Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Deficit

v3.20.2
Stockholders' Deficit
3 Months Ended
Jun. 30, 2020
Equity [Abstract]  
Stockholders' Deficit

NOTE 11 — STOCKHOLDERS’ DEFICIT

 

As of June 30, 2020, the Company had two classes of capital stock: common stock and Series Alpha convertible preferred stock. As of March 31, 2020, the Company had two classes of capital stock with one being divided into five series: common stock and preferred stock (Series A convertible preferred stock, Series B convertible preferred stock, Series C convertible preferred stock, Series D convertible preferred stock and Series D-1 convertible preferred stock).

 

Common Stock

 

Holders of common stock generally vote as a class with the holders of the preferred stock and are entitled to one vote for each share held. Subject to the rights of the holders of the preferred stock to receive preferential dividends, the holders of common stock are entitled to receive dividends when and if declared by the Board of Directors. Following payment of the liquidation preference of the preferred stock, as of March 31, 2020 any remaining assets would be distributed ratably among the holders of the common stock and, on an as-if-converted basis, the holders of Series C convertible preferred stock, Series D convertible preferred stock and Series D-1 convertible preferred stock) upon liquidation, dissolution or winding up of the affairs of the Company. Following payment of the liquidation preference of the preferred stock, as of June 30, 2020 any remaining assets would be distributed ratably among the holders of the common stock and, on an as-if-converted basis, the holders of Series Alpha convertible preferred stock upon liquidation, dissolution or winding up of the affairs of the Company. The holders of common stock have no preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions.

 

At June 30, 2020, the Company has reserved 16,465,518 shares of authorized but unissued common stock for possible future issuance. At June 30, 2020, shares were reserved in connection with the following:

 

Exercise of issued and future grants of stock options     3,674,624  
Exercise of stock warrants     6,543,205  
Conversion of Series Alpha preferred stock     6,247,689  
Total     16,465,518  

 

Series A, B, C, D, D-1 Convertible Preferred Stock

 

At March 31, 2020, there were 2,412,887, 7,707,736, 3,300,715, 1,508,305, 643,511 shares of Series A, B, C, D, D-1 convertible preferred stock outstanding respectively. All shares of Series A, B, C, D, D-1 convertible preferred stock were converted into common stock at the time of the May 2020 reverse recapitalization transaction.

 

Stock Options and Warrants

 

The Company recognizes all compensatory share-based payments as compensation expense over the service period, which is generally the vesting period. There was approximately $359,000 and $0 of compensation costs related to outstanding options and warrants for the three months ended June 30, 2020 and 2019, respectively.

 

In April 2020, the Company adopted the 2020 Stock Incentive Plan (the “2020 Plan”) which provides for the granting of incentive or nonstatutory common stock options to qualified employees, officers, directors, consultants and other service providers. At June 30, 2020 and 2019 there were 3,579,500 and 0 outstanding options respectively under the 2020 Plan and there were 477,657 and 0 options available respectively for future grant.

 

The Company has also granted equity classified warrants (originally exercisable to purchase Series C convertible preferred stock, and now instead exercisable to purchase common stock) to service providers, as compensation for services.

 

In addition, the Company has granted warrants for purposes other than compensation for services.

 

The following represents a summary of the options granted to employees and non-employees that are outstanding at June 30, 2020, and changes during the period then ended:

 

    Shares    

Weighted–

Average

Exercise Price

    Range of Exercise Price     Weighted–
Average
Remaining
Life (Years)
 
Total outstanding – March 31, 2020         $                  
Legacy Ritter options     95,124       92.80     $ 5.75—$1,465.75       1.87  
Granted     3,579,500       5.10     $ 4.97—$5.13       9.94  
Expired                            
Forfeited                            
Total outstanding – June 30, 2020     3,674,624     $ 7.37     $ 4.97—$1,465.75       9.73  
Exercisable (vested)     110,124     $ 80.84     $ 4.97—$1,465.75       2.97  
Non-Exercisable (non-vested)     3,564,500     $ 5.10     $ 4.97—$5.13       9.94  

 

There was approximately $0.4 million and $0 of compensation costs related to outstanding options for the three months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, there was approximately $14.1 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.94 years.

 

No stock options were exercised during the three months ended June 30, 2020.

 

The exercise price for an option issued under the 2020 Plan is determined by the Board of Directors, but will be (i) in the case of an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than 110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair market value per share on the date of grant; and (ii) in the case of a non-statutory stock option, no less than 100% of the fair market value per share on the date of grant. The options awarded under the 2020 Plan will vest as determined by the Board of Directors but will not exceed a ten-year period. The weighted average grant date fair value per share of options granted during the three months ended June 30, 2020 was $5.10.

 

Fair Value of Equity Awards

 

The Company utilizes the Black-Scholes option pricing model to value awards under its Plans. Key valuation assumptions include:

 

Expected dividend yield. The expected dividend is assumed to be zero, as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock.
   
Expected stock-price volatility. The Company’s expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term.
   
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.
   
Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

 

The material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted for the periods presented were as follows:

 

   

For the three months

ended

June 30, 2020

 
Expected dividend yield     0.00 %
Expected stock-price volatility     102 %
Risk-free interest rate     0.33% — 0.59 %
Expected average term of options     6.0  
Stock price   $ 4.97 — 5.13  

 

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

 

    For the three months ended June 30,  
    2020     2019  
General and administrative   $ 272,978     $  
Research and development     85,647        
Total   $ 358,625     $  

 

Compensatory Warrants

 

In the three months ended June 30, 2020, in connection with the $4.0 million equity capital raise as part of the May 2020 reverse recapitalization transaction, the Company issued common stock warrants to an advisor and its designees for the purchase of 811,431 shares of the Company’s common stock at an exercise price of $1.11 per share. The issuance of these warrants did not result in expense on the Company’s statements of operations. In addition, various service providers hold compensatory warrants issued in 2017 and earlier for the purchase of 668,024 shares of Company common stock at a weighted exercise price of $2.34 per share. No compensatory warrants were issued in the three month ended June 30, 2019.

 

The following table summarizes the compensatory warrant activity for the three months ended June 30, 2020:

 

    Common Stock  
    Shares    

Weighted–

Average

Exercise Price

    Range of Exercise Price     Weighted–
Average
Remaining
Life (Years)
 
Total outstanding – March 31, 2020         $                  
Series C preferred stock warrants exchanged for common stock warrants upon reverse recapitalization     668,024       2.34                  
Legacy Ritter warrants                            
Granted     811,431       1.11                  
Expired                            
Forfeited                            
Total outstanding – June 30, 2020     1,479,455     $ 1.67                  
Exercisable     660,832     $ 2.34       $2.07 —$2.54       3.82  
Non-Exercisable     818,623     $ 1.12       $1.11 —$2.54       4.91  

 

Noncompensatory Equity Classified Warrants

 

In the three months ended June 30, 2020, as a commitment fee, the Company issued noncompensatory equity classified warrants to an investor for the purchase of 270,478 shares of Company common stock at an exercise price of $1.11 per share. No noncompensatory equity classified warrants were issued in the three months ended June 30, 2019.

 

The following table summarizes the noncompensatory equity classified warrant activity for the three months ended June 30, 2020:

 

    Common Stock  
    Shares    

Weighted–

Average

Exercise Price

    Range of Exercise Price     Weighted–
Average
Remaining
Life (Years)
 
Total outstanding – March 31, 2020         $                  
Legacy Ritter warrants     81,455       54.04                  
Granted     270,478       1.11                  
Expired     (1,673 )     1,562.50                  
Forfeited                            
Total outstanding – June 30, 2020     350,260     $ 1.08                  
Exercisable     350,260     $ 5.96       $1.11 – $2,325.00       4.31  
Non-Exercisable         $              

 

There were no compensation costs related to outstanding warrants for the three months ended June 30, 2020 and 2019. As of June 30, 2020 and 2019, there was approximately $0 and $11,000 of unrecognized compensation cost related to nonvested warrants, respectively.