LONG-TERM DEBT RELATED-PARTY

3 Months Ended

Mar. 31, 2023

NOTE 10. LONG-TERM DEBT RELATED-PARTY

On August 15, 2022, the Company entered into an exchange agreement (the “August 2022 Exchange Agreement”) with the Jack W. Schuler Living Trust (the “Schuler Trust”). 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 for (a) the Secured Note in an aggregate principal amount of $34.9 million 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. 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.

On August 15, 2022, the transaction qualified as an extinguishment of debt. Under extinguishment accounting, the Notes exchanged by the Schuler Trust were derecognized and the new instruments were issued, which include the Secured Note and the Warrant, were recorded at their fair values. The estimated fair value of the Secured Note on August 15, 2022 was $16.0 million. This valuation estimated an issuance discount of $18.9 million. The effective interest rate on the Secured Note is 24.60%.

The carrying value of the Secured Note at March 31, 2023 and December 31, 2022 consisted of the following (in thousands):


	March 31,		December 31,
	2023		2022
Outstanding principal	$	34,934	$	34,934
Unamortized debt issuance discount	(17,504)		(18,076)
Net carrying amount	$	17,430	$	16,858

Interest expense in connection with the Secured Note during the three months ended March 31, 2023 and 2022 was as follows (in thousands):


	Three Months Ended March 31,
	2023		2022
Contractual interest	$	441	$	—
Amortization of the debt discount	572		—
Total interest expense	$	1,013	$	—

The Secured Note’s carrying amount of $17.4 million and accrued interest expense of $1.1 million are recorded in non-current liabilities on the Company’s condensed consolidated balance sheet as of March 31, 2023. Neither the principal amount nor the accrued interest are contractually payable within twelve months of the balance sheet date of March 31, 2023. 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 under the Secured Note have been paid or shares issued as of March 31, 2023.

The following presents maturities of future principal and accrued interest obligations of the Secured Note as of March 31, 2023 (in thousands):


	Principal		Accrued Interest		Total
2023	$	—	$	—	$	—
2024	—		—		—
2025	—		—		—
2026	—		—		—
2027	34,934		1,104		36,038
Thereafter	—		—		—
Total	$	34,934	$	1,104	$	36,038

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.

Fair Value of the Secured Notes

The Secured Note is an instrument measured at fair value using Level 3 inputs. The estimated fair value of the Secured Note on March 31, 2023 and December 31, 2022 was $6.2 million and $16.0 million, respectively.

The fair value of the Secured Note 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 table below summarizes the significant assumptions and inputs used to estimate the fair value of the Secured Note as of March 31, 2023 and December 31, 2022:


	March 31,			December 31,
	2023			2022
Stock price	$	0.70		$	2.68
Term (years)	4.38			5
Volatility	103.49		%	84.30		%
Risk-free rate	3.67		%	2.91		%

See Note 4, Fair Value of Financial Instruments for additional information.

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, as set forth in the Warrant. The Warrant is exercisable for up to 2,471,710 shares of common stock. The Warrant meets the criteria for classification in stockholders’ equity and was recorded in equity and initially measured at fair value.

Restructuring Support Agreement

On April 21, 2023, the Company entered into the Restructuring Support Agreement with certain holders of the Notes, the holder of the Secured Note and the holders of the Company’s Series A Preferred Stock to negotiate in good faith to effect the restructuring of the Company’s capital structure, including the Notes, the Secured Note and the Company’s Series A Preferred Stock, as well as a contemplated amendment to the March 2022 Securities Purchase Agreement, as an Out-of-Court Restructuring. See Note 19, Subsequent Events for additional information.