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CONVERTIBLE NOTES FINANCINGS
6 Months Ended
Jun. 30, 2024
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES FINANCINGS

5) CONVERTIBLE NOTES FINANCINGS

 

On July 14, 2023, the Company received $8.7 million from a private placement in which the Company issued $8.7 million in aggregate principal amount of convertible notes (the “July 2023 convertible notes”) and warrants to purchase an aggregate of approximately 6.1 million shares of its common stock (the “July 2023 warrants”). The Company recognized approximately $0.2 million in fees associated with the transaction.

 

On December 14, 2023, the Company entered into a purchase agreement with certain purchasers for the private placement of $9.2 million of convertible notes (the “December 2023 convertible notes” and together with the July 2023 convertible notes, the “convertible notes”) and warrants to purchase an aggregate of approximately 9.6 million shares of the Company’s common stock (the “December 2023 warrants” and together with the July 2023 warrants, the “note warrants”).

 

 

There were two closings under the December 14, 2023 purchase agreement – one on December 15, 2023 and the second on January 11, 2024. At the first closing, the Company received $7.8 million and issued $7.8 million of December 2023 convertible notes and December 2023 warrants to purchase approximately 8.1 million shares of its common stock. At the second closing, the Company received $1.4 million and issued $1.4 million of December 2023 convertible notes and December 2023 warrants to purchase approximately 1.5 million shares its common stock.

 

See Note 13 for more information on the note warrants.

 

The July 2023 convertible notes bear interest at 6% per annum, and the December 2023 convertible notes bear interest at 12% per annum, both of which are payable quarterly in arrears. At the Company’s election, it may pay interest either in cash or in-kind by increasing the outstanding principal amount of the convertible notes. The convertible notes mature on the five-year anniversary of the date of their issuance, unless earlier converted or repurchased. The Company does not have the option to redeem any of the convertible notes prior to maturity.

 

At the option of the holders, the convertible notes may be converted from time-to-time in whole or in part into shares of the Company’s common stock at an initial conversion rate of, with respect to the July 2023 convertible notes, $2.86 per share and, with respect to the December 2023 convertible notes, $1.9194 per share, subject to customary adjustments for stock splits, stock dividends, recapitalization and the like. As of June 30, 2024, none of the convertible notes were converted into shares of common stock.

 

The convertible notes do not contain any ratchet or other financial antidilution provisions. The convertible notes contain conversion limitations such that no conversion may be made if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99%, 9.99% or 19.99% immediately after conversion thereof, subject to certain increases not in excess of either 9.99% or 19.99% at the option of such holder.

 

The convertible notes provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest, breach of covenants or other agreements in the convertible notes; the occurrence of a material adverse effect event (as defined in the related securities purchase agreement) and certain events of bankruptcy. Generally, if an undisputed event of default occurs and is continuing under the convertible notes, the holder thereof may require the Company to redeem some or all of their convertible notes at a redemption price equal to 100% of the principal amount of the convertible notes being redeemed, plus accrued and unpaid interest thereon. As of June 30, 2024, there were no events of default that occurred under the convertible notes.

 

The Company determined that there were no embedded derivatives within the convertible notes that required bifurcation from the host agreement. In connection with the December 2023 convertible notes that were issued on January 11, 2024, the Company allocated the gross proceeds received and the fees incurred over the applicable convertible notes and warrants based on their relative fair values as follows (in thousands):

 

   Relative   Allocation   Allocation of Proceeds and Costs   Allocation of Proceeds, 
   Fair Value   Percentage   Proceeds   Costs   Net 
Convertible notes  $1,750    46.24%  $650   $(31)  $619 
Note warrants   2,035    53.76%   755    (35)   720 
   $3,785    100.00%  $1,405   $(66)  $1,339 

 

The Company estimated the fair values of the convertible notes as of January 11, 2024 based off a valuation performed by a third-party specialist as of December 15, 2023 using a binomial tree model and the following assumptions:

  

   Stock
Price
   Credit
Spread
   Volatility   Risk-Free
Rate
 
Convertible notes  $1.75    2,000    109%   3.90%

 

 

The fair value of the note warrants, all of which qualified for equity classification, was determined using the Black-Scholes pricing model as of January 11, 2024 using the following assumptions:

 

   Stock
Price
   Exercise
Price
   Expected
Life
  Volatility   Dividend   Risk-Free
Rate
 
Warrants  $1.75   $1.43   5 years   102%   0.00%   3.90%

 

The amount of proceeds allocated to the note warrants resulted in a corresponding reduction in the carrying value of the respective convertible notes as a debt discount, which is amortized with the debt issuance costs as a component of interest expense based on the effective interest rate method over the contractual terms of the convertible notes.

 

The following table shows the activity that occurred during the six months ended June 30, 2024 for the convertible notes on the accompanying condensed consolidated balance sheet:

 

   Gross convertible notes   Debt discount and debt issuance costs   Convertible notes, net 
             
Beginning balance as of January 1, 2024  $16,616   $(9,843)  $6,773 
December 2023 notes issued in January 2024   1,405    (786)   619 
Paid-in-kind interest added to principal   584    -    584 
Amortization of debt discount and debt issuance costs   -    919    919 
Ending balance as of June 30, 2024  $18,605   $(9,710  $8,895 

 

To date, the Company has elected to pay in-kind the accrued interest payable on the convertible notes and has added the accrued and unpaid interest to the principal amount of the applicable convertible note. For the three months ended June 30, 2024, the Company has recognized approximately $0.9 million in interest expense for the convertible notes, which includes $0.5 million for the amortization of the debt discount and debt issuance costs and $0.4 million for accrued and unpaid interest on the convertible notes recorded in accrued expenses in the accompanying condensed consolidated balance sheet. For the six months ended June 30, 2024, the Company has recognized approximately $1.7 million in interest expense, which includes $0.9 million for the amortization of the debt discount and debt issuance costs, $0.4 million recorded for accrued and unpaid interest on the convertible notes recorded in accrued expenses in the accompanying condensed consolidated balance sheet and $0.4 million of accrued interest that was paid in-kind and added to the principal of the convertible notes.