Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity

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Stockholders' Equity
9 Months Ended
Nov. 04, 2018
Equity [Abstract]  
STOCKHOLDERS' EQUITY

Note 8 – Stockholders’ Equity

 

Preferred Stock

 

In fiscal 2018, the Company completed financing transactions with funds and investment vehicles advised by Mistral, Satori, executive management and third-party investors. As part of the transactions, the Company received $21,139,845 in cash (net of issuance costs of $1,325,156) in exchange for a total of 2,247 Series A, A-1 and A-2 Preferred Units (preferred stock equivalent of 2,247,000) and warrants to purchase 798,975 shares of common stock, subject to adjustments in the exercise price. The preferred stock carried an annual dividend of 8% compounded and conversion rights dependent upon certain events occurring. The adjustment to exercise price and conversion rights are explained in detail in the Company’s final prospectus (the “Prospectus”), dated June 26, 2018 and filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”).

 

In order to eliminate all outstanding preferred stock upon completion of the IPO, on April 19, 2018, the Company and the majority holders of each of the Series A Preferred Stock, the Series A-1 Preferred Stock and the Series A-2 Preferred Stock agreed to amend and restate each series of preferred stock to, among other things, revise the conversion features of the preferred stock to provide that, immediately prior to the closing of an initial public offering, the preferred stock:

 

(1) will accrue an additional amount of dividends equal to the amount of dividends that would have accrued and accumulated through and including the one-year anniversary of the completion of the initial public offering,

 

  (2) will, along with the aggregate accrued or accumulated and unpaid dividends thereon, automatically convert into shares of common stock at a price per share equal to the lesser of (a) 70% of the offering price, or (b) the applicable calculation set forth pursuant to the terms of their respective certificates of designation.

 

All outstanding preferred stock totaling $25,645,000, including the additional year of dividends of $2,037,200 and accumulated dividends at 8% through June 29, 2018 of $2,495,704 was converted into 3,287,441 shares of common stock upon completion of the Company’s IPO on June 29, 2018. The preferred stock converted to common stock at $9.13 per share resulting in a deemed dividend of $22,601,161 related to the conversion.

 

Common Stock Warrants

 

In fiscal 2018, as noted above, the Company completed financing transactions with funds and investment vehicles advised by Mistral, Satori, and executive management in which the Company originally issued warrants to purchase an aggregate total of 15,979,500 shares of common stock subject to adjustments in the exercise price as defined below. See specific details in the Company’s Prospectus.

 

In consideration for agreeing to amend the outstanding preferred stock to automatically convert immediately prior to the completion of the IPO, on April 19, 2018, the Company and a majority of the holders of the warrants issued along with the preferred stock, agreed to amend and restate the warrants to replace the aggregate dollar value of each warrant with a fixed number of warrant shares. In order to prevent dilution of the purchase rights granted under the warrants, the exercise price shall be calculated as follows:

 

I. If, prior to the exercise of the warrant, the Company completes its initial public offering of Common Stock (“Qualified IPO”), the exercise price per warrant share shall, subject to certain provisions, be equal to the purchase price per share of Common Stock in the Qualified IPO;

 

II. If, prior to the exercise of the warrant and prior to a Qualified IPO, the Company completes a third party equity or equity-linked financing with an institutional investor resulting in aggregate gross proceeds to the Company of at least $15,000,000 (a “Qualified Financing”), the exercise price per warrant share shall be equal to the purchase price per share of Common Stock in the Qualified Financing (subject to adjustment); provided, however, that following completion of a Qualified IPO, the exercise price per Warrant Share shall be the lower of the exercise price (the “Qualified Exercise Price”);

 

III. If, prior to exercise of the warrant, the Company has not completed a Qualified IPO or Qualified Financing, the exercise price per warrant share shall be determined based on a valuation of the Company prior to such exercise of $80 million (the “Valuation Exercise Price,” and together with the IPO Exercise Price or the Qualified Exercise Price, as the case may be, the “Exercise Price”); or

 

IV. If there is Qualified Financing subsequent to a previous Qualified Financing and prior to a Qualified IPO, the Exercise Price per warrant share shall be equal to the lesser of the then current Exercise Price immediately prior to such subsequent Qualified Financing and the purchase price or deemed purchase price per share of Common Stock in the subsequent Qualified Financing.

 

As a result of the modification, on April 19, 2018, the Company updated the fair value of the warrants using the assumptions detailed below using a probability-weighted expected return. As the total fair value of the modified warrants was less than the total fair value of the original warrants, there was no financial statement impact during the thirteen weeks ended May 6, 2018. On June 29, 2018, the Company completed a Qualified IPO and the exercise price was adjusted to equal the purchase price per share of common stock of $16.00. The Company computed the value of the warrants with the updated assumptions using the Black-Scholes Model, as described below, and recorded the difference between the fair value of the new warrants compared to the old warrants as a deemed dividend of $1,498,079.

 

There were 281,750 warrants, with a five-year term, issued to Roth Capital Partners, LLC as part of the underwriting agreement in connection with the Company’s IPO. These warrants were valued using the Black-Scholes model.

 

In fiscal 2019, the Company amended and restated warrants totaling 56,077 with a three-year term, valued using the Black-Scholes model. The Company recorded the difference between the fair value of the new warrants compared to the old warrants as a deemed dividend of $408,919.

 

The warrants may be exercised at any time following the date of issuance during the period prior to their expiration date. The fair value of each warrant is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on comparable Companies’ historical volatility, which management believes represents the most accurate basis for estimating expected future volatility under the current circumstances. The risk-free rate is based on the U.S. treasury yield in effect at the time of the grant. The Black-Scholes model assumptions are noted in the following table:

 

      April 19,
2018
    June 29,
2018
    June 29,
2018
    September 26,
2018
 
  Warrants     798,795       798,795       281,750       56,077  
  Expected volatility     41.4% - 43.7 %     42.0 %     41.3 %     43.8 %
  Expected dividend yield     0 %     0 %     0 %     0 %
  Expected term (in years)     3.10       3.00       5.00       3.00  
  Risk-free interest rate     1.7% - 2.0 %     2.6 %     2.7 %     2.6 %
  Exercise price   $ 14.80     $ 16.00     $ 19.20     $ 9.13  
  Calculated fair value of warrant   $ 3.12     $ 5.00     $ 8.84     $ 12.87  

 

Total warrants outstanding as of November 4, 2018, were as follows:

 

      Average Exercise Price     Number of Warrants     Weighted Average Remaining Life  
  Outstanding at February 4, 2018   $ 17.18       930,054       3.24  
                           
  Warrants issued     18.56       1,136,802       3.65  
                           
  Expired and canceled     17.18       (930,054 )     (3.20 )
                           
  Exercised     9.13       (56,077 )     2.68  
                           
  Warrants Outstanding at November 4, 2018   $ 16.83       1,080,725       3.17  

 

The Company early adopted ASU 2017-11, which addresses the accounting for warrants with down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings, which allowed the Company to account for the warrants issued along with the preferred raise in fiscal 2018 as equity versus a liability.

 

Equity Incentive Plan

 

In October 2017, the Company adopted the 2017 Equity Incentive Plan (the “Plan”) which provides for Awards in the form of Options, Stock Appreciation rights, Restricted Stock Awards, Restricted Stock Units, Performance shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards. In April 2018, the board of directors of the Company approved an increase in shares of common stock reserved for issuance under the Plan from 420,000 to 604,612 shares of common stock.

 

On May 10, 2018, the Board of Directors approved an increase in shares of common stock reserved for issuance under the Plan from 604,612 to 615,066 shares of common stock.

 

All awards shall be granted within 10 years from the effective date of the Plan. Other than the activity disclosed below relating to Restricted Stock Units, there was no other activity under the Plan for the thirteen weeks ended November 4, 2018 and October 29, 2017.

 

In October 2017, the Company granted 258,000 Restricted Stock Units to certain officers of the Company with a fair value of $2,792,849. As of November 4, 2018, there were 193,500 unvested units outstanding related to this grant. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on January 31, 2018, and twenty-five percent on each of the next three anniversaries of that initial vesting date. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and thirty-nine weeks ended November 4, 2018 related to these grants.

 

In March 2018, the Company granted 52,504 Restricted Stock Units to certain executive employees of the Company with a fair value of $568,356. As of November 4, 2018, there were 39,378 unvested units outstanding related to this grant. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on May 1, 2018, and twenty-five percent on January 31st of the following three years. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and thirty-nine weeks ended November 4, 2018 related to these grants.

 

On May 10, 2018, the Company granted 188,917 Restricted Stock Units to certain officers of the Company with a fair value of $2,800,695. As of November 4, 2018, there were 141,688 unvested units outstanding related to this grant. The vesting of the restricted stock units is based on both time and performance. The time vesting units vest twenty-five percent on the closing of the offering, and twenty-five percent on January 31, 2019, 2020 and 2021. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and thirty-nine weeks ended November 4, 2018 related to these grants.

 

On June 20, 2018, the Company granted to certain executive and non-executive employees of the Company an aggregate of 68,378 Restricted Stock Units, with a fair value of $1,014,046 of which between fifteen and twenty-five percent of the total grant or 14,625 Restricted Stock Units, immediately vested. The vesting of the unvested Restricted Stock Units is based on both time and performance. The time and performance vesting units will vest twenty-five percent on July 1, 2019, and July 2020 and between twenty-five to thirty-five percent on July 1, 2021. The performance vesting units will only vest upon the achievement of certain benchmarks. As of November 4, 2018, there were 50,461 unvested units outstanding related to this grant. There were 3,292 and 3,569 units forfeited from this grant during the thirteen and thirty-nine weeks ended November 4, 2018.

 

In September 2018, the Company granted a certain executive employee of the Company 10,500 Restricted Stock Units with a fair value of $250,950. As of November 4, 2018, there were 7,875 unvested units outstanding related to this grant. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on October 4, 2018, and twenty-five percent on January 31st of the following three years. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and thirty-nine weeks ended November 4, 2018 related to these grants.

 

A summary of the status of our unvested Restricted Stock Units as of November 4, 2018, and changes during the thirteen and thirty-nine weeks then ended, is presented below:

 

      Number of shares     Weighted average grant date fair value  
  Unvested at February 4, 2018     193,500     $ 10.83  
                   
  Granted     52,504       10.83  
                   
  Forfeited     -                 -  
                   
  Vested     (13,126 )     10.83  
                   
  Unvested at May 6, 2018     232,878       10.83  
                   
  Granted     257,295       14.83  
                   
  Forfeited     (277 )     14.83  
                   
  Vested     (61,577 )     14.83  
                   
  Unvested at August 5, 2018     428,319       12.69  
                   
  Granted     10,500       23.99  
                   
  Forfeited     (3,292 )     14.83  
                   
  Vested     (2,625 )     23.99  
                   
  Unvested at November 4, 2018     432,902     $ 12.84  

 

Stock compensation expense related to the above Restricted Stock Units was $515,739 and $2,108,342 for the thirteen and thirty-nine weeks ended November 4, 2018 and is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. There were no Restricted Stock Units granted prior to October 29, 2017.

 

The total unrecognized restricted stock unit compensation cost related to non-vested awards was $2,533,468 as of November 4, 2018 and will be recognized in operations over a weighted average period of 1.27 years.