7. Preferred Stock

The Company’s Amended and Restated Certificate of Incorporation (the “Articles”) provides for a class of authorized stock known as preferred stock, consisting of 500,000 shares, $0.0001 par value per share, issuable from time to time in one or more series. During the year ended December 31, 2021, the Articles were amended to designate and authorize 6,746 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”).

On December 17, 2021, the Company closed a registered direct offering with certain institutional investors for the issuance and sale of an aggregate of 6,745.008 shares of Series A Preferred Stock and warrants to purchase up to an aggregate of 281,047 shares of common stock, par value $0.0001 per share, for gross proceeds of $6.7 million, or net cash proceeds of $6.0 million after deducting $0.7 million related to placement agent’s fees and other offering expenses. The shares of Series A Preferred Stock have a stated value of $1,000.00 per share and are initially convertible into an aggregate of 562,085 shares of common stock at a conversion price of $12.00 per share at any time. The common warrants have an exercise price of $13.99 per share. In addition, the Company issued the placement agent designees warrants to purchase up to 36,538 shares of common stock at an exercise price of $14.99 per share and their fair value of $0.4 million was recorded as an additional offering cost. Both the common warrants and the placement warrants are exercisable six months following the date issuance and have a five-year term.

The Series A Preferred Stock does not have any mandatory redemption provisions, contingently redeemable redemption provisions, preferential dividend rights, liquidation preferences, or voting rights, apart from mirrored, non-discretionary voting rights with common stock as a single class, equal to 100,000 votes per share of common stock underlying the Series A Preferred Stock on the Reverse Stock Split proposal which was approved by the Company’s stockholders at a special stockholder meeting on February 10, 2022.

The Company evaluated the classification of the Series A Preferred Stock and determined equity classification was appropriate due to no mandatory or contingently redeemable redemption features. The warrants issued to the investors were considered freestanding equity classified instruments. The Company first allocated gross proceeds from the registered direct offering between the Series A Preferred Stock and the warrants issued to investors using a relative fair value approach, resulting in an initial allocation to both instruments of $4.8 million and $2.0 million, respectively. The issuance costs, inclusive of the fair value of warrants issued to placement agent designees, were allocated between the Series A Preferred Stock and the warrants issued to investors in a systematic and rational manner resulting in an allocation to both instruments of $0.8 million and $0.3 million, for an initial net allocation of $4.0 million and $1.6 million, respectively. On the issuance date, the Company estimated the fair value of the warrants issued to investors and to placement agent designees using a Black-Scholes option pricing model using the following assumptions: (i) contractual term of 5 years, (ii) expected volatility rate of 117.98%, (iii) risk-free interest rate of 1.23%, (iv) expected dividend rate of 0%, and (v) closing price of the Company’s common stock of the day immediately preceding the registered direct offering. The fair value of Series A Preferred Stock was estimated based upon equivalent common shares that preferred stock could have been converted into at the closing price of the day immediately preceding the purchase date.

The embedded conversion feature was evaluated and bifurcation from the preferred stock equity host was not considered necessary. A beneficial conversion feature was separately recorded as a discount to the Series A Preferred Stock resulting in the amount of $3.2 million based on the intrinsic value of the beneficial conversion feature. As the Series A Preferred Stock was immediately convertible into common stock, a deemed dividend related to the discount associated with the beneficial conversion feature was immediately recorded.

As of December 31, 2022, all 6,745.008 shares of Series A Preferred Stock were converted into 562,085 shares of common stock.