Note 9 – Stockholders’ Equity

Reverse Stock Split

Effective January 8, 2018, pursuant to authority granted by the stockholders of the Company, the Company implemented a 1-for-3.75 reverse split of the Company’s issued and outstanding common stock and preferred stock (the “Reverse Split”). The number of authorized shares remains unchanged. All share and per share information has been retroactively adjusted to reflect the Reverse Split for all periods presented, unless otherwise indicated.

Authorized Capital

As of December 31, 2017, the Company was authorized to issue 60,000,000 shares of common stock, par value of $0.0001 per share, and 36,000,000 shares of preferred stock, par value of $0.0001 per share. The holders of the Company’s common stock are entitled to one vote per share. As of December 31, 2017, the preferred stock was designated as follows: 20,000,000 shares designated as Series A Convertible Preferred Stock; 5,714,286 shares designated as Series A-2 Convertible Preferred Stock; and 10,000,000 shares designated as Series B Convertible Preferred Stock.

On January 29, 2018, in connection with its IPO and the conversion of all then existing preferred stock into common stock, the Company filed its Third Amended and Restated Certificate of Incorporation (the “Third Amendment”) with the Secretary of State of the State of Delaware, effective the same day. Pursuant to the Third Amendment, the Company is authorized to issue 90,000,000 shares of common stock and 6,000,000 shares of preferred stock. The holders of the Company’s common stock are entitled to one vote per share. No shares of preferred stock were designated. Pursuant to the Third Amendment, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, redemption, voting or other rights.

2014 Equity Incentive Plan

The Company’s 2014 Equity Incentive Plan (“2014 Plan”) provides for the issuance of incentive stock options, nonstatutory stock options, rights to purchase common stock, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants of the Company and its affiliates. The 2014 Plan became effective on December 14, 2014 and shall terminate on the tenth (10th) anniversary of the effective date. The 2014 Plan requires the exercise price of stock options to be greater than or equal to the fair value of the Company’s common stock on the date of grant. As of December 31, 2017, there were 48,917 shares available for future issuance under the 2014 Plan.

On January 5, 2018, the Company’s Board of Directors and shareholders approved an amendment to the Company’s 2014 Plan to increase the number of shares of common stock authorized under the 2014 Plan from 1,733,333 shares to 1,866,667 shares.

Series A and Series A-2 Convertible Preferred Stock

On October 6, 2016, the Company sold an aggregate of 788,827 shares of Series A-2 Convertible Preferred Stock to investors at a price of $5.25 per share for aggregate proceeds of $4,141,338.

On July 6, 2017, the Company’s Board of Directors adopted, and the Company’s stockholders approved, the Second Amendment to the Company’s Certificate of Incorporation (the “Second Amendment”). Pursuant to the Second Amendment, in the event that any holder of shares of Series A Convertible Preferred Stock or Series A-2 Convertible Preferred Stock (collectively, the “Series A/A-2 Preferred Stock”) does not participate in a subsequent financing (as defined in the Second Amendment) by purchasing in the aggregate, in such subsequent financing, at least 75% of such holder’s pro rata amount, then each share of Series A/A-2 Preferred Stock held by such holder shall automatically be converted into common stock concurrently with the consummation of such subsequent financing. Such conversion is referred to as a “Special Mandatory Conversion.”

On September 27, 2017, in connection with the sale of Series B Convertible Preferred Stock, holders of an aggregate of 299,863 shares of Series A Convertible Preferred Stock did not participate in such financing by purchasing at least 75% of such holder’s pro rata amount. As a result, the Special Mandatory Conversion of the Series A/A-2 Preferred Stock was triggered and, accordingly, such shares of Series A Convertible Preferred stock were automatically converted into an aggregate of 299,863 shares of common stock.

The preferred stock did not contain a redemption provision and an overall analysis of its features performed by the Company determined that it was more akin to equity and therefore, has been classified within stockholders’ equity on the balance sheet. While the embedded conversion option (“ECO”) was subject to an anti-dilution price adjustment, since the ECO was clearly and closely related to the equity host, it was not required to be bifurcated and accounted for as a derivative liability under ASC 815. The Company determined that the preferred stock did not contain a beneficial conversion feature, since the conversion price exceeded the estimated fair value of the Company’s common stock as of the commitment date.

The Series A and Series A-2 Convertible Preferred Stock is convertible, at the option of the holder, at any time into shares of common stock on a one-for-one basis. In the event of any issuances by the Company for less than the in-force conversion price, the preferred stock conversion price shall be reduced on a weighted average basis. Each share of preferred stock shall automatically be converted into shares of common stock at the then effective conversion price: (i) immediately prior to the closing of a firm commitment underwritten initial public offering provided that (A) the aggregate offering price, net of underwriters’ discounts and expenses, is at least $2.00 per share of common stock and (B) the aggregate proceeds of such offering are not less than $20,000,000; or (ii) the date specified by written consent or agreement of the holders of at least 75% of the then outstanding shares of preferred stock. See Note 10 – Subsequent Events for additional details.

Series B Convertible Preferred Stock

During the year ended December 31, 2017, the Company sold an aggregate of 918,983 shares of its Series B Convertible Preferred Stock to investors at a price of $6.98 per share for aggregate gross proceeds of $6,409,651. The Company incurred $41,958 of legal costs in connection with the sale, such that the aggregate net proceeds from the sale were $6,367,693.

On November 9, 2017, the Board adopted resolutions ratifying each of the issuances of Series B Convertible Preferred Stock, which were then approved by the Company’s shareholders. On November 13, 2017, the Company filed a certificate of validation with the Delaware Secretary of State in respect of such ratifications, such that, as of that date, the Series B Convertible Preferred Stock was duly authorized, validly issued, fully paid and nonassessable.

The Series B Convertible Preferred Stock is convertible, at the option of the holder, at any time into shares of common stock on a one-for-one basis, subject to certain adjustments. In the event of any issuances by the Company for less than the in-force conversion price, the Series B Convertible Preferred Stock conversion price shall be reduced on a weighted average basis. Each share of Series B Convertible Preferred Stock shall automatically be converted into shares of common stock at the then effective conversion price: (i) immediately prior to the closing of a firm commitment underwritten initial public offering provided that (A) the aggregate offering price, net of underwriters' discounts and expenses, is at least $2.00 per share of common stock and (B) the aggregate proceeds of such offering are not less than $20,000,000; or (ii) the date specified by written consent or agreement of the holders of at least 75% of the then outstanding shares of preferred stock.

The Series B Convertible Preferred did not contain a redemption provision and an overall analysis of its features performed by the Company determined that it was more akin to equity and therefore, has been classified within stockholders’ equity on the balance sheet. While the embedded conversion option (“ECO”) was subject to an anti-dilution price adjustment, since the ECO was clearly and closely related to the equity host, it was not required to be bifurcated and accounted for as a derivative liability under ASC 815. The Company determined that the Series B Convertible Preferred did not contain a beneficial conversion feature, since the conversion price exceeded the estimated fair value of the Company’s common stock as of the commitment date.

See Note 10 – Subsequent Events for additional details.

Stock Warrants

On September 27, 2017, the Company issued a warrant to purchase 61,875 shares of common stock at an exercise price of $6.98 per share to an investor for cash consideration of $431,574, which was included within additional paid-in capital on the balance sheet as of December 31, 2017. The warrant is exercisable any time through September 27, 2027. The warrant was sold to an investor for the amount of the investment in excess of what was permitted to be purchased of Series B Convertible Preferred Stock.

A summary of the warrant activity during the year ended December 31, 2017 is presented below:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Number of		Exercise		Life		Intrinsic
	Warrants		Price		In Years		Value
Outstanding January 1, 2017		-	$	-
Granted		61,875		6.98
Forfeited		-		-
Outstanding December 31, 2017		61,875	$	6.98		9.7	$	-

Exercisable December 31, 2017		61,875	$	6.98		9.7	$	-

The following table presents information related to warrants as of December 31, 2017:

Warrants Outstanding				Warrants Exercisable
				Weighted
		Outstanding		Average		Exercisable
Exercise		Number of		Remaining Life		Number of
Price		Warrants		In Years		Warrants
	6.98		61,875		9.7		61,875
			61,875		9.7		61,875

Stock Options

In applying the Black-Scholes option pricing model to stock options granted, the Company used the following approximate assumptions:

	For the Year Ended
	December 31,
	2017			2016
Expected term (years)		5.32 - 10.00			10.00
Risk free interest rate		1.95 - 2.39	%		1.53% - 1.83	%
Expected volatility		130	%		131	%
Expected dividends		0.00	%		0.00	%

The Company has computed the fair value of stock options granted using the Black-Scholes option pricing model. Option forfeitures are accounted for at the time of occurrence. The expected term used for options issued to non-employees is usually the contractual life and the expected term used for options issued to employees and directors is the estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option grants. The Company does not currently have a trading history to support its historical volatility calculations. Accordingly, the Company is utilizing an expected volatility figure based on a review of the historical volatility of three comparable entities over a period of time equivalent to the expected life of the instrument being valued. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.

The weighted average estimated grant date fair value of the stock options granted for the year ended December 31, 2017 and 2016 was approximately $1.77 and $1.16 per share, respectively.

The Company recorded stock-based compensation expense related to stock options of $412,312 and $2,690 during the year ended December 31, 2017 and 2016, respectively. As of December 31, 2017, there was $1,327,224 of unrecognized stock-based compensation expense, of which, $377,816 related to non-employee grants, which will be recognized over a weighted average period of 2.4 years. Subsequent to December 31, 2017, the Company closed on its IPO at an offering price of $10.00 per share and as of March 27, 2018, the Company’s shares closed at $9.20 per share. The Company’s stock-based compensation expense related to non-employee grants that is recognized subsequent to December 31, 2017 will be materially impacted as a result of the increase in stock price subsequent to December 31, 2017.

A summary of the option activity during the year ended December 31, 2017 is presented below:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Number of		Exercise		Life		Intrinsic
	Options		Price		In Years		Value
Outstanding January 1, 2017		786,669	$	1.37
Granted		897,747		1.95
Forfeited		-		-
Outstanding December 31, 2017		1,684,416	$	1.68		8.5	$	4,361,825

Exercisable December 31, 2017		920,383	$	1.39		7.6	$	883,675

The following table presents information related to stock options as of December 31, 2017:

Options Outstanding				Options Exercisable
				Weighted
		Outstanding		Average		Exercisable
Exercise		Number of		Remaining Life		Number of
Price		Options		In Years		Options
$	1.24		760,001		7.2		760,001
$	1.95		897,747		9.5		152,465
$	5.25		26,668		8.8		7,917
			1,684,416		7.6		920,383