Quarterly report pursuant to Section 13 or 15(d)

Series A Convertible Preferred Stock, Stockholders' Deficit, and Warrants

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Series A Convertible Preferred Stock, Stockholders' Deficit, and Warrants
9 Months Ended
Sep. 30, 2017
Equity [Abstract]  
Series A Convertible Preferred Stock, Stockholders' Deficit, and Warrants

Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants

 

Preferred Stock

 

The Company is authorized to issue 20,000,000 shares of its preferred stock, 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. At September 30, 2017, a total of 422,838 shares of Series A Convertible Preferred Stock (classified in temporary equity), and 125,000 shares of Series A-1 Convertible Preferred Stock (classified in permanent equity), were each issued and outstanding. At December 31, 2016 there were no shares of preferred stock issued or outstanding.

 

Series A Preferred Stock Units Private Placement

 

The Company’s Board of Directors 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 $2.2 million, after payment of placement agent fees and closing costs.

 

Subsequently, on October 20, 2017, the Company initiated an exchange offer (Series A Exchange Offer), to the holders of the Series A Convertible Preferred Stock and Series A Warrants, to exchange one share Series A Convertible Preferred Stock for 1.5 shares of Series A-1 Convertible Preferred Stock; and, to exchange one Series A Warrant for one Series A-1 Warrant. The Series A Exchange Offer expires November 17, 2017. See below for a discussion of the Series A-1 Convertible Preferred Stock and Series A-1 Warrants.

 

The Series A Preferred Stock Unit was comprised of one share of Series A Convertible Preferred Stock and one Series A Warrant. The Series A Convertible Preferred Stock and Series A Warrants were immediately separable upon their issuance, and became convertible and exercisable, respectively, on May 21, 2017 upon stockholder approval of the Series A Preferred Stock Units private placement, with such approval obtained in accordance with Nasdaq Stock Market Rule 5635(d).

 

At the election of their respective holder, a share of Series A Convertible Preferred Stock is convertible into a number of shares of common stock of the Company at a prescribed exchange ratio; and, a Series A Warrant is exercisable for one share of common stock of the Company, or may be exchanged for four Series X Warrants, with each such Series X Warrant exercisable for one share of common stock of the Company - each as more fully described below.

 

The Series A Warrant and the Series A Convertible Preferred Stock conversion option, which is accounted for as an embedded derivative and bifurcated from its host financial instrument, were each determined to be a derivative liability under ASC 815, as discussed below.

 

The issuance of the Series A Preferred Stock Units resulted in the recognition of an aggregate loss of $3,124,285, 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 amounting to $2,735,657, recognized as a current period expense, along with offering costs of $388,628, which were also recognized as a current period expense, 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(1)     (4,050,706 )
Less: Series A Convertible Preferred Stock conversion option embedded derivative liability initial fair value(1)     (1,221,963 )
Excess of initial fair value over gross proceeds     (2,735,657 )
Offering costs of the issuance of the Series A Preferred Stock Units     (388,628 )
Loss on issuance of Series A Preferred Stock Units   $ (3,124,285 )

 

  (1) See Note 3, Financial Instruments Fair Value Measurements, for information with respect to the fair value of the Series A Convertible Preferred Stock embedded derivative liability and the Series A Warrants liability.

 

The Company has filed an effective registration statement on Form S-1 (File No. 333-216963) registering for resale the maximum number of the Company’s shares of common stock issuable upon conversion of the Series A Convertible Preferred Shares and the exercise of the Series A Warrants, or if exchanged, the Series X Warrants. Such registration statement also registers the resale of the Series X Warrants, and the initial issuance of the shares of common stock of the Company underlying the Series X Warrants to the extent the Series X Warrants are publicly sold prior to the exercise of such Series X Warrants. The Company timely filed the initial registration statement with the SEC on March 27, 2017, and such registration statement became effective on June 23, 2017, with such dates consistent with the requirements of the registration rights agreement entered into in connection with the Series A Preferred Stock Units private placement. If such registration statement effectiveness is not maintained, then, the Company is required to make payments to the investors of 2% of their Series A Preferred Stock Units subscription amount on the date of such event, and every thirty days thereafter until the effectiveness is cured.

 

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 became convertible on May 21, 2017 upon stockholder approval of the Series A Preferred Stock Units private placement, with such approval obtained in accordance with Nasdaq Stock Market Rule 5635(d). At the holders’ election, a share of Series A Convertible Preferred Stock is convertible into a number of shares of common stock of the Company at a conversion ratio equal to its stated value divided by a conversion price of $4.99 per share, subject to further adjustment. The Series A Convertible Preferred Stock conversion price is subject to further reduction by a prescribed formula should any subsequent issuances of convertible securities by the Company be at a price lower than such conversion price immediately prior to such new issuance. In this regard, at issuance, the Series A Convertible Preferred Stock conversion price was initially $6.00 per share, and was subsequently adjusted to $5.00 per share upon the issuance of the Series S Warrants on July 3, 2017, and then to $4.99 per share upon the issuance of the Series A-1 Preferred Stock Units on August 4, 2017, with such conversion price subject to further adjustment as noted above.

 

As of September 30, 2017, there were 422,838 shares of Series A Convertible Preferred Stock issued and outstanding. Subsequently, in November 2017, at the election of the holder, 8,334 shares of Series A Convertible Preferred Stock were converted into 10,021 shares of common stock of the Company.

 

The Series A Convertible Preferred Stock conversion option is accounted for as an embedded derivative and bifurcated from Series A Convertible Preferred Stock host financial instrument, under ASC 815, as, along with other provisions, the conversion price is subject to potential adjustment resulting from future financing transactions, under certain conditions. The Series A Convertible Preferred Stock conversion option embedded derivative is classified as a current liability on the unaudited 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 its fair value recognized as other income or expense in the unaudited condensed consolidated statement of operations. See Note 3, Financial Instruments Fair Value Measurements, for further detail regarding the fair value of the Series A Convertible Preferred Stock conversion option embedded derivative liability.

 

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 derivative 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, as discussed above.

 

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, shares of common stock, and /or cash payment. As of September 30, 2017, Series A Convertible Preferred Stock dividends totaling $130,010 or a payment-in-kind of 21,711 shares of Series A Convertible Preferred Stock, were earned, accumulated, and in arrears, as the Company’s Board of Directors had not declared such dividends payable, and, as such, the Company has not recognized a Series A Convertible Preferred Stock dividend payable liability as of September 30, 2017, and will not recognize such dividend payable liability until they are declared by the Company’s Board of Directors. Notwithstanding, the Company has presented such dividend value as a component of the loss attributable to common stockholders in the calculation of basic and diluted net loss per share.

  

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.

 

Series A-1 Preferred Stock Units Private Placement

 

On August 3, 2017, the Company’s Board of Directors authorized the issuance of up to 150,000 Series A-1 Preferred Stock Units, and on August 4, 2017, the Company entered into a Securities Purchase Agreement pursuant to which the Company may issue up to an aggregate of $600,000 (subject to increase) of Series A-1 Preferred Stock Units at a price of $4.00 per unit, in a private placement transaction (Series A-1 Preferred Stock Units private placement). On the August 4, 2017 closing of the Series A-1 Preferred Stock Units private placement, a total of 125,000 Series A-1 Preferred Stock Units were issued for cash proceeds of $500,000 - the Company did not incur placement agent fees in connection with the August 4, 2017 closing.

 

Subsequently, on October 18, 2017, upon approval by the unanimous vote of the Series A-1 Preferred Stock Units holders, the Series A-1 Preferred Stock Units private placement transaction documents were amended: to remove the requirement for the Company to file with the SEC an initial registration statement within sixty days of the August 4, 2017 closing date; to provide for the exchange of one Series A-1 Warrant for five Series W Warrants; to exchange one Series A-1 Warrant for four Series X-1 Warrants, with such Series X-1 Warrants replacing the Series X Warrants. The Series X-1 Warrants are substantively equivalent to the Series X Warrants with respect to material contractual terms and conditions, including the same $6.00 per share exercise price, and dates of exercisability and expiry. The Series X-1 Warrant also confirms such warrants are not subject to redemption, and under no circumstances will the Company be required to net cash settle the Series X-1 Warrants, for any reason, nor to pay any liquidated damages or other payments, resulting from a failure to satisfy any obligations under the Series X-1 Warrant, notwithstanding such provisions were applicable to the Series X Warrant through the operation of the Series A-1 Preferred Stock Units Securities Purchase Agreement. Additionally, as the Company’s Series A Warrants can be exchanged for four Series X Warrants, the Series X-1 Warrants were instituted for issuance upon the exchange of the corresponding Series A-1 Warrant. See below for a discussion of the Series W Warrants or Series X-1 Warrants issued upon the exchange of the Series A-1 Warrants, and the Series X Warrants issued upon the exchange of the Series A Warrants.

 

The Series A-1 Preferred Stock Unit was comprised of one share of Series A-1 Convertible Preferred Stock and one Series A-1 Warrant - as more fully described below. At their issuance, the Series A-1 Convertible Preferred Stock and the Series A-1 Warrant were immediately separable, and each was immediately convertible and exercisable, respectively.

  

The Series A-1 Preferred Stock Units private placement cash proceeds of $500,000 were allocated as $189,550 to the Series A-1 Convertible Preferred Stock and $310,450 to the Series A-1 Warrants, based on their respective relative fair value. The issue-date fair value of the Series A-1 Convertible Preferred Stock was determined using a combination of the Series A-1 Convertible Preferred Stock’s present value of its cash flows and incorporating a required rate of return determined through a synthetic credit rating analysis and the Black-Scholes valuation model; and the fair value of the Series A-1 Warrants was determined using a Black-Scholes valuation model and assuming the exchange of one Series A-1 Warrant for four Series X Warrants, using the following assumptions:

 

    Issue  
Series A-1 Convertible Preferred Stock   Date  
Aggregate fair value   $ 189,550  
Required rate of return     27.0 %
Series A-1 Convertible Preferred Stock shares     125,000  
Conversion ratio     1.0 x
Stated Value per share - conversion ratio numerator   $ 4.00  
Conversion price per share - conversion ratio denominator   $ 4.00  
Value of common stock   $ 2.98  
Expected term (years)     6.74  
Volatility     52 %
Risk free rate     2.0 %
Dividend yield     0 %

 

    Issue  
Series A-1 Convertible Preferred Stock   Date  
Aggregate fair value   $ 310,450  
Series A-1 Warrants     125,000  
Exercise price per share   $ 6.00  
Value of common stock   $ 2.98  
Expected term (years)     6.74  
Volatility     52 %
Risk free rate     2.0 %
Dividend yield     0 %

 

The registration rights agreement, as amended, entered into in connection with the Series A-1 Preferred Stock Units private placement, requires the Company to file with the SEC a registration statement registering for resale the maximum number of common shares issuable upon conversion of the Series A-1 Convertible Preferred Shares and the exercise of the Series A-1 Warrants or, the Series W or Series X-1 Warrants issued in exchange for the Series A-1 Warrants (as discussed below). The Company expects such registration statement to also register the resale of the Series W Warrants and the Series X-1 Warrants, and will register the initial issuance of shares of common stock of the Company underlying the Series W Warrants and the Series X-1 Warrants to the extent each such warrants are publicly sold prior to their respective exercise. Such registration rights agreement requires the Company to use commercially reasonable best efforts to have such registration statement declared effective no later than one hundred and fifty (150) days from the August 4, 2017 closing date. If such registration statement is not effective by the contractually agreed upon date or such registration statement effectiveness is not maintained, then, the Company is required to make payments to the investors of 2% of their Series A-1 Preferred Stock Units subscription amount on the date of such events, and every thirty days thereafter until the effectiveness is cured.

  

Series A-1 Convertible Preferred Stock

 

The Series A-1 Convertible Preferred Stock has a par value of $0.001 per share, no voting rights, a stated value of $4.00 per share, was immediately convertible upon its issuance, and, at the election of the holders, is convertible into a number of shares of common stock at a conversion ratio equal to its stated value divided by a conversion price of $4.00 per share, with such conversion price not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the Company’s common stock. The Series A-1 Convertible Preferred Stock shall not be redeemed for cash and under no circumstances shall the Company be required to net cash settle the Series A-1 Convertible Preferred Stock. As of September 30, 2017, there were 125,000 shares of Series A-1 Convertible Preferred Stock issue and outstanding.

 

The Series A-1 Preferred Stock Units private placement cash proceeds allocated to the Series A-1 Convertible Preferred Stock, as discussed above, of $189,550 resulted in an effective conversion price below the issue-date fair value of the underlying shares of common stock, resulting in a $182,500 beneficial conversion feature, which was accounted for as an implied discount on the Series A-1 Convertible Preferred Stock. The Series A-1 Convertible Preferred Stock does not have a stated redemption date and was immediately convertible upon issuance, resulting in the full accretion of the beneficial conversion feature as a deemed dividend paid to the Series A-1 Convertible Preferred Stock on the August 4, 2017 issue date.

 

The Series A-1 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-1 Convertible Preferred Stock dividends from October 1, 2017 through October 1, 2021 are payable-in-kind (“PIK”) in additional shares of Series A-1 Convertible Preferred Stock. The dividends may be settled after October 1, 2021, at the option of the Company, through any combination of the issuance of additional Series A-1 Convertible Preferred Stock, shares of common stock, and /or cash payment. As of September 30, 2017, Series A-1 Convertible Preferred Stock dividends totaling $6,196 or a payment-in-kind of 1,551 shares of Series A-1 Convertible Preferred Stock, were earned, accumulated, and in arrears, as the Company’s Board of Directors had not declared such dividends payable, and, as such, the Company has not recognized a Series A-1 Convertible Preferred Stock dividend payable liability as of September 30, 2017, and will not recognize such dividend payable liability until they are declared by the Company’s Board of Directors. Notwithstanding, the Company has presented such dividend value as a component of the loss attributable to common stockholders in the calculation of basic and diluted net loss per share.

  

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 13,343,061 and 13,330,811 shares of common stock outstanding as of September 30, 2017 and December 31, 2016, respectively.

 

Pre-Initial Public Offering

 

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 8,710,181 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, 1,393,629 shares of common stock were issued as a result of the exercise of 1,393,629 Private Placement Warrants for cash proceeds of $1.25 million.

 

In August 2015, the Company issued 97,554 warrants to an outside advisor in exchange for services.

 

The 9,560,295 remaining unexercised warrants discussed above, were subsequently converted into identical Series W Warrants issued in the Company’s April 28, 2016 initial public offering (“IPO”), and are therefore aggregated with the Series W Warrants issued in the IPO, and together are collectively referred to as “Series W Warrants” - see below for a further discussion of the Series W Warrants.

 

Initial Public Offering

 

Under a registration statement on Form S-1 (File No. 333-203569) declared effective January 29, 2016, the Company’s IPO was consummated on April 28, 2016, resulting in $4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and offering expenses, from the issuance of 1,060,000 units at an offering price of $5.00 per unit, with each such unit comprised of one share of common stock of the Company and one warrant to purchase a share of common stock of the Company, with such warrant referred to as a “Series W Warrant” - see below for a discussion of the Series W Warrant. 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.

 

The units issued in the IPO were initially listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “PAVMU”, until July 27, 2016, when the PAVMU units ceased to be quoted and traded on Nasdaq, and the underlying shares of common stock and the Series W Warrants began separate trading on Nasdaq, under their respective individual symbols of “PAVM” for the shares of common stock and “PAVMW” for the Series W Warrants - see below for a discussion of the Series W Warrant.

 

Post-Initial Public Offering

 

In March 2017 and September 2017, 400 shares and 11,850 shares of common stock were issued, resulting from a corresponding number of Series W Warrants exercised for $2,000 and $59,250 of cash proceeds, respectively.

 

In November 2016 and December 2016, 20,732 and 79 shares of common stock were issued, resulting from the cashless exercise of 40,000 and 200 Series W Warrants, respectively.

 

Subsequently, in October 2017, 532,000 shares of common stock were issued, resulting from a corresponding number of Series S Warrants exercised for $5,320 of cash proceeds; and, in November 2017 122,080 shares of common stock were issued, resulting from the cashless exercise of 122,360 Series S Warrants.

 

Subsequently, in November 2017, 10,021 shares of common stock were issued, resulting from, at the election of the holder, the conversion of 8,334 shares of Series A Convertible Preferred Stock.

  

Warrants

 

The accounting for warrants issued to purchase shares of common stock of the Company is based on the specific terms of the respective warrant agreement. Generally, warrants are classified as equity, but may be classified as a derivative liability if the warrant agreement provides for cash settlement or has certain exercise price adjustment provisions.

 

The following table summarizes outstanding warrants to purchase common stock at the dates indicated:

 

    Warrants Exercisable at        
          Weighted           Weighted        
          Average           Average        
    September 30, 2017     Exercise
Price /Share
    December 31, 2016     Exercise
Price
    Expiration Date  
Equity classified warrants                                        
Series W Warrants     10,567,845     $ 5.00       10,580,095     $ 5.00       January 2022  
Unit Purchase Options                                        
Series W Warrants     53,000     $ 5.00       53,000     $ 5.00       January 2022  
Series S Warrants     2,660,000     $ 0.01           $       June 2032  
Series A-1 Warrants     125,000     $ 6.67           $       April 2024  
                                         
Liability classified warrants                                        
Series A Warrants     422,838     $ 6.65           $       April 2024  
                                         
Total     13,828,683     $ 4.11       10,580,095     $ 5.00          

 

Equity-Classified Warrants

 

Series W Warrants

 

The Series W Warrants 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, as discussed below.

 

As discussed above, a total of 1,060,000 Series W Warrants were issued in the Company’s IPO, and the remaining previously issued (pre-IPO) 9,560,295 unexercised warrants outstanding on the April 28, 2016 date of the Company’s IPO were automatically converted into identical Series W Warrants issued in the Company’s IPO, and are therefore aggregated with the 1,060,000 Series W Warrants issued in the IPO, and together are collectively referred to as Series W Warrants.

 

As discussed below, a Series A-1 Warrant, at the election of the holder, may be exchanged for five Series W Warrants or four Series X-1 Warrants. As of September 30, 2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.

 

In March 2017 and September 2017, 400 and 11,850 Series W Warrants were exercised for cash proceeds of $2,000 and $59,250, respectively, resulting in the issuances of a corresponding number of shares of common stock. In November and December 2016, 40,000 and 200 Series W Warrants were exercised on a cashless basis, resulting in the issuance of 20,732 and 79 shares of common stock, respectively.

 

Commencing April 28, 2017, the Company may redeem the outstanding Series W 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.

  

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 Series W Warrants, along with the registration of (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 of common stock, 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 purchased 25,000 IPO Warrants (issued prior to the IPO) from a shareholder who had previously purchased shares of common stock and warrants in the Company’s private financings prior to its IPO, with shares of common stock underlying such IPO Warrants purchased by the CEO not included in the February 2017 Form S-1.

 

Series S Warrants

 

The Company and Scopia Holdings LLC (“Scopia or the Lender”) entered into a Note and Security Purchase Agreement under which, on July 3, 2017, the Company issued to Scopia and its designees, a Senior Secured Note (“Scopia Note”), and 2,660,000 Series S Warrants to purchase shares of common stock of the Company. The Series S Warrants were immediately exercisable upon issuance, have an exercise price of $0.01 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, may be exercised for cash or on a cashless basis, and expire June 30, 2032, with any Series S Warrants outstanding on their expiration date will be automatically exercised on a cashless basis.

 

The Scopia Note and the Series S Warrants are freestanding financial instruments, as the Series S Warrants were immediately legally detachable from the Scopia Note and were immediately exercisable. The Series-S Warrants are classified as equity in the condensed consolidated balance sheet. The Scopia Note net cash proceeds were allocated to the Scopia Note and the Series S Warrants based on their respective relative fair value, resulting in an allocation of $1,408,125 to the Scopia Note and $3,434,452 to the Series S-Warrants. See Note 12, Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants, for further information regarding the Note and Security Purchase Agreement with Scopia, including the non-recurring issue-date fair values of the Scopia Note and Series S Warrants.

 

As of September 30, 2017, there were 2,660,000 Series S Warrants issued and outstanding. Subsequently, in October 2017, 532,000 Series S Warrants were exercised for cash proceeds of $5,320, resulting in the issuance of a corresponding number of shares of common stock; and, in November 2017, 122,360 Series S Warrants were exercised on a cashless basis, resulting in the issuance of 122,080 shares of common stock.

 

Series A-1 Warrants

 

The Series A-1 Warrants were exercisable upon their issuance and expire after the close of business on April 30, 2024, and each may be exercised for one share of common stock at an exercise price of $6.67 per share, with such exercise price not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the common stock. Additionally, as a result of the October 18, 2017 amendment discussed above, through April 30, 2024, each Series A-1 Warrant, at the option of the holder, may be exchanged into five Series W Warrants or four Series X-1 Warrants. The Series W Warrants or Series X-1 Warrants issued upon the exchange of a Series A-1 Warrant are discussed below. As of September 30, 2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.

 

The Series A-1 Warrants are not subject to redemption, and under no circumstances will the Company be required to net cash settle the Series A-1 Warrants. The Series A-1 Warrants have been accounted for as equity-classified warrants, with an issue-date allocated fair value of $310,450, as discussed above.

 

A Series A-1 Warrant may be exercised for one share of common stock at an exercise price of $6.67 per share, with such exercise price not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the common stock. Additionally, as a result of the October 18, 2017 amendment discussed above, through April 30, 2024, each Series A-1 Warrant, at the option of the holder, may be exchanged into five Series W Warrants or four Series X-1 Warrants. The Series W Warrants or Series X-1 Warrants issued upon the exchange of a Series A-1 Warrant are discussed below. As of September 30, 2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.

 

If at any time after the six month anniversary of the Series A-1 Preferred Stock Units August 4, 2017 closing date, there is not an effective registration statement registering, or no current prospectus available for, the resale of the shares underlying the Series A-1 Warrants, then the Series A-1 Warrants may be exercised, in whole or in part, at such time by means of a “cashless exercise”. During the time the Series A-1 Warrants are outstanding, the holders will be entitled to participate in dividends or other distributions on a pro rata basis based upon the equivalent number of common shares that would have been outstanding had the warrants been fully exercised.

  

Series W Warrants and Series X-1 Warrants Issued Upon Exchange of Series A-1 Warrants

 

As discussed above, a Series A-1 Warrant, at the election of the holder, may be exchange for five Series W Warrants or four Series X-1 Warrants. As of September 30, 2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants. Notwithstanding, the 125,000 Series A-1 Warrants issued and outstanding at September 30, 2017, if exchanged, would result in the issuance of 625,000 such Series W Warrants or the issuance of 500,000 such Series X-1 Warrants.

 

As more fully discussed above, the Series W Warrants issued upon the exchange of a Series A-1 Warrant 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, as discussed above.

 

The Series X-1 Warrants issued upon exchange of a Series A-1 Warrant, are exercisable for one share of common stock of the Company at $6.00 per share, with such Series X-1 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-1 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. The Series X-1 Warrants may be exercised until their April 30, 2024 expiration date, or earlier upon redemption by the Company, as discussed below. At their expiration date, provided the closing price of the Company’s common stock is greater than $6.00 /per share, any such outstanding Series X-1 Warrants will be automatically exercised via a cashless exercise.

 

The Company may redeem all, but not less than all, of the issued and outstanding Series X-1 Warrants, at any time after April 30, 2019, at a price of $0.01 per Series X-1 Warrant, if the volume weighted average price per share of the common stock of the Company has been for twenty trading days out of the thirty trading day period ending three business days prior to the notice of redemption, at least $18.00, with such price adjusted for stock splits, stock dividends, or similar events occurring after the August 4, 2017 closing date of the Series A-1 Preferred Stock Units private placement.

 

Series X Warrants Issued Upon Exchange of Series A Warrants

 

A Series A Warrant, as discussed below, at the election of the holder, may be exchanged for four Series X Warrants. As of September 30, 2017, no Series A Warrants had been exchanged for Series X Warrants. Notwithstanding, the 422,838 Series A Warrants issued and outstanding at September 30, 2017, if exchanged, would result in the issuance of 1,691,352 such Series X Warrants.

 

The Series X Warrants issued upon exchange of a Series A Warrant are 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 - 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. The Series X Warrants may be exercised until their April 30, 2024 expiration date, or earlier upon redemption by the Company, as discussed below. At their expiration date, provided the closing price of the Company’s common stock is greater than $6.00 per share, any such outstanding Series X Warrants will be automatically exercised via a cashless exercise.

 

The Company may redeem all, but not less than all, of the issued and outstanding Series X Warrants, at any time after April 30, 2019, at a price of $0.01 per Series X Warrant, if the volume weighted average price per share of the common stock of the Company has been for twenty trading days out of the thirty trading day period ending three business days prior to the notice of redemption, at least $18.00, with such price adjusted for stock splits, stock dividends, or similar events occurring after the January 26, 2017 initial closing date of the Series A Preferred Stock Units private placement.

  

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 its issue-date fair value, with such fair value subsequently remeasured at each reporting period, with the resulting fair value adjustment recognized as other income or expense on the condensed consolidated statement of operations. If upon the occurrence of an event resulting in the warrant liability or the embedded derivative liability to be subsequently classified as equity, the fair value will be adjusted on such date-of-occurrence, with such date-of-occurrence fair value adjustment recognized as other income or expense, and then it will be classified as equity at such date-of-occurrence adjusted fair value.

 

Series A Warrants

 

The Series A Warrants became exercisable on May 21, 2017 upon stockholder approval of the Series A Preferred Stock Units private placement, with such approval obtained in accordance with Nasdaq Stock Market Rule 5635(d), and expire after the close of business on April 30, 2024. The Series A Warrants are not subject to redemption.

 

The Series A Warrants may be exercised for one share of common stock at an exercise price of $6.65 per share, with such exercise price initially $8.00 per share at issuance, and subsequently adjusted to $6.67 per share upon the issuance of the Series S Warrants on July 3, 2017, and then to $6.65 per share upon the issuance of the Series A-1 Preferred Stock Units on August 4, 2017. Additionally, through April 30, 2024, each Series A Warrant, at the election of the holder, may be exchanged for four Series X Warrants, with such Series X Warrants discussed above.

 

The Series A Warrant exercise price is subject to further reduction by a prescribed formula on a weighted average basis in the event the Company issues common stock, options, or convertible securities at a price lower than the exercise price of Series A Warrants immediately prior to such securities issuance.

 

During the time the Series A Warrants are outstanding, the holders will be entitled to participate in dividends or other distributions on a pro rata basis based upon the equivalent number of common shares that would have been outstanding had the warrants been fully exercised.

 

As noted above, the Series A Warrants are accounted for as a derivative liability under FASB ASC 815, as, along with other provisions, the conversion price is subject to potential adjustment resulting from future financing transactions, under certain conditions. The Series A Warrant is classified as a current liability on the unaudited condensed consolidated balance sheet, initially measured at its issue-date fair value, with such fair value subsequently remeasured at each reporting period, with the resulting fair value adjustment recognized as other income or expense on the condensed consolidated statement of operations. See Note 3, Financial Instruments Fair Value Measurements, for further detail regarding the fair value of the Series A Warrants liability.

 

Unit Purchase Options

 

On April 28, 2016, the Company issued 53,000 unit purchase options to the selling agents in the Company’s IPO (“UPO”), with such unit purchase options enabling the holder to purchase at an exercise price of $5.50 per unit, with each such unit being identical to the unit issued in the Company’s IPO, and thus comprised of one share of common stock and one Series W Warrant to purchase a share of common stock of the Company at an exercise price of $5.00 per share, as discussed above. The estimated the fair value of such unit purchase options was $105,100, which was accounted for as offering costs of the Company’s IPO, and was determined using a Black-Scholes option pricing model with the following assumptions: fair value of the underlying unit of $5.00, expected volatility of 50%, risk free rate of 1.28%, remaining contractual term of 4.6 years, and a dividend yield of 0%.