Debt

6 Months Ended

Jun. 30, 2023

Debt

Debt

Note 5. Debt

In December 2020, the Company entered into a $20 million convertible debt financing agreement with Pontifax. Under the terms of the agreement with Pontifax, the Company had access to up to $20 million in convertible debt financing in three tranches, which will mature on June 15, 2025 and had an interest-only period for the first two years with a fixed interest rate of 8.47% on borrowed amounts and an interest rate of 1% on amounts available but not borrowed as an unused line of credit fee. After the interest-only period, the outstanding principal was to be repaid in quarterly payments of $1 million each commencing in the first quarter of 2023. The agreement is secured by a lien covering substantially all of the Company’s assets, other than intellectual property. The agreement contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, including on intellectual property, guaranties, mergers and consolidations, substantial asset sales, investments and loans, certain corporate changes, transactions with affiliates and fundamental changes. Affirmative covenants included, among others, covenants requiring the Company to protect and maintain its intellectual property and comply with all applicable laws, deliver certain financial reports, maintain a minimum cash balance and maintain its insurance coverage.

Upon the closing of this transaction, the Company borrowed the first tranche of $10 million, had the option to draw the second tranche of $5 million at any time during the initial 12 months of the loan and the third tranche of $5 million upon filing of the HyBryte™ NDA, subject to certain conditions. The Company elected to let the options to borrow both the second and third tranches expire as of December 15, 2021 and March 15, 2022, respectively.

On April 19, 2023, the Company entered into an amendment to the convertible debt financing agreement dated December 15, 2020 with Pontifax. The amendment called for the immediate payment of $5 million of the outstanding principal balance and any accrued interest, waived any prepayment charge in connection with the repayment of this amount and resulted in an outstanding principal balance of $3 million. The amendment also provided for a new interest only period from the date of the amendment through June 30, 2024, reduced quarterly principal repayments from $1 million to $750,000 and eliminated the minimum cash covenant. Further, the amendment reduced the conversion price with respect to the remaining principal amount under the agreement to (i) 90% of the closing price of the Company’s common stock on the day before the delivery of the conversion notice with respect to the first 588,599 shares of the Company’s common stock issuable upon conversion and to (ii) $1.70 with respect to all shares of the Company’s common stock issuable upon conversion in excess of the first 588,599 shares so issued. The amendment provided that Pontifax waive its right to execute any remedies available to it in connection with the FDA’s refusal to file the NDA for HyBryte^TM indefinitely. The extended interest only period and elimination of the minimum cash covenant were contingent upon completing capital financing activities that exceeded $10 million, in the aggregate, by December 31, 2023. The Company met that prerequisite based on the May 2023 public offering and sales under the B. Riley sales agreement through June 30, 2023. Pontifax further agreed to defer delivery of any conversion notice during the six months following the closing of the May 2023 public offering. The remaining terms of the agreement remain in effect without modification.

The amendment to the convertible debt financing agreement with Pontifax resulted in the extinguishment of the original convertible debt. The Company concluded that the amended debt instrument has an embedded

derivative that requires bifurcation pursuant to ASC 815-15-25-1 and qualifies for the fair value option in accordance with ASC 815-15-25-4 through ASC 815-15-25-6. The Company elected to account for the amended convertible debt using the fair value option, which requires the Company to record changes in fair value as a component of other income or expense.  The fair value of the convertible debt on the date of the amendment was approximately $3,304,000, which resulted in the recognition of a loss on extinguishment of approximately $394,000 on the Company’s accompanying consolidated statements of operations during the three and six month periods ended June 30, 2023.  The fair value of the convertible debt as of June 30, 2023 was approximately $2,844,000, which resulted in the recognition of approximately $460,000 of other income from the change in the fair value of the convertible debt on the Company’s accompanying consolidated statements of operations during the three and six month periods ended June 30, 2023.  The fair value of the convertible debt was estimated using the Monte Carlo valuation method.

The key assumptions used in the Monte Carlo valuations were as follow:

Assumptions	4/19/2023		6/30/2023
Stock price	$	1.72	$	0.70
Volatility		75.20%		94.00%
Discount rate		16.28%		13.75%
Risk-free rate		4.27%		5.00%
Conversion price range		$2.00 - $3.78		$2.00 - $3.78

Interest expense incurred during the three months ended June 30, 2023 and 2022 was $86,556 and $211,170, respectively. Interest expense incurred during the six months ended June 30, 2023 and 2022 was $274,521 and $420,019. Interest expense paid during the three months ended June 30, 2023 and 2022 was $211,170 and $208,849. Interest expense paid during the six months ended June 30, 2023 and 2022 was $424,660 and $432,751, respectively.

Annual principal and interest payments due as of June 30, 2023 in accordance with the amended terms of the Pontifax loan agreement, assuming no conversion is as follows:

Year	Principal		Interest		Total
2023	$	—	$	191,445	$	191,445
2024		2,250,000		206,761		2,456,761
2025		750,000		16,012		766,012
Total	$	3,000,000	$	414,218	$	3,414,218