| Stockholders' Equity | (9) Stockholders’ Equity
(a) Issuance of Common Stock
On February 27, 2020, the Company completed a registered direct offering of securities registered under an effective registration statement filed pursuant to the Securities Act of 1933, as amended ("February 2020 Offering"). The gross proceeds from the February 2020 Offering were approximately $6.0 million, before deducting placement agent fees and other offering expenses of approximately $347,000. In the February 2020 Offering, the Company sold 10,084,034 Class A Units at an offering price of $0.595 per unit, with each Class A Unit consisting of one share of its common stock and one-half of a common warrant to purchase one share of common stock at an exercise price of $0.53 per share of common stock. Additionally, the common stock warrants were immediately exercisable and expire on February 27, 2025. By their terms, however, the common stock warrants cannot be exercised at any time that the common stock warrant holder would beneficially own, after such exercise, more than 4.99% (or, at the election of the holder, 9.99)% of the shares of common stock then outstanding after giving effect to such exercise.
On November 18, 2019, the Company completed a public offering of securities registered under an effective registration statement filed pursuant to the Securities Act of 1933, as amended ("November 2019 Offering"). The gross proceeds from the November 2019 Offering were approximately $6.0 million, before deducting placement agent fees and other offering expenses of $404,000. In the November 2019 Offering, the Company sold (i) 10,450,000 Class A Units, with each Class A Unit consisting of one share of its common stock and a common warrant to purchase one share of its common stock, and (ii) 1,550,000 Class B Units, with each Class B Unit consisting of one pre-funded warrant to purchase one share of its common stock and a common warrant to purchase one share of its common stock, at a price of $0.50 per Class A Unit and $0.4999 per Class B Unit. The pre-funded warrants, which were exercised for common stock in December 2019, were issued in lieu of common stock in order to ensure the purchaser did not exceed certain beneficial ownership limitations. The pre-funded warrants were immediately exercisable at an exercise price of $.0001 per share, subject to adjustment. Additionally, the common stock warrants were immediately exercisable at an exercise price of $0.50 per share, subject to adjustment, and expire on November 17, 2024. By their terms, however, neither the pre-funded warrants nor the common stock warrants can be exercised at any time that the pre-funded warrant holder or the common stock warrant holder would beneficially own, after such exercise, more than 4.99% (or, at the election of the holder, 9.99)% of the shares of common stock then outstanding after giving effect to such exercise. On the date of the November 2019 Offering, the Company allocated approximately $768,000 and $4.8 million to common stock/additional paid-in capital and warrant liability, respectively.
In March 2017, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), to sell shares of our common stock, with aggregate gross sales proceeds of up to $20.0 million, from time to time, through an “at the market” (“ATM”), equity offering program, under which Cantor acts as sales agent. The shares of common stock to be sold under the Sales Agreement were originally sold and issued pursuant to the Company’s Registration Statement on Form S‑3 (File No. 333‑199093) (the “Prior Form S‑3”), which was previously declared effective by the Securities and Exchange Commission, and the related prospectus and one or more prospectus supplements. On October 13, 2017, the Company filed a Form S‑3 (File No. 333‑220942) (the “New Form S‑3”) to replace the Prior Form S‑3. The New Form S‑3 has been declared effective by the Securities and Exchange Commission, and the Prior Form S‑3 has been terminated. The New Form S‑3 registered the sale of up to $150.0 million of any combination of common stock, preferred stock, debt securities, warrants and units pursuant to a shelf registration statement. The New Form S‑3 also contains a prospectus pursuant to which we may sell, from time to time, shares of our common stock having an aggregate offering price of up to $25.0 million through Cantor as our sales agent, pursuant to the Sales Agreement.
On April 10, 2020, the Company filed a prospectus supplement in which the Company disclosed that the Company was subject to the limitations of General Instruction I.B.6. of Form S-3 with the amount of shares of our common stock available for sale under the New Form S-3 limited to one-third of the aggregate market value of our common equity held by non-affiliates of the Company over any rolling 12-month period and further limited the future amount sold under the Sales Agreement to $5.0 million.
As of June 30, 2020, we had sold an aggregate of 6,635,535 shares at a weighted-average sales price of $3.02 per share under the ATM for aggregate gross proceeds of $20.0 million and net proceeds of $19.3 million, after deducting sales agent commission and discounts and our other offering costs. During the three and six months ended June 30, 2020, the Company did not sell any shares under the ATM. During the three months ended June 30, 2019, the Company sold an aggregate of 149,037 shares at a weighted-average sales price of $1.95 per share under the ATM for aggregate gross proceeds of $290,000 and $281,000 in net proceeds. During the six months ended June 30, 2019, the Company sold an aggregate of 2,992,504 shares at a weighted-average sales price of $2.18 per share under the ATM for aggregate gross proceeds of $6.5 million and $6.3 million in net proceeds.
(b) Rights Agreement
On November 13, 2015, the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, entered into a Rights Agreement. Also on November 12, 2015, the board of directors of the Company authorized and the Company declared a dividend of one preferred stock purchase right (each a “Right” and collectively, the “Rights”) for each outstanding share of common stock of the Company. The dividend was payable to stockholders of record as of the close of business on November 30, 2015 and entitles the registered holder to purchase from the Company one one-thousandth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock of the Company at a price of $63.96 per one-thousandth share (the “Purchase Price”). The Rights will generally become exercisable upon the earlier to occur of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons has become an Acquiring Person (as defined below) or (ii) 10 business days (or such later date as may be determined by action of the board of directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding common stock of the Company. Except in certain situations, a person or group of affiliated or associated persons becomes an “Acquiring Person” upon acquiring beneficial ownership of 15% or more of the outstanding shares of common stock of the Company.
In general, in the event a person becomes an Acquiring Person, then each Right not owned by such Acquiring Person will entitle its holder to purchase from the Company, at the Right’s then current exercise price, in lieu of shares of Series A Junior Participating Preferred Stock, common stock of the Company with a market value of twice the Purchase Price. In addition, if after any person has become an Acquiring Person, (a) the Company is acquired in a merger or other business combination, or (b) 50% or more of the Company’s assets, or assets accounting for 50% or more of its earning power, are sold, leased, exchanged or otherwise transferred (in one or more transactions), proper provision shall be made so that each holder of a Right (other than the Acquiring Person, its affiliates and associates and certain transferees thereof, whose Rights became void) shall thereafter have the right to purchase from the acquiring corporation, for the Purchase Price, that number of shares of common stock of the acquiring corporation which at the time of such transaction would have a market value of twice the Purchase Price.
The Company will be entitled to redeem the Rights at $0.001 per Right at any time prior to the time an Acquiring Person becomes such. The terms of the Rights are set forth in the Rights Agreement, which is summarized in the Company’s Current Report on Form 8‑K dated November 13, 2015. The rights plan was originally set to expire on November 12, 2018; however, on November 5, 2018 our Board of Directors approved an Amended and Restated Rights Agreement pursuant to which the expiration date was extended to November 5, 2021, unless the rights are earlier redeemed or exchanged by the Company.
(c) Share-Based Payments
The Company recognizes stock-based compensation expense for grants of stock option awards, restricted stock units and restricted stock under the Company’s Incentive Plan to employees and nonemployee members of the Company’s board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period. In addition, the Company grants stock options to nonemployee consultants from time to time in exchange for services performed for the Company.
The Company uses the Black-Scholes model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of the Company’s common stock price, (ii) the periods of time over which employees and members of the board of directors are expected to hold their options prior to exercise (expected term), (iii) expected dividend yield on the Common Stock, and (iv) risk-free interest rates. Stock-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation cost that has been expensed in the statements of operations amounted to $465,000 and $446,000, respectively, for the three months ended June 30, 2020 and 2019 and amounted to $787,000 and $723,000, respectively, for the six months ended June 30, 2020 and 2019, and is allocated as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
2020
2019
2020
2019
Research and development
$
199,777
$
177,137
$
334,441
$
286,175
General and administrative
265,281
269,213
452,530
437,102
$
465,058
$
446,350
$
786,971
$
723,277
The Company issued 113,000 stock options and 739,000 stock options, respectively, during the three and six months ended June 30, 2020 and issued 55,000 stock options during the three and six months ended June 30, 2019.
Key assumptions used in the determination of the fair value of stock options granted are as follows:
2020
2019
Expected term
years
5.60
years
Risk-free interest rate
1.33
%
1.90
%
Expected dividend yield
—
—
Expected volatility
99.52
%
79.13
%
Expected Term : The expected term represents the period that the stock-based awards are expected to be outstanding. Due to limited historical experience of similar awards, the expected term was estimated using the simplified method in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment, for awards with stated or implied service periods. The simplified method defines the expected term as the average of the contractual term and the vesting period of the stock option. For awards with performance conditions, and that have the contractual term to satisfy the performance condition, the contractual term was used.
Risk-Free Interest Rate : The risk-free interest rate used was based on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term.
Expected Dividend : The expected dividend assumption is based on management’s current expectation about the Company’s anticipated dividend policy. The Company does not anticipate declaring dividends in the foreseeable future.
Expected Volatility : Since the Company did not have sufficient trading history, the volatility factor was based on the average of similar public companies through August 2014. When selecting similar companies, the Company considered the industry, stage of life cycle, size, and financial leverage. Beginning in July 2017, the volatility factor is based solely on the Company's trading history since March 2014.
FASB ASC 718, Stock Compensation, requires the Company to recognize compensation expense for the portion of options that are expected to vest. Therefore, the Company applied estimated forfeiture rates that were derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
As of June 30, 2020, there was $556,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock option plan. That cost is expected to be recognized over a weighted average period of 1.68 years and will be adjusted for subsequent changes in estimated forfeitures. Additionally, as of June 30, 2020, there was $408,000 of total unrecognized compensation cost related to unvested restricted stock units that have either time-based or performance vesting.
(d) Stock Option Plan
In April 2014, the board of directors adopted the 2014 Stock and Incentive Plan ("2014 Plan") subject to shareholder approval which was received in June 2014. The 2014 Plan provides for the granting of nonqualified and incentive stock options, stock appreciation rights, restricted stock units, restricted stock and dividend equivalents. An aggregate of 1,000,000 shares were authorized for issuance under the 2014 Plan. Additionally, 271,906 remaining authorized shares under the 2011 Equity Incentive Plan ("2011 Plan") were issuable under the 2014 Plan at the time of the 2014 Plan adoption. Upon receiving shareholder approval in June 2016, the 2014 Plan was amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 1,271,906 to 2,471,906. Additionally, upon receiving shareholder approval in June 2018, the 2014 Plan was further amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 2,471,906 to 3,221,906. Finally, upon receiving shareholder approval in June 2020, the 2014 Plan was further amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 3,221,906 to 5,721,906. The board of directors, on an option-by-option basis, determines the number of shares, exercise price, term, and vesting period for options granted. Options granted generally have a ten-year contractual life. The Company issues shares of common stock upon the exercise of options with the source of those shares of common stock being either newly issued shares or shares held in treasury. An aggregate of 5,721,906 shares are authorized for issuance under the 2014 Plan, with 2,491,332 shares remaining available for grant as of June 30, 2020.
A summary of stock option activity is as follows:
Outstanding stock options
Number of
Weighted average
shares
exercise price
Balance at December 31, 2019
2,310,485
$
4.81
Options granted
739,000
0.54
Options exercised
—
—
Options forfeited
(37,444)
0.94
Options cancelled
—
—
Balance at June 30, 2020
3,012,041
3.81
Options exercisable at June 30, 2020
2,059,877
5.16
The following table summarizes information about stock options outstanding and exercisable at June 30, 2020:
Options outstanding
Options exercisable
Weighted
Weighted
average
average
remaining
Weighted
remaining
Weighted
contractual
average
Aggregate
contractual
average
Aggregate
Number
life
exercise
intrinsic
Number
life
exercise
intrinsic
outstanding
(Years)
price
value
exerciseable
(Years)
price
value
3,012,041
6.40
$
$
511,610
2,059,877
$
$
1,083
The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. There were no stock options exercised during the three and six months ended June 30, 2020 and 2019.
(e) Restricted Stock Units
A summary of restricted stock unit activity is as follows:
Number of
unvested restricted
stock units
Balance at December 31, 2019
661,307
Granted
—
Vested
(25,000)
Forfeited
(30,625)
Balance at June 30, 2020
605,682
(f) Common Stock Warrants
The Company accounts for its common stock warrants under ASC 480, Distinguishing Liabilities from Equity , which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer's equity shares, or is indexed to such an obligation, and requires or may require the issuer to settle the obligation by transferring assets, to be classified as a liability. In accordance with ASC 480, the Company's outstanding warrants from the November 2019 Offering are classified as a liability. The liability is adjusted to fair value at each reporting period, with the changes in fair value recognized as gain (loss) on change in fair value of warranty liability in the Company's consolidated statements of operations. The warrants issued in the November 2019 Offering allow the warrant holder, if certain change in control events occur, the option to receive an amount of cash equal to the value of the warrants as determined in accordance with the Black-Scholes option pricing model with certain defined assumptions upon a fundamental transaction.
As of June 30, 2020, the Company had 1,873,000 common stock warrants outstanding from the November 2019 Offering to purchase an equal number of shares of common stock. The fair value of these warrants on December 31, 2019 and June 30, 2020 was determined using the Black-Scholes option pricing model with the following Level 3 inputs (as defined in the November 2019 Offering):
June 30, 2020
December 31, 2019
November 18, 2019
Expected life in years
4.88
5.00
Risk-free interest rate
0.29
%
1.69
%
1.63
%
Dividend yield
—
—
—
Volatility
140.22
%
225.93
%
224.47
%
Stock price
$
$
0.39
$
0.41
During the three and six months ended June 30, 2020, the Company recorded a non-cash loss of $2.1 million and $3.2 million, respectively, from the change in fair value of the November 2019 Offering warrants. The following table is a reconciliation of the warrant liability measured at fair value using level 3 inputs:
Warrant Liability
Balance at December 31, 2019
$
4,591,200
Settlement of liabilty on warrant exercise
(5,591,362)
Change in fair value of common stock warrants
3,166,474
Balance at June 30, 2020
$
2,166,312
Additionally, in the February 2020 Offering, the Company issued 5,024,017 common stock warrants. However, the February 2020 Offering warrants do not provide the warrant holder the option to receive an amount of cash equal to the Black-Scholes value of the warrants upon a fundamental transaction. Therefore, the Company has not recorded a warrant liability with respect to the warrants issued in the February 2020 Offering.
The following table summarizes the number of common stock warrants outstanding and the weighted average exercise price:
Common Stock
Weighted Average
Warrants
Exercise Price
Outstanding at December 31, 2019
12,000,000
$
0.50
Issued
5,042,017
0.53
Exercised
(13,618,807)
0.51
Expired
—
—
Cancelled
—
—
Forfeited
—
—
Balance at June 30, 2020
3,423,210
$
0.51
During the three and six months ended June 30, 2020, 13,497,807, and 13,618,807, respectively, common stock warrants to purchase one share of our common stock were exercised resulting in proceeds of approximately $6.9 million in each of the three and six-month periods ending June 30, 2020.
The following table summarizes information about common stock warrants outstanding at June 30, 2020:
Warrants outstanding
Weighted average
remaining contractual life
Weighted average
Aggregate intrinsic
Number exercisable
(Years)
exercise price
value
$
$
2,555,134 |
