LONG-TERM DEBT RELATED-PARTY

9 Months Ended

Sep. 30, 2023

NOTE 10. LONG-TERM DEBT RELATED-PARTY

On August 15, 2022, the Company entered into the August 2022 Exchange Agreement with the Schuler Trust. Under the terms of the August 2022 Exchange Agreement, the Schuler Trust agreed to exchange (the “August 2022 Exchange Transaction”) with the Company $49.9 million in aggregate principal amount of 2.50% 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 $21.20 per share (the “Warrant”).

The Secured Note had a scheduled maturity date of August 15, 2027 and was repayable upon written demand at any time on or after such date. The Company could, 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 $21.20. The Secured Note bore interest at a rate of 5.00% 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 Secured Note was 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 did not restrict the incurrence of future indebtedness by the Company but will become subordinated in right of payment and lien priority upon the request of any future senior lender.

On August 15, 2022, the August 2022 Exchange Transaction qualified as an extinguishment of debt. Under extinguishment accounting, the 2.50% Notes exchanged by the Schuler Trust were derecognized and the new Secured Note and the Warrant were issued and 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 was 24.60%.

In June 2023, the Company fully extinguished the Secured Note by exchanging the Secured Note for shares of the Company’s common stock in connection with the Restructuring Transactions as discussed further below.

The carrying value of the Secured Note at September 30, 2023 and December 31, 2022 consisted of the following (in thousands):


	September 30,		December 31,
	2023		2022
Outstanding principal	$	—	$	34,934
Unamortized debt issuance discount	—		(18,076)
Net carrying amount	$	—	$	16,858

Interest expense in connection with the Secured Note during the three and nine months ended September 30, 2023 and 2022 was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Contractual interest	$	—	$	220	$	784	$	220
Amortization of the debt discount	—		275		1,034		275
Total interest expense	$	—	$	495	$	1,818	$	495

Secured Note Amendment and Exchange

As discussed in Note 9, Convertible Notes, on June 9, 2023, the Company and the Schuler Trust amended the Secured Note (the “Secured Note Amendment”), which changed its settlement provisions. Pursuant to the Secured Note Amendment, the share conversion price was changed from $21.20 to $10.60, and the Secured Note was contemporaneously settled through the Company’s issuance of approximately 3.4 million shares of common stock.

Under ASC 470-50-40, the transaction qualified as an extinguishment of debt. The reacquisition price of the extinguished debt was determined as the fair value of the common stock issued. The closing price of the Company’s common stock on June 9, 2023, the date of the extinguishment, was $7.40 and was used to estimate the fair value of the common stock issued which was $25.4 million, while the carrying amount of the Secured Note and associated accrued interest being extinguished was $19.3 million. This resulted in a net loss on extinguishment of $6.1 million, which was recorded to loss on extinguishment of debt with related party on the on the condensed consolidated statements of operations.

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 247,171 shares of common stock, at an exercise price of $21.20 per share. The Warrant meets the criteria for classification in stockholders’ equity and was initially measured at its fair value and recorded in equity as contributed capital.