Annual report pursuant to Section 13 and 15(d)

Note 8 - Stockholders' Deficit

v3.19.1
Note 8 - Stockholders' Deficit
12 Months Ended
Dec. 31, 2018
Notes to Financial Statements  
Stockholders' Equity Note Disclosure [Text Block]
8.
Stockholders’ Deficit
 
Preferred Stock
 
As of
December 31, 2018,
the Company is 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, 2018
and
2017,
there were
416,666
Series A preferred stock and
2,118,100
Series B preferred stock issued and outstanding.
 
The Series A preferred stock has the following features:
 
 
1.
Dividends accrue at a rate of
8%
per annum based on
$4.80
per Series A preferred share, the dividends are cumulative but non-compounding and payable upon the Company’s voluntary or involuntary liquidation, dissolution or winding up, the exercise of conversion rights of the holder, the declaration by the Company’s Board, upon a closing of the sale of the Company’s common shares to the public at a price of at least
$24.00
per share with at least
$50,000,000
of gross proceeds and the common shares listed on the New York Stock Exchange or NASDAQ Capital Market, and upon conversion of at least
50.1%
of the issued and outstanding Series A preferred stock. The Company has the option to pay the dividend in cash or by issuing common stock.
 
 
2.
A liquidation right preferable over the right of the Company’s common stock.
 
 
3.
Each share of the Series A preferred stock has
one
voting right.
 
 
4.
Each share of the Series A preferred stock is convertible by the holder, at any time, into shares of common stock equal to
$4.80
divided by a conversion price, initially set at
$4.80.
The conversion price is adjustable upon certain events.
 
The Series B preferred stock has similar rights as Series A preferred stock except that the dividends are based on
$6.61
per Series B preferred share and Series B preferred stock is convertible into common stock at a rate of
$6.61
divided by a conversion price initially set at
$6.61.
As of
December 31, 2018
and
2017,
accrued dividends for preferred stock were
$4,613,260
 and
$3,333,260,
respectively. At
December 31, 2018,
the conversion price for the Series A and Series B preferred stock were
$4.80
and
$6.61,
respectively. The holder of the Series A and Series B preferred stock has 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.
 
All outstanding shares of Series A and Series B preferred stock and accrued dividends on these shares were converted into common stock upon the Company’s IPO on
February 14, 2019.
The Company amended its articles of incorporation on
February 19, 2019
and
no
longer has preferred shares authorized under the amended articles 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, 2018,
14,745
shares remained available for grant under the
2012
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
3,000,000
shares. As of
December 31, 2018,
780,000
shares remained available for grant under the
2018
Stock Plan.
 
Restricted Stock
 
During the years ended
December 31, 2018
and
2017,
the Company recorded
$533,550
 and
$570,536,
respectively, in stock-based compensation for the restricted shares previously issued. During the years ended
December 31, 2018
and
2017,
177,500
 shares vested each period and at
December 31, 
2018,
127,500
 shares which immediately vested upon completion of the Company’s IPO. As of
December 31, 2018,
unamortized expense related to the restricted stock grant was
$264,451.
 
Stock Options
 
The following table summarizes stock option activities for the years ended
December 31, 2018:
 
   
Number of
Shares
   
Weighted
Average
Exercise Price
   
Weighted
Average
Remaining Life
(in Years)
   
Aggregate
Intrinsic Value
 
Outstanding, December 31, 2016
   
    $
     
 
    $
 
Granted
   
15,000
     
0.13
     
 
     
 
 
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
 
                                 
Exercisable, December 31, 2018
   
7,500
    $
0.13
     
8.76
    $
11,550
 
 
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
4
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.
 
On
October 1, 2017,
the Company granted options to purchase
15,000
common shares to a member of the scientific advisory board. The stock options have a
ten
-year contractual term from date of grant, an exercise price of
$0.13
per share. Options to purchase
3,750
common shares vested on the date of grant and options to purchase
3,750
common shares vest on each of the anniversary after the grant date. The options had a fair value of
$46,711
that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (
1
) discount rate of
1.92%
based on the daily yield curve rates for U.S. Treasury obligations, (
2
) expected life of
5.75
years based on the simplified method provided in Staff Accounting Bulletin, (
3
) expected volatility range from
79.0%
based on the historical volatility of comparable companies' stock, (
4
)
no
expected dividends and (
5
) fair market value of the Company's stock at
$3.21
per share which value was determined by the Company's Board after reviewing and considering, among other factors, the last time a private transaction for the Company’s stock occurred.
 
All options issued and outstanding are being amortized over their respective vesting periods. The unrecognized compensation expense at
December 31, 2018
was
$2,321,072.
During the years ended
December 31, 2018
and
2017,
the Company recorded option expense of
$404,635
 and
$15,570,
respectively.
 
Warrants
 
On
April 20, 2018,
the Company issued warrants to purchase
79,350
shares of common stock at an exercise price of
$1.75.
The warrants expire on
April 20, 2023.
The warrants were issued to a placement agent in connection with notes issued under the Fourth Note.
 
On
June 8, 2018,
the Company issued warrants to purchase
12,000
shares of common stock at an exercise price of
$1.75.
The warrants expire on
June 8, 2023.
The warrants were issued to a placement agent in connection with notes issued under the Fourth Note.
 
From
October
through
December 2018,
the Company issued warrants to purchase
685,000
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 investors in connection with notes issued under the Fifth Note.
 
The grant date fair value of these
776,350
 warrants was
$878,622,
which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option-pricing model include (
1
) discount rate of
2.8%
to
3.05%
based on the daily yield curve rates for U.S. Treasury obligations, (
2
) expected term of
5
years based on the term of the warrants, (
3
) expected volatility between
84%
to
86%
 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.
 
The fair value amount was included in discounts on convertible notes payable and notes payable, which were amortized over the life of the debt. At
December 31, 2018,
the unamortized balance amounted to
$400,485.
 
During the year ended
December 31, 2018,
the Company recorded amortization expense related to these warrants of
$66,269.
 
The following table summarizes warrant activities for the year ended
December 31, 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
     
 
     
 
 
Exercised
   
     
     
 
     
 
 
Canceled
   
     
     
 
     
 
 
Outstanding, December 31, 2018
 
 
776,350
   
$
1.75
   
 
4.80
   
$
 
                                 
Exercisable, December 31, 2018
 
 
776,350
   
$
1.75
   
 
4.80
   
$
 
 
 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.