Note 6 - Stock-based Compensation

The amended and restated Heatwurx, Inc. 2011 Equity Incentive Plan (the “Plan”) was adopted on April 15, 2011 by the board of directors and approved by the shareholders on October 15, 2012. Under this Plan, employees, non-employee directors, advisors, and consultants of the Company and its affiliates are eligible to receive grants under the Plan. The Plan authorizes the issuance of up to 257,143 shares of common stock. If unexercised options expire or are terminated, the underlying shares will again become available for future grants under the Plan. At September 30, 2018, there were no outstanding awards that had been granted under this Plan.

The Plan provides for the grant of options to purchase shares of common stock of the Company. Options may be incentive stock options, designed to satisfy the requirements of Section 422 of the U.S. Internal Revenue Code, or non-statutory stock options, which do not meet those requirements. Incentive stock options may only be granted to employees of the Company and its affiliates. Non-statutory stock options may be granted to employees, nonemployee directors, advisors, and consultants of Company and its affiliates.

The exercise price for non-statutory and incentive stock options granted under the equity compensation plan may not be less than 100% of the fair market value of the common stock on the option grant date or 110% in the case of incentive stock options granted to employees who own stock representing more than 10% of the voting power of all classes of common stock of the Company. The Board of Directors, until a Compensation Committee has been appointed, has the authority to establish the vesting, including the terms under which vesting may be accelerated, and other terms and conditions of the options granted. Options can have a term of no more than ten years from the grant date except for incentive stock options granted to 10% stockholders which can have a term of no more than five years from the grant date.

The Board of Directors may amend or terminate the Plan and outstanding options at any time without the consent of option holders provided that such action does not adversely affect outstanding options. Amendments are subject to stockholder approval to the extent required by applicable laws and regulations. Unless terminated sooner, the Plan will automatically terminate on April 15, 2021, the tenth anniversary of April 15, 2011.

During the nine months ended September 30, 2018, the Company granted non-qualified stock options outside of the Plan for a total of 334,400 shares of common stock. An option for the purchase of 316,400 shares of common stock vests over a four-year term and an option for the purchase of 18,000 shares of common stock vests over one-year term. Both stock option grants have a maximum contractual term of ten years. Vesting is subject to the holder’s continuous service with the Company.

The fair value of each stock option grants was estimated using the Black-Scholes option-pricing model at the date of grant. The Company recently completed a reverse merger, as described in Note 1, and as such, lacks company-specific historical and implied volatility information. Therefore, it determined its expected stock volatility based on the historical volatility of a publicly traded set of peer companies, and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. Due to the lack of historical exercise history, the expected term of the Company’s stock options was determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

The fair value of the Company’s option awards granted during the nine-month period ended September 30, 2018 was estimated using the following assumptions:

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2018:

No options were vested or exercisable as of September 30, 2018. The weighted average grant date fair value per share of options granted during the nine months ended September 30, 2018 was between $2.00 and $2.10. No forfeiture rate was applied to these stock options.

The Company recorded $50,528 of stock-based compensation expense for the three and nine months ended September 30, 2018 for awards issued under the above-mentioned plan as general and administrative expense.

No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

As of September 30, 2018, there was approximately $649,913 of total unrecognized compensation expense, related to the unvested stock options which are expected to be recognized over a weighted average period of 3.9 years.