Stockholders’ Deficit | 8. Stockholders’ Deficit Common Stock On August 23, 2018, the Company amended and restated its Certificate of Incorporation in connection with the IPO. The Company’s Amended and Restated Certificate of Incorporation authorizes 200,000,000 shares of common stock, During the three months ended September 30, 2018 and 2017, the company issued 1,068 and 1,168 shares of common stock in connection with the exercise of stock options for net proceeds of $1,116 and $1,500, respectively. During the nine months ended September 30, 2018 and 2017, the company issued 1,856 and 1,168 shares of common stock in connection with the exercise of stock options for net proceeds of $3,499 and $1,500, respectively. Convertible Preferred Stock Conversion of all outstanding Preferred Stock to Common Stock In August 2018, due to completion of a public offering meeting certain requires (as defined below), each 42.8 shares of Series Preferred was converted into one share of common stock at a Conversion Price of $1.3995 for each share of Series A, B and B-1 convertible preferred stock, $1.4043 for each share of Series C convertible preferred stock and $0.48 for each share of Series D and D-1 convertible preferred stock. Prior to the August 2018 offering, there were 121,992,497 shares of convertible preferred stock outstanding. The Company’s convertible preferred stock had been classified as temporary equity on the accompanying balance sheets in accordance with authoritative guidance for the classification and measurement of redeemable securities. As of September 30, 2018, there are no shares of convertible preferred stock outstanding. The following sets forth information regarding all convertible preferred stock securities sold since January 1, 2017: Series D-1 Convertible Preferred Stock Financing From February through November 2017, the Company sold and issued 36,974,586 shares of Series D-1 convertible preferred stock at $0.48 per share, raising approximately $17,750,000, net of issuance costs of $154,191. At any time after December 31, 2021, holders of a majority of the then outstanding Series D-1 convertible preferred stock may redeem any unconverted or unredeemed Series D-1 convertible preferred stock in cash at the greater of the original convertible preferred stock purchase price plus all declared but unpaid dividends or the fair market value. The Company had determined not to adjust the carrying values of the Series D-1 convertible preferred stock to the liquidation preferences of such shares because of the uncertainty over whether or when such an event would occur. The Company had determined that it was not probable that such redemption would occur as a mandatory conversion event, the close of the public offering, was expected in advance of the redemption triggers. Convertible Preferred Stock The Series A, B, B-1, C, D and D-1 convertible preferred stock (collectively, the “Series Preferred”) had the following rights and privileges immediately prior to conversion to common stock in connection with the public offering: Voting rights Series Preferred stockholders were entitled to cast the number of votes equal to the number of whole shares of common stock into which the convertible preferred stock was convertible. Conversion Each 42.8 shares of Series Preferred was convertible, at any time, into one share of common stock at the then-applicable Conversion Price (as defined below). The Series Preferred was automatically converted into common stock, at the then-applicable Conversion Price, upon (a) the vote or consent of 66-2/3% of the outstanding shares of Series Preferred or (b) upon the closing of the sale to the public of either shares of common stock or units comprised of shares of common stock and warrants to purchase shares of common stock (i) in which the price per share paid by the public (prior to the deduction of underwriting discounts and registration expenses) was no less than $6.00 per share, or to the extent units are sold in such offering, no less than $6.00 per unit (in each case as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to shares of common stock effectuated after August 15, 2018), in each case in the initial closing of the such offering, and (ii) resulting in at least $15,000,000 in gross proceeds to the company (prior to the deduction of underwriting discounts and registration expenses), in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended. The Conversion Price was initially $1.3995 for each share of Series A, B and B-1 convertible preferred stock, $1.4043 for each share of Series C convertible preferred stock and $0.48 for each share of Series D and D-1 convertible preferred stock. The Conversion Price was subject to adjustment in certain circumstances. Dividends Holders of the Series Preferred were entitled to receive cash dividends at the rate of 8% of the applicable Original Issue Price (as defined below) per annum, on a non-cumulative basis, on each outstanding share of Series Preferred. The Company could not declare any dividends on any shares of Series Preferred other than shares of Series D-1 convertible preferred stock unless the holders of the Series D-1 convertible preferred stock then outstanding first receive, or simultaneously receive, full payment of a dividend. The Original Issue Price was $2.733 per share for the Series A convertible preferred stock, $1.3995 per share for the Series B convertible preferred stock, $1.3995 per share for the Series B-1 convertible preferred stock, $1.4043 per share for the Series C convertible preferred stock, $0.48 per share for the Series D convertible preferred stock and $0.48 per share for the Series D-1 convertible preferred stock, each subject to adjustment in the event of any reorganization, stock split, recapitalization or other similar event involving or affecting a change in the Company’s capital structure. Liquidation Preferences In the event of liquidation or winding up of the Company, (i) the holders of the Series D and D-1 convertible preferred stock, on a pari passu basis, were entitled to receive, prior to and in preference to any payment or distribution to the holders of, Series C convertible preferred stock, Series B and B-1 convertible preferred stock, Series A convertible preferred stock and common stock, a per-share amount equal to the applicable Liquidation Preference (as defined below); (ii) the holders of the Series C convertible preferred stock, on a pari passu basis, were entitled to receive, prior to and in preference to any payment or distribution to the holders of Series B and B-1 convertible preferred stock, Series A convertible preferred stock, and common stock, a per-share amount equal to the applicable Liquidation Preference; and (iii) the holders of Series B and B-1 convertible preferred stock and the holders of Series A convertible preferred stock, on a pari passu basis, were entitled to receive, prior to and in preference to any payment or distribution to the holders of common stock, a per-share amount equal to the applicable Liquidation Preference. The Liquidation Preference was calculated as follows: (i) when the Company was valued at $91 million or below, the Liquidation Preference was equal to the applicable Original Issue Price for such shares plus the amount of any declared but unpaid dividends and (ii) when the company was valued greater than $91 million, the Liquidation Preference was equal to the applicable Original Issue Price for such shares plus the amount of any declared but unpaid dividends, with the first $10 million of proceeds above $91 million distributed to the holders of the Series D and D-1 convertible preferred stock on a pro rata basis ((i) and (ii) together, “Liquidation Preference”). Stock Options In August 2018, the Company’s board of directors (the “Board”) and its stockholders adopted the 2018 Equity Incentive Plan (the “2018 Plan”), as a successor to and continuation of the Company’s 2006 Equity Incentive Plan (the “2006 Plan”). Under the 2018 Plan the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then its employees, directors and consultants, including employees and consultants of its affiliates. The Company has initially reserved 1,499,454 shares of common stock for issuance under the 2018 Plan, which is the sum of (1) 1,000,000 new shares, plus (2) the number of shares that remained available for issuance under the 2006 Plan at the time the 2018 Plan became effective, and (3) any shares subject to outstanding stock options or other stock awards that were granted under the 2006 Plan that would have otherwise returned to the 2006 Plan. In addition, the number of shares of common stock reserved for issuance under the 2018 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 2019 through January 1, 2028, in an amount equal to 5% of the total number of shares of the Company’s capital stock outstanding on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by the Board. As of September 30, 2018, there were 415,137 shares of common stock subject to outstanding options and 1,084,285 shares of common stock reserved for future stock awards under the 2018 Plan. A summary of the Company’s stock option activity under the 2018 Plan and 2006 Plan is as follows: Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2018 436,341 $ 5.14 9.0 $ — Granted (unaudited) 385 6.00 — Exercised (unaudited) (1,856 ) 1.28 $ 4,571 Cancelled/Expired (unaudited) (19,733 ) 9.65 — Outstanding at September 30, 2018 (unaudited) 415,137 $ 4.99 8.2 $ 2,589,204 Vested and expected to vest at September 30, 2018 (unaudited) 399,705 $ 5.14 8.2 $ 2,487,288 Vested and exercisable at September 30, 2018 (unaudited) 261,487 $ 6.73 8.1 $ 1,580,698 For the three months ended September 30, 2018 and 2017, the Company granted to its employee’s options to purchase no shares and 17,769 shares of its common stock with an exercise price of $1.28 per share, respectively. For the nine months ended September 30, 2018 and 2017, the Company granted to its employee’s options to purchase 385 shares and 422,706 shares of its common stock with an exercise price of $6.00 per share and $1.28 per share, respectively. For the three months ended September 30, 2018 and 2017, the total grant date fair value of vested options was $50,584 and $60,515, respectively. The Company did not grant employee options during the three months ended September 30, 2018; the weighted-average grant date fair value of employee option grants during the three months ended September 30, 2017 was $0.67. For the nine months ended September 30, 2018 and 2017, the total grant date fair value of vested options was $161,897 and $232,915, respectively. The weighted-average grant date fair value of employee option grants during the nine months ended September 30, 2018 and 2017 was $2.99 and $0.66, respectively. Stock-Based Compensation Expense The Company recognized stock-based compensation expense of Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Research and development $ 43,363 $ 18,564 $ 131,900 $ 162,420 General and administrative 9,762 5,561 28,651 79,551 Total stock-based compensation expense $ 53,125 $ 24,125 $ 160,551 $ 241,971 The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Risk-free interest rate — 1.8 % 2.5 % 2.5 % Expected volatility — 58.0 % 63.0 % 58.0 % Expected term (in years) — 5.3 4.0 5.1 - 5.3 Expected dividend yield — 0.0 % 0.0 % 0.0 % Risk-free interest rate. The risk-free rate assumption is based on the U.S. Treasury instruments, the terms of which were consistent with the expected term of the Company’s stock options. Expected volatility. Due to the Company’s limited operating history and lack of company-specific historical or implied volatility as a private company, the expected volatility assumption was determined by examining the historical volatilities of a group of industry peers whose share prices are publicly available. Expected term. The expected term of stock options represents the weighted-average period the stock options are expected to be outstanding. The Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded. As a result, the Company uses the simplified method for estimating the expected term as provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. Expected dividend yield. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not intend to pay dividends. Forfeitures . The Company reduces stock-based compensation expense for actual forfeitures during the period. As of September 30, 2018 the unrecognized compensation cost related to outstanding employee options was $132,726 and is expected to be recognized as expense over approximately 1.1 years. Employee Stock Purchase Plan In August 2018, the Board and the Company’s stockholders adopted the 2018 Employee Stock Purchase Plan (the “ESPP”). A total of 175,000 shares of common stock are initially reserved for issuance under the ESPP. In addition, the number shares of common stock reserved for issuance under the ESPP will automatically increase each on January 1 of each calendar year, beginning on January 1, 2019, through January 1, 2028, by the lesser of (1) 1% of the total number of shares of the Company’s common stock outstanding on the last day of the calendar month before the date of the automatic increase, (2) 220,000 shares, or (3) a lesser number of shares as determined by the Board. As of September 30, 2018, no shares of common stock have been purchased under the ESPP. Common Stock Reserved for Future Issuance Common stock reserved for future issuance consist of the following: Nine Months Ended September 30, 2018 Stock options issued and outstanding 415,137 Authorized for future stock awards, option grants, or employee stock purchase program 1,259,285 Common Warrants 4,015,013 Total 5,689,435 |