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CONVERTIBLE NOTES FINANCINGS
 3 Months Ended
Mar. 31, 2024
CONVERTIBLE NOTES FINANCINGS [Abstract]  
CONVERTIBLE NOTES FINANCINGS

4)
CONVERTIBLE NOTES FINANCINGS



On July 14, 2023, the Company received $8.7 million from a private placement in which the Company issued $8.7 million in aggregate principal amount of convertible notes (the “July 2023 convertible notes”) and warrants to purchase an aggregate of approximately 6.1 million shares of its common stock (the “July 2023 warrants”). The Company recognized approximately $0.2 million in fees associated with the transaction.



On December 14, 2023, the Company entered into a purchase agreement with certain purchasers for the private placement of $9.2 million of convertible notes (the “December 2023 convertible notes” and together with the July 2023 convertible notes, the “convertible notes”) and warrants to purchase an aggregate of approximately 9.6 million shares of the Company’s common stock (the “December 2023 warrants” and together with the July 2023 warrants, the “note warrants”).



There were two closings under the December 14, 2023 purchase agreement – one on December 15, 2023 and the second on January 11, 2024.  At the first closing, the Company received $7.8 million and issued $7.8 million of December 2023 convertible notes and December 2023 warrants to purchase approximately 8.1 million shares of its common stock.  At the second closing, the Company received $1.4 million and issued $1.4 million of December 2023 convertible notes and December 2023 warrants to purchase approximately 1.5 million shares its common stock.



See Note 12 for more information on the note warrants.



The July 2023 convertible notes bear interest at 6% per annum, and the December 2023 convertible notes bear interest at 12% per annum, both of which are payable quarterly in arrears.  At the Company’s election, it may pay interest either in cash or in-kind by increasing the outstanding principal amount of the convertible notes.  The convertible notes mature on the five-year anniversary of the date of their issuance, unless earlier converted or repurchased.  The Company does not have the option to redeem any of the convertible notes prior to maturity.



At the option of the holders, the convertible notes may be converted from time-to-time in whole or in part into shares of the Company’s common stock at an initial conversion rate of, with respect to the July 2023 convertible notes, $2.86 per share and, with respect to the December 2023 convertible notes, $1.9194 per share, subject to customary adjustments for stock splits, stock dividends, recapitalization and the like.  As of March 31, 2024, none of the convertible notes were converted into shares of common stock.



The convertible notes do not contain any ratchet or other financial antidilution provisions.  The convertible notes contain conversion limitations such that no conversion may be made if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99%, 9.99% or 19.99% immediately after conversion thereof, subject to certain increases not in excess of either 9.99% or 19.99% at the option of such holder.


The convertible notes provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest, breach of covenants or other agreements in the convertible notes; the occurrence of a material adverse effect event (as defined in the related securities purchase agreement) and certain events of bankruptcy. Generally, if an undisputed event of default occurs and is continuing under the convertible notes, the holder thereof may require the Company to redeem some or all of their convertible notes at a redemption price equal to 100% of the principal amount of the convertible notes being redeemed, plus accrued and unpaid interest thereon. As of March 31, 2024, there were no events of default that occurred under the Convertible notes.



The Company determined that there were no embedded derivatives within the convertible notes that required bifurcation from the host agreement.  In connection with the December 2023 convertible notes that were issued on January 11, 2024, the Company allocated the gross proceeds received and the fees incurred over the applicable convertible notes and warrants based on their relative fair values as follows (in thousands):

 
        
Allocation of Proceeds and Costs
  
Allocation of
  
 
Relative
Fair Value
  
Allocation
Percentage
  
Proceeds
  
Costs
  
Proceeds,
Net
  
Convertible notes
  
$
1,750
      
46.24
%
  
$
650
    
$
(31
)
  
$
619
  
Note warrants
    
2,035
      
53.76
%
    
755
      
(35
)
    
720
  
 
  
$
3,785
      
100.00
%
  
$
1,405
    
$
(66
)
  
$
1,339
  


The Company estimated the fair values of the convertible notes as of January 11, 2024 based off a valuation performed by a third-party specialist as of December 15, 2023 using a binomial tree model and the following assumptions:

 
 
Stock
Price
  
Credit
Spread
  
Volatility
  
Risk-Free
Rate
  
Convertible notes
  
$
1.75
      
2,000
      
109
%
    
3.90
%

 

The fair value of the note warrants, all of which qualified for equity classification, was determined using the Black-Scholes pricing model as of January 11, 2024 using the following assumptions:

 
 
Stock
Price
  
Exercise
Price
  
Expected
Life
Volatility
  
Dividend
  
Risk-Free
Rate
  
Warrants
  
$
1.75
    
$
1.43
  
5 years
    
102
%
    
0.00
%
    
3.90
%

 

The amount of proceeds allocated to the note warrants resulted in a corresponding reduction in the carrying value of the respective convertible notes as a debt discount, which is amortized with the debt issuance costs as a component of interest expense based on the effective interest rate method over the contractual terms of the convertible notes.

 

The following table shows the activity that occurred during the three months ended March 31, 2024 for the convertible notes on the accompanying condensed consolidated balance sheet:

 
 
  
Gross
convertible
notes
    
Debt
discount
and debt
issuance
costs
    
Convertible
notes, net
  
 
                  
Beginning balanace as of January 1, 2024
  
$
16,616
    
$
(9,843
)
  
$
6,773
  
December 2023 notes issued in January 2024
    
1,405
      
(786
)
    
619
  
Paid-in-kind interest added to principal
    
177
      
-
      
177
  
Amortization of debt discount and debt issuance costs
    
-
      
445
      
445
  
Ending balanace as of March 31, 2024
  
$
18,198
    
$
(10,184
)
  
$
8,014
  


To date, the Company has elected to pay in-kind the accrued interest payable on the convertible notes and has added the accrued and unpaid interest to the principal amount of the applicable convertible note.  The Company has recognized approximately $0.8 million in interest expense for the three months ended March 31, 2024 for the convertible notes, which includes $0.4 million for the amortization of the debt discount and debt issuance costs and $0.4 million recorded in accrued expenses in the accompanying condensed consolidated balance sheet.