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Convertible Notes

12 Months Ended

Dec. 31, 2021

5.	Convertible Notes

In March 2020, the Company entered into a note purchase agreement for the issuance of up to $4.0 million of convertible promissory notes, which, if not converted, had an initial maturity date of March 31, 2021. The Company entered into a series of convertible note payable agreements (the “2020 Convertible Notes”) for aggregate borrowings of $3.0 million. The 2020 Notes bore interest at the rate of 5% per annum and could not be prepaid prior to the maturity date unless approved in writing by the Company and requisite holders.

The terms of the 2020 Convertible Notes provided for automatic conversion into equity shares in the next equity financing round with total proceeds of not less than $10.0 million (a “Qualified Financing’), at a conversion price per share equal to 80% of the price per share paid by investors purchasing such equity securities in a Qualified Financing. For purposes of the 2020 Convertible Notes, equity securities meant the Company’s common stock, preferred stock or any securities providing for rights to purchase the Company’s common stock, preferred stock or securities convertible into or exchangeable for the Company’s common stock or preferred stock issued in the Qualified Financing. If the Company consummated a Change of Control prior to a Qualified Financing, the Company would repay each holder in cash an amount equal to the greater of (a) two times (2x) the entire outstanding principal balance of the 2020 Convertible Notes or (b) the amount the holder would receive if the 2020 Convertible Notes had been converted into shares of the Company’s Series B convertible preferred stock immediately prior to the consummation of the Change in Control, at a conversion price equal to the Series B convertible preferred stock Original Issue Price.

On March 1, 2021, the Company entered into an amendment to the 2020 Convertible Notes which extended the maturity date of the 2020 Convertible Notes from March 31, 2021 to October 30, 2021 and provided for the conversion of the 2020 Convertible Notes into shares of the Company’s common stock upon a Qualified Financing that is an IPO. No other terms of the 2020 Convertible Notes were amended. This amendment was accounted for as a troubled debt restructuring pursuant to FASB ASC Topic 470-60, “Troubled Debt Restructurings by Debtors.” As the future undiscounted cash flows of the 2020 Convertible Notes were greater than their carrying amount, the carrying amount was not adjusted and no gain was recognized as a result of the modification of terms.

The Company determined that the redemption features contained rights and obligations for conversion were contingent upon a potential future financing event or a change in control. Thus, the embedded redemption features were bifurcated from the face value of the notes and accounted for as a derivative liability to be remeasured at the end of each reporting period. The fair value of the derivative liability at December 31, 2021 and 2020 was $0 and $856,000, respectively. Debt issuance costs were $22,000 at December 31, 2020. There were no debt issuance costs as of December 31, 2021. The derivative liability was subject to fair value remeasurement at the end of each reporting period. The debt discount and debt issuance costs were being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. For the year ended December 31, 2021, the Company recognized $379,000 for amortization of the debt discount and debt issuance costs, of which $369,000 pertains to the debt discount and $10,000 pertained to debt issuance costs. For the year ended December 31, 2020, the Company recognized $477,000 of amortization of debt discount and $12,000 of amortization of debt issuance costs as interest expense in the statement of operation for the year ended December 31, 2020. The effective interest rate of the 2020 Convertible Notes was 0% and 30.8% at December 31, 2021 and 2020, respectively, compared to the stated rate of 5% per annum. The effective interest rate immediately prior to the conversion of the Convertible Notes resulting from the Company’s IPO was 8.6% per annum. As a result, the Company’s reported interest expense was significantly higher than the contractual cash interest payments. The Company recognized interest expense in the statements of operations of $101,000, in each of the years ended December 31, 2021 and 2020, related to the 2020 Convertible Notes.

In April 2021, the Company entered into a note purchase agreement and a series of convertible note payable agreements (the “2021 Convertible Notes,” together with the 2020 Convertible Notes, the “2020 and 2021 Convertible Notes”) for aggregate borrowings of $2.0 million. Outstanding borrowings under the 2021 Convertible Notes and accrued interest were due in April 2022, if not previously converted. The 2021 Notes bore interest at the rate of 5% per annum. Pursuant to the 2021 Convertible Notes, the outstanding principal and accrued interest are automatically convertible into equity shares in a Qualified Financing at a conversion price per share equal to 87.5% of the price per share paid by investors purchasing such equity securities in a Qualified Financing.

The Company determined that these redemption features in the 2021 Convertible Notes contained rights and obligations for conversion contingent upon a potential future financing event or a change in control. Thus, the embedded redemption features were bifurcated from the face value of the note and accounted for as a derivative liability to be remeasured at the end of each reporting period. Upon issuance of the notes, the Company recorded the fair value of the derivative liability of $363,000 and debt issuance costs of $23,000, with the offsetting amount being recorded as a debt discount. The derivative liability was subject to fair value remeasurement at the end of each reporting period. The discount and debt issuance costs were being amortized to interest expense using the effective interest method over the expected term of the 2021 Convertible Notes. For the year ended December 31, 2021, the Company recognized $386,000 for the amortization of the debt discount and debt issuance costs, of which $363,000 pertains to the debt discount and $23,000 pertained to debt issuance costs. This amortization expense was recognized as interest expense in the statements of operations. The effective interest rate of the 2021 Convertible Notes was 0% at December 31, 2021 compared to the stated rate of 5%. As a result, the Company’s reported interest expense was significantly higher than the contractual cash interest payments. During the year ended December 31, 2021, the Company recognized interest expense in the statements of operations of $38,000 related to the 2021 Convertible Notes.

The Company completed an IPO on August 30, 2021, which triggered the automatic conversion of the outstanding Convertible Notes plus accrued interest into an aggregate of 708,820 units. Each unit consisted of (a) one share of common stock and (b) one five-year warrant to purchase one share of common stock at an exercise price equal to $10.80 per share (Note 7, Warrant Liability). Upon conversion of the 2020 and 2021 Convertible Notes, the outstanding principal, including debt discount and debt issuance costs for those Convertible Notes of $5.3 million, was derecognized into stockholders’ equity (deficit). The unamortized debt discount totaling $78,000 was recognized as a loss on extinguishment of debt and is included in loss (gain) on loan extinguishment in the Company’s statements of operations.

RenovoRx, Inc.

Notes to Financial Statements