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NOTES PAYABLE AND DERIVATIVE LIABILITY
 12 Months Ended
Dec. 31, 2024
Notes Payable And Derivative Liability  
NOTES PAYABLE AND DERIVATIVE LIABILITY

7. NOTES PAYABLE AND DERIVATIVE LIABILITY

 

Background

 

On October 14, 2024, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) for the purchase of senior secured convertible notes (the “Note”) with an institutional investor (the “Holder”). The principal amount for the initial note is $45.0 million (the “Initial Principal Amount”), with an option for the Company to issue additional principal in the amount of $30.0 million (the “Additional Principal Amount” and, together with the Initial Principal Amount, the “Principal Amount”) of convertible notes to the Holder, subject to certain limitation.

 

The Note will rank senior to all outstanding and future indebtedness of the Company. Beginning on January 1, 2025, the Holder may elect to require the Company to partially repay the Notes up to $1.8 million monthly prior to April 1, 2025, and up to $3.5 million monthly on and after April 1, 2025, plus a 10% premium. In lieu of electing a partial repayment in each of the stated months, the Holder has the right to convert the Note to shares of the Company’s common stock at a conversion price of $0.7462 prior to June 1, 2025 and $1.5960 on or after June 1, 2025, subject to certain conditions.

 

Additionally, the Company has the option to require the Holder to convert the entire Note to shares of common stock if the share price exceeds $2.3940 on each of 20 consecutive VWAP Trading Days, subject to certain other equity conditions. If not fully repaid or converted, the end of term maturity balance is the outstanding principal balance of the Note multiplied by 110% and matures on October 1, 2026. The Note bears zero coupon. Pursuant to terms of the Note, the Company will maintain minimum liquidity of $30.0 million for the duration of the Note term, subject to decreases beginning on May 1, 2025.

 

On October 23, 2024, the Purchase Agreement closed and the Note was issued for net proceeds of approximately $38.1 million, inclusive of all discounts, fees, and expenses related to the transaction.

 

On December 30, 2024, pursuant to the terms of the Note, the Holder elected to convert $1.8 million of outstanding principal into 2,345,068 shares of the Company’s common stock. See Note 16. Subsequent Events for details of additional conversions subsequent to the date of these financial statements.

 

 

Components

 

The Note is a convertible debt instrument with multiple redemption, conversion, and put features. Certain features qualify as embedded derivatives requiring bifurcation. Therefore, the bifurcated features are accounted for separately as a compound embedded derivative in accordance ASC 815, “Derivatives and Hedging” and are included in the derivative liability on the consolidated balance sheets. The host contract, which represents the Note excluding the derivative liability, is accounted for as non-convertible debt under ASC 470, “Debt” and is included in notes payable, current and notes payable, net of current portion on the consolidated balance sheets.

 

Notes Payable

 

The host contract is recorded at the total amount repayable at maturity of $49.5 million, comprised of $45.0 million principal plus a $4.5 million 10% repayment premium, less any conversions of outstanding principal, net of debt discount and issuance costs. The debt discount is equal to the amount repayable at maturity, net of cash proceeds received at issuance and the initial fair value of the bifurcated derivative liability. Debt issuance costs are comprised of qualifying expenses resulting directly from the transaction. During the year ended December 31, 2024, conversions reduced the amount repayable at maturity to $47.6 million.

 

Supplemental balance sheet information is as follows:

 

(in thousands)  2024   2023 
   Year Ended December 31, 
(in thousands)  2024   2023 
Amount repayable at maturity  $47,575   $- 
Unamortized debt discount   (12,021)   - 
Unamortized issuance costs   (2,552)   - 
Net carrying amount   33,002    - 

 

Interest expense related to the amortization of the debt discount and issuance costs was $4.4 million for the year ended December 31, 2024, and $0.0 million for the year ended December 31, 2023. The monthly effective interest rate implicit in the Note as of December 31, 2024 under the interest method was 5.1%.

 

Maturities of partial repayments, if elected by the Holder, are as follows:

 

(in thousands)    
Years Ended December 31,  Maturities 
2025  $38,500 
2026   9,075 
Total partial repayments  $47,575 

 

Subsequent to December 31, 2024, the partial repayment amounts and maturity schedule were modified (see Note 16. Subsequent Events).

 

Derivative Liability

 

The derivative liability was initially recorded at its fair value of $7.5 million as of the issuance date of October 23, 2024. The derivative liability is subsequently remeasured and reported at fair value each reporting period, with the changes in fair value recorded as an unrealized gain or loss and recognized in earnings.

 

The fair value of derivatives not designated as hedging instruments are as follows:

 

 

(in thousands)  2024   2023 
   Year Ended December 31, 
(in thousands)  2024   2023 
Derivative liability  $14,581   $- 
Total  $14,581   $- 

 

 

Unrealized gains and losses associated with derivatives not designated as hedging instruments are as follows:

 

(in thousands)  2024   2023   2022 
   Year Ended December 31, 
(in thousands)  2024   2023   2022 
Unrealized loss on derivative liability  $(8,866)  $-   $- 
Total  $(8,866)  $-   $- 

 

Fair Value Measurements

 

The fair value of the derivative liability is determined utilizing a “with and without” method, in which the fair value is calculated as the difference in the fair value of the entire hybrid instrument and the fair value of the instrument excluding the bifurcated derivative features.

 

The fair value of the hybrid instrument is estimated using a binomial lattice model, which projects future movements of the underlying instrument over the remaining term. The model then calculates the fair value of the instrument by discounting projected cash flows based on the optimal action at each point in time. Optimal actions for both the Company and the Holder are determined by the projected stock price at a point in time, in addition to the probabilities of the occurrence of certain events. At initial measurement on October 23, 2024, a Monte Carlo simulation was further incorporated in order to simulate the Company’s share price as of the registration date, which occurred on November 21, 2024.

 

The fair value of the host contract excluding embedded derivative features is estimated using a debt discounted cash flow model, which assumes that the contract is a debt instrument with only the option to redeem partial principal payments prior to maturity. Projected cash flows are based on the assumption that the Holder will fully exercise early redemption options, based on the estimated internal rate of return for the Holder resulting from early redemption as compared to redemption at maturity. The debt discount rate is estimated based on the rate of similar non-convertible debt instruments reflecting the Company’s credit risk.

 

The valuation inputs hierarchy classification for liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2024 and 2023 (in thousands). See Note 6. Investment Securities, Available-For-Sale and Fair Value Measurements, for discussion of the fair value level hierarchy.

 

As of December 31, 2024  Level 1   Level 2   Level 3 
Derivative liability  $-   $-   $14,581 
Total  $-   $-   $14,581 

 

The table below lists the inputs and assumptions for the Company’s initial valuation as of October 23, 2024 and re-valuation of the derivative liability as of December 31, 2024:

 

   December 31,   October 23, 
   2024   2024 
Expected term (years)   1.75    1.94 
Risk-free interest rate   4.18%   4.04%
Dividend yield   0%   0%
Volatility   78.02%   73.00%
Discount rate   50.0%   50.0%