (18) months was modified by the Board on July 13, 2021, to expire on December 31, 2022. During the years ended December 31, 2021 and 2020, the Company issued warrants to purchase 1,308,750 shares and 634,625 shares of common stock at an exercise price of $3.00.

Warrants Issued with Senior Convertible Notes Payable

In conjunction with the sale of senior convertible notes payable, the Company issued warrants to purchase an aggregate of 3,591,235 of its common shares. The holder of the Warrants shall have the right to purchase up to the number of shares that equals the quotient obtained by dividing: (i) the Warrant Coverage Amount, by (ii) the Conversion Price. The “Warrant Coverage Amount” shall mean the amount obtained by multiplying: (A) one hundred percent (100%); by (B) aggregate principal amount of the Holder’s Note(s). The conversion price in effect on any Conversion Date shall be equal to 80% of the offering price per share of common stock in our initial public offering. Each Warrant is exercisable at a price equal to 115% of our initial public offering price (see Note 5).

Warrants Issued under Advisory Board Agreement

On July 1, 2021, the Company entered into a three-year consulting agreement (the “Agreement”) for which the consultant is to serve on the Company’s Advisory Board and provide services as defined in the Agreement. Per the terms of the Agreement, the Company is to pay the consultant $5,000 per month during the first six month period of the Agreement, and the Company shall grant, as of July 1, 2021, (i) a warrant, for a term of three years, to purchase 100,000 shares of common stock, which shall vest on the date hereof, at an exercise price of $2.00 per share, (ii) a warrant, for a term of three years, to purchase 100,000 shares of common stock, which shall vest on December 1, 2021, at an exercise price of $2.00 per share, (iii) a warrant, for a term of three years, to purchase 100,000 shares of common stock, which shall vest on September 1, 2022, at an exercise price of $4.00 per share, and (iv) a warrant, for a term of three years, to purchase 100,000 shares of common stock, which shall vest on December 1, 2022, at an exercise price of $4.00 per share. The aggregate fair value of the warrants was determined to be $382,000, which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: fair value of our stock price of $2.00 per share based on recent private sales of our stock, expected term of five years, volatility of 108%, dividend rate of 0%, and weighted average risk-free interest rate of 0.25%.

During the year ended December 31, 2021, the Company recognized $288,000 of compensation expense relating to vested warrants. As of December 31, 2021, the aggregate amount of unvested compensation related to these warrants were approximately $93,000 which will be recognized as an expense as the warrants vest in future periods through December 2022.

Summary of Options

2016 Stock Incentive Plan

The Company’s 2016 Equity Incentive Plan (the “Plan”) is for officers, employees, non-employee members of the Board of Directors, and consultants of the Company. The Plan authorized the granting of not more than 1 million restricted shares, stock appreciation rights (“SAR’s”), and incentive and non-qualified stock options to purchase shares of the Company’s common stock. On July 13, 2021, the Board increased the number of common shares authorized to be issued under the Company’s 2016 Equity Incentive Plan one (1) million shares to seven (7) million shares.