| Stockholders' Equity | Note 7. Stockholders’ Equity Convertible Preferred Stock The Company is authorized to issue 10,000,000 shares of Preferred Stock. Securities Purchase Agreement On December 16, 2022, the Company entered into a Securities Purchase Agreement for a private placement (Private Placement) with certain entities and members of management (collectively, Purchasers). Pursuant to the Securities Purchase Agreement, the Company agreed to sell to the Purchasers warrants to purchase up to an aggregate of 22,598,870 shares of the Company’s common stock, at a purchase price of $ 0.4425 per warrant. The closing of the Private Placeme nt occurred on May 8, 2023 (the Issue Date), following the satisfaction of certain closing conditions, including the completion of enrollment in the randomized withdrawal period of Study C602, an ongoing open-label extension study of DCCR for the treatment of PWS. The Company received gross proceeds of $ 10.0 million for the sale and issuance of warrants to purchase common stock. The warrants are separated into two tranches with 8,598,870 Tranche A Warrants and 14,000,000 Tranche B Warrants. The Tranche A warrants are exercisable for $ 1.75 per share, with an aggregate exercise price of up to approximately $ 15.0 million, and the Tranche B warrants are exercisable for $ 2.50 per share, with an aggregate exercise price of up to $ 35.0 million. The Tranche A warrants were immediately exercisable and were required to be exercised within 30 days of announcement of positive top-line data from the randomized withdrawal period of Study C602. The Tranche B warrants are also immediately exercisable and expire upon the earlier of 3.5 years from the date of issuance or 30 days following receipt of the U.S. Food and Drug Administration approval of DCCR for the treatment of PWS. On September 26, 2023, the Company announced positive top-line data and the Tranche A warrants were exercised for gross proceeds of $ 15.0 million with 3,310,568 shares and 2,420,394 pre-funded exchange warrants being issued prior to the quarter end, and 526,741 shares and 2,341,167 pre-funded exchange warrants being issued after the quarter end. Underwritten Public Offering On March 31, 2022, the Company sold 2,666,667 shares of its common stock at a public offering price of $ 3.75 , and for certain investors, in lieu of common stock, pre-funded warrants (the 2022 pre-funded warrants) to purchase 1,333,333 shares of its common stock at a public offering price $ 3.60 per pre-funded warrant, which represents the per share public offering price for the common stock less the $ 0.15 per share exercise price for each 2022 pre-funded warrant. The 2022 pre-funded warrants are immediately exercisable and may be exercised at any time until all 2022 pre-funded warrants are exercised in full. Each share of common stock or 2022 pre-funded warrant was sold together with one, immediately exercisable, common warrant (the 2022 common warrants) with a five-year term to purchase one share of common stock at an exercise price of $ 4.50 per share. The net proceeds of the offering were $ 13.8 million, after deducting the underwriting discount and other offering expenses. The Company is not required under any circumstance to settle any of the 2022 pre-funded warrants or the 2022 common warrants for cash, and therefore classified both types of warrants as permanent equity. During the three months ended September 30, 2023, 1,869,327 warrants were exercised for gross proceeds of $ 8.4 million and 353,155 pre-funded warrants were exercised using the cashless exercise option with no additional proceeds received by the Company. At the Market Offering In July 2021, the Company entered into a Controlled Equity Offering Sales Agreement under which the Company may sell shares of its common stock having an aggregate offering price of up to $ 25.0 million from time to time in any method permitted by law deemed to be an “at the market” Rule 415 under the Securities Act of 1933, as amended. As of September 30, 2023, the Company has sold an aggregate of 1,877,170 shares of common stock through the at the market program, totaling $ 7.4 million in net proceeds. The Controlled Equity Offering Sales Agreement was terminated in connection with the October 2, 2023 financing. Other Common Stock Warrants As of September 30, 2023, the Company had 6,804 common stock warrants outstanding from the 2010/2012 convertible notes, with an exercise price of $ 365.25 and a term of 10 years expiring in November 2024 . The Company also had 1,100 common stock warrants issued to the underwriter in the Company’s IPO, with an exercise price of $ 535.50 and a term of 10 years, expiring in November 2024 . As of September 30, 2023 and December 31, 2022, the following table summarizes the Company's outstanding common stock warrants:
As of September 30, 2023 As of December 31, 2022
Number of Common Warrant Shares Weighted Average Exercise Price per Share Number of Common Warrant Shares Weighted Average Exercise Price per Share Expiration Date
Common stock warrants 7,904 $ 388.94 7,904 $ 388.94 November 2024
2018 PIPE warrants 34,241 $ 30.00 34,241 $ 30.00 December 2023
March 2022 Common warrants 2,130,656 $ 4.50 4,000,000 $ 4.50 March 2027
March 2022 Pre-funded warrants 927,806 $ 0.15 1,280,965 $ 0.15 March 2027
May 2023 Tranche A warrants 2,867,908 $ 1.75 — $ — November 2026 (1)
May 2023 Tranche A Pre-funded warrants 2,420,394 $ 0.01 — $ — November 2026 (1)
May 2023 Tranche B warrants 14,000,000 $ 2.50 — $ — November 2026 (1)
Total 22,388,909 5,323,110
(1) Subject to earlier expiration as described above. Equity Incentive Plans 2014 Plan The Company maintains the 2014 Equity Incentive Plan (the 2014 Plan). Under the 2014 Plan the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance units or performance shares to employees, directors, advisors, and consultants. Options granted under the 2014 Plan may be incentive stock options (ISOs) or nonqualified stock options (NSOs). ISOs may be granted only to Company employees, including officers and directors. The Board has the authority to determine to whom stock options will be granted, the number of options, the term, and the exercise price. Options are to be granted at an exercise price not less than fair value. For individuals holding more than 10 % of the voting rights of all classes of stock, the exercise price of an option will not be less than 110 % of fair value. The vesting period for service-based stock options is normally monthly over a period of 4 years from the vesting date. Performance-based grants have vesting contingent upon the achievement of certain performance criteria related to the Company’s commercialization of its therapeutics. The contractual term of an option is no longer than five years for ISOs for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options. The terms and conditions governing restricted stock units is at the sole discretion of the Board. On March 23, 2023, the Company filed a Registration Statement on Form S-8 which registered 238,329 shares available for grant and issuance under the 2014 Plan, all of which became available for grant and issuance under the 2014 Plan on January 1, 2023. On May 25, 2023, the stockholders approved the Amended and Restated 2014 Plan which included an increase of 1.8 million shares available for grant and issuance. As of September 30, 2023, a total of 17,780 shares are available for future grant under the 2014 Plan. Inducement Plan The Company maintains the 2020 Inducement Equity Incentive Plan (the Inducement Plan). The Inducement Plan provides for the grant of equity-based awards, including non-statutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance units, and its terms are substantially similar to the 2014 Plan. In accordance with Rule 5635(c)(4) and Rule 5635(c)(3) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company, or, to the extent permitted by Rule 5635(c)(3) of the Nasdaq Listing Rules, in connection with a merger or acquisition. On March 23, 2023, the Company filed a Registration Statement on Form S-8 which registered 500,000 shares available for issuance under the Inducement Plan, all of which became available for grant and issuance under the Inducement Plan on February 17, 2023. As of September 30, 2023, a total of 590,668 shares are available for future grant under the Inducement Plan. Stock-based compensation expense The Company recognizes stock-based compensation expense related to options and restricted stock units granted to employees, directors and consultants. The compensation expense is allocated on a departmental basis, based on the classification of the award holder. No income tax benefits have been recognized in the condensed consolidated statements of operations and comprehensive loss for stock-based compensation arrangements during any of the periods presented. Stock-based compensation expense was recognized in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Research and development $ 935 $ 200 $ 1,587 $ 511
General and administrative 1,266 483 2,449 1,387
Total $ 2,201 $ 683 $ 4,036 $ 1,898 Stock Options The Company granted options to purchase 77,000 and 157,673 shares of the Company’s common stock during the three months ended September 30, 2023 and 2022, respectively, and granted options to purchase 1,663,454 and 283,919 of the Company's common stock during the nine months ended September 30, 2023 and 2022, respectively. There were no performance-based options granted during the three and nine months ended September 30, 2023 and 2022, respectively. The fair value of each award granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Expected life (years) 5.3 - 6.0 5.2 - 5.7 5.3 - 6.0 5.2 - 6.0
Risk-free interest rate 4.0 %- 4.4 % 2.8 %- 3.1 % 3.5 %- 4.4 % 1.7 %- 3.0 %
Volatility 98 %- 100 % 92 %- 95 % 98 %- 100 % 88 %- 93 %
Dividend rate — % — % — % — % The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. These assumptions include the following estimates: • Expected life: The expected life of stock options represents the period of time that the options are expected to be outstanding. Due to the lack of historical exercise history, the expected life of the Company’s service-based stock options has been determined utilizing the “simplified method”, based on the average of the contractual term of the options and the weighted-average vesting period. The expected life for the performance-based options was determined based on consideration of the contractual term of the stock options, an estimate of the date the performance criteria would be met and expectations of employee behavior. • Risk-free interest rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected life of the stock options. • Volatility: The estimated volatility rate is based on the volatilities of the Company’s common stock for a historical period equal to the expected life of the stock options. • Dividend rate: The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero . The following table summarizes stock option transactions for the nine months ended September 30, 2023 as issued under the 2014 Plan and the Inducement Plan:
Number of Weighted- Weighted Aggregate Intrinsic Value
Outstanding Share (in years) (in thousands)
Balance at January 1, 2023 686,574 $ 28.83 7.93
Options granted 1,663,454 4.81
Options exercised ( 3,931 ) 3
Options canceled/forfeited ( 45,685 ) 71.99
Balance at September 30, 2023 2,300,412 $ 10.65 8.92 $ 47,959
Options exercisable at September 30, 2023 684,187 $ 19.86 7.75 $ 10,695
Options vested and expected to vest at September 30, 2023 2,277,454 $ 10.39 9.17 $ 47,959 The weighted-average grant date fair value of options granted was $ 3.80 and $ 2.62 per share for the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023 total unrecognized employee stock-based compensation related to stock options that are likely to vest was $ 7.4 million, which is expected to be recognized over the weighted-average remaining vesting period of 2.6 years. Restricted Stock Units There were no restricted stock units granted by the Company during the three months ended September 30, 2023 and 2022, respectively, and 414,710 and 8,967 restricted stock units granted during the nine months ended September 30, 2023 and 2022, respectively, to employees and directors. The restricted stock units granted to directors in 2023 were 100 % vested on the grant date and represent compensation for past board services. Restricted stock units granted during 2023 vest 100 % nine months from date of grant. The restricted stock units were valued based on the Company’s common stock price on the grant date. The following table summarizes restricted stock unit transactions for the nine months ended September 30, 2023 as issued under the 2014 Plan:
Number of Weighted-
Outstanding at January 1, 2023 19,068 $ 57.75
Restricted stock units granted 414,710 $ 5.25
Restricted stock units vested ( 9,534 ) $ 57.75
Restricted stock units canceled/forfeited - $ 0.00
Outstanding at September 30, 2023 424,244 $ 6.43 The weighted-average grant-date fair value of all restricted stock units granted during the nine months ended September 30, 2023 and 2022 was $ 5.25 and $ 5.33 , respectively. The fair value of all restricted stock units vested during the nine months ended September 30, 2023 and 2022 was $ 23,000 and $ 0.6 million, respectively. At September 30, 2023, total unrecognized employee stock-based compensation related to restricted stock units was $ 0.8 million, which is expected to be recognized over the weighted-average remaining vesting period of 0.2 years. 2014 Employee Stock Purchase Plan The Company’s board of directors and stockholders have adopted the 2014 Employee Stock Purchase Plan (ESPP). The ESPP has become effective, and the board of directors will implement commencement of offers thereunder in its discretion. A total of 1,864 shares of the Company’s common stock has been made available for sale under the ESPP. In addition, the ESPP provides for annual increases in the number of shares available for issuance under the plan on the first day of each year beginning in the year following the initial date that the board of directors authorizes commencement, equal to the least of: • 1.0 % of the outstanding shares of the Company’s common stock on the first day of such year; • 3,729 shares; or • such amount as determined by the board of directors. As of September 30, 2023, there were no purchases by employees under this plan. |
