8. Warrants

The following table summarizes information about warrants outstanding and exercisable into shares of the Company’s common stock for the years ended December 31, 2019 and 2018 is as follows:


	Year ended December 31,
	2019	2018
Warrants outstanding, beginning balance	34,682	4,590
Issuances	20,637,761	30,951
Exercises	(1,250,000)	—
Expirations and cancellations	(551)	(859)
Warrants outstanding, ending balance	19,421,892	34,682

For the fiscal year ended December 31, 2019, the Company issued 20,637,761 warrants, as follows:

March 2019 Ladenburg Warrants

In March 2019, in consideration of services provided in the Company’s March 2019 public offering of 19,019 common shares, the Company issued to Ladenburg Thalmann & Co. warrants to purchase an aggregate of 761 shares of common stock at an exercise price of $17.50 per common share. The warrants were valued at $13,028 using the Black-Scholes option pricing model as follows: exercise price of $17.50 per share, stock price of $18.90 per share, expected life of five years, volatility of 146%, and a risk-free rate of 2.21%. The warrants were classified in stockholders’ equity.

March 2019 LOC Warrant

In March 2019, in consideration of a letter of credit cancellation related to the Company’s office lease, the Company issued a warrant to purchase warrant shares equal to a fixed principal amount divided by a variable exercise price (see Note 3). The warrants were initially classified as liabilities pursuant to ASC 480-10 due to their debt-like nature. On July 23, 2019, upon the exercise price of the warrants becoming fixed, the warrants became exercisable into 45,750 shares of the Company’s common stock and were reclassified to additional paid-in-capital with a fair value of $71,079 (see Note 3).

2019 Bridge Note Warrants

Between March 18, 2019 and June 26, 2019, concurrent to the Company entering into Promissory Notes of $5,050,000, the Company issued twenty-one warrants to purchase warrant shares equal to a fixed principal amount divided by a variable exercise price (see Note 3). The warrants for all twenty-one Bridge Notes were initially liability classified pursuant to ASC 480-10 due to their debt-like nature. On July 23, 2019, upon the exercise price of the warrants becoming fixed, the warrants became exercisable into 2,781,250 shares of the Company’s common stock and were reclassified to additional paid-in-capital with a fair value of $4,259,327 (see Note 3).

July 2019 Series 1 Warrants

In July 2019, the Company entered into an underwriting agreement (see Note 10), relating to a public offering, which was comprised of (1) 2,886,500 Class A Units, priced at $2.00 per unit, with each unit consisting of (i) one share of the Company’s voting common stock, (ii) one Series 1 warrant to purchase one share of Common Stock, and (iii) one Series 2 warrant to purchase one share of Common Stock, and (2) 10,787 Class B Units, priced at a price of $1,000 per unit, with each unit consisting of (i) one share of Series B convertible preferred stock, convertible into 500 shares of Common Stock, (ii) 500 Series 1 Warrants and (iii) 500 Series 2 Warrants.

The Series 1 Warrants have an exercise price of $2.00 and expire on the earlier of (a) 5 years from the date of issuance and (b) 30 calendar days following the public announcement of Positive Interim Results related to the diarrhea results from the HALT-D investigator initiated trial, if and only if certain trading benchmarks are achieved during such 30 calendar day period.

In the offering, the Company sold (i) 2,886,500 Class A Units, which included Series 1 warrants to purchase 2,886,500 shares of the Company’s common stock and (ii) 10,787 Class B Units, which included Series 1 warrants to purchase 5,393,500 shares of the Company’s common stock. In total, 8,280,000 Series 1 warrants were issued, with an initial valuation of $5,025,515 computed using the Black-Scholes-Merton pricing model using a stock price of $1.73, a strike price of $2.00, an expected term of 5.0 years, volatility of 109.25% and a risk-free discount rate of 1.83%. Upon issuance, the Series 1 warrants were classified in additional paid-in-capital.

Modification of the July 2019 Series 1 Warrants

In September 2019, the Company reduced the exercise price all 8,280,000 Series 1 Warrants from $2.00 to $1.40. The Company determined the impact of this modification to be an increase in the fair value of the warrants of $522,143. Because the modification applied to the entire class of Series 1 Warrant holders, the increase in fair value represented a deemed dividend to the entire class of Series 1 Warrant holders. The modification did not result in the reclassification of the equity-classified Series 1 warrants from additional paid-in-capital to liability classification.

During the three months ended December 31, 2019, the Company determined that it had used the incorrect volitlity rate in measuring the value of the modified Series 1 warrants. In the three months ended September 30, 2019, the Series 1 warrants were recorded at $252,106 in additional paid-in-capital – when it should have been $522,143. This error led to the understatement of additional paid-in-capital by $270,037 on the condensed consolidated balance sheet for the three and nine months ended September 30, 2019. In the three months ended December 31, 2019, the Company corrected this error. The Company did not deem this error to be material to its consolidated financial statements for the third quarter of 2019.

July 2019 Series 2 Warrants

The Series 2 Warrants have an exercise price of $2.00 and expire on the first date on the earlier of (a) 5 years from the date of issuance and (b) 30 calendar days following the public announcement by the Company that a pivotal phase 3 clinical trial using crofelemer (Mytesi®, or the same or similar product with a different name) for the treatment of cancer therapy-related diarrhea in humans has met its primary endpoint in accordance with the protocol, if and only if certain trading benchmarks are achieved during such 30 calendar day period. In addition, each Series 2 Warrant has an embedded call option that allows the Company to redeem any unexercised warrants if certain contingencies are met.

In the July 2019 offering, the Company sold (i) 2,886,500 Class A Units, which included Series 2 warrants to purchase 2,886,500 shares of the Company’s common stock and (ii) 10,787 Class B Units, which included Series 2 warrants to purchase 5,393,500 shares (10,787 Class B Units multiplied by 500 warrants per Class B Unit equals 5,393,500) of the Company’s common stock. In total, 8,280,000 Series 2 warrants were issued, with an initial valuation of $5,025,515 computed using the Black-Scholes-Merton pricing model using a stock price of $1.73, a strike price of $2.00, an expected term of 5.0 years, volatility of 109.25% and a risk-free discount rate of 1.83%. Upon issuance, the Series 2 Warrants were classified in additional paid-in-capital.

December 2019 PIPE Financing Warrants

In December 2019, the Company entered into a securities purchase agreement with certain investors pursuant to which the Company, in a Private Placement, sold (i) an aggregate of 2,500,000 unregistered shares of the Company’s common stock, and (ii) Warrants to purchase up to an aggregate of approximately 1,250,000 shares of common stock, for an aggregate purchase price of $1,500,000 (see Note 10). The warrants have an exercise price of $0.78 per share and become exercisable on June 24, 2020 (6 months after their issuance date) and have a five-year term.

The warrants were valued at $685,969 using the Black-Scholes option pricing model as follows: exercise price of $0.78 per share, stock price of $0.62 per share, expected life of five years, volatility of 143%, and a risk-free rate of 2.42%. As the common stock and warrants were issued in a unit structure, the aggregate proceeds of $1,500,000 were allocated to the two securities using the relative fair value method, resulting with the common stock and warrants being allocated $1,035,000 and $465,000, respectively. The warrants were classified in stockholders’ equity.

For the fiscal year ended December 31, 2018, the Company issued 30,951 warrants, as follows:

August 2018 Financing Warrants

In August 2018, in consideration of services provided, the Company issued a warrant to purchase 429 shares of common stock which were exercisable only in the event that the Company raised new financing of at least $3,000,000, and expired five years from the date of issuance. The warrants were valued at $17,582 using the Black-Scholes option pricing model as follows: exercise price of $74.20 per share, stock price of $74.20 per share, expected life of five years, volatility of 126%, and a risk-free rate of 3.83%. In October 2018, in a public offering, the Company met the $3,000,000 new financing threshold and the warrants became exercisable.The warrants were classified in stockholders’ equity.

August 2018 License Transaction Warrants

In August 2018, in consideration of services provided, the Company issued a warrant contingent upon the Company consummating a Licensing Transaction. Upon resolution of the contingency, the Company issued a five-year warrant to purchase 952 shares of the Company’s common stock.The warrants had an issuance-date fair value of $6,312 using the Black-Scholes option pricing model as follows: exercise price of $74.20 per share, stock price of $74.20 per share, expected life of five years, volatility of 126%, and a risk-free rate of 3.83%. The warrants were classified in stockholders’ equity.

August 2018 LOC Warrant

In August 2018, in consideration of the Letter of Credit associated with the Company’s office lease, the Company issued to an existing shareholder a five-year warrant to purchase 9,580 shares of the Company’s common stock. The Warrant is exercisable on or after March 28, 2019 at an exercise price of $49.08. The warrants had an issuance-date fair value of $493,688 using the Black-Scholes-Merton model with the following criteria: stock price of $58.52 per share, expected life of 5 years, volatility of 132%, risk-free rate of 2.77% and dividend rate of 0%.The $493,688 fair value of the Warrant was classified in the statement of stockholders equity with an offset to deferred rent.

September 2018 L2 Warrants

Concurrent to entering into the Note Purchase Agreement with L2 Capital in September 2018, the Company issued to L2 Capital a 5-year warrant to purchase 2,649 shares of the Company’s common stock at an exercise price of $63.00 per share. The warrants had an issuance-date fair value of $100,330 using the Black-Scholes-Merton model with the following criteria: stock price of $44.80 per share, expected life of 5 years, volatility of 132%, risk-free rate of 2.87% and dividend rate of 0%. The $100,330 fair value of the Warrant was recorded in additional paid-in-capital and treated as a discount to the L2 Capital Promissory note balance.

September 2018 Conte Warrants

Concurrent to entering into the Note Purchase Agreement with an accredited investor in September 2018, the Company issued to the accredited investor a 5-year warrant to purchase 484 shares of the Company’s common stock at an exercise price of $86.10 per share. The warrants had an issuance-date fair value of $17,819 using the Black-Scholes-Merton model with the following criteria: stock price of $44.80 per share, expected life of 5 years, volatility of 132%, risk-free rate of 2.87% and dividend rate of 0% The warrants were recorded in additional paid-in capital and treated as a discount to the Conte Promissory note balance.

October 2018 Underwriter Warrants

In October 2018, in consideration of services provided leading up to the Company’s October 2018 public offering, the Company issued warrants to various service providers to purchase an aggregate of 17,142 shares of common stock at an exercise price of $52.50 per common share. The warrants had an issuance-date fair value of $611,286 using the Black-Scholes option pricing model as follows: exercise price of $52.50 per share, stock price of $41.30 per share, expected life of five years, volatility of 138%, and a risk-free rate of 2.51%. The warrants were classified as liabilities pursuant to ASC 815-40 as there was potential cash settlement.