NOTE 6 — STOCKHOLDERS’ EQUITY (DEFICIT)

Changes in Authorized Capital Stock

The Company held its annual meeting of stockholders on April 24, 2019, whereby the Company’s stockholders approved an amendment to the Certificate of Incorporation to (i) increase the authorized number of shares of Common Stock from 200 million shares to 500 million shares, and (ii) a recission of the previous designation of 15.0 million shares of the Series A Preferred Stock. As a result of this action, the Company has authority to designate and issue up to 20.0 million shares of Preferred Stock as of June 30, 2019.

Series AA Preferred Stock Financing

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 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 5.0 million 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 2.5 million shares of Series AA Preferred Stock to the New Investors at a purchase price of $10.00 per share for aggregate proceeds of $25.0 million.

The Series AA Preferred Stock ranked senior to the Common Stock in the event of a liquidation, dissolution or winding up of the Company. The Series AA Shares had 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 were 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 approximately $2.3 million. 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 11.

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. On April 24, 2019, The Company’s stockholders approved an increase in the number of authorized shares of Common Stock from 200.0 million shares to 500.0 million shares whereby all 2.5 million shares of Series AA Preferred Stock held by the New Investors automatically converted into approximately 113.6 million shares of the Company’s Common Stock. As of June 30, 2019, the New Investors collectively own 54% of the Company’s Common Stock which resulted in a change of control.

The Company agreed to use commercially reasonable efforts to, (i) prepare and file with the Securities and Exchange Commission (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. The Company filed this Registration Statement with the SEC in August 2019.

The Company granted each of the New Investors a call option whereby upon the earlier of (i) December 31, 2020 and (ii) such date that the Company requests the New Investors to provide additional financing, each New Investor may elect to purchase up to $10.0 million of Common Stock at a purchase price equal to the greater of (i) $0.29 per share or (ii) 75% of the volume weighted average closing price of the Company’s Common Stock during the thirty consecutive trading days prior to the date of the notice. As discussed in Note 13, the New Investors exercised the call option on July 23, 2019, resulting in the purchase of an aggregate of approximately 69.0 shares of Common Stock for gross proceeds of $20.0 million at a purchase price of $0.29 per share.

Automatic Conversion of Promissory Notes

Due to closing of the Series AA Financing for gross proceeds of $25.0 million, the Fiscal 2018 Notes discussed in Note 5 converted for an aggregate of approximately $6.1 million, which consisted of the aggregate principal balance plus accrued interest through January 30, 2019. 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 was exchanged for 767,519 shares of Series A Preferred Stock resulting in an effective issuance price of $8.00 per share to give effect to the 20% discount. This 20% discount is included in the calculation of the BCF discussed in Note 5 which resulted in additional interest expense of $2.2 million for the fiscal year ended June 30, 2019.

Upon receipt of shareholder approval for an increase in the number of authorized shares of Common Stock to 500.0 million shares on April 24, 2019, all 767,519 shares of Series AA Preferred Stock held by the former Fiscal 2018 Note holders converted into approximately 34.9 million shares of the Company’s Common Stock.

Series AA Conversion Terms

The conversion terms for all shares of Series AA Preferred Stock that converted to Common Stock on April 24, 2019, are as follows (in thousands, except share and per share amounts):

 

2017 Private Placement

For the fiscal quarter ended September 30, 2017, the Company closed a private placement for the issuance of 4.5 million shares of Common Stock to accredited investors at an offering price of $1.00 per share. The Company received gross proceeds of $4.5 million. Placement agent commissions amounted to $60,000 related to this private placement.

Lincoln Park Purchase Agreement

In December 2017, we entered into a purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”)  with the Lincoln Park Capital Fund, LLC (“Lincoln Park”) pursuant to which Lincoln Park agreed to purchase up to an aggregate of $10.0 million of the Company’s Common Stock (subject to certain limitations) over the term of the agreement that expires in December 2020. As required by the Registration Rights Agreement, the Company filed a registration statement with the SEC under the Securities Act of 1933 to register for resale the shares of Common Stock that have been or may be issued to Lincoln Park under the Purchase Agreement. As consideration for Lincoln Park’s commitment to purchase shares of the Company’s Common Stock under the agreement, the Company issued approximately 345,000 shares of Common Stock with an estimated fair value of $0.3 million in December 2017.

Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $10.0 million of shares of the Company’s Common Stock. As contemplated by the Purchase Agreement, and so long as the closing price of the Company’s common stock exceeds $0.40 per share, then the Company may direct Lincoln Park, at its sole discretion to purchase up to 65,000 shares of its Common Stock on any business day, provided that five business day has passed since the most recent purchase. The price per share for such purchases will be equal to the lower of: (i) the lowest sale price on the applicable purchase date and (ii) the arithmetic average of the three lowest closing sale prices for the Company’s Common Stock during the 12 consecutive business days ending on the business day immediately preceding such purchase date (in each case, to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction that occurs on or after the date of the purchase agreement). The maximum amount of shares subject to any single regular purchase increases as the Company’s share price increases, subject to a maximum of $0.5 million.

In addition to regular purchases, the Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional purchases if the closing sale price of the Common Stock exceeds certain threshold prices as set forth in the purchase agreement. In all instances, the Company may not sell shares of its Common Stock to Lincoln Park under the purchase agreement if it would result in Lincoln Park beneficially owning more than 9.99% of its Common Stock. There are no trading volume requirements or restrictions under the purchase agreement nor any upper limits on the price per share that Lincoln Park must pay for shares of Common Stock.

The Company’s Common Stock has not exceeded the threshold price of  $0.40 per shares for the period from August 2018 through June 2019. The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. During any “event of default” under the Purchase Agreement, all of which are outside of Lincoln Park’s control, Lincoln Park does not have the right to terminate the Purchase Agreement; however, the Company may not initiate any regular or other purchase of shares by Lincoln Park, until such event of default is cured.

XOMA Equity Issuance

The closing of the debt financing for the Fiscal 2018 Notes on April 3, 2018 was considered to be the initial closing for the Common Stock purchase agreement. Accordingly, the Company issued an aggregate of 8.1 million shares of Common Stock to XOMA with an aggregate fair value of approximately $4.6 million. This amount is included in research and development licensing costs in the accompanying consolidated statement of operations for the fiscal year ended June 30, 2018.