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COMMON STOCK, STOCK OPTIONS AND WARRANTS
 6 Months Ended
Mar. 31, 2016
Notes to Financial Statements  
NOTE 6. COMMON STOCK, STOCK OPTIONS AND WARRANTS

Private Offering

 

In 2014, the Company entered into an investment banking agreement to raise up to $5.1 million and issue up to 8,500,000 Units described below. The agreement contemplated a Reverse Acquisition with a public company. As of December 31, 2013, the Company capitalized as deferred offering costs a $25,000 retainer for legal costs associated with this offering. The $25,000 retainer was charged to additional paid-in capital on completion of the first closing of the offering.

 

On September 12, 2014, the Company sold 3,400,067 Units for a purchase price of $0.60 per Unit for gross proceeds of $2,040,040. Each Unit consists of one share of common stock and one five-year warrant (the "Investor Warrants") to purchase one share of common stock at an exercise price of $0.60, (the "Private Offering"). The exercise price of the Investor Warrants was subject to adjustment, for up to one year, if the Company issues common stock at a price lower than the exercise price, subject to certain exceptions. The Investor Warrants will be redeemable by the Company at a price of $0.001 per Investor Warrant at any time subject to the conditions that (i) the common stock has traded for twenty (20) consecutive trading days with a closing price of at least $1.50 per share with an average trading volume of 50,000 shares per day and (ii) the Company provides 20 trading days prior notice of the redemption and the closing price of the common stock is not less than $1.17 for more than any 3 days during such notice period and (iii) the underlying shares of common stock are registered.

 

The Placement Agent was paid a commission of ten percent (10%) and a non-accountable expense allowance of three percent (3%) of the funds raised in the Private Offering. As a result of the foregoing arrangement, the Placement Agent was paid commissions and expenses of $265,206. In addition, the Company issued to the Placement Agent and their designees five-year warrants (the "Placement Agent Unit Warrants") to purchase 680,013 Units at an exercise price of $0.60 per Unit. The Placement Agent Unit Warrants are exercisable on a cash or cashless basis with respect to purchase of the Units, and will be exercisable only for cash with respect to warrants received as part of the Units. The exercise price of the warrants underlying the Placement Agent Unit Warrants was subject to weighted-average adjustment, for up to one year, if the Company issues common stock at a price lower than the exercise price, subject to certain exceptions.

 

In addition, the Placement Agent was issued warrants to purchase 1,000,000 shares of common stock exercisable for cash at $0.60 per share for investment banking services provided in connection with the transaction (the "Placement Agent Share Warrants"). Other cash expenses related to the private placement totaled $169,000. The Placement Agent may, while the Placement Agent Unit Warrants are outstanding, appoint one person to the Board of Directors, and designate one person who may attend meetings of the Board of Directors as an observer. On November 2, 2015, the Placement Agent waived its right to appoint a person to the Board of Directors.

 

In connection with the Private Offering, the Company entered into a Registration Rights Agreement pursuant to which the Company is required to file a registration statement (the "Registration Statement"), registering for resale all shares of common stock (i) included in the Units; and (ii) issuable upon exercise of the Investor Warrants. The Company has agreed to use its reasonable efforts to cause the Registration Statement to be filed no later than 60 days after the completion of the Private Offering (the "Filing Deadline"), and to have the Registration Statement declared effective within 180 days of the Filing Deadline. See Note 10. Any holders of the shares of common stock removed from the Registration Statement as a result of a Section 415 comment from the SEC shall be included in a subsequent registration statement the Company will file no later than six months after the prior registration statement (or such other period as permitted by SEC rules). The Company filed the Registration Statement on September 11, 2015 and it was declared effective on January 21, 2016.

 

During the year ended September 30, 2015, the Company sold an additional 2,837,037 Units for a purchase price of $0.54 per Unit and 200,000 Units for a purchase price of $0.60 per Unit for gross proceeds of $1,652,000. Each Unit consists of one share of common stock and one Investor Warrant (see description above). There was no placement agent for the 2015 private placements and other cash expenses related to the placements were $142,507. In connection with these placements, the Company credited $741,058 to stockholders' equity (deficit) and $768,435 to derivative warrant liability.

 

During the six months ended March 31, 2016, the Company sold an additional 2,500,001 Units for a purchase price of $0.54 per Unit and 216,667 Units for a purchase price of $0.60 per Unit for gross proceeds of $1,480,000. Each Unit consists of one share of common stock and one Investor Warrant (see description above). There was no placement agent for these private placements and other cash expenses related to the placements were $81,312. In connection with these placements, the Company credited $694,683 to stockholders' equity (deficit) and $704,005 to derivative warrant liability.

 

On March 22, 2016, the Company sold 5,000,000 shares of common stock at $0.60 per share to its Chairman of the Board, Leonard Mazur, for gross proceeds of $3,000,000. There were no expenses related to this placement.

 

Stock Options

 

On September 12, 2014, the Board of Directors adopted the 2014 Stock Incentive Plan (the "2014 Plan") and reserved 13,000,000 shares of common stock for issuance to employees, directors and consultants. On September 12, 2014, the stockholders approved the plan. Pursuant to the 2014 Plan, the Board of Directors (or committees and/or executive officers delegated by the Board of Directors) may grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards. As of March 31, 2016, there were options to purchase an aggregate of 5,858,758 shares of common stock outstanding under the 2014 Plan and 7,141,242 shares available for future grants.

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. Due to its limited operating history and limited number of sales of its Common Stock, the Company estimated its volatility in consideration of a number of factors including the volatility of comparable public companies. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the financial statements, to estimate option exercises and employee terminations within the valuation model. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. The expected term of stock options granted, all of which qualify as "plain vanilla," is based on the average of the contractual term (generally 10 years) and the vesting period. For non-employee options, the expected term is the contractual term.

 

A summary of option activity under the 2014 Plan as of March 31, 2016 and the changes during the six months then ended is presented below:

 

Options   Shares    

Weighted-

Average

Exercise

Price

   

Weighted-

Average

Remaining

Contractual

Term

 

Aggregate

Intrinsic

Value

 
                             
Outstanding at October 1, 2015     3,900,000     $ 0.47     8.94 years   $ 297,000  
Granted     800,000     $ 0.54              
Assumed in acquisition     1,158,758     $ 0.07              
Exercised     —       —              
Forfeited or expired     —       —              
Outstanding at March 31, 2016     5,858,758     $ 0.40     8.51 years   $ 1,182,870  
Exercisable at March 31, 2016     3,487,027     $ 0.41     8.41 years   $ 673,899  

 

On September 12, 2014, the Board of Directors granted stock options to purchase 3,300,000 shares of common stock at an exercise price of $0.45 per share. The weighted average grant-date fair value of the options was estimated at $0.34 per share. These options vest over three years and have a term of 10 years.

 

On April 1, 2015, the Board of Directors granted stock options to purchase 100,000 shares of common stock at an exercise price of $0.60 per share. The weighted average grant-date fair value of the options was estimated at $0.16 per share. These options vested immediately and have a term of 5 years. On June 1, 2015, the Board of Directors granted stock options to purchase 500,000 shares of common stock at an exercise price of $0.60 per share. The weighted average grant-date fair value of the options was estimated at $0.27 per share. These options vest over three years and have a term of 10 years.

 

In October 2015, the Company appointed two new directors. Each director received an option to purchase 400,000 shares of the Company's common stock at an exercise price of $0.54 per share in consideration for their services as members of the Company's board of directors. The weighted average grant-date fair value of the options was estimated at $0.28 per share. These options vest over 14 months and have a term of 10 years.

 

On March 30, 2016, the Company assumed stock options to purchase 1,158,758 shares of common stock in connection with the acquisition of LMB. The LMB option holders received stock options to purchase 1,068,230 shares at an exercise price of $0.001 per share and 90,528 shares at an exercise price of $0.91 per share. Pursuant to the original grants, options to purchase 72,423 shares were immediately vested and options to purchase 1,086,335 shares vest over three years. The March 30, 2016 estimated fair value of the stock options was $670,242. The fair value of the vested options was estimated at $461,808 and has been included in the purchase price of LMB. The March 30, 2016 fair value of the unvested options was estimated at $208,434 per share and will be expensed over the remaining vesting period of the options. These options all had original terms of 10 years.

 

Stock-based compensation expense for the three months ended March 31, 2016 and 2015 was $115,614 and $108,765, respectively. Stock-based compensation expense for the six months ended March 31, 2016 and 2015 was $236,913 and $217,529, respectively.

 

At March 31, 2016, unrecognized total compensation cost related to unvested awards of $532,107 is expected to be recognized over a weighted average period of 1.13 years.

  

Warrants

 

The Company has reserved 15,159,095 shares of common stock for the exercise of outstanding warrants. Because the Company does not have sufficient authorized shares to cover all share-settleable instruments, the Company evaluated the potential for additional derivative liability accounting using a policy for partial reclassification on a proportionate basis. The impact was not considered material. The following table summarizes the warrants outstanding at March 31, 2016:

 

    Exercise price     Number         Expiration Dates  
                           
Investor Warrants   $ 0.60       3,400,067         September 12, 2019  
Placement Agent Unit Warrants     0.60       680,013         September 12, 2019  

Warrants underlying Placement Agent

Unit Warrants

     0.60       680,013         September 12, 2019  
Placement Agent Share Warrants     0.60       1,000,000         September 12, 2019  
Investor Warrants     0.60       500,000         March 19, 2020  
Investor Warrants     0.60       583,334   (1 )   April 22, 2020  
Investor Warrants     0.60       258,333   (1 )   April 30, 2020  
Investor Warrants     0.60       333,334   (1 )   June 10, 2020  
Investor Warrants     0.60       100,000   (1 )   June 22, 2020  
Investor Warrants     0.60       370,370   (1 )   June 26, 2020  
Investor Warrants     0.60       208,333   (1 )   July 2, 2020  
Investor Warrants     0.60       100,000   (1 )   July 25, 2020  
Investor Warrants     0.60       333,333   (1 )   July 15, 2020  
Investor Warrants     0.60       250,000   (1 )   September 14, 2020  
Investor Warrants     0.60       166,667   (1 )   November 5, 2020  
Investor Warrants     0.60       166,667   (1 )   November 18, 2020  
Investor Warrants     0.60       250,000   (1 )   November 20, 2020  
Investor Warrants     0.60       458,333   (1 )   January 7, 2021  
Investor Warrants     0.60       241,667   (1 )   February 2, 2021  
Investor Warrants     0.60       1,000,000   (1 )   February 17, 2021  
Investor Warrants     0.60       50,000   (1 )   March 17, 2021  
Investor Warrants     0.60       383,334   (1 )   March 21, 2021  
LMB Warrants     0.41       1,352,266         June 12, 2019 - March 2, 2021  
LMB Warrants     0.66       122,319         September 30, 2019 - January 8, 2020  
LMB Warrants     1.38       265,814         November 3, 2019 - March 6, 2020  
LMB Warrants     0.50       1,108,249         August 18, 2020 – March 14, 2021  
LMB Warrants     0.91       796,649         March 24, 2022 – April 29, 2022  
              15,159,095            

 

  (1) Fair value of these warrants are included in the derivative warrant liability

 

On March 30, 2016, the Company granted warrants to purchase 3,645,297 shares of common stock in connection with the acquisition of LMB. The warrants have exercise prices between $0.41 and $1.38 per share. All warrants were vested at March 30, 2016. The fair value of the warrants was estimated at $1,071,172 and has been included in the purchase price of LMB. The warrants have remaining terms between 3.2 and 6.1 years.

 

At March 31, 2016, the weighted average remaining life of all of the outstanding warrants is 4.10 years, all warrants are exercisable, and the aggregate intrinsic value for the warrants outstanding was $367,755.