| Series A Preferred Stock and Common Stock Purchase Warrants | 11. 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. 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. 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 (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 September 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 because 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;
(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 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. 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 11(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 September 30, 2022, a total of 4,574 Series A Preferred shares were converted into 2,164,143 shares of our common stock, thereby
reducing outstanding Series A Preferred shares at September 30, 2022 to 15,226. The fair value of the derivative liability associated
with the Series A Preferred Stock converted during the nine-month period ended September 30, 2022, as determined by Monte Carlo simulations,
was $955. Because the latest eight
conversions in the nine-month period ended September 30, 2022, were completed at less than the agreed floor price, we recorded a
floor price liability and recognized a corresponding reduction of additional paid in capital, as follows:
i. During the six months ended June 30, 2022, $1,511 (paid in cash prior to June 30, 2022); and
ii. During the three months ended September 30, 2022, $1,646 (recorded as an accrued liability at September
30, 2022, inclusive of accrued interest of $49). (See Note 20) 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 nine-month period ended September 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 nine-month period ended September 30, 2022 and the fair value of the
Series A Preferred Derivative liability determined at September 30, 2022 and December 31, 2021:
January 1, December 31,
Initial exercise price $9.05 - $9.91 $ 9.91
Stock price on valuation date $1.10 - $10.75 $ 10.37
Risk-free rate 1.03% - 4.23 % 0.96 %
Time to exercise (years) 2.22 - 2.96 2.97
Equity volatility 70%
- 114 % 70 %
Probability of volume failure 93%
- 99 % 92 %
Rounded 10-day average daily volume (in 1,000’s) $297 - $873 $ 908 On September 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 $1,262. 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 September 30, 2022 and December 31, 2021,
using the following inputs:
September 30, December 31,
Initial exercise price $ 9.91 $ 9.91
Stock price on valuation date $ 1.10 $ 10.50
Risk-free rate 4.14 % 0.91 %
Expected life of the 3i Warrant to convert (years) 2.22 3.0
Rounded annual volatility 106 % 73 %
Timing of liquidity event November 15, 2022 Q3 2022 – Q2 2023
Expected probability of event 98 % 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
Warrant Series A Series A Additional Accrued Consolidated
Balances, December 31, 2021 $ 11,273 $ 7,181 $ 632 $ 80 $ — $ (154 )
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
Conversion of 1,792 shares of Series A Preferred Stock — (341 ) (60 ) 401 — —
Floor price adjustment on conversion of 1,792 shares of Series A Preferred Stock — — — (1,646 ) 1,646 —
Fair value adjustment (257 ) 255 — — — 2
Balances, September 30, 2022 $ 1,262 $ 2,795 $ 2,056 $ (3,546 ) $ 1,645 $ 13,442 |
