NOTE 9 – PREFERRED STOCK

On November 7, 2007, and February 4, 2008, we entered into securities purchase agreements (the Purchase Agreements) with accredited investors to sell shares of a newly created series of our preferred stock, designated “Series A Cumulative Convertible Preferred Stock”, par value $0.01 per share, for an issue price of $10,000 per share, (the Series A Preferred Stock) and agreed to issue warrants to purchase shares of our common stock at an exercise price of $175.00 per share. The shares of Series A Preferred Stock were convertible into common stock at the initial conversion price of $150.00 per share. The exercise and conversion price have changed, as described below.

As a condition to closing, we entered into an Investor Rights Agreement with each of the investors purchasing shares of Series A Preferred Stock.

In connection with the sale and issuance of Series A Preferred Stock and warrants, we entered into a Director Designation Agreement whereby we agreed to continue SCO’s right to designate two individuals to serve on the Board of Directors of PlasmaTech.

The Series A Preferred Stock granted the holders of such preferred stock anti-dilution, dividend and liquidations rights that were superior to those held by the holders of our common stock. Under those terms, if PlasmaTech issued additional shares of common stock, in certain circumstances, for a price below $150.00 per share, the conversion price of the Series A Preferred Stock would be lowered to the lowest subsequent issue price below $150.00 per share until the shares are converted or redeemed. This would have had the effect of diluting the holders of our common stock. Under the terms of the Purchase Agreement, if PlasmaTech issued additional shares of common stock, in certain circumstances, for a price below $175.00 per share, the exercise price of the warrants would be lowered to the lowest subsequent issue price below $175.00 per share until the warrants were exercised or expired. Additionally, as discussed below, if we were unable to maintain an effective registration statement related to the Series A Preferred Stock, we would be required to pay liquidating damages.

On October 25, 2012, we issued Series B Preferred Stock with a conversion into common stock at $25.00 per share in a private placement offering. Per the terms of the agreement with the outstanding Series A Preferred Stock holders their stock became convertible into shares of common stock at $25.00 per share. At December 31, 2013 the Series A Preferred Stock was convertible into 1,164,348 shares of common stock.

All Series A Preferred Stock, Series A dividends payable and interest on Series A Preferred Stock dividends payable were converted into 8,961,769 shares of common stock just prior to the closing of the financing on December 24, 2014.

Effective January 1, 2009, we adopted the provisions of FASB ASC 815, “Derivatives and Hedging” (FASB ASC 815) (previously EITF 07-5, “Determining Whether an Instrument (or an Embeded Feature) is Indexed to an Entity’s Own Stock”). As a result of adopting FASB ASC 815, warrants to purchase 77,091 of our common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants had an exercise price of $175.00 and expired on November 10, 2013 and February 4, 2014.

We determined that the anti-dilution provision built into the Series A Preferred Stock and warrants issued should be considered for derivative accounting. FASB ASC 815 requires freestanding contracts that are settled in a company’s own stock to be designated as an equity instrument, assets or liability. Under the provisions of FASB ASC 815, a contract designated as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification as equity, until the contract is exercised or until the contract expires. We determined that the anti-dilution provision associated with the November 2007 and February 2008 preferred shares and warrants no longer met the criteria for equity accounting through the revised criteria in FASB ASC 815.

Accordingly, at January 1, 2009, we determined that the warrants and the Series A Preferred Stock conversion feature should be accounted for as derivative liabilities. The preferred stock conversion feature was determined to have no fair market value at both issuance dates as well as each reporting period until the third quarter of 2010 since management asserted that the likelihood of issuing any new equity at a price that would trigger the anti-dilution effect to be nil. During the third quarter of 2010 we were actively raising capital. With our stock price below $150.00 a share it was possible that we would sell shares below $150.00 per share. Since this would require an adjustment to our convertible preferred stock we recorded a derivative liability and expense at September 30, 2010. The derivative liability and expense was revalued at December 31, 2013 was $1,190,000; and at December 24, 2014 was $24,300,000. The change in the fair value of the derivative was a loss of $23,110,000 in 2014 and a gain of $8,010,000 in 2013. The Series A Preferred Stock was converted into common stock at December 24, 2014 and the amount of the derivative liability was reclassified to stockholders equity.

The warrants were valued at issuance and each reporting period since using the Black-Scholes model. On January 1, 2009 we reclassified the fair value of the warrants from equity to liability as if these warrants were treated as a derivative liability since their issue date. We recorded derivative gain of $271,000 for the year ended December 31, 2013. Warrants to purchase 72,998 shares of our common stock expired November 10, 2013. The remaining 9,992 warrants expired February 4, 2014.

On October 25, 2012, we entered into a Preferred Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with existing investors whereby we agreed to sell 1,000 shares of a newly created series of our preferred stock, designated “Series B Cumulative Convertible Preferred Stock”, par value $0.01 per share, for an issue price of $10,000 per share, (the “Series B Preferred Stock”) and agreed to issue warrants to purchase 400,000 shares of our common stock at an exercise price of $25.00 per share, for an aggregate purchase price of $10,000,000. The financing consisted of $4,703,000 of new investment and the conversion of approximately $5,297,000 of outstanding dividends payable on our Series A Preferred Stock. Certain terms of the Series B Preferred Stock were senior in right to the Company’s outstanding Series A Preferred Stock. The Series B financing was approved by the requisite percentage of the holders of the Company’s Series A Preferred Stock and closed on October 25, 2012.

The shares of Series B Preferred Stock issued upon closing were convertible at the option of the holder into shares of our common stock at a conversion price of $25.00 per share of common stock (the “Conversion Price”). The Conversion Price was not subject to adjustment, except in cases of stock splits, stock dividends or similar transactions.

The Series B Preferred Stock was entitled to a liquidation preference, senior to the liquidation preference of the Series A Preferred Stock, equal to the greater of (i) (A) two times (2x) the Stated Value for the Series B Preferred Stock, plus any accumulated and unpaid dividends (whether or not declared) on the Series B Preferred Stock if such liquidation takes place prior to the fifth anniversary of the original issue date or (B) three times (3x) the Stated Value for the Series B Preferred Stock, plus any accumulated and unpaid dividends (whether or not declared) on the Series B Preferred Stock if such liquidation took place on or after to the fifth anniversary of the original issue date, or (ii) the cash or other property distributable upon such liquidation with respect to the shares of Common Stock into which such shares of Series B Preferred Stock, including any accrued dividends thereon, could have been converted immediately prior to such payment. “Stated Value” shall mean $10,000 per share of Series B Preferred Stock, as it may be increased from time to time as set forth in the Certificate of Designations. The Series B Preferred Stock is also entitled to a dividend of 12% per annum, payable quarterly in cash or additional Stated Value, at the election of the majority holders at time of payment.

We had the right, but not the obligation, and with the written consent of the majority holders, to force conversion (“Mandatory Conversion”) of all, but not less than all, of the outstanding Series B Preferred Stock into common stock as long as the closing price of our common stock exceeds $250.00 for at least 20 consecutive trading days immediately prior to the conversion and the average daily trading volume is not less than 4,000 shares per day for at least 20 consecutive trading days immediately prior to such date on which the Company gave notice of such conversion. The Company’s ability to cause a Mandatory Conversion was subject to certain other conditions, including that a registration statement covering the common stock issuable upon such Mandatory Conversion was in effect and able to be used.

The common stock purchase warrants issued are for an aggregate of 400,000 shares of our common stock at an exercise price of $25.00. The warrants can also be exercised on a cashless basis. The warrants will expire six years from the date of issuance.

The warrant exercise price is subject to equitable adjustment for stock splits, dividends, combinations, and reorganizations only.

The Share Exchange Agreement dated September 10, 2014 between us and the Series B Preferred Stock holders approved the conversion of all Series B Preferred Stock, Series B dividends payable, interest on Series B Preferred Stock dividends payable and liquidated damages, subject to the closing of an offering of at least $10 million.

All Series B Preferred Stock, Series B dividends payable, interest on Series B Preferred Stock dividends payable and liquidated damages were converted into 6,951,837 shares of common stock just prior to the closing of the financing on December 24, 2014.

Pursuant to the terms of an Investor Rights Agreement with the Purchasers of Series A Preferred Stock, we were required to maintain an effective registration statement. The Securities and Exchange Commission declared the registration statement effective November 13, 2008 relating to a portion of such securities, and as a result, we accrued $857,000 in potential liquidated damages as of December 31, 2013 and December 31, 2012. Potential liquidated damages are capped at 10% of each holder’s investment. The accrued liquidated damages of $857,000 were converted into common stock at December 24, 2014.

Unpaid preferred stock dividends and interest of $6,913,416 accrued at December 24, 2014 was converted into common stock at December 24, 2014

Unpaid preferred stock dividends and interest of $3,046,553 accrued at December 31, 2014 was converted into common stock at December 24, 2014.