Note 7. Redeemable Convertible Preferred Stock

December 2019 Private Placement

On December 23, 2019, the Company entered into a Securities Purchase Agreement (the “December 2019 Securities Purchase Agreement”) with institutional investors affiliated with Baker Brothers (the “Purchasers”), an existing shareholder and related party as more fully described in Note 16, under which the Company sold 23,684 shares of Series B1 convertible preferred stock (“Series B1 Preferred Stock”) and warrants to purchase 2,368,400 shares of the Company’s common stock at an exercise price of $1.52 per share (or, if the holder elects to exercise the warrants for shares of Series B1 Preferred Stock, 23,684 shares of Series B1 Preferred Stock at an exercise price of $152 per share) for aggregate gross proceeds of $3.9 million (the “Initial Closing”).

In addition, we have agreed to sell to the Purchasers, at their option and subject to certain conditions including stockholder approval to increase the Company’s authorized shares of common stock, shares of Series B2 convertible preferred stock (“Series B2 Preferred Stock”), Series B3 convertible preferred stock (“Series B3 Preferred Stock”) and Series B4 convertible preferred stock (“Series B4 Preferred Stock) and accompanying warrants to purchase common stock (or preferred stock at the election of the holder) over a 21-month period after stockholder approval is received (the “Future Tranche Rights”) as follows:


		Price Per		Aggregate
Future Tranche Rights	Preferred Shares	Share		Purchase Price
Tranche 2 (Series B2) (1)	98,685	$	152	$	15,000,120
Tranche 3 (Series B3) (2)	82,418	$	182		15,000,076
Tranche 4 (Series B4) (2)	82,418	$	182		15,000,076
Total	263,521			$	45,000,272

(1)

Accompanied by related warrants to purchase up to 9,868,500 shares of the Company’s common stock (or, if the holder elects to exercise the warrants for shares of Series B1 Preferred Stock, 98,685 shares of Series B1 Preferred Stock), at an exercise price of $1.52 per share (or, if the holder elects to exercise the warrants for Series B1 Preferred Stock, $152 per share of Series B1 Preferred Stock).

(2)

Accompanied by related warrants to purchase up to 6,593,440 shares of the Company’s common stock (or, if the holder elects to exercise the warrants for shares of Series B1 Preferred Stock, 65,934 shares of Series B1 Preferred Stock), at an exercise price of $1.82 per share (or, if the holder elects to exercise the warrants for Series B1 Preferred Stock, $182 per share of Series B1 Preferred Stock).

As consideration for the Future Tranche Rights, the Company received aggregate gross proceeds of $6.2 million (the “Option Fee”). In the event the Company does not receive the required shareholder approval to increase the Company’s authorized shares of common stock in an amount sufficient to cover the conversion of all potential convertible securities issuable under the December 2019 Securities Purchase Agreement on or prior to December 31, 2020, the Option Fee shall be returned to the Purchasers. The Board recommends the stockholders support the proposal to increase the authorized shares.

The purchase and sale of the securities issuable under tranches 2, 3 and 4 may occur in two or more separate closings, each to be conducted at the Purchasers’ discretion. The right of the Purchasers to purchase Series B2, Series B3 and Series B4 Preferred Stock will expire 9 months, 15 months, and 21 months following shareholder approval, respectively. However, the Purchasers’ right to purchase securities under tranches 3 and 4 is contingent on the purchase of all of the securities in each preceding tranche right. In the event the Purchaser’s do not purchase all of the securities in a given tranche, their right to purchase shares in future tranches terminates and any outstanding warrants issued under the December 2019 Securities Purchase Agreement would terminate. Additionally, the Company has the right to decline the Series B4 Preferred Stock investment if its common stock trades at $7.60 for 20 days out of 30 days subsequent to the closing of the Series B3 Preferred Stock investment.

In addition to the aggregate gross proceeds received from the Initial Closing and the Option Fee, the Company is eligible to receive aggregate gross proceeds of up to an additional $87.6 million under the December 2019 Securities Purchase Agreement.

Note 7. Redeemable Convertible Preferred Stock (Continued)

Accounting Considerations

The Company determined that the Series B1 Preferred Stock, the accompanying Series B1 warrants, and each of the Future Tranche Rights represented a freestanding financial instrument. The warrants and the Future Tranche Rights are liability classified as the underlying shares are potentially redeemable and such redemption is deemed to be outside of the Company’s control. The $10.1 million in gross proceeds received in December 2019 was allocated to the Series B1 warrants and the Future Tranche Rights based on their estimated fair values of $2.6 million and $35.5 million, respectively. The excess fair value of $28.0 million over the gross proceeds received of $10.1 million was recorded as a deemed dividend to Baker Brothers, an existing significant shareholder. Costs in connection with the December 2019 Securities Purchase Agreement were expensed as incurred.

Due to the redeemable nature of the Series B1 Preferred Stock, the Series B1 Preferred Stock has been classified as temporary equity. While the Series B1 Preferred Stock is not currently redeemable, it will become redeemable either on (i) the fifth anniversary of the initial issue date, or December 23, 2024, provided that certain events (the “Redemption Loss Events”) do not occur first or (ii) upon a liquidation or deemed liquidation event, provided that certain events (the “Liquidation Loss Events”) do not occur first. The Company cannot assess the probability of whether the Redemption Loss Events will occur prior to the fifth anniversary of the initial issue date, if ever, as certain factors triggering such events are outside the control of the Company. Accordingly, the carrying value of the Series B1 Preferred Stock is being accreted to its redemption value as of December 31, 2019. In the event the holders of the Series B1 Preferred Stock lose their right to request redemption, the Series B Preferred Stock will no longer be accreted to its redemption value until redemption upon a liquidation event is deemed probable. For the year ended December 31, 2019, accretion was de minimis.