Note 12 – Stockholders’ Equity

Common Stock

On March 19, 2019, the Company closed an underwritten public offering of its common stock. This offering was made pursuant to an underwriting agreement between the Company and BTIG, LLC. The offering resulted in the sale of 27,272,727 shares to the public at a price of $1.10 per share. The Company generated gross proceeds of $30.0 million. Net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses are approximately $27.8 million. In addition, the Company granted the underwriters a 30-day option (the “option”) to purchase up to an additional 4,090,909 shares of common stock subject to the same terms and conditions. On March 28, 2019, an additional 2,199,259 shares were sold pursuant to the option at a price of $1.10 per share, resulting in net proceeds to the Company of approximately $2.3 million.

Preferred Stock

In accordance with the Certificate of Incorporation, the Company is authorized to issue 10,000,000 preferred shares at a par value of $0.001. In connection with a private placement of Series A Preferred Stock, on July 26, 2016, the Company filed the Series A Certificate of Designation with the Secretary of the State of Delaware to designate the preferences, rights and limitations of the Series A Preferred Stock. Pursuant to the Series A Certificate of Designation, the Company designated 1,600,000 shares of the Company’s previously undesignated preferred shares as Series A Preferred Stock. In connection with a public offering of Series B Preferred Stock, on June 19, 2018, the Company filed the Series B Certificate of Designation with the Secretary of the State of Delaware to designate the preferences, rights and limitations of the Series B Preferred Stock. Pursuant to the Series B Certificate of Designation, the Company designated 8,000 shares of the Company’s previously undesignated preferred shares as Series B Preferred Stock.

Series A Preferred Stock

On July 29, 2019, the Company effected a mandatory conversion of all then outstanding shares of Series A Preferred Stock in accordance with terms of the underlying Certificate of Designation. The conversion resulted in the issuance of 14,678,580 shares of the Company’s common stock. In addition, the Company issued 3,522,860 shares of common stock as payment-in-kind for dividends that were accrued to shareholders of Series A Preferred Stock.

Conversion:

Prior to the automatic conversion of the Series A Preferred Stock on July 29, 2019, each share of Series A Preferred Stock was convertible at the option of the holder into such number of shares of the Company’s common stock equal to the number of shares of Series A Preferred Stock to be converted, multiplied by the stated value of $5.00 per share (the “Stated Value”), divided by the Conversion Price in effect at the time of the conversion (the initial conversion price is $0.50, subject to adjustment in the event of stock splits, stock dividends, and a “fundamental transaction” as defined below). Based on the conversion price and number of shares outstanding, the Series A Preferred Stock were converted into 14,678,580 shares of common stock. A “fundamental transaction” means: (i) a merger or consolidation of the Company with or into another entity, (ii) any sale of all or substantially all of our assets in one transaction or a series of related transactions, or (iii) any reclassification of our Common Stock or any compulsory share exchange by which Common Stock is effectively converted into or exchanged for other securities, cash or property. Each share of Series A Preferred Stock will automatically convert into common stock upon the earlier of (i) notice by the Company to the holders that the Company has elected to convert all outstanding Series A Preferred Stock; provided however that in the event the Company elects to force automatic conversion pursuant to this clause (i), the conversion date for purposes of calculating the accrued dividend (as defined below) is deemed to be July 29, 2019, (ii) July 29, 2019, (iii) the approval of the Company’s MAT2203 product candidate by the FDA or the EMA (the “Regulatory Approval”) or (iv) the Regulatory Approval of the Company’s MAT2501 product candidate.

Beneficial Conversion Feature- Series A Preferred Stock (deemed dividend):

Prior to the automatic conversion of the Series A Preferred Stock on July 29, 2019, each share of Series A Preferred Stock was convertible into shares of common stock, at any time at the option of the holder at a conversion price of $0.50 per share.

Based on the guidance in ASC 470-20-20, the Company determined that a beneficial conversion feature existed, as the effective conversion price for the Series A Preferred Stock at issuance was less than the fair value of the common stock which the preferred shares are convertible into. A beneficial conversion feature based on the intrinsic value of the date of issuances for the Series A Preferred Stock was approximately $4.4 million.

Liquidity Value and Dividends:

Pursuant to the Certificate of Designation, the Series A Preferred Stock accrued dividends at a rate of 8.0% once per year on the first three anniversaries of July 29, 2016, which were paid to the holders of such Series A Preferred Stock in shares of common stock upon conversion. Dividends of approximately $1.8 million, representing 3,522,860 shares of common stock, were accrued as paid-in-kind through July 29, 2019, with $0.6 million accrued in each of 2019, 2018 and 2017.

Royalty:

The Series A Preferred Stock includes the right, as a group, to receive: (i) a royalty of 4.5% of the net sales of the Company’s MAT2203 and MAT2501 product candidates, in each case from and after the date, respectively, such product candidate has received FDA or EMA approval, and (ii) a royalty of 7.5% of the proceeds, if any, received by the Company in connection with the licensing or other disposition by the Company of MAT2203 and/or MAT2501 (“Royalty Payment Rights”). The royalty is payable so long as the Company has valid patents covering MAT2203 and MAT2501, as applicable. The Royalty Payment Rights are unsecured obligations of the Company. The royalty payment will be allocated to the holders based on their pro rata ownership of vested Series A Preferred Stock. The royalty rights that are part of the Series A Preferred Stock vested in equal thirds, on July 29, 2017, July 29, 2018, and July 29, 2019 (each a “Vesting Date”) Following the July 29, 2019 conversion of Series A Preferred Stock, the Royalty Payment Rights may be transferred subject to available exemption from registration under applicable securities laws. These rights were not separable free-standing instruments requiring bifurcation at the date of transaction. The Company may recognize a deemed dividend for the estimated fair value of the vested portion of Royalty Payment Rights in future periods. As of December 31, 2019, no accrual has been recorded for royalty payments as it is not probable at this time that any amount will be paid.

Series B Preferred Stock

On June 19, 2018, the Company entered into a placement agency agreement with ThinkEquity, a Division of Fordham Financial Management, Inc., as placement agent, relating to the offering, issuance and sale of up to 8,000 shares of the Company’s Series B Convertible Preferred Stock, par value $0.0001 per share with a stated value of $1,000 per share which are convertible into an aggregate of up to 16,000,000 shares of the Company’s common stock at an initial conversion price of $0.50 per share. The offering also included up to an additional 7,200,000 shares of common stock issuable upon payment of dividends under the Series B Preferred Stock. The offering closed on June 21, 2018 raising a gross amount of $8 million with net proceeds of $7.1 million after deducting issuance costs. The placement agent received 7% commission on the gross proceeds, 1% of the gross proceeds to cover non-accountable expenses and 240,000 warrants fair valued at approximately $89,000 treated as a reduction to gross proceeds, that are exercisable over a 5-year period at an exercise price of $0.75 per share.

As of December 31, 2019 and 2018, there were 4,577 shares 4,819 shares, respectively, of Series B Preferred Stock outstanding.

Conversion:

Optional Conversion. Subject to the Beneficial Ownership Limitation (defined below), each share of Series B Preferred Stock will be convertible into shares of the Company’s common stock at any time at the option of the holder at an initial conversion price of $0.50 per share subject to adjustment for reverse splits, stock combinations and similar changes as provided in the Certificate of Designation. Based on the current conversion price and number of shares outstanding, the Series B Preferred Stock is convertible into 9,154,000 shares of common stock. Dividends will not accrue and will not be paid following optional conversion. During the years ended December 31, 2019 and 2018, 242 shares and 3,181 shares, respectively, of Series B preferred stock were converted into shares of common stock.

Automatic Conversion. Subject to the Beneficial Ownership Limitation described below, each share of Series B Preferred Stock shall automatically convert into 2,000 shares of the Company’s common stock at an initial conversion price of $0.50 per share upon the earlier of (i) the first FDA approval of one of our product candidates, (ii) the 36-month anniversary of the of the filing of the Certificate of Designation for the Series B Preferred Stock with the Secretary of State of Delaware (the “COD Effective Date” which is June 19, 2018) or (iii) the consent to conversion by holders of at least 50.1% of the outstanding shares of Series B Preferred Stock. In the event the Series B Preferred Stock automatically converts into common stock prior to the 36 month anniversary of the COD Effective Date, the holder on the date of such conversion shall also be entitled to receive those dividends which would have been payable after the conversion date, as if the shares of Series B Preferred Stock had remained unconverted and outstanding through the 36 month anniversary of the COD Effective Date. Such dividend amount shall be payable as set forth above in shares of common stock upon such automatic conversion.

Beneficial Conversion Feature. The Optional and Automatic conversion features do not contain a BCF as the effective conversion price for the Series B Preferred Stock at issuance was equal to the fair value of the common stock into which the preferred shares are convertible into.

Beneficial Ownership Limitation. The Company may not affect any optional or automatic conversion of the Series B Preferred Stock, or issue shares of common stock as dividends and a holder does not have the right to convert any portion of the Series B Preferred Stock to the extent that, after giving effect to such conversion such holder would beneficially own in excess of the Beneficial Ownership Limitation, or such holder, together with such holder’s affiliates, and any persons acting as a group together with such holder or affiliates, would beneficially own in excess of the Beneficial Ownership Limitation. The “Beneficial Ownership Limitation” is 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon conversion of Series B Preferred Stock held by the applicable holder. A holder may, prior to issuance of the Series B Preferred Stock or, with 61 days prior notice to us, elect to increase or decrease the Beneficial Ownership Limitation; provided, however, that in no event may the Beneficial Ownership Limitation exceed 9.99%.

Liquidity Value and Dividends:

Dividends. Subject to the Beneficial Ownership Limitation described above, holders of the Series B Preferred Stock are entitled to receive dividends payable in the Company’s common stock as follows: (i) a number of shares of common stock equal to 10% of the shares of common stock underlying the Series B Preferred Stock then held by such holder on the 12 month anniversary of the COD Effective Date, (ii) a number of shares of common stock equal to 15% of the shares of common stock underlying the Series B Preferred Stock then held by such holder on the 24-month anniversary of the COD Effective Date and (iii) a number of shares of common stock equal to 20% of the shares of common stock underlying the Series B Preferred Stock then held by such holder on the 36-month anniversary of the COD Effective Date. In the event a purchaser in this offering no longer holds Series B Preferred Stock as of the 12-month anniversary, the 24-month anniversary or the 36-month anniversary, such purchaser will not be entitled to receive any dividends on such anniversary date. Based on an accounting of the holders of record of Series B Preferred Stock on June 19, 2019, the Company paid the 12-month anniversary dividend payment of 10%, totaling 946,000 shares of common stock.

In the event a fundamental transaction is consummated prior to the automatic conversion of the Series B Preferred Stock, the dividends will be accelerated and paid to the extent not previously paid. In addition, holders of Series B Preferred Stock will be entitled to receive dividends equal, on an as-if-converted to shares of common stock basis, and in the same form as dividends actually paid on shares of the common stock when, as, and if such dividends are paid on shares of the common stock. Notwithstanding the foregoing, to the extent that a holder’s right to participate in any dividend in shares of common stock to which such holder is entitled would result in such holder exceeding the Beneficial Ownership Limitation, then such holder shall not be entitled to participate in any such dividend to such extent and the portion of such shares that would cause such holder to exceed the Beneficial Ownership Limitation shall be held in abeyance for the benefit of such holder until such time, if ever, as such holder’s beneficial ownership thereof would not result in such holder exceeding the Beneficial Ownership Limitation.

Pursuant to its Certificate of Designation, the liquidation value of a share of Series B Preferred Stock is equal to the stated value of $1,000 per share (as adjusted for stock splits, stock dividends, combinations or other recapitalizations of the Series A Preferred Stock) plus any earned but unpaid dividends.

Warrants

The Company has issued two types of warrants: (i) investor warrants and (ii) placement agent warrants. All warrants are exercisable immediately upon issuance and have a five-year term. The warrants may be exercised at any time in whole or in part upon payment of the applicable exercise price until expiration. No fractional shares will be issued upon the exercise of the warrants. The exercise price and the number of shares purchasable upon the exercise of the investor warrants are subject to adjustment upon the occurrence of certain events, which include stock dividends, stock splits, combinations and reclassifications of the Company’s capital stock or other similar changes to the equity structure of the Company.

For the 20 million investor warrants issued in 2015, the Company may call the warrants at any time the common stock trades above $3.00 for twenty (20) consecutive days following the effectiveness of the registration statement covering the resale of the shares of common stock underlying the warrants, provided that the warrants can only be called if such registration statement is current and remains effective at the time of the call and provided further that the Company can only call the investor warrants for redemption, if it also calls all other warrants for redemption on the terms described above. The Company did not call any warrants during the periods ended December 31, 2019 and 2018.

The placement agent warrants do not have a redemption feature. They may be exercised on a cashless basis at the holder’s option.

The investor warrants and placement agent warrants are classified as equity instruments.

As of December 31, 2019, the Company had outstanding warrants to purchase an aggregate of 5,396,812 shares of common stock at exercise prices ranging from $0.50 to $0.75 per share. A summary of warrants outstanding as of December 31, 2019 and 2018 is presented below, all of which are fully vested (in thousands):

* Weighted average exercise price for outstanding warrants is $0.62.

** Weighted average exercise price for outstanding warrants is $0.61.