TEMPORARY EQUITY, PREFERRED STOCK, COMMON STOCK, AND WARRANTS

12 Months Ended

Dec. 31, 2023

TEMPORARY EQUITY, PREFERRED STOCK, COMMON STOCK, AND WARRANTS

NOTE 6 – TEMPORARY EQUITY, PREFERRED STOCK, COMMON STOCK, AND WARRANTS

Option and Pre-Closing Collaboration Fee

On November 14, 2023, we signed a non-binding term sheet with Telix with respect to the Merger. Upon execution of that term sheet, Telix paid us $2,000,000 as an Option and Pre-Closing Collaboration Fee, and to assure 60 days of exclusivity as they completed their due diligence and the parties negotiated the definitive Merger Agreement (the “Telix Option Fee”). If the Merger does not close, the Telix Option Fee will be automatically converted to QSAM common stock at a price of $6.70 per share for 298,507 common shares and is considered potentially dilutive equity. The exclusivity period granted in return for the Telix Option Fee was extended on January 11, 2024 for an additional 30 days for no additional consideration. On February 7, 2024, we signed the definitive Merger Agreement with Telix, and are currently working to close the Merger in the first half of 2024. The Company evaluated the accounting treatment for this payment under ASC 815 and recorded the $2,000,000 in additional paid in capital.

Series A Redeemable Convertible Preferred Stock (“Series A Stock”)

As of December 31, 2023 and 2022, the Company had 240 and 480 shares of Series A Stock issued and outstanding, respectively. The Series A Stock has no voting rights until converted to common stock and has a liquidation preference equal to the aggregate purchase price of the outstanding shares of Series A Stock at $1,000 per share, plus accrued dividends. Pursuant to a modification agreement effective as of March 31, 2023, the two Series A Stockholders agreed to change the redemption date on their Series A Stock to December 31, 2023 and waive any prior defaults by the Company.

In December 2023, the Company signed blanket Conversion Notice and Reservation of Rights Agreements (the “Conversion Notice”) with both of the Series A Stockholders providing that immediately prior to closing the proposed Merger with Telix, all remaining shares of Series A Stock held by such holders plus all accrued dividends would be automatically converted to common stock. In return for this agreement, the Company agreed that it would not seek to redeem the Series A Stock as of January 1, 2024, and the parties waived all existing defaults. The Conversion Notice is non-revokable but expires upon the sooner of the closing of the Merger or 12 months from the date of signing, and as a result, the new Redemption Date under the Series A Stock was reset to December 15, 2024.

As of February 8, 2024, all shares of Series A Stock plus all accrued dividends had been converted to common stock and the Series A Stock was retired in full (see Note 10 – Subsequent Events).

The Series A Stock carries a 6% per annum dividend calculated on the stated value of the stock and is cumulative and payable quarterly beginning July 1, 2016. These dividends are accrued at each reporting period and are added to the redemption value of the stock; however, since the Company has an accumulated deficit, the charge has been recognized in additional paid-in capital. The accrued dividends are $268,800 and $241,200 as of December 31, 2023 and 2022, respectively. During the fourth quarter 2023, the Series A Stockholders converted $240,000 of principal amount of Series A Stock to 80,000 shares of common stock. As of December 31, 2023 and 2022, the stated value of the Series A Stock and the accrued dividends was $509,198 and $721,200, respectively, which has been presented as mezzanine equity on the consolidated balance sheets, which resides between liabilities and stockholders’ equity (deficit).

The outstanding principal and accrued dividends on the shares of Series A Stock as of December 31, 2023 are convertible into the Company’s common stock at $3.00 (the “Conversion Price”), which was reduced in the first quarter of 2023 pursuant to a price protection provision included in the Series A Stock Certificate of Designation (“Series A Designation”), as the Company offered an inducement to holders of warrants to convert their warrants at such lower conversion price. The Series A Designation requires an adjustment to the Conversion Price if a subsequent equity sale occurs at a price below the conversion rate. The Company recorded a deemed dividend within stockholders’ deficit associated with the reduction in Conversion Price from $3.33 to $3.00 of $96,245 based on the incremental value to the Series A Stockholders due to the Conversion Price reduction. This incremental value has also been presented on the consolidated statement of operations as an addition to the net loss available to common stockholders. The incremental value was determined by computing the additional shares the Series A Stockholders would receive based on the Conversion Price reduction multiplied by the estimated fair value of common stock of $4.00 at such time.

Prior to the last Conversion Price adjustment, the outstanding shares of Series A Stock as of December 31, 2022 were convertible at $3.33 per share of the Company’s common stock, which was reduced in 2022 pursuant to the Series A Designation as the Company sold a common stock and warrant unit in an offering at $4.50, the fair value of which was determined to be $3.33. The Company recorded a deemed dividend within additional paid in capital on the consolidated statement of stockholders’ deficit associated with the reduction in Conversion Price from $6.40 to $3.33 of $342,497 based on the incremental value to the Series A Stockholders due to the Conversion Price reduction. This incremental value has also been presented on the consolidated statement of operations as an addition to the net loss available to common stockholders. The incremental value was determined by computing the additional shares the Series A Stockholders would receive based on the Conversion Price reduction multiplied by the estimated fair value of common stock of $3.33.

Management has determined that the Series A Stock is more akin to a debt security than equity primarily because it contains a mandatory 2-year redemption date at the option of the holder (which pursuant to the December 2023 modification signed by both Series A Stockholders, was changed to December 31, 2024 from December 31, 2023), which only occurs if the Series A Stock is not converted to common stock. Therefore, management has presented the Series A Stock outside of permanent equity as mezzanine equity, which resides between liabilities and equity.

Series B Convertible Preferred Stock (“Series B Stock”)

In December 2020, the Company filed an amendment to its Articles of Incorporation to authorize the issuance of up to 2,500 shares of Series B Stock, par value $0.001 per share, pursuant to a Certificate of Designation (“Series B Designation”). The Series B Stock provides the holders a 10% annual paid-in-kind dividend, a liquidation preference equal to the purchase price of the shares ($1,000 per share) followed by the right to participate with the common stockholders in the instance of a liquidation or other exit event, and provides the holders the right to vote along with the common holders based on the common conversion amount of their holdings. In January 2021, the Company closed a private offering of its Series B Stock for $1,000 per share, raising a total of $2,500,000, inclusive of $156,000 in prior debt conversion and $23,000 of notes payable with directors converted to shares of Series B Stock and warrants. Between July 27 and August 24, 2021, 15 holders of an aggregate of 991 shares of Series B Stock converted their shares of Series B Stock into 163,134 shares of common stock, which included $53,061 of accrued dividends. As of December 31, 2023 and 2022, 1,509 shares of Series B Stock were issued and outstanding. The accrued dividends are $455,548 and $304,653, as of December 31, 2023 and 2022, respectively, which are presented on the consolidated balance sheets.

The Series B Stock was originally convertible into common stock at a ratio of $6.40 per share, subject to anti-dilution protections in the case of certain issuances of securities below that conversion price, and as a result of this price protection, the ratio was reduced in the fourth quarter of 2022 to $6.19 per share based on the Series B Designation which defines the adjustment to the conversion ratio and incremental shares when the Company issues common stock at a price below the conversion ratio. For the year ended December 31, 2022, the Company recorded a deemed dividend within stockholders’ equity associated with the reduction in conversion price from $6.40 to $6.19 of $30,938 based on the incremental value to the Series B Stockholders due to the conversion price reduction. This incremental value has also been presented on the consolidated statement of operations as an addition to the net loss available to common stockholders.

In the period ended March 31, 2023, the anti-dilution protections were triggered as a result of additional common stock issuances and the warrant conversion repricing, and the conversion ratio was reduced to $5.42. The Company recorded a deemed dividend within stockholders’ equity associated with the reduction in conversion price from $6.19 to $5.42 of $168,835 based on the incremental value to the Series B Stockholders due to the conversion price reduction. This incremental value has also been presented on the consolidated statement of operations as an addition to the net loss available to common stockholders.

In the period ended September 30, 2023, the anti-dilution protections were triggered as a result of additional common stock issuances, and the conversion ratio was reduced to $5.30. The Company recorded a deemed dividend within stockholders’ equity associated with the reduction in conversion price from $5.42 to $5.30 of $40,461 based on the incremental value to the Series B Stockholders due to the conversion price reduction. This incremental value has also been presented on the consolidated statement of operations as an addition to the net loss available to common stockholders.

As of October 31, 2023, all remaining Series B Stockholders signed agreements with the Company providing that if the Company lists its common shares on Nasdaq or otherwise signs an agreement to be acquired, such shareholders will automatically and without any further action on their part exchange their shares of Series B Stock for common shares at an exchange ratio of $3.00, inclusive of all accrued dividends through September 30, 2023. In the instance of an acquisition of the Company, such exchange into common shares at the reduced price is in lieu of any contracted liquidation preference payments. As a result of the signing of the Merger Agreement with Telix, on February 6, 2024 all shares of Series B Stock plus all accrued dividends were exchanged into 658,968 shares of common stock (see Note 10 – Subsequent Events).

Common Stock

During the years ended December 31, 2023 and 2022, the Company issued shares of common stock as follows (adjusted as necessary to reflect a 40:1 reverse stock split in March 2022):

	2023		2022
	For the Years Ended December 31,
	2023		2022
Adjustment for 40:1 Reverse Stock Split		-		266
Conversion of debentures and accrued interest		-		5,469
Conversion of accrued salary to management		-		168,611
Exercise of common stock warrants to common stock		365,001		-
Stock based compensation to employees and directors		271,141		-
Cashless exercise of service warrants into common stock		8,571		-
Conversion of Series A preferred stock to common stock		80,000		-
Conversion of convertible debt and interest to common stock		164,446		22,155
Issuance of common stock for cash		296,304		311,666
Stock based compensation for consulting services		144,900		118,750
Total common shares issued		1,330,363		626,917

During the year ended December 31, 2023, the Company issued common stock for cash in private placement offerings as follows: 69,834 shares of common stock for $314,251 in a common stock and warrant unit offering that closed March 31, 2023; 176,471 shares of common stock for $600,000 in the third quarter of 2023, inclusive of a $100,000 subscription receivable received in October 2023; 50,000 shares of common stock for $250,000 in the fourth quarter of 2023. The Company also received exercises of 365,001 warrants issued in the first quarter 2023 unit offering into 365,001 shares of common stock at an exercise price of $3.00, for a total of $1,144,501, which included $49,500 that offset fees owed for services, and which also included $342,669 in subscription receivables related to conversion notices that were executed prior to March 31, 2023 and funds that were received in April 2023.

As of March 31, 2023, the Company converted outstanding convertible debt of $480,000 plus $39,712 of interest totaling $519,712 into 164,446 shares of common stock at a conversion price of $3.50.

During the year ended December 31, 2023, the Company converted $240,000 of Series A preferred stock to 80,000 shares of common stock at $3.00 per share.

During the year ended December 31, 2023, the Company issued 8,571 shares of common stock through a cashless exercise of 50,000 warrants.

Additionally, during the year ended December 31, 2023, the Company issued 269,102 shares to board members and employees for their annual bonus as deferred compensation until vested. The awards are subject to vesting and forfeiture conditions including satisfaction of certain performance-based milestones, as follows: (1) 209,102 shares were issued as incentive compensation vesting 50% upon the Company’s uplisting to Nasdaq if within three years, with the balance vesting in eight quarterly installments commencing on the sooner of such Nasdaq uplisting or 12 months after issuance; provided all shares shall vest upon the sale, merger or other “exit” event for the Company and its shareholders; and (2) 60,000 shares were issued to compensate four members of the management team for acceptance of a significant reduction in their base salaries in 2023 to help the Company conserve cash resources, and vest upon the completion of the Company’s next funding in the amount of at least $5 million or Company exit. The awards scheduled to vest upon the occurrence of the vesting conditions will not vest in accordance with those vesting conditions if the recipient of the award is no longer providing services to the Company at the time of vesting. The award recipient’s status will end on the day the notice of termination is provided (whether by the Company or by the recipient upon resignation) and will not be extended by any notice period that may be required contractually or under applicable local law.

Further, the Company issued 2,040 immediately vested unregistered shares of common stock to its Chief Financial Officer in lieu of deferred cash compensation of approximately $10,200.

For the years ended December 31, 2023 and 2022, the Company recognized stock-based compensation to employees and directors totaling $37,000 and $864,002, respectively, related to common stock that was exchanged on December 6, 2021 from Series E-1 Preferred Stock (that was concurrently retired), which is included in compensation and related expenses on the consolidated statements of operations. As of December 31, 2023, there is no unrecognized compensation remaining from these common shares.

During the year ended December 31, 2022, $35,000 of debentures and accrued interest were converted into 5,469 shares of common stock at a price of $6.40 per share. Additionally, the Company issued 48,750 shares of common stock for services, and 10,000 shares of common stock for services provided by one director who resigned from the Board in the same period. Additionally, the Company issued 311,666 shares for $1,402,500 cash in 2022.

Warrants

During the year ended December 31, 2023, the Company issued 69,832 warrants in connection with the common stock and warrant unit offering (the “Unit Warrants”), and 50,000 warrants to a service provider totaling $91,979 in consulting services expense. The Company issued 311,666 Unit Warrants in 2022.

A summary of warrant activity and related information for the year ending December 31, 2023 is as follows:

	Warrants			Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding as of December 31, 2022		323,543		$	6.15	$	-
Issued		119,832			4.25		-
Exercised		(390,071	)		3.35		-
Terminated in connection with cashless exercise		(41,429	)	$	5.25		-
Expired		(11,875	)		10.00		-
Outstanding as of December 31, 2023		-		$	-	$	-

The aggregate intrinsic value of the warrants is the difference between the fair market value of the Company’s closing price of its common stock at each reporting date, less the exercise price multiplied by the number of warrants outstanding, which was $0 at December 31, 2023 and 2022, respectively.

- Definition

The entire disclosure for equity.

+ References

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+ Details

QSAM Biosciences, Inc. 10-K