7. Common Stock

12 Months Ended

Dec. 31, 2019

Equity [Abstract]

Common Stock

During 2016 and 2017, the Company issued Notes in the aggregate principal amount of $2.4 million convertible to common stock within three years at the rate of $.50 per share and Warrants to purchase up to 2.4 million shares of the Company’s common stock at $1.00 per share. During 2018, holders of $400,000 in principal amount of Notes converted into 800,000 shares of common stock. In 2019, holders of $100,000 in principal amount of Notes converted into 200,000 shares of common stock. In February 2020, in conjunction with the Company’s refinancing, $1,275,000 in principal amount of Notes were repaid terminating the holders’ right to convert and canceling their warrants. Now outstanding are $625,000 principal amount of Notes convertible to stock at $0.50 per share and warrants to purchase 625,000 shares of stock at $1.00 per share.

The Company has an incentive stock option plan for key employees, officers and directors. The options are generally exercisable three years after the date of grant and expire ten years after the date of grant. The option prices are the fair market value of the stock at the date of grant. At December 31, 2019, the Company had the following employee stock options outstanding:

# Common Shares Issuable		Exercise Price
	46,500	$	0.58
	155,000		0.58
	1,400,000		0.58
	31,000		0.58
	123,667		0.58
	207,500		1.00
	232,500		1.00
	287,500		1.00
	280,000		0.53
	35,000		0.50
	372,500		0.51
	332,500		0.623
	474,500		0.60

As of December 31, 2019, options for 3,488,834 shares were exercisable.

The Company adopted the modified prospective method to account for stock option grants, which does not require restatement of prior periods. Under the modified prospective method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption, net of an estimate of expected forfeitures. Compensation expense is based on the estimated fair values of stock options determined on the date of grant and is recognized over the related vesting period, net of an estimate of expected forfeitures which is based on historical forfeitures.

The Company estimates the fair value of its option awards on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on external data while all other assumptions are determined based on the Company’s historical experience with stock options. The following assumptions were used for grants in 2017, 2018 and 2019:

Expected volatility	30% to 20%
Expected dividend yield	None
Expected term (in years)	3
Risk-free interest rate	1.68 to 2.82%

The following table sets forth the number of options outstanding as of December 31, 2016, 2017, 2018 and 2019 and the number of options granted, exercised or forfeited during the years ended December 31, 2017, 2018 and 2019:

Balance of employee stock options outstanding as of 12/31/16	2,957,667
Stock options granted during the year ended 12/31/17	410,500
Stock options exercised during the year ended 12/31/17	0
Stock options forfeited during the year ended 12/31/17	(34,000)
Balance of employee stock options outstanding as of 12/31/17	3,334,167
Stock options granted during the year ended 12/31/18	415,000
Stock options exercised during the year ended 12/31/18	0
Stock options forfeited during the year ended 12/31/18	(105,500)
Balance of employee stock options outstanding as of 12/31/18	3,643,667
Stock options granted during the year ended 12/31/19	529,500
Stock options exercised during the year ended 12/31/19	-
Stock options forfeited during the year ended 12/31/19	(195,000)
Balance of employee stock options outstanding as of 12/31/19	3,978,167

The following table sets forth the number of non-vested options outstanding as of December 31, 2016, 2017, 2018 and 2019, and the number of stock options granted, vested and forfeited during the years ended December 31, 2017, 2018 and 2019.

Balance of employee non-vested stock options outstanding as of 12/31/16	791,668
Stock options granted during the year ended 12/31/17	410,500
Stock options vested during the year ended 12/31/17	(418,333)
Stock options forfeited during the year ended 12/31/17	(34,000)
Balance of employee non-vested stock options outstanding as of 12/31/17	749,835
Stock options granted during the year ended 12/31/18	415,000
Stock options vested during the year ended 12/31/18	(337,499)
Stock options forfeited during the year ended 12/31/18	(105,500)
Balance of employee non-vested stock options outstanding as of 12/31/18	721,836
Stock options granted during the year ended 12/31/19	529,500
Stock options vested during the year ended 12/31/19	(325,000)
Stock options forfeited during the year ended 12/31/19	(195,000)
Balance of employee non-vested stock options outstanding as of 12/31/19	731,336

During 2019, employee stock options were granted for 529,500 shares and options for 195,000 shares were forfeited. At December 31, 2019, the weighted average grant date fair value of non-vested options was $0.576 per share and the weighted average grant date fair value of vested options was $0.683 per share.

The weighted average grant date fair value of employee stock options granted during 2017 was $0.51, during 2018 was $0.623 and during 2019 was $0.66. Total compensation cost recognized for share-based payment arrangements was $14,588 with a tax benefit of $5,808 in 2017, $16,597 with a tax benefit of $3,983 in 2018, and $18,829 in 2019 with a tax benefit of $4,995 in 2019. As of December 31, 2019, total unamortized compensation cost related to options was $48,477, which will be recognized as compensation cost over the next six to 36 months. No cash was used to settle equity instruments under share-based payment arrangements.