Convertible Preferred Stock and Common Stock Warrants (Notes)

3 Months Ended

Mar. 31, 2017

Equity [Abstract]

Convertible Preferred Stock and Common Stock Warrants

7. Convertible Preferred Stock and Common Stock Warrants

In contemplation of completing a private placement, the Company amended and restated its articles of incorporation and authorized 13,750,000 shares of Series A Preferred Stock. The Company has classified its Series A Preferred Stock outside of stockholders’ equity (deficit) because the shares contain deemed liquidation rights that are contingent redemption features not solely within the control of the Company.

Series A Convertible Preferred Stock Transaction

In March 2017, the Company completed a $25.0 million private placement of its securities by offering units consisting of one share of the Company’s Series A Preferred Stock and a warrant to purchase one share common stock for each share of Series A Preferred Stock purchased in the offering. Each share of Series A Preferred Stock entitles the holder to an 8.0% cumulative dividend payable in shares of our common stock on a semi-annual basis. The holders may, at their option, convert each share of Series A Preferred Stock into one share of the Company’s common stock based on the initial conversion price of $2.02 per share, subject to adjustment. Each warrant entitles the holder to purchase one share of common stock at an initial exercise price of $2.22, subject to adjustment and expires on the fifth anniversary of their original issuance date.

Upon completing the private placement, the Company sold 12,376,329 units and received approximately $22.1 million in aggregate net cash proceeds from the private placement, after deducting commissions of approximately $2.4 million and offering expenses of approximately $0.5 million payable by the Company. The final closing of the private placement occurred on March 31, 2017, and the Company received $8.3 million of net proceeds on April 3, 2017. In addition, as compensation for its services, the Company granted to its placement agent in the offering warrants to purchase an aggregate of 1,179,558 shares of common stock at an initial exercise price of $2.22 per share, which expire on the fifth anniversary of their original issuance date.

During its evaluation of equity classification for the common stock warrants, the Company considered the conditions as prescribed within ASC 815-40, Derivatives and Hedging, Contracts in an Entity’s own Equity (“ASC 815-40”). The conditions within ASC 815-40 are not subject to a probability assessment. As the Company is obligated to issue a variable number of shares to settle the cumulative Series A preferred dividends, the Company cannot assert there will be sufficient authorized shares available to settle the warrants issued in connection with the Series A offering. Accordingly, these warrants are classified as liabilities. The Company will continue to classify such warrants as liabilities until they are exercised, expire, or are no longer require to be classified as liabilities.

As the fair value of the warrants upon issuance was in excess of the proceeds of the Series A offering, there are no proceeds allocated to the Series A convertible preferred stock. The excess fair value of the warrants over the gross proceeds of the Series A offering and the fair value of the warrants granted to its placement agent was $10.2 million in the aggregate and was recorded as warrant related expenses in the statement of operations for the three months ended March 31, 2017.

Dividends

The Company shall pay a cumulative preferential dividend on each share of the Series A Preferred Stock outstanding at a rate of 8.0% per annum, payable only in shares of common stock, semi-annually in arrears on April 1 and October 1 of each year commencing on October 1, 2017. This cumulative preferential dividend is not subject to declaration. The Company accrued approximately $59,000 in dividends for the three months ended March 31, 2017.

Voting

Subject to certain preferred stock class votes specified in the Certificate of Designation of Preferences, Rights and Limitations of the Series A Convertible Preferred Stock (the “Certificate of Designation”) or as required by law, the holders of the Series A Preferred Stock and common stock vote together on an as-converted basis. In accordance with NASDAQ listing rules, in any matter voted on by the holders of our common stock, each share of Series A Preferred Stock entitles the holder thereof to a number of votes based upon the closing price of our common stock on the NASDAQ Capital Market on the date of issuance. Accordingly, shares of Series A Preferred Stock issued in the initial closing of the private placement on March 14, 2017 are entitled to 0.84874 votes per share and shares of Series A Preferred Stock issued in the final closing of the private placement on March 31, 2017 are entitled to 0.50627 votes per share.

Liquidation Preference

The Series A Preferred Stock is senior to the common stock. In the event of a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or in the event of a deemed liquidation event, which includes a sale of the Company as defined in the Certificate of Designation, the holders of the Series A Preferred Stock shall be entitled to receive their original investment amount. If upon the occurrence of such event, the assets and funds available for distribution are insufficient to pay such holders the full amount to which they are entitled, then the entire remaining assets and funds legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the full amounts to which they would otherwise be entitled.

Conversion

The Series A Preferred Stock is convertible, at the holder’s option, into common stock. At the Company’s option, the Series A convertible preferred stock can be converted into common stock upon (a) the thirty-day moving average of the closing price of the Company’s common stock exceeding $8.00 per share, (b) a financing of at least $10.0 million or (c) upon the majority vote of the voting power of the then outstanding shares of Series A convertible preferred stock. The conversion price of the Series A Preferred Stock is subject to adjustment as described in the Certificate of Designation.

Upon any conversion, any unpaid dividends shall be payable to the holders of Series A preferred stock.

Make-Whole Provision

Until March 2020 and subject to certain exceptions, if the Company issues at least $10.0 million of its common stock or securities convertible into or exercisable for common stock at a per share price less than $2.02 (such lower price, the “Make-Whole Price”) while any shares of Series A Preferred Stock remain outstanding, the Company will be required to issue to these holders of Series A Preferred Stock a number of shares of common stock equal to the additional number of shares of common stock that such shares of Series A Preferred Stock would be convertible into if the conversion price of such shares was equal to 105% of the Make-Whole Price (the “Make-Whole Adjustment”). The Make-Whole Adjustment was evaluated and was not required to be bifurcated from the Series A Preferred Stock.

Common Stock Warrants

As of March 31, 2017, the Company had the following warrants outstanding to acquire shares of its common stock:

	Outstanding	Range of exercise price per share
Common stock warrants issued prior to Merger	460,721	$20.00 - $750.00
Common stock warrants issued in Series A	13,555,887	$2.22
	14,016,608

During the three months endedMarch 31, 2017, no warrants were exercised or expired. The common stock warrants issued prior to the Merger expire periodically through 2019. The common stock warrants issued in connection with the March 2017 Series A private placement expire in March 2022. During the three months ended March 31, 2017, the Company incurred $26.0 million in warrant related expenses associated with the private placement, which consisted primarily of the change in fair value of the common stock warrants from issuance and the excess fair value of the common stock warrants over the gross cash proceeds of the Series A offering.