Annual report pursuant to Section 13 and 15(d)

Stockholders??? Equity (Deficit)

v3.8.0.1
Stockholders’ Equity (Deficit)
12 Months Ended
Dec. 31, 2017
Equity [Abstract]  
Stockholders' Equity (Deficit)

NOTE 5 - STOCKHOLDERS’ EQUITY (DEFICIT)

 

The Company has authorized capital to 200,000,000 shares of Common Stock with par value to $0.0001 per share and has authorized capital of 50,000,000 shares of preferred stock, par value $0.0001 per share. Throughout this Annual Report, all share and per share values for all periods presented in the accompanying consolidated financial statements are retroactively restated for the effect of the 1:4 reverse stock split on October 30, 2017.

 

Series B Preferred Stock

 

The terms of the Series B Convertible Preferred Stock are summarized below:

 

Dividend. The holders of Series B Convertible Preferred Stock will be entitled to receive such dividends paid and distributions made to the holders of Common Stock, pro rata to the same extent as if such holders had converted the Series B Convertible Preferred Stock into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the record date for such dividends and distributions.

 

Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Company, after provision for payment of all debts and liabilities of the Company, any remaining assets of the Company shall be distributed pro rata to the holders of Common Stock and the holders of Series B Convertible Preferred Stock as if the Series B Convertible Preferred Stock had been converted into shares of Common Stock on the date of such liquidation, dissolution or winding up of the Company.

 

Voting Rights. The Series B Convertible Preferred Stock have no voting rights except with regard to certain customary protective provisions set forth in the Series B Convertible Preferred Stock Certificate of Designations and as otherwise provided by applicable law.

 

Conversion. Each share of Series B Convertible Preferred Stock may be converted at the holder’s option at any time after issuance into one share of Common Stock, provided that the number of shares of Common Stock to be issued pursuant to such conversion does not exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 9.99% of all of the Common Stock outstanding at such time, unless otherwise waived in writing by the Company with sixty-one (61) days’ notice.

 

As of December 31, 2016, 195,501 shares of Series B Convertible Preferred Stock were outstanding and as of December 31, 2017, one share of Series B Convertible Preferred Stock had been converted to the Company’s Common Stock.

 

Series D Convertible Preferred Stock

 

The Company issued 502,750 shares of Series D Convertible Preferred Stock on August 7, 2017 in exchange for the remaining outstanding convertible note issued in October 2014. The terms of the Series D Convertible Preferred Stock are summarized below:

 

Dividend. The holders of Series D Convertible Preferred Stock will be entitled to receive such dividends paid and distributions made to the holders of Common Stock, pro rata to the same extent as if such holders had converted the Series D Convertible Preferred Stock into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the record date for such dividends and distributions.

 

Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Company, after provision for payment of all debts and liabilities of the Company, any remaining assets of the Company shall be distributed pro rata to the holders of Series B Convertible Preferred Stock and Series D Convertible Preferred Stock as if the Series B Convertible Preferred Stock and Series D Convertible Preferred Stock had been converted into shares of Common Stock on the date of such liquidation, dissolution or winding up of the Company, prior to any distributions to Junior Stock, which includes the Company’s Common Stock.

 

Voting Rights. Except as otherwise expressly required by law, each holder of Series D Convertible Preferred Shares shall be entitled to vote on all matters submitted to shareholders of the Company and shall be entitled to the number of votes for each Preferred Share owned at the record date for the determination of shareholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, equal to the number of shares of Common Stock such Preferred Shares are convertible into (voting as a class with Common Stock).

 

Conversion. Each share of Series D Convertible Preferred Stock may be converted at the holder’s option at any time after issuance into five shares of Common Stock, provided that the number of shares of Common Stock to be issued pursuant to such conversion does not exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 9.99% of all of the Common Stock outstanding at such time, unless otherwise waived in writing by the Company with ninety-one (61) days’ notice.

 

As of December 31, 2017, all of the Series D Convertible Preferred Stock had been converted to the Company’s Common Stock and no shares of the Series D Convertible Preferred Stock remain outstanding.

 

Series E Preferred Stock

 

The Company issued Series E Convertible Preferred Stock in exchange for a majority of the outstanding warrants issued in August and September 2017 in conjunction with the issuance of convertible notes. The exchange resulted in a gain of approximately $305,000, which represented the fair value of the warrants less the fair value of the Series E Convertible Preferred Stock on the date of the exchange. The terms of the Series E Convertible Preferred Stock are summarized below:

 

Dividend. The holders of Series E Convertible Preferred Stock will be entitled to receive such dividends paid and distributions made to the holders of Common Stock, pro rata to the same extent as if such holders had converted the Series E Convertible Preferred Stock into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the record date for such dividends and distributions.

 

Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Company, after provision for payment of all debts and liabilities of the Company, any remaining assets of the Company shall be distributed pro rata to the holders of Series B Convertible Preferred Stock, Series D Convertible Preferred Stock and Series E Convertible Preferred Stock as if the Series B Convertible Preferred Stock, Series D Convertible Preferred Stock and Series E Convertible Preferred Stock had been converted into shares of Common Stock on the date of such liquidation, dissolution or winding up of the Company, prior to any distributions to Junior Stock, which includes the Company’s Common Stock.

 

Voting Rights. Except as otherwise expressly required by law and subject to the 4.99% limitation set forth in the blocker clause in the Series E, each holder of Series E Convertible Preferred Shares shall be entitled to vote on all matters submitted to shareholders of the Company and shall be entitled to the number of votes for each share of Series E Convertible Preferred Stock owned at the record date for the determination of shareholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, equal to the number of shares of Common Stock such Series E Convertible Preferred Shares are convertible into (voting as a class with Common Stock).

 

Conversion. Each share of Series E Convertible Preferred Stock may be converted at the holder’s option at any time after issuance into 1,000 shares of Common Stock, provided that the number of shares of Common Stock to be issued pursuant to such conversion does not exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 4.99% of all of the Common Stock outstanding at such time, unless otherwise waived in writing by the Company with ninety-one (61) days’ notice.

 

As of December 31, 2017, none of the Series E Convertible Preferred Stock had been converted to the Company’s Common Stock and 5,511.700 shares of the Series E Convertible Preferred Stock was outstanding.

 

Common Stock

 

On May 11, 2016, the Company entered into a consulting agreement with the Cooper Law Firm, LLC (“Cooper”), pursuant to which the Company agreed to issue 20,000 shares of the Company’s Common Stock. In connection with this transaction, the Company valued the shares at the quoted market price on the date of grant at $6.80 per share or $136,000.

 

On December 9, 2016, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional investors for the sale of an aggregate of 870,500 shares of the Company’s common stock, at a purchase price of $6.00 per share, and warrants to purchase 435,249 shares of common stock for a purchase price of $0.04 per warrant, or $17,020 in total. All warrants were purchased in January 2017.

 

On April 12, 2017, the Company issued 31,250 shares of the Company’s Common Stock pursuant to a settlement agreement with Dominion Harbor Group, LLC. In connection with this issuance, the Company valued the shares at the quoted market price on the date of grant at $3.32 per share or $103,750. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On April 24, 2017, the Company issued 7,500 shares in total of the Company’s Common Stock to a vendor in partial or total payment of outstanding invoices. In connection with this issuance, the Company valued the shares at the quoted market price on the date of grant at $3.32 per share or $24,900. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On August 9, 2017, the Company issued 250,000 shares of the Company’s Common Stock pursuant to the conversion of 200,000 shares of Series D Convertible Preferred Stock.

 

On August 29, 2017, the Company issued 200,000 shares in total of the Company’s Common Stock to four different vendors in partial or total payment of outstanding invoices. In connection with this issuance, the Company valued the shares at the quoted market price on the date of grant at $2.04 per share or $408,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On September 5, 2017, the Company issued 62,500 shares of the Company’s Common Stock pursuant to the conversion of 50,000 shares of Series D Convertible Preferred Stock.

 

On September 5, 2017, the Company issued 44,000 shares of the Company’s Common Stock pursuant to the conversion of $35,200 in principal amount invested in the Convertible Note.

 

On September 5, 2017, the Company issued 175,000 shares of the Company’s Common Stock pursuant to the conversion of $140,000 in principal amount invested in the Convertible Note.

 

On September 6, 2017, the Company issued 315,710 shares of the Company’s Common Stock pursuant to the conversion of $252,568 in principal amount invested in the Convertible Note.

 

On September 13, 2017, the Company issued 315,938 shares of the Company’s Common Stock pursuant to the conversion of 252,750 shares of Series D Convertible Preferred Stock.

 

On September 29, 2017, the Company recognized $1,333,000 of stock-based compensation in connection with the issuance of 775,000 shares of Common Stock in accordance with certain consulting and employee agreements. 

 

On October 2, 2017 and October 3, 2017, the Company issued 598,500 shares of the Company’s Common Stock to holders of the warrants issued pursuant to the April Purchase Agreement following approval by the Company’s shareholders of the warrant exchange at a special meeting held on September 29, 2017.

 

On October 26, 2017, the Company issued 700,000 and 50,000 shares to Mr. Croxall and Mr. Knuettel, respectively, pursuant to their respective retention agreements. In connection with this issuance, the Company valued the shares at the quoted market price on the date of grant at $1.08 per share or $810,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On October 26, 2017, the Company issued 25,000 shares to Mr. Spangenberg pursuant to his termination agreement. In connection with this issuance, the Company valued the shares at the quoted market price on the date of grant at $1.48 per share or $37,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On November 11, 2017, the Company issued 195,500 shares pursuant to the conversion of 195,500 shares of the Company’s Series B Convertible Preferred Stock.

 

On November 20, 2017, the Company issued 325,000 shares of the Company’s Common Stock pursuant to the conversion of $260,000 in principal amount invested in the Convertible Note.

 

On November 20, 2017, the Company issued 81,699 shares of the Company’s Common Stock pursuant to the engagement agreement with Company counsel. In connection with this transaction, the Company valued the shares at the quoted market price on the date of grant at $2.18 per share or $178,104. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On November 22, 2017, the Company issued 335,000 shares of the Company’s Common Stock pursuant to the conversion of $268,000 in principal amount invested in the Convertible Note.

 

On November 24, 2017, the Company issued 335,000 shares of the Company’s Common Stock pursuant to the conversion of $268,000 in principal amount invested in the Convertible Note.

 

On November 27, 2017, the Company issued 277,855 shares of the Company’s Common Stock pursuant to the conversion of $222,294 in principal amount invested in the Convertible Note.

 

Common Stock Warrants

 

Pursuant to the sales of securities underlying the Purchase Agreement entered into on December 9, 2016, the Company issued a warrant to the underwriter (“Underwriter’s Warrant”) to purchase 43,525 shares of Common Stock on December 9, 2016. The Underwriter’s Warrant has an exercise price of $6.92 per share. In addition, in a series of issuances in January 2017, the Company issued warrants to the investors (“Investor Warrants”) pursuant to the Purchase Agreement to purchase 435,249 shares of the Company’s Common Stock. The Investor Warrants have an exercise price of $6.80 per share. The warrants were issued in a series of transaction during January 2017 and were valued based on the Black-Scholes model, using the strike price of $6.80 per share, market prices ranging from $7.00 to $8.52 per share, an expected term of 3.25 years, volatility ranging from 38% to 39%, based on the average volatility of comparable companies over the comparable prior period, and a discount rate as published by the Federal Reserve ranging from 1.50% to 1.56%. The Company reviewed the issuance of the Underwriter and Investor Warrants and determined that pursuant to ASC 480 and ASC 815, the Underwriter and Investor Warrants should be classified as a liability and marked to market every reporting period. Following acceptance by the SEC of the Company’s registration statement registering these warrants, the warrants were reclassified from a liability to equity, though, following the agreement to merge with GBV, the warrants were reclassified as liabilities and marked to market at December 31, 2017.

 

On January 10, 2017, pursuant to the amendment to the Fortress debt, the Company issued a five-year warrant to DBD to purchase 46,875 shares of the Company’s Common Stock, exercisable at $6.80 per share, subject to adjustment. The warrant was valued based on the Black-Scholes model, using the strike and market prices of $6.80 and $7.60 per share, respectively, an expected term of 3.00 years, volatility of 39% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.52%. The Company reviewed the issuance of the Underwriter and Investor Warrants and determined that pursuant to ASC 480 and ASC 815, the Underwriter and Investor Warrants met the requirement to be classified as equity and were booked as Additional Paid-in Capital.

 

Pursuant to the sales of securities underlying the April Purchase Agreement entered into on April 18, 2017, the Company issued a warrant to the underwriter (“Underwriter’s Warrant”) to purchase 14,250 shares of Common Stock. The Underwriter’s Warrant has an exercise price of $3.08 per share. In addition, also associated with the April Purchase Agreement, the Company issued warrants to the investors (“April Investor Warrants”) pursuant to the Purchase Agreement to purchase 570,000 shares of the Company’s Common Stock. The Investor Warrants have an exercise price of $3.32 per share. The Investor Warrants were valued based on the Black-Scholes model, using the strike price of $3.08 per share, an expected term of 2.5 years, volatility of 39%, based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.60%. The Underwriter’s Warrant was valued based on the Black-Scholes model, using the strike price of $3.32 per share, an expected term of 3.25 years, volatility of 38%, based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.72%. The Company reviewed the issuance of the Underwriter and Investor Warrants and determined that pursuant to ASC 480 and ASC 815, the Underwriter and Investor Warrants should be classified as equity. The April Investor Warrants were converted into 2,394,000 shares of the Company’s Common Stock following approval by the shareholders on September 29, 2017.

 

Pursuant to the Unit Purchase Agreement entered into on August 14, 2017, the Company, in two closings, issued warrants to the investors (“Note Investor Warrants”) to purchase 6,875,000 shares of the Company’s Common Stock. The Note Investor Warrants have an exercise price of $1.20 per share. The Note Investor Warrants from the first close were valued based on a Monte Carlo simulation model, using the strike price of $1.20 per share, remaining term of 5.50 years, volatility of 100%, based on the terms of the Unit Purchase Agreement which set the volatility at the greater 100% or the 100-day volatility immediately following certain events and a discount rate as published by the Federal Reserve of 1.76%. The Note Investor Warrants from the second close were valued based on a Monte Carlo simulation model, using the strike price of $1.20 per share, remaining term of 5.50 years, volatility of 100%, based on the methodology set forth above and a discount rate as published by the Federal Reserve of 1.98%. The Company reviewed the issuance of the Note Investor Warrants and determined that pursuant to ASC 480 and ASC 815, the Note Investor Warrants should be classified as a liability. On November 28, 2017, Note Investor Warrants to purchase 6,656,000 were exchanged for 5,511.700 shares of Series E Convertible Preferred Stock, convertible into 5,511,700 shares of the Company’s Common Stock. Prior to the exchange, the Company recognized a loss of approximately $21,850,000 as a result of the valuation as of November 28, 2017, the date on which the exchange took place. The remaining Note Investor Warrants to purchase 219,000 shares of the Company’s Common Stock were marked to market at December 31, 2017.

 

During the year ended December 31, 2017, warrants to purchase 37,177 shares of Common Stock were cancelled as they reached the end of their lives without being exercised in accordance with the terms of the underlying agreements. As of December 31, 2017, the Company had warrants outstanding to purchase 773,966 shares of Common Stock with a weighted average remaining life of 4.12 years. A summary of the status of the Company’s outstanding stock warrants and changes during the period then ended is as follows:

 

    Number of Warrants     Weighted Average Exercise Price     Weighted Average Remaining Life  
Balance at December 31, 2015     505,327     $ 17.09       0.87  
Granted     43,525     $ 6.92       4.94  
Cancelled     (426,499 )   $ 12.88        
Forfeited                  
Exercised     (5,834 )   $ 8.00        
Balance at December 31, 2016     116,519     $ 15.18       3.25  
Granted     7,941,374     $ 1.70       5.02  
Cancelled     (37,177 )   $ 15.60        
Forfeited                  
Exercised     (7,246,750 )   $ 1.38        
Balance at December 31, 2017     773,966     $ 5.99       4.12  
                         
Warrants exercisable at December 31, 2017     773,966                  
Weighted average fair value of warrants granted during the period           $ 1.70          

 

Common Stock Options

 

On May 10, 2016, the Company entered into an executive employment agreement with Erich Spangenberg (“Spangenberg Agreement”) pursuant to which Mr. Spangenberg would serve as the Company’s Director of Acquisitions, Licensing and Strategy. As part of the consideration, the Company agreed to grant Mr. Spangenberg a ten-year stock option to purchase an aggregate of 125,000 shares of Common Stock, with a strike price of $7.48 per share, vesting in twenty-four (24) equal installments on each monthly anniversary of the date of the Spangenberg Agreement. The options were valued based on the Black-Scholes model, using the strike and market prices of $7.48 per share, an expected term of 5.75 years, volatility of 47% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.32%.

 

On May 20, 2016, the Company entered into an employment agreement with Kathy Grubbs (“Grubbs Agreement”) pursuant to which Ms. Grubbs would serve as an analyst. As part of the consideration, the Company agreed to grant Ms. Grubbs a ten-year stock option to purchase an aggregate of 12,500 shares of Common Stock, with a strike price of $9.00 per share, vesting in thirty-six (36) equal installments on each monthly anniversary of the date of the Grubbs Agreement. The options were valued based on the Black-Scholes model, using the strike and market prices of $9.00 per share, an expected term of 6.50 years, volatility of 47% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.88%.

 

On July 1, 2016, in conjunction with an executive employment agreement with David Liu (“Liu Agreement”) pursuant to which Mr. Liu would serve as the Company’s CTO, entered into on June 29, 2016, the Company granted Mr. Liu a ten-year stock option to purchase an aggregate of 37,500 shares of Common Stock, with a strike price of $11.16 per share, vesting in thirty-six (36) equal installments on each monthly anniversary of the date of the Liu Agreement. The options were valued based on the Black-Scholes model, using the strike and market prices of $11.16 per share, an expected term of 6.50 years, volatility of 47% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.20%.

 

On October 13, 2016, the Company issued its independent board members ten-year options to purchase an aggregate of 20,000 shares of the Company’s Common Stock with an exercise price of $9.64 per share, subject to adjustment, which shall vest monthly over twelve (12) months commencing on the date of grant. The options were valued based on the Black-Scholes model, using the strike and market prices of $9.64 per share, an expected term of 5.5 years, volatility of 46% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.21%. As there were not sufficient shares in the Company’s equity incentive plans to accommodate these grants, Mr. Croxall forfeited a portion of one of his options to purchase 80,000 shares.

 

Under two separate declarations during 2017, Doug Croxall, the Company’s former CEO, agreed to forfeit all of his stock options.

 

At December 31, 2017, there was a total of $0 of unrecognized compensation expense related to non-vested option-based compensation arrangements entered into during the year. A summary of the stock options as of December 31, 2017 and changes during the period are presented below:

 

    Number of Options     Weighted Average
Exercise Price
    Weighted Average
Remaining Life
 
Balance at December 31, 2015     845,817     $ 17.00       7.11  
Granted     195,000     $ 8.52       9.44  
Cancelled     (93,464 )   $ 23.20        
Forfeited     (68,319 )   $ 20.96        
Exercised                  
Balance at December 31, 2016     879,034     $ 17.84       6.79  
Granted         $        
Cancelled         $        
Forfeited     (430,263 )   $ 13.13        
Exercised         $        
Balance at December 31, 2017     448,771     $ 15.50       6.23  
                         
Options Exercisable at December 31, 2017     433,667     $ 15.52       6.16  
Options expected to vest     15,104     $ 14.56       8.18  
Weighted average fair value of options granted during the period           $          

 

Stock options outstanding at December 31, 2017 as disclosed in the above table have no intrinsic value at the end of the period.