LONG-TERM DEBT RELATED-PARTY

12 Months Ended

Dec. 31, 2022

NOTE 11. LONG-TERM DEBT RELATED-PARTY

On August 15, 2022, the Company entered into the August 2022 Exchange Agreement with the Schuler Trust, a holder of the Notes. Jack Schuler, who serves as a member of the Company’s board of directors, is the sole trustee of the Schuler Trust. Under the terms of the August 2022 Exchange Agreement, the Schuler Trust agreed to exchange with the Company $49.9 million in aggregate principal amount of Notes held by it (the “Exchanged Notes”) for (a) a secured promissory note in an aggregate principal amount of $34.9 million (the “Secured Note”) and (b) a Warrant to acquire the Company’s common stock at an exercise price of $2.12 per share (the “Warrant”).

The Secured Note has a scheduled maturity date of August 15, 2027 and is repayable upon written demand at any time on or after such date. The Company may, at its option, repay the Secured Note in (i) cash or (ii) in the form of common stock of the Company, in a number of shares that is obtained by dividing the total amount of such payment by $2.12. However, the payment in common stock is subject to certain limitations, including that the aggregate amount of common shares issued to settle the debt not exceed 19.99% of the Company’s then outstanding shares of common stock. The Secured Note bears interest at a rate of 5.0% per annum, payable at the option of the Company in the same form, at the earlier of (i) any prepayment of principal and (ii) maturity. The Company may prepay the Secured Note at any time without premium or penalty. The Secured Note is secured by substantially all of the assets of the Company, subject to customary exceptions and limitations, pursuant to a security agreement, dated as of August 15, 2022. The Secured Note does not restrict the incurrence of future indebtedness by the Company but shall become subordinated in right of payment and lien priority upon the request of any future senior lender.

Under ASC 470-50-40, the transaction qualified as an extinguishment of debt. Under extinguishment accounting, the Exchanged Notes were derecognized and the new instruments, which include the Secured Note and the Warrant, were recorded at their fair values on the issuance date, August 15, 2022. See Note 10, Convertible Notes for additional information. The fair value of the Secured Note was $16.0 million and was estimated using a Monte Carlo simulation which simulated the share price of the Company over the remaining term through the Secured Note’s maturity date. The simulated per-share price in a given iteration determined if the Company settled in cash or shares, and the mean present value of the iterations was concluded as the estimated fair value. The fair value of the Secured Note is a non-recurring measurement that is categorized as Level 3 within the fair value hierarchy as it is based on Level 2 and Level 3 inputs. Based on a face value of $34.9 million and fair value of $16.0 million, the Company recorded a debt issuance discount of $18.9 million, which is being amortized over the life of the Secured Note using the effective interest method. The effective interest rate on the Secured Note is 24.60%.

The table below summarizes the significant assumptions and inputs used to estimate the fair value of the Secured Note as of August 15, 2022:


	2022
Stock price	$	2.68
Term (years)	5
Volatility	84.30		%
Risk-free rate	2.91		%

The carrying value of the Secured Note at December 31, 2022 consisted of the following (in thousands):


	2022
Outstanding principal	$	34,934
Unamortized debt issuance discount	(18,076)
Net carrying amount	$	16,858

Interest expense consisted of the following for the year ended December 31 (in thousands):


	2022
Contractual interest	$	663
Amortization of the debt discount	834
Total interest expense	$	1,497

The Secured Note’s carrying amount of $16.9 million and accrued interest expense of $0.7 million are recorded in non-current liabilities on the Company’s consolidated balance sheet as of December 31, 2022. Neither the principal amount nor the accrued interest are contractually payable within twelve months of the balance sheet date of December 31, 2022. The Secured Note’s interest is payable at the option of the Company in the same form as the principal, at the earlier of (i) any prepayment of principal and (ii) maturity. It is the Company’s intention to pay all interest at maturity.

No principal or accrued interest have been paid or shares issued as of December 31, 2022.

The following presents maturities of future principal and accrued interest obligations of the Secured Note as of December 31, 2022 (in thousands):


	Principal		Accrued Interest		Total
2023	$	—	$	—	$	—
2024	—		—		—
2025	—		—		—
2026	—		—		—
2027	34,934		663		35,597
Thereafter	—		—		—
Total	$	34,934	$	663	$	35,597

If the Company were to make a first and final interest payment on the maturity date of August 15, 2027, the interest payable amount would be $9.9 million.

Warrant

The Warrant may be exercised from February 15, 2023 through the earlier of (i) August 15, 2029 and (ii) the consummation of certain acquisition transactions involving the Company (the “exercise period”), as set forth in the Warrant agreement. The Warrant is exercisable for up to 2,471,710 shares of the Company’s common stock and may be exercised in whole or in part at any time during the exercise period. The Company determined that the Warrant meets the criteria for classification in stockholders’ equity and was recorded in equity and initially measured at fair value on the issuance date. The fair value of the Warrant was $3.8 million and was estimated using the Black-Scholes option pricing model. The fair value of the Warrant is a non-recurring measurement that is categorized as Level 3 within the fair value hierarchy as it is based on Level 2 and Level 3 inputs. No portion of the Warrant has been exercised as of December 31, 2022.

The table below summarizes the significant assumptions and inputs used to estimate the fair value of the Warrant as of August 15, 2022:


	2022
Stock market price	$	2.12
Exercise price	$	2.12
Contractual term (in years)	7
Volatility	76.10		%
Expected dividends	—
Risk free interest rates	2.86		%