Convertible Debt

3 Months Ended

Mar. 31, 2023

Convertible Debt

Convertible Debt

6. Convertible Debt

As described in Note 2, on January 10, 2023, the Company received a Loan of $30 million from Innoviva pursuant to the Credit Agreement. The Loan bears an interest rate of 8.0% per annum, and has a maturity date of January 10, 2024. Repayment of the Loan is required to be guaranteed by the Company’s domestic subsidiaries and foreign material subsidiaries, and the Loan is secured by substantially all of the assets of the Company and the subsidiary guarantors.

 The Credit Agreement provides that if a Qualified Financing occurs, which is defined in the Credit Agreement as a financing from new investors of at least $30 million, the outstanding principal amount of and all accrued and unpaid interest on the Loan shall be converted into shares of the Company’s common stock, at a price per share equal to a 15.0% discount to the lowest price per share for Common Stock paid by investors in such Qualified Financing. The Credit Agreement also required the Company to file the Registration Statement for the resale of all securities issued to the lender in connection with any conversion under the Credit Agreement, which the Company originally filed on February 13, 2023 and which was declared effective by the SEC on April 6, 2023. The Credit Agreement also confers upon the lender the option to convert any outstanding Loan amount, including all accrued and unpaid interest thereon, at the lender’s option, into shares of Common Stock at a price per share equal to the greater of book value or market value per share of Common Stock on the date immediately preceding the effective date of the Credit Agreement, which was $1.52 (as may be appropriately adjusted for any stock split, combination or similar act).

The Company evaluated authoritative guidance for accounting for the Loan and concluded that the Loan should be accounted for at fair value under ASC 480, Distinguish Liabilities from Equity, due to the fact that the Loan will predominately be settled with the Company’s Common Stock. Consequently, the Company recorded the Loan in its entirety at fair value on its balance sheet, with changes in fair value recorded as other income (expenses) in the statement of operations during each reporting period.

The Company estimates the fair value of the Loan using a weighted probability of various scenario of the Loan during its term, utilizing significant assumptions and estimates such as volatility and risk-free interest rates, which are level 3 fair value inputs unobservable from active markets.

The following table presents the Company’s fair value measurements using level 3 inputs during the three months ended March 31, 2023.

	Fair Value
Balance at December 31, 2022	$	—
Net issuance of the Loan		29,226,000
Change in fair value		3,162,000
Balance at March 31, 2023	$	32,388,000