Convertible Promissory Notes

9 Months Ended

Sep. 30, 2020

Q1 2019 Notes

In January and February 2019, the Company issued $11,770,000 principal amount of unsecured convertible promissory notes (the “Q1 2019 Notes”), of which $4,756,000 was with related parties (executive officers, members of the Company’s board of directors or entities affiliated with them). The Q1 2019 Notes bore simple interest at a rate of 8% per annum. Originally, the Q1 2019 Notes had a maturity date of January 31, 2020, but on July 3, 2019, the Company entered into an amendment with the holders of the Q1 2019 Notes to extend the maturity to June 30, 2020. The entire amount of the outstanding principal amount plus accrued interest on the Q1 2019 Notes converted into 954,074 shares of common stock in connection with the IPO on July 29, 2019.

The Company determined that certain features of the Q1 2019 Notes were subject to bifurcation and separate accounting under ASC Subtopic 815-15, Embedded Derivatives. The embedded derivative was recorded at fair value each reporting period, with changes in fair value recorded as “other expense, net” in the statements of operations and comprehensive (loss) income. No hedge accounting treatment was applied. The Company also determined the Q1 2019 Notes contained a beneficial conversion feature under ASC Subtopic 470-20, Debt with Conversion and Other Options, related to the optional conversion of the Q1 2019 Notes into Series F redeemable convertible preferred stock at maturity. The debt discounts created from the initial recognition of the embedded derivative and the beneficial conversion feature were being amortized to interest expense over the life of the debt using the effective interest method. Amortization of discounts and issuance costs on the Q1 2019 Notes totaled $245,000 for the three months ended September 30, 2019 and $1,216,000 for the nine months ended September 30, 2019 and were included in interest expense. The conversion of the Q1 2019 Notes was considered an extinguishment for accounting purposes. The Company recognized an extinguishment gain of $5,213,000 during the three and nine months ended September 30, 2019.

The amounts recognized in net income for three and nine months ended September 30, 2019 for the embedded derivative liability are as follows (in thousands):

(Loss) Recognized in Net Income

Statement of Operations and Comprehensive (Loss) Income Location

Three Months Ended
September 30, 2019

Nine Months Ended
September 30, 2019

Derivatives Not Classified as Hedging Instruments

Embedded derivative in convertible promissory notes

Other expense, net

(101)

(237)

July 2019 Note

On July 12, 2019, the Company issued an unsecured convertible promissory note having a principal amount of $10,000,000 (the ‘‘July 2019 Note’’) to an investor. The July 2019 Note bore simple interest at a rate of 8% per annum and had an original maturity date of June 30, 2020. The IPO triggered an automatic conversion feature of the July 2019 Note under which the

outstanding principal amount plus accrued interest converted into 707,032 shares of common stock in connection with the closing of the IPO on July 29, 2019, based on a price derived from a valuation calculated pursuant to the terms of the July 2019 Note. In connection with the July 2019 Note issuance, the Company issued the purchaser of the July 2019 Note a warrant to purchase up to 209,243 shares of common stock at an exercise price of approximately $0.001 per share.

The Company elected to account for the July 2019 Note under the fair value option in accordance with ASC Topic 825, Financial Instruments. Under the fair value option, changes in fair value were recorded in the condensed statements of operations and comprehensive (loss) income each period as “other expense, net.” For the three and nine months ended September 30, 2019, the company recorded $2,077,000 of negative fair value adjustments through the settlement date in the statements of operations and comprehensive (loss) income.