Note 5 – Convertible Notes Payable

The following activity occurred during the year ended December 31, 2021:

As part of the Company’s financing activities, the Company issued convertible notes payable in exchange for cash. As of December 31, 2020, the outstanding balance of these notes amounted to $24.1 million.

In January 2021, the Company issued similar notes payable in exchange for cash of $1.2 million. On February 16, 2021, in accordance with the note agreements upon completion of an equity offering, these notes were mandatorily converted at a conversion rate of $3.40 per share into 7,438,235 shares of the Company’s common stock.

In fiscal 2019 and 2020, the Company issued its convertible notes payable to resolve claims and disputes pertaining to certain debt and equity instruments issued by the Company in prior years. As of December 31, 2020, the outstanding balance of these notes payable for settlement agreements amounted to $2.5 million.

On February 16, 2021 in accordance with the note agreements upon completion of an equity offering, these notes were mandatorily converted at a conversion rate of $3.40 per share into 743,529 shares of the Company’s common stock.

On June 23, 2020, the Company entered into Standstill and Forbearance Agreements (collectively, the “Forbearance Agreements”) with the holders of $13.2 million aggregate principal amount of the Convertible Notes (the “Default Notes”), which were in default. As of December 31, 2020, the outstanding balance of the notes payable amounted to $3.8 million.

On February 16, 2021 in accordance with the note agreements upon completion of an equity offering, these notes were mandatorily converted at a conversion rate of $3.40 per share into 1,132,059 shares of the Company’s common stock.

As of December 31, 2020, the outstanding balance of convertible notes payable issued in exchange for consulting services amounted to $0.4 million.

In January 2021, the Company issued additional notes payable of $0.7 million in exchange for consulting services as well as a note payable of $0.5 million in exchange for cancellation of an unpaid consulting fee recorded and incurred in fiscal 2020.

On February 16, 2021 in accordance with the note agreements upon completion of an equity offering, these notes were mandatorily converted at a conversion rate of $3.40 per share into 472,059 shares of the Company’s common stock.

As of December 31, 2020, the Company accrued interest of $4.8 million related to all outstanding convertible notes payable. In addition, during the period ended December 31, 2021, the Company accrued interest of $0.7 million. As a result of the mandatory conversion of the Company’s notes payable, on February 16, 2021, total accrued interest amounting to $5.5 million was converted to 1,627,440 shares of common stock.

In total, notes payable of $38.8 million ($33.3 million principal and accrued interest of $5.5 million) were mandatorily converted to 11,413,322 shares of common stock of which, 11,086,024 shares of common stock were issued in fiscal 2021 and the remaining 327,298 shares were issued in fiscal year 2022.

Adoption of ASU 2020-06

In fiscal 2020, the Company recorded a note/debt discount of $4.7 million to account for the beneficial conversion feature that existed on the date of issuance of certain convertible notes payable. The debt discount was being amortized to interest expense over the term of the corresponding convertible notes payable.

On January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. As a result of the adoption of ASU 2020-06, the Company extinguished its previously recorded debt discount of $4.7 million by charging the opening additional paid in capital at January 1, 2021. In addition, the Company also adjusted accumulated deficit to account for the derecognition of the $0.2 million interest expense due to the amortization of the debt discount that was recorded in fiscal 2020. As a result of these adjustments, the unamortized debt discount of $4.5 million was extinguished during the year ended December 31, 2021.