DEBT

12 Months Ended

Dec. 31, 2022

Debt Disclosure [Abstract]

DEBT

DEBT

2020 Convertible Note

On January 10, 2020, the Company entered into a securities purchase agreement and unsecured convertible promissory note in the principal amount of $2,750,000 (the “2020 Convertible Note”). The holder of the 2020 Convertible Note could elect to convert all or a portion of the note, at any time from time to time into the Company’s common stock at a conversion price of $65.00 per share, as adjusted by the Reverse Stock Split effected October 17, 2022. The purchase price of the 2020 Convertible Note was $2,500,000 and carried an original issuance discount of $250,000, which was included in the principal amount of the 2020 Convertible Note.

The various conversion and redemption features contained in the 2020 Convertible Note were embedded derivative instruments, which were recorded as a debt discount and derivative liability at the issuance date at their estimated fair value of $0.4 million. Amortization of the debt discount and accretion of the original issuance discount (“OID”) for the 2020 Convertible Note recorded as interest expense was approximately $44,000 for the year ended December 31, 2021. There was no interest expense incurred under the 2020 Convertible Note during the year ended December 31, 2022.

The 2020 Convertible Note bore interest at the rate of 10% per annum, compounding on a daily basis. During the year ended December 31, 2021, the Company paid the remaining balance of principal and interest of approximately $0.1 million in cash.

2022 Convertible Note

On June 30, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) for the purchase of senior secured convertible notes with an institutional investor (the “Holder”). The purchase price of the initial note issued on July 15, 2022 and maturing July 1, 2025, is $21.0 million (the “2022 Convertible Note”), and carries an OID of 5% or $1.1 million, with an option for the Company to issue additional convertible notes to the Holder with principal amounts of up to an aggregate of $70.0 million, subject to certain limitations. The 2022 Convertible Note bears interest equal to the three-month benchmark rate plus 5% (with a floor of 6% and 18% upon default). The Company paid debt issuance costs of approximately $1.1 million during the year ended December 31, 2022. The Company’s accounting policy is to amortize the debt discount and OID over the estimated life of the debt, which is approximately 2.5 years for the 2022 Convertible Note.

On November 7, 2022, the Company amended and restated the 2022 Convertible Note (the “Amended 2022 Note”) in order to, among other things, reduce the minimum liquidity requirement from 110% of the outstanding principal amount to 80% of the outstanding principal amount, which released approximately $6.3 million from restricted cash upon the effective date of the Amended 2022 Note. Additionally, the Amended 2022 Note removed the provisions related to accelerated principal payments and instead established scheduled equity amortization payments beginning in November 2022. On the first day of each month through June 1, 2023, the Company will make an amortization payment equal to $1.68 million, to be paid in shares of the Company’s common stock (unless the Company elects to pay in cash), to the Holder, subject to certain conditions, including the equity conditions (as defined in the original 2022 Convertible Note). Such amortization payment may be optionally decreased by the Company, or if agreed to in writing by the Holder and the Company, increased. On the first day of each month on or after July 1, 2023, the Company will make an amortization payment equal to $882,000 in cash (unless the Company elects to pay in shares of common stock, subject to certain conditions, including the equity conditions). Such amortization payment may be optionally increased by the Company, if agreed to in writing by the Holder and the Company. The Amended 2022 Note also amends the definitions of the Conversion Floor Price, Subsequent Financing, Subsequent Financing Requirement and Required Reserve Amount.

The Amended 2022 Note was accounted for as a debt modification and represents the same indebtedness represented by the Original 2022 Convertible Note. Additionally, the Company and the Holder also amended the Securities Purchase Agreement to replace the form of note with a form of note substantially similar to the Amended 2022 Note, which the Company may use to issue, at the Company’s option, additional notes to the Holder with principal amounts of up to an aggregate of $70.0 million, subject to certain limitations.

The Amended 2022 Note ranks senior to all outstanding and future indebtedness of the Company and its subsidiaries over the three-year term. The Amended 2022 Note also contains customary affirmative and negative covenants, including limitations on incurring indebtedness, the creation of additional liens on the Company’s assets, and entering into investments, as well as a subsequent financing requirement to raise at least $25.0 million by March 31, 2023, and a minimum liquidity requirement to maintain 80% of the outstanding principal in a restricted cash account. The Company is required to have shares reserved of at least 200% of then outstanding principal and accruable interest divided by the Holder’s conversion rate. The Holder can elect to convert at the Holder’s conversion rate of $7.06 per share, subject to certain adjustments, including but not limited to, the issuance of certain rights, options or warrants.

The Company can elect to make principal or interest payments in common stock instead of cash at an amount equal to 92% of the lowest daily volume weighted-average price (“VWAP”) of the Company’s common stock during the three-trading day period immediately prior to payment date, which cannot be less than the floor price of $2.00 per share.

The Holder can redeem the Amended 2022 Note in cash upon (i) a “fundamental change”, as defined in the Amended 2022 Note, (ii) cessation of vurolenatide clinical development while the Company’s total market capitalization is less than $100 million for a period of five consecutive days (the “Clinical Development Cessation”), (iii) an event of default as defined in the Amended 2022 Note, or (iv) if the resale registration statement is withdrawn. The Holder’s cash redemption price ranges from 5% to 15% of then-outstanding principal and unpaid interest. If the Holder redeemed the Amended 2022 Note at December 31, 2022 under the redemption options (i) through (iii) above, the Company would settle the Amended 2022 Note in cash at a price of approximately $24.0 million. Redemption option (iv) would result in a cash redemption payment of approximately $21.9 million. The Company can elect to redeem the Amended 2022 Note in cash at an amount equal to the greater of (A) the “fixed conversion value”, as defined in the Amended 2022 Note, plus accrued and unpaid interest and (B) if

before the first year anniversary of the issuance date, 125% of then-outstanding principal and interest. If the Company elected to redeem the Amended 2022 Note as of December 31, 2022, the Company would have settled the Amended 2022 Note in cash for approximately $26.1 million.

Events of defaults include, but are not limited to, failure to make timely payments, failure to maintain the minimum liquidity requirement, failure to timely deliver certain notices (including notice of a fundamental change or the Clinical Development Cessation) and filing for bankruptcy. There were no events of default during the year ended December 31, 2022.

The Company made principal and interest payments in equity of $0.1 million, which was settled with 55,719 shares of the Company’s common stock at a weighted-average conversion price of $1.89. In addition, the Company paid interest payments in cash of approximately $0.8 million. The various conversion and redemption features contained in the Amended 2022 Note are embedded derivative instruments, which were recorded as a debt discount and derivative liability at the issuance date at their estimated fair value of $2.0 million. Amortization of the debt discount and accretion of the OID for the Amended 2022 Note, recorded as interest expense using an effective interest rate of 24.7%, was approximately $1.8 million for the year ended December 31, 2022. The unamortized discount and OID is approximately $2.3 million, which is expected to be amortized over approximately 1.3 years.

The Amended 2022 Note, which is classified as current as of December 31, 2022, consisted of:

	December 31,
	2022
Convertible notes payable, net	$	22,050,000
Less: principal payments of debt	(105,000)
Less: unamortized debt discount and OID	(2,328,687)
Total convertible notes payable, net	$	19,616,313