Long-Term Debt Related-Party

9 Months Ended

Sep. 30, 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 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 will be repayable upon written demand at any time on or after such date. The Company may, at its option, repay the 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.

Under ASC 470-50-40, the transaction qualified as an extinguishment of debt. Under extinguishment accounting, the Notes were derecognized and the new instruments, which include the Secured Note and the Warrant, were recorded at their fair values. See Note 10, Convertible Notes for additional information. The Secured Notes is an instrument measured at fair value on a non-recurring basis using Level 3 inputs. To estimate the Secured Note’s fair value, the Company applied a Monte Carlo simulation which simulated the share price of the Company over the remaining term to the maturity date of the Secured Note. The simulated per-share price in a given iteration determined if the Company settled in cash or shares. 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 September 30, 2022 consisted of the following (in thousands):


	September 30,
	2022
Outstanding principal	$	34,934
Unamortized debt issuance discount	(18,635)
Net carrying amount	$	16,299

Interest expense in connection with the Secured Note during the three and nine months ended September 30, 2022 and 2021 was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Contractual interest	$	220	$	—	$	220	$	—
Amortization of the debt discount	275		—		275		—
Total interest expense	$	495	$	—	$	495	$	—

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. The Warrant was measured at fair value on a non-recurring basis using Level 3 inputs. The fair value of the warrant on August 15, 2022 was $3.8 million.

The table below summarizes the inputs used to calculate the estimated fair value of the Warrant issued during the three months ended September 30, 2022:


Contractual term (in years)	7.0
Volatility	76.10	%
Expected dividends	—
Risk free interest rates	2.86	%