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12. SHAREHOLDERS' EQUITY
 9 Months Ended
Sep. 30, 2015
Equity [Abstract]  
SHAREHOLDERS' EQUITY

NOTE 12 – SHAREHOLDERS’ EQUITY

 

PREFERRED STOCK

 

At September 30, 2015, the Company was authorized to issue 100,000,000 shares of its Series A preferred stock with a par value of $0.001 per share.

 

During the nine months ended September 30, 2015, the Company issued shares of Series A preferred stock as follows:

 

On February 23, 2015, the Company issued 66,625 Series A preferred to GGE as part of the consideration paid for the Acquired Assets. The fair value of the Series A preferred stock was $28,402,000 based on a calculation using a binomial lattice option pricing model. See Note 15.

 

The 66,625 shares of Series A preferred issued to GGE are contingently redeemable in 4 tranches as follows:  (i) 15,000 shares in Tranche One; (ii) 15,000 shares in Tranche Two; (iii) 11,625 shares in Tranche Three; and (iv) 25,000 shares in Tranche Four.

 

In addition, upon the original issuance of the 66,625 shares of Series A preferred stock issued to GGE, the Series A preferred stock had the following features:

 

● a liquidation preference senior to all of the Company’s common stock equal to $400 per share;
● a dividend, payable annually, of 10% of the liquidation preference;
● voting rights on all matters, with each share having 1 vote; and
● a conversion feature at GGE’s option which would allow the Series A preferred stock to be converted into shares of the Company’s common stock on a 1,000:1 basis, subject to stockholder approval of the issuance of the shares of common stock issuable upon such conversion.

 

However, following the October 7, 2015 approval of the Company shareholders of the issuance of shares of common stock upon the conversion of the Series A preferred, the Series A preferred features have been modified as follows:

 

● the Series A preferred has ceased accruing dividends and all accrued and unpaid dividends have been automatically forfeited and forgiven; and
● the liquidation preference of the Series A preferred has been reduced to $0.001 per share from $400 per share.

 

GGE is also subject to a lock-up provision that prohibits it from selling the shares of common stock through the public markets for less than $1 per share (on an as-converted to common stock basis) until February 23, 2016, and in no event may GGE convert shares of Series A preferred if upon such conversion it would beneficially own more than 9.99% of our outstanding common stock or voting stock.

 

The Series A Preferred is redeemable at the option of the company or anyone that the COmpany assigns the right to redeem the Series A Preferred (the “Assigns”), if the Company repays the Secured Promissory Notes by November 23, 2015.

 

The Series A preferred is redeemable as follows:

 

● until November 23, 2015, the Company may redeem any or all of the Tranche One shares at a repurchase price of $500 per share;
● from November 24, 2015 until February 23, 2017, the Company  may redeem any or all of the Tranche One shares and Tranche Two shares at a repurchase price of $650 per share; and
● from February 24, 2017 until February 23, 2018, the Company  may redeem any or all remaining outstanding shares of Series A preferred at a repurchase price of $800 per share.

 

In addition, if the Company repays the Secured Promissory Notes and redeems all of the Tranche One shares by November 23, 2015 the above redemption options are modified as follows:

 

● the Tranche Four shares are automatically redeemed for $-0- per share; and
● GGE may request (but not require) that the Company redeem:
  °       the Tranche Two shares at a redemption price of $650 per share for a period of 30 days following February 23, 2017; and
  °       the Tranche Two Shares and 11,625 shares of the Tranche Three shares at a redemption price of $800 per share for a period of 30 days following February 23, 2018.
     

 

In the event the Company or its Assigns do not redeem all the Series A preferred shares, GGE has no recourse against the Company.  However, if the Company or its Assigns do not redeem all the Series A preferred shares, and the average closing price of the Company’s common stock over the 30 day period immediately preceding February 23, 2018 is below $0.80 per share, then the Company is required to issue to GGE up to an additional 10,000 shares of Series A preferred, pro-rated based on the actual number of shares of Preferred Series A not redeemed and repurchased by the Company.

 

As of September 30, 2015, there were 66,625 shares of the Company’s Series A preferred stock outstanding.

 

COMMON STOCK

 

At September 30, 2015, the Company was authorized to issue 200,000,000 shares of its common stock with a par value of $0.001 per share.

 

During the nine months ended September 30, 2015, the Company issued shares of common stock or restricted common stock as follows:

 

On January 7, 2015, the Company granted 965,000 shares of its restricted common stock with a fair value of $357,000, based on the market price on the date of grant, to certain of its employees, including 370,000 shares to Chairman and Chief Executive Officer, Frank C. Ingriselli, 325,000 shares to President and Chief Financial Officer, Michael L. Peterson, and 270,000 shares to Executive Vice President and General Counsel, Clark R. Moore, all pursuant to the Company’s 2012 Amended and Restated Equity Incentive Plan and in connection with the Company’s 2014 annual equity incentive compensation review process. 40% of the shares vest on the nine month anniversary of the grant date, 20% vest on the twelve month anniversary of the grant date, 20% vest on the eighteen month anniversary of the grant date and 20% vest on the twenty-four month anniversary of the grant date, all contingent upon the recipient’s continued service with the Company. The vesting of the securities is subject to the terms of certain Vesting Agreements described below.

 

On January 27, 2015, a holder of Convertible Bridge Notes converted an aggregate of $83,000 (principal and accrued interest amounts) due under the Convertible Bridge Notes into an aggregate of 165,431 shares of common stock of the Company.  

 

On February 6, 2015, the Company granted 193,550 shares of its restricted common stock with a fair value of $120,000, based on the market price on the date of grant, to certain members of its board of directors, pursuant to the Company’s 2012 Equity Incentive Plan, of which $29,000 was expensed as of March 31, 2015. 100% of the shares vest on September 10, 2015, contingent upon the recipient being a Director of, or employee of or consultant to, the Company on such vesting date.

 

On February 23, 2015, the Company issued 3,375,000 restricted common shares to GGE valued at $0.81 per share, based on the market price on the date of grant, as part of the consideration paid for the Acquired Assets.

 

On March 6, 2015, the Company granted 15,000 fully-vested shares of its restricted common stock with a fair value of $10,000, based on the market price on the date of grant, to a consultant pursuant to the Company’s 2012 Amended and Restated Equity Incentive Plan. 

 

On April 16, 2015, the Company issued 19,445 shares of common stock to a former employee in connection with the exercise of 33,334 options on a cashless basis.

 

On May 13, 2015, the Company announced the pricing of an underwritten public offering of an aggregate of 5,600,000 shares of common stock at price of $0.50 per share to the public (the "May 2015 Offering"). The underwriter in the offering was granted a 45-day option to purchase up to 840,000 shares of common stock to cover overallotments.  On May 18, 2015, the Company closed this underwritten offering of an aggregate of 5,600,000 shares of common stock, and on May 19, 2015 the underwriter exercised a portion of its overallotment option and purchased 766,197 shares of common stock.  With the exercise of a portion of the overallotment option, the Company sold 6,366,197 total shares of common stock in the May 2015 Offering for net proceeds of approximately $2.78 million.  The Company received gross proceeds of $3,183,000 before deducting underwriting discounts and offering expenses as a result of the offering.

 

On September 10, 2015, the Company issued 390,000 shares to a financial and professional relations advisor valued at $0.35 per share, based on the fair value of the stock on the date granted, in connection with the Company’s entry into a consulting services agreement in the amount of $137,000.

 

As of September 30, 2015, Bridge Notes with an aggregate principal balance of $475,000 remain outstanding, plus accrued interest of $102,000 and additional payment-in-kind of $48,000. The aggregate principal and accrued, unpaid interest and payment-in-kind amounts are available for conversion into common stock pursuant to the terms of the Bridge Notes.

 

Stock compensation expense recorded related to restricted stock during the nine months ended September 30, 2015 was $2,117,000. The remaining unamortized stock compensation expense at September 30, 2015 related to restricted stock was $965,000.

 

Vesting Agreements

 

As a required term of our entry into the Reorganization Agreement, Messrs. Ingriselli, Peterson and Moore each entered into Vesting Agreements with the Company, pursuant to which they each individually agreed, that effective as of the date of such agreements (May 21, 2015), all existing so-called “10b5-1 trading plans” providing for the periodic sale of their restricted stock upon vesting shall be terminated, and the vesting of all restricted stock they hold which is subject to vesting prior to the Exchange being consummated (the “Exchange Closing”) will be delayed until the 2nd business day following either (x) the Exchange Closing, or (y) the Company’s public disclosure of the termination of the Exchange (the “Vesting Delay”).  This Vesting Delay will occur provided that effective upon the 2nd trading day following the Company’s public announcement of the Exchange Closing, all unvested stock subject to the Vesting Delay, and all unvested stock and options subject to vesting through July 1, 2016, will vest immediately (subject to not more than 573,000 shares of unvested stock and options to purchase 333,000 shares vesting to Mr. Ingriselli, not more than 520,500 shares of unvested stock and options to purchase 292,500 shares vesting to Mr. Peterson, and not more than 389,000 shares of unvested stock and options to purchase 243,000 shares vesting to Mr. Moore) (the “Closing Acceleration”). The Closing Acceleration will occur even if the executives are not then employees or directors of the Company on such date. Notwithstanding the above, in the event the Reorganization Agreement is terminated or the Exchange is not consummated by December 29, 2015 (unless otherwise agreed upon in writing by the parties to the Reorganization Agreement), all restricted stock subject to the Vesting Delay will vest on the 2nd business day following the Company’s public disclosure of the termination of the Exchange (in the event the Reorganization Agreement was terminated prior to December 29, 2015), or, in the event the Exchange is not terminated by, or consummated by, December 29, 2015, on January 7, 2016, and the original vesting terms for all future unvested stock and options will be reinstated to the terms in effect prior to the parties’ entry into the Vesting Agreements. We also agreed to pay up to $370,000 in taxes due in connection with such Closing Acceleration, including gross ups (allocated up to $143,008 for Mr. Ingriselli, up to $129,906 for Mr. Peterson, and up to $97,086 for Mr. Moore). Finally, all options subject to the Closing Acceleration will be extended for a period of five years following the closing of the Exchange, regardless of their original terms.