Note 10 — Warrants

Early Warrant Exercise Transaction

In July 2020, the Company entered into letter agreements with certain of the Company’s Series A warrant holders (the “Series A Warrant Holders”), who were previously issued warrants (the “Original Warrants”) to purchase shares of common stock of the Company in the Private Placement. The Series A Warrant Holders agreed to the early exercise of Series A warrants pursuant to the letter agreements (the “Early Warrant Exercise Transaction”). The transaction closed in August 2020. The Company raised net proceeds of $2.5 million in the Early Warrant Exercise Transaction. we intend to use the net proceeds from the Early Warrant Exercise Transaction to fund commercialization and development of our B-TRAN™ technology and general corporate and working capital purposes.

Pursuant to the letter agreements and in consideration of the Series A Warrant Holders exercising Series A warrants to purchase an aggregate of 1,176,137 shares of common stock, the Company issued to the Series A Warrant Holders new Series C warrants to purchase up to an aggregate of 705,688 shares of common stock with an exercise price of $8.90 per share and an expiration date of August 4, 2025. The estimated fair value of the Series C warrants, calculated using the Black-Scholes model, was $3.7 million on the date of issuance and was recognized as a non-cash warrant inducement expense within other expenses in the statement of operations. The assumptions used in the Black Scholes model included a risk-free interest rate of 0.22%, a zero expected dividend yield, an expected life of 5 years and an expected volatility of 90%.

To the extent that a Series A Warrant Holder’s exercise of Original Warrants would result in such holder exceeding beneficial ownership of 9.99% of the outstanding common stock of the Company, such excess warrant shares will be held in abeyance for the benefit of such Series A Warrant Holder until such time as its right thereto would not result in the holder exceeding this limitation. The term of the abeyance shall extend no later than May 12, 2025.

During the year ended December 31, 2019 and in connection with the Private Placement, the Company issued pre-funded warrants to purchase 868,443 shares of common stock that were immediately exercisable and have no expiration date. The pre-funded warrants were recorded as a component of stockholders’ equity within additional paid-in capital. Also in connection with the Private Placement, investors received warrants to purchase 1,766,751 shares of common stock at an exercise price of $2.32 per share that will expire five year from the date of issuance. The placement agreement received 70,670 warrants to purchase shares of common stock as part of its placement agent fee. The placement agent warrant has an exercise price of $2.9716 per share and expires five year from the date of issuance.

The warrants were sold with shares of common stock or pre-funded warrants for $2.4763 per unit. The unit price was allocated to the warrants and common stock or pre-funded warrants based upon the relative fair value of the securities, with the warrants valued using the Black-Scholes model. The allocated fair value of the warrants was estimated to be $1.6 million on the date of issuance. In addition, the placement agent warrant was valued at $98,592 on the date of issuance.

The assumptions used in the Black-Scholes model for these warrants are as follows:

A summary of the Company’s warrant activity and related information is as follows:

At December 31, 2020, 803,300 excess warrant shares were held in abeyance.

All warrants were exercisable at December 31, 2020 although warrants may generally be exercised only to the extent that the total number of shares of common stock then beneficially owned by these shareholders does not exceed 4.99% (or, at the investor’s election, 9.99%) of the outstanding shares of the Company’s stock.

The weighted average remaining life, excluding the 320,201 pre-funded warrants with no expiration date, of the outstanding warrants is 4.3 years.

The estimated aggregate pre-tax intrinsic value (the difference between the Company’s stock price on the last day of the year ended December 31, 2020 and the exercise prices, multiplied by the number of in-the-money warrants) is $11.8 million.