In December 2018, two New Investors expressed interest in investing in the Company and affirmed their intent to enter into exclusive diligence and negotiations regarding a potential equity financing (“Transaction”). In exchange for the receipt of a total of $1.5 million ("Exclusivity Payment"), the Company entered into an exclusivity agreement ("Exclusivity") with the New Investors. On January 7, 2019, the parties entered into a Purchase Agreement for Shares of Series AA Preferred Stock (the “Purchase Agreement”) whereby the New Investors agreed to purchase shares of newly designated Series AA Preferred Stock (the “Series AA Financing”) for aggregate gross proceeds to the Company of $25.0 million (inclusive of the $1.5 million Exclusivity Payment). On January 18, 2019, the board of directors authorized the designation of 5,000,000 shares of the Company’s Preferred Stock as Series AA Preferred Stock. On January 30, 2019, the parties closed the Series AA Financing and the Company issued an aggregate of 2,500,000 Series AA shares to the New Investors at a purchase price of $10.00 per share.

A condition to closing the Series AA Financing was the resignation of a majority of the Company’s former directors and the appointment of the New Investors as directors whereby the New Investors collectively control the board of directors with two of the three members. As a result of the issuance of the Series AA shares, the New Investors collectively own 54% of the Company’s Common Stock on an as-converted basis which resulted in a change of control. In addition, the Company granted the Purchasers a board nomination right whereby so long as the New Investors and their affiliates collectively hold at least 40% of the aggregate Series AA shares, they shall have the right to nominate three members of the Company’s board of directors.

 

The Series AA Shares have an effective conversion price of approximately $0.22 per share of Common Stock whereby the shares of Series AA Preferred Stock held by the New Investors are immediately convertible, at the option of the holders, into an aggregate of approximately 113.6 million shares of the Company’s Common Stock. The fair value of the Company’s common stock on the issuance date of the Series AA Shares was $0.24 per share which resulted in a BCF of $2,273,000. Since the Series AA Shares are classified as equity instruments, this BCF is treated as an adjustment in computing net loss attributable to common stockholders in Note 12. As discussed in Note 13, upon receipt of shareholder approval for an increase in the number of authorized shares of Common Stock to 500,000,000 shares on April 24, 2019, all 2,500,000 shares of Series AA Preferred Stock held by the New Investors converted into approximately 113.6 million shares of the Company’s Common Stock.

 

The Company agreed to use commercially reasonable efforts to, (i) prepare and file with the SEC within sixty calendar days after the closing of the Series AA Financing a registration statement under the U.S. Securities Act of 1933, as amended (the “Registration Statement”), to permit the resale of all shares of Common Stock issued upon the conversion of the Series AA shares purchased in the Series AA Financing.  The Company also agreed to use commercially reasonable efforts to cause the Registration Statement to be declared effective within ninety calendar days following the closing of the Series AA Financing.

 

 

Due to closing of the Series AA Financing for gross proceeds of $25.0 million, the Fiscal 2018 Notes converted for an aggregate of $6,140,117, which consisted of the aggregate principal balance of $5,340,000 plus accrued interest through January 30, 2019 of $800,117. As discussed in Note 6, the Fiscal 2018 Notes were convertible at a discount of 20% from the issuance price paid by the New Investors. Therefore, the total balance of the Fiscal 2018 Notes of $6,140,117 was exchanged for 767,519 Series A shares resulting in an effective issuance price of $8.00 per share to give effect to the 20% discount in the Fiscal 2018 Notes. This 20% discount is included in the calculation of the BCF discussed in Note 6 which resulted in an expense of $2,233,000 for the three and nine months ended March 31, 2019.

 

As discussed in Note 13, upon receipt of shareholder approval for an increase in the number of authorized shares of Common Stock to 500,000,000 shares on April 24, 2019, all shares of Series AA Preferred Stock held by the former Fiscal 2018 Note holders converted into approximately million shares of the Company’s Common Stock.

 

 

The original issue price and conversion terms for all Series AA Shares outstanding as of March 31, 2019, are as follows:

 

 

As of March 31, 2019, the Company did not have an adequate number of authorized shares of Common Stock available to accommodate conversion of all of the Series AA shares and all outstanding stock options and warrants.

As discussed in Note 13, the Company held its annual meeting of stockholders on April 24, 2019, which resulted in the approval of an increase in the authorized number of shares of Common Stock from 200 million shares to 500 million shares. Accordingly, all shares of Series AA Preferred Stock shown in the table above automatically converted on that date to 148,523,540 shares of Common Stock. As a result of the agreement by the New Investors to delay conversion and the subsequent approval by shareholders to increase the authorized shares, the Series AA Preferred Stock is classified within stockholders’ equity in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2019.

 

For changes in stockholders’ equity (deficit) for the nine months ended March 31, 2019, please refer to the unaudited condensed consolidated statement of stockholders’ equity (deficit) on page 3. The following table presents changes in stockholders’ equity (deficit) for the three months ended March 31, 2019:

 

  

 

(1)

Changes in stockholders’ equity for the nine months ended March 31, 2018, are as follows: