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CONVERTIBLE DEBT- RELATED PARTY
 12 Months Ended
Dec. 31, 2023
Debt Disclosure [Abstract]  
CONVERTIBLE DEBT- RELATED PARTY

NOTE 8 — CONVERTIBLE DEBT- RELATED PARTY

 

On December 22, 2022, the Company issued to Alpha an 8% Senior Convertible Debenture in the aggregate principal amount of $3,300,000 for a purchase price of $3,000,000 (less expenses) pursuant to the terms of a Securities Purchase Agreement, dated December 21, 2022. The Debenture has a maturity date of December 22, 2025 and was initially convertible, at any time, and from time to time, until the Debenture is no longer outstanding, at Alpha’s option, into shares of common stock of the Company (the “Conversion Shares”), at a price equal to $1.32 per share, subject to adjustment as described in the Debenture (the “Conversion Price”) and other terms and conditions described in the Debenture, including the necessary stockholder approvals, which the Company obtained at its 2023 annual meeting of stockholders on July 13, 2023. As a part of the same transaction, on December 22, 2022, the Company issued to Alpha a liability classified warrant (the “Alpha Warrant”) to purchase 2,500,000 shares of the Company’s common stock (see Note 7 - Warrant Liabilities). The exercise price of the Alpha Warrant was initially $1.65 (equal to 125% of the Conversion Price of the Debenture on the closing date) subject to adjustment as described in the Alpha Warrant. The Alpha Warrant may be exercised by Alpha, in whole or in part, at any time before June 22, 2028, subject to certain terms and conditions described in the Alpha Warrant, including the necessary stockholder approvals, which the Company obtained at its 2023 annual meeting of stockholders on July 13, 2023.

 

The proceeds from the transaction were used to advance the Company’s QN-302 Investigative New Drug candidate towards clinical trials and other working capital purposes.

 

Commencing June 1, 2023 and continuing on the first day of each month thereafter until the earlier of (i) December 22, 2025 and (ii) the full redemption of the Debenture (each such date, a “Monthly Redemption Date”), the Company must redeem $110,000 plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture (the “Monthly Redemption Amount”). The Monthly Redemption Amount must be paid in cash; provided that after the first two monthly redemptions, the Company may elect to pay all or a portion of a Monthly Redemption Amount in shares of common stock of the Company, based on a Conversion Price equal to the lesser of (i) the then Conversion Price of the Debenture and (ii) 85% of the average of the VWAPs (as defined in the Debenture) for the five consecutive trading days ending on the trading day that is immediately prior to the applicable Monthly Redemption Date. The Company may also redeem some or all of the then outstanding principal amount of the Debenture at any time for cash in an amount equal to 105% of the then outstanding principal amount of the Debenture being redeemed plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture. The Company’s election to pay monthly redemptions in Conversion Shares or to effect an optional redemption is subject to the satisfaction (or waiver) of the Equity Conditions (as defined in the Debenture), including the necessary stockholder approvals, which the Company obtained at its 2023 annual meeting of stockholders on July 13, 2023.

 

The Debenture accrues interest at the rate of 8% per annum, which did not begin accruing until December 1, 2023. Interest may be paid in cash or shares of common stock of the Company or a combination thereof at the option of the Company; provided that interest may only be paid in shares if the Equity Conditions have been satisfied (or waived).

 

Both the Debenture and the Alpha Warrant provide for adjustments to the Conversion Price and exercise price, respectively, in connection with stock dividends and splits, subsequent equity sales and rights offerings, pro rata distributions, and certain fundamental transactions. Both the Debenture and the Alpha Warrant include a beneficial ownership blocker of 9.99%, which may only be waived by Alpha upon 61 days’ notice to the Company.

 

Pursuant to resale registration rights granted by the Company to Alpha in such Securities Purchase Agreement, the Company filed a resale registration statement on Form S-3 (File Number 333-269088) on December 30, 2022 registering the resale by Alpha of up to 5,157,087 shares of common stock of the Company which could be issued to Alpha pursuant to the Debenture and the Alpha Warrant, which registration statement was declared effective by the SEC on January 5, 2023 (the “Original Registration Statement”). The Company later became ineligible to update the Original Registration Statement via incorporation by reference of its future SEC periodic and current reports as a result of its failure to timely file its annual report on Form 10-K for the fiscal year ended December 31, 2022. Therefore, the Company filed a Post-Effective Amendment No. 1 to Form S-3 on Form S-1 (No. 333-269088)(the “Post-Effective Amendment No. 1”) on September 1, 2023 in order to maintain the registration of the resale by Alpha of up to 3,958,537 shares of common stock of the Company issuable under the Debenture and the Alpha Warrant., which Post-Effective Amendment No. 1 was declared effective by the SEC on September 7, 2023.

 

 

The Company evaluated the Debenture and the Alpha Warrant and determined that the Alpha Warrant is a freestanding financial instrument. Initially, the Alpha Warrant is not considered indexed to the Company’s own stock, because the settlement amount would not equal the difference between the fair value of a fixed number of the Company’s equity shares and a fixed strike price and all of the adjustment features in Section 3(b) of the Alpha Warrant are not down round provisions, as defined in ASU 2017-11. Accordingly, the Alpha Warrant was classified as a liability and recognized at fair value, with subsequent changes in fair value recognized in earnings.

 

The proceeds from the Debenture were allocated to the initial fair value of the Alpha Warrant, with the residual balance allocated to the initial carrying value of the Debenture. The Company has not elected the fair value option for the Debenture. The Debenture was recognized as proceeds received after allocating the proceeds to the Alpha Warrant, and then allocating remaining proceeds to a suite of bifurcated embedded derivative features (conversion option, contingent acceleration upon an Event of Default, and contingent interest upon an Event of Default), with the resulting difference, if any, allocated to the loan host instrument. The suite of derivative features was measured and determined to have no fair value.

 

The original issue discount of $0.3 million, the initial fair value of the Alpha Warrant of $2.8 million, the initial fair value of the suite of bifurcated embedded derivative features of $0, and the fees and costs paid to Alpha and other third parties of $0.1 million comprised the debt discount upon issuance. The debt discount is amortized to interest expense over the expected term of the Debenture using the effective interest method, in accordance with ASC 835-30. The debt host instrument of the Debenture will subsequently be measured at amortized cost using the effective interest method to accrete interest over its term to bring the Debenture’s initial carrying value to the principal balance at maturity.

 

Between January 9 and 12, 2023, the Company issued 841,726 shares of common stock upon Alpha’s partial conversion of the Debenture at $1.32 per share for a total of $1,111,078 principal. Upon conversion, the Company recognized a loss on conversion of convertible debt of approximately $1.1 million, recorded to other expenses in the consolidated statements of operations.

 

In October and December 2023, the Company issued 309,665 shares of common stock to Alpha in lieu of cash for monthly redemption payments on the Debenture at a weighted average price of $0.71 per share. Upon redemption for shares, the Company recognized a loss on partial debt extinguishment of $34,315.

 

On September 22, 2023, the Company entered into a consent and waiver (the “Waiver”) with Alpha. Pursuant to the Waiver, Alpha consented to the Company’s election to pay all of the Monthly Redemption Amount for October 2023 in Conversion Shares (the “October Payment”) and waived the requirement of satisfaction of the Equity Conditions in relation to the October and December Payment. On October 3, 2023 the Company issued 128,595 shares of common stock to Alpha in satisfaction of the October Payment. On December 8, 2023 the Company issued 181,070 shares of common stock to Alpha in satisfaction of the December Payment.

 

On December 5, 2023, the Company and Alpha executed Amendment No. 1 with regard to Securities Purchase Agreement (the “SPA Amendment”), pursuant to which the Company and Alpha agreed to, among other things, reduce the Conversion Price of the Debenture from $1.32 per share to $0.73 per share and reduce the exercise price of the Alpha Warrant from $1.65 per share to $0.73 per share, in each case subject to certain adjustments. In addition, the SPA Amendment revised certain provisions of the Alpha Warrant to (i) limit the circumstances which would trigger a potential adjustment to the exercise price of the Alpha Warrant and (ii) clarify the treatment of the Alpha Warrant upon a Fundamental Transaction. The purpose of these revisions was to remove the terms that caused the Alpha Warrant to be liability-classified under U.S. GAAP. The Company performed an assessment and concluded that all remaining adjustment features in the revised language meet the FASB’s definition of a down-round feature. In addition, the Alpha Warrant was determined to meet all of the additional requirements for equity classification. Accordingly, as of December 5, 2023, the Company remeasured the Alpha Warrant to its fair value immediately prior to the modification and recognized the change in fair value in earnings. The incremental fair value impact from the Alpha Warrant modification of $0.09 million was included in the Company’s evaluation of the Debenture modification under ASC 470, discussed further below. The Company then reclassified the Alpha Warrant liability to equity at its post-modification fair value of $1.6 million.

 

In accordance with ASC 470-50, the Company determined that the modified terms of the Debenture were substantially different when compared to the original terms that existed prior to the SPA Amendment, and thus the event was required to be accounted for as a debt extinguishment. Accordingly, the Company derecognized the net carrying value of the original Debenture, and recorded the new debt instrument at its fair value of $1.4 million, and recorded a $0.6 million loss on debt extinguishment. The difference between the remaining Debenture principal and its fair value on December 5, 2023 was recorded as a debt discount and will be amortized to interest expense over the expected term of the Debenture using the effective interest method, in accordance with ASC 835-30.

 

During the year ended December 31, 2023, the Company recognized a loss on voluntary conversion of convertible debt of approximately $1.1 million, recognized an extinguishment loss of $0.6 million upon October and December 2023 share redemptions and December 2023 modification of the Debenture, and recorded accrued interest of approximately $1.5 million, in other expenses in the consolidated statements of operations. During the year ended December 31, 2023 the Company paid Monthly Redemption Amounts of $550,000 in cash and $220,000 in common stock, and as of December 31, 2023 the remaining Debenture principal balance was approximately $1.4 million, the remaining discount was approximately $0.1 million, and the fair value of the suite of bifurcated embedded derivative features was $0.

 

 

The senior convertible debt comprises the following:

 

  

December 31,

2023

  

December 31,

2022

 
Senior convertible debenture  $1,418,922   $3,300,000 
Discount on convertible debenture   (119,706)   (3,239,803)
Total convertible debt-related party  $1,299,216   $60,197 

 

As of December 31, 2023, there were no unwaived events of default or violation of any covenants under the Company’s financing obligations.