8. Shareholders’ Equity

Common Stock

Restricted Stock Issuance — Retired Founder

In October 2011, the Company issued 120,000 restricted shares of common stock to its former Chief Scientific Officer and founder, Dr. Jeffrey Hillman in connection with his retirement from full time services to the Company effective October 31, 2011. The restricted shares are subject to performance conditions as well as time based vesting. The performance based vesting relates to the completion of certain work-in-process concerning Company intellectual property and the time vesting is equal over a three year period with restricted shares being subject to earlier vesting upon a change of control. The Company recorded compensation expense of $169,773 for the year ended December 31, 2012 and $-0- for the year ended December 31, 2013 for these restricted shares which represented the total grant date fair value of the restricted shares. At December 31, 2013, 40,000 shares of restricted common stock are non-vested.

Unsecured Debt Conversion Issuance-KFLP

On March 23, 2012, pursuant to the terms of the Debt Exchange Agreement, the Company issued 6,285,619 shares of common stock to the KFLP.

Exclusive Channel Collaboration Agreement with Intrexon –Lantibiotics–Share Issuance

On June 5, 2012, in conjunction with the Company’s execution and delivery of the Lantibiotic ECC with Intrexon, the Company also entered into a Stock Issuance Agreement with Intrexon which included certain registration rights. Pursuant to that Stock Issuance Agreement, Intrexon was issued 4,392,425 shares of the Company’s common stock, which was deemed consideration for the execution and delivery of the Lantibiotic ECC. This resulted in the Company recording a non-cash expense of $5,798,001 during the quarter ended June 30, 2012.

The registration rights granted to Intrexon in the Stock Issuance Agreement by the Company consisted of “piggyback registration” rights which permit Intrexon to participate in any firm commitment underwritten offering of securities by the Company, subject to underwriter cutbacks and lockups. In addition, the Company is precluded from granting registration rights in connection with a private placement unless (i) all shares held by Intrexon are, at the time of such private placement, included on a registration statement, or (ii) the Company agrees, in connection with such private placement, to grant Intrexon the right to include on the registration statement a number of Intrexon’s Company shares equal to one half of the number of shares to be registered on behalf of the other holders or prospective holders.

Pursuant to the Stock Issuance Agreement, Intrexon is also entitled, at its election, to participate in future securities offerings of the Company that constitute “qualified financings” and purchase securities equal to 30% of the number of shares of common stock or other securities sold in such offering (exclusive of Intrexon’s purchase). For this purpose, a “qualified financing” means a sale of common stock or equity securities convertible into common stock in a public or private offering, raising gross proceeds of at least $1,000,000, where the sale of shares is either registered under the Securities Act of 1933, as amended, at the time of issuance or the Company agrees to register the resale of such shares.

Under the terms of the Stock Issuance Agreement, the Company agreed to issue to Intrexon additional shares of its common stock based upon the achievement of certain milestones. See Note 13 — Commitments and Contingencies.

Exclusive Chanel Collaboration Agreement with Intrexon-Probiotics–Share Issuance

On September 30, 2013, in conjunction with the Company’s execution and delivery of the Probiotic ECC with Intrexon, the Company also entered into a Stock Purchase and Issuance Agreement and a First Amendment to the Stock Purchase and Issuance Agreement (collectively the “SPIA”) with Intrexon. Pursuant to the SPIA, the Company (i) sold to Intrexon 1,300,000 shares of the Company’s common stock at a price per share of $3.00 for gross proceeds of $3,900,000, and (ii) paid Intrexon an up-front technology access fee of $6,000,000 (the “Technology Access Fee”) in consideration for the execution of the Probiotic ECC. The Technology Access Fee was paid to Intrexon by the Company through the (i) issuance of 1,348,000 (at $3.00 per share) shares of the Company’s common stock (the “Technology Access Shares”), and (ii) a convertible promissory note in the amount of $1,956,000 which is payable, at the Company’s option, in cash or shares of Company common stock (the “Convertible Note”). The Convertible Note matured on December 31, 2013 and required the Company to obtain shareholder approval prior to any exercise by the Company of its right to convert the Convertible Note into common stock. The conversion price was equal to the closing price per share of the Company’s common stock on the last trading day immediately prior to the date of conversion. The payment of this Technology Access Fee resulted in the Company recording a non-cash expense of $6,000,000 during the quarter ended September 30, 2013. The Company obtained the requisite shareholder approval to have the additional shares of its common stock listed and, on December 18, 2013, the Company issued to Intrexon 698,241 shares of Company common stock in connection with the conversion of the Convertible Note and accrued interest based upon a conversion price of $2.82 per share. The Company intends to use the proceeds from the private placement sale of common stock to Intrexon towards development of the Company’s key initiatives relating to the Probiotic ECC, and general corporate purposes. Under the terms of the SPIA and Probiotic ECC, the Company agreed to issue to Intrexon additional shares of its common stock based upon the achievement of certain milestones. See Note 13 — Commitments and Contingencies.

 

July 2012 Private Placement Issuance-Purchasers

On July 30, 2012, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Purchasers”) pursuant to which the Company: (i) sold to the Purchasers an aggregate of 8,666,665 shares of the Company’s Common Stock at a price per share of $1.50 (the “Common Shares”) for aggregate gross proceeds of approximately $13,000,000 (the “Offering”). The Company intends to use the net proceeds from this offering to accelerate development of several of the Company’s key initiatives including its recently announced Channel Agreement with Intrexon relating to the Company’s lantibiotics program, sales and marketing of the Company’s probiotic product lines and general corporate purposes.

Griffin Securities, Inc. (the “Placement Agent”) served as the placement agent for the Offering. In consideration for services rendered as the Placement Agent in the Offering, the Company agreed to (i) pay to the Placement Agent cash commissions equal to $899,698, or 7.0% of the gross proceeds received in the Offering, less certain excluded proceeds, (ii) issue to the Placement Agent, or its designee, a five-year warrant to purchase up to 771,169 shares of the Company’s Common Stock (representing 9% of the Common Shares sold in the Offering) with an exercise price of $1.50 per share (the “Agent Warrants”); and (iii) reimburse the Placement Agent for its reasonable actual out-of-pocket expenses, incurred in connection with the Offering, including reasonable legal fees and disbursements up to a maximum aggregate amount of $50,000. The determination of the Placement Agent’s fees did not include any shares issued to the KFLP, (in connection with the automatic conversion of its secured debt with us described below) or shares acquired by any officers or directors participating in the Offering.

The total amount charged to additional paid-in-capital as a result of the Offering was $1,111,664. This amount is comprised of $949,698 for services provided by Griffin Securities, Inc., $155,626 for services provided by the Company’s legal counsel and independent accountants, and $6,340 for other services.

On July 30, 2012, the Company issued to Griffin Securities, Inc., or its designee, a five-year warrant to purchase up to 771,169 shares of the Company’s Common Stock with an exercise price of $1.50 per share. The warrant was issued as partial consideration for Griffin Securities, Inc. acting as the Placement Agent for our July 2012 Private Placement Financing. The warrants were valued at $2.40 per share for a total of $1,850,806. The issuance of the warrant resulted in no charge being made to additional-paid-in capital.

In connection with the Offering, the Company also entered into a registration rights agreement with the Purchasers (the “Registration Rights Agreement”). The Registration Rights Agreement required that the Company file a registration statement (the “Initial Registration Statement”) with the Securities and Exchange Commission (the “SEC”) within forty-five (45) days of the closing date of the Offering (the “Filing Date”) for the resale by the Purchasers of all of the Common Shares and all shares of Common Stock issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect thereto (the “Registrable Securities”). On August 31, 2012, the Company filed Form S-1 Registration Statement with the SEC. On September 21, 2012 the Company filed Amendment No. 1 to Form S-1 Registration Statement with the SEC. On September 26, 2012 the Registration Statement was declared effective by the SEC. Upon the occurrence of certain events (each an “Event”), including, but not limited to, that the Initial Registration Statement is not filed prior to the Filing Date, the Company will be required to pay liquidated damages to each of the Purchasers equal to 1.5% of the aggregate purchase price paid by such Purchaser for the Registrable Securities upon the date of the Event and then monthly thereafter until the earlier of: (i) the Event is cured, or (ii) the registrable shares are eligible for resale under Rule 144 without manner of sale or volume limitations. In no event shall the aggregate amount of liquidated damages payable to each of the Purchasers exceed in the aggregate 10% of the aggregate purchase price paid by such Purchaser for the Registrable Securities.

In connection with the Offering, the KFLP waived receiving comparable registration rights as the Purchasers in the Offering as well as its piggyback registration rights applicable to the Offering. Intrexon also waived its piggyback registration rights applicable to the Offering and waived its participation rights.

Secured Debt Conversion Issuance-KFLP

On July 30, 2012, the Company’s secured debt in the principal amount of $2.5 million, together with accrued but unpaid interest of $38,185 thereon, due to the KFLP was automatically converted contemporaneously with the closing of the Offering into 1,692,123 shares of common stock issued to the KFLP at the same price of $1.50 per share paid by the Purchasers in the Offering. The conversion occurred because the Offering constituted a “qualified financing” under the terms of the Company’s Loan Agreement with the KFLP.

2012 Incentive Plan Issuances

On March 11, 2011, our Board of Directors and Compensation Committee awarded 10,000 shares of restricted common stock to each of, our former chief financial officer and to Mr. Robert Koski, our director at a grant date fair value of $3.60 per share. The restricted stock awards were pursuant to the Company’s Stock Incentive Plan. Half of the awarded shares vest in six (6) months and the other half on the anniversary date of the award. As a result of his resignation, of our former chief financial officer, he forfeited 5,000 shares of the previously granted restricted stock. The Company recorded a net reversal of previously recorded compensation expense of $11,340 for the year ended December 31, 2012.

 

On August 6, 2012, both the Board of Directors and the Compensation Committee of the Board of Directors of the Company met and determined that one of the performance goals established in the Company’s Long Term Incentive Programs as part of executive compensation and non-employee director compensation programs (“LTIPs”) had been achieved. The performance goal met was the goal related to the Company successfully raising $10,000,000 of new capital. The aggregate shares awarded under the LTIPs of 465,816, consisted of a total of 215,405 shares to non-employee directors and 250,411 shares to executive officers. Of the aggregate 465,816 shares awarded under the LTIPs, 66,233 shares were retained by the Company for applicable tax withholding obligations.

On October 23, 2012 the Compensation Committee of the Board of Directors approved discretionary bonus award in the form of 83,500 shares of our common stock to Michael Sullivan our Chief Financial Officer. Of the 83,500 shares which were awarded, 26,261 shares were retained by the Company for applicable tax withholding obligations. The award was made in consideration of Mr. Sullivan’s services since he joined the Company, including but not limited to, his services regarding the Company’s securities filings, the financings by the KFLP, the Intrexon collaboration, the recent substantial capital raise closing and related follow-on registration statement.

On October 18, 2013, both the Board of Directors and the Compensation Committee of the Board of Directors of the Company met and determined that one of the performance goals established in the Company’s LTIP, as amended, (See Note 9) had been achieved. The performance goal met was the goal related to the broadening of the Intrexon relationship to include a new area outside of lantibiotics. The aggregate shares awarded under the LTIPs of 422,359, consisted of a total of 165,925 shares to non-employee directors and 256,434 shares to executive officers. Of the aggregate 422,359 shares awarded under the LTIPs, 84,287 shares were retained by the Company for applicable tax withholding obligations.

On November 27, 2013, both the Board of Directors and the Compensation Committee of the Board of Directors of the Company met and determined that one of the performance goals established in the Company’s LTIPs had been achieved. The performance goal met was the goal related to the Capital raise by the Company of $12,000,000 or more in a single year. The aggregate shares awarded under the LTIPs of 502,654, consisted of a total of 191,985 shares to non-employee directors and 310,669 shares to executive officers. Of the aggregate 502,654 shares awarded under the LTIPs, 113,636 shares were retained by the Company for applicable tax withholding obligations.

Compensation expense related to restricted stock awards is a non-cash expense and is included in selling, general and administrative expenses in the accompanying statement of operations. At December 31, 2013, no shares of restricted common stock awarded pursuant to the Company’s LTIPs’ are non-vested.

The November 2013 Underwritten Public Offering

On November 20, 2013, the Company completed an underwritten public offering of 4,400,000 shares of common stock at a public offering price of $2.50 per share resulting in gross proceeds of $11,000,000. The net proceeds from this public offering after deducting underwriting discounts and direct offering expenses were $9,904,996 and are expected to be used for our ongoing clinical development of lantibiotics, probiotics sales and marketing and for general corporate purposes, including research and development activities for our other product candidates and any future product candidates that we may develop or acquire, as well as for general and administrative costs. In addition, we may use a portion of the net proceeds for licensing or acquiring intellectual property to incorporate into our products and product candidates or our research and development programs. We may also use a portion of the net proceeds to in-license, acquire or invest in complementary businesses or products; however, we have no current commitments or obligations to do so.

Warrants

The Company’s outstanding and exercisable warrants as of December 31, 2013 are presented below:

 

Exercise Price				Warrants Outstanding				Expiration Dates
$	1.50				571,169			7/30/17
$	2.00				2,170,925			3/23/15
$	10.00				5,000			4/15/14
					2,747,094

On March 23, 2012, pursuant to the terms of a Debt Exchange Agreement and a Loan Agreement with the Koski Family Limited Partnership, or KFLP, the Company issued warrants to acquire 1,571,405 and 599,520 shares of common stock, respectively, to the KFLP. The warrants are exercisable immediately at a price per share of $2.00 and expire three years from the date of issuance. The warrants were valued at $1.00 per share.

 

On July 30, 2012, the Company issued to Griffin Securities, Inc., or its designee, a five-year warrant to purchase up to 771,169 shares of the Company’s Common Stock with an exercise price of $1.50 per share. The warrant was issued as partial consideration for Griffin Securities, Inc. acting as the Placement Agent for our July 2012 Private Placement Financing. The warrants were valued at $2.40 per share.

On September 14, 2012, warrants to acquire 12,500 shares of the Company’s common stock at a price of $6.00 per share expired. On September 27, 2012, the KFLP made a distribution of a portion of its warrants to the underlying partners of the KFLP. As a result of such distribution the KFLP retained warrants to acquire 61,405 and 599,520 respectively and its underlying partners (including certain trusts) were issued warrants to acquire an aggregate of 1,510,000 shares of common stock.

On January 31, 2013 Griffin Securities Inc. exercised 200,000 of their previously issued warrants resulting in the issuance of 106,250 shares of our common stock.

On May 30, 2013, warrants to acquire 127,888 and 161,000 shares of the Company’s common stock at prices of $26.00 and $15.00 per share, respectively expired.

As of December 31, 2013 there are 2,747,094 warrants and 633,840 stock options outstanding. If all warrants and stock options were exercised, the total number of outstanding common shares would be approximately 39,374,878 as of December 31, 2013.

On January 13, 2014, 210,000 previously issued warrants were exercised resulting in the net issuance of 135,000 shares of our common stock.