Note 7 - Equity and Stock-based Compensation

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

Note 7 – Equity and Stock-Based Compensation

Under the Company’s Second Amended and Restated Certificate of Incorporation, it has the authority to issue a total of 101,000,000 shares of capital stock, consisting of: (i) 100,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share, which will have such rights, powers and preferences as the Board of Directors of the Company shall determine. 

Private Placement Equity Issuances

The Company sold 3,957,757 shares of common stock to certain accredited investors pursuant to Security Purchase Agreements in two private placements which closed in April and May 2022 for proceeds of $3,957,757.  Certain related parties including a principal shareholder, members of the Board of Directors, and members of senior management invested an aggregate of $940,400 in the April 2022 private placement transaction.

Pacific Medical Common Stock and Warrant Purchase Agreement

On August 24, 2022, the Company entered into a Common Stock and Warrant Purchase Agreement (the “Agreement”) with Pacific Medical, Inc. (“Pacific Med”) for the sale and issuance of shares of common stock and warrants to purchase shares of common stock. Pacific Med is the exclusive distributor for the Aurix System product within a territory that covers the states of Washington, Oregon, Idaho, Montana, Wyoming, most of California, the northern half of Nevada, plus Alaska.

Pursuant to the Agreement, Pacific Med purchased 500,000 shares of the Company’s common stock for $500,000. As part of the purchase of common stock, the Company agreed to grant to Pacific Med the right to participate in any future financing by the Company through December 31, 2023 (the “Participation Rights”) in connection with a listing of our common stock on a national securities exchange. The Participation Rights entitle Pacific Med to purchase up to 500,000 shares of common stock upon substantially the same terms, conditions, and price provided for in such financing. If such a financing does not occur by December 31, 2023, the Company agreed to issue Pacific Med a warrant with a January 1, 2024 issuance date and exercisable until June 30, 2024, to purchase up to 500,000 shares of Common Stock at a price equal to the lower of $2.00 per share or the 20-day volume weighted average closing price per share ending December 31, 2023 (the “Contingent Warrant”). The common stock, Participation Rights, and Contingent Warrant are equity classified.

As part of the Agreement and as additional incentive compensation with respect to Pacific Med’s performance under its existing sales and distribution arrangement, the Company also provided to Pacific Med two compensatory performance-based stock purchase warrants and certain contingently issuable performance shares. The first warrant entitles Pacific Med to purchase up to 250,000 shares of common stock at a price of $1.00 per share (the “First Warrant”) upon Pacific Med attaining certain performance goals set forth in the First Warrant based upon exceeding sales quota revenue, as agreed between the Company and Pacific Med, for calendar years 2023 and/or 2024. The second warrant entitles Pacific Med to purchase up to 200,000 shares of Common Stock at a price of $1.50 per share (the “Second Warrant”) upon Pacific Med attaining certain performance goals set forth in the Second Warrant based upon exceeding sales quota revenue, as agreed between the Company and Pacific Med, for calendar years 2024 and/or 2025. The First Warrant will expire December 31, 2027 and the Second Warrant will expire December 31, 2028. The fair value of the First Warrant and Second Warrant at the date of issuance was approximately $434,000 and $345,000, respectively, based on a Black-Scholes option pricing model. As the exercisability of the two warrants is not considered probable as of December 31, 2022, there was no recognition of stock-based compensation expense for the year ended December 31, 2022. When exercisability is determined to be probable, the issuance date fair value of the warrant earned through such date will be recognized with the balance of the fair value recognized ratably over the remaining period of performance. The Company also agreed to issue up to 300,000 shares of common stock to Pacific Med subject to and upon the achievement of certain milestones set forth in the Agreement based upon sales of our products over defined 12-month periods of between $4.5 million by June 30, 2024 through at least $12.5 million in calendar year 2025 (the Performance Shares”). The fair value of the Performance Shares at the date of issuance was approximately $615,000 based on the closing stock price on the closing of the Agreement. As the issuance of the shares is not considered probable as of December 31, 2022, there was no expense recognition for the year ended December 31, 2022. When issuance is determined to be probable, the issuance date fair value of the shares through such date will be recognized with the balance of the fair value recognized ratably over the remaining period of performance.

Stock-Based Compensation

In July 2016, the Board of Directors approved the Company’s 2016 Omnibus Incentive Plan (the “2016 Omnibus Plan”), and in August 2016, the Board amended such plan to include an evergreen provision, intended to increase the maximum number of shares issuable under the Omnibus Plan on the first day of each fiscal year (starting on January 1, 2017) by an amount equal to six percent (6%) of the shares reserved as of the last day of the preceding fiscal year, provided that the aggregate number of all such increases may not exceed 1,000,000 shares. In November 2016, holders of a majority of our capital stock approved the 2016 Omnibus Plan, as amended and restated, which provides for the Company to grant equity and cash incentive awards to officers, directors and employees of, and consultants to, the Company and its subsidiaries. Further, in March 2022, the Board approved an amendment to the 2016 Omnibus Plan to increase the shares available under to Plan to 4,250,000 and remove the annual evergreen provision, which was approved by the holders of a majority of our common stock outstanding and which became effective in June 2022. 

A summary of stock option activity under the 2016 Omnibus Plan during the year ended December 31, 2022 is presented below: 

Stock Options – 2016 Omnibus Plan	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at January 1, 2021		1,355,001	$	0.52		4.90
Granted		-		-		-
Exercised		-		-		-
Forfeited or expired		-		-		-
Outstanding at January 1, 2022		1,355,001	$	0.52		3.90
Granted		2,021,666		0.73		10.00
Exercised		-		-		-
Forfeited or expired		-		-		-
Outstanding at December 31, 2022		3,376,667	$	0.64		6.70
Exercisable at December 31, 2022		2,151,667	$	0.57		5.23

There were 2,021,666 stock options granted under the 2016 Omnibus Plan during the year ended December 31, 2022 of which (i) 206,666 options were granted to settle prior accrued compensation liabilities with senior management and Board of Directors, (ii) 450,000 of immediately vested options were granted to management, the Board of Directors, and a third-party service provider, (iii) 1,355,000 incentive stock options vesting over 3 years were granted to employees, and (iv) 10,000 incentive stock options vesting over 1 year were granted to a third party consultant. The fair value of the stock options granted in settlement of accrued liabilities was approximately $3,000. As the options issued were to related parties, the $103,333 of settled liabilities was credited to additional paid-in-capital. The fair value of 450,000 of immediately vested options was $6,430 and was recognized as stock-based compensation expense for the year ended December 31, 2022. The fair value of 1,365,000 of incentive stock options vesting over one and three years was approximately $47,500 with $2,715 recognized as stock-based compensation expense for the year ended December 31, 2022. No stock options were exercised during the year ended December 31, 2022. The aggregate intrinsic value for outstanding and exercisable options as of December 31, 2022 was approximately $2,892,000 and $2,001,000, respectively. There were no options granted or exercised during 2021 and zero intrinsic value for all options as of December 31, 2021.

For the year ended December 31, 2022, the Company recorded total stock-based compensation expense of $9,145. There was no stock based compensation expense for the year ended December 31, 2021. As of December 31, 2022, there was approximately $45,000 of unrecognized compensation cost related to the 1,225,000 non-vested stock options granted during the year ended December 31, 2022.