Note 8 - Stockholders’ Equity

As of December 31, 2016, the Company has 200,000,000 shares of authorized common shares and 25,304,270 issued and outstanding, and 10,000,000 of authorized preferred shares, none of which were issued or outstanding.

On September 13, 2016, the Company entered into the Sales Agreement with Cowen pursuant to which the Company may offer and sell from time to time, up to an aggregate of $25 million of shares of its common stock through Cowen, as sales agent, with initial sales limited to an aggregate of $11.5 million. Pursuant to the Sales Agreement, Cowen may sell the shares of common stock by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on The NASDAQ Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by the Company. The Company pays Cowen compensation equal to 3.0% of the gross proceeds from the sales of common stock pursuant to the terms of the Sales Agreement. As of December 31, 2016, the Company has sold an aggregate of approximately 3.6 million shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $4.4 million, and gross proceeds of $4.7 million. As of December 31, 2016, remaining availability under the at the market offering is $6.8 million. Subsequent to December 31, 2016, the Company has sold an aggregate of approximately 2.1 million shares of its common stock under this at the market offering resulting in aggregate net proceeds to the Company of approximately $2.1 million, and gross proceeds of $2.2 million. Under the initial sales agreement, remaining availability under the at the market offering is $4.6 million.

On May 19, 2016 and June 27, 2016, the Company offered and sold units in a private offering to members of management and employees and to accredited investors, including Merck GHI and jVen Capital, each unit consisting of either (i) one share of common stock and a detachable stock purchase warrant to purchase an additional 0.75 shares of common stock, or (ii) one share of non-voting convertible preferred stock and a detachable stock purchase warrant to purchase an additional 0.75 shares of common stock, at a price of $1.14 per unit. The total net proceeds to the Company, after deducting offering commissions and expenses was $9.5 million. Pursuant to the private placement the Company issued 6,744,127 shares of common stock, 2,309,428 of Series A non-voting convertible preferred stock and stock purchase warrants to acquire an additional 6,790,169 shares of common stock. Under the purchase agreement, the Company granted registration rights to the investors in the private financing.

Each share of Series A non-voting convertible preferred stock was convertible at the option of the holder in whole or in part and from time to time into one share of common stock, was entitled to dividends on as “as converted basis” when and if dividends are issued to common stockholders, and participates in liquidation on a pari passu basis with common stockholders. The preferred stock was classified as permanent equity. The stock purchase warrants issued as part of the units are exercisable $1.3125 per share beginning 90 days after closing for five years, expiring on May 18, 2021. The warrants are classified as permanent equity at December 31, 2016. In connection with the issuance of Series A non-voting convertible preferred stock, the Company recognized a beneficial conversion feature of $332,550 as a deemed dividend to the preferred stockholders. Holders of the Series A non-voting convertible preferred stock subsequently converted all 2,309,428 shares of preferred stock into 2,309,428 shares of common stock in July 2016. The shares of preferred stock were retired and are no longer available for future issuance.

The Company filed a registration statement on Form S-3 on June 13, 2016 to register for resale by the investors, from time to time, of the shares of common stock acquired, or underlying the warrants issued, in the private offering. On July 20, 2016, the registration statement was declared effective by the SEC.

In July 2015, the Company issued 1,136,364 shares of common stock to Merck GHI for cash consideration of $5.0 million (see Note 5).

On May 8, 2015, the Company completed its IPO pursuant to which the Company offered and sold 2,850,000 units, each unit consisting of one share of common stock and a detachable stock purchase warrant to purchase an additional share of common stock, at an initial offering price of $6.00 per unit. Of the total gross proceeds of $17.1 million, approximately $2.1 million was used to satisfy outstanding demand notes by exchanging such notes for 350,000 units in the IPO. After considering the demand notes, and underwriting discounts, commissions and offering expenses of $2.9 million (which were charged to additional paid-in capital), the total net cash proceeds to the Company was $12.1 million. On the IPO closing date, the underwriters exercised a portion of their over-allotment option to acquire an additional 422,500 stock purchase warrants for cash of $4,225.

In connection with the IPO, all of the Company’s outstanding Series A redeemable convertible preferred stock, 2014 convertible notes and 2015 convertible notes were converted into 7,374,852 shares of common stock. Prior to the IPO, the carrying value of the Series A redeemable convertible preferred stock was increased by the accretion of related discounts, issuance costs and accrued but unpaid dividends so that the carrying amount would equal the redemption amount at the dates the stock becomes redeemable.

The stock purchase warrants issued as part of the units (including over-allotment option) are exercisable for 3,272,500 shares of common stock at $6.60 per share beginning six months after the closing of the IPO for five years, expiring on May 8, 2020. Additionally, the Company issued additional warrants to its investment bankers to purchase 185,250 shares of common stock, on the same terms as the warrants issued with the units. The warrants were valued using the Black-Scholes option pricing model and are classified as equity.

Stock options

In 2008, the Board adopted, and the stockholders approved, the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”), pursuant to which the Company’s Board of Directors may grant either incentive or non-qualified stock options or shares of restricted stock to directors, key employees, consultants and advisors.

In April 2015, the Board adopted, and the Company’s stockholders approved, the 2015 Equity Incentive Plan (the “2015 Plan”); the 2015 Plan became effective upon the execution and delivery of the underwriting agreement for the Company’s IPO. Following the effectiveness of the 2015 Plan, no further grants have been made under the 2008 Plan. The 2015 Plan provides for the granting of incentive stock options within the meaning of Section 422 of the Code to employees and the granting of non-qualified stock options to employees, non-employee directors and consultants. The 2015 Plan also provides for the grants of restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and stock payments to employees, non-employee directors and consultants.

Under the 2015 Plan, the aggregate number of shares of the common stock authorized for issuance may not exceed (1) 1,355,000 plus (2) the sum of the number of shares subject to outstanding awards under the 2008 Plan as of the 2015 Plan’s effective date, that are subsequently forfeited or terminated for any reason before being exercised or settled, plus (3) the number of shares subject to vesting restrictions under the 2008 Plan as of the 2015 Plan’s effective date that are subsequently forfeited. In addition, the number of shares that have been authorized for issuance under the 2015 Plan will be automatically increased on the first day of each fiscal year beginning on January 1, 2016 and ending on (and including) January 1, 2025, in an amount equal to the lesser of (1) 4% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (2) another lesser amount determined by the Company’s Board of Directors. Shares subject to awards granted under the 2015 Plan that are forfeited or terminated before being exercised or settled, or are not delivered to the participant because such award is settled in cash, will again become available for issuance under the 2015 Plan. However, shares that have actually been issued shall not again become available unless forfeited. As of December 31, 2016, 669,651 shares remain available for issuance under the 2015 Plan.

For the years ended December 31, 2016 and 2015, the Company recognized stock compensation expense as follows:

	Year Ended December 31,
	2016		2015
Cost of services	$	6,003	$	—
Research and development		236,341		240,739
General and administrative		599,550		619,899
Sales and marketing		103,567		584,450
	$	945,461	$	1,445,088

No income tax benefit for stock-based compensation arrangements was recognized in the consolidated statements of operations due to the Company’s net loss position.

As of December 31, 2016, the Company had unrecognized expense related to its stock options of $2.2 million, which will be recognized over a weighted average period of 1.17 years.

A summary of the status of options granted is presented below as of and for the years ended December 31, 2016 and 2015:

	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2015		404,272					9.3	$	—
Granted		1,961,637		$	2.68
Exercised		(11,472	)	$	0.20			$	19,519
Forfeited		(193,657	)	$	0.55
Outstanding at December 31, 2015		2,160,780		$	2.60		9.1	$	1,575,646
Granted		1,463,650		$	1.41
Exercised		(66,502	)	$	0.36			$	79,406
Forfeited		(571,687	)	$	3.99
Expired		(8,581	)	$	8.49
Outstanding at December 31, 2016		2,977,660		$	1.76		8.6	$	663,298
Vested and expected to vest		2,977,660		$	1.76		8.6	$	663,298
Exercisable at December 31, 2016		1,098,504		$	0.22		8.0	$	421,621

The total fair value of options vested in the years ended December 31, 2016 and 2015, was $1,088,978 and $1,140,079, respectively. The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model based on the assumptions below:

	Year Ended December 31,
	2016		2015
Annual dividend		—		—
Expected life (in years)	5.25 - 6.25		5.5 - 6.25
Risk free interest rate	1.2 - 2.2%		1.5 - 1.9%
Expected volatility	42.0 - 49.8%		47.7 - 65.0%

The Company issued an annual grant on February 22, 2017 of 723,300 options to employees at an exercise price of $1.03 per share.

Restricted stock units

In the fourth quarter of 2015, the Company granted restricted stock units to acquire 75,000 shares of common stock, with a weighted average grant date fair value of $1.70 per share, 18,750 shares of which remain outstanding as of December 31, 2016. 16,666 restricted stock units vested and 39,584 restricted stock units were forfeited during the year ended December 31, 2016 at a weighted average grant date fair value of $1.70 per share.

Stock purchase warrants

At December 31, 2016 and 2015, the following warrants to purchase shares of common stock were outstanding:

				Outstanding at December 31,
Issuance	Exercise Price		Expiration	2016		2015
August 2007	$	7.91	August 2017		8,921		8,921
March 2008	$	790.54	March 2018		46		46
November 2009	$	7.91	November 2019		6,674		6,674
January 2010	$	7.91	January 2020		6,674		6,674
March 2010	$	7.91	March 2020		1,277		1,277
November 2011	$	7.91	November 2021		5,213		5,213
December 2011	$	7.91	December 2021		664		664
March 2012	$	109.90	March 2019		4,125		4,125
February 2015	$	6.60	February 2025		225,011		225,011
May 2015	$	6.60	May 2020		3,457,750		3,457,750
May 2016	$	1.31	May 2021		4,739,348		—
June 2016	$	1.31	May 2021		2,050,821		—
					10,506,524		3,716,355

The warrants listed above were issued in connection with various equity, debt, preferred stock or development contract agreements. The warrants issued in February 2015 were initially classified as a liability since the exercise price was variable. The exercise price became fixed as a result of the Company’s IPO and, as such, the warrant liability was marked to fair value at that time and reclassified to equity (see Note 13).