Annual report pursuant to Section 13 and 15(d)

Stockholders' (Deficit) Equity

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Stockholders' (Deficit) Equity
12 Months Ended
Dec. 31, 2019
Equity [Abstract]  
Stockholders' Deficit Stockholders’ (Deficit) Equity
Preferred Stock
Until amending the Company's certificate of incorporation in February 2019, the Company was authorized to issue 2,534,766 shares of preferred stock with a par value of $0.001 per share with such designation, rights, and preferences as may be determined from time-to-time by the Company's Board. As of December 31, 2019 and 2018, there were 0 and 416,666 Series A preferred stock and 0 and 2,118,100 Series B preferred stock issued and outstanding, respectively. Dividends accrued at a rate of 8.00% per annum based on $4.80 per Series A preferred share, the dividends were cumulative but non-compounding.

The Series B preferred stock had similar rights as Series A preferred stock except that the dividends were based on $6.61 per Series B preferred share and Series B preferred stock was convertible into common stock at a rate of $6.61 divided by a conversion price initially set at $6.61. As of the Company’s IPO date of February 19, 2019 and December 31, 2018, accrued dividends for preferred stock were $4,773,480 and $4,613,261, respectively. The holder of the Series A and Series B preferred stock agreed to convert the preferred stock into common stock upon the completion of the Company's IPO. The holders of the Company’s outstanding shares of preferred stock agreed to waive the adjustment to the conversion price of the preferred stock upon the issuances of the Third and Fourth Note.

On February 19, 2019, all outstanding shares of Series A and Series B preferred stock and accrued dividends on these shares were converted into 2,534,766 and 954,696 shares of common stock, respectively, upon the closing of the Company’s IPO. The Company amended its articles of incorporation on February 19, 2019 eliminating the preferred shares authorized under the amended certificate of incorporation.
Adoption of 2012 Long Term Incentive Plan
In November 2012, the Company’s Board and stockholders adopted the 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 Stock Plan is designed to enable the Company to offer employees, officers, directors and consultants, as defined, an opportunity to acquire a proprietary interest in the Company. The types of awards that may be granted under the 2012 Stock Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law. All awards are subject to approval by the Company’s Board. The 2012 Stock Plan reserves shares of common stock for issuance in accordance with the 2012 Stock Plan’s terms. Total number of shares reserved and available for issuance under the plan were 789,745 shares. As of December 31, 2019, 14,745 shares remained under the 2012 Stock Plan. The Company does not intend to utilize the 2012 Stock Plan and instead intends to utilize the 2018 Stock Plan.
Adoption of 2018 Stock Plan
In June 2018, the Company’s Board and stockholders adopted the 2018 Stock Plan. The 2018 Stock Plan is designed to enable the Company to offer employees, officers, directors and consultants, as defined, an opportunity to acquire a proprietary interest in the Company. The types of awards that may be granted under the 2018 Stock Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law. All awards are subject to approval by the Company’s Board. The 2018 Stock Plan reserves shares of common stock for issuance in accordance with the 2018 Stock Plan’s terms. Total number of shares reserved and available for issuance under the plan is 3,400,000 shares. As of December 31, 2019, 531,450 shares remained available for grant under the 2018 Stock Plan.
Restricted Stock

Restricted stock activity for the year ended December 31, 2019 and 2018 is summarized as follows:
Number of Shares Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2017 305,000    $ 3.21   
  Vested (177,500)   3.21   
Outstanding at December 31, 2018 127,500    $ 3.21   
  Granted 200,000    11.54   
  Vested (169,164)   5.26   
Outstanding at December 31, 2019 158,336    $ 11.54   
On May 8, 2019, the Company granted and issued 200,000 shares of restricted common stock to three consultants in connection with the provision of services pursuant to agreements entered into in April 2019. The consultants were each accredited investors. 25,000 shares vested within 4 months of the approval date of the agreement. The remaining 175,000 shares vest over 42 months, beginning on September 19, 2019. As of December 31, 2019, 41,664 shares have vested and 158,336 remain unvested.

During the years ended December 31, 2019 and 2018, the Company recorded $889,539 and $553,552, respectively, in stock-based compensation for the restricted shares previously issued. During the year ended December 31, 2018, 177,500 shares vested and 127,500 shares remained unvested, which immediately vested upon completion of the Company’s IPO.

As of December 31, 2019, there was $1,682,917 of unrecognized compensation expense related to restricted shares.
Stock Options
The following table summarizes stock option activities for the years ended December 31, 2019 and 2018:
Number of
Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining Life
(in Years)
Aggregate
Intrinsic Value
Outstanding, December 31, 2017 15,000    $ 0.13    9.75 $ —   
  Granted 2,220,000    1.75    —    —   
Outstanding, December 31, 2018 2,235,000    1.74    9.44 $ 23,100   
  Granted 648,550    6.03    —    —   
Outstanding, December 31, 2019 2,883,550    $ 2.70    8.62 $ 23,861,981   
Exercisable, December 31, 2019 867,563 $ 1.73    8.66 $ 8,025,827   

During the year ended December 31, 2018, the Company granted its employees 2,220,000 options to purchase the Company’s common stock with an exercise price of $1.75 per share, for a term of 10 years, and a vesting period of four years. The options have an aggregated grant date fair value of $2,694,567 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 2.77% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 6.25 years based on the simplified method provided in Staff Accounting Bulletin, (3) expected volatility range from 84.5% to 84.7% based on the historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value of the Company's stock at $1.67 per share which value was determined by the Company's Board after reviewing and considering, among other factors, a valuation report issued by an independent appraisal firm.
Officer Debt Forgiveness - Stock Options
In January 2019, certain individuals agreed to the extinguishment of $484,065 in deferred compensation, including $434,065 for individuals still with the Company, that had been earned through September 30, 2018 and was to be repaid out of the proceeds from the Company's IPO. In recognition of this extinguishment of deferred compensation, during the three months ended March 31, 2019, the Company granted these individuals options to purchase 401,750 shares of the Company’s common stock with an exercise price of $1.75 per share, for a term of 10 years, and a vesting period of 25% per quarter over one year. The options have an aggregated grant date fair value of $456,961 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 2.53% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 5.27 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility of 84.3% based on the historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value of the Company's stock at $1.67 per share which value was determined by the Company's Board after reviewing and considering, among other factors, a valuation report issued by an independent appraisal firm.
In addition, during the year ended December 31, 2019, the Company granted certain individuals options to purchase 246,800 shares of the Company’s common stock with an average exercise price of $13.00 per share, for a term of 10 years, and a vesting period ranging from one year to 25% per year over four years. The options have an aggregated grant date fair value of $2,762,693 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rates ranging from 1.65% to 2.12% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected lives ranging from 5.50 to 6.25 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility ranging from 82.99% to 85.06% based on the historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value of the Company's stock ranging from $5.73 to $17.50 per share.
All options issued and outstanding are being amortized over their respective vesting periods. The unrecognized compensation expense at December 31, 2019 was $3,485,140. During the years ended December 31, 2019 and 2018, the Company recorded $1,598,514 and $404,632, respectively, of stock-based compensation expense for options.
Warrants
During the year ended December 31, 2018, the Company issued warrants to purchase 776,350 shares of common stock at an exercise price of $1.75. The warrants expire five years from the date of issuance. The warrants were issued to placement agents and investors in connection with notes issued under the Fourth and Fifth Notes.
In January and February 2019, the Company issued warrants to purchase 300,000 shares of common stock at an exercise price of $1.75 on various dates. The warrants were issued to investors in connection with notes issued under the Fifth Note.
On February 19, 2019, the Company issued warrants to the underwriters of the Company's IPO to purchase 152,081 shares of common stock at an exercise price of $6.00. The warrants expire five years from the date of issuance.
The total grant date fair value of all these 1,228,431 warrants was $1,636,232, which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (1) discount rates in the range of 2.5% to 2.8% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected term of five years based on the term of the warrants, (3) expected volatilities of 84.09% to 85.80% based on the historical volatility of comparable companies' stock, (4) no expected dividends, and (5) fair value of the Company's stock at $1.67 per share for warrants issued prior to the IPO, a value determined by the Company's Board after reviewing and considering, among other factors, a valuation report issued by an independent appraisal firm, or the fair market value of the Company's stock at the closing of its' IPO on February 19, 2019 of $4.87 for warrants on that day.

The fair value amount was included in discounts on convertible notes payable and was amortized over the life of the convertible notes payable. As a result of the Company’s IPO closing on February 19, 2019, all $664,953 of unamortized discount on convertible notes payable was accelerated and recorded as expense.

PIPE Offerings

On June 16, 2019, the Company entered into a private offering with certain institutional and accredited investors for the sale by the Company in a private placement of 675,000 units (each a “June Unit”) of common stock issued at $14.00 per June Unit for total gross proceeds of $9,450,000. Each June Unit consisted of (i) one share of its common stock, and (ii) a warrant to purchase 0.7 shares (a total of 472,500) of common stock (each a “June Warrant”) (collectively, "June PIPE"). The June Warrants included in the June Units are exercisable at a price of $16.00 per share commencing on the date of issuance and will expire on August 23, 2024, pursuant to which the resale of the shares of common stock underlying the June Warrants are registered. On July 1, 2019, the Company filed a Registration Statement on Form S-1 to register for resale the common stock underlying the June Units sold with the Company's June 2019 private offering. The Company estimates the net proceeds from the closing of the sale of the June Units on June 19, 2019 was $8,643,302 after deducting the placement agent fees and estimated offering expenses payable by the Company.

The grant date fair value of these 472,500 June Warrants was $4,420,503, which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (1) discount rate of 1.85% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected term of five years based on the term of the warrants, (3) expected volatility of 85% based on the historical volatility of comparable companies' stock, (4) no expected dividends, and (5) fair value of the Company's stock at $14.30 per share.

On October 10, 2019, the Company entered into a second private placement of 485,250 units (each an “October Unit”) of common stock issued at $12.88 per October Unit for total gross proceeds of $6,250,020. Each October Unit consisted of (i) one share of the Company’s common stock, and (ii) a warrant to purchase 1.1 shares (a total of 533,775) of common stock (each an “October Warrant”) (collectively, "October PIPE"). The October Warrants included in the October Units are exercisable at a price of $12.88 per share commencing on the date of issuance and will expire on October 10, 2024. On November 8, 2019, the Company filed a Registration Statement on Form S-1 to register for resale the common stock underlying the October Units sold with the Company's October 2019 private offering. The Company estimates the net proceeds from the closing of the sale of the October Units on October 11, 2019 was $5,738,111 after deducting the placement agent fees and estimated offering expenses payable by the Company.
The grant date fair value of these 533,775 October Warrants was $4,537,648, which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (1) discount rate of 1.59% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected term of five years based on the term of the warrants, (3) expected volatility of 82.92% based on the historical volatility of comparable companies' stock, (4) no expected dividends, and (5) fair value of the Company's stock at $12.88 per share.

The fair value amount of these PIPE transaction warrants were included in additional paid-in-capital as deal costs.
The following table summarizes warrant activities for the years ended December 31, 2019 and 2018:
Number of
Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining Contractual
Term (in Years)
Aggregate
Intrinsic Value
Outstanding, December 31, 2017 —    $ —    —    $ —   
Granted 776,350    1.75    4.80 —   
Outstanding, December 31, 2018 776,350    $ 1.75    4.80 $ —   
Granted 1,458,356    10.88    —    —   
Exercised (685,900)   2.12    —    6,073,855   
Forfeited (cashless exercise) (174,198)   3.99    —    —   
Outstanding December 31, 2019 1,374,608    $ 10.97    4.43 $ 13,591   
Exercisable, December 31, 2019 1,374,608    $ 10.97    4.43 $ 13,591   
Officer Debt Forgiveness - Warrants
During the year ended December 31, 2018, certain executives agreed to forgive bonuses totaling $132,708 that were previously approved by the Company’s Board. The bonuses related to services for 2015 and were included in accrued liabilities. The Company recorded the forgiveness as capital contributions in 2018 as the executives are considered related parties.