On December 23, 2019, the Company entered into the December 2019 Securities Purchase Agreement, 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, the Company has agreed to sell to the Purchasers, at their option and subject to certain conditions, 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 following stockholder approval for the Charter Amendment (the “Future Tranche Rights”). As of June 30, 2020, the Company’s outstanding Future Tranche Rights are as follows:

(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 December 2019. In the event the Company did 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 was refundable to the Purchasers. At the Company’s 2020 Annual Meeting of Stockholders held on May 12, 2020, stockholders of the Company voted to approve an amendment to the Company’s Restated Certificate of Incorporation to increase the authorized number of shares of common stock, par value $0.001 per share, to 140,000,000 (the “Charter Amendment”), representing an amount sufficient to cover the conversion of all potential future convertible securities. As a result of stockholder approval of the Charter Amendment, the Company is not required to return the Option Fee.

Note 7. Redeemable Convertible Preferred Stock (Continued)

The purchase and sale of the securities issuable under tranches 2, 3 and 4 may occur in up to three 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 on February 12, 2021 (or on the 10^th business day following the Company’s ORR Data Announcement, as defined in the December 2019 Securities Purchase Agreement, for its ILLUMINATE-301 study, if later), August 12, 2021, and February 12, 2022, 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, at the discretion of the Purchasers, to receive aggregate gross proceeds of up to an additional $87.6 million under the December 2019 Securities Purchase Agreement.

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.

Due to the redeemable nature of the Series B1 Preferred Stock, the Series B1 Preferred Stock is currently 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 June 30, 2020. 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 three and six months ended June 30, 2020, accretion was de minimis.