Note 7 — Stockholders’ Equity

Class A Preferred Shares

On September 13, 2016, 2,000,000 shares of Preferred Stock were authorized, of which 250,000 have been designated as Class A Preferred Stock and the remainder are undesignated preferred stock. The Class A Preferred Stock, with a par value of $0.0001 per share, is identical to undesignated Common Stock other than as to voting rights, conversion rights, and the Annual Stock Dividend right (as described below). The undesignated Preferred Stock may be issued from time to time in one or more series. The Company’s Board of Directors is authorized to determine or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions, if any), the redemption price or prices, the liquidation preferences and other designations, powers, preferences and relative, participating, optional or other special rights, if any, and the qualifications, limitations and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock (but not below the number of shares of any such series then outstanding).

On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Class A Preferred Stock shall be entitled to cast for each share of Class A Preferred Stock held by such holder as of the record date for determining stockholders entitled to vote on such matter, the number of votes that is equal to one and one-tenth (1.1) times a fraction, the numerator of which is the sum of (A) the number of shares of outstanding Common Stock and (B) the whole shares of Common Stock in to which the shares of outstanding Class A Preferred Stock are convertible, and the denominator of which is number of shares of outstanding Class A Preferred Stock (the “Class A Preferred Stock Ratio”). Thus, the Class A Preferred Stock will at all times constitute a voting majority.

Each share of Class A Preferred Stock is convertible, at the option of the holder, into one fully paid and nonassessable share of Common Stock (the “Conversion Ratio”), subject to certain adjustments. If the Company, at any time effects a subdivision or combination of the outstanding Common Stock (by any stock split, stock dividend, recapitalization, reverse stock split or otherwise), the applicable Conversion Ratio in effect immediately before that subdivision is proportionately decreased or increased, as applicable, so that the number of shares of Common Stock issuable on conversion of each share of Class A Preferred Stock shall be increased or decreased, a applicable, in proportion to such increase or decrease in the aggregate number of shares of Common Stock outstanding. Additionally, if any reorganization, recapitalization, reclassification, consolidation or merger involving the Company occurs in which the Common Stock (but not the Class A Preferred Stock) is converted into or exchanged for securities, cash or other property, then each share of Class A Preferred Stock becomes convertible into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Company issuable upon conversion of one share of the Class A Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction. Pursuant to the reverse stock split by the Company in September 2022, the Class A Preferred Stock has a Conversion Ratio of 15 Class A Preferred to one share of Common Stock.

Common Stock

As of December 31, 2022, the Company’s authorized capital stock consists of 20,000,000 shares of common stock, with $0.0001 par value (see Note 1).

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our Board of Directors, subject to any preferential dividend rights of outstanding preferred stock.

In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

In November 2021, the Company, pursuant to an underwritten public offering, sold 149,252 shares of its common stock at a price of $20.10 per share for gross proceeds of approximately $3.0 million. After deducting underwriting discounts and commissions and other expenses, net proceeds from this underwritten public offering were $2.6 million.

In December 2021, the Company, pursuant to an underwritten public offering, sold 127,340 shares of its common stock at a price of $16.05 per share for gross proceeds of approximately $2.0 million. In addition, the Company granted the underwriters a 45-day option to purchase additional shares of common stock, representing up to 15% of the number of the shares, solely to cover over-allotments. This 45-day purchase option was not exercised. After deducting underwriting discounts and commissions and other expenses, net proceeds from this underwritten public offering were $1.8 million.

Pursuant to the October 2022 Offering, the Company sold 2,652,065 units (“Units”) and 984,300 pre-funded units (“Pre-funded Units”). Each Unit consisted of one share (a “Share”) of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and one warrant to purchase one share of Common Stock (each, a “Warrant” and, collectively, the “Warrants”), and each Pre-funded Unit consisted of one pre-funded warrant to purchase one share of Common Stock (each, a “Pre-funded Warrant” and collectively, the “Pre-funded Warrants”) and one Warrant. The Units were sold at a price of $3.30 per Unit, and the Pre-Funded Units were sold at a price of $3.2999 ($3.30 less $0.0001, the exercise price of the Pre-funded Warrants).

The Warrants are immediately exercisable upon issuance and are exercisable for a period of five years after the issuance date. The Shares, the Pre-funded Warrants and the Warrants were immediately separable upon issuance and were issued separately. The Underwriter was granted a 45-day option to purchase up to an aggregate of (i) 545,454 additional Shares and/or Pre-funded Units, representing 15% of the Shares and Pre-funded Warrants sold in the Offering, and/or (ii) Warrants to purchase 545,454 additional Shares, representing 15% of the Warrants sold in the Offering, which it initially exercised, in part, electing to purchase 545,454 Warrants at a purchase price of $0.01 per Warrant. The Company consummated the transactions contemplated by the Offering and the Underwriting Agreement, including the partial exercise of the Underwriter’s option, on October 11, 2022. Prior to the closing date of the Offering, investors in certain of the Pre-funded Warrants, pursuant to the terms thereof, elected to exercise 949,900 Pre-funded Warrants. Accordingly, at the closing, the Company issued 949,900 fewer Pre-funded Warrants and, in lieu thereof, the corresponding 949,900 shares of Common Stock.

The Company received net proceeds from the Offering of $10.3 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.

Pursuant to the Founders Agreement, the Company issued 90,909 shares of common stock to Fortress related to the October 2022 offering, which is equivalent to 2.5% of the gross amount of the offering. The Company recorded the expense of $0.3 million in research and development on the record date and issued the shares on January 1, 2023.

Equity Incentive Plan

The Company has in effect the 2015 Incentive Plan (“2015 Incentive Plan’). The 2015 Incentive Plan was adopted in January 2015 by our stockholders and an amendment to the plan to increase the number of authorized shares issuable to 266,666 shares was approved by our stockholders in December 2021. Under the 2015 Incentive Plan, the compensation committee of the Company’s board of directors is authorized to grant stock-based awards to directors, officers, employees and consultants. The plan authorizes grants to issue up to 266,666 shares of authorized but unissued common stock and expires 10 years from adoption and limits the term of each option to no more than 10 years from the date of grant.

Total shares available for the issuance of stock-based awards under the Company’s 2015 Incentive Plan was 122,489 shares at December 31, 2022.

Restricted Stock Units and Restricted Stock Awards

The following table summarizes restricted stock unit and award activity for the year ended December 31, 2022:

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For the years ended December 31, 2022, and 2021 stock-based compensation expenses associated with the amortization of restricted stock units and restricted stock awards for employees and non-employees were approximately $0.6 million and $0.4 million, respectively.

For the years ended December 31, 2022, and 2021, the weighted average grant date fair value of restricted stock units and awards granted was zero and $13.95, respectively. For the years ended December 31, 2022, and 2021, the weighted average grant date fair value of restricted stock units and awards forfeited was $13.95 and $119.70, respectively. The total fair value of restricted stock units and awards that vested during the years ended December 31, 2022, and 2021 was $3.3 million and $0.6 million, respectively.

At December 31, 2022, the Company had unrecognized stock-based compensation expense related to restricted stock units and restricted stock awards of $0.1 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.96 years. This amount does not include, as of December 31, 2022, 3,333 shares of restricted stock outstanding which are performance-based and vest upon achievement of certain corporate milestones. The expense is recognized over the vesting period of the award. Stock-based compensation for awards containing performance conditions will be measured as of the grant date and recorded if and when it is probable that the performance condition will be achieved.

Stock Warrants

The following table summarizes the warrant activity for the years ended December 31, 2021 and 2022:

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Upon the exercise of warrants, the Company will issue new shares of its common stock.

Public Offering Warrant Liabilities

In October 2022, the Company sold 2,652,065 units (“Units”) and 984,300 pre-funded units (“Pre-funded Units”). Each Unit consisted of one share (a “Share”) of the Company’s common stock (“Common Stock”), and one warrant to purchase one share of Common Stock (each, a “Warrant” and, collectively, the “Warrants”), and each Pre-funded Unit consisted of one pre-funded warrant to purchase one share of Common Stock (each, a “Pre-funded Warrant” and collectively, the “Pre-funded Warrants”) and one Warrant. The Units were sold at a price of $3.30 per Unit, and the Pre-Funded Units were sold at a price of $3.2999 ($3.30 less $0.0001, the exercise price of the Pre-funded Warrants). Net proceeds from the offering were $10.3 million after deducting underwriting discounts and commissions and other transaction costs.

We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 and ASC 815. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each consolidated balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a gain or loss on the consolidated statements of operations. The fair value of the warrants was estimated using a Monte Carlo simulation approach (see Note 2).

The Company deemed the October 2022 Warrants to be classified as liabilities on the consolidated balance sheet as they contain terms for redemption of the underlying security that are outside of the Company’s control. The Warrants were recorded at the time of closing at a fair value of $8.3 million, determined by using the Monte Carlo simulation approach.

The Company revalued the October 2022 Warrants at December 31, 2022 using the Monte Carlo simulation approach. This resulted in a decrease in common stock warrant liability of $5.6 million, with an offsetting gain recorded to change in fair value of common stock warrant liabilities in the consolidated statements of operations.