NOTE 8 – STOCKHOLDERS’ EQUITY

The Company is authorized to issue up to 100,000,000 shares of common stock with a par value of $0.00001. In addition, the Company is authorized to issue 5,000,000 shares of preferred stock with a par value of $0.00001. The specific rights of the preferred stock, when so designated, shall be determined by the board of directors.

Common Stock

In October 2021, the Company completed its initial public offering and sold 3,251,875 shares of common stock for net proceeds of approximately $15.9 million. Total issuance costs were $2,949,882 including the issuance of fully vested warrants to purchase 162,594 shares of the Company’s common stock with a five year exercise term at an exercise price of $6.88 per share to the underwriter of the initial public offering which were valued at $981,871. Upon completion of the initial public offering all shares of preferred stock were converted to common stock. The total shares of common stock issued upon conversion of preferred stock were 5,743,175.

On February 1, 2022, the Company sold 6,666,667 shares of its common stock in a public offering at $3.00 per share. The Company received net proceeds of $18,089,117 after underwriter commissions and expenses of $1,910,816. The underwriter was also issued a warrant to purchase 333,334 shares of the Company’s common stock at an exercise price of $3.75 per share that expires five years from the date of issuance.

The underwriting agreement provided the underwriter with the option to sell an additional 1,000,000 shares (the “Overallotment”) which could be sold for up to 45 days subsequent to the completion of the offering at $3.00 per share. The underwriter did not exercise the option for the Overallotment.

The Company’s officers and directors agreed not to sell any shares for 90 days following this offering. The Company has agreed not to issue any shares for a period of twelve months following the offering, other than for the purposes of shares issued related to the 2021 Plan (as defined below) or for an acquisition or merger, without the consent of the underwriter.

As discussed in Note 6 above, the Company issued the Convertible Notes and Note Warrants, along with the warrants to the placement agent in August 2022. The Company received consent from the underwriter to issue such securities. In addition, the Company was required to reserve 21,135,267 shares of common stock for future issuance of shares for the conversion of the Convertible Notes and exercise of the Note Warrants and 603,864 shares for the exercise of the placement agent warrants.

SAFE Agreements

During the period ended December 31, 2020, the Company entered into SAFE agreements (Simple Agreement for Future Equity) with investors through an exchange for cash investments totaling $2,000,000. Upon a future equity financing, the SAFE agreements would convert into the same securities in that equity financing at the lower of the price per share of the funding, or a price per share based on a $5 million company valuation using a fully diluted common stock basis. The SAFE agreements had no interest rate or maturity date, and the SAFE investors had no voting right prior to conversion. The SAFE agreements were recorded as a liability of $2,000,000 as of December 31, 2020. In January 2021, upon closing of the Series A Preferred Stock offering discussed below, the amount invested under these SAFE agreements were converted into 424,269 shares of Series A preferred stock.

In January 2021, the Company completed a WeFunder SAFE offering which was convertible into shares of the Company’s preferred stock upon specified future financing events. The Company received gross proceeds of $2,258,940 and paid expenses of $53,500, reflected as costs of capital. In connection with the Series A preferred stock offering as discussed below, the WeFunder SAFE investments were converted into 351,832 shares of Series A preferred stock.

Preferred Stock

In 2021, the Company designated 1,400,000 shares of preferred stock as Series A preferred stock. The Series A preferred stock had a par value of $0.00001, had no voting rights, no dividends and each share would automatically convert into 2.5 shares of common stock of the Company at the time of the Company’s initial public offering. In February 2021, the Company completed an offering of 415,287 shares of Series A preferred stock and received gross proceeds of $2,669,974. The Company paid expenses of $205,470 related to the offering including issuing to one financial broker dealer 79,750 shares of common stock and 79,775 fully vested warrants with a 5 year exercise term to purchase common stock with an exercise price of $2.57 valued at $49,743.

In 2021, the Company designated 1,500,000 shares of preferred stock as Series B preferred stock, with a par value of $0.00001 per share and a stated value of $9.50 per share. The Series B preferred stock would receive dividends equivalent to any such dividends paid on common stock in the future, had no voting rights, and each share would automatically convert into 2.5 shares of common stock upon completion of the Company’s initial public offering. As of March 31, 2021, the Company completed the sale of 457,688 shares of Series B preferred stock and received gross proceeds of $4,347,495 and paid expenses of $70,802. In May 2021, the Company completed the remaining sale of 648,139 shares of Series B preferred stock and received gross proceeds of $6,157,842 for these shares and paid expenses of $819,224. The Company issued 123,296 shares of common stock and 197,277 fully vested warrants to purchase common stock with a 5 year exercise term and an exercise price of $3.80 valued at $182,281 to two financial brokers who assisted the Company with this offering.

As noted above, the Series A and Series B preferred stock was converted to shares of common stock upon the closing of the Company’s initial public offering in October 2021.

Warrants

During the year ended December 31, 2021, the Company issued fully vested warrants to purchase 150,000 shares of the Company’s common stock to consultants with exercise prices ranging from $0.245 - $1.00 which expire 10 years from the date of issuance. The Company valued the warrants using an estimated fair value of the shares of common stock between $0.76 – $1.18, volatility of 105% based on peer companies, risk free interest rate of 0.85%, no dividends and an estimated life of 5 years. During the year ended December 31, 2021, certain warrant holders, including those from the Series A and Series B preferred stock offerings, exercised warrants representing 317,018 shares of common stock, primarily on a cashless basis, and the Company issued 236,220 shares of common stock as settlement for these warrants. Total proceeds received from warrant exercises occurring in the year ended December 31, 2021 was $6,250.

Entities controlled by the Company’s two founders, who were both directors and one of which was the Chairman of the Board at the time these agreements were entered into, each entered into an anti-dilution warrant with the Company. In the event of their ownership of the Company’s fully diluted capitalization being less than 25% or 18.75%, each individual would have received common stock warrants with an exercise price of $0.0041 to purchase sufficient shares to return them to those ownership percentages. The warrants were fully vested upon grant and have an exercise period of 10 years from the date of grant. As of December 31, 2020, no warrants were owed to the two founders. As discussed below, subsequent to December 31, 2020, the anti-dilution warrants were exchanged for a fixed number of warrants.

In March 2021, the Company agreed to exchange the two anti-dilution warrants that were issued to Highbridge and Pink Possum for a total of 11,000,000 warrants to purchase shares of common stock at an exercise price of $0.98 for a period of 10 years. In connection with this exchange, the Company amended its existing consulting agreements with Highbridge and Pink Possum, to allow for the payment of compensation totaling $30,000,000 in the event that the Company’s market capitalization exceeds $300,000,000 for 21 consecutive trading days. The Company will have the option to settle the amount by issuing shares of common stock based on the closing price of the Company’s stock at the start of the 21-day period. In addition to this payment, Highbridge and Pink Possum will continue to receive a cash payment equal to 1% of the gross sale price in the event of a change of control of the Company with a sale price of at least $100,000,000. In connection with the exchange, the Company recognized expense of $13,031,989 for the estimated fair value of the warrants on a Black-Scholes option pricing model utilizing the following assumptions: 1) volatility of 106% based on a peer group of companies; 2) risk-free rate of 1.67%; 3) dividend rate of 0.0%; and 4) an expected term of 10 years. In December 2021, Highbridge exercised its warrants on a cashless basis and the Company issued 5,507,575 shares of common stock. As of July 26, 2022, this founder is no longer on the board of directors but does hold board observer rights.

As discussed in Note 6, the Company issued the Note Warrants, which are fully vested, to purchase 9,057,971 shares of the Company’s common stock at an exercise price of $2.85. The Note Warrants expire five years from the issuance date. Also, the Company issued to the placement agent of the Convertible Notes, fully vested warrants to purchase 603,864 shares of the Company’s common stock at an exercise price of $3.5625. The warrants are not exercisable until February 24, 2023 and expire on February 24, 2028. The Company valued all of these warrants using the closing price of the Company’s common stock on August 24, 2022 of $2.44, volatility of 79.81% based on peer companies, risk free interest rate of 3.03%, no dividends and an estimated life of 2.5 years.

During three and nine months ended September 30, 2022, the Company recognized expense of $0 and $7,302, respectively, and during the three and nine months ended September 30, 2021, the Company recognized expense of $151,720 and $13,274,861, respectively, related to common stock warrants. No additional expense will be recognized in the future for any warrants outstanding as of September 30, 2022.

The following is the activity related to common stock warrants during the nine months ended September 30, 2022: