NOTE 6 – TEMPORARY EQUITY

On June 24, 2022, the Company closed on an offering (“the Offering”) with certain institutional investors (the “Investors”), pursuant to which the Company issued and sold, in a private placement, 2,500,000 shares of the Company’s Series A Convertible Redeemable Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”), and 500,000 shares of the Company’s Series B Convertible Redeemable Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock,” and together with the Series A Preferred Stock, the “Preferred Stock”), at an offering price of $9.50 per share, representing a 5% original issue discount (“OID) to the stated value of $10.00 per share, for gross proceeds of $28.5 million in the aggregate for the Offering, before the deduction of fees and offering expenses. The shares of Preferred Stock are convertible, at a conversion price of $4.00 per share (subject in certain circumstances to adjustments), into shares of the Company’s common stock, at the option of the holders and, in certain circumstances, by the Company.

On August 5, 2022, an amendment (the “Amendment”) to the Company’s Articles of Incorporation, as amended, to increase the Company’s authorized shares of common stock from 50,000,000 to 150,000,000, was approved at a special meeting of shareholders. The Series A Preferred Stock had the right to vote on such Amendment on an as-converted to common stock basis. The shares of the Series B Preferred Stock were automatically voted in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding any shares of Common Stock that were not voted) and Series A Preferred Stock were voted to increase the Authorized Shares. The Amendment required the approval of the majority of the votes associated with the Company’s outstanding stock entitled to vote on the proposal. Because the Series B Preferred Stock were automatically and without further action of the purchaser voted in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding any shares of Common Stock that were not voted) and Series A Preferred Stock were voted on the Amendment, abstentions by common stockholders did not have any effect on the votes cast by the holders of the Series B Preferred Stock. The Certificates of Designation for the Preferred Stock provides that the Preferred Stock have no voting rights other than the right to vote on the Amendment and as a class on certain other specified matters, and, with respect to the Series B Certificate of Designation, the right to cast 2,500 votes per share of Series B Preferred Stock on the Amendment.

The holders of Preferred Stock are entitled to dividends, on an as-if converted basis, equal to dividends actually paid, if any, on shares of Common Stock. The Preferred Stock is convertible, at the option of the holders and, in certain circumstances, by the Company, into shares of Common Stock at a conversion price of $4.00 per share. The conversion price can be adjusted pursuant to the Certificates of Designation for stock dividends and stock splits, subsequent rights offering, pro rata distributions of dividends or the occurrence of a fundamental transaction (as defined in the applicable Certificate of Designation). The holders of the Preferred Stock have the right to require the Company to redeem their shares of preferred stock for cash at 105% of the stated value of such shares through September 22, 2022. The Company has the option to redeem the Preferred Stock for cash at 105% of the stated value, subject to the holders’ rights to convert the shares prior to such redemption.

The $28.5 million in gross proceeds of the Offering are held in an escrow account, along with an additional $3.0 million deposited by the Company to cover the aggregate OID as well as the additional amount that would be necessary to fund the 105% redemption price until the expiration of the redemption period for the Preferred Stock, as applicable, subject to the earlier payment to redeeming holders. Upon expiration of the redemption period, any proceeds remaining in the escrow account will be disbursed to the Company.

In connection with the Offering, the Company and the Investors entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Company is required to file a registration statement with the Securities and Exchange Commission to register for resale the shares that are issued upon the potential conversion of shares of Preferred Stock. The registration statement will be filed with the Securities and Exchange Commission on or before the later of 10 calendar days following the date of the shareholder meeting held on August 5, 2022, to seek approval of the Amendment and the 70^th calendar day following the date of the Registration Rights Agreement.

Since the Preferred stock has a redemption feature at the option of the holder, it is classified as temporary equity. As of June 30, 2022, the Series A Preferred stock and Series B Preferred Stock has been recorded on the balance sheet at redemption value of approximately $26.3 million and $5.2 million, respectively.

As of June 30, 2022, Series A and Series B preferred shares reflected on the balance sheet is reconciled on the following table (in thousands):