Note 10. Issuance of Series A-1 Preferred Stock

As of December 31, 2022, the Company had 10,000,000 shares of preferred stock authorized, par value of $0.001 per share, and no shares of preferred stock were issued or outstanding. As of March 31, 2023, as a result of the Company’s private placement financing, there were 30,190 shares of Series A-1 Preferred Stock issued and outstanding.

On March 3, 2023, the Company issued and sold, in a private placement, 30,190 shares of Series A-1 Preferred Stock for an aggregate net proceeds of $28.0 million (the “Preferred Stock Offering”), net of placement agent fees and offering expenses of $2.2 million. The Company intends to use the net proceeds from the Preferred Stock Offering to support the Company’s New Drug Application (NDA) submission for approval of Renazorb for the treatment of hyperphosphatemia and, if approved, for the commercial launch of Renazorb in the U.S.

Pursuant to the Certificate of Designation of Preferences, Rights and Limitations of the Series A Convertible Voting Preferred Stock (the “Certificate of Designation”), each share of Series A-1 Preferred Stock is, subject to approval of the Company’s stockholders, convertible into a unit (“Unit”) consisting of: (i) shares of common stock of the Company and, if applicable, shares of Series A-2 Preferred Stock, in lieu of Common Stock, (ii) a tranche A warrant to acquire approximately 46,675,940 shares of Series A-3 Preferred Stock (the “Tranche A Warrant”), (iii) a tranche B warrant to acquire approximately 42,432,672 shares of Series A-4 Preferred Stock (the “Tranche B Warrant”), and (iv) a tranche C warrant to acquire approximately 67,892,276 shares of Series A-5 Preferred Stock (the “Tranche C Warrant”, together with the Tranche A Warrant and the Tranche B Warrant, the “Warrants”). The Tranche A warrants for an aggregate exercise price of approximately $25 million are exercisable until 21 days following the Company’s announcement of receipt of FDA approval for Renazorb, the Tranche B warrants for an aggregate exercise price of approximately $25 million are exercisable until 21 days following the Company’s announcement of receipt of Transitional Drug Add-On Payment Adjustment (“TDAPA”) approval for Renazorb, and the Tranche C Warrant for an aggregate exercise price of approximately $50 million are exercisable until 21 days following four quarters of commercial sales of Renazorb following receipt of TDAPA approval.

The Company has designated 30,190 shares of Series A-1 Preferred Stock, 1,800,000 shares of Series A-2 Preferred Stock, 1,800,000 shares of Series A-3 Preferred Stock, 1,800,000 shares of Series A-4 Preferred Stock, and 3,600,000 shares of Series A-5 Preferred Stock, together the “Series A Preferred Stock”. The Series A Preferred Stock has a par value of $0.001 per share. The Certificate of Designation states that, to the extent that the conversion of the Series A-1 preferred stock as well as the exercise of the Tranche A, B, and C warrants into Series A-2, Series A-3, Series A-4, and Series A-5 preferred stock results in a beneficial ownership interest in excess of the maximum percentage of common stock upon conversion, the holders will receive the as converted equivalent for the remaining shares in preferred stock on a one-for-one basis with common shares. As the Company does not currently have sufficient authorized shares of preferred stock available to satisfy the one-for-one conversion to Series A preferred stock, the Company may be required to seek shareholder approval for an increase in the number of authorized preferred shares. However, it is the Company’s intent to modify the language of the Certificate of Designation such that the conversion will reflect a $1,000 per share value for the preferred stock expected to be issued as Series A-2, Series A-3, Series A-4, and Series A-5 preferred stock.

The Company determined that the holders can detach the warrants from the Series A-1 preferred stock, because the stock will automatically convert into shares of common stock, and the holders will be able to sell those shares while retaining the warrants. Accordingly, the warrants are considered freestanding from the Series A-1 preferred stock. The Company noted that at contract inception, the warrants are contingently issuable upon the occurrence of a specified event (shareholder approval). Once the warrants are legally issued as a result of the automatic conversion of the Series A-1 preferred stock upon shareholder approval, they will become immediately exercisable at the option of the holder. The Company determined that the contingently issuable warrants qualify as derivative instruments pursuant to ASC 815-40 and that the warrants will be considered issued for accounting purposes concurrently with the Series A-1 Preferred Stock.

In connection with the Series A-1 Preferred Stock issuance, the Company recognized liabilities for the associated Warrants, which had an aggregate fair value of $2.8 million at the time of issuance. $0.2 million of offering costs were allocated to the Warrants and expensed during the three months ended March 31, 2023. The fair value of the Warrants were accounted for as a reduction to the net proceeds of the Preferred Stock Offering, which resulted in an initial carrying value of $25.4 million for the Series A-1 Preferred Stock (net of $2.0 million of placement agent fees and offering costs allocated to the Series A-1 Preferred Stock). Refer to Note 11 for disclosures related to the Warrants.

The Series A-1 Preferred Stock have the following rights:

Dividends: Prior to the receiving stockholder approval, dividends will accrue, on all issued and outstanding shares of Series A-1 Preferred Stock, prior to and in preference to all other shares of capital stock of the Company, at an annual rate of eight percent (8%) compounded annually on the original per share price (plus any such accreted compounded amounts); provided that such annual dividend rate shall increase to fourteen percent (14%) if stockholder approval is not obtained at the first meeting of stockholders following the date of the Preferred Stock offering. If such dividends are not declared and paid in cash, the dividend amounts will be added to the aggregate liquidation preference then outstanding of the Series A-1 Preferred Stock. As of March 31, 2023, the Company has recorded $0.2 million, or $6.36 per share, of deemed dividends on the outstanding Series A-1 Preferred Stock.

Voting: Holders of the Series A-1 Preferred Stock are entitled to vote together with the common stock on an as-if-converted-to-common-stock basis as determined by dividing the liquidation preference with respect to such shares of Series A Preferred Stock by the conversion price. Holders of common stock are entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders.

Board of Directors Designation Rights: The holders of Series A-1 Preferred Stock have the right to appoint one member to the Board of Directors.

Conversion: Prior to the receipt of stockholder approval, the Series A-1 Preferred Stock is not convertible by the holder thereof. The Company intends to present for a vote the issuance by the Company of shares of common stock pursuant to the terms of the private placement financing transaction during the Company’s Annual Meeting in June 2023.

On the tenth trading day following the announcement of the stockholder approval, each share of Series A-1 Preferred Stock shall automatically convert into a unit consisting of: (1) the number of shares of common stock equal to the quotient of (A) the liquidation preference with respect to such share of Series A-1 Preferred Stock, divided by (B) the conversion price, provided that, to the extent the share conversion would cause such Holder’s beneficial ownership to exceed 9.99%, such holder shall receive shares of Series A-2 Preferred Stock in lieu of common stock, on a one-for-one basis, with respect to the number of shares of common stock that exceed 9.99% ownership, (2) a Tranche A Warrant, (3) a Tranche B Warrant, and (4) a Tranche C Warrant.

Redemption: In the event stockholder approval is not obtained within one year following the issuance of the Series A-1 Preferred Stock, at the election of the holder, shares of Series A-1 Preferred Stock shall be redeemed by the Corporation at a price equal to the then liquidation preference at any time for up to three years following the issuance date.

Liquidation Preference: The Series A-1 Preferred Stock shall have a liquidation preference of one-times the original per share price   of $1,000 per share, plus any accrued but unpaid dividends thereon, whether or not declared, subject to certain customary anti-dilution adjustments.

The Series A-2, A-3, A-4, and A-5 Preferred Stock have the following rights:

Dividends: Dividends will accrue, on all issued and outstanding shares of Series A-2, A-3, A-4, and A-5 Preferred Stock, prior to and in preference to all other shares of capital stock of the Company, at an annual rate of eight percent (8%) compounded annually on the original per share price (plus any such accreted compounded amounts). If such dividends are not declared and paid in cash, the dividend amounts will be added to the aggregate liquidation preference then outstanding.

Voting: Holders of the Series A-2, A-3, A-4, and A-5 Preferred Stock are entitled to vote together with the common stock on an as-if-converted-to-common-stock basis as determined by dividing the liquidation preference with respect to such shares of Preferred Stock by the conversion price. Holders of common stock are entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders.

At the option of the holder thereof, each share of Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series A-4 Preferred Stock, or Series A-5 Preferred Stock shall be convertible into one share of common stock.