| Series A Preferred Stock and Common Stock Purchase Warrants | 13. Series A Preferred Stock and Common Stock Purchase Warrants (a) Series A Preferred Stock Terms On May 20, 2021, we entered
into a Securities Purchase Agreement (the “SPA”) with 3i, LP, a Delaware limited partnership (“3i”) for the purchase
and sale of 20,000 shares of our Series A Convertible Preferred Stock (the “Preferred Shares”) for $1,000 per share for an
aggregate purchase price of $20 million (the “PIPE Investment”) with accompanying common stock purchase warrants (the “3i
Warrants”). On December 8, 2021, the Board adopted resolutions to create a series of twenty thousand (20,000) shares of preferred
stock, par value $0.0001, designated as “Series A Convertible Preferred Stock.” On December 14, 2021, we filed a Certificate
of Designations (the “COD”) setting forth the rights, preferences, privileges and restrictions for 20,000 shares of Series
A Convertible Preferred Stock (the “Series A Preferred Stock”). On December 20, 2021, we issued 20,000 shares of Preferred
Stock at $1,000 per share and a common stock purchase warrant to purchase 2,018,958 shares of common stock at an initial exercise price
of $9.9061 to 3i for an aggregate purchase price of $20 million. Except to the extent that the
holders of at least a majority of the outstanding Series A Preferred Stock (the “Required Holders”) expressly consent to the
creation of Parity Stock (as defined below) or Senior Preferred Stock (as defined below), all shares of capital stock are junior in rank
to all Series A Preferred Stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution
and winding up of the Company (such junior stock is referred to herein collectively as “Junior Stock”). The rights of all
such shares of capital stock of the Company will be subject to the rights, powers, preferences and privileges of the Series A Preferred
Stock. Without limiting any other provision of the COD, without the prior express consent of the Required Holders, voting separate as
a single class, the Company will not hereafter authorize or issue any additional or other shares of capital stock that is (i) of senior
rank to the Series A Preferred Stock in respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution
and winding up of the Company (collectively, the “Senior Preferred Stock”), (ii) of pari passu rank to the Series A Preferred
Stock in respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the
Company (collectively, the “Parity Stock”) or (iii) any Junior Stock having a maturity date or any other date requiring redemption
or repayment of such shares of Junior Stock that is prior to the first anniversary of the December 20, 2021. In the event of the merger
or consolidation of the Company with or into another corporation, the Series A Preferred Stock will maintain their relative rights, powers,
designations, privileges and preferences provided for herein and no such merger or consolidation will result inconsistent therewith. The Series A Preferred Stock
has a liquidation preference equal to an amount per Series A Preferred Stock equal to the sum of (i) the Black Scholes Value (as defined
in the Warrants, which was sold concurrent with the Series A Preferred Stock) with respect to the outstanding portion of all Warrants
held by such holder (without regard to any limitations on the exercise thereof) as of the date of such event and (ii) the greater of (A)
125% of the Conversion Amount of such Series A Preferred Stock on the date of such payment and (B) the amount per share such holder would
receive if such holder converted such Series A Preferred Stock into common stock immediately prior to the date of such payment, and will
be entitled to convert into shares of common stock at an initial fixed conversion price of $9.9061 per share, subject to a beneficial
ownership limitation of 4.99% which can be adjusted to a beneficial ownership limitation of 9.99% upon sixty-one (61) days’ prior
written notice. Under the terms of the COD,
the initial fixed conversion price of the Series A Preferred Stock is $9.9061, subject to adjustment. In the event that (i) the average
of the VWAP of the Company’s shares for each of the five (5) trading days immediately preceding the date of delivery is less than
the fixed conversion price of $9.9061 (a “Price Failure”), or (ii) the sum of (x) the aggregate daily dollar trading volume
(as reported on Bloomberg) of our common stock on Nasdaq during the ten (10) trading day period ending on the trading day immediately
preceding such date of determination, divided by (y) ten (10), is less than $1,500 (a “Volume Maximum Failure”), each share
of Series A Preferred Stock is entitled to convert at a price equal to 90% of the sum of the two (2) lowest VWAPs during the ten (10)
trading day period immediately preceding the date of delivery divided by two (2) (the “90% Conversion Price”), but not less
than the Floor Price (as defined in the COD), or, at the time of such Price Failure or Volume Maximum Failure, the sum of the average
daily U.S. Dollar volume for our common stock during the ten (10) days previous to conversion divided by ten (10) is less than $2 million
then each share of Series A Preferred Stock is entitled to convert at the lower of the fixed conversion price or a price equal to 80%
of the sum of the two (2) lowest VWAPs during the ten (10) trading day period immediately preceding delivery divided by two (2) (the “80%
Conversion Price”), but not less than the Floor Price (such 80% Conversion Price or 90% Conversion Price, as the case may be, the
“Alternate Conversion Price”). In addition, the COD and the
Warrant provides for an adjustment to the conversion price and exercise of the Warrant in the event of a “new issuance” of
our common stock, or common stock equivalents, at a price less than the applicable conversion price of the Series A Preferred Stock or
exercise price of the Warrant. The adjustment is a “full ratchet” adjustment in the conversion price of the Series A Preferred
Stock and the exercise price of the Warrant equal to the lower of the new issuance price or the then existing conversion price of the
Series A Preferred Stock or exercise price of Warrant, with few exceptions. Furthermore, if we fail to maintain an adequate number of
authorized and unissued shares of our common stock in reserve and we are unable to deliver shares or our common stock upon conversion
of the Preferred Stock, we may be required to redeem the shares we were unable to deliver at a price equal to the highest closing price
of our common stock during the time between the failure to deliver shares of our common stock and the redemption date. If certain defined “triggering
events” defined in the COD occur, such as a breach of the Registration Rights Agreement (specifically the Company’s Form S-1
as filed on SEC Edgar on September 13, 2021 and subsequently amended), suspension of trading, or our failure to convert the Series A Preferred
Stock into common stock when a conversion right is exercised, failure to issue our common stock when the Warrant is exercised, failure
to declare and pay to any holder any dividend on any dividend date, or upon a “bankruptcy triggering event” (as defined in
the COD), then we may be required to redeem the Series A Preferred Stock for cash in the amount of up to a minimum of 125% of their Conversion
Amount (as defined in the COD). In addition, if thirty (30) days after our common stock commences trading on the Nasdaq Stock Market the
sum of the average daily dollar volume for the ten (10) days previous to conversion divided by ten (10) is less than $2.5 million, then
the Series A Preferred Stock will be entitled to a one-time dividend equal to an 8% increase in the stated value of the Series A Preferred
Stock, or an $80 dollar increase per share in stated value, resulting in a stated value of $1,080 (one thousand and eighty dollars) per
Series A Preferred Stock. Additionally, if any of the triggering events are not addressed on a timely basis, we could be liable to pay
and 18% per annum dividend. On April 29, 2022, the Company experienced a triggering event as defined in the COD. In the event that the Company
experiences a “Change of Control” (as defined in the COD), the Company may also be required to redeem the Preferred Shares
for cash at a minimum of 125% of their Conversion Amount. Holders of Series A Preferred
Stock will have no voting rights, except as required by law and as expressly provided in the COD. (b) Series A Preferred
Stock Triggering Event As more specifically discussed
below, a “Triggering Event” under the COD occurred on April 29, 2022, under Section 5(a)(ii) of the COD, which would have
resulted in the following unless 3i, agreed to forebear and/or waive its rights under the COD: 1. An 18% per annum dividend
will start to accrue on the stated value of all outstanding Preferred Shares and will continue to accrue until the Triggering Event has
been cured. The accrued dividend is added to the stated value prior to the Dividend Payment Date and paid in cash on the first trading
day of the Company’s next fiscal quarter. A “Late Charge” in the amount of 18% per annum will accrue on any amounts
due to be paid to holders of the Preferred Shares if not paid when due, including payments that may be owed under Section 2(e) of the
Registration Rights Agreement (“RRA”). 2. A “Triggering Event
Redemption Right” will commence and remain open for a period of 20 trading days from the later of the date the Triggering Event
is cured or the receipt by 3i of the Triggering Event Notice. Under the Triggering Event Redemption Right, if elected by the holder of
the Preferred Shares, the Company would be obligated to redeem all or a portion of the Preferred Shares for a minimum of 125% of the stated
value of the Preferred Shares. Concurrently, under the provisions of the PIPE Warrant, if elected by 3i, the Company would be obligated
to redeem the PIPE Warrant for the Black Sholes Triggering Event Value as defined in the warrant agreement. 3. A “Registration Delay
Payment” will accrue on April 22, 2022 (the expiration of the Allowable Grace Period under the RRA) in the amount of 2% of 3i’s
“Purchase Price” as defined in the Securities Purchase Agreement which is approximately 2% of $20 million, or $400
and will continue to accrue at 2% every 30 days thereafter. Additionally, a late charge of 2% per month will accrue on any payments that
are not paid when due. The Registration Delay Payments will stop accruing when the post-effective amendment is declared effective by the
SEC at which time the registration statement and its prospectus will again be available for the resale of common stock. On May 4, 2022, the Company
and 3i entered into a Forbearance Agreement and Waiver, dated April 27, 2022, wherein 3i confirmed that no Triggering Event as defined
under the COD has occurred prior to April 27, 2022, that a Triggering Event under Section 5(a)(ii) will and has occurred on April 29,
2022, and that in consideration for the Registration Delay Payments the Company is obligated to pay under the RRA, and additional amounts
the Company is obligated to pay under the COD and 3i’s legal fees incurred in the preparation of the Forbearance Agreement and Waiver
in the aggregate of $539 paid upon execution of the Forbearance Agreement and Waiver, and so long as the Company pays the Registration
Delay Payments that become due and payable under the RRA after the execution of the Forbearance Agreement and Waiver, 3i has agreed to
forbear exercising any rights or remedies that it may have under the COD that arises as a result of a Triggering Event under Section 5(a)(ii)
of the COD and Section 4(c)(ii) of the PIPE Warrant until the earlier to occur of (i) the date immediately prior to the date of occurrence
of a Bankruptcy Triggering Event, (ii) the date of occurrence of any other Triggering Event under Section 5(a) of the COD (excluding any
Triggering Event arising solely as a result of Section 5(a)(ii) of the COD and Section 4(c)(ii) of the PIPE Warrant), (iii) the time of
any breach by the Company under the Forbearance Agreement and Waiver, (iv) the Resale Availability Date as defined therein and (v) June
4, 2022 (such period, the “Forbearance Period”). Provided that the Company is not in breach of its obligations under Forbearance
Agreement and Waiver, effective as of the Trading Day immediately following the date the Company cures the Triggering Event under Section
5(a)(ii) of the COD, 3i agrees to waive any rights or remedies that it may have under the COD that arises as a result of a Triggering
Event under Section 5(a) of the COD and Section 4(c)(ii) of the PIPE Warrant that may have arisen prior to the date of the Forbearance
Agreement and Waiver. On June 6, 2022, we entered into
that certain First Amendment to the Forbearance Agreement and Waiver with 3i, (the “Amendment”) to extend the forbearance
period date under subsection 5 of Section 2 of the Forbearance Agreement and Waiver dated April 27, 2022 (the “Original Agreement”)
from June 4, 2022 to June 20, 2022. In addition, the parties agreed that the forbearance period of June 20, 2022 may also be
extended for an additional fifteen (15) days to July 5, 2022, provided that, on June 20, 2022 the Company will remove the restrictive
legend on 441,005 shares of common stock of the Company issued in connection with the conversion of certain shares of Series A Preferred
Stock (“Conversion Shares”) by 3i pursuant to the conversion notice dated May 2, 2022, and 3i is able to sell the Conversion
Shares free of restrictions (including volume restrictions) pursuant to SEC Rule 144(b)(1)(i) (the “Legend Removal”). The
Original Agreement was entered into by the Company and 3i as a result of a delay under the Registration Rights Agreement dated May 20,
2021. Under the Original Agreement, in exchange for certain consideration, 3i agreed to forbear exercising any rights or remedies that
it may have had under the COD in connection with certain Triggering Events (as described therein) until the earlier to occur of (i) the
date immediately prior to the date of occurrence of a Bankruptcy Triggering Event, (ii) the date of occurrence of any other Triggering
Event under Section 5(a) of the COD (excluding any Triggering Event arising solely as a result of Section 5(a)(ii) of the COD and Section
4(c)(ii) of the Warrant), (iii) the time of any breach by the Company under the Forbearance Agreement and Waiver, (iv) the Resale Availability
Date as defined therein and (v) June 4, 2022 (such period, the “Original Forbearance Period”). As a result of the Amendment,
the June 4, 2022, date has been amended to June 20, 2022, with the option to extend to July 5, 2022 subject to the Legend Removal. (c) 3i Warrant Terms Concurrently with the issuance
of our Preferred Stock, the Company issued warrants to purchase 2,018,958 shares of the Company’s common stock at an exercise price
of $9.9061 per share, subject to adjustments (“3i Warrants”). The material terms of the 3i Warrants are as follows:
(i) The
warrants have and term of three years and expire on December 20, 2024;
(ii) The exercise of the 3i Warrants are subject to a beneficial ownership
limitation of 4.99% which can be adjusted to a beneficial ownership limitation of 9.99% upon sixty-one (61) days’ prior written
notice;
(iii) The exercise price and the number of 3i Warrant shares issuable upon the exercise of the 3i Warrants are subject to adjustment, as follows:
o In
the event of a stock dividend, stock split or stock combination recapitalization or other similar transaction involving the Company’s
common stock the exercise price will be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock
outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately
after such event;
o If the Company sells or issues any shares of common stock, options,
or convertible securities at an exercise price less than a price equal to the 3i Warrant exercise price in effect immediately prior to
such sale (a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the exercise price then in effect shall
be reduced to an amount equal to the new issuance price;
o Simultaneously
with any adjustment to the exercise price, the number of 3i Warrant shares that may be purchased upon exercise of the 3i Warrant shall
be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable hereunder for the adjusted
number of 3i Warrant shares shall be the same as the aggregate exercise price in effect immediately prior to such adjustment (without
regard to any limitations on exercise) and;
o Voluntary adjustment reducing the exercise price for the Company to any amount and
for any period deemed appropriate by the board of directors of the Company with the prior written consent of the Required Holders.
(iv) In the event of either the Company consolidating or merging with or into another entity (the “Fundamental Transaction”), the sale or assignment of substantially all of the Company’s subsidiaries, or a Triggering Event (as defined in the COD), the holder is entitled to require the Company to pay the holder an amount in cash equal to the Black-Scholes value of the 3i Warrants on or prior to the later of the second trading after the date of request for payment and the date of consummation of the Fundamental Transaction; or at any time after the occurrence of the Triggering Event. (d) Accounting
i. Series A Convertible Preferred Stock The Company evaluated the Series A Convertible Preferred Stock redemption
feature and recorded it in mezzanine given the cash redemption right that is within the holder’s control. Generally, preferred stock
that are currently redeemable should be adjusted to their redemption amount at each balance sheet date. If it is probable that the equity
instrument will become redeemable, the Company has the option to either accrete changes in the redemption value over the
period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the
earliest redemption date of the instrument or to recognize changes in the redemption value immediately as they occur and adjust the carrying amount
of the instrument to equal the redemption value at the end of each reporting period. The Company recognizes changes in redemption value when
redemption becomes probable to occur. The embedded conversion feature related to the convertible derivative
liability has been recorded on the balance sheet as a current liability at its fair market value utilizing an appropriate valuation model
considering all relevant assumptions current at the date of issuance and at each reporting period as described in Note 13(e).
ii. 3i Warrants The 3i Warrants were identified as a freestanding financial instrument
and meet the criteria for derivative liability classification, initially measured at fair value. Subsequent changes in fair value are
recognized through earnings for as long as the contracts continue to be classified as a liability. The measurement of fair value is determined
utilizing an appropriate valuation model considering all relevant assumptions current at the date of issuance and at each reporting period
(i.e., share price, exercise price, term, volatility, risk-free rate and expected dividend rate). (e) Series A Preferred Stock Conversions Between January 1, 2022, and June 30, 2022, a total of 2,782 Series
A Preferred shares were converted into 1,187,281 shares of our common stock, thereby reducing outstanding Series A Preferred shares at
June 30, 2022 to 17,018. The fair value of the derivative liability associated with the Series A Preferred Stock converted during
the six month period ended June 30, 2022, as determined by Monte Carlo simulations, was $613. Because the latest four conversions
in the six-month period ended June 30, 2022, were completed at less than the agreed floor price, we recorded a floor price liability of
$1,511 and recognized a $1,511 reduction of additional paid in capital. The liability was paid in cash prior to June 30, 2022. Additionally, because the Company’s average daily dollar volume
of stock trading was less than $2.5 million during a ten-day period in January 2022, the Company has recorded a one-time deemed dividend
of 8% in the amount of $1,572 on preferred stock converted between February 1, 2022 and March 31, 2022 and the balance of Series A Preferred
Stock outstanding as at March 31, 2022 as an increase to the value of the Series A Preferred Stock and a reduction of additional paid
in capital. In addition, under the terms of the Registration Rights Agreement (“RRA”), during the period ended June 30, 2022,
the Company has also paid 3i an additional $800 in Registration Delay Payments. The following inputs were
used for the Series A Preferred Stock conversions recorded in the six month period ended June 30, 2022 and the fair value of the Series
A Preferred Derivative liability determined at June 30, 2022 and December 31, 2021:
January 1, 2022 December 31, 2021
Initial exercise price $ 9.05 - $9.91 $ 9.91
Stock price on valuation date $ 1.32 - $10.75 $ 10.37
Risk-free rate 1.03% - 2.95 % 0.96 %
Time to exercise (years) 2.47 - 2.96 2.97
Equity volatility 70%
- 105 % 70 %
Probability of volume failure 93%
- 99 % 92 %
Rounded 10-day average daily volume (in 1,000’s) $ 297 - $873 $ 908 On June 30, 2022, the Company
utilized the reset strike options Type 2 model by Espen Garder Haug and Black-Scholes Merton models to estimate the fair value of the
3i Warrants to be approximately $1,519. On December 31, 2021, the Company utilized Monte Carlo simulations models to estimate the
fair value of the 3i Warrants to be approximately $11,273. The 3i Warrants were valued at June 30, 2022, and December 31, 2021, using
the following inputs:
June 30, December 31,
Initial exercise price $ 9.91 $ 9.91
Stock price on valuation date $ 1.32 $ 10.50
Risk-free rate 2.91 % 0.91 %
Expected life of the 3i Warrant to convert (years) 2.48 3.0
Rounded annual volatility 120 % 73 %
Timing of liquidity event February 15, 2023 Q3 2022 – Q2 2023
Expected probability of event 90 % 90 % The accounting for the Series
A Convertible Preferred Stock and 3i Warrants is illustrated in the tables below:
Consolidated Balance Sheets Consolidated
Warrant Series A Series A Additional Finance Fair value
Subscription proceeds received on December 20, 2021 $ 11,273 $ 7,409 $ 1,318 $ — $ — $ —
Costs allocated and expensed — (680 ) 877 —
December 21, 2021 conversion of 200 Series A Preferred Stock — (74 ) (6 ) 80 — —
Fair value adjustment at December 31, 2021 — (154 ) — — — (154 )
Balance, December 31, 2021 $ 11,273 $ 7,181 $ 632 $ 80 $ 877 $ (154 )
Consolidated Balance Sheets Consolidated
Warrant Series A Series A Additional Accrued Fair value
Balances, December 31, 2021 $ 11,273 $ 7,181 $ 632 $ 80 $ — $ —
Conversion of 1,973 shares of Series A Preferred Stock — (452 ) (62 ) 514 — —
Floor price adjustment on conversion of 1,973 shares of Series A Preferred
stock — — — (133 ) 133 —
8% deemed dividend on Preferred Stock — — 1,572 (1,572 ) — —
Fair value adjustment (9,008 ) (3,558 ) — — — 12,566
Balances, March 31, 2022 2,265 3,171 2,142 (1,111 ) 133 12,566
Conversion of 809 shares of Series A Preferred Stock — (161 ) (26 ) 187 — —
Floor price adjustment on conversion of 809 shares of Series A Preferred
Stock — — — (1,377 ) 1,377 —
Cash payment of accrued liabilities — — — — (1,511 ) —
Fair value adjustment (746 ) (128 ) — — — 874
Balances, June 30, 2022 $ 1,519 $ 2,882 $ 2,116 $ (2,301 ) $ (1 ) $ 13,440 |
