Mateon Therapeutics, Inc.CONDENSED Consolidated Balance Sheets

Condensed Statements of Stockholders’ Deficit

(in thousands)

(unaudited)(Unaudited)

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The accompanying notes.

Mateon Therapeutics, Inc.

Condensed Statementsfootnotes are an integral part of Cash Flows

(in thousands)

(unaudited)these unaudited condensed consolidated financial statements.

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MATEON THERAPEUTICS, INC. AND SUBSIDIARY

CONDENSED Consolidated STATEMENTS OF OPERATIONS

For the Three and nine months ended September 30, 2019 and 2018

(Unaudited)

The accompanying notes.

Leases

At the inception of an arrangement of over 12 months duration, the Company determines whether it contains a leasevalues based on the arrangement’s factsshort-term maturity of these instruments. As defined in ASC 820, “Fair Value Measurements and circumstances. WhenDisclosures,” fair value is the arrangement containsprice that would be received to sell an asset or paid to transfer a leaseliability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

The three levels of over 12 months duration,right-of-usethe fair value hierarchy defined by ASC 820 are as follows:

The Adhera Convertible Series E Preferred shares contain “full-ratchet” anti-dilution provisions. If Adhera issues any new common shares or derivative securities convertible into shares of common stock at a price that is lower than the conversion price for the Convertible Series E Preferred Stock (other than certain limited exempt issuances) then the conversion price for the Convertible Series E Preferred Stock will automatically adjust to the lower conversion price, as defined in the agreement with Adhera. The Adhera Convertible Series E Preferred shares are not publicly traded and corresponding operating lease liabilitiesthere are recorded based on the presentno freely observable inputs from objective sources. Any short-term changes in value of lease payments over the expected term. The Company uses its estimated incremental borrowing rate for collateralized assets as the basis for the discount rate used to determine the present value. Lease expense is recognized over the expected term on a straight-line basis.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASUNo. 2016-2, “Leases (Topic 842),” which requires substantially all leases, including operating leases, to be recognized by lessees on their balance sheet as aright-of-use asset and corresponding lease liability. ASUNo. 2016-2 became effective for the Company’s interim and annual reporting periods beginning on January 1, 2019, which is the date the Company adopted the new standard. On the date of adoption, the Company had only one lease, which is for the Company’s principal executive office and the lease expires on June 30, 2019.

The Company elected to use the modified retrospective approach for the adoption of ASU2016-2. The Company also elected to apply the transition method that allows companies to continue applying the guidance under the lease standard in effect at that time in the comparative periods presented in the financial statements. The Company further elected practical expedients not to reassess prior conclusions about lease identification, lease classification and initial direct costs under the new standard. Results for reporting periods beginning January 1, 2019 are presented under the new standard, while prior period amountsAdhera common stock are not adjustedindicative of a change in value of Adhera Convertible Series E Preferred shares given the different rights and continue to be reported under the accounting standards in effect for the prior period.

Upon adoptionpreferences of the new lease standard on January 1, 2019, the Company capitalized right of use assets of $101,000 and recognized a total of $109,000 of lease liabilities on its balance sheet. On December 31, 2018, prior to the adoption of ASU2016-2, the Company had recognized $8,000 of lease liabilities on its balance sheet, therefore the adoption of the new lease standard resulted in an increase to the Company’s liabilities of $101,000 on the date of adoption. The Company used a discount rate of 10%. As of January 1, 2019, minimum remaining lease payments aggregated $112,000, and as of March 31, 2019, minimum remaining lease payments aggregated $56,000.

3. Stockholders’ Equity

The following is a summary of the Company’s outstanding common stock warrants:such shares.

The following is a summary of the Company’s stock option activity under its equity incentive plans:

As of March 31, 2019, there was approximately $366,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted average period of approximately 1.0 years.

The fair value for stock options granted is estimated at the date of grant using a Black-Scholes option pricing model. No stock options were granted during the three months ended March 31, 2019 or March 31, 2018.

4. Net Loss Per Share

Basic and diluted net loss per common share was calculatedis computed by dividing the net loss per share attributed to the Company’s common shares by the weighted-average number of common shares outstanding during the period. Diluted net loss per share includes the effect of all dilutive, potentially issuable common equivalent shares as defined using the treasury stock method. All of the Company’s common stock equivalents are anti-dilutive due to the Company’s net loss position for the periods presented. Accordingly,(notes convertible into common stock, equivalents of approximately 6,774,000 stock options and 22,216,000 warrantswarrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. The following number of shares have been excluded from diluted loss since such inclusion would be anti-dilutive:

Stock-Based Compensation

The Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements of operations.

For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at March 31,the time of grant and revised.

Pursuant to ASU 2018-07 Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance with ASC 718. The Company uses valuation methods and assumptions to value the stock options that are in line with the process for valuing employee stock options noted above.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. For the three and nine months ending September 30, 2019 and 4,705,000 stock options2018, there were no impairment losses recognized for long-lived assets.

Intangible Assets

The Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and 9,626,000 warrantsOther. The Company reviews the intangible assets for impairment on an annual basis or if events or changes in circumstances indicate it is more likely than not that they are impaired. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors.

Goodwill

Goodwill represents the excess of the purchase price of acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at March 31, 2018, were excludedleast once annually, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill for impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.

The first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the calculationfair value of weighted averagethe reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.

Convertible Instruments

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815 “Derivatives and Hedging”.

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with ASC 470-20 “Debt – Debt with Conversion and Other Options.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

ASC 815-40 “Derivatives and Hedging – Contracts in Entity’s Own Equity” provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.

Research & Development Costs

In accordance with ASC 730-10-25 “Research and Development”, research and development costs are charged to expense as and when incurred.

Prior Period Reclassifications

Certain amounts in prior periods have been reclassified to conform with current period presentation.

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for diluted netGoodwill Impairment. The new guidance requires only a one-step quantitative impairment test, whereby a goodwill impairment loss per share.will be measured as the excess of a reporting period unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Company’s financial statements and related disclosures.

5. Subsequent Events

MergerIn August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2018. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The adoption of ASU 2016-15 did not have a material impact on the Company’s financial statements and related disclosures.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with OncotelicCustomers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year. ASU 2014-09 became effective for the Company on January 1, 2018. The ASU also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The Company did not have any revenues for the three and nine months ended September 30, 2019 and 2018 respectively, and may not have revenues in the near future. The adoption of ASC 606 is not likely to have any impact on the Company’s financial statements and related disclosures.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of ASU 2016-02 did not have a material impact on the Company’s financial statements and related disclosures as the Company does not have any leases.

All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.

NOTE 3 - ACQUISITIONS

Merger Agreement with Oncotelic, Inc.

Effective April 17,22, 2019, the Company entered into a merger agreement withcompleted the Merger pursuant to the Merger Agreement. Pursuant to the terms of the Merger Agreement, Oncotelic, Inc. (“Oncotelic”, a clinical-stage biopharmaceutical company focused on the treatment of cancer usingTGF-b RNA), and Oncotelic Acquisition Corporation (the “Merger Sub”, a newly formed wholly-owned subsidiary of the Company). Mateon and Oncotelic entered into the merger agreement in order to create a publicly-traded company with a pipeline of immunotherapies that target several cancer markets which currently lack adequate treatment options.

On April 22, 2019, following the satisfaction of closing conditions contained in the merger agreement, the Merger Sub was merged with and into Merger Sub. Oncotelic, with OncotelicInc. was the surviving the mergercorporation and, as a subsidiary of the Company. In connection with the merger, the Company issued approximately 41,000,000 shares of common stock and 193,713 shares of newly designated Series A Preferred Stock to the former stockholders of Oncotelic in exchange for all of the previously outstanding shares of Oncotelic common stock. Included in the shares issued to the former stockholders of Oncotelic are approximately 2,110,000 shares of common stock and approximately 10,000 shares of Series A Preferred Stock which are to be issued subject to the holders’ waiver of dissenter’s rights.

Each share of Series A Preferred Stock is convertible into 1,000 shares of common stock and is eligible to vote on stockholder matters on anas-converted basis. The Series A Preferred Stock will convert into common stock upon the availability of a sufficient number of authorized shares of common stock. As a result of the merger, the former Oncotelic security holders immediately before the transaction own approximately 85%Merger, became a wholly owned subsidiary of the issued and outstanding common stock, including shares of common stock that are issuable upon conversion of the Series A Preferred Stock, and the stockholders of the Company immediately before the transaction own the remaining 15%.Mateon.

The Company plans to report data regarding the financial statements of Oncotelic, including pro forma financial information, once Oncotelic’s financial statements are completed. Oncotelic is in the process of preparing its financial statements for all relevant reporting periods and obtaining audits for its fiscal years ended December 31, 2018 and 2017, and, accordingly, it is currently impractical to include such information.

Contingent Value Right for previous Mateon stockholders

Holders of Mateon common stock at the close of business on the date prior toOn the effectiveness of the merger were issued a Contingent Value Right (“CVR”),Merger it is reflected that:

Each CVR provides them withits holder the right to receive 75% of the net proceeds received from the full or partial sale, license, transfer or other disposition of the intellectual property rights and related assets of the Company’sMateon’s product candidates OXi4503 and CA4P, in

their current form and for their currently contemplated uses at the time of Closing, that occurs under a definitive agreement executed prior to the fourth anniversary of the mergerMerger (after the initial $500,000 of such net proceeds, which will be retained by the Company). The Company’s stock transfer agent acts as the rights agent for the CVR holders. The CVRs are not transferrable,transferable, do not entitle their holdersthe holder to any equity interest in the Company and do not have any voting or dividend rights.

Management Change

Immediately following the Merger, Mateon had 82,419,967 shares of Common Stock issued and outstanding and 193,713 shares of Preferred Stock which when converted at a 1:1,000 ratio will result in an additional 193,712,995 shares of Common Stock. The pre-Merger stockholders of Mateon retained an aggregate of 41,419,934 shares of Common Stock of Mateon, representing approximately 15% ownership of the post-Merger company. Therefore, upon consummation of the Merger, there was a change in control of Mateon, with the former owners of Oncotelic effectively acquiring control of Mateon. The Merger has been treated as a recapitalization and reverse acquisition for financial accounting purposes. As such, Oncotelic is considered the acquirer for financial accounting purposes, and the registrant’s historical financial statements of the Company before the Merger has been replaced with the historical financial statements of Oncotelic before the Merger in the financial statements and filings with the Securities and Exchange Commission.

The Company obtained a preliminary 3^rd party valuation on the fair value of the assets acquired and liabilities assumed for use in the purchase price allocation, as well as the value the consideration exchanged in the Merger. It was determined that the market price of the Company’s Common Stock was a readily determinable measurement for calculating the fair value of the consideration and the Merger date stock price of $.09 was used to value the equity interest exchanged.

The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed as of the transaction date:

a. The primary items that generate goodwill include the value of the synergies between the acquired company and Oncotelic, Inc. and the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset.

Goodwill is the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets. In accordance with applicable accounting standards, goodwill is not amortized but instead is tested for impairment at least annually or more frequently if certain indicators are present. Goodwill and intangibles is not deductible for tax purposes. The Company has considered the termsvaluation as a preliminary allocation of assets and liabilities and may adjust such estimates in the future, if deemed material.

b. The total purchase price of $3,727,752 represents the consideration transferred from Mateon in the Merger and was calculated based on the number of shares of Common Stock outstanding at the date of the merger agreement, Vuong Trieu, Ph.D.Merger.

NOTE 4 - INTANGIBLE ASSETS AND GOODWILL

Mateon completed a Merger with Oncotelic (Note 3), Oncotelic’s Chairmanwhich gave rise to Goodwill of $4,751,055. The Goodwill will be tested on the annual impairment date chosen of December 31.

Assignment and Chief Executive Officer, was appointedAssumption Agreement with Autotelic, Inc.

In April 2018, Oncotelic entered into an Assignment and Assumption Agreement (the “Assignment Agreement”) with Autotelic Inc., an affiliate company, and Autotelic LLC, an affiliate company, pursuant to which Oncotelic acquired the rights to all intellectual property (“IP”) related to a patented product. As consideration for the Assignment Agreement, Oncotelic issued 204,798 shares of its Common Stock for a value of $819,191. The Assignment Agreement also provides that Oncotelic shall be responsible for all costs related to the Company’s boardIP, including development and maintenance, going forward. All previous pass through charges related to this asset from Autotelic Inc. to Autotelic, LLC and then to Oncotelic will be null and void. As a result, Oncotelic wrote-off approximately $458,000 in previously billed charges related to the Oncotelic IP for the year ended December 31, 2018 which was recorded in general and administrative expenses. Dr. Trieu, a related party, is a control person in Autotelic LLC and Autotelic Inc.

Intangible Asset Summary

The following table summarizes the balances as of directorsSeptember 30, 2019 and was appointed Chief Executive OfficerDecember 31, 2018, of the Companyintangible assets acquired, their useful life, and Chairmanannual amortization:

Amortization of identifiable intangible assets for the three and nine months ended September 30, 2019 and 2018 was $12,841 and $12,841; and $38,524 and $21,402, respectively.

The future yearly amortization expense over the next five years and thereafter are as follows:

NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the boardfollowing amounts:

NOTE 6 – CONVERTIBLE DEBENTURES AND NOTES

As of directors. September 30, 2019, convertible debentures and notes, net of debt discount, consist of the following amounts:

The Company’s previous CEO, William D. Schwieterman, M.D.gross principal balances on the convertible debentures and notes listed above totaled $1,200,000 and included an initial debt discount totaling $800,140. Total amortization expense related to these debt discounts was $60,413 and $88,479 for the three and nine months ended September 30, 2019, respectively. No similar expense was recorded in the same periods of 2018. The total unamortized debt discount for the nine months ended September 30, 2019, was $711,661.

Bridge Financing

Peak One Financing

On April 17, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Peak One Opportunity Fund, L.P. (the “Buyer”, resigned from his position as CEO, although he will remain“Peak One”), for a membercommitment to purchase convertible notes in the aggregate amount of $400,000, pursuant to which, for an aggregate purchase price of $400,000, the Buyer purchased (a) Tranche #1 in the form of a Convertible Promissory Note in the principal amount of $200,000 (the “Convertible Note”) and (b) 350,000 restricted shares of the Company’s boardCommon Stock (the “Shares”) (the “Purchase and Sale Transaction”). The Company used the net proceeds from the Purchase and Sale Transaction for working capital and general corporate purposes.

The Convertible Note has a principal balance of directors. Also$200,000, including a 10%$ OID of $20,000 and $5,000 in accordancedebt issuance costs, receiving net proceeds of $175,000, with a maturity date of of April 23, 2022. Upon the occurrence of certain events of default, the Buyer, amongst other remedies, has the right to charge a penalty in a range of 18% to 40% dependent on the specific default event. Amounts due under the Convertible Note may also be converted into shares (the “Tranche #1 Conversion Shares”) of the Company’s Common Stock at any time, at the option of the holder, at (i) a conversion price, during the first 180 days, of $0.10 per share (the “Fixed Price”), and then (2) at the lower of the Fixed Price or 65% of the Company’s lowest traded price after the first 180 days or at the lower of the Fixed Price or 55% of the Company’s traded stock price under certain circumstances. The Company has agreed, to at all times, reserve and keep available out of its authorized Common Stock a number of shares equal to at least two times the full number of the Tranche #1 Conversion Shares. The Company may redeem the Convertible Note at rates of 110% to 140% over the principal balance dependent on certain events and redeem the value with accrued interest thereon, if any.

The issuance of the Convertible Note resulted in a discount from the beneficial conversion feature totaling $84,570, including $52,285 related to the beneficial conversion feature and a discount from the issuance of restricted stock of 350,000 shares for $32,285. Total amortization of these OID and debt issuance cost discounts totaled $9,198 and $15,996 during the three and nine months ended September 30, 2019. Total unamortized discount on this note was $93,575 as of September 30, 2019.

On June 12, 2019, the Company entered into an amendment of the Purchase Agreement (“Amendment #1”) in connection with the termsdraw-down of the merger agreement, allsecond tranche, and to provide for additional borrowing capacity under that agreement. Amendment #1 increased the borrowing amount up to $600,000, adding the ability to borrow an additional $200,000 in a third tranche.

On June 12, 2019, the Buyer purchased Convertible Note Tranche #2 (“Tranche #2”) totaling $200,000, including a 10% OID of $20,000 and a $1,000 debt issuance cost, receiving net proceeds of $179,000 against the other previous directors of the Company resigned effective on the closingApril 17, 2019, Purchase Agreement with Peak One, with a maturity date of June 12, 2022. Amounts due under Tranche #2 are convertible at the merger.same terms as Tranche #1 above.

Bridge financing

The issuance of Tranche #2 resulted in a discount from the beneficial conversion feature totaling $180,000, including $132,091 related to the conversion feature and a discount from the issuance of restricted stock of 350,000 shares for $47,909. Total amortization of these OID and debt issuance cost discounts totaled $16,872 and $20,173 during the three and nine months ended September 30, 2019. Total unamortized discount on this note was $180,827 as of September 30, 2019.

TFK Financing

On April 23, 2019, the Company, completed an initial tranche aggregating $0.6 millionentered into a Convertible Note (the “TFK Note”) with TFK Investments, LLC (“TFK”). The TFK Note has a principal balance of bridge financing. Under$200,000, including a 10% OID of $20,000 and $5,000 in debt issuance costs, receiving net proceeds of $175,000, with a maturity date of April 23, 2022. Upon the bridge financing,occurrence of certain events of default, the Company issued $600,000Buyer, amongst other remedies, has the right to charge a penalty in a range of debentures18% to four investors (including $168,000 with Dr. Trieu,40% dependent on the incoming Chairman and Chief Executive Officerspecific default event Amounts due under the Convertible Note may also be converted into shares (the “TFK Conversion Shares”) of the Company).Company’s Common Stock at any time, at (i) a conversion price, during the first 180 days, of $0.10 per share (the “Fixed Price”), and then (2) at the lower of the Fixed Price or 65% of the Company’s lowest traded price after the first 180 days or at the lower of the Fixed Price or 55% of the Company’s traded stock price under certain circumstances. The debentures were issuedCompany has agreed to at all times reserve and keep available out of its authorized Common Stock a 10%number of shares equal to at least two times the full number of the TFK Conversion Shares. The Company may redeem the Convertible Note at rates of 110% to 140% rates over the principal balance dependent on certain events and redeem the value with accrued interest thereon, if any.

The issuance of the TFK Note resulted in a discount for proceedsfrom the beneficial conversion feature totaling $84,570, including $52,285 related to the Companybeneficial conversion feature and a discount from the issuance of $540,000. Underrestricted stock of 350,000 shares for $32,285. Total amortization of these OID and debt issuance cost discounts totaled $9,198 and $15,996 during the termsthree and nine months ended September 30, 2019. Total unamortized discount on this note was $93,575 as of the bridge financing agreements, after MaySeptember 30, 2019.

Notes with Officer and Bridge Investor

On April 23, 2019, the Company entered into a convertible note with our Chief Executive Officer, Vuong Trieu, M.D. (the “Trieu Note”). The Trieu Note has a principal balance of $164,444, including a 10% OID of $16,444, resulting in net proceeds of $148,000, with a maturity date of April 23, 2022. Upon the occurrence of certain events of default, the Buyer, amongst other remedies, has the potentialright to draw downcharge a second tranchepenalty in a range of $600,00018% to 40% dependent on the specific default event Amounts due under the Convertible Note may also be converted into shares (the”Trieu Conversion Shares”) of debentures for an aggregate purchase pricethe Company’s Common Stock at any time, at the option of $540,000. The debentures are payable on sliding schedule of premiums over a six month period, and during this period the debentures are convertible into common stockholder, at a fixedconversion price of $0.10 per share. Thereafter,share (the “Fixed Price”), at the debentures arelower of the Fixed Price or 65% of the Company’s lowest traded price after the 180^th day or at the lower of the Fixed Price or 55% of the Company’s traded stock price under certain circumstances. The Company has agreed to at all times reserve and keep available out of its authorized Common Stock a number of shares equal to at least two times the full number of Conversion Shares. The Company may redeem the Convertible Note at rates of 110% to 140% rates over the principal balance dependent on certain events and redeem the value with accrued interest thereon, if any.

The issuance of the Trieu Note resulted in a discount from the beneficial conversion feature totaling $131,555 related to the conversion feature. Total amortization of the 10% OID discount totaled $12,424 and $21,606 during each of the three and nine months ended September 30, 2019. Total unamortized discount on this note was $126,393 as of September 30, 2019.

On April 17, 2019, the Company entered into a Securities Purchase Agreement (the “Bridge SPA”) with our CEO and the Bridge Investor with a commitment to purchase convertible notes in the aggregate of $400,000.

On April 23, 2019, pursuant to the Bridge SPA the Company entered into commonConvertible Note Tranche #1 (“Tranche #1”) with the Bridge Investor. Tranche #1 has a principal balance of $35,556, an OID of $3,556, resulting in net proceeds of $32,000, with a maturity date of April 23, 2022. Upon the occurrence of certain events of default, the Buyer, amongst other remedies, has the right to charge a penalty in a range of 18% to 40% dependent on the specific default event Amounts due under Tranche #1 may also be converted into shares (the “Bridge SPA Conversion Shares”) of the Company’s Common Stock at any time, at (i) a conversion price, during the first 180 days, of $0.10 per share (the “Fixed Price”), and then (2) at the lower of the Fixed Price or 65% of the Company’s lowest traded price after the first 180 days or at the lower of the Fixed Price or 55% of the Company’s traded stock price under certain circumstances. The Company may redeem the Convertible Note at rates of 110% to 140% rates over the principal balance dependent on certain events and redeem the value with accrued interest thereon, if any.

The issuance of the note resulted in a discount from the beneficial conversion feature totaling $28,445. Total amortization of the OID and discount totaled $2,687 and $4,672 during the three and nine months ended September 30, 2019. Total unamortized discount on this note was $27,329 as of September 30, 2019.

On August 6, 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #2 (“Tranche #2”) with the Bridge Investor. Tranche #2 has a principal balance of $200,000, an OID of $20,000 and debt issuance costs of $5,000, resulting in net proceeds of $175,000, with a maturity date of August 6, 2022. Upon the occurrence of certain events of default, the Buyer, amongst other remedies, has the right to charge a penalty in a range of 18% to 40% dependent on the specific default event Amounts due under Tranche #1 may also be converted into shares (the “Bridge SPA Conversion Shares”) of the Company’s Common Stock at any time, at the option of the holder, at a conversion price of $0.10 per share (the “Fixed Price”), at the lower of the Fixed Price or 65% of the Company’s lowest traded price after the 180^th day or at the lower of the Fixed Price or 55% of the Company’s traded stock price under certain circumstances. The Company may redeem the Convertible Note at rates of 110% to 140% rates over the principal balance dependent on certain events and redeem the value with accrued interest thereon, if any.

The issuance of the note resulted in a discount from the beneficial conversion feature totaling $175,000. Total amortization of the OID and discount totaled $10,036 during each of the three and nine months ended September 30, 2019. Total unamortized discount on this note was $189,963 as of September 30, 2019.

Convertible Note with PointR Data, Inc.

On July 22, 2019, the Company entered into a Note Purchase Agreement with PointR. Pursuant to the market price at the time of conversion.

Upon closing the bridge financing,Note Purchase Agreement, the Company issued 700,000a Convertible Promissory Note to PointR. in the principal amount of $200,000. The Convertible Promissory Note bears interest at a rate of 8% per annum. Interest payments are due monthly on the 15th day of each calendar month (or the next business day thereafter), and are payable, at the option of the holder, either in cash or in shares of the Company’s Common Stock, valued at the closing price of the Common Stock on the principal market on which the Common Stock is either traded or quoted at such time. The Convertible Promissory Note is due and payable on demand by the holder (a) at any time after January 1, 2020 or (b) upon the occurrence of an Event of Default (as defined in the Convertible Note and the Note Purchase Agreement). All amounts outstanding under the Convertible Promissory Note will be automatically be converted into the Company’s securities issued in next equity financing raising gross proceeds of $10 million or more (a “Qualified Financing”) at the price per share paid by investors in the Qualified Financing. As the conversion feature is contingent upon a future event, the conversion feature will be evaluated under ASC 470-20 and ASC 815 when and if the Qualified Financing occurs.

On November 4, 2019, the Convertible Note, with accrued interest thereon, was converted into Company’s Series A Preferred Stock and is a part of the total consideration of 84,475 Series A Preferred Stock issued to the PointR shareholders.

NOTE 7 - RELATED PARTY TRANSACTIONS

Master Service Agreement with Autotelic Inc.

In October 2015, Oncotelic entered into a Master Service Agreement (the “MSA”) with Autotelic Inc., a related party that is partly-owned by the Company’s CEO Vuong Trieu, Ph.D. Dr. Trieu, a related party, is a control person in Autotelic Inc. Autotelic Inc. currently owns less than 10% of the Company. The MSA stated that Autotelic Inc. will provide business functions and services to the Company and allowed Autotelic Inc. to charge the Company for these expenses paid on its behalf. The MSA includes personnel costs allocated based on amount of time incurred and other services such as consultant fees, clinical studies, conferences and other operating expenses incurred on behalf of the Company. The MSA requires a 90-day written termination notice in the event either party requires to terminate such services.

Expenses related to the MSA were $309,194 and $1,004,316 for the three and nine months ended September 30, 2019 as compared to $201,139 and $502,846 for the three and nine months ended September 30, 2018.

In January 2019, Oncotelic issued a total of $80,772 shares of common stock with a fair value of $4.00 per share to Autotelic, Inc. in lieu of cash for the settlement of outstanding accounts payable.

Stock Purchase Agreements

In December 2018, Oncotelic entered into a Stock Purchase Agreement with the Company’s CEO, Vuong Trieu, Ph.D. (the “Vuong SPA”). In connection with the Vuong SPA Oncotelic issued 189,238 shares of common shares at $4.00 per share. As consideration for the shares Oncotelic received 151.39 Preferred Series E shares of Adhera Therapeutics, Inc. with a value of $756,950.

In December 2018, Oncotelic entered into a Stock Purchase Agreement with Autotelic Inc. (the “Autotelic SPA”). In connection with the Autotelic SPA Oncotelic issued 226,988 shares of common shares at $4.00 per share. As consideration for the shares Oncotelic received 181.59 Preferred Series E shares of Adhera Therapeutics, Inc. with a value of $907,950.

License Fee with Autotelic

In December 2015, Oncotelic paid Autotelic Inc. $395,150 for the right to license the use of Trabedersen (OT-101) for 5 years. On April 13, 2018, Oncotelic purchased the license for OT-101 from Autotelic Inc. for $819,191, which was recorded as an intangible asset, and as a result, expensed the remaining prepaid expense of $191,191. In addition, Oncotelic recorded a charge of approximately $10,000 and $21,000 and $7,000 and $7,000 for the three and nine months ended September 30, 2019 and 2018, respectively, as amortization of the intangibles acquired. As such, Oncotelic had approximately $760,000 and $791,000 of unamortized intangibles as of September 30, 2019 and December 31, 2018, respectively. On December 31, 2018, Oncotelic issued Autotelic Inc. 204,798 shares of the Company’s common stock as consideration for the license.

Note Payable – Related Party

On April 23, 2019, the Company issued a convertible note to our Chief Executive Officer totaling $164,444, including OID of $16,444, receiving net proceeds of $148,000, which will be used by the Company for working capital and general corporate purposes. (Note 6)

NOTE 8 - STOCKHOLDERS’ EQUITY

The following transactions affected the Company’s Stockholders’ Equity:

Equity Transactions During the Period Prior to the Merger

Issuance of Common Stock

On December 26, 2018, Oncotelic issued 26,100 shares of common stock to a third-party investor in connection with a Share Purchase Agreement for 20.88 shares of Preferred Series E Stock of Adhera Therapeutics, Inc. with a value of $104,400.

On December 26, 2018, Oncotelic entered into a Stock Purchase Agreement with the Company’s CEO, Vuong Trieu, Ph.D. (the “Vuong SPA”). In connection with the Vuong SPA Oncotelic issued 189,238 shares of common shares at $4.00 per share. As consideration for the shares Oncotelic received 151.39 Preferred Series E shares of Adhera Therapeutics, Inc. with a value of $756,950.

On December 26, 2018, Oncotelic entered into a Stock Purchase Agreement with Autotelic Inc. (the “Autotelic SPA”). In connection with the Autotelic SPA Oncotelic issued 226,988 shares of common shares at $4.00 per share. As consideration for the shares Oncotelic received 181.59 Preferred Series E shares of Adhera Therapeutics, Inc. with a value of $907,950.

On January 11, 2019, Oncotelic issued 11,250 shares of common stock with a fair value of $4.00 per share to an employee in lieu of cash for compensation.

In January 2019, Oncotelic issued a total of 80,772 shares of common stock with a fair value of $4.00 per share to Autotelic, Inc. in lieu of cash for the settlement of outstanding accounts payable and services received during the three months ended March 31, 2019.

On January 29, 2019, Oncotelic issued a total of 20,750 shares of common stock with a fair value of $4.00 per share to two separates investors for $83,000 in cash.

On March 31, 2019, Oncotelic issued 80,594 shares of common stock with a fair value of $4.00 per share to various employees in lieu of cash for accrued compensation.

In April 2019, the unaffiliated bridgeCompany issued a total of 150,000 shares of Common Stock to two investors as a commitment feeresult of the conversion of warrants for $120 in cash.

Equity Transactions During the Period Since the Merger

Issuance of Preferred Stock

On April 22, 2019, pursuant to the Merger the Company issued 193,713 shares of Series A Convertible Preferred Stock in exchange for 77,154 shares of Oncotelic common stock. (Note 3)

Issuance of Common Stock

On April 22, 2019, pursuant to the Merger the Company issued 41,000,033 shares of Common Stock in exchange for 10,318,746 shares of Oncotelic common stock. (Note 3)

On April 23, 2019, the Company issued 700,000 restricted shares of its Common Stock with a fair value of $0.11 per share to two noteholders in connection with convertible notes payable. (Note 6)

On June 12, 2019, the Company issued 350,000 restricted shares of its Common Stock with a fair value of $0.18 per share in connection with a convertible note payable. (Note 6)

NOTE 9 – STOCK-BASED COMPENSATION

Options

Pursuant to the Merger, Mateon’s Common Stock and corresponding outstanding options survived. The below information details represents Mateon’s associated option activity pre and post merger.

As of September 30, 2019, options to purchase Common Stock were outstanding under three stock option plans – the 2017 Equity Incentive Plan (the “2017 Plan”), the 2015 Equity Incentive Plan (the “2015 Plan”) and the 2005 Stock Plan (the “2005 Plan”). Under the 2017 Plan, up to 2,000,000 shares of the Company’s Common Stock may be issued pursuant to awards granted in the form of nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards. Under the 2015 and 2005 Plans, taken together, up to 7,250,000 shares of the Company’s Common Stock may be issued pursuant to awards granted in the form of incentive stock options, nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards. Employees, consultants, and directors are eligible for awards granted under the 2017 and 2015 Plans. Since the adoption of the 2015 Plan, no further awards may be granted under the 2005 Plan, although options previously granted remain outstanding in accordance with their terms.

Compensation based stock option activity for qualified and unqualified stock options are summarized as follows:

The following table summarizes information about options to purchase shares of the Company’s Common Stock outstanding and exercisable at September 30, 2019:

The compensation expense attributed to the issuance of the options is recognized as they are vested.

The employee stock option plan stock options are exercisable for ten years from the grant date and vest over various terms from the grant date to three years.

The aggregate intrinsic value totaled $0 and was based on the Company’s closing stock price of $0.185 as of September 30, 2019, which would have been received by the option holders had all option holders exercised their options as of that date.

All the compensation expense was recorded prior to the close of the Merger, as the vesting of all the options was accelerated due to the effective change in control of the Company, and as such no compensation expense related to the above options was recorded during the three and nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was no future compensation cost as all stock options are vested at September 30, 2019.

On April 22, 2019 and in conjunction with the close of the Merger, the Company recorded approximately $341,000 in compensation cost as a result of the acceleration of the vesting schedule of approximately 328,000 Oncotelic options. Pursuant to the Merger these options were converted into Common and Series A Preferred Shares in the Company.

On August 23, 2019, the Company entered into Employment Agreements and incentive compensation arrangements with each of its executive officers, including Dr. Vuong Trieu, the Chief Executive Officer; Dr. Fatih Uckun, the Chief Medical Officer; Dr. Chulho Park, its Chief Technology Officer; and Mr. Amit Shah, the Chief Financial Officer. Details of the agreements and the incentive compensation is described in detail in Note 9 – Commitments & Contingencies under “Employment Agreements”. The incentive stock options or the restricted stock awards granted to the Company’s executive officers have not been issued as of the date of this filing.

Warrants

Pursuant to the Merger, Mateon’s Common Stock and corresponding outstanding warrants survived. The below information details represents Mateon’s associated warrant activity pre and post merger.

The issuance of warrants to purchase shares of the Company’s Common Stock including those attributed to debt issuances are summarized as follows:

The following table summarizes information about warrants outstanding and exercisable at September 30, 2019:

The expense attributed to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for three to five years from the grant date. All are currently exercisable. There were no warrants issued during the three and nine months ended September 30, 2019.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Leases

The Company had a lease for its corporate headquarters, which expired in June 2019. The lease was for a total of 5,275 square feet of office space located in South San Francisco, California. Rental expense related to that corporate headquarters was $35,772 and $35,772 for the three and nine months ended September 30, 2019. Currently, the Company is leasing the office located at 29397 Agoura Road, Suite 107, Agoura Hills, CA 91301 on a month-to-month basis until such time a new office is identified.

Legal Claims

From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently a party to any legal proceedings that it currently believes, if determined adversely to the Company, would individually or taken together have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.

Employment Agreements

On August 23, 2019, the Company entered into Employment Agreements and incentive compensation arrangements with each of its executive officers, including Dr. Vuong Trieu, the Chief Executive Officer; Dr. Fatih Uckun, the Chief Medical Officer; Dr. Chulho Park, its Chief Technology Officer; and Mr. Amit Shah, the Chief Financial Officer. On November 18, 2019, upon review of said employment agreemen with Dr Uckun, it was observed that the agreement submitted for Dr. Uckun was the incorrect document. The Company has submitted the correct employment agreement with this Quarterly Report on Form 10Q. No compensatory terms of the earlier agreement submitted have changed.

The Employment Agreements provide for annual base salaries for each year of the term, subject to review and adjustment by the Company’s Board of Directors (the “Board”) or the Compensation Committee of the Board (“Compensation Committee”) from time to time. Each Employment Agreement provides that the executive shall be eligible for an annual discretionary cash bonus expressed as a percentage the executive’s base salary, subject to their achievement of performance targets and goals established by the Board or the Compensation Committee.

The Employment Agreements provide for equity awards to each executive under the terms of the Company’s stock option plans. Each Employment Agreement provides that the executive will receive a restricted stock grant of the Company’s Common Stock, par value $0.01 per share. The Company will compensate Messrs. Trieu, Uckun, Park and Shah for the taxes actually incurred on grant of the restricted shares. The restricted stock will vest fully on the one-year anniversary of employment. As of September 30, 2019, the restricted shares have yet to be issued. The Employment Agreements also provide for grants of incentive stock options to purchase shares of the Company’s Common Stock under the Stock Plan. Such options shall vest and become exercisable after one year of employment. As of September 30, 2019, the Company these options have yet to be granted. Thereafter, each Employment Agreement contemplates that the executive will be eligible to receive a comparable annual grant of restricted shares or stock options as approved by the Board or Compensation Committee and which shall contain the customary terms and provisions of such grants generally to key executives under the Stock Plan.

The initial restricted stock grants and stock option grants have been set for the executives as follows:

The incentive stock options or the restricted stock awards granted to the Company’s executive officers have not been issued as of the date of this filing.

NOTE 11 – SUBSEQUENT EVENTS

Merger with PointR

On August 17, 2019, the Company entered into an Agreement and Plan of Merger (the “PointR Merger Agreement”) with PointR. Upon the terms of, and subject to the satisfaction of the conditions described in, the PointR Merger Agreement, PointR would be merged with and into a newly formed subsidiary of the Company (the “PointR Merger Sub”), with PointR surviving the merger as a wholly-owned subsidiary of the Company. The merger is intended to create a publicly-traded artificial intelligence driven immuno-oncology company with a robust pipeline of first in class TGF-β immunotherapies for late stage cancers such as gliomas, pancreatic cancer and melanoma.

On November 1, 2019, the Company entered into Amendment No. 1 (the “Amendment”) to the PointR Merger Agreement with PointR. The Amendment revised certain terms of the PointR Merger Agreement to provide that holders of PointR common stock would receive shares of the Company’s Preferred Stock in lieu of the Company’s Common Stock in connection with the financing.merger. The Amendment revised the terms of the milestones for earn-out payment as well.

For additional information concerning

On November 4, 2019, pursuant to the terms of the PointR Merger Agreement the Company completed the merger with Oncotelic,PointR. On the CVRs,effectiveness of the management changemerger, the outstanding common stock of PointR immediately prior to the merger, including the conversion of a $200,000 note with accrued interest, excluding any shares of PointR held by stockholders exercising dissenters’ appraisal rights, was converted solely into the right to receive approximately 84,475 shares of the Company’s Preferred Stock.

Immediately following the closing of the Merger, the former PointR security holders own approximately 23.29% of the Company’s issued and outstanding Common Stock (including any shares of Common Stock issuable upon the conversion of the Company’s Preferred Stock), and the bridge financings, seeCompany’s stockholders prior to the Merger own approximately 76.71% of the Company’s Current Reportsissued and outstanding Common Stock (including any shares of Common Stock issuable upon conversion of the Company’s Preferred Stock).

Amendments to Peak One Convertible Note and TFK Note

On November 5, 2019, the Company and Peak One amended the Convertible Note under Tranche #1 to extend the date of conversion of the Convertible Note into Common Stock of the Company at 65% of the traded price of the Company’s Common Stock until January 8, 2020. This restriction did not apply if Peak One wished to convert the Convertible Note at $0.10. The Company compensated Peak One 300,000 shares of Mateon’s Common Stock for delaying the conversion until January 8, 2020. Such shares were issued to Peak One on Form8-K filed withNovember 18, 2019.

Similarly, TFK amended the SECTFK Convertible Note to extend the date of conversion of the Convertible Note into Common Stock of the Company at 65% of the traded price of the Company’s Common Stock until January 8, 2020. This restriction did not apply if TFK wished to convert the Convertible Note at $0.10 per share The Company compensated TFK 300,000 shares of Mateon’s Common Stock for delaying the conversion until January 8, 2020. Such shares were issued to Peak One on AprilNovember 18, and April 25, 2019.

ItemITEM 2. Management’s DiscussionMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes a number of forward-looking statements that reflect management’s current views with respect to future events and Analysisfinancial performance. Forward-looking statements are projections in respect of Financial Conditionfuture events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. Those statements include statements regarding the intent, belief or current expectations of us and Resultsmembers of Operationsour management team, as well as the assumptions on which such statements are based.

The following discussion

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. These statements are only predictions and analysis should be read together withinvolve known and unknown risks, uncertainties and other factors. Some of these risks are included in the audited financial statementssection entitled “Risk Factors” set forth in this Quarterly Report and notes in our Annual Report on Form10-K for the fiscal year ended December 31, 2018, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained therein. The following discussion and analysis should also be read in conjunctionfiled with the unauditedSecurities and Exchange Commission (the “SEC”) on April 10, 2019, and in other reports that we file with the SEC. The occurrence of any of these risks, or others of which we are currently unaware, may cause our company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks include, by way of example and without limitation: