Stockholders’ Equity

2011 Equity Incentive Plan

The Company’s 2011 Equity Incentive Plan, as amended and restated (the “Plan”), is designed and utilized to enable the Company to provide its employees, officers, directors, consultants, and others whose past, present, and/or potential contributions to the Company have been, are, or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. A total of 13,000,000 shares of common stock are eligible for issuance under the Plan. The Plan provides for the grant of any or all of the following types of awards: stock options, restricted stock, deferred stock, stock appreciation rights, and other stock-based awards. The Plan is administered by the Company’s Board of Directors, or, at the Board’s discretion, a committee of the Board.

The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation,” by recognizing the fair value of stock-based compensation as an operating expense over the service period of the award or term of the corresponding contract, as applicable.

The fair value of options and warrants is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The risk-free rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies, and expected life is based on the estimated average of the life of options and warrants using the simplified method. The Company utilizes the simplified method to determine the expected life of the options and warrants due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

Restricted stock awards are valued using the fair value of the Company’s stock at the date of grant.

The Company accounts for non-employee awards in accordance with ASU 2018-07, “Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting”. Such awards are measured at the grant-date fair value of the equity instruments to be issued, and the compensation expense for such awards is recognized in the same period as if cash had been paid for the related goods or services rendered.

For stock option awards for which vesting is contingent upon the achievement of certain performance targets, the timing and amount of compensation expense recognized is based upon the Company’s projections and estimates of the relevant performance metric(s).

Forfeitures are accounted for as a reduction of compensation cost in the period when such forfeitures occur.

Stock Options

Options granted under the Plan expire at various times - either five, seven, or ten years from the date of grant, depending on the particular grant.

On January 1, 2019, the Company granted options to purchase 250,000 shares of common stock to a certain key employee. The exercise price is $3.00 per share, and the vesting of such options is dependent upon the Company achieving certain 12-month sales targets through December 31, 2021.

On February 27, 2019, the Company granted options to purchase 2,578,947 shares of common stock to Robert D’Loren, the Company’s Chief Executive Officer. The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 736,842 shares occur if the Target Prices are equal to or greater than $3.00 per share; 626,316 shares vest if the Target Price is equal to or greater than $5.00 per share; 515,789 shares vest if the Target Price is equal to or greater than $7.00 per share; 405,263 shares vest if the Target Price is equal to or greater than $9.00 per share; and 294,737 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. As of September 30, 2019, none of the aforementioned Target Price thresholds have been met, and therefore, none of these options have vested.

On February 27, 2019, the Company granted options to purchase 552,632 shares of common stock to James Haran, the Company’s Chief Financial Officer. The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 157,895 shares occur if the Target Prices are equal to or greater than $3.00 per share; 134,211 shares vest if the Target Price is equal to or greater than $5.00 per share; 110,526 shares vest if the Target Price is equal to or greater than $7.00 per share; 86,842 shares vest if the Target Price is equal to or greater than $9.00 per share; and 63,158 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. As of September 30, 2019, none of the aforementioned Target Price thresholds have been met, and therefore, none of these options have vested.

On February 27, 2019, the Company granted options to purchase 368,421 shares of common stock to Seth Burroughs, an officer of the Company. The exercise price is $1.70 per share, and the vesting of such options is dependent upon the Company’s common stock achieving certain stock trading prices for a minimum of ten (10) trading days (the "Target Prices"). The vesting of 105,263 shares occur if the Target Prices are equal to or greater than $3.00 per share; 89,474 shares vest if the Target Price is equal to or greater than $5.00 per share; 73,684 shares vest if the Target Price is equal to or greater than $7.00 per share; 57,895 shares vest if the Target Price is equal to or greater than $9.00; and 42,105 shares vest if the Target Price is equal to or greater than $11.00 per share. The options are exercisable until February 27, 2029. As of September 30, 2019, none of the aforementioned Target Price thresholds have been met, and therefore, none of these options have vested.

On March 13, 2019, the Company granted options to purchase an aggregate of 154,000 shares of common stock to various employees. The exercise price of the options is $1.73 per share, and all options vested immediately on the date of grant.

On March 15, 2019, the Company granted options to purchase 50,000 shares of common stock to a certain key employee. The exercise price of the options is $5.50 per share, and all options vested immediately on the date of grant.

On April 1, 2019, the Company granted options to purchase an aggregate of 150,000 shares of common stock to non-management directors. The exercise price of the options is $1.70 per share, and 50% of the options vest on each of April 1, 2020 and April 1, 2021.

On April 15, 2019, the Company granted options to purchase an aggregate of 24,000 shares of common stock to certain employees. The exercise price of the options is $1.40 per share, and 50% of the options vest on each of April 15, 2020 and April 15, 2021.

On May 1, 2019, the Company granted options to purchase 10,000 shares of common stock to an employee. The exercise price of the options is $1.38 per share, and 50% of the options vest on each of May 1, 2020 and May 1, 2021.

On September 1, 2019, the Company granted options to purchase 15,000 shares of common stock to an employee. The exercise price of the options is $1.59 per share, and one-third of the options will vest on each of September 1, 2020, September 1, 2021, and September 1, 2022.

A summary of the Company’s stock options activity for the current nine months is as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2019	3,257,875		$	5.44	3.19	$	—
Granted	4,153,000		1.84
Canceled	—		—
Exercised	—		—
Expired/Forfeited	(271,250	)	5.28
Outstanding at September 30, 2019, and expected to vest	7,139,625		$	3.35	6.08	$	—
Exercisable at September 30, 2019	2,598,125		$	5.16	2.15	$	—

Compensation expense related to stock options for the current quarter and the prior year quarter was approximately $66,000 and $319,000, respectively. Compensation expense related to stock options for the current nine months and prior year nine months was approximately $382,000 and $867,000, respectively. Total unrecognized compensation expense related to unvested stock options at September 30, 2019 amounts to approximately $387,000 and is expected to be recognized over a weighted average period of approximately 1.98 years.

A summary of the Company’s non-vested stock options activity for the current nine months is as follows:



	Number of Options		Weighted Average Grant Date Fair Value
Balance at January 1, 2019	1,481,079		$	1.23
Granted	4,153,000		0.03
Vested	(1,024,914	)	1.03
Forfeited or Canceled	(67,665	)	0.99
Balance at September 30, 2019	4,541,500		$	0.18

Warrants

Warrants granted under the Plan expire at various times - either five, seven, or ten years from the date of grant, depending on the particular grant.

On July 18, 2019, the Company granted warrants to purchase an aggregate of 115,000 shares of common stock. The exercise price of the warrants is $3.17 per share, and one-third of the options vested on each of July 25, 2019, August 24, 2019, and September 23, 2019.

A summary of the Company’s warrants activity for the current nine months is as follows:



	Number of Warrants	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding and exercisable at January 1, 2019	1,214,815	$	9.32	1.66	$	—
Granted	115,000	3.17
Canceled	—	—
Exercised	—	—
Expired/Forfeited	—	—
Outstanding and exercisable at September 30, 2019	1,329,815	$	8.79	1.25	$	—

Compensation expense related to warrants was approximately $14,000 for both the current quarter and current nine months.

No compensation expense was recognized in the prior year quarter or prior year nine months related to warrants.

Stock Awards

On February 27, 2019, the Company entered into a two-year employment agreement with a key employee which includes a performance stock bonus of up to $90,000 for each of the years ended December 31, 2019 and 2020. The performance stock bonus is earned upon the Company achieving certain sales targets.

On April 1, 2019, the Company issued an aggregate of 60,000 shares of stock to certain non-management directors, which will vest evenly over two years, whereby 50% shall vest on April 1, 2020, and 50% shall vest on April 1, 2021.

A summary of the Company’s restricted stock activity for the current nine months is as follows:



	Number of Restricted Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	1,460,210		$	4.82
Granted	60,000		1.70
Canceled	—		—
Vested	(121,000	)	5.24
Expired/Forfeited	—		—
Outstanding at September 30, 2019	1,399,210		$	4.65

Compensation expense related to restricted stock grants for the current and prior year quarter was approximately $47,000 and $128,000, respectively. Compensation expense related to restricted stock grants for the current nine months and prior year nine months was approximately $213,000 and $548,000, respectively. Total unrecognized compensation expense related to unvested restricted stock grants at September 30, 2019 amounts to approximately $144,000 and is expected to be recognized over a weighted average period of approximately 1.03 years.

The Company also recognized approximately $168,000 of compensation expense for the current quarter and current nine months, related to certain senior management bonuses payable in stock.

Shares Available Under the Company’s 2011 Equity Incentive Plan

At September 30, 2019, there were 1,890,346 shares of common stock available for issuance under the Plan.

Shares Reserved for Issuance

At September 30, 2019, there were 10,359,786 shares of common stock reserved for issuance pursuant to unexercised warrants and stock options, or available for issuance under the Plan.

Dividends

The Company has not paid any dividends to date.