(10) Stockholders’ Equity

On May 10, 2023, at the 2023 annual meeting of the stockholders, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split at a ratio not less than 1-for-5 and not more than 1-for-20, with the exact ratio to be set within that range at the discretion of the Board without further approval or authorization from our stockholders.

On May 10, 2023, the Company’s Board approved a reverse stock split ratio of 1-for-17. The Company filed the Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware on May 10, 2023, and the Amendment became effective at 5:00 p.m. Eastern Time on Thursday, May 11, 2023. The Company’s shares began trading on a split-adjusted basis on the Nasdaq Capital Market commencing upon market open on May 12, 2023.

All common stock share data and per share price data of the Company reflect the reverse stock split effective May 11, 2023.

On June 8, 2022, at the 2022 annual meeting of the stockholders, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock, par value $0.0001, from 100,000,000 shares to 200,000,000 shares. The Company filed the amendment to the Restated Certificate with the Secretary of State of the State of Delaware on June 28, 2022. The amendment to the Restated Certificate became effective upon filing with the Secretary of State of the State of Delaware.

On March 6, 2017, the Company entered into the Sales Agreement with Cantor Fitzgerald & Co. (“Cantor”) pursuant to which the Company may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to the amount the Company registered on an effective registration statement pursuant to which the offering is being made. The Company currently has registered up to $50.0 million for sale under the Sales Agreement, pursuant to the Registration Statement on Form S-3 (File No. 333-250072) through Cantor as the Company’s sales agent. Cantor may sell the Company’s common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act, including sales made directly on or through the Nasdaq Capital Market or any other existing trade market for our common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to prevailing market prices, or any other method permitted by law. Cantor uses its commercially reasonable efforts consistent with its normal trading and sales practices and applicable law and regulations to sell these shares. The Company pays Cantor 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. In addition, the Company has also provided Cantor with customary indemnification rights.

The shares of the Company’s common stock sold under the Sales Agreement are sold and issued pursuant to the Registration Statement on Form S-3 (File No. 333-250072) (the “Form S-3”), which was previously declared effective by the Securities and Exchange Commission, and the related prospectus and one or more prospectus supplements.

The Company is not obligated to make any sales of its common stock under the Sales Agreement. The offering of common stock pursuant to the Sales Agreement will terminate upon the termination of the Sales Agreement as permitted therein. The Company and Cantor may each terminate the Sales Agreement at any time upon ten days’ prior notice.

As of June 30, 2023, the Company had sold an aggregate of 883,711 shares at a weighted-average sales price of $37.23 per share under the At the Market Offering (the “ATM Offering”) for aggregate gross proceeds of $32.9 million and net proceeds of $31.7 million, after deducting sales agent commission and discounts and our other offering costs. During the three and six months ended June 30, 2023, and 2022, the Company did not sell any shares of its common stock pursuant to the Sales Agreement. As of June 30, 2023, the Company had $41.2 million available for sale under the Sales Agreement. However, as of April 3, 2023, the Company is now subject to General Instruction I.B.6 of Form S-3 which limits the amounts that we may sell under the registration statement. As a result of such limitations, the Company has currently registered the offer and sale of shares of the Company’s common stock pursuant to the Sales Agreement having an aggregate offering price of up to $15.7 million.

On March 7, 2023, the Board of the Company declared a dividend of one one-thousandth (1/1,000^th) of a share of Series B Preferred Stock, par value $0.0001 per share (“Series B Preferred Stock”), for each outstanding share of common stock of the Company, to stockholders of record on March 24, 2023. The Certificate of Designation of Series B Preferred Stock (the “Certificate of Designation”) was filed with the Delaware Secretary of State and became effective on March 10, 2023.

The dividend was based on the number of shares of outstanding common stock on March 24, 2023, and resulted in 88,511 Series B Preferred shares being issued. Each whole share of Series B Preferred Stock entitled the holder thereof to 1,000,000 votes per share, and each fraction of a share of Series B Preferred Stock had a ratable number of votes. Thus, each one-thousandth of a share of Series B Preferred Stock was entitled to 1,000 votes. The outstanding shares of Series B Preferred Stock were entitled to vote together with the outstanding shares of common stock as a single class exclusively with respect to any proposal to adopt an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), to effect a reverse stock split of the outstanding shares of Common Stock at a ratio determined in accordance with the terms of such amendment (the “Reverse Stock Split”), and (ii) any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Reverse Stock Split (the “Adjournment Proposal”) in conjunction with the Company’s 2023 annual meeting of stockholders.

All shares of Series B Preferred Stock that were not present in person or by proxy at the 2023 annual meeting as of immediately prior to the opening of the polls (the “Initial Redemption Time”) were automatically redeemed by the Company without further action on the part of the Company or the holder of shares of Series B Preferred Stock (the “Initial Redemption”). The remaining shares of Series B Preferred Stock that were not redeemed pursuant to the Initial Redemption were redeemed automatically upon the effectiveness of the amendment to the Certificate of Incorporation implementing the Reverse Stock Split (the “Subsequent Redemption”). As of June 30, 2023, all shares of Series B Preferred Stock have been redeemed by the Company.

Each “beneficial owner” (as such terms are defined in the Certificate of Designation with respect to the Series B Preferred Stock) of shares of Series B Preferred Stock redeemed in the redemptions described above has the right to receive an amount equal to $0.01 in cash for each ten whole shares of Series B Preferred Stock that were “beneficially owned” by the beneficial owner as of immediately prior to the applicable redemption time and redeemed pursuant to such redemption, payable upon receipt by the Company of a written request submitted by the applicable beneficial owner to the corporate secretary of the Company following the applicable redemption time.

The Series B Preferred Stock was not convertible into, or exchangeable for, shares of any other class or series of stock or other securities of the Company. The Series B Preferred Stock had no stated maturity and was not subject to any sinking fund. The Series B Preferred Stock was not subject to any restriction on the redemption or repurchase of shares by the Company while there is any arrearage in the payment of dividends or sinking fund installments.

The Company was not solely in control of the redemption of the shares of Series B Preferred Stock prior to the annual meeting of stockholders since the holders had the option of deciding whether to vote in respect of the above-described Reverse Stock Split, which determined whether a given holder’s shares of Series B Preferred Stock was redeemed in the Initial Redemption or the Subsequent Redemption. Since the redemption of the Series B Preferred Stock was not solely in the control of the Company, the shares of Series B Preferred Stock were classified within the mezzanine equity in the Company’s unaudited consolidated statement of stockholder’s equity. Upon issuance, the shares of Series B Preferred Stock were measured at redemption value. As of June 30, 2023, all shares of Series B Preferred Stock have been redeemed by the Company.

The foregoing description of the Series B Preferred Stock does not purport to be complete and is qualified in its entirety by reference to the Certificate of Designation, which is filed as Exhibit 3.2 to the Form 8-K filed with the SEC on March 10, 2023.

On November 13, 2015, the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, entered into a Rights Agreement. Also on November 12, 2015, the Board of the Company authorized and the Company declared a dividend of one preferred stock purchase right (each a “Right” and collectively, the “Rights”) for each outstanding share of common stock of the Company. The dividend was payable to stockholders of record as of the close of business on November 30, 2015 and entitles the registered holder to purchase from the Company one one-thousandth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock of the Company at a price of $63.96 per one-thousandth share (the “Purchase Price”). The Rights will generally become exercisable upon the earlier to occur of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons has become an Acquiring Person (as defined below) or (ii) 10 business days (or such later date as may be determined by action of the Board prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding common stock of the Company. Except in certain situations, a person or group of affiliated or associated persons becomes an “Acquiring Person” upon acquiring beneficial ownership of 15% or more of the outstanding shares of common stock of the Company.

In general, in the event a person becomes an Acquiring Person, then each Right not owned by such Acquiring Person will entitle its holder to purchase from the Company, at the Right’s then current exercise price, in lieu of shares of Series A Junior Participating Preferred Stock, common stock of the Company with a market value of twice the Purchase Price. In addition, if after any person has become an Acquiring Person, (a) the Company is acquired in a merger or other business combination, or (b) 50% or more of the Company’s assets, or assets accounting for 50% or more of its earning power, are sold, leased, exchanged or otherwise transferred (in one or more transactions), proper provision shall be made so that each holder of a Right (other than the Acquiring Person, its affiliates and associates and certain transferees thereof, whose Rights became void) shall thereafter have the right to purchase from the acquiring corporation, for the Purchase Price, that number of shares of common stock of the acquiring corporation which at the time of such transaction would have a market value of twice the Purchase Price.

The Company will be entitled to redeem the Rights at $0.001 per Right at any time prior to the time an Acquiring Person becomes such. The terms of the Rights are set forth in the Rights Agreement, which is summarized in the Company’s Current Report on Form 8-K dated November 13, 2015. The rights plan was originally set to expire on November 12, 2018; however, on November 5, 2018 our Board approved an Amended and Restated Rights Agreement pursuant to which the expiration date was extended to November 5, 2021, and again on November 2, 2021, the Company adopted a Second Amended and Restated Rights Agreement pursuant to which the expiration date was extended to November 1, 2024, unless the rights are earlier redeemed or exchanged by the Company.

The Company recognizes stock-based compensation expense for grants of stock option awards, restricted stock units and restricted stock under the Company’s Incentive Plan to employees, nonemployees and nonemployee members of the Company’s Board based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period. In addition, the Company has granted performance-based stock option awards and restricted stock units, which vest based upon the Company satisfying certain performance conditions. Potential compensation cost, measured on the grant date, related to these performance options will be recognized only if, and when, the Company estimates that these options or units will vest, which is based on whether the Company considers the performance conditions to be probable of attainment. The Company’s estimates of the number of performance-based options or units that will vest will be revised, if necessary, in subsequent periods.

The Company uses the Black-Scholes model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of the Company’s common stock price, (ii) the periods of time over which employees and members of the board of directors are expected to hold their options prior to exercise (expected term), (iii) expected dividend yield on the Common Stock, and (iv) risk-free interest rates. Stock-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation cost that has been expensed in the statements of operations amounted to approximately $165,000 and $ 140,000, for the three months ended June 30, 2023 and 2022, respectively, and approximately $343,000 and $311,000, for the six months ended June 30, 2023 and 2022, respectively, and is allocated as follows:

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs

The Company issued 8,820 and 26,467 stock options, respectively, during the three and six months ended June 30, 2023, and issued 10,086 and 29,643 stock options during the three and six months ended June 30, 2022.

Key assumptions used in the determination of the fair value of stock options granted are as follows:

Expected Term: The expected term represents the period that the stock-based awards are expected to be outstanding. The expected term was estimated using the simplified method in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment for awards with stated or implied service periods. The simplified method defines the expected term as the average of the contractual term and the vesting period of the stock option. For awards with performance conditions, and that have the contractual term to satisfy the performance condition, the contractual term was used.

Risk-Free Interest Rate: The risk-free interest rate used was based on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term.

Expected Dividend: The expected dividend assumption is based on management’s current expectation about the Company’s anticipated dividend policy. The Company does not anticipate declaring dividends in the foreseeable future.

Expected Volatility: The volatility factor is based solely on the Company’s trading history.

For options granted during the six months ended June 30, 2023 and 2022, the Company calculated the fair value of each option grant on the respective dates of grant using the following weighted average assumptions:

Schedule of Key Assumption of Fair Value of Stock Options Granted 

FASB ASC 718, Stock Compensation, requires the Company to recognize compensation expense for the portion of options that are expected to vest. Therefore, the Company applied estimated forfeiture rates that were derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

As of June 30, 2023, there was approximately $766,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock option plan. That cost is expected to be recognized over a weighted average period of 1.64 years and will be adjusted for subsequent changes in estimated forfeitures.

In April 2014, the Board adopted the 2014 Stock and Incentive Plan (“2014 Plan”) subject to shareholder approval which was received in June 2014. The 2014 Plan provides for the granting of nonqualified and incentive stock options, stock appreciation rights, restricted stock units, restricted stock and dividend equivalents. An aggregate of 58,823 shares were authorized for issuance under the 2014 Plan. Additionally, 15,994 remaining authorized shares under the 2011 Equity Incentive Plan (“2011 Plan”) were issuable under the 2014 Plan at the time of the 2014 Plan adoption. Upon receiving shareholder approval in June 2016, the 2014 Plan was amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 74,817 to 145,405. Additionally, upon receiving shareholder approval in June 2018, the 2014 Plan was further amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 145,405 to 189,522. Finally, upon receiving shareholder approval in June 2020, the 2014 Plan was further amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 189,522 to 336,582. The Board, on an option-by-option basis, determines the number of shares, exercise price, term, and vesting period for options granted. Options granted generally have a ten-year contractual life. The Company issues shares of common stock upon the exercise of options with the source of those shares of common stock being either newly issued shares or shares held in treasury. An aggregate of 336,582 shares of common stock are authorized for issuance under the 2014 Plan, with 46,519 shares remaining available for grant as of June 30, 2023.

A summary of stock option activity is as follows:

Schedule of Stock Option Activity

The following table summarizes information about stock options outstanding and exercisable at June 30, 2023:

 Schedule of Share-based Compensation of Stock Options Outstanding and Exercisable

The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. There were 0 and 12 stock options exercised during the three months ended June 30, 2023 and 2022, respectively. There were 0 and 12,261 stock options exercised during the six months ended June 30, 2023 and 2022, respectively.

The Company accounts for its common stock warrants under ASC 480, Distinguishing Liabilities from Equity, which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and requires or may require the issuer to settle the obligation by transferring assets, to be classified as a liability. In accordance with ASC 480, the Company’s outstanding warrants from the November 2019 Offering are classified as a liability. The liability is adjusted to fair value at each reporting period, with the changes in fair value recognized as gain (loss) on change in fair value of warrant liability in the Company’s consolidated statements of operations. The warrants issued in the November 2019 Offering allow the warrant holder, if certain change in control events occur, the option to receive an amount of cash equal to the value of the warrants as determined in accordance with the Black-Scholes option pricing model with certain defined assumptions upon a fundamental transaction.

As of June 30, 2023, the Company had 64,362 common stock warrants outstanding from the November 2019 Offering to purchase an equal number of shares of common stock. The fair value of these warrants on June 30, 2023 and on December 31, 2022 was determined using the Black-Scholes option pricing model with the following Level 3 inputs (as defined in the November 2019 Offering):

During the three and six months ended June 30, 2023, the Company recorded non-cash gains of approximately $27,000 and $126,000, respectively, from the change in fair value of the November 2019 Offering warrants. During the three and six months ended June 30, 2022, the Company recorded a non-cash gain of approximately $583,000 and $205,000, respectively, from the change in fair value on the November 2019 Offering warrants. The following table is a reconciliation of the warrant liability measured at fair value using level 3 inputs:

Schedule of Reconciliation of Warrant Liability

Additionally, in the February 2020 Offering, the Company issued 296,593 common stock warrants. However, because these warrants do not provide the warrant holder the option to put the warrant back to the Company, the warrants are classified as equity. As of June 30, 2023, and 2022, there were 49,433 warrants outstanding that were issued in the February 2020 Offering.

The following table summarizes the number of common stock warrants outstanding and the weighted average exercise price:

Schedule of Number of Warrants Outstanding and the Weighted Average Exercise Price

There were no common stock warrants exercised during either the three or six months ended June 30, 2023 and 2022.

The following table summarizes information about common stock warrants outstanding at June 30, 2023:

Schedule of Common Stock Warrants Outstanding