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Note 8 - Stockholders' Equity
 9 Months Ended
Jun. 30, 2022
Notes to Financial Statements  
Stockholders' Equity Note Disclosure [Text Block]

8.   Stockholders’ Equity

 

Under our Certificate of Incorporation, we are authorized, subject to limitations prescribed by Delaware law and our Charter, to issue up to 1,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions. Our Board of Directors can increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our Board of Directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock.   

 

Series A Convertible Preferred Stock

 

The Company has designated 264,000 shares of its preferred stock as Series A Convertible Preferred Stock (“Series A Preferred Stock”). The shares of Series A Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the number of shares of Series A Preferred Stock to be converted, multiplied by the stated value of $10 and (ii) divided by the conversion price in effect at the time of conversion. As of June 30, 2022, and September 30, 2021, the Company had no shares of Series A Preferred Stock outstanding.

 

Series B Convertible Preferred Stock

 

The Company has designated 5,000 shares of its preferred stock as Series B Convertible Preferred Stock (“Series B Preferred Stock”). The shares of Series B Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the number of shares of Series B Preferred Stock to be converted, multiplied by the stated value of $1,000 and (ii) divided by the conversion price in effect at the time of conversion. As of June 30, 2022, and September 30, 2021, the Company had no shares of Series B Preferred Stock outstanding. 

 

Series C Convertible Preferred Stock

 

The Company has designated 11,000 shares of its preferred stock as Series C Convertible Preferred Stock (“Series C Preferred Stock”). The shares of Series C Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the number of shares of Series C Preferred Stock to be converted, multiplied by the stated value of $1,000 and (ii) divided by the conversion price in effect at the time of conversion. Series C Preferred Stock vote on an as-converted basis along with shares of the Company’s common stock, are not entitled to receive dividends, unless specifically declared by our Board of Directors, and in the event of any liquidation, dissolution or winding up of the Company the holders of Series C Preferred Stock are entitled to receive in preference to the holders of common stock, Series A Preferred Stock, Series B Preferred Stock and any other stock, the amount equal to the stated value per share of Series C Preferred Stock. The Company may not effect, and a holder will not be entitled to, convert the Series C Preferred Stock or exercise any Series C Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise. As of June 30, 2022, and September 30, 2021, the Company had 350 shares of Series C Preferred Stock outstanding, which were convertible into an aggregate of 38,889 shares of the Company’s common stock.

 

Registered Offering of Common Stock and Private Placement of Series D Convertible Preferred Stock (the “ May 2021 Offerings”)

 

On May 14, 2021, the Company offered and sold a total of 1,060,000 shares of its common stock to certain institutional investors at a public offering price of $2.28 per share in a registered direct offering (“RD Offering”). The RD Offering was registered under the Securities Act of 1933, as amended, pursuant to a prospectus supplement to the Company's then-current registration statement on Form S-3.

 

Additionally, on May 14, 2021, the Company entered into securities purchase agreements with certain institutional investors pursuant to which the Company offered and sold a total of 2,700 units (“Units”) at a purchase price of $1,000 per Unit (“Private Placement”). Each Unit consisted of (i) one share of the Company’s newly designated Series D Convertible Preferred Stock (“Series D Preferred Stock”) and (ii) warrants to purchase common stock up to one-half of the shares issuable upon conversion of the Series D Preferred Stock as a part of the Units. In total, the Company issued 2,700 shares of Series D Preferred Stock and warrants to purchase up to 592,106 shares of common stock.

 

Joseph Gunnar & Company, LLC acted as lead placement agent for both the RD Offering and the Private Placement (collectively, the “May 2021 Offerings”) and Taglich Brothers, Inc. acted as co-placement agent for the May 2021 Offerings (the "Placement Agents"). As compensation for their services, the Company paid to the Placement Agents a fee equal to 8% of the aggregate purchase price paid and reimbursed the Placement Agents for certain expenses incurred in connection with the May 2021 Offerings. In addition, the Company issued to the Placement Agents warrants, in substantially the same form as the Series D Preferred Warrants, to purchase an aggregate of 179,536 shares of common stock.

 

In connection with the Private Placement, the Company has designated 4,200 shares of its preferred stock as Series D Convertible Preferred Stock.  The shares of Series D Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the number of shares of Series D Preferred Stock to be converted, multiplied by the stated value of $1,000 and (ii) divided by the conversion price in effect at the time of conversion.  Holders of Series D Preferred Stock were prohibited from converting Series D Preferred Stock into conversion shares if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% (or 9.99% upon the election of the holder prior to the issuance of the Series D Preferred Stock) of the total number of shares of common stock then issued and outstanding. At the original issuance date, shares of Series D Preferred Stock issued in Private Placement were convertible into an aggregate of 1,184,211 shares of common stock.

 

The Company’s common stock is listed on the NASDAQ Capital Market, and, as such, it is subject to the applicable rules of the Nasdaq Stock Market LLC, including Nasdaq Listing Rule 5635(a), which requires stockholder approval in connection with the acquisition of another company (see Note 14) if the Nasdaq-listed company will issue 20% or more of its common stock. For purposes of Nasdaq Listing Rule 5635(a), the issuance of any common stock in the Acquisition (see Note 14) and the May 2021 Offerings would be aggregated together. Thus, to permit the issuance of common stock upon conversion of the Series D Preferred Stock and upon exercise of the warrants issued in the Private Placement, the Company had to obtain stockholder approval of these issuances. Upon issuance, the Company had determined that such prohibition did not represent an inability for the Company to satisfy its obligation to deliver shares upon conversion, as the holders’ conversion option itself was contingent upon Stockholder Approval. On September 16, 2021, the Company obtained Stockholder Approval. The Company determined that the Series D Preferred Stock should be classified as permanent equity.

 

The Series D Preferred Stock contained an embedded conversion feature that could affect the ultimate settlement of the Series D Preferred Stock. The Company determined that the embedded conversion feature’s economic characteristics and risks were clearly and closely related to the economic characteristics and risks of the Series D Preferred Stock. As a result, the embedded conversion feature was not required to be bifurcated from the Series D Preferred Stock.

 

The Series D Preferred Stock issued contained a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception, as the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date. An embedded beneficial conversion feature is required to be recognized separately by allocating a portion of the proceeds equal to the intrinsic value, at the commitment date, of the feature to additional paid-in capital. As discussed below, the May 2021 Offerings cash proceeds allocated to the Series D Preferred Stock based on its relative fair value resulted in an effective conversion price of $1.41, which was below the commitment date fair value of the underlying shares of common stock of $2.50, resulting in a beneficial conversion feature measured at $1.3 million. As discussed in Note 14, upon the acquisition of Hawk Search during the third quarter of fiscal 2021, Series D Preferred Stock was issued as part of consideration transferred in which the intrinsic value of the embedded conversion feature was calculated at $724 as of the acquisition date.

 

During the fourth quarter of fiscal 2021, the Company recognized the impact of the beneficial conversion feature upon Stockholder Approval, as the beneficial conversion feature became immediately exercisable, at the option of the holder. The Company recognized full accretion of the beneficial conversion feature as a deemed dividend of $2.0 million to the Series D Preferred Stock. Such deemed dividend was recognized as an increase to accumulated deficit and an increase to additional paid-in capital and was included as a component of net loss attributable to common stockholders. During the fourth quarter of fiscal 2021, all Series D Preferred Stock was converted to common shares with no remaining Series D Preferred Stock outstanding at June 30, 2022 and September 30, 2021.

 

As noted above, in connection with the May 2021 Offerings, the Company issued Series D Preferred Warrants and Placement Agents Warrants to purchase up to 592,106 and 179,536 shares of common stock, respectively. The Series D Preferred and Placement Agents Warrants (hereinafter referred to collectively as the “Series D Warrants”) are puttable at the option of the holder in the event of a Fundamental Transaction, as defined in the respective warrant agreements. The put feature requires the Company to pay holders an amount of cash equal to the Black-Scholes Value, as defined in the respective warrant agreements, of the remaining unexercised portion of the Series D Warrants on the date of consummation of such Fundamental Transaction. The Company determined that the Series D Warrants are required to be classified as liabilities measured at fair value at their issuance date and to be subsequently remeasured at fair value each reporting period, with changes in fair value recognized in period earnings (see Note 4).

 

As the common stock in the RD Offering was sold concurrently with the Units sold in the Private Placement, for any common purchasers, inclusive of purchaser affiliated entities, the aggregate proceeds from the May 2021 Offerings were allocated, on an investor-by-investor basis, to the Series D Preferred Warrants based on their fair value and the residual proceeds to the common stock and Series D Preferred Stock based on their relative fair values. Accordingly, the May 2021 Offerings proceeds, net of certain fees due to placement agents, inclusive of the fair value of warrants issued to placement agents, and transaction-related expenses, of approximately $4.3 million were allocated $1.0 million to the Series D Preferred Warrants based on their issuance-date fair value, $1.9 million to common stock and $1.3 million to Series D Preferred Stock based on their respective relative fair values.

 

The issuance-date fair value of the Series D Warrants issued to placement agents was determined to be incremental cost directly attributable to the May 2021 Offerings and was charged by the Company against proceeds along with other fees paid to the Placement Agents.

 

Registered Offering and Sale of Common Stock

 

On February 4, 2021, the Company offered and sold a total of 880,000 shares of its common stock, par value $0.001 per share, to certain institutional and accredited investors at a public offering price of $3.10 per share in a registered direct offering (the “Offering”). The Offering was registered under the Securities Act of 1933, as amended, pursuant to a prospectus supplement to the Company’s currently effective registration statement on Form S-3 (File No. 333-239104), which was initially filed with the SEC on June 12, 2020, and was declared effective on June 25, 2020. The Company filed the final prospectus supplement for the Offering on or about February 5, 2021. The Offering closed on February 8, 2021, and resulted in proceeds, net of certain fees due to placement agents and transaction expenses, to the Company of approximately $2.5 million. The net proceeds received by the Company will be used for general corporate purposes, including general working capital.

 

Joseph Gunnar & Company, LLC acted as lead placement agent for the Offering, and Taglich Brothers, Inc. acted as co-placement agent for the Offering. As compensation for their services, the Company paid to the Placement Agents a fee equal to 8% of the aggregate purchase price paid for shares placed by the Placement Agents at closing and reimbursed the Placement Agents for certain expenses incurred in connection with the Offering. In addition, the Company issued to the Placement Agents warrants to purchase an aggregate of 58,169 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants have a term of five years from the date of issuance and an exercise price of $3.875 per share.

 

Amended and Restated Stock Incentive Plan

 

The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and former debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. The Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provided for the issuance of up to 5,000 shares of common stock. This Plan expired in August 2016. As of June 30, 2022, there were 1,226 options outstanding under the Plan. On April 29, 2016, the stockholders approved a new stock incentive plan, the 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company. At the annual meeting held on September 20, 2019, the Company’s stockholders voted to amend the 2016 Plan to increase the number of shares of the Company’s common stock available for issuance as awards granted under the Stock Incentive Plan from 10,000 to 800,000 shares. At the annual meeting held on March 30, 2022, the Company’s stockholders voted to further amend the 2016 Plan to increase the number of shares of the Company’s common stock available for issuance as awards granted under the Stock Incentive Plan from 800,000 to 1,650,000 shares. As of June 30, 2022, there were 1,176,839 options outstanding and 423,815 shares available for future issuance under the 2016 Plan.

 

Compensation Expense

 

Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. Compensation expense is recorded in the consolidated statements of operations with a portion charged to Cost of revenue and a portion to Operating expenses, depending on the employee’s department.

 

During the three and nine months ended June 30, 2022 and 2021, compensation expense related to share-based payments was as follows:

 

  

Three Months Ended
June 30,

  

Nine Months Ended
June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Cost of revenue

 $6  $6  $19  $18 

Operating expenses

  86   37   188   115 

Interest expense and other, net

  157   -   157   - 
  $249  $43  $364  $133 

 

Interest expense and other, net includes compensation expense related the fair value of fully-vested stock options granted in April 2021.  120,000 shares were granted to directors, as more fully described below under the caption “Summary of Option and Warrant Activity and Outstanding Shares.”  As of June 30, 2022, the Company had approximately $0.5 million of unrecognized compensation costs related to unvested options, which is expected to be recognized over a weighted-average period of 2.28 years.

 

Common Stock Warrants

 

The Company typically issues warrants to individual investors and placement agents to purchase shares of the Company’s common stock in connection with public and private placement fund raising activities. Warrants may also be issued to individuals or companies in exchange for services provided to the Company. The warrants are typically exercisable six months after the issue date, expire in five years, and contain a cashless exercise provision and piggyback registration rights.

 

Montage Warrant - As additional consideration for a prior loan arrangement which was paid in full in a prior period not presented, the Company issued to Montage Capital an eight-year warrant (the “Montage Warrant”) to purchase the Company’s common stock at a price equal to $132.50 per share. The Montage Warrant contains an equity buy-out provision upon the earlier of (1) dissolution or liquidation of the Company, (2) any sale or distribution of all or substantially all of the assets of the Company, or (3) a “Change in Control” as defined within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934. Montage Capital has the right to receive an equity buy-out of $250. If the equity buy-out is exercised, the Montage Warrant will be surrendered to the Company for cancellation.

 

Series A and C Preferred Warrants - In March 2019, in connection with the issuance of the Company’s Series C Preferred Stock, the Company issued warrants to purchase the Company’s common stock. These warrants were designated as (i) Series A Warrants with an initial term of 5.5 years and an exercise price of $4.00; (ii) Series B Warrants, which expired unexercised during the Company’s 2021 fiscal year, with an initial term of 24 months and an exercise price of $4.00; and (iii) Series C Warrants with an initial term of 5.5 years and an exercise price of $0.05 (collectively, hereinafter referred to as the “Series C Preferred Warrants”). The Company also issued warrants with an exercise price of $4.00 to purchase shares of the Company’s common stock to the Placement Agents. The Company may not effect, and a holder will not be entitled to convert, the Series C Preferred Stock or exercise any Series C Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise.

 

As of June 30, 2022, the number of shares issuable upon exercise of the (i) Series A Warrants were 872,625 shares; (ii) Series C Warrants were 13,738 shares; (iii) the Placement Agent Warrants issued in connection with the Series C Preferred Stock were 11,992 shares; and (iv) Investor Warrants were 41,621 shares.

 

Series D Preferred Warrants - The Units sold in Private Placement on May 14, 2021 also consisted of Series D Warrants to purchase up to 592,106 shares of common stock. The Series D Preferred Warrants issued on May 14, 2021 have an initial exercise date of November 14, 2021, with a term of five and a half years which ends on November 16, 2026. Series D Preferred Warrants have an exercise price of $2.51.

 

In addition, pursuant to the May 2021 Offerings, the Company issued to the Placement Agents warrants to purchase an aggregate of 179,536 shares of common stock. The Placement Agents Warrants issued on May 14, 2021 have an initial exercise date of November 14, 2021, with a term of five years which ends on May 12, 2026. The Placement Agent Warrants have an exercise price of $2.85.

 

The Company may not effect, and a holder will not be entitled to convert, the Series D Preferred Stock or exercise any May 2021 Offering Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise. As of June 30, 2022, no Series D Warrants have been exercised and the aggregate number of shares issuable upon exercise was 592,106 and 179,536 shares for investors and placement agents, respectively.

 

The Montage Warrants, Series C Preferred Warrants, the Placement Agent Warrants issued in connection with the Series C Preferred Stock, and the Series D Warrants were all determined to be derivative liabilities and are subject to remeasurement each reporting period (see Note 4).

 

During nine months ended June 30, 2022, 26,605 Placement Agent Warrants were exercised. 

 

Total warrants outstanding as June 30, 2022, were as follows:

 

Type

 

Issue

Date

 

Shares

  

Price

 

Expiration

Financing (Montage)

 

10/10/2017

  1,327  $132.50 

10/10/2025

Investors

 

10/19/2018

  3,120  $25.00 

10/19/2023

Placement Agent

 

10/16/2018

  10,000  $31.25 

10/16/2023

Investors

 

3/12/2019

  41,621  $4.00 

10/19/2023

Investors

 

3/12/2019

  872,625  $4.00 

9/12/2024

Investors

 

3/12/2019

  13,738  $0.05 

9/12/2024

Placement Agent

 

3/12/2019

  11,992  $4.00 

9/12/2024

Placement Agent

 

2/4/2021

  31,564  $3.88 

2/4/2026

Investors

 

5/14/2021

  592,106  $2.51 

11/16/2026

Placement Agent

 

5/14/2021

  179,536  $2.85 

5/12/2026

Total

  1,757,629      

 

Summary of Option and Warrant Activity and Outstanding Shares

 

During the three months ended June 30, 2022, the Company, (i) issued 120,000 total options to Board members at an exercise price of $1.85, which vested immediately upon issuance, (ii) issued 362,000 total options to its Chief Executive Officer at an exercise price of $1.85, which vest ratably over a 3-year period, and (iii) issued 48,000 total options to employees at an exercise price of $1.27, which vest ratably over a 3-year period. During the nine months ended June 30, 2022, in addition to the options noted above, the Company granted options to purchase 5,000 shares at an exercise price of $3.99, which vest ratably over a three-year period commencing on October 1, 2021. During the three and nine months ended June 30, 2021, the Company granted options to purchase 95,500 shares at an exercise price of $2.51, which vest ratably over a three-year period commencing on June 1, 2021. All such options granted expire ten years from the date of grant.

 

The weighted-average option fair values, as determined using the Black-Scholes option valuation model, and the assumptions used to estimate these values for stock options granted during the nine months ended June 30, 2022 are as follows:

 

  

Board

  

Non-Board

 

Weighted-average fair value per share option

 $1.30  $1.40 

Expected life (in years)

  5.0   6.0 

Volatility

  89.2

%

  95.0

%

Risk-free interest rate

  2.80

%

  2.80

%

Dividend yield

  0.0

%

  0.0

%

 

The expected option term is the number of years the Company estimates the options will be outstanding prior to exercise based on historical trends of employee turnover. Expected volatility is based on historical daily price changes of the Company’s common stock for a period equal to the expected life. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The expected dividend yield is zero since the Company does not currently pay cash dividends on its common stock and does not anticipate doing so in the foreseeable future.

 

A summary of combined stock option and warrant activity for the nine months ended June 30, 2022, is as follows:

 

  

Stock Options

  

Stock Warrants

 
      

Weighted -

      

Weighted -

 
      

Average

      

Average

 
      

Exercise

      

Exercise

 
  

Options

  

Price

  

Warrants

  

Price

 
                 

Outstanding, October 1, 2021

  765,232  $4.66   1,788,745  $4.18 

Granted

  535,000   1.82   -   - 

Exercised

  (13,333

)

  1.40   (26,605)  3.88 

Forfeited

  (108,700

)

  2.38   -   - 

Expired

  (134

)

  937.88   (4,511)  218.89 

Outstanding, June 30, 2022

  1,178,065   3.60   1,757,629   3.64 

Options vested and exercisable, June 30, 2022

  586,765   5.33         

 

As of June 30, 2022, there was no aggregate intrinsic value of options outstanding and exercisable, and the weighted-average remaining contractual term was 8.7 and 8.3 years, respectively.