NOTE 14. STOCKHOLDERS’ EQUITY

2019 Capital Raise

On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants (“2019 Warrants”) to purchase shares of our common stock (together “2019 Units”) in a registered direct offering for $1.00 per 2019 Unit (combined the “2019 Capital Raise”). The 2019 Warrants have an exercise price of $1.30 per share and are exercisable for five years from the date of issuance. We received cash of $2,604,355 which is net of $395,645 of issuance costs, of which $318,681 is included as amortization of debt discount and equity issuance costs and $76,964 is included as a reduction of additional paid in capital. Of the gross proceeds, we recorded $2,416,422 as a warrant derivative liability, as discussed in Note 11. We used a portion of the net proceeds from the issuance of the 2019 Units to pay down the 8.5% Notes by $5,743,000, leaving $1,106,000 outstanding.

Share-based compensation

Share-based compensation expense consisted of the following:


		Year ended December 31,
		2019		2018
Employee Awards	$	3,040,497	$	3,626,271
Consulting Awards		85,683		306,466
Feinsod Agreement		840,441		2,062,270
	$	3,966,621	$	5,995,007

Employee Stock Options

On October 29, 2014, the Board authorized the adoption of and, on June 26, 2015, our stockholders ratified, our 2014 Equity Incentive Plan for the issuance of 10 million shares of our common stock and, in April 2018, stockholders approved an increase of 5 million shares of common stock that may be granted (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 15 million shares of our common stock and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants. A Registration Statement on Form S-8 for the initial 10 million shares automatically became effective in May 2016, and a Registration Statement on Form S-8 for the additional 5 million shares and 900,000 shares under the Feinsod Agreement automatically became effective in June 2018 (collectively, the “Registration Statements”). The Registration Statements relate to 15,000,000 shares of our common stock, which are issuable pursuant to or, upon exercise of, options that have been granted or may be granted under our Incentive Plan. As of December 31, 2019, there were 986,442 shares available to issue under the Incentive Plan.

Share-based compensation costs for award grants to employees and directors (“Employee Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. The following summarizes the Black-Scholes assumptions used to value the Employee Awards granted:


	Year ended December 31,
	2019	2018
Exercise price	$0.55 2.37	$ 1.71 7.17
Stock price on date of grant	$0.55 2.37	$ 1.71 7.17
Volatility	119 - 130%	131 140 %
Risk-free interest rate	1.43 2.60%	2.1 2.9 %
Expected life (years)	3.0	3.0
Dividend yield	–	–

The following summarizes Employee Awards activity:


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2018	9,173,380		1.68
Granted	5,927,390		0.98
Exercised	(269,728)		0.70
Forfeited or expired	(3,947,262)		1.80
Outstanding at December 31, 2019	10,883,780		1.28	5.4	$	61,000

Exercisable at December 31, 2019	7,331,365	$	1.51	5.8	$	8,000

As of December 31, 2019, there was approximately $838,267 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of twelve and a half months.

Consulting Services

As needed, we may issue warrants and options to third parties in exchange for consulting services. Stock-based compensation costs for award grants to third parties for consulting services (“Consulting Awards”) are recognized on a straight-line basis over the contractual term.

The fair value of each warrant grant is estimated using Black-Scholes. We use historical data to estimate the expected price volatility. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of valuation for the estimated life of the option. The following summarizes the Black-Scholes assumptions to value the Consulting Awards granted:


	Year ended December 31,
	2019	2018
Exercise price	$0.71 2.37	$ 3.08
Stock price, date of valuation	$0.71 2.37	$ 3.08
Volatility	125 - 141%	134 %
Risk-free interest rate	1.64 2.62%	2.3 %
Expected life (years)	2.0 5.0	2.0
Dividend yield	–	–

The following summarizes Consulting Awards activity:


	Number of Shares	Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2018	50,000	2.53
Granted	85,000	1.31
Exercised	–	–
Forfeited or expired	(10,000)	1.40
Outstanding and exercisable at December 31, 2019	125,000	1.79	1.1	$	0.00

We granted 25,000 shares of common stock with a fair value of $92,500 to a non-employee for consulting services, which were issued in July 2018. Additionally, we granted 47,933 shares of common stock with a fair value of $142,500 to non-employees for consulting services, which were issued in October 2018. During 2019, we granted 85,000 options with a fair value of $93,614 to non-employees for consulting services.

Feinsod Employment Agreement

On December 8, 2017, we entered into an agreement (the “Feinsod Agreement”) with Michael Feinsod for his continued service as our Executive Chairman of our Board of Directors. Pursuant to the agreement, Mr. Feinsod received (a) 600,000 stock options that vest on the anniversary date of the agreement for the next three years, or 200,000 per year (“Time-based Options”); and (b) three tranches of 100,000 stock options that vest when our stock price has an average trading price for 20 days of $3.50, $5.00 and $6.50 (“Market-based Options”). The options have an exercise price of $3.45 per share and a ten-year life. These options were not issued under the Incentive Plan; however, the underlying shares were included in the Registration Statement on Form S-8 that automatically became effective in June 2018. During the quarter ended March 31, 2018, the $3.50 and $5.00 Market-based Options vested and, accordingly, the expense associated with those options was recognized immediately.

On August 6, 2019, we entered into an agreement (the “Feinsod Agreement”) with Michael Feinsod for his permanent service as our Chief Executive Officer. Pursuant to the agreement, Mr. Feinsod received 1,000,000 stock options that vest when our stock price has a trading price of equal to or above $4.51 per share for five consecutive days. The options have an exercise price of $0.83 per share and a ten-year life. These options were issued under the Incentive Plan. The options were valued using the Monte Carlo method. For the year ended December 31, 2019, we recognized approximately $116,000 of share-based compensation expense related to these options.

The underlying assumptions used in the Monte Carlo simulations to determine the fair value of options were:


	August 6, 2019
Current stock price	$ 0.83
Exercise price	$ 0.83
Vesting goal	$ 4.51
Risk-free interest rate	1.73 %
Expected term (in years)	10
Expected volatility	123%

DB Option Agreement warrants

In order to extend the DB Option Agreement with Infinity Capital, in March 2016 we granted Infinity Capital warrants to purchase 100,000 shares of our common stock at an exercise price of $0.67 per share with a five year life. All 100,000 warrants were still outstanding as of December 31, 2019.

IPG Acquisition Warrants

In connection with the IPG acquisition in 2015, we issued to IPG 500,000 fully-vested warrants to purchase a) 250,000 shares of our common stock at $4.50 per share, (the “IPG $4.50 Warrants”), and b) 250,000 shares of our common stock at $5.00 per share (the “IPG $5.00 Warrants”) (collectively, the “IPG Warrants”). All of these warrants expired unexercised during the quarter ended March 31, 2018.

Warrants with Debt

The following summarizes warrants issued with debt activity:


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017	3,351,700	$	0.65
Granted	6,000,000		2.35
Exercised	(3,316,786)		0.77
Expired	(42,700)		5.00
Outstanding at December 31, 2018	5,992,214		2.26
Granted	2,481,000		0.98
Exercised	–		–
Expired	–		–
Outstanding and exercisable at December 31, 2019	8,473,214		1.00	0.5	$	162,990

On May 31, 2019, we issued the 2019 Units at $1.00, which triggered the “down round” feature specified in the 8.5% Warrants. We calculated the difference between the 8.5% Warrants’ fair value on the date the down round feature was triggered using the original exercise price and the new exercise price. On October 18, 2019, November 1, 2019 and again on December 11, 2019, we issued additional warrants at $1.00, $0.68 and $0.45, respectively. These triggered the “down round” feature on both the 8.5% warrants and the 2019 Units. The difference in fair value of the effect of the down round feature is reflected in our consolidated financial statements as a deemed dividend and as a reduction to income available to common stockholders in the basic earnings per share calculation.

The underlying assumptions used in the binomial lattice model to determine the fair value of the 8.5% Warrants were:


	Pre-Trigger	Post-Trigger
Current stock price	$ 0.95	$ 0.95
Exercise price	$ 2.35	$ 1.00
Risk-free interest rate	2.21 %	2.21 %
Expected dividend yield	–	–
Expected term (in years)	0.89	0.89
Expected volatility	123%	123%


	Pre-Trigger	Post-Trigger
Current stock price	$ 0.70	$ 0.70
Exercise price	$ 1.00	$ 0.68
Risk-free interest rate	1.55 %	1.55 %
Expected dividend yield	–	–
Expected term (in years)	0.47	0.47
Expected volatility	114%	114%


	Pre-Trigger	Post-Trigger
Current stock price	$ 0.67	$ 0.67
Exercise price	$ 0.68	$ 0.45
Risk-free interest rate	1.61 %	1.61 %
Expected dividend yield	–	–
Expected term (in years)	0.36	0.36
Expected volatility	113%	113%

The underlying assumptions used in the binomial lattice model to determine the fair value of the 2019 Warrants were:


	Pre-Trigger	Post-Trigger
Current stock price	$ 0.63	$ 0.63
Exercise price	$ 1.30	$ 1.00
Risk-free interest rate	1.56 %	1.56 %
Expected dividend yield	–	–
Expected term (in years)	4.62	4.62
Expected volatility	115%	115%


	Pre-Trigger	Post-Trigger
Current stock price	$ 0.70	$ 0.70
Exercise price	$ 1.00	$ 0.68
Risk-free interest rate	1.55 %	1.55 %
Expected dividend yield	–	–
Expected term (in years)	4.58	4.58
Expected volatility	114%	114%


	Pre-Trigger	Post-Trigger
Current stock price	$ 0.67	$ 0.67
Exercise price	$ 0.68	$ 0.45
Risk-free interest rate	1.61 %	1.61 %
Expected dividend yield	–	–
Expected term (in years)	4.47	4.47
Expected volatility	113%	113%

Fall 2017 Capital Raise

During the year ended December 31, 2017, in a private placement we raised $4 million of equity by issuing four million shares of our common stock and four million warrants (“Fall 2017 Warrants”) to purchase shares of our common stock (together “Units”) for $1.00 per Unit. The Fall 2017 Warrants had an exercise price of $0.50 per share and were exercisable for two years. If our common stock closed above $5.00 for ten consecutive days, we could call the warrants, giving the warrant holders 10 days to exercise. During the quarter ended March 31, 2018, we called the warrants and all were exercised. In consideration for the sale of the Units, we received $3,750,000 in cash and extinguished $250,000 of 12% Notes.