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Debt and Warrants Transactions
 9 Months Ended
Sep. 30, 2023
Debt Disclosure [Abstract]  
Debt and Warrants Transactions Debt and Warrants Transactions
2022 Notes and Warrants Offering
On August 11, 2022, the Company entered into a Securities Purchase Agreement ("SPA") with certain accredited investors, and, pursuant to the SPA, sold a new series of senior secured convertible notes (the "Notes") with an aggregate original principal amount of $15.0 million and an initial conversion price of $3.35 per share, subject to adjustment as described in the Notes, and warrants to acquire up to an aggregate amount of 2,238,806 additional shares of the Company’s common stock (the "Warrants" and together with the Notes, the "Notes and Warrants Offering"). The Warrants are exercisable at a price of $3.35 per share and expire five years from the date of issuance on August 11, 2027. There is no established public trading market for the Warrants and the Company does not intend to list the Warrants on any national securities exchange or nationally recognized trading system. The closing of the Notes and Warrants Offering occurred on August 11, 2022.
The Notes accrue compounding interest at the rate of 6.0% per annum, which is payable in cash or shares of the Company's common stock at the Company's option, in arrears in accordance with the terms of the Notes. Upon the occurrence and during the continuance of an Event of Default (as defined in the Notes), the Notes will accrue interest at the rate of 15.0% per annum. Upon conversion and other designated events, holders of the Notes are also entitled to receive an interest make-whole payment. Upon a redemption due to a Change in Control (as defined in the Notes), holders of the Notes are entitled to cash settlement. The Notes mature on December 31, 2023, with amortization payments due monthly by the first business day of the month from April 2023 through December 2023, and the balance at maturity. There were principal installment payments of $10.9 million made during the nine months ended September 30, 2023 as described in Note 3 above, and as such a portion of the debt and related derivative were derecognized.
The Warrants were assessed and concluded to be liability instruments due to cash settlement provisions, and as a result all changes in the fair value of the Warrants will be recognized in the Company's consolidated statements of operations until they are either exercised or expire. The Warrants are not traded in an active securities market and, as such, the estimated fair value at inception was $3.8 million, determined utilizing a Black-Scholes option pricing model and is reflected on the balance sheet line "Warrant liabilities" and as a discount on the Notes.
The Notes contain a make-whole feature and a redemption right payable in cash upon change in control feature, as well as certain other conversion and redemption features. These features are viewed collectively as a compound embedded derivative that meets the criteria to be bifurcated and carried at fair value. This is classified in the balance sheet line as "Derivative liabilities" and as a discount on the Notes, with subsequent adjustments to fair value each reporting period with a charge to earnings. The derivative was initially recognized at a fair value of $4.2 million and is subsequently adjusted to fair value quarterly, as required, and immediately prior to any change in underlying debt balance. The change in valuation of the debt instrument as a whole, including the derivative, as a result of installment payments extinguishing an aggregate of $10.9 million in principal under the Notes, is reflected in the statement of operations line "Loss on derecognition of
debt" totaling $1.6 million for the three months ended September 30, 2023 and $3.0 million for the nine months ended September 30, 2023. Below are specific assumptions utilized:


Convertible Notes DerivativeCommon stock market priceRisk-free interest rateExpected dividend yieldExpected term (in years)Expected volatility
March 31, 2023 for April 1, 2023 Installment date
$1.16 4.68 %— 0.75 84.34 %
May 1, 2023 for May 1, 2023 Installment date
$1.22 4.68 %— 0.6781.57 %
May 31, 2023 for June 1, 2023 Installment date
$1.21 4.91 %— 0.5986.20 %
June 30, 2023 for July 1, 2023 Installment date
$1.11 5.42 %— 0.5090.68 %
July 31, 2023 for August 1, 2023 Installment date
$1.14 5.53 %— 0.4259.89 %
August 31, 2023 for September 1, 2023 Installment date
$1.71 5.54 %— 0.3369.85 %
September 30, 2023 for October 1, 2023 Installment date
$1.21 5.56 %— 0.2578.21 %
During the three months ended September 30, 2023, the Company recognized interest expense of $1.5 million on the Notes and related instruments utilizing the effective interest rate of 155%, which includes amortization of debt issuance costs of $0.1 million, amortization of discount of $1.3 million, and contractual interest of $0.1 million.
During the nine months ended September 30, 2023, the Company recognized interest expense of $5.9 million on the Notes and related instruments utilizing the effective interest rate of 155%, which includes amortization of debt issuance costs of $0.3 million, amortization of discount of $5.1 million, and contractual interest of $0.5 million.
In accordance with the 2022 Notes and Warrants offering, during the nine months ended September 30, 2023, 11,420,603 shares of the Company's Common Stock were issued for the April 1, 2023 through the October 1, 2023 principal amortization installment date payments, which in total reduced the convertible Notes principal balance by $10.9 million. The payment for the October 1, 2023 principal amortization installment date was completed on September 30, 2023. During the three months ended September 30, 2023, 1,159,415 shares of the Company's Common Stock were prefunded to the holders of the Notes for the remaining balance related to the November 1, 2023 principal amortization installment date. This prefunded balance of $1.2 million is reflected in the balance sheet line "Prepaid expenses and other current assets" as of September 30, 2023. There were no conversions by the holders of the Notes during the nine months ended September 30, 2023.
The current balance of the Notes as of September 30, 2023 is as follows (unaudited, in thousands):
Current
Gross Balance as of September 30, 2023$4,051 
Unamortized Discount(562)
Unamortized Issuance Costs(33)
Net Balance as of September 30, 2023$3,456 
The Notes contain certain customary affirmative and negative covenants regarding the incurrence of indebtedness, acquisition and investment transactions, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters. As of September 30, 2023, the Company was in compliance with all covenants.
Warrant Liabilities
As further discussed above, on August 11, 2022, warrants to purchase 2,238,806 shares of common stock were issued with an exercise price of $3.35 per share in conjunction with the Notes and Warrants Offering, at an initial fair value of $3.8 million. As further discussed in Note 3, Additional Warrants to purchase 1,132,075 shares of common stock were issued with an exercise price of $2.65 per share in conjunction with the Stock and Additional Warrants Offering.
All changes in the fair value of these warrant liabilities are recognized in the Company's consolidated statements of operations until they are either exercised or expire. Since issuance of the Warrants and Additional Warrants, there have
been no warrant exercises. The Warrants and Additional Warrants are not traded in an active securities market and, as such, the estimated fair value was determined by using a Black-Scholes option pricing model that utilizes assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility over the expected term of the warrants. The Company has no reason to believe future volatility over the expected remaining life of the Warrants and Additional Warrants is likely to differ materially from historical volatility. Expected life is based on the contractual term of the applicable warrants. Below are the specific assumptions utilized:
Warrants
September 30, 2023
Common stock market price$1.21 
Risk-free interest rate4.49 %
Expected dividend yield— 
Expected term (in years)3.87 
Expected volatility66.05 %

Additional Warrants
September 30, 2023
Common stock market price$1.21 
Risk-free interest rate4.49 %
Expected dividend yield— 
Expected term (in years)4.37 
Expected volatility69.23 %