8.	Convertible Preferred Stock and Common Stock Warrants

In contemplation of completing the private placement described below, the Company amended and restated its articles of incorporation and authorized

13,750,000

shares of Series A convertible preferred stock. The Company has classified its Series A convertible preferred stock outside of stockholders

’ equity because the shares contain deemed liquidation rights that are contingent redemption features

not

solely within the control of the Company.

Series

A Convertible Preferred Stock Transaction

March 2017,

the Company completed a

$25.0

million private placement of its securities in which the Company offered and sold units consisting of

one

share of the Company

’s Series A convertible preferred stock and a warrant to purchase

one

share of common stock for each share of Series A convertible preferred stock purchased in the offering. Each share of Series A convertible preferred stock entitles the holder to an

8.0%

cumulative dividend payable in shares of our common stock on a semi-annual basis. The holders

may,

at their option, convert each share of Series A convertible preferred stock into

one

share of the Company’s common stock based on the initial conversion price of

$2.02

per share, subject to adjustment. Each warrant entitles the holder to purchase

one

share of common stock at an initial exercise price of

$2.22,

subject to adjustment and expires on the

fifth

anniversary of their original issuance date.

The Company sold

12,376,329

units in the private placement and received approximately

$22.1

million in aggregate net cash proceeds, after deducting commissions and other expenses of approximately

$2.9

million. In addition, as compensation for its services, the Company granted to its placement agent in the offering warrants to purchase an aggregate of

1,179,558

shares of common stock at an initial exercise price of

$2.22

per share, which expire on the

fifth

anniversary of their original issuance date.

During its evaluation of equity classification for the common stock warrants, the Company considered the conditions as prescribed within ASC

815

40,

Derivatives and Hedging, Contracts in an Entity’s own Equity

(“ASC

815

40”

). The conditions within ASC

815

are

not

subject to a probability assessment. As the Company is obligated to issue a variable number of shares to settle the cumulative dividends on the Series A convertible preferred stock, the Company cannot assert there will be sufficient authorized shares available to settle the warrants issued in connection with the Series A offering. Accordingly, these warrants are classified as liabilities. The Company will continue to classify such warrants as liabilities until they are exercised, expire, or are

longer required to be classified as liabilities.

As the fair value of the warrants upon issuance was in excess of the proceeds of the Series A offering, there are

proceeds allocated to the Series A convertible preferred stock. The excess fair value of the warrants over the gross proceeds of the Series A offering and the fair value of the warrants granted to its placement agent was

$10.2

million in the aggregate and was recorded as warrant related expenses in the statement of operations for the

nine

months ended

September

30,

2017.

Dividends

The Company shall pay a cumulative preferential dividend on each share of the Series A convertible preferred stock outstanding at a rate of

8.0%

per annum, payable only in shares of common stock, semi-annually in arrears on

April 1

and

October 1

of each year commencing on

October 1, 2017.

This cumulative preferential dividend is

not

subject to declaration. The Company recognized approximately

$0.4

million and

$0.9

million in dividends, respectively, for the

three

and

nine

months ended

September

30,

2017.

Voting

Subject to certain preferred stock class votes specified in the Certificate of Designation of Preferences, Rights and Limitations of the Series A Convertible Preferred Stock (the “Certificate of Designation”) or as required by law, the holders of the Series A convertible preferred stock votes together with the holders of common stock as a single class on an adjusted as-converted basis. In accordance with N

ASDAQ

listing rules, in any matter voted on by the holders of our common stock, each share of Series A convertible preferred stock entitles the holder thereof to a number of votes based upon the closing price of our common stock on the N

ASDAQ

Capital Market on the date of issuance of such shares of Series A convertible preferred stock. Accordingly, shares of Series A convertible preferred stock issued in the initial closing of the private placement on

March 14, 2017

are entitled to

0.84874

votes per share and shares of Series A Preferred Stock issued in the final closing of the private placement on

March 31, 2017

are entitled to

0.50627

votes per share, in each case, subject to adjustment as described in the Certificate of Designation.

Liquidation Preference

The Series A convertible preferred stock is senior to the common stock. In the event of a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or in the event of a deemed liquidation event, which includes a sale of the Company as defined in the Certificate of Designation, the holders of the Series A convertible preferred stock shall be entitled to receive their original investment amount. If upon the occurrence of such event, the assets and funds available for distribution are insufficient to pay such holders the full amount to which they are entitled, then the entire remaining assets and funds legally available for distribution shall be distributed ratably among the holders of the Series A convertible preferred stock in proportion to the full amounts to which they would otherwise be entitled.

Conversion

The Series A convertible preferred stock is convertible, at the holder

’s option, into common stock. At the Company’s option, the Series A convertible preferred stock can be converted into common stock upon (a) the

thirty

-day moving average of the closing price of the Company’s common stock exceeding

$8.00

per share, (b) a financing of at least

$10.0

million or (c) upon the majority vote of the voting power of the then outstanding shares of Series A convertible preferred stock. The conversion price of the Series A convertible preferred stock is subject to adjustment as described in the Certificate of Designation.

Upon any conversion, any unpaid dividends shall be payable to the holders of Series A convertible preferred stock. During the

three

and

nine

months ended

September 30, 2017,

2,125,306

and

4,052,297

shares of Series A convertible preferred stock, respectively, were converted into common stock. During the

three

and

nine

months ended

September 30, 2017,

approximately

$0.1

million and

$0.2

million in accrued dividends, respectively, were converted into

62,701

and

88,436

shares of common stock, respectively.

Make-Whole Provision

Until

March 2020

and subject to certain exceptions, if the Company issues at least

$10.0

million of its common stock or securities convertible into or exercisable for common stock at a per share price less than

$2.02

(such lower price, the “Make-Whole Price”) while any shares of Series A convertible preferred stock remain outstanding, the Company will be required to issue to these holders of Series A convertible preferred stock a number of shares of common stock equal to the additional number of shares of common stock that such shares of Series A convertible preferred stock would be convertible into if the conversion price of such shares was equal to

105%

of the Make-Whole Price (the “Make-Whole Adjustment”). The Make-Whole Adjustment was evaluated and was

not

required to be bifurcated from the Series A convertible preferred stock.

Common Stock Warrants

As of

September

30,

2017,

the Company had the following warrants outstanding to acquire shares of its common stock:

	Outstanding		Range of exercise price per share
Common stock warrants issued prior to Merger		447,721	$20.00	-	$750.00
Common stock warrants issued in Series A		13,555,887		$2.22
		14,003,608

During the

nine

months ended

September

30,

2017,

13,000

warrants, issued prior to the Merger, expired. These common stock warrants will expire periodically through

2019.

The common stock warrants issued in connection with the

March 2017

Series A private placement expire in

March 2022.

During the

three

and

nine

months ended

September

30,

2017,

the Company recognized a net gain of

$8.4

million and

$5.8

million in warrant related charges associated with the Series A private placement, which consisted primarily of the change in fair value of the common stock warrants from issuance and the excess fair value of the common stock warrants over the gross cash proceeds of the Series A offering.