NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies
Description of the Business
Soliton, Inc. (“Soliton” or the “Company”) was organized under the laws of the State of Delaware on March 27, 2012. The Company operates in one segment as a medical device company organized to develop and commercialize products utilizing its proprietary Rapid Acoustic Pulse ("RAP") technology platform. The Company is a pre-revenue stage company with its first products being developed for the removal of tattoos and the reduction of cellulite. The Company received clearance from the U.S. Food & Drug Administration ("FDA") for its tattoo removal indication in June of 2019 and has recently completed a four-site pivotal trial for the reduction of cellulite and filed a 510(k) with the FDA seeking clearance for this indication. The Company is based in Houston, Texas. Upon completion of the development of its products and regulatory clearances to market such products, the Company anticipates revenue will be driven by the sale of its RAP console and disposable cartridges to dermatologists, plastic surgeons and other physician offices, as well as medi-spas under the supervision of a doctor.
Basis of Presentation
The accompanying condensed interim financial statements are unaudited. These unaudited condensed interim financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all the information and notes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and accompanying notes as found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020. In the opinion of management, the unaudited condensed interim financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2019 unaudited condensed balance sheet included herein was derived from the audited financial statements, but does not include all disclosures, including notes, required by GAAP for complete financial statements.
The Company operates in one reportable segment based on management’s view of its business for purposes of evaluating performance and making operating decisions.
The preparation of these unaudited condensed interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company's significant estimates and assumptions include work performed but not yet billed by contract manufacturers, engineers and research organizations, the valuation of equity related instruments, depreciable lives of long-lived assets (including property and equipment and intangible assets), and the valuation allowance related to deferred taxes. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Some of these judgments can be subjective and complex, and, consequently, actual results could differ from those estimates.
The coronavirus disease (“COVID-19”) pandemic has negatively impacted, and may continue to negatively impact, the macroeconomic environment in the United States and globally, including our business, financial condition and results of operations. Due to the evolving and uncertain nature of COVID-19, it is reasonably possible that it could materially impact our estimates, particularly those that require consideration of forecasted financial information, in the near to medium term. These estimates relate to certain accounts including, but not limited to, the valuation allowance related to deferred taxes, intangible assets, and other long-lived assets. The magnitude of the impact will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer and provider behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19.
On June 30, 2020, the Company completed a public offering ("June 2020 Offering") of 4,216,868 shares of common stock for total gross proceeds of approximately $35.0 million. The shares of Company common stock were sold at a public offering price of $8.30 per share and were purchased by the underwriters from the Company at a price of $7.719 per share. The June 2020 Offering was made under a prospectus supplement and related prospectus filed with the SEC pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-236963). Net proceeds from the sale of the common
stock on June 30, 2020 was approximately $32.0 million after deducting underwriting discounts and estimated offering expenses.
Material Uncertainties
The Company is an early stage and emerging growth company and has not generated any revenues to date. As such, the Company is subject to all of the risks associated with early stage and emerging growth companies. Since inception, the Company has incurred losses and negative cash flows from operating activities.
For the three and nine months ended September 30, 2020 and 2019, the Company incurred net losses of $3.6 million and $4.3 million, respectively, and $10.0 million and $10.5 million, respectively, and had net cash flows used in operating activities for the nine months ended September 30, 2020 and 2019 of $8.8 million and $8.3 million, respectively. At September 30, 2020, the Company had an accumulated deficit of $66.0 million, working capital of $33.1 million and cash, cash equivalents and restricted cash of $34.8 million. The Company does not expect to experience positive cash flows from operating activities in the near future. The Company expects its cash, cash equivalents and restricted cash on hand of $34.8 million as of September 30, 2020 will be sufficient to fund the Company's operations into the third quarter of 2022 but not beyond.
The Company anticipates incurring operating losses for the next few years as it completes the development of its products, seeks requested regulatory clearances to market such products and supports the commercial launch of its products. These factors raise uncertainties about the Company's ability to fund operations in future years. If the Company needs to raise additional capital in order to continue to execute its business plan or a change to its business plan, including obtaining additional regulatory clearance for its products currently under development and commercializing and generating revenues from products under development, there is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company. A failure to raise sufficient capital could adversely impact the Company’s ability to achieve its intended business objectives and meet its financial obligations beyond the third quarter of 2022. The accompanying condensed financial statements have been prepared on a going concern basis and do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Inventory
Inventory is valued at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method. Inventory consists of raw materials purchased by the Company and held offsite by a vendor.
Intangible Assets
Intangible assets include trademarks. At September 30, 2020 and December 31, 2019, the Company had trademarks of $0.1 million and $0.1 million, respectively. The Company does not amortize trademarks with indefinite useful lives, rather, such assets are required to be tested for impairment at least annually or sooner if events or changes in circumstances indicate that the asset may be impaired. During the three months ended September 30, 2020, the Company wrote down a trademark with a net book value of $19.7 thousand.
Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. Unvested restricted stock awards contain dividend rights and are considered participating securities as contemplated for the computations of basic and diluted earnings or loss per share. These securities do not participate in losses and accordingly no such allocation has been made in the periods presented. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
As of September 30, 2020, potentially dilutive securities included options to purchase 3,409,550 common shares, warrants to purchase 1,324,608 common shares and unvested restricted stock of 120,842 shares.
As of September 30, 2019, potentially dilutive securities included options to purchase 2,843,550 common shares, warrants to purchase 888,333 common shares and unvested restricted stock of 170,834 shares.
Recent Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), which establishes a right-of-use (“ROU”) model requiring a lessee to recognize a ROU asset and a lease liability for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASC 842 was originally effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020 with early adoption permitted. In October 2019, the FASB delayed the implementation of ASC 842 for private companies until fiscal years beginning after December 15, 2020. In June 2020, the FASB further delayed the implementation of ASC 842 for private companies until fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Given the Company's status as an Emerging Growth Company ("EGC"), the Company will adopt ASC 842 in accordance with the private company guidance. The modified retrospective transition approach applies to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has the option to instead apply the provisions at the effective date without adjusting the comparative periods presented. The Company is currently evaluating the impact of this guidance on its financial position, results of operations, and cash flows.
The Company does not believe that any other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
Reclassifications
In certain instances, amounts reported in prior years' financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had an effect on previously reported cash flows between operating and investing activities.
Note 2 - Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
|
|
|
|
Prepaid insurance
|
$
|
207
|
|
|
$
|
94
|
|
Other prepaids and receivables
|
107
|
|
|
2
|
|
Total prepaid expenses and other current assets
|
$
|
314
|
|
|
$
|
96
|
|
As of September 30, 2020, other prepaids and receivables largely included payments made to vendors for work that has not yet been completed and for payments made as a result of listing requirements for public companies.
Note 3 - Property and Equipment
As of September 30, 2020 and December 31, 2019, the net carrying value of property and equipment was approximately $1.3 million and $0.8 million, respectively, and included $0.7 million and $0, respectively, in construction-in-process for equipment being built and software being developed but not yet placed into service.
Depreciation expense for the three months ended September 30, 2020 and 2019 was $0.1 million and $0.1 million, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $0.2 million and $0.1 million, respectively.
Note 4 - Convertible Notes Payable
In connection with the closing of the IPO on February 19, 2019, convertible notes (and related accrued interest) of $11.8 million were converted into 6,825,391 shares of common stock. Certain notes automatically converted, according to their terms, into common stock. Certain holders were not permitted to convert such notes to the extent that the holders or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. Due to this limitation, principal representing less than $0.1 million of these notes was later converted into 273,034 shares of the Company's common stock in August and September 2019 when the conversion did not result in the holders and any of its affiliates owning more
than 4.99% of the Company's outstanding common shares. All remaining debt instruments were settled at the closing of the IPO.
Note 5 - Commitments and Contingencies
On April 5, 2012, the Company entered into a Patent and Technology License Agreement with The University of Texas M.D. Anderson Cancer Center ("MD Anderson"). Pursuant to the agreement, the Company obtained a royalty-bearing, worldwide, exclusive license to intellectual property including patent rights related to the patents and technology the Company uses. Under the agreement, the Company paid a nonrefundable license documentation fee in the high-five digits 30 days after the effective date of the agreement. Additionally, the Company agreed to pay a nonrefundable annual maintenance fee starting on the third anniversary of the effective date of the agreement, which escalates each anniversary and is currently in the mid-five digits. Additionally, the Company agreed to a running royalty percentage of net sales in the mid-single digits. The Company also agreed to make certain milestone payments in the low to mid-six digits and sublicensing payments, including a $0.25 million milestone payment made in June 2019 after the Company received FDA clearance for our RAP device for tattoo removal. The specific patents initially subject to the agreement expire between 2031 and 2032.
MD Anderson has the right to terminate the agreement upon advance notice in the event of a default by the Company. The agreement will expire upon the expiration of the licensed intellectual property. The rights obtained by the Company pursuant to the agreement are made subject to the rights of the U.S. government to the extent that the technology covered by the licensed intellectual property was developed under a funding agreement between MD Anderson and the U.S. government. To the extent that is the case, the Company's license agreement with, and the intellectual property rights it has licensed from MD Anderson, are subject to such a funding agreement and any superior rights that the U.S. government may have with respect to the licensed intellectual property. Therefore, there is a risk that the intellectual property rights the Company has licensed from MD Anderson may be non-exclusive or void if a funding agreement related to the licensed technology between MD Anderson and the U.S. government does exist and depending on the terms of such an agreement. Notwithstanding the foregoing, the Company does not believe our RAP technology received any federal funding. All out-of-pocket expenses incurred by MD Anderson in filing, prosecuting and maintaining the licensed patents have been and shall continue to be assumed by the Company. For the nine months ended September 30, 2020 and 2019, the Company paid approximately $0.1 million and $0.1 million, respectively, for expenses related to this agreement.
As the inventor of the intellectual property licensed from MD Anderson, Dr. Capelli, the Company's Vice Chairman, Chief Science Officer and Co-Founder, is entitled to 50% of the license income (which is determined after MD Anderson recoups any costs associated therewith) that the Company is required to pay to MD Anderson pursuant to the Company's license agreement with MD Anderson. For the nine months ended September 30, 2020, Dr. Capelli was paid $37.5 thousand from MD Anderson. In addition, Dr. Capelli is entitled to 50% of the proceeds (after the recoupment of any costs associated therewith) from the sale by MD Anderson of 175,000 shares issued to MD Anderson in connection with the license agreement.
Purchase Commitments
On November 20, 2019, the Company entered into a cooperative development addendum ("Addendum") to its engineering and development services master agreement with Emphysys, Inc. ("Emphysys”). The Addendum states that Emphysys will provide the Company with engineering and design service labor related to shockwave technology for use in dermatology and aesthetics fields for a 36 month period ending July 1, 2022.
During the term of the Addendum, the Company agreed to certain minimum annual expenditures. If the Company fails to spend such minimum annual amounts or if the Company terminates the Addendum without cause, the Company will be required to pay Emphysys an early termination fee of no more than $0.4 million. In the event that all or substantially all of the stock or assets of either party are sold then, at the request of the other party, the Addendum may be terminated (without the requirement to pay a termination fee) and the obligation of Emphysys to provide future services to the Company shall terminate. Pursuant to the Addendum, with certain exceptions, Emphysys covenanted that it will not perform or agree to perform services with any company other than Soliton in the area of arc-discharge driven acoustical shockwave generation for medical dermatological or aesthetic dermatological indications during the term of the Addendum or any extension thereof, and for a period of six months after the termination of the Addendum.
As of September 30, 2020, the Company had purchase obligations of $2.9 million to Emphysys. This commitment is for services used in the ordinary course of business and does not represent excess commitments or loss contracts. The remaining minimum purchase obligations are $1.3 million and $1.6 million, respectively, for the 12 month periods ending June 30, 2021 and June 30, 2022. If we fail to spend such minimum annual amounts or if the Company terminates the Addendum without cause, the Company will be required to pay Emphysys an early termination fee of no more than $0.4 million.
On March 6, 2020, the Company entered into a manufacturing service agreement (the "Agreement") with Sanmina Corporation ("Sanmina"). The Agreement states that Sanmina will provide the Company with certain manufactured products for a one year period, with pricing adjusted for material variations of market prices for components, parts and raw material, including variations resulting from allocations, shortages or tariffs. In addition, pricing will be based on the forecasted volumes provided by the Company and the projected inventory turns as agreed by both parties.
Either party may terminate the Agreement or an order under the Agreement for default, if the other party materially breaches the Agreement; provided, however, no termination shall occur until thirty days after the defaulting party is notified in writing of the material breach and has failed to cure or give adequate assurances of performance within the thirty day period after notice of material breach. In addition, the Company may terminate the Agreement for any reason upon thirty days’ prior written notice and may terminate any order under the Agreement for any reason upon 120 days’ (before scheduled shipment) prior written notice. Sanmina may terminate the Agreement for any reason upon ninety days’ notice. In the event the Agreement or an order under the Agreement is terminated for any reason other than a breach by Sanmina, the Company is required to pay Sanmina termination charges equal to (i) the contract price for all finished product existing at the time of termination; (ii) Sanmina’s cost (including labor, components and applicable mark-ups per the pricing model) for all work in process; and (iii) the cost of components ordered by Sanmina pursuant to the Agreement.
Lease Commitments
The Company leases space for its corporate office, which provides for an original 63 month term beginning on February 1, 2016, with initial rent payments of $7.9 thousand per month that escalate annually to a maximum of $8.9 thousand per month through the expiration of the agreement. On September 15, 2020, the Company entered into a 12 month extension of its corporate office lease. Total rent expense under this office space lease arrangement for each of the three and nine months ended September 30, 2020 and 2019 was $24.2 thousand and $23.6 thousand, respectively, and $0.1 million and $0.1 million, respectively.
Future minimum lease payments as of September 30, 2020 were less than $0.2 million through the lease term ending April 30, 2022.
Letters of Credit
The Company has an irrevocable letter of credit which supports its obligations to pay or perform according to the requirements of an underlying agreement with a certain vendor. Such letter of credit has an initial term of one year, renews automatically for an additional year and can only be modified or canceled with the approval of the beneficiary. As of September 30, 2020, the letter of credit was not used.
Legal Proceedings
In the normal course of business, from time-to-time, the Company may be subject to claims in legal proceedings. However, the Company does not believe it is currently a party to any pending legal actions. Notwithstanding, legal proceedings are subject to inherent uncertainties and an unfavorable outcome could include monetary damages, and in such event, could result in a material adverse impact on the Company's business, financial position, results of operations or cash flows.
Employment Agreements
The Company has agreements with certain employees to provide certain benefits in the event of termination where the base salary and certain other benefits would amount to $2.9 million using the rate of compensation in effect at November 2, 2020.
Note 6 - Stockholders’ Equity (Deficit)
Adoption of 2018 Stock Plan
In June 2018, the Company’s Board of Directors (the "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 4,150,000 shares. As of September 30, 2020, 755,450 shares remained available for grant under the 2018 Stock Plan.
Restricted Stock
Restricted stock activity for the nine months ended September 30, 2020 is summarized as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
Outstanding, December 31, 2019
|
158,336
|
|
|
$
|
11.54
|
|
Vested
|
(37,494)
|
|
|
11.54
|
|
Outstanding, September 30, 2020
|
120,842
|
|
|
$
|
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 four months of the approval date of the agreement. The remaining 175,000 shares vest over 42 months, beginning on September 19, 2019. As of September 30, 2020, 79,158 shares have vested life-to-date and 120,842 remain unvested.
During the three months ended September 30, 2020 and 2019, the Company recorded $0.1 million and $0.2 million, respectively, in stock-based compensation for the restricted shares previously issued. During the nine months ended September 30, 2020 and 2019, the Company recorded $0.4 million and $0.8 million, respectively, in stock-based compensation for the restricted shares previously issued.
As of September 30, 2020, there was $1.3 million of unrecognized compensation expense related to restricted shares.
Stock Options
The following table summarizes stock option activities for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining Life
(in Years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
2,883,550
|
|
|
$
|
2.70
|
|
|
8.62
|
|
$
|
23,862
|
|
Granted
|
526,000
|
|
|
11.08
|
|
|
—
|
|
|
—
|
|
Outstanding, September 30, 2020
|
3,409,550
|
|
|
$
|
4.00
|
|
|
8.11
|
|
$
|
12,424
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2020
|
1,612,250
|
|
|
$
|
2.41
|
|
|
7.84
|
|
$
|
8,434
|
|
During the nine months ended September 30, 2020, the Company granted certain individuals options to purchase 526,000 shares of common stock with an average exercise price of $11.08 per share, with contractual terms ranging from one to ten years, and vesting periods ranging from 8.33% monthly over one year to 25.00% per year over four years. The options have an aggregate grant date fair value of $4.2 million 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 0.1% to 1.6% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected lives ranging from 5.50 years to 6.25 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility ranging from 83.1% to 88.3% based on the historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair value of the Company's stock ranging from $6.44 to $13.50 per share.
All options issued and outstanding are being amortized over their respective vesting periods. During the three months ended September 30, 2020 and 2019, the Company recorded option expense of $0.6 million and $0.5 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded option expense of $1.8 million and $1.1 million, respectively. The unrecognized compensation expense for options at September 30, 2020 was $5.8 million.
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 certain 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 certain notes.
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 aggregate grant date fair value of these 1,228,431 warrants was $1.6 million, 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 terms of five years based on the terms of the warrants, (3) expected volatility of 84.1% to 85.8% 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 value of the Company's stock at the closing of its IPO on February 19, 2019 of $4.87 for warrants on that day.
As a result of the Company’s IPO closing on February 19, 2019, $0.7 million of unamortized discount on issuance costs were accelerated and recorded as expense, including $0.1 million for costs associated with convertible notes, $0.1 million for warrants issued in connection with the convertible notes and $0.5 million for warrants issued in connection with non-convertible notes issued prior to the IPO. Warrants issued to underwriters in connection with the IPO were treated as deal costs.
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 of 675,000 units (each a “June Unit”) at $14.00 per June Unit for total gross proceeds of $9.5 million. Each June Unit consisted of (i) one share of the Company’s 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. 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. Net proceeds from the closing of the sale of the June Units on June 19, 2019 were $8.6 million after deducting the placement agent fees and offering expenses.
The grant date fair value of these 472,500 June Warrants was $4.4 million, which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option pricing model include (1) discount rate of 1.9% 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 84.9% 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 private offering with certain institutional and accredited investors for the sale by the Company of 485,250 units (each an “October Unit”) at $12.88 per October Unit for total gross proceeds of $6.3 million. 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. Net proceeds from the closing of the sale of the October Units on October 11, 2019 were $5.7 million after deducting the placement agent fees and offering expenses.
The grant date fair value of these 533,775 October Warrants was $4.5 million, which was determined utilizing the Black-Scholes option pricing model. Variables used in the Black-Scholes option pricing model include (1) discount rate of 1.6% 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 82.9% 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 the warrants from the two PIPE transactions were included in additional paid-in-capital as deal costs.
The following table summarizes warrant activity for the nine months ended September 30, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in Years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
1,374,608
|
|
|
$
|
10.97
|
|
|
4.43
|
|
$
|
14
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
(40,891)
|
|
|
1.75
|
|
|
—
|
|
|
247
|
|
Forfeited (cashless exercise)
|
(9,109)
|
|
|
1.75
|
|
|
—
|
|
|
—
|
|
Outstanding, September 30, 2020
|
1,324,608
|
|
|
$
|
11.32
|
|
|
3.70
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2020
|
1,324,608
|
|
|
$
|
11.32
|
|
|
3.70
|
|
$
|
—
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Note 7 - Subsequent Events
On October 22, 2020, the Board appointed Niquette Hunt as an independent member of the Company’s Board, effective on such date. Ms. Hunt was also appointed to serve on the Board’s audit committee and compensation committee. Ms. Hunt will participate in the Company’s standard compensation program for non-employee directors, including annual cash compensation of $38,000, annual compensation of $9,000 and $6,000 for serving as a member of the audit committee and compensation committee, respectively, and an initial award of a 10 year option to purchase 30,000 shares of the Company's common stock, under the Company's 2018 Stock Plan, with 4 year annual vesting and an exercise price equal to the closing price of the Company's common stock on the date of the appointment.
On October 23, 2020, the Board appointed Michael K. Kaminer, M.D., as an independent member of the Company’s Board, effective on such date. Dr. Kaminer was also appointed to serve on the Board’s nominating and governance committee. Dr. Kaminer will participate in the Company’s standard compensation program for non-employee directors, including annual cash compensation of $38,000, annual compensation of $5,000 for serving as a member of the nominating and governance committee and an initial award of a 10 year option to purchase 30,000 shares of the Company's common stock, under the Company's 2018 Stock Plan, with 4 year annual vesting and an exercise price equal to the closing price of the Company's common stock on the date of the appointment.
On October 30, 2020, the Company entered into an employment agreement with Brad Hauser to serve as the Company's President and Chief Executive Officer effective November 2, 2020. Mr. Hauser was granted a restricted stock unit award for 200,000 shares of the Company's common stock, under the Company's 2018 Stock Plan, with 4 year annual vesting at a price equal to the closing price of the Company's common stock on the date of the appointment. Mr. Hauser was also granted a 10 year option to purchase 350,000 shares of the Company's common stock, under the Company's 2018 Stock Plan, with a 4 year annual vesting and an exercise price equal to the closing price of the Company's common stock on the date of the appointment.
On October 30, 2020, Dr. Chris Capelli transitioned to the position of Chief Science Officer and the Board appointed Mr. Capelli as Vice Chairman of the Board. In connection with Dr. Capelli's transition, the Company entered into an amendment to Dr. Capelli's amended and restated employment agreement.