Note 9 – Stockholder’s Equity

Initial Public Offering

On February 16, 2018, the Company closed its IPO in which it sold 3,500,000 shares of the Company’s common stock at a public offering price of $5.00 per share. In connection with the closing of the IPO, (1) the Company received net proceeds of approximately $15,000 after deducting underwriting discounts and commissions of $1,400 and other offering expenses of approximately $1,100, (2) the amendment to the registration rights agreement described below became effective, (3) the amendment to the Certificate of Designation described above in Note 7 became effective, (4) all outstanding shares of Series A Convertible Preferred Stock converted, on a one-to-one basis, into shares of the Company’s common stock, (5) the Company issued the Royalty Payment Rights Certificates as described in Note 7, and (6) the Company issued warrants to certain of the former Series A Convertible Preferred Stock holders, pursuant to the amendment to the Registration Rights Agreement, the amendment to the Certificate of Designation, and the execution of a lock up agreement, to purchase an aggregate of 1,095,682 shares of the Company’s common stock (the “Ten Percent Warrants”). The Ten Percent Warrants are currently exercisable, have a five-year term, and provide for cashless exercise. In addition, the Company granted the representative of the several underwriters in the IPO (the “Representative”) a 30-day option (the “Over-Allotment Option”) to purchase up to an aggregate 525,000 additional shares of the Company’s common stock at an exercise price of $5.00 per share.

The Ten Percent Warrants were valued using the Black-Scholes option pricing model using the following assumptions, (i), exercise price of $5.00 (ii) expected life of 5 years, (iii) volatility of 67.08%, (iv) risk-free rate of 2.63%, and (v) dividend rate of zero. For the year ended December 31, 2018, the Company recorded $3,156 for the fair value of the Ten Percent Warrants as warrant expense in the accompanying consolidated statement of comprehensive loss.

On March 12, 2018, the Company issued an additional 56,000 shares of its common stock at a price of $5.00 per share, pursuant to the Representative’s partial exercise of the Over-Allotment Option. In connection with the closing of the partial exercise of the Over-Allotment Option, the Company received net proceeds of $258 after deducting underwriting discounts and commissions of $22.

Follow On Public Offering

On December 24, 2018, the Company completed a follow on underwritten public offering of 5,750,000 shares of the Company’s common stock at a public offering price of $2.70 per share (the “Follow On Offering”), inclusive of 750,000 shares issued pursuant to the full exercise of the underwriters option to purchase up to an additional 750,000 shares (the “Underwriters Option”) of the Company’s common stock in connection with the Follow On Offering. Net proceeds from the Follow On Offering were approximately $14,036, inclusive of $1,883 pursuant to the full exercise of the Underwriters Option, after deducting, in the aggregate, underwriting discounts and commissions $1,086 and other offering expenses of approximately $402.

Issuance of Common Stock and Warrants to Purchase Common Stock

On March 27, 2018, the Company’s Board of Directors approved the issuance of 15,000 shares of the Company’s common stock to a third party for services to be provided. The stock vests immediately and is subject to a lock-up through February 14, 2019. The Company recorded the fair market value of the stock as stock-based compensation in the amount of $69.

On June 6, 2018, the Company entered into a consultant agreement with a service provider which shall continue until the agreement is terminated by the Company or service provider by providing at least five business days’ prior written notice. Pursuant to the agreement, the Company (a) issued a warrant on June 6, 2018 to purchase 10,000 shares of the Company’s common stock, with an exercise price of $5.25 per share, at which time a measurement date was reached (b) upon the four (4) month anniversary of the execution of the agreement will issue a warrant to purchase 10,000 shares of the Company’s common stock, with an exercise price of $6.25 per share, and (c) upon the eight (8) month anniversary of the execution of the agreement, provided the service provider is still engaged at that time, will issue a warrant to purchase 10,000 shares of the Company’s common stock, with an exercise price of $7.25 per share (collectively, such warrants referred to as the “Consultant Warrants”). The Consultant Warrants will each have a five-year term, vest immediately, and will provide for cashless exercise. Warrants totaling 30,000 in relation to this agreement were valued using the Black-Scholes option pricing model under the following assumptions, (i) expected life of 5 years, (ii) volatility of 67.25%, 69.23%, and 70.86% (iii) risk-free rate of 2.51%, 2.81%, and 3.07%, and (iv) dividend rate of zero. The fair value of the 30,000 warrants was initially estimated to be $95 at the inception of the agreement. At December 31, 2018, the fair value was re-measured to be $79 which is expensed using the straight-line method over eight months. The Company recorded $67 as general and administrative expense in the accompanying consolidated statement of comprehensive loss in relation to the 30,000 warrants for the year ended December 31, 2018.

On July 2, 2018, the Company entered into a consultant agreement with a service provider which shall continue until February 28, 2019, unless and until sooner terminated by the Company or service provider by providing, at any time after October 2, 2018, at least five business days’ prior written notice. Pursuant to the agreement, the Company (i) issued a fully-vested and nonforfeitable warrant on July 2, 2018 (at which point a measurement date was reached) to purchase 25,000 shares of the Company’s common stock, with an exercise price of $7.39 per share, and expires 12 months from the date of agreement, (ii) issued a fully-vested and nonforfeitable warrant on July 2, 2018 (at which point a measurement date was reached) to purchase 25,000 shares of the Company’s common stock, with an exercise price of $7.39 per share, and expires 18 months from the date of the agreement, (iii) upon the three (3) month anniversary of the date of the agreement will issue a fully-vested and nonforfeitable warrant to purchase 25,000 shares of the Company’s common stock with an exercise price of $8.75 per share, and expires 18 months from the date of the agreement and (iv) upon the six (6) month anniversary of the date of the agreement, provided the service provider is still engaged at that time, will issue a fully-vested and nonforfeitable warrant to purchase 25,000 shares of common stock of the Company with an exercise price of $10.00 per share, and expires 24 months from the date of the agreement. The warrants issued under this agreement are callable by the Company and it will have the right to require the consultant to exercise all or any warrants still unexercised for a cash exercise or the Company may re-purchase the warrant at a price of $0.01 per warrant share if the Company’s stock trades above a closing floor price ranging from $9.00 to $13.00 per share for ten (10) consecutive trading days. In accordance with FASB ASC 480, the call feature is a conditional obligation upon an event not certain to occur that becomes mandatorily redeemable if that event occurs, the condition is resolved, or that event becomes certain to occur. Because the conditional event is within control of the Company, the call feature is not recognized for accounting purposes until the Company exercises its rights under agreement. Warrants totaling 100,000 in relation to this agreement were valued using the Black-Scholes option pricing model under the following assumptions, (i) expected life of 1-2 years, (ii) volatility of 62.04% - 65.84%, (iii) risk-free rate of 2.34% - 2.66%, and (iv) dividend rate of zero. The aggregate fair value of the 100,000 warrants was initially estimated to be $146 and was re-measured at December 31, 2018 for $122 which will be expensed using the straight-line method over eight months. The Company recorded $95 as general and administrative expense in the accompanying consolidated statement of comprehensive loss for the year ended December 31, 2018. As of December 31, 2018, the Company has recorded a prepaid expense in the amount of $27, related to the fully vested, nonforfeitable warrants issued for which services have not been rendered.

On July 3, 2018, the Company entered into an amendment to a consulting agreement dated May 27, 2017 as a continuation of investor relation and consulting services to extend the termination of the agreement to July 2019 and issued 30,000 shares of common stock which vests immediately and a warrant to purchase 90,000 shares of common stock which vests immediately. The warrants are exercisable at $8.50 per share and expire five years from the date of issuance. The 90,000 warrants were valued using the Black-Scholes option pricing model under the following assumptions, (i) expected life of 5 years, (ii) volatility of 68.31%, (iii) risk-free rate of 2.72%, and (iv) dividend rate of zero. The fair value of the 90,000 warrants and 30,000 shares of common stock was estimated to be $594 which will be expensed using the straight-line method over thirteen months, the expected term of the agreement. The Company recorded $276 as general and administrative expense in the accompanying consolidated statement of comprehensive loss for the year ended December 31, 2018. As of December 31, 2018, the Company has recorded a prepaid expense in the amount of $317, related to the fully vested nonforfeitable shares of common stock and warrants issued for which services have not been rendered.

Consultant Award 

On July 3, 2018, the Company engaged an executive search firm (the “Firm”) to conduct a confidential search for a Chief Executive Officer (the “CEO”) for the Company. The terms of the engagement were that upon a successful search, the Company would compensate the Firm one-third of the total first-year actual cash compensation for the position. The Company agreed to (a) make payments based on the CEO’s base salary of $475, and (b) make a true-up payment (the “True-up Payment”) at the end of the CEO’s first year of employment based on the actual cash compensation earned within the CEO’s first year of employment, exclusive of any Employment Buy-Out Payments.

The recruiter was successful in recruiting a new CEO for the Company. An employment agreement was finalized and entered into during the third quarter and effective October 1, 2018. The Company deemed the Firm’s services were rendered in the third quarter of 2018 as an employment agreement was finalized in September 2018. The CEO’s annual base salary is $475 and is entitled to bonus and Employment Buy-Out Payments.

Firm Compensation

The Firm’s total compensation is to be paid 75% in cash and 25% in equity in the form of a warrant valued per the last round valuation. The cash component for the initial base salary measurement for $119 was payable in three (3) monthly installments with the first installment dated at the start date of the engagement. Therefore, the first installment was dated July 3, 2018; since, the Company deemed the services began in July 2018. As of December 31, 2018, the $119 cash component has been paid and was expensed as general and administrative in the accompanying consolidated statement of comprehensive loss for the year ended December 31, 2018.

On November 8, 2018, the Company issued a warrant (the “Base Warrant”) to purchase 7,917 shares of the Company’s common stock, with an exercise price of $5.00 per share and expires on November 8, 2021, as payment for the equity component for the initial base salary measurement. The Base Warrant is fully-vested, nonforfeitable and was valued on November 8, 2018 (at which point a measurement date was reached) using the Black-Scholes option pricing model under the following assumptions, (i) expected life of 3 years, (ii) volatility of 63.62%, (iii) risk-free rate of 3.05%, and (iv) dividend rate of zero. The aggregate fair value of the 7,917 warrants was estimated to be $11 which was recorded as general and administrative expense in the accompanying consolidated statement of comprehensive loss for the year ended December 31, 2018.

The Firm’s total compensation is the aggregate of one-third of the base salary of $475 which was paid as of December 31, 2018 and one-third of any additional cash compensation earned within the CEO’s first year of employment. As of December 31, 2018, the Company owes the following payments: (i) a warrant (the “Contingent Warrant”) for 25% of one-third of any additional cash compensation earned by the CEO during his first year of employment, and (ii) a cash payment for 75% of one-third of any additional cash compensation earned by the CEO during his first year of employment. For items (i) and (ii), a True-up Payment will be determined after the first year of employment ends and the additional cash compensation is known.

 Contingent Warrant

The Contingent Warrant will be issued with an exercise price subject to adjustment and with a three-year term, to purchase shares of the Company’s common stock. As of December 31, 2018, the Contingent Warrant has not been issued but will be fully vested upon issuance.

Consultant Expense

The Company valued the entire agreement and recorded $251 as general and administrative expense for the year ended December 31, 2018 as follows: (i) $158 earned for one-third of $475 paid 75% in cash and 25% by issuing the Base Warrant, and (ii) $93 for the estimated cash portion of the True-up Payment that will also be paid 75% in cash and 25% by issuing a variable number of warrants. As of December 31, 2018, the Company has recorded in the aggregate $93 in accounts payable and accrued expenses in relation to this agreement.

Employment Buy-Out Payments

The Firm agreed not to include any Employment Buy-Out Payments stipulated in the agreement as a calculation in the Firm’s fee as these Employment Buy Out Payments were deemed to be earned at the CEO’s previous place of employment. The Employment Buy-Out Payments represent any cash and equity bonuses earned that the CEO forfeited upon departing his previous place of employment, thus the Employment Buy-Out Payments will not be considered in the True-up Payment.

Warrants

A summary of the Company’s warrants to purchase common stock activity is as follows:

At December 31, 2018, outstanding warrants to purchase 2,629,468 shares of common stock were exercisable with a weighted-average exercise price per share of $5.24.

Stock Options

Exercise of Options

On February 21, 2018, a consultant exercised 896 options on a cashless basis which resulted in the issuance of 391 shares of the Company’s common stock.

On July 5, 2018, the Company issued 773 shares of its common stock upon the exercise of 773 employee options at an exercise price of $4.50 per share. In connection with the exercise, the Company received $3 in proceeds.

On July 31, 2018, the Company issued 1,792 shares of its common stock upon the exercise of 1,792 employee options at an exercise price of $2.52 per share. In connection with the exercise, the Company received $5 in proceeds.

On August 23, 2018, the Company issued 3,943 shares of its common stock upon the exercise of 3,943 employee options at an exercise price of $2.38 per share. In connection with the exercise, the Company received $9 in proceeds.

On August 23, 2018, the Company issued 2,389 shares of its common stock upon the exercise of 2,389 employee options at an exercise price of $2.52 per share. In connection with the exercise, the Company received $6 in proceeds.

On September 14, 2018, the Company issued 5,000 shares of its common stock upon the exercise of 5,000 employee options at an exercise price of $4.50 per share. In connection with the exercise, the Company received $23 in proceeds.

On September 14, 2018, the Company issued 499 shares of its common stock upon the exercise of 499 employee options at an exercise price of $5.00 per share. In connection with the exercise, the Company received $2 in proceeds.

2016 Equity Incentive Plan

In December 2016, the Company adopted the Motus GI Holdings, Inc. 2016 Equity Incentive Plan (the “2016 Plan”). Pursuant to the 2016 Plan, the Company’s board of directors may grant options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock, stock units, performance shares, performance units, incentive bonus awards, other cash-based awards and other stock-based awards to employees, officers, directors, consultants and advisors. Pursuant to the terms of an annual evergreen provision in the 2016 Plan, the number of shares of common stock available for issuance under the 2016 Plan shall increase annually by six percent (6%) of the total number of shares of common stock outstanding on December 31st of the preceding calendar year; provided, however, that the board of directors may act prior to the first day of any calendar year to provide that there shall be no increase such calendar year, or that the increase shall be a lesser number of shares of our common stock than would otherwise occur. On January 1, 2018, pursuant to an annual evergreen provision, the number of shares of common stock reserved for future grants was increased by 629,594 shares. As of December 31, 2018, there was a total of 2,641,250 shares of common stock reserved for issuance under the 2016 Plan and there were 99,417 shares of common stock available for future grant under the 2016 Plan. In accordance with the terms of the 2016 Plan, effective as of January 1, 2019, the number of shares of common stock available for issuance under the 2016 Plan increased by 1,286,409 shares, which was six (6%) of the outstanding shares of common stock on December 31, 2018. As of January 1, 2019, the 2016 Plan had a total reserve of 3,927,659 shares and there were 1,381,473 shares available for future issuance. 

A summary of the Company’s stock option activity is as follows:

The options granted during the year ended December 31, 2018 were valued using the Black-Scholes option pricing model using the following weighted average assumptions: (i) expected life of 5.8 years, (ii) volatility of 68.72%, (iii) risk free interest rate of 3.01% and (iv) dividend yield of zero. The weighted average grant date fair value during 2018 was $2.59.

The options granted during the year ended December 31, 2017 were valued using the Black-Scholes option pricing model using the following weighted average assumptions: (i) expected life of 5.8 years, (ii) volatility of 60%, (iii) risk free interest rate of 1.92% to 2.36% and (iv) dividend yield of zero.

At December 31, 2018, unamortized stock compensation for stock options was $2,898, with a weighted-average recognition period of 1.16 years.

At December 31, 2018, outstanding options to purchase 1,113,792 shares of common stock were exercisable with a weighted-average exercise price per share of $4.36.

For the year ended December 31, 2018, the Company recorded $1,832 for stock based compensation expense related to stock options.

For the year ended December 31, 2017, the Company recorded $1,744 for stock based compensation expense related to stock options.

Stock Based Compensation

The following table sets forth total non-cash stock-based compensation for the issuance of common stock, options to purchase common stock, warrants to purchase common stock, and restricted stock unit award by operating statement classification for the years ended December 31, 2018 and 2017: