Series A Convertible Preferred Stock and Stockholders' Deficit | NOTE 4 - SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT A. Common Stock The Company’s common stock confer upon their holders the following rights: ● The right to participate and vote in the Company’s stockholder meetings, whether annual or special. Each share will entitle its holder, when attending and participating in the voting in person or via agent or letter, to one vote; ● The right to a share in the distribution of dividends, whether in cash or in the form of bonus shares, the distribution of assets or any other distribution pro rata to the par value of the shares held by them; and ● The right to a share in the distribution of the Company’s excess assets upon liquidation pro rata to the par value of the shares held by them. B. Series A Convertible Preferred Stock The terms of the Series A Convertible Preferred Stock are governed by a Certificate of Designation (the “Series A Certificate of Designation”) filed by the Company with the Delaware Secretary of State on April 30, 2018. Pursuant to the Series A Certificate of Designation, the Company designated 500 shares of the Company’s preferred stock as “Series A Convertible Preferred Stock”. As more fully described below, on April 30, 2018, the Company issued a total of 500 shares of Series A Convertible Preferred Stock in connection with the Share Purchase Agreement. Following is a summary of the material terms of the Series A Convertible Preferred Stock: ● Dividends When the obligation for accrued dividend is settled through the issuance of the Company’s common stock and the number of shares to be issued to the Purchaser is considered as fixed and determinable, the accrued dividend is recorded as additional paid-in capital versus deduction of accumulated deficit. As of September 30, 2019, accrued dividend of $61 will be settled through issuance of the Company’s common stock but the number of shares to be issued to the Purchaser is not considered as fixed and determinable, thus such accrued dividend was recorded as accrued liability. During the period commencing April 30, 2018 through December 31, 2018, the Company recorded $179 as dividend on Series A Convertible Preferred Stock, of which $114 was paid through December 31, 2018 by issuance of 801,230 shares of common stock. The remaining $65 which represent the dividend accrued as of December 31, 2018, was paid on January 3, 2019 through issuance of 832,368 shares of common stock. During the period commencing January 1, 2019 through September 30, 2019, the Company recorded $194 as dividend on Series A Convertible Preferred Stock, of which $133 represents dividend that was paid through September 30, 2019 by issuance of 16,908,217 shares of common stock (as of September 30, 2019 the Company has an obligation to issue 6,642,441 additional shares of common stock, which arefixed and determinable). The remainder of $62 will be settled through issuance of the Company’s common stock but the number of shares to be issued to the Purchaser is not considered as fixed and determinable, thus such accrued dividend was recorded as part of other current liabilities as of September 30, 2019. ● Liquidation ● Voting Rights ● Conversion Due to the Trigger Event as discussed below, the conversion price was adjusted to an amount equal to (A) 75% of the quotient determined by dividing (x) the sum of the 3 lowest Closing Prices of the shares of common stock during the period beginning 10 Trading Days prior to such Triggering Event Conversion Date and ending 3 Trading Days after the shares of shares of common stock are received into Holder’s brokerage account and fully cleared for trading, by (y) 3, minus (B) $0.01. From January 1, 2019 through September 30, 2019, the Purchaser converted an aggregate of 61 shares of Preferred Stock into an aggregate of 77,362,264 shares of the shares of common stock at the conversion prices in effect on the respective conversion dates. Consequently, the Company reclassified an amount of $916 out of the bifurcated embedded derivative related to optional conversion feature upon triggering event, and amount of $350 out of the mezzanine, into the equity. ● Redemption ● Certain mandatory redemption provisions provide that, beginning January 30, 2019 and continuing for every 30-days period thereafter (each a “Mandatory Redemption Date”), the Company is required to offer to redeem 1/12 th ● Upon the occurrence of an offering of debt or equity securities of the Company or any of its subsidiaries resulting gross cash proceeds of not less than $10,000, the Company is required to make an offer to the holders of shares of the Series A Convertible Preferred Stock to redeem 50% of the outstanding Series A Convertible Preferred Stock at either (i) 115% of the stated value of each Preferred Share ($10) plus any unpaid accrued dividends if redeemed on or prior to October 30, 2018 or (ii) 120% of the stated value of each Preferred Share ($10) plus any unpaid accrued dividends if redeemed after October 30, 2018 (the “Redemption Premium”). ● Upon sale of assets (other than products to be sold in the normal course of business) of the Company and its subsidiaries in an amount of proceeds in excess of $500, the Company is required to offer to redeem to 100% of the outstanding Series A Convertible Preferred Stock for the Redemption Premium, and may be redeemed in cash or, at the Company’s sole discretion in freely tradeable shares of the Company’s common stock if the Company is in full compliance with all of the Equity Conditions as defined in the Series A Certificate of Designation. ● The Company may also be required, at the option of holders of the Series A Convertible Preferred Stock to redeem any outstanding shares of Series A Convertible Preferred Stock upon a Change of Control or Bankruptcy Event. Each Preferred Stock shall be redeemed for an amount equal to Redemption Premium, and may be redeemed in cash or, at the Company’s sole discretion in freely tradeable shares of the Company’s common stock if the Company is in full compliance with all of the Equity Conditions as defined in the Series A Certificate of Designation. ● The Company may, at any time upon at least 15 trading days prior written notice to each holder, redeem all or portion of the outstanding Preferred Stock in cash in an amount equal to Redemption Premium. As of September 30, 2019, the Company is not in compliance with the Equity Conditions and therefore beginning January 31, 2019 for every 30-days period thereafter, at the request of the purchaser, the Company might be required to redeem in cash, 1/12th of the outstanding shares of Series A Convertible Preferred Stock for an amount equal to 110% of the stated value ($10) of such shares of Series A Convertible Preferred Stock plus any accrued but unpaid dividends up to the Mandatory Redemption Date. As of the date of issuance of these financial statements, the Purchaser has not requested redemption in cash of any shares of Series A Convertible Preferred Stock. C. Securities Purchase Agreement On April 30, 2018 (the “Initial Date”), the Company consummated a private placement transaction (the “April 2018 PIPE”) by entering into a Securities Purchase Agreement (the “Agreement”) with a non-US-based institutional investor (the “Purchaser”), pursuant to which, the Company sold and the Purchaser bought, (i) 500 shares of Preferred Stock designated as Series A Convertible Preferred Stock (the “Preferred Stock”), which were initially convertible into 25,000,000 shares of common stock at a conversion price of $0.20 per share, (the conversion price has been adjusted due to the Trigger Event described below), subject to adjustment pursuant to the anti-dilution provisions of the Preferred Shares, and (ii) Warrants (the “Warrants”) representing the right to initially acquire 12,500,000 shares of common stock over a period of five years from the Initial Date at an exercise price of $0.22 per share, which is subject to certain adjustments including anti-dilution provisions (since the Initial Date through September 30, 2019, no adjustments have been made to the exercise price), for an aggregate purchase price of $5,000. The Company engaged Newbridge as exclusive placement agent for the aforesaid Agreement, pursuant to which the Company was required to pay a cash fee to Newbridge and issued to them warrants to purchase 2,500,000 shares of common stock (or 10% of the aggregate number of fully diluted shares of common stock that have been purchased by an Purchaser) over a period of three years from the Initial Date at an exercise price of $0.20 per share, which is subject to certain adjustments including anti-dilution provisions (since the Initial Date through September 30, 2019, no adjustments have been made to the exercise price). In addition, the Company is also obligated to pay Newbridge a warrants solicitation fee equal to 4% of the gross proceeds received by the Company upon cash exercise of any Warrants purchased by the Purchaser in connection with the Agreement (since the Initial Date through September 30, 2019, no solicitation fee was earned). On November 27, 2018, the Tel Aviv regional Prosecutor’s Service filed criminal charges against Dr. Yehuda Baruch, the Chief Medical and Regulatory Affairs Officer of the Company, alleging that Dr. Baruch conducted an improper sexual relationship with a psychiatric patient. Dr. Baruch denies all allegations. The Company together with its legal counsels believe that such criminal charges are not directed at, and do not concern, the Company, any actions of Dr. Baruch in the Company or any other of the Company’s directors or officers. The Company is evaluating its proposed response, if any, considering the allegations brought against Dr. Baruch. The aforesaid charges brought against Dr. Baruch are considered a “trigger event” (the “Trigger Event”) under the Series A Certificate of Designation. Subject to certain beneficial ownership limitations of the Preferred Stock, at any time during the period commencing on the date of the occurrence of a Trigger Event and ending on the date of the cure of such Trigger Event, the Purchaser of the Preferred Stock may, at its option, by delivery of notice to the Company, specify a future date upon which such holder shall require the Company to convert all, or any number of, Preferred Stock into shares of the Company’s common stock at an adjusted conversion ratio as specified in the Series A Certificate of Designation. Due to the aforesaid Trigger Event, the conversion price was adjusted to an amount equal to (A) 75% of the quotient determined by dividing (x) the sum of the 3 lowest Closing Prices of the shares of common stock during the period beginning 10 Trading Days prior to such Triggering Event Conversion Date and ending 3 Trading Days after the shares of shares of common stock are received into Holder’s brokerage account and fully cleared for trading, by (y) 3, minus (B) $0.01. The Warrants are considered a freestanding instrument, as the Company believes they are legally detachable and separately exercisable. As defined in the Agreement, upon certain changes in control events, the Purchaser may elect to receive cash equal to the Black-Scholes value of the outstanding Warrants. Consequently, the Warrants were accounted for and recognized as a non-current financial liability on the consolidated balance sheet under ASC 815-40-25 and were measured at fair value at the initial date and subsequently the Warrants are marked to market in each reporting period until they are exercised or expired, as earlier, with changes in the fair value of the Warrants charged into the statement of comprehensive loss. Thus, the Warrants amounting to $113 and $1,475 were measured at fair value on September 30, 2019 and December 31, 2018, respectively. For the three and nine months ended September 30, 2019, the Company recorded income in total amount of $77 and $1,362, respectively, due to revaluation of Warrants to purchase shares of shares of common stock in the statement of operations and comprehensive loss as separate line (see also Note 3). In addition, at the Initial Date, the Company identified several embedded features which require separate accounting as derivatives under ASC 815-15. Nevertheless, except specific embedded feature relating to contingent redemption feature in case of other than upon bankruptcy triggering event, the Company determined that all remaining embedded features should not bifurcated from the host contract or the probability of occurrence of such embedded features is low and therefore the fair value of such embedded features was determined to be immaterial upon initial recognition. In addition, the Company determined that the Trigger Event is considered as optional conversion feature upon triggering event that should be estimated at fair value. Thus, the bifurcated embedded derivatives amounting to $12 and $8,129 were measured at fair value on September 30, 2019 and December 31, 2018, respectively. The change in the fair value is resulted from revaluation of the bifurcated embedded derivatives in total amount of $274 and $7,201 which was recognized under other income in the statement of comprehensive loss in a separate line for the three and nine months ended September 30, 2019, respectively. In addition, upon a partial conversion of 61 shares of Series A Convertible Preferred Stock into 77,362,264 shares of common stock, a relative portion of $916 out of the bifurcated embedded derivative related to optional conversion feature upon triggering event, and an amount of $350 out of the mezzanine were reclassified to equity. Under ASC 480-10-S99 “Distinguishing Liabilities from Equity,” since the Series A Convertible Preferred Stock have conditional redemption provisions which are outside of the control of the Company and also contain a deemed liquidation preference, the Preferred Stock were classified as mezzanine financing at the initial measurement date at the residual amount, which is the difference between the total proceeds received, the fair value of the Warrants, the fair value of the embedded derivative related to the contingent redemption of Series A Convertible Preferred Stock and after consideration with the amount related to the BCF. Subsequently, the Company accretes changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology. Changes in the redemption value are considered as changes in accounting estimates. The below table outlines the change in the mezzanine account during the nine months ended September 30, 2019 Nine months ended Unaudited Balance at December 31, 2018 $ 2,226 Accretion of Preferred Stock to redemption value 2,438 Partial conversion of Preferred Stock into shares of common stock (350 ) Balance at September 30, 2019 $ 4,314 D. Stock-based compensation 1. In 2019, the Company approved the Amended and Restated 2016 Employee Incentive Plan (the “2016 Plan”) which provides for the issuance of common stock, stock options and other stock-based awards to employees, officers, directors, consultants, and advisors. The number of shares reserved for issuance under the 2016 Plan is 36,000,000 shares of common stock. 2. Stock options grants: A. On January 14, 2019, the Company granted stock options exercisable into 500,000 shares to several employees under the 2016 Plan at an exercise price of $0.22 per share. The stock options become vested over a three-year period from the date of grant. The stock options shall vest 1/3 one year from the grant date and the remaining 2/3 on a quarterly basis (8.33% per quarter). The Company used the Black-Scholes-Merton pricing model to estimate the fair value of the stock options by taking into account assumptions as follows: expected dividend yield of 0%; risk-free interest rate of 2.51%; expected volatility of 252% and expected term of 4.46 years. The fair value of the stock options at the grant date was $64 (50% out of it relates to employee who left the company after the grant was performed). B. On January 14, 2019, the Company granted stock options exercisable into 1,500,000 shares to its Chief Scientific Officer under the 2016 Plan at an exercise price of $0.05 per share. 33% of the stock options vested on February 18, 2019 and the remaining 1,000,000 stock options will vest over a 2-year period commencing on the first quarter after the first vesting event, in equal quarterly installments of 125,000 stock options per quarter. The Company used the Black-Scholes-Merton pricing model to estimate the fair value of the stock options by taking into account assumptions as follows: expected dividend yield of 0%; risk-free interest rate of 2.51%; expected volatility of 286% and expected term of 3.35 years. The fair value of the stock options at the grant date was $194. C. On February 4, 2019, the Company granted stock options exercisable into 1,500,000 shares to its Chief Financial Officer, under the 2016 Plan at an exercise price of $0.22 per share. The stock options shall vest over a 3-year period from the vesting start date, such that approximately 166,656 stock options shall vest upon the 1-year anniversary of the start date and the remaining stock options shall vest in 8 equal quarterly instalments thereafter. The Company used the Black-Scholes-Merton pricing model to estimate the fair value of the stock options by taking into account assumptions as follows: expected dividend yield of 0%; risk-free interest rate of 2.51%; expected volatility of 252% and expected term of 4.49 years. The fair value of the stock options at the grant date was $151. 3. The following tables present a summary of the status of the grants to employees, officers and directors as of September 30, 2019: Shares Weighted Weighted Aggregate Options outstanding at December 31, 2018 27,250,000 $ 0.05 8.0 $ 1,453 Granted 3,500,000 $ 0.15 - - Forfeited (2,000,000 ) $ 0.05 - - Options outstanding at September 30, 2019 28,750,000 $ 0.06 7.47 $ - Options exercisable at September 30, 2019 26,250,000 $ 0.05 7.37 $ - (*) The aggregate intrinsic value represents the total intrinsic value (the difference between the fair value of the Company’s shares common stock on the last traded day of third fiscal quarter of 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2019. This amount is impacted by the changes in the fair value of the Company’s shares as of September 30, 2019. 4. The following table summarizes information about stock options outstanding at September 30, 2019: Options Outstanding Options Exercisable Range of exercise prices Shares Weighted Weighted Shares Weighted $0.05 27,000,000 $ 0.05 7.42 26,250,000 $ 0.05 $0.22 1,750,000 $ 0.22 9.35 - $ - Total Shares 28,750,000 $ 0.06 7.54 26,250,000 $ 0.05 5. As of September 30, 2019, there was $90 of total unrecognized compensation cost related to non-vested stock options granted under the 2016 Plan. This cost is expected to be recognized over a weighted-average period of 1.10 years. 6. The total equity-based compensation expense related to all the Company’s equity-based awards issued to employees, recognized for the three and nine months ended September 30, 2019 amounted to $33 and $142, respectively. The expense for the three and nine months ended September 30, 2019 is net of credit from reversal of previous expense on forfeited option. These expenses have been recorded as general and administrative expenses as part of the statement of comprehensive loss. 7. On December 12, 2017, the Company entered into a new agreement with a service provider, Lyons Capital LLC, pursuant to which the service provider rendered services in February 2018 relating to the 2018 Wall Street Conference at the Deerfield Beach Florida Hilton and sponsorship in the conference for consideration of 150,000 fully vested restricted shares of common stock of the Company. The grant was accounted for under ASC 505-50 “share-based payment arrangement with nonemployees”, when the fair value of the grant amounting to $72 was recorded as part of general and administrative expenses for the year ended December 31, 2018. As of September 30, 2019, the aforesaid shares have not been issued by the Company. E. Common stock subscriptions receivable In January 2018, the Company received a cash payment of $105 for common stock subscriptions receivable from a former employee. F. Amortization of services receivable Prior to January 1, 2019, the Company had granted stock awards to non-employees that are being recognized ratably over the requisite service periods. The Company recognized amortization of services receivable of $37 and $108 for the three and nine months ended September 30, 2019, respectively. Unamortized services receivable of $13 as of September 30, 2019, will be recognized ratable over the remainder of 2019. |