9. Capital Structure

 

On October 20, 2015, the Company filed an amended and restated certificate of incorporation in connection with the closing of its initial public offering. The amended and restated certificate of incorporation authorizes the Company to issue two classes of stock, common stock and preferred stock, and eliminates all references to the previously existing series of preferred stock. At December 31, 2015, the total number of shares of capital stock the Company was authorized to issue was 205,000,000 of which 200,000,000 was common stock and 5,000,000 was preferred stock. All shares of common and preferred stock have a par value of $0.001 per share. At December 31, 2015, there were 8,650,143 shares of common stock outstanding and zero shares of preferred stock outstanding.

 

Common Stock

 

Reverse Stock Split

 

On September 1, 2015, the Company filed an amendment to its amended and restated certificate of incorporation effecting a 1-for-28 reverse stock split of its common stock. All share and per share amounts of common stock in the accompanying financial statements have been restated for all periods to give retroactive effect to the reverse stock split. The shares of common stock retained a par value of $0.001 per share. Accordingly, the stockholders’ equity (deficit) reflects the reverse stock split by reclassifying from common stock to additional paid-in capital an amount equal to the par value of the decreased shares resulting from the reverse stock split.

 

Initial Public Offering

 

On October 20, 2015, the Company closed an initial public offering of its units (the “IPO”). Each unit consisted of one share of common stock, one Class A warrant to purchase one share of common stock at an exercise price of $4.55 per share and one Class B warrant to purchase one-half share of common stock at an exercise price of $3.90 per full share (the “units”). The Class A warrants expire on October 20, 2018 and the Class B warrants expire on April 20, 2017. The closing of the IPO resulted in the sale of 4,000,000 units at an initial public offering price of $6.50 per unit for gross proceeds of $26.0 million. The net proceeds of the IPO, after underwriting discounts, commissions and expenses, and before offering expenses, to the Company were approximately $23.6 million. On November 13, 2015, the units separated into common stock, Class A warrants and Class B warrants and began trading separately on the NASDAQ Capital Market.

 

On November 23, 2015, the underwriter of the IPO exercised its over-allotment option for 20,000 shares of common stock, 551,900 Class A warrants to purchase one share of common stock and 551,900 Class B warrants to purchase one-half share of common stock for additional gross proceeds of $135,319.

 

The common stock and accompanying Class A warrants and Class B warrants have been classified to stockholders’ equity (deficit) in the Company’s balance sheet.

 

Underwriter’s Unit Purchase Option

 

The underwriter of the IPO received, for $100 in the aggregate, a unit purchase option (the “UPO”) to purchase up to a total of 40,000 units (or 1% of the units sold in the IPO) exercisable at $7.48 per unit (or 115% of the public offering price per unit in the IPO). The units underlying the UPO will be, immediately upon exercise, separated into shares of common stock, underwriters’ Class A warrants and underwriters’ Class B warrants (such warrants together referred to as the Underwriters’ Warrants) such that, upon exercise, the holder of a UPO will not receive actual units but will instead receive the shares of common stock and Underwriters’ Warrants, to the extent that any portion of the Underwriters’ Warrants underlying such units have not otherwise expired. The exercise prices of the underwriters’ Class A warrants and underwriter’s Class B warrants underlying the UPO are $5.23 and $4.49, respectively. The UPO may be exercised for cash or on a cashless basis, at the holder’s option, and expires on October 14, 2020; provided, that, following the expiration of underwriters’ Class B warrants on April 20, 2017, the UPO will be exercisable only for shares of common stock and underwriters’ Class A warrants at an exercise price of $7.475 per unit; provided further, that, following the expiration of underwriters’ Class A warrants on October 20, 2018, the UPO will be exercisable only for shares of common stock at an exercise price of $7.47. The Company classified the UPO as a liability as it is a freestanding marked-to-market derivative instrument that is precluded from being classified in stockholders’ equity. The fair value of the UPO is re-measured each reporting period and the change in fair value is recognized in the statement of operations (see Note 4).

 

Voting

 

Common stock is entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors, and does not have cumulative voting rights. Accordingly, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election.

 

Dividends

 

The holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors out of legally available funds.

 

Liquidation

 

In the event of the Company’s liquidation, dissolution or winding up, holders of the Company’s common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all debts and other liabilities.

 

Rights and Preferences

 

Holders of the Company’s common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the Company’s common stock.

 

Convertible Preferred Stock

 

Preferred Stock Conversion

 

Upon the closing of the IPO in October 2015, each share of Series A convertible preferred stock was converted into 0.04464 shares of common stock, each share of Series A‑1 convertible preferred stock was converted into 0.05357 shares of common stock and each share of Series B convertible preferred stock was converted into 0.03571 shares of common stock. As a result, the outstanding preferred stock as of the closing of the IPO converted into 3,980,422 shares of common stock.

 

Series A Convertible Preferred Stock Transactions

 

On February 14, 2012, March 23, 2012 and April 4, 2012, the Company completed closings of its private placement offering of Series A convertible preferred stock in the total amount of approximately $19.0 million. The number of shares of Series A convertible preferred stock issued in the three closings was 25,305,583 along with investor warrants to purchase 225,869 shares of common stock at an exercise price equal to $28.00 per share. The placement agent received warrants to purchase 126,091 shares of common stock. On May 18, 2012, the Company completed a direct private placement of its Series A convertible preferred stock in the amount of $1.2 million. On March 23, 2012, a convertible demand promissory note with an outstanding principal balance of $3.0 million, plus accrued interest of $58,000, was converted into 4,077,475 shares of Series A convertible preferred stock along with warrants to purchase 36,406 shares of common stock at an exercise price equal to $28.00 per share. In March 2012, an amount of $100,000 due to a related party was converted into 133,333 shares of Series A convertible preferred stock and a warrant to purchase 1,190 shares of common stock. The net proceeds to the Company from these Series A convertible preferred stock issuances after offering costs was approximately $17.7 million.

 

In connection with the issuance of the Series B convertible preferred stock in 2014, the holders of Series A convertible preferred stock waived their contractual anti‑dilution rights set forth in the Company’s amended and restated articles of incorporation (as amended from time to time, “Articles”). In exchange for waiving this right, the Company adjusted the conversion price for Series A convertible preferred stock of $0.75 per share to $0.60 per share. With the assistance of a third party valuation firm, management determined the fair value of the Series A convertible preferred stock to be $0.34 per share at the time of extinguishment. The $9,393,746 gain on extinguishment was equal to the excess carrying value of the Series A convertible preferred stock of $19,856,632 over the fair value of the amended Series A convertible preferred stock of $10,462,886. Because the underlying transaction was between the Company and its equity investors, the Company accounted for the extinguishment as a noncash gain to additional paid in capital in accordance with ASC 470‑50‑40‑2 and included as a component of net loss attributable to common stockholders.

 

Series A‑1 Convertible Preferred Stock Transaction

 

In August 2013, the Company completed a $6.8 million private equity offering of Series A-1 convertible preferred stock. The number of shares of Series A‑1 convertible preferred stock issued was 9,074,511 shares along with investor warrants to purchase 80,966 shares of common stock. The net proceeds to the Company after offering costs were approximately $6.1 million.

 

In connection with the issuance of the Series B convertible preferred stock in 2014, the holders of A‑1 preferred stock waived their contractual anti‑dilution rights under the Articles. In exchange for waiving this right, Company adjusted the conversion price for Series A‑1 convertible preferred stock of $0.75 per share to $0.50 per share and in exchange for waiving the 2.5% cumulative dividend right, the Company issued to the holders, 6,877 shares of common stock. With the assistance of a third party valuation firm, management determined the fair value of the Series A‑1 convertible preferred stock to be $0.37 per share at the time of extinguishment. The $3,140,692 gain on extinguishment was equal to the excess carrying value of the Series A‑1 convertible preferred stock of $1 plus the unamortized beneficial conversion feature of $6,567,063, over the fair value of the amended Series A‑1 convertible preferred stock of $3,389,330 and the fair value of the 6,877 shares of common stock of $37,041. Because the underlying transaction was between the Company and its equity investors, the Company accounted for the extinguishment as a noncash charge to additional paid in capital in accordance with ASC 470‑50‑40‑2.

 

Series B Convertible Preferred Stock Transaction

 

In July 2014, pursuant to the terms of the agreement, the Company completed an initial closing of an equity offering for 46,684,455 shares of its Series B convertible preferred stock at an original issuance price of $0.2999 per share for gross proceeds of $14.0 million. The Company also issued demand notes in July 2014, with an aggregate principal balance of $1.0 million, which were converted into 3,333,331 shares of Series B convertible preferred stock at an original issuance price of $0.2999 per share for additional gross proceeds of $1.0 million. In addition, and pursuant to the terms of several convertible promissory notes issued from April through June 2014, the Company issued 5,597,618 shares of Series B convertible preferred stock upon the conversion of the outstanding principal and interest due under the convertible promissory notes at a conversion price of $0.2249 per share for an aggregate amount of $1.3 million.  

 

In August 2014, the Company completed a second closing of an equity offering for shares of its Series B convertible preferred stock with its term loan lender. Pursuant to the same terms and conditions of the initial offering, the Company issued 3,334,445 shares of Series B convertible preferred stock to the term loan lender at an original issuance price of $0.2999 per share for additional gross proceeds of $1.0 million.

 

The right of the investors (the “investor rights obligation”) to purchase Series B convertible preferred stock represented a freestanding financial instrument and was indexed to an obligation of the Company to repurchase its Series B convertible preferred stock by transferring assets. As such, the Company accounted for the investor rights obligation as a liability in accordance with ASC 480. The Company adjusted the carrying value of the liability to its estimated fair value at each reporting date. Increases or decreases in the fair value of the investor rights obligation were recorded as other income (expense) in the accompanying statements of operations. The fair value of the liability was determined using a valuation model, which considers the probability of achieving certain milestones, the entity’s cost of capital, the estimated period the rights will be outstanding, consideration received for the instrument with the rights, the number of shares to be issued to satisfy the rights, the price of such shares and any changes in the fair value of the underlying instrument. At the date of issuance in July 2014, the Company recorded the investor rights obligation at its initial estimated fair value of $2.6 million. The investor rights obligation expired in October 2015 upon the closing of the Company’s IPO and the Company recognized a gain on the change in fair value of $1.1 million, which was recorded as other income in the accompanying statements of operations.

 

Common Stock Warrants

 

At December 31, 2015, the following common stock warrants were outstanding:

 

 

Series B Convertible Preferred Stock Warrants

 

In August 2014, warrants to purchase 625,208 shares of Series B convertible preferred stock, at an exercise price equal to $0.2999 per share, were issued to the term loan lender in conjunction with the loan of $7.5 million (see Note 8). Upon the closing of the Company’s IPO, these warrants to purchase 625,208 shares of Series B convertible preferred stock became warrants to purchase 22,328 shares of common stock at an exercise price of $8.40 per share, in accordance with their terms. These warrants represent a freestanding financing instrument indexed to an obligation of the Company and as such is accounted for as a liability in accordance with ASC 480. The Company adjusts the carrying value of the liability, which appears as “warrant liability” on the accompanying balance sheets, to its estimated fair value at each reporting date (see Note 4).