Co-Diagnostics, Inc. Stock Compensation Disclosure

NOTE 3: STOCK-BASED COMPENSATION

 

Stock Incentive Plans

 

Under the Co-Diagnostics, Inc. 2015 Long-term Incentive Plan (the “2015 Plan”), the board of directors may issue incentive stock options, share equivalents such as restricted stock awards, stock bonus awards, performance shares and restricted stock units to employees and directors and non-qualified stock options to consultants of the company. Options generally expire ten years after being granted. Options granted vest in accordance with the vesting schedule determined by the board of directors, usually ratably over a three-year vesting schedule upon anniversary date of the grant with the first 1/3 vesting on the grant date. Should an employee terminate before the vesting period is completed, the unvested portion of each grant is forfeited. The Company has used the Black-Scholes valuation model to estimate fair value of our stock-based awards, which requires various judgmental assumptions including estimated stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based on market-based implied volatility. The 2015 Plan reserves an aggregate of 6,000,000 shares. The number of unissued stock options authorized under the 2015 Plan at December 31, 2019 was 3,978,183. On February 10, 2020 we issued an aggregate of 100,000 options to the four independent members of our Board of Directors.

 

Stock Options

 

There were 890,000 and 850,000 options granted in the years ended December 31, 2019 and 2018, respectively. The Black-Scholes valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest rate and expected option term. In determining the expected volatility our computation is based the stock prices of 3 comparable companies and is based on a combination of historical and market-based implied volatility. The risk-free interest rate was based on the yield curve of a zero-coupon U.S. Treasury bond on the date the option was granted with a maturity equal to the expected term of the option. The fair values for the options granted were estimated at the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:

 

		Year Ended December 31, 2019				Year Ended December 31, 2018
Risk free interest rate			1.56	%			2.95	%
Expected life (in years)			10.0				5.5
Expected volatility			63.65	%			47.75	%
Expected dividend yield			0.00	%			0.00	%
Stock price		$	1.07			$	2.63

 

The weighted average fair value of options granted during the years ended December 31, 2019 and 2018 was $0.52 and $1.24, respectively.

 

The Company recorded stock-based compensation expense of $589,683 and 468,240 for the years ended December 31, 2019 and 2018, respectively, and all of it is included general and administrative expenses per the Consolidated Statements of Operations.

 

The following table summarizes option activity during the years ended December 31, 2019 and December 31, 2018, respectively.

 

		Options Outstanding				Weighted Average Exercise Price				Weighted Average Fair Value				Weighted Average Remaining Contractual Life (years)
Outstanding at January 1, 2018			332,707			$	1.29			$	0.70				7.05
Options granted			850,000				2.63				1.24				9.73
Expired			—				—				—				—
Forfeited options			—				—				—				—
Exercised			—				—				—				—
Outstanding at December 31, 2018			1,172,707			$	2.23			$	1.09				8.72
Options granted			890,000				1.07				0.52				9.66
Expired			—				—				—				—
Forfeited options			(40,890	)			(3.85	)			(1.59	)			(8.04	)
Exercised			—				—				—				—
Outstanding at December 31, 2019			2,021,817			$	1.69			$	0.83				8.73

 

The intrinsic value of the outstanding options at December 31, 2019 and 2018 was $102,366 and 245,690, respectively.

 

Warrants

 

The Company estimates the fair value of issued warrants on the date of issuance as determined using a Black-Scholes pricing model. The Company amortizes the fair value of issued warrants using a vesting schedule based on the terms and conditions of each associated underlying contract, as earned. The Black-Scholes valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest rate and expected warrant term. In determining the expected volatility our computation is based the stock prices of 3 comparable companies and is based on a combination of historical and market-based implied volatility. The risk-free interest rate was based on the yield curve of a zero-coupon U.S. Treasury bond on the date the warrant was issued with a maturity equal to the expected term of the warrant.

 

There were 500,000 and 50,000 warrants issued in the years December 31, 2019 and 2018, respectively. The fair values for the warrants issued were estimated at the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:

 

		Year Ended December 31, 2019				Year Ended December 31, 2018
Risk free interest rate			1.98	%			2.94	%
Expected life (in years)			5.0				5.0
Expected volatility			50.88	%			47.95	%
Expected dividend yield			0.00	%			0.00	%
Stock price		$	1.53			$	2.41

 

The weighted average fair value of warrants issued during the years ended December 31, 2019 and 2018 was $1.46 and $1.22 per share, respectively.

 

Included in stock-based compensation for the year ended December 31, 2019, the Company recognized $390,265 -based compensation expense in general and administrative expenses for the year ended December 31, 2019 for the issuance of 500,000 warrants to two companies for services rendered.

 

There are 313,779 warrants outstanding that have a down round feature whereby the warrants exercise price could adjust if the Company issues equity below the warrants exercise price. The original exercise price of the warrants was $2.59. During the year ended December 31, 2019, the exercise price of these warrants was adjusted to $1.20 as a result of the issuance of equity below the original exercise price. The value of the effect of the warrant exercise price reset was $78,090 and was recorded to retained earnings and additional paid-in capital.

 

In the year ended December 31, 2018, the Company included $61,100 of stock-based compensation in sales and marketing expenses for 50,000 warrants issued to a company as part of the repurchasing of a market licensing agreement.

 

The following table summarizes warrant activity during the years ended December 31, 2019 and 2018, respectively.

 

		Warrants Outstanding				Weighted Average Exercise Price				Weighted Average Fair Value				Weighted Average Remaining Contractual Life (years)
Outstanding at January 1, 2018			706,262			$	3.27			$	1.48				4.22
Warrants issued			50,000				2.00				1.22				5.00
Expired			—				—				—				—
Forfeited warrants			—				—				—				—
Exercised			272,727				0.11				0.54				3.39
Outstanding at December 31, 2018			483,535			$	4.92			$	1.99				3.29
Warrants issued			500,000				1.53				1.46				5.00
Expired			—				—				—				—
Forfeited warrants			—				—				—				—
Exercised			—				—				—				—
Outstanding at December 31, 2019			983,535			$	1.44			$	1.03				3.34

 

The following table summarizes information about stock options and warrants outstanding at December 31, 2019.

 

				Outstanding												Exercisable
Range of								Weighted Average Remaining				Weighted Average								Weighted Average
Exercise Prices				Number Outstanding				Contractual Life (years)				Exercise Price				Number Exercisable				Exercise Price
$	0.01-1.40				1,855,151				6.69			$	0.82				1,328,484			$	0.70
	2.00-3.85				1,055,445				7.87				2.54				772,112				2.51
	5.61-7.20				94,756				2.37				6.64				94,756				6.64
$	0.01-7.20				3,005,352				6.97			$	1.61				2,195,352			$	1.60

 

Common Stock

 

During the twelve months ending December 31, 2019, we issued an aggregate of 127,516 shares of our common stock to a company valued at $108,463 to three companies for services rendered pursuant to professional services agreements. The shares were issued pursuant to consulting agreements and the services performed were comprised of financial services and media and shareholder relation services.

 

In the year ended December 31, 2018, the Company issued 606,199 shares of our common stock as follows: 1) 272,727 shares for the exercise of outstanding warrants for $30,000 in cash, 2) 84,112 shares valued at $202,090 to 4 companies for consulting services, in our general and administrative department and, 3) 249,360 shares valued at $600,958 issued to 1 company as part of the repurchasing of a market licensing agreement in our sales and marketing department.

 

Total unrecognized stock-based compensation was $459,560 at December 31, 2019 which the Company expects to recognize as follows:

 

Year		Amount
2020		$	369,379
2021			90,181
Total		$	459,560