Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity

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Stockholders' Equity
9 Months Ended
Sep. 30, 2016
Equity [Abstract]  
Stockholders' Equity

9.         Stockholders’ Equity

 

Interstate Battery Agreements

 

Investment Agreement

 

The Company entered into a Credit Agreement dated May 18, 2016 with Interstate Battery pursuant to which Interstate Battery loaned the Company $5,000,000 in consideration of the Company’s issuance of a secured convertible promissory note in the original principal amount of $5,000,000. The note bears interest at the rate of eleven percent (11%) per annum, compounding monthly, and all interest is payable upon the earlier of maturity or conversion of the principal amount. The loan matures on May 24, 2019. The outstanding principal is convertible into shares of the Company’s common stock at a conversion price of $7.12 per share. The Company obligations under the note and Credit Agreement are secured by a second priority lien on the real estate, fixtures and equipment at the Company’s recycling facility at McCarran, Nevada. The Credit Agreement includes representations, warranties, and affirmative and negative covenants that are customary of institutional credit agreements.

 

Pursuant to the Credit Agreement, the Company also issued to Interstate Battery two common stock purchase warrants, including:

 

  a warrant to purchase 702,247 shares of the Company’s common stock, at an exercise price of $7.12 per share, that is exercisable upon grant and expires on May 24, 2018; and

 

  a warrant to purchase 1,605,131 shares of the Company’s common stock, at an exercise price of $9.00 per share, that is exercisable commencing November 24, 2016 and expires on May 24, 2019.

 

The warrants contain cashless exercise and standard anti-dilution adjustment provisions. If Interstate converts its convertible note and exercises both warrants in their entirety, it will own slightly less than 20% of the Company’s common stock at an average price per share of approximately $7.93.

 

The Company also entered into a Stock Purchase Agreement dated May 18, 2016 with Interstate Battery pursuant to which the Company issued and sold to Interstate Battery 702,247 shares of the Company’s common stock at $7.12 per share for the gross proceeds of approximately $5,000,000. The Stock Purchase Agreement includes customary representations, warranties, and covenants by Interstate Battery and us, and an indemnity from us in favor of Interstate Battery.

 

In connection with the investment transactions, the Company also entered into an Investors Rights Agreement dated May 18, 2016 with Interstate Battery pursuant to which the Company granted Interstate Battery customary demand and piggyback registration rights, limited board observation rights over the next three years and limited preemptive rights allowing Interstate Battery the right to purchase its proportional share of certain future equity issuances by the Company over the next three years. The Company included all of the Interstate Battery shares in its S-3 Registration Statement filed with the Securities and Exchange Commission on August 1, 2016.

 

The investment transactions with Interstate Battery closed on May 24, 2016. There were no sales commissions paid by the Company in connection with its sale of securities to Interstate Battery.

 

The Company allocated the $10.0 million proceeds from the Credit Agreement and Stock Purchase Agreement, to the various securities based on their relative fair values on the closing date of May 24, 2016.

 

  The fair value of the note was calculated using an average of the Merrill Lynch US High Yield CCC rate of 16.21% on May 24, 2016 and the Merrill Lynch US High Yield B effective yield of 7.44% on May 24, 2016.
 
  The fair value of the common stock was based on the closing market price of the Company’s common stock on the NASDAQ stock market on May 24, 2016.

 

The fair value of the warrants using the Black-Scholes-Merton Option Pricing Model and the assumptions are listed in the table below.

 

    Warrant #1     Warrant #2  
Warrant shares issued     702,247       1,605,131  
Market price   $ 11.39     $ 11.39  
Exercise price   $ 7.12     $ 9.00  
Term (years)     2       3  
Risk-free interest rate     0.91 %     1.05 %
Volatility     65.70 %     67.80 %
Dividend rate     0 %     0 %
Per share FV of warrant   $ 5.89     $ 5.89  
FV of warrant   $ 4,136,074     $ 9,449,754  

 

Both warrants were issued on May 24, 2016, when the closing market price of our stock was $11.39.

 

The table below presents the allocation of the proceeds based on the relative fair values of the stock, warrants and note.

 

    Fair value     Allocated value  
             
Allocation of Proceeds                
Convertible note   $ 4,878,974     $ 1,843,669  
Warrants     13,585,828       5,133,819  
Common stock     7,998,593       3,022,512  
                 
    $ 26,463,396     $ 10,000,000  

 

The difference between the face value of the convertible note and the allocated amount (which considers both the allocated fair value of the issued stock and allocated fair value of the warrants) was recorded as an initial discount to the convertible note; common stock was recorded at its allocated fair value as a credit to par value and additional paid-in capital as appropriate, based on the number of shares issued, and the allocated fair value of the warrant was credited to additional paid-in capital. After taking into consideration the amortization of the note discount, the effective interest rate is 184.75%.

 

The convertible note includes an embedded beneficial conversion feature. The intrinsic value of the beneficial conversion feature was treated as an additional component of the discount attributable to the convertible note. The initial discount (attributable to the stock and warrants as noted above) and the discount attributable to the beneficial conversion feature exceeds the face amount of the convertible note. To avoid reducing the initial net carrying value of the convertible note to or below zero, the discount attributable to the beneficial conversion feature was limited such that the aggregate of all discounts does not exceed 99.5% of the face amount of the convertible note. The discount is being accreted to interest expense using the effective interest method over the three-year life of the loan. If the loan is converted prior to its maturity, any remaining discount will be expensed immediately.

 

Costs incurred in connection with the deal of $771,000 were allocated between additional paid-in capital and prepaid financing/ debt discount (“debt issuance costs”) in the same manner as the above allocation of proceeds. The allocated debt issuance costs of $142,000 were recorded as a reduction to the carrying amount of the convertible note and are being amortized as interest expense within the condensed consolidated statements of operations over the three-year life of the loan. The remaining $629,000 was recorded as a reduction to additional paid-in capital.

 

National Securities Placement

 

On May 18, 2016, the Company entered into a Stock Purchase Agreement and a Registration Rights Agreement with certain accredited investors pursuant to which the Company issued and sold to the investors 719,333 shares of its common stock at a price of $7.12 per share for the gross proceeds of $5,121,651. The Stock Purchase Agreement includes customary representations, warranties, and covenants by the investors and the Company, and an indemnity from the Company in favor of the investors. The private placement closed on May 24, 2016. The Company included all of these shares in its S-3 Registration Statement filed with the Securities and Exchange Commission on August 1, 2016.

 

National Securities Corporation acted as placement agent for the private placement and received sales commission in the amount of six percent (6%) of the gross proceeds, or a total of $307,000 in commissions from us. In addition, we reimbursed National Securities for its out-of-pocket expenses and legal fees in the aggregate amount of $38,000. The total costs of $345,000 have been recorded as a reduction to additional paid-in capital.

 

Warrant issued

 

A warrant to purchase 12,500 of the Company’s common stock was issued on January 31, 2016 at an exercise price of $6.00 per share. The warrant was fully vested upon issuance and has a term of 1.25 years.

  

The following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of the warrant.

 

Expected stock volatility     80 %
Risk free interest rate     0.97 %
Expected years until exercise     1.25  
Dividend yield     0.00 %

 

The fair value was $15,476 and was recorded as increase to consulting expense and increase in additional paid in-capital.

 

A warrant to purchase 12,500 of the Company’s common stock was issued on April 30, 2016, at an exercise price of $6.00 per share. The warrant was fully vested upon issuance and expires, if not exercised, on July 31, 2018.

  

The following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of the warrant.

 

Expected stock volatility     80 %
Risk free interest rate     0.77 %
Expected years until exercise     2.25  
Dividend yield     0.00 %

 

The fair value was $57,204 and was recorded as increase to consulting expense and increase in additional paid in-capital.

 

A warrant to purchase 12,500 of the Company’s common stock was issued on July 31, 2016, at an exercise price of $6.00 per share. The warrant was fully vested upon issuance and expires, if not exercised, on July 31, 2018.

  

The following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of the warrant.

 

Expected stock volatility     80 %
Risk free interest rate     0.72 %
Expected years until exercise     2.00  
Dividend yield     0.00 %

 

The fair value was $65,000 and was recorded as increase to consulting expense and increase in additional paid in-capital.

 

Warrants exercised

 

On June 7, 2016, when the five-day average of closing prices for the Company’s common stock was $12.16 per share, 15,203 shares of the Company’s common stock were issued pursuant to a cashless exercise of a warrant for 30,000 shares of the Company’s common stock with an exercise price of $6.00 per share.

 

Stock based compensation

 

The 2014 Stock Incentive Plan (the “2014 Plan”) authorizes a total of 1,363,637 shares for option grants. The 2014 Plan provides for the following types of stock-based awards: incentive stock options; non-statutory stock options; restricted stock; and performance-based stock. The 2014 Plan, under which equity incentives may be granted to employees and directors under incentive and non-statutory stock option agreements requires that the option price may not be less than the fair value of the stock at the date the option is granted. Option awards may not have a term exceeding 10 years from the grant date. As of September 30, 2016, the Company had 488,609 shares available for future grants under the 2014 Stock Incentive Plan.

 

Options granted generally have a five-year term and vest over a three-year period; one third the first year, one third the second year and the remaining third vest on a monthly basis in the third year.

 

The stock-based compensation expense attributable to option grants recorded was allocated as follows:

 
    Three months ended September 30,     Nine months ended September 30,  
    2016     2015     2016     2015  
Operations and development costs   $ 120     $ 38     $ 226     $ 71  
Business development and management costs     40       55       672       104  
Total   $ 160     $ 93     $ 898     $ 175  

 

The following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of the options.

 

Expected stock volatility     72% -80 %
Risk free interest rate     0.92% - 1.77 %
Expected years until exercise     2.50 - 3.50  
Dividend yield     0.00 %

 

The Company issued 4,500 shares of common stock for the three months and nine months ended September 30, 2016 upon stock option exercises.

 

Option modification

During the three months ended June 30, 2016, the Compensation Committee of the Board of Directors approved the modification of the terms of a stock option previously granted to a member of its Board of Directors to accelerate vesting and the waiver of the early termination of the option based upon the director’s end of service to the Company. The modification resulted in additional compensation expense of $175,000.