| Series A Convertible Preferred Stock, Stockholders' Deficit, and Warrants | Note 12 — Series A Convertible Preferred
Stock, Stockholders’ Deficit, and Warrants Preferred Stock The Company is authorized
to issue 20,000,000 shares of preferred stock with a par value of $0.001 per share with such designation, rights, and preferences
as may be determined from time-to-time by the Company’s board of directors. As discussed below, at June 30, 2017, a total
of 422,838 shares of Series A Convertible Preferred Stock were issued and outstanding. At December 31, 2016 there were no shares
of preferred stock issued or outstanding. Subsequently, on August 4, 2017, the Company issued 125,000 shares of Series A-1 Convertible
Preferred Stock in connection with the Series A-1 Preferred Stock Units private placement. See Note 14, Subsequent Events Series A Preferred
Stock Units Private Placement The Company’s Board
of Directors has authorized the issuance of up to a total of 1.25 million Series A Preferred Stock Units, including authorizing
500,000 units on January 21, 2017 and 750,000 units on May 10, 2017. On January 26, 2017, the Company entered into a Securities
Purchase Agreement pursuant to which the Company may issue up to an aggregate of $3,000,000 (subject to increase) of Series A Preferred
Stock Units at a price of $6.00 per unit, in a private placement transaction (Series A Preferred Stock Units private placement). At the Series A Preferred
Stock Units private placement initial closing on January 26, 2017, and at subsequent closings on January 31, 2017 and March 8,
2017, a total of 422,838 Series A Preferred Stock Units were issued for aggregate gross proceeds of approximately $2.5 million
and net proceeds of approximately $2.1 million, after payment of placement agent fees and closing costs. A Series A Preferred Stock
Unit consists of one share of Series A Convertible Preferred Stock and one Series A Warrant, as more fully described below. The
Series A Convertible Preferred Stock and Series A Warrants were immediately separable upon their issuance. The Series A Convertible
Preferred Stock became convertible and the Series A Warrants became exercisable on May 21, 2017 upon stockholder approval, obtained
in accordance with Nasdaq Stock Market Rule 5635(d), of the Series A Preferred Stock Units private placement. Initially, each share
of Series A Convertible Preferred Stock is convertible into a number of shares of common stock equal to the stated value of $6.00
per share divided by the initial conversion price of $6.00 per share, subject to adjustment; and, each Series A Warrant is exercisable
for one share of common stock at the initial exercise price of $8.00 per share, subject to adjustment. Subsequently, upon the issuance
of the Series S Warrants on July 3, 2017, in connection with the $5.0 Million Senior Secured Notes Payable, the Series A Convertible
Preferred Stock conversion price was adjusted to $5.00 per share, and the Series A Warrant exercise price was adjusted to $6.67
per share. Further, upon the issuance of the Series A-1 Preferred Stock Units on August 4, 2017, the Series A Convertible Preferred
Stock conversion price was further adjusted to $4.99 per share, and the Series A Warrants exercise price was further adjusted to
$6.65 per share, and each is subject to further adjustment. See Note 14, Subsequent Events Further, through April
30, 2024, each Series A Warrant may also be exchanged, at the option of the holder, into four Series X Warrants, each of which
is exercisable for one share of common stock at $6.00 per share, with such Series X Warrant exercise price not subject-to further
adjustment, except in the event of stock dividends, stock splits or similar events affecting the common stock. The Series X Warrants
are exercisable commencing on the first trading day following October 31, 2018, and may be exercised until April 30, 2024, or earlier
upon redemption. In connection with
the Series A Preferred Stock Units private placement, the Company entered into a registration rights agreement, requiring the Company
to file a registration statement with the Securities and Exchange Commission registering for resale the maximum number of shares
of common stock issuable upon conversion of the issued Series A Convertible Preferred Shares and the exercise of the Series A Warrants
or, if converted, the Series X Warrants. The registration rights agreement required the Company to file an initial registration
statement registering the underlying common shares no later than sixty (60) days from the initial closing date of the Preferred
Stock Units private placement and to use commercially reasonable best efforts to have such registration statement declared effective
no later than one hundred and fifty (150) days from the initial closing date. The Company timely filed the initial registration
statement on Form S-1 (File No. 333-216963) with the SEC on March 27, 2017, and such registration statement became effective on
June 23, 2017. A failure of the Company to maintain the effectiveness of the registration statement would result in the Company
having to pay damages of 2% of each investor’s subscription amount on the date of a Maintenance Failure, as well as every
30 th As discussed herein
below, the Series A Convertible Preferred Stock conversion option and the Series A Warrants were determined to be derivatives under
ASC Topic 815, Derivative and Hedging The initial carrying
value of the Series A Convertible Preferred Stock is the difference between the Series A Preferred Stock Units issuance gross proceeds
less the initial fair values of the Series A Warrants liability and the Series A Convertible Preferred Stock conversion option
embedded derivative liability. At issuance, the Series A Convertible Preferred Stock has a carrying value of $0 resulting from
the aggregate initial fair value of the Series A Warrant liability and the Series A Convertible Preferred Stock conversion option
embedded derivative liability being in excess of the Series A Preferred Stock Units issuance gross proceeds, with such excess recognized
as a current period expense amounting to $2,735,657, before offering costs of $388,628, which were also recognized as a current
period expense, resulting in a $3,124,285 loss on the issuance of the Series A Preferred Stock Units recognized in the unaudited
condensed consolidated statement of operations, summarized as follows:
Series A
Preferred
Stock Units
Issue Dates
(Aggregate)
Series A Preferred Stock Units issuance gross proceeds $ 2,537,012
Less: Series A Warrants initial fair value (4,050,706 )
Less: Series A Convertible Preferred Stock conversion option
embedded derivative liability initial fair value (1,221,963 )
Excess of initial fair value over gross proceeds (2,735,657 )
Offering costs related to issuance of Series A Preferred Stock Units (388,628 )
Loss on issuance of Series A Preferred Stock Units $ (3,124,285 ) Series A Convertible
Preferred Stock The Series A Convertible
Preferred Stock has a par value of $0.001 per share, no voting rights, a stated value of $6.00 per share, and, at the holders’
election, is convertible into a number of shares of common stock equal to the stated value of $6.00 per share divided by the initial
conversion price of $6.00 per share, subject to adjustment. Subsequently, upon the issuance of the Series S Warrants on July 3,
2017, in connection with the $5.0 Million Senior Secured Notes Payable, the Series A Convertible Preferred Stock conversion price
was adjusted to $5.00 per share. Further, upon the issuance of the Series A-1 Preferred Stock Units on August 4, 2017, the Series
A Convertible Preferred Stock conversion price was further adjusted to $4.99 per share, and is subject to further adjustment. See
Note 14, Subsequent Events The Series A Convertible
Preferred Stock provides for dividends at an 8% annual rate, compounded quarterly, accumulate, and are payable in arrears upon
being declared by the Company’s Board of Directors. The Series A Convertible Preferred Stock dividends from April 1, 2017
through April 1, 2021 are payable-in-kind (“PIK”) in additional shares of Series A Convertible Preferred Stock. The
dividends may be settled, after April 1, 2021, at the option of the Company, through any combination of the issuance of additional
Series A Convertible Preferred Stock, common shares, and /or cash payment. As of June 30, 2017, Series A Convertible Preferred
Stock dividends totaling $77,711 or a payment-in-kind of 12,984 shares of Series A Convertible Preferred Stock, were earned, accumulated,
and in arrears, as the Company’s Board of Directors has not declared such dividends payable. Accordingly, the Company has
not recognized a Series A Convertible Preferred Stock dividend payable liability as of June 30, 2017, and will not recognize such
dividend payable liability until such dividends are declared by the Company’s Board of Directors. In the event of a Deemed
Liquidation Event, as defined in the Certificate of Designation of Preferences, Rights, and Limitations of the Series A Convertible
Preferred Stock, the Series A Convertible Preferred Stock can become redeemable at the election of at least two-thirds of holders
of the then number of issued and outstanding Series A Convertible Preferred Stock, if the Company fails to effect a dissolution
of the Company under the Delaware General Corporation Law within ninety (90) days after such Deemed Liquidation Event. In the event
of any voluntary or involuntary liquidation, dissolution, or winding up of the Company or a Deemed Liquidation Event, as defined,
the holders of the Series A Convertible Preferred Stock then outstanding are entitled to be paid out the assets of the Company
available for distribution to its stockholders before any payment shall be made to the holders of the common stock, an amount per
share equal to the greater of (i) the stated value, plus any dividends accrued but unpaid, or (ii) such amount per share as would
have been payable had all the shares of Series A Convertible Preferred Stock been converted into shares of common stock prior to
such liquidation, dissolution, winding up, or Deemed Liquidation Event, as defined. As the Deemed Liquidation Event, as defined,
is a contingent event, the Series A Convertible Preferred Stock is classified outside of stockholders’ equity in temporary
(“mezzanine”) equity. Further, as the Series A Convertible Preferred Stock is not currently redeemable and redemption
is not probable, as a Deemed Liquidation Event, as defined, has not occurred and is not probable, the Series A Convertible Preferred
Stock will not be measured at fair value until such time as a redemption trigger occurs which causes redemption to be probable. As discussed above, the
Series A Convertible Preferred Stock has a carrying value of $0 resulting from the issuance date initial fair values of the Series
A Warrant liability and the Series A Convertible Preferred Stock conversion option embedded derivative liability being in excess
of the Preferred Stock Units issuance gross proceeds, with such excess recognized as a current period loss in the unaudited condensed
consolidated statement of operations. Series A Convertible
Preferred Stock Conversion Option Embedded Derivative Liability The Series A Convertible
Preferred Stock conversion option (as discussed above), is accounted for as an embedded derivative, and bifurcated from the Series
A Convertible Preferred Stock host instrument. The Series A Convertible Preferred Stock conversion option embedded derivative is
classified as a current liability on the condensed consolidated balance sheet, initially measured at fair value at the time of
issuance and subsequently remeasured at fair value at each reporting period, with changes in fair value recognized as other income
or expense in the condensed consolidated statement of operations. The following table summarizes the estimated fair values of the
Series A Convertible Preferred Stock conversion option embedded derivative liability as of the dates indicated along with assumptions
utilized in each calculation:
Issue
Dates
Aggregated
Weighted
June 30, 2017 Average
Fair value per conversion option $ 1.69 $ 2.89
Series A Convertible Preferred Stock outstanding 422,838 422,838
Calculated aggregate fair value $ 714,596 $ 1,221,963
Value of common stock $ 4.50 $ 5.73
Expected term (years) 6.8 7.2
Volatility 49 % 47 %
Risk-free interest rate 2.1 % 2.3 %
Dividend yield 0 % 0 % The fair value
of the Series A Convertible Preferred Stock conversion option embedded derivative liability was determined using a Monte Carlo
simulation. The valuation of the Series A Convertible Preferred Stock conversion option embedded derivative liability is subjective
and is affected by changes in inputs to the valuation model including the Company’s stock price, and the assumptions regarding
the likelihood and timing of dilutive transactions; the estimated volatility in the value of the Company’s equity instruments;
risk-free rates based on U.S. Treasury security yields; and the Company’s dividend yield. Changes in these assumptions can
materially affect the fair value estimate. Common Stock The Company is
authorized to issue 50,000,000 shares of common stock with a par value of $0.001 per share. There were 13,331,211 and 13,330,811
shares of common stock outstanding as of June 30, 2017 and December 31, 2016, respectively. In connection with
the organization of the Company in June 2014, a total of 8,083,049 shares of the Company’s common stock and 8,710,182 warrants
(of which 627,133 warrants were subsequently returned to the Company in October 2014) (“Founders’ Warrants”)
were sold to the Company’s founders (the “Founders”) for an aggregate purchase price of $3,212. In June 2014 and
July 2014, in a private placement (Private Placement 1), a total of 418,089 units, consisting of one share of common stock and
one warrant, were sold to the initial investor investors (“Initial Investors”) for an aggregate purchase price of $75,000
less offering costs of $7,500. In November 2014, the Company completed another private placement (Private Placement 2) of 2,355,233
units, consisting of one share of common stock and one warrant, raising $845,000 in gross offering proceeds less offering costs
of $46,500. Taken together, the Private Placement 1 warrants and Private Placement 2 warrants are referred to collectively as the
“Private Placement Warrants”. Subsequently, in September 2015, the Company issued 1,393,629 shares of common stock
resulting from the exercise of 1,393,629 Private Placement Warrants for cash proceeds of $1.25 million. On April 28, 2016,
the Company’s IPO was consummated with the issuance of 1,060,000 units at an offering price of $5.00 per unit, with each
unit consisting of one share of common stock and one warrant, with each warrant entitling the holder to purchase a share of common
stock at $5.00 per share (the “IPO Issued Warrants”). The IPO resulted in gross cash proceeds of $5.3 million
and $4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and offering expenses. The
Company estimated the fair value of its common stock issued in the IPO using the guideline transaction method of the market approach
and arrived at an estimated fair value of common stock of $3.50. See below for further information regarding the IPO Issued Warrants. The remaining unexercised
warrants issued in both the June 2014 inception transaction (the Founders Warrants discussed above) and the June and July 2014
private placement transactions (the Private Placement Warrants discussed above) - totaling 9,560,295 warrants - were converted
into the same terms and conditions of the warrants issued in the Company’s IPO (as discussed above), and are heretofore aggregated
with the warrants issued in the Company’s IPO, and are collectively referred to as “IPO Warrants”. In March 2017,
the Company issued 400 shares of common stock resulting from the exercise of 400 warrants for cash proceeds of $2,000. In November
2016, the Company issued 20,732 shares of common stock resulting from the exercise of 40,000 warrants on a cashless basis. In December
2016, the Company issued 79 shares of common stock resulting from the exercise of 200 warrants on a cashless basis. Warrants The Company accounts
for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement.
The following table summarizes outstanding warrants to purchase common stock:
Warrants Exercisable at
Weighted Weighted
June 30,2017
Average Exercise Price December 31,2016
Average Exercise Price
Expiration Date
Equity classified warrants IPO Warrants 10,579,695 $ 5.00 10,580,095 $ 5.00 January 2022
Liability classified warrants Series A Warrants 422,838 $ 8.00 — $ — April 2024
Total 11,002,533 $ 5.12 10,580,095 $ 5.00 Subsequently, on
July 3, 2017, 2,660,000 Series S Warrants were issued, in connection the $5.0 million Senior Secured Notes Payable; and on August
4, 2017, the Company issued 125,000 Series A-1 Warrants in connection with the Series A-1 Preferred Stock Units private placement.
See Note 14, Subsequent Events Equity-Classified Warrants IPO Warrants The 1,060,000 warrants
issued in the April 28, 2016 IPO have an exercise price of $5.00 per share, with such exercise price not subject to further adjustment,
except in the event of stock dividends, stock splits or similar events affecting the common stock., and became exercisable on October
28, 2016 and expire on January 29, 2022 or earlier upon redemption by the Company, under certain conditions, as discussed below.
As discussed above, effective on the date of the IPO, the previously issued 9,560,295 warrants outstanding at the time of the April
28, 2016 IPO, automatically converted into warrants having the same terms and conditions as the 1,060,000 warrants issued in the
Company’s IPO, and are aggregated with the 1,060,000 warrants issued in the Company’s IPO, and are collectively referred
to as IPO Warrants. In March 2017,
400 IPO Warrants were exercised for cash proceeds of $2,000, resulting in the issuance of 400 shares of common stock. In November
2016, 40,000 IPO Warrants were exercised on a cashless basis, resulting in the issuance of 20,732 shares of common stock. In December
2016, 200 IPO Warrants were exercised on a cashless basis, resulting in the issuance of 79 shares of common stock. Commencing April
28, 2017, the Company may redeem the outstanding IPO Warrants (other than those outstanding prior to the IPO held by the Company’s
management, founders, and members thereof, but including the warrants held by the initial investors), at the Company’s option,
in whole or in part, at a price of $0.01 per warrant:
* at any time while the warrants are exercisable;
* upon a minimum of 30 days’ prior written notice of redemption;
* if, and only if, the volume weighted average price of the Company’s common stock equals or exceeds $10.00 (subject-to adjustment) for any 20 consecutive trading days ending three business days before the Company issues its notice of redemption, and provided the average daily trading volume in the stock is at least 20,000 shares per day; and,
* if, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying such warrants. The right to exercise
will be forfeited unless the IPO Warrants are exercised prior to the date specified in the notice of redemption. On and after the
redemption date, a record holder of an IPO Warrant will have no further rights except to receive the redemption price for such
holder’s IPO Warrant upon surrender of such warrant. IPO Warrants Registration Statement
on Form S-1 (File No. 333-214288) - February 2017 The Company filed
a Registration Statement on Form S-1 (File No. 333-214288), declared effective February 3, 2017, (the “February 2017 Form
S-1”) to register the issuance of 1,020,000 shares of the Company’s common stock upon the exercise of 1,020,000 remaining
unexercised IPO Warrants (issued in the Company’s IPO as discussed above). Additionally, the February 2017 Form S-1 registered
(i) the issuance of 1,062,031 shares of the Company’s common stock upon the exercise of 1,062,031 of the unexercised IPO
Warrants (issued prior to the IPO), but only in the event such warrants are publicly transferred pursuant to Rule 144 prior to
exercise, or (ii) the resale of such shares, but only in the event such warrants are exercised prior to being publicly transferred
pursuant to Rule 144. Separately, in January 2017, the Company’s CEO executed a transaction with a shareholder who had previously
purchased shares of common stock and warrants in the Company’s private financings prior to its IPO, under which the CEO purchased
25,000 IPO Warrants (issued prior to the IPO) from the shareholder. Accordingly, the shares of common stock underlying such IPO
Warrants were not included in the February 2017 Form S-1. Unit Purchase Options On April 28, 2016,
the Company issued Unit Purchase Options (“UPO”) to the selling agents in the Company’s IPO. The UPO provides
for the purchase at an exercise price of $5.50 per Unit of 53,000 Units, with each Unit being identical to the units sold in the
Company’s IPO, and therefore consisting of one share of common stock and one warrant to purchase a share of common stock
at $5.00 per share. The Company estimated the fair value of the unit purchase options issued to the selling agents was $105,100,
which was accounted for as offering costs of the Company’s IPO. The fair value of the unit purchase options was determined
using a Black-Scholes option pricing model with the following assumptions: fair value of the underlying unit of $5.00, dividend
yield of 0.00%, expected volatility of 50%, risk free rate of 1.28% and remaining contractual term of 4.6 years. Liability-Classified Warrants Common stock warrants
are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification of the warrant
exercise price in the event subsequent sales of common stock are at a lower price per share than the then-current warrant exercise
price, as is the case for the Series A Warrants. The Company classifies derivative warrant liabilities on the condensed consolidated
balance sheet as a current liability, initially measured at fair value at the time of issuance and subsequently remeasured at fair
value at each quarterly balance sheet date, with changes in fair value recognized as income or expense on the condensed consolidated
statement of operations. Series A Warrants The Series A Warrants
may be exercised for one share of common stock at an initial exercise price of $8.00 per share, subject to adjustment. Subsequently,
upon the issuance of the Series S Warrants on July 3, 2017, in connection with the $5.0 Million Senior Secured Notes Payable, the
Series A Warrant exercise price was adjusted to $6.67 per share. Further, upon the issuance of the Series A-1 Preferred Stock Units
on August 4, 2017, the Series A Warrants exercise price was further adjusted to $6.65 per share, and each is subject to further
adjustment. See Note 14, Subsequent Events The following table summarizes the estimated
fair values of the Series A Warrants as of the dates indicated along with weighted average assumptions utilized in each calculation:
Issue Dates Aggregated
June 30, 2017
Weighted Average
Series A Warrants outstanding 422,838 422,838
Fair value per warrant $ 5.95 $ 9.58
Calculated aggregate fair value $ 2,515,886 $ 4,050,706
Value of common stock $ 4.5 $ 5.73
Exercise price $ 8.00 $ 8.00
Expected term (years) 6.84 7.2
Risk free rate 2.1 % 2.3 %
Volatility 49 % 47 %
Dividend yield 0 % 0 % The fair value
of the Series A warrants was determined using a Monte Carlo simulation. The valuation of the Series A Warrants is subjective and
is affected by changes in inputs to the valuation model including the Company’s common stock, and the assumptions regarding
the likelihood and timing of dilutive transactions; the estimated volatility in the value of the Company’s equity instruments;
risk-free rates based on U.S. Treasury security yields; and the Company’s dividend yield. Changes in these assumptions can
materially affect the fair value estimate. Series X Warrants Through April 30, 2024,
each Series A Warrant may be exchanged, at the option of the holder, into four Series X Warrants, with each Series X Warrants
exercisable for one share of common stock at $6.00 per share, with such Series X Warrant exercise price not subject to further
adjustment, except in the event of stock dividends, stock splits or similar events affecting the common stock. Holders may exercise
Series X Warrants by paying the exercise price in cash. The Series X Warrants are exercisable commencing on the first trading
day following October 31, 2018 - as it is the later of (i) the May 21, 2017 stockholder approval in accordance with Nasdaq Stock
Market Rule 5635(d) of the Series A Preferred Stock Units private placement; or (ii) October 31, 2018 - and may be exercised until
April 30, 2024, or earlier upon redemption. At any time after April 30, 2019, the Company may, at its option, redeem all, but
not less than all, of the outstanding Series X Warrants at a price of $0.01 per Series X Warrant if the volume weighted average
price per share of the Common Stock has been at least $18.00 (as adjusted for stock splits, stock dividends, or similar events
occurring after the initial Closing date) for twenty trading days out of the thirty trading day period ending three business days
prior to the notice of redemption in addition to certain other conditions. As of June 30, 2017, there were no Series X Warrants
issued and outstanding. |
