Quarterly report pursuant to Section 13 or 15(d)

COMMON STOCK, STOCK OPTIONS AND WARRANTS

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COMMON STOCK, STOCK OPTIONS AND WARRANTS
9 Months Ended
Jun. 30, 2017
Notes to Financial Statements  
NOTE 6. COMMON STOCK, STOCK OPTIONS AND WARRANTS

Common Stock

 

On September 15, 2016, the stockholders approved an increase in the number of shares of authorized common stock from 90,000,000 shares to 200,000,000 shares. On June 9, 2017, the Company affected a 1-for-15 reverse stock split of its issued and outstanding shares of common stock, $0.001 par value. Under the terms of the reverse stock split, fractional shares issuable to stockholders were rounded up to the nearest whole share, resulting in a reverse split slightly less than 1-for-15 in the aggregate.

  

Private Offerings

 

On September 12, 2014, the Company sold 226,671 Units for a purchase price of $9.00 per Unit for gross proceeds of $2,040,040. Each Unit consists of one share of common stock and one five-year warrant (the “Investor Warrants”) to purchase one share of common stock at an exercise price of $9.00 (the “Private Offering”). The Investor Warrants will be redeemable by the Company at a price of $0.015 per Investor Warrant at any time subject to the conditions that (i) the common stock has traded for twenty (20) consecutive trading days with a closing price of at least $22.50 per share with an average trading volume of 3,333 shares per day and (ii) the Company provides 20 trading days prior notice of the redemption and the closing price of the common stock is not less than $17.55 for more than any 3 days during such notice period and (iii) the underlying shares of common stock are registered.

 

The Company issued the Placement Agent and their designees five-year warrants (the “Placement Agent Unit Warrants”) to purchase 45,334 Units at an exercise price of $9.00 per Unit. The Placement Agent Unit Warrants are exercisable on a cash or cashless basis with respect to purchase of the Units, and will be exercisable only for cash with respect to warrants received as part of the Units.

 

In addition, the Placement Agent was issued warrants to purchase 66,667 shares of common stock exercisable for cash at $9.00 per share for investment banking services provided in connection with the transaction (the “Placement Agent Share Warrants”).

 

In connection with the Private Offering, the Company entered into a Registration Rights Agreement pursuant to which the Company filed a registration statement, registering for resale all shares of common stock (i) included in the Units; and (ii) issuable upon exercise of the Investor Warrants. The Registration Statement was declared effective on January 21, 2016.

 

During the year ended September 30, 2015, the Company sold an additional 189,136 Units for a purchase price of $8.10 per Unit and 13,333 Units for a purchase price of $9.00 per Unit for gross proceeds of $1,652,000. Each Unit consists of one share of common stock and one Investor Warrant (see description above).

 

During the year ended September 30, 2016, the Company sold an additional 290,000 Units for a purchase price of $8.10 per Unit and 17,778 Units for a purchase price of $9.00 per Unit for gross proceeds of $2,509,000. Each Unit consists of one share of common stock and one Investor Warrant (see description above). On May 12, 2016, the Company announced that it had completed the final phase of the Private Offering.

 

On March 22, 2016, the Company sold 333,333 shares of common stock at $9.00 per share to its Chairman of the Board, Leonard Mazur, for gross proceeds of $3,000,000. There were no expenses related to this placement.

 

In February 2017, the Company completed an offering (the “2016 Offering”) and sold 128,017 units at $6.00 per unit for gross proceeds of $768,100. Each unit consisted of (i) one share of common stock and (ii) a five year warrant to purchase one share of common stock at an exercise price of $8.25 per share (the “2016 Offering Warrants”). The placement agent received a 10% cash commission on the gross proceeds, an expense allowance equal to 3% of the proceeds, and warrants to purchase 12,802 shares of common stock at an exercise price of $8.25 per share. The estimated fair value of the 128,017 warrants issued to the investors was $587,592 and the estimated fair value of the 12,802 warrants issued to the placement agent was $58,759. The placement agent commissions and expense allowance was $99,853. Other costs of the placement were $176,896.

 

During January 2017, the Company issued 29,729 shares of its common stock for investor relations services. The $298,774 fair value of the common stock was expensed during the nine months ended June 30, 2017.

 

On May 5, 2017, the Company issued 11,400 shares of common stock valued at $77,748 in connection with a settlement agreement and release with a consultant that had an agreement with Leonard-Meron Biosciences. The Company expensed the $77,748 as a settlement expense during the nine months ended June 30, 2017.

 

On June 7, 2017, the Company entered into a release agreement with the placement agent for the 2016 Offering. The placement agent consented to future financings and waived certain covenants contained in the 2016 Offering agreements. As consideration for the release, the Company issued 6,668 shares of common stock valued at $45,476 to the placement agent. The Company expensed the $45,576 as a settlement expense during the nine months ended June 30, 2017.

 

On June 8, 2017, the Company entered into release agreements (the “Investor Release Agreements”) with the investors in the 2016 Offering where each investor released the Company from the restrictions included in the unit purchase agreements. In exchange, the Company agreed that (i) in the event that a financing is conducted at a price per share or price per unit lower than $6.00, then the Company will issue additional shares to each investor sufficient to effectively reprice the sale of the 2016 Offering units to the lower price; (ii) in the event that the financing is conducted at a price per share or price per unit less than the $8.25 exercise price of the warrants issued in the 2016 Offering then the exercise price of the warrants shall be reduced to the lower price; and (iii) the Company will give each investor no less than 6 hours of notice before the closing of any subsequent financing, through and including the Company’s securities offering pursuant to an S-1 registration statement filed with the U.S. Securities and Exchange Commission, and each investor shall have a 6-hour option to purchase up to 20% of the securities sold in such offering. In connection with these agreements the Company reclassified the fair value of the 140,819 warrants issued in the 2016 Offering to derivative warrant liability on June 8, 2017 (see Notes 5 and 9).

 

Public Offering

 

On May 12, 2017, the Company filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission to register up to approximately $18 million of securities, the proceeds of which will be used towards the research and development of our products and product candidates, and the remainder for capital expenditures, working capital and other general corporate purposes. No assurance can be given that such offering will be consummated, or if consummated, will raise the maximum amount contemplated thereunder. The Company may not sell securities pursuant to the registration statement until it is declared effective.

 

Unit Purchase Options

 

On April 7, 2017, the Company issued a three year Unit Purchase Option Agreement to a consultant for the purchase of 38,000 units at a purchase price of $9.00 per unit. Each unit consists of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $9.00 per share which expires on the earlier of three years after exercise of the Unit Purchase Option Agreement or April 7, 2023. The consultant provided the Company with business development and financing assistance for the three months ended June 30, 2017. The Company estimated the fair value of the unit purchase option agreement at $104,138 and expensed it during the nine months ended June 30, 2017.

 

On June 29, 2017, the Company issued a three year Unit Purchase Option Agreement to a consultant for the purchase of 62,667 units at a purchase price of $9.00 per unit. Each unit consists of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $9.00 per share which expires on the earlier of three years after exercise of the Unit Purchase Option Agreement or June 29, 2022. The consultant will provide the Company with business development and financing assistance through December 31, 2017. The Company estimated the fair value of the unit purchase option agreement at $193,860 and recorded it as a prepaid expense at June 30, 2017.

 

Stock Options

 

On September 12, 2014, the Board of Directors adopted the 2014 Stock Incentive Plan (the “2014 Plan”) and reserved 866,667 shares of common stock for issuance to employees, directors and consultants. On September 12, 2014, the stockholders approved the plan. Pursuant to the 2014 Plan, the Board of Directors (or committees and/or executive officers delegated by the Board of Directors) may grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards. As of June 30, 2017, there were options to purchase an aggregate of 586,039 shares of common stock outstanding, options to purchase 4,829 were exercised, and 275,799 shares were available for future grants.

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. Due to its limited operating history and limited number of sales of its Common Stock, the Company estimated its volatility in consideration of a number of factors including the volatility of comparable public companies. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the consolidated financial statements, to estimate option exercises and employee terminations within the valuation model. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. The expected term of stock options granted, all of which qualify as “plain vanilla,” is based on the average of the contractual term (generally 10 years) and the vesting period. For non-employee options, the expected term is the contractual term.

 

A summary of option activity under the 2014 Plan as of June 30, 2017 and the changes during the nine months then ended is presented below:

 

Options   Shares    

Weighted-

Average

Exercise

Price

   

Weighted-

Average

Remaining

Contractual

Term

 

Aggregate

Intrinsic

Value

 
Outstanding at September 30, 2016     582,199     $ 8.11     8.59 years   $ 1,355,924  
Granted     8,669       10.05              
Exercised     (4,829 )     0.01              
Forfeited or expired                        
Outstanding at June 30, 2017     586,039     $ 8.21     7.88 years   $ 415,971  
Exercisable at June 30, 2017     462,019     $ 7.68     7.71 years   $ 415,971  

  

Stock-based compensation expense for the nine months ended June 30, 2017 and 2016 was $808,356 and $517,677, respectively.

 

At June 30, 2017, unrecognized total compensation cost related to unvested awards of $631,756 is expected to be recognized over a weighted average period of 1.56 years.

 

Warrants

 

The Company has reserved 1,385,195 shares of common stock for the exercise of outstanding warrants. The following table summarizes the warrants outstanding at June 30, 2017:

 

  Exercise price     Number      
Investor Warrants $ 9.00     226,671   September 12, 2019  
Placement Agent Unit Warrants   9.00     45,334   September 12, 2019  
Warrants underlying Placement Agent Unit Warrants   9.00     45,334   September 12, 2019  
Placement Agent Share Warrants   9.00     66,667   September 12, 2019  
Investor Warrants   9.00     143,025   March 19, 2020 – June 26, 2020  
Investor Warrants   9.00     59,444   July 2, 2020 – September 14, 2020  
Investor Warrants   9.00     38,889   November 5, 2020 – November 20, 2020  
Investor Warrants   9.00     142,222   January 7, 2021 – March 21, 2021  
Investor Warrants   9.00     126,667   April 15, 2021 – April 25, 2021  
LMB Warrants   6.15     90,151   June 12, 2019 - March 2, 2021  
LMB Warrants   9.90     8,155   September 30, 2019 - January 8, 2020  
LMB Warrants   20.70     17,721   November 3, 2019 - March 6, 2020  
LMB Warrants   7.50     73,883   August 18, 2020 – March 14, 2021  
LMB Warrants   7.50     53,110   March 24, 2025 – April 29, 2025  
Financial Advisor Warrants   3.00     66,667   August 15, 2021  
2016 Offering Warrants   8.25     128,017 (1) November 23, 2021 - February 27, 2022  
2016 Offering Placement Agent Warrants   8.25     12,802 (1) November 23, 2021 - February 27, 2022  
Convertible Note Warrants   9.75     40,436   September 12, 2019  
          1,385,195      

______

(1)     Fair value of these warrants are included in the derivative warrant liability

 

During the nine months ended June 30, 2017, the Company sold 128,017 2016 Offering Units, at a price of $6.00 per Unit, consisting of (i) one share of common stock and (ii) a warrant to purchase one share of common stock. Each 2016 Offering Warrant has an exercise price of $8.25 and is exercisable for five years from the date of issuance. Additionally, warrants to purchase 12,802 shares of common stock were granted to the Placement Agent pursuant to the above pricing terms.

 

On June 7, 2017, the Company issued a warrant to purchase 40,436 shares of common stock at $9.75 per share in settlement of issues related to the July 31, 2014 conversion of a subordinated convertible promissory note. The Company charged the $119,402 estimated fair value of the warrant to settlement expenses during the nine months ended June 30, 2017.

 

On June 8, 2017, the Company entered into release agreements with the investors in the 2016 Offering where each investor released the Company from the restrictions included in the unit purchase agreements. In exchange, the Company agreed that (i) in the event that a financing is conducted at a price per share or price per unit lower than $6.00, then the Company will issue additional shares to each investor sufficient to effectively reprice the sale of the 2016 Offering units to the lower price; (ii) in the event that the financing is conducted at a price per share or price per unit less than the $8.25 exercise price of the warrants issued in the 2016 Offering then the exercise price of the warrants shall be reduced to the lower price; and (iii) the Company will give each investor no less than 6 hours of notice before the closing of any subsequent financing, through and including the Company’s securities offering pursuant to an S-1 registration statement filed with the U.S. Securities and Exchange Commission, and each investor shall have a 6-hour option to purchase up to 20% of the securities sold in such offering. In connection with these agreements the Company reclassified the fair value of the 140,819 warrants issued in the 2016 Offering to derivative warrant liability on June 8, 2017 (see Note 5).

  

Effective June 16, 2017, the Company amended warrants associated with the Leonard-Meron Biosciences, Inc. 2015 private placement offering. The warrant amendments removed the exercise price reset provisions, adjusted the exercise price of the warrants to $7.50 per share and extended the term of the warrants by three years. The estimated fair value of the warrants on June 16, 2017 after the amendments was $250,733. As a result of the amendment, the Company recorded an incremental cost of $71,488 as a settlement expense during the nine months ended June 30, 2017.

 

At June 30, 2017, the weighted average remaining life of all of the outstanding warrants is 3.26 years, all warrants are exercisable, and the aggregate intrinsic value for the warrants outstanding was $230,391.

 

Common Stock Reserved 

 

A summary of common stock reserved for future issuances is as follows:

 

   

June 30,

2017

   

September 30,

2016

 
2014 Stock Incentive Plan options outstanding     586,039       582,185  
2014 Stock Incentive Plan reserved for future grants     275,799       284,482  
Warrants     1,385,195       1,203,940  
Unit purchase options     201,334        
Total     2,448,367       2,070,607  

 

The Company has also reserved an undetermined number of shares in connection with (i) the outstanding convertible promissory notes (See Notes 4 and 9), (ii) the rights granted to the investors in the 2016 Offering (See Note 6 – Private Offerings and Note 9), and (iii) the planned public offering (See Note 6 – Public Offering and Note 9).