| Debt | 4.
Debt Convertible
Notes Baker
Bros. Notes On
April 23, 2020, the Company entered into a Securities Purchase and Security Agreement (the Baker Bros. Purchase Agreement) with certain
affiliates of Baker Bros. Advisors LP, as purchasers (the Baker Purchasers), and Baker Bros. Advisors LP, as designated agent, pursuant
to which the Company agreed to issue and sell to the Baker Purchasers (i) convertible senior secured promissory notes (the Baker Notes)
in an aggregate principal amount of up to $ 25.0
million and (ii) warrants to purchase shares
of common stock (the Baker Warrants) in a private placement. At
the initial closing date of April 24, 2020 (the Baker Initial Closing), the Company issued and sold Baker Notes with an aggregate principal
amount of $ 15.0
million (the Baker First Closing Notes) and Baker
Warrants exercisable for 1,639
shares of common stock. Following
the Baker Initial Closing, the Baker Purchasers had an option to purchase from the Company up to $ 10.0
million of Baker Notes (the Baker Purchase Rights)
at the Baker Purchasers’ discretion at any time prior to the Company receiving at least $ 100.0
million in aggregate gross proceeds from one
or more sales of equity securities. On
June 5, 2020 (the Exercise Date), the Baker Purchasers exercised the Baker Purchase Rights. At the second closing date of June 9, 2020
(the Baker Second Closing), the Baker Purchasers acquired the remaining Baker Notes with an aggregate principal amount of $ 10.0
million and Baker Warrants exercisable for 1,092
shares of common stock. Upon the completion of
the underwritten public offering in June 2020, the exercise price of the Baker Warrants was $ 4,575
per share. The Baker Warrants have a five-year
term with a cashless exercise provision and are
immediately exercisable at any time from their respective issuance date. The
Baker Notes have a five-year
term, with no pre-payment ability during the
first three
years . Interest on the unpaid principal balance
of the Baker Notes (the Baker Outstanding Balance) accrues at 10.0 %
per annum with interest accrued during the first year from the two respective closing dates recognized as payment-in-kind. The effective
interest rate for the period was 10.0 %.
Accrued interest beyond the first year of the respective closing dates is to be paid in arrears on a quarterly basis in cash or recognized
as payment-in-kind, at the direction of the Baker Purchasers. As discussed below, with the amendment to the Baker Bros. Purchase Agreement,
interest payments were paid-in kind. Interest pertaining to the Baker Notes for the three months ended March 31, 2023 and 2022 was approximately
$ 1.4
million and $ 0.7
million, respectively, which was added to the
outstanding principal balance. The Company accounts for the Baker Notes under the fair value method as described below and, therefore,
the interest associated with the Baker Notes is included in the fair value determination. As of March 31, 2023, the Baker Notes could
be converted into 57,426,766
shares of common stock. The
Baker Notes are callable by the Company on 10
days’ written notice beginning on the third
anniversary of the initial closing date of April 24, 2020. The call price will equal 100 %
of the Baker Outstanding Balance plus accrued and unpaid interest if the Company’s common stock as measured using a 30 -day
volume weighted average price (VWAP) is greater than the benchmark price of $ 9,356.25
as stated in the Baker Bros. Purchase Agreement,
or 110 %
of the Baker Outstanding Balance plus accrued and unpaid interest if the VWAP is less than such benchmark price. The Baker Purchasers
also have the option to require the Company to repurchase all or any portion of the Baker Notes in cash upon the occurrence of certain
events. In a repurchase event, as defined in the Baker Bros. Purchase Agreement, the repurchase price will equal 110 %
of the Baker Outstanding Balance plus accrued and unpaid interest. In an event of default or the Company’s change of control, the
repurchase price will equal to the sum of (x) three times of the Baker Outstanding Balance plus (y) the aggregate value of future interest
that would have accrued. The Baker Notes were convertible at any time at the option of the Baker Purchasers at the conversion price of
$ 4,575
per share prior to the First and Second Baker
Amendments (as defined below). On
November 20, 2021, the Company entered into the first amendment to the Baker Bros. Purchase Agreement (the First Baker Amendment), in
which each Baker Purchaser had the right to convert all or any portion of the Baker Notes into common stock at a conversion price equal
to the lesser of (a) 4,575
and (b) 115 %
of the lowest price per share of common stock (or, as applicable with respect to any equity securities convertible into common stock,
115 %
of the applicable conversion price) sold in one or more equity financings until the Company has met a qualified financing threshold defined
as one or more equity financings resulting in aggregate gross proceeds to the Company of at least $ 50
million (the Financing Threshold). The
First Baker Amendment also extended, effective upon the Company’s achievement of the Financing Threshold, the affirmative covenant
to achieve $ 100.0
million in cumulative net sales of Phexxi by
June 30, 2022 to June 30, 2023. Additionally per the First Baker Amendment, if in any equity financing closing on or prior to the date
the Company has met the Financing Threshold, the Company was required to issue warrants to purchase capital stock of the Company (or
other similar consideration), the Company was also required to issue to the Baker Purchasers an equivalent coverage of warrants (or other
similar consideration) on the same terms as if the Baker Purchasers participated in the financing in an amount equal to the then outstanding
principal of Baker Notes held by the Baker Purchasers. In satisfaction of this requirement and in connection with the closing of the
May 2022 Public Offering, the Company issued warrants to purchase 582,886
shares of the Company’s common stock at
an exercise price of $ 93.75
per share (the June 2022 Baker Warrants). As
required by the terms of the First Baker Amendment, the June 2022 Baker Warrants have substantially the same terms as the warrants issued
in the May 2022 Public Offering. Refer to Note 8 - Stockholders’ Deficit 1.625
per share with the February and March 2023 Notes
issuance, both as discussed below, and further reset to $ 0.8125
per share along with the April 2023 Notes issuance. On
March 21, 2022, the Company entered into the second amendment to the Baker Bros. Purchase Agreement (the Second Baker Amendment), pursuant
to which each Baker Purchaser now has the right to convert all or any portion of the Baker Notes into Common Stock at a conversion price
equal to the lesser of (a) $ 725.81
or (b) 100 %
of the lowest price per share of common stock (or as applicable with respect to any equity securities convertible into common stock,
100 %
of the applicable conversion price) sold in any equity financing until the Company has (i) met the qualified financing threshold by June
30, 2022, defined as a single underwritten financing resulting in aggregate gross proceeds to the Company of at least $ 20
million (Qualified Financing Threshold) and (ii)
the publication of its top-line results from its EVOGUARD 93.75 .
The Company achieved the Clinical Trial Milestone in October 2022. Also, with the achievement of the Qualified Financing Threshold and
the Clinical Trial Milestone, the affirmative covenant to achieve $ 100.0
million in cumulative net sales of Phexxi was
extended to June 30, 2023. On
September 15, 2022, the Company entered into the third amendment to the Baker Bros. Purchase Agreement (the Third Baker Amendment), pursuant
to which the conversion was amended to equal to $ 26.25 ,
subject to adjustment for certain dilutive Company equity issuance adjustments for a two-year
period, removal of an interest make-whole payment
due in certain circumstances, and certain change of control and liquidation payment amounts were reduced from three times the outstanding
amounts of the Baker Notes to two times the outstanding amounts. In addition, the Third Baker Amendment provides that the Company may
make future interest payments to the Baker Purchasers in kind or in cash, at the Company’s option. The
Baker Notes contain various customary affirmative and negative covenants agreed to by the Company, including timely payment, in cash,
of the quarterly interest payment and maintaining an active listing. On September 12, 2022, the Company received a default notice from
the Baker Purchasers due to its failure of making the required payments of accrued interest for the first and second quarters of 2022
in the aggregate amount of $ 1.4
million and being delisted from Nasdaq. As a
result of the cross-default provisions applicable to the Adjuvant Notes and the May 2022 Notes (both, as discussed below), the Company
was also in default of these Notes. On September 15, 2022, the Company entered into a (i) Forbearance Agreement (the Secured Creditor
Forbearance Agreement) with the Baker Purchasers, pursuant to which the Baker Purchasers agreed to forbear from exercising any of their
rights and remedies during the Forbearance Period (as defined), but solely with respect to the specified events of default (Forbearance
Termination Event) provided under the Secured Creditor Forbearance Agreement, which includes among other things, the first date after
December 31, 2022, on which the Company’s cash falls below $ 1.0
million. In exchange for the forbearance and
the Third Baker Amendment, the Company agreed to adjust the aggregate principal balance of the Baker Notes to $ 44.2
million, which includes the delinquent interest
payments of $ 1.4
million that the Baker Purchasers agreed to forego
in cash, as well as an immaterial amount of legal fees incurred by the Baker Purchasers’ counsel. On
December 19, 2022, the Company entered into the First Amendment to Forbearance Agreement (the Amendment) effective as of December 15,
2022 (the Amendment Effective Date) to amend certain provisions of the of the Secured Creditor Forbearance Agreement dated September
15, 2022. The Amendment revises the Secured Creditor Forbearance Agreement to (i) amend the Fifth Recital Clause to clarify that the
Purchasers consent to any additional indebtedness pari passu 5.0
million, and (ii) strike and entirely replace
Section 4 to clarify the terms of the Purchasers’ consent to Interim Financing (as defined therein). No other revisions were made
to the Secured Creditor Forbearance Agreements. On
March 7, 2023, Baker Bros. Advisors, LP (the Designated Agent) provided a Notice of Event of Default and Reservation of Rights (the Notice
of Default) relating to the Baker Bros. Purchase Agreement. The Notice of Default claims that the Company has failed to maintain the
“Required Reserve Amount” as required by the Third Baker Amendment. The Designated Agent, at the direction of the Baker Purchasers,
has accelerated repayment of the outstanding balance payable. As a result, approximately $ 92.7
million representing two times the sum of the
outstanding balance and all accrued and unpaid interest thereon and all other amounts due under the Baker Bros. Purchase Agreement and
other documents was due and payable within three business days of receipt of the Notice of Default.
In addition, the Notice of Default resulted in a cross default under all outstanding debt. As of the date of the filing of this Registration
Statement the Baker Notes remain outstanding, and the Company has sufficient required reserve number of shares upon the effectuation
of the 2023 Reverse Stock Split. The failure to cure the default or otherwise settle or resolve, could have a significant negative
financial impact on the Company, could result in litigation, and could result in the assets of the company being seized, attached or
otherwise utilized to satisfy the debt. The
Company evaluated whether any of the Embedded Features required bifurcation as a separate component of equity. The Company elected the
fair value option (FVO) under ASC 825, Financial Instruments (ASC 825), as the Baker Notes are qualified financial instruments and are,
in whole, classified as liabilities. Under the FVO, the Company recognized the hybrid debt instrument at fair value, inclusive of the
Embedded Features with changes in fair value related to changes in the Company’s credit risk being recognized as a component of
accumulated other comprehensive income in the condensed consolidated balance sheets. All other changes in fair value were recognized
in the condensed consolidated statements of operations. For
the quarter ended March 31, 2023, using the valuation methods discussed in Note 6- Fair Value Financial Instruments, 15.5 As
of March 31, 2023, the Baker Notes are recorded at fair value in the condensed consolidated balance sheet as short-term convertible notes
payable with a total balance of $ 23.8
million, and the total outstanding balance including
principal and accrued interest is $ 93.3
million. Adjuvant
Notes On
October 14, 2020, the Company entered into a Securities Purchase Agreement (the Adjuvant Purchase Agreement) with Adjuvant Global Health
Technology Fund, L.P., and Adjuvant Global Health Technology Fund DE, L.P. (together, the Adjuvant Purchasers), pursuant to which the
Company sold unsecured convertible promissory notes (the Adjuvant Notes) in aggregate principal amount of $ 25.0
million. The
Adjuvant Notes have a five-year
term, and in connection with certain Company
change of control transactions, the Adjuvant Notes may be prepaid at the option of the Company or will become payable on the date of
the consummation of a change of control transaction at the option of the Adjuvant Purchasers. The Adjuvant Notes have interest accruing
at 7.5 %
per annum on a quarterly basis in arrears to the outstanding balance of the Adjuvant Notes and are recognized as payment-in-kind. The
effective interest rate for the period was 7.7 %. Interest
expense for the Adjuvant Notes for the three months ended March 31, 2023 and 2022 consisted of the following (in thousands): Schedule
of interest expense
2023 2022
Three
Months Ended March 31,
2023 2022
Coupon
interest $ 497 $ 513
Amortization
of issuance costs 68 10
Total $ 565 $ 523 The
Adjuvant Notes are convertible, subject to customary 4.99 %
and 19.99 %
beneficial ownership limitations, into shares of the Company’s common stock, par value $ 0.0001
per share, at any time at the option of the Adjuvant
Purchasers at a conversion price of $ 6,843.75
per share. In connection with certain Company
change of control transactions, the Adjuvant Notes may be prepaid at the option of the Company or will become payable at the option of
the Adjuvant Purchasers. To the extent not previously prepaid or converted, the Adjuvant Notes were originally automatically convertible
into shares of the Company’s common stock at a conversion price of $ 6,843.75
per share immediately following the earliest
of the time at which the (i) 30 -day
value-weighted average price of the Company’s common stock was $ 18,750
per share, or (ii) the Company achieved cumulative
net sales from the sales of Phexxi of $ 100.0
million, provided such net sales are achieved
prior to July 1, 2022. On
April 4, 2022, the Company entered into the first amendment to the Adjuvant Purchase Agreement (the Adjuvant Amendment). The Adjuvant
Amendment extended, effective as of the next date the Company achieved the Qualified Financing Threshold upon the closing of the May
2022 Public Offering, the affirmative covenant to achieve $ 100.0
million in cumulative net sales of Phexxi by
June 30, 2022 to June 30, 2023. The Adjuvant Amendment also provided for an adjustment to the conversion price of the Adjuvant Notes
such that the conversion price (the Conversion Price) for these Notes, effective as of the May 2022 reverse stock split the conversion
price will now be the lesser of (i) $ 678.49
and (ii) 100 %
of the lowest price per share of common stock (or with respect to securities convertible into common stock, 100 %
of the applicable conversion price) sold in any equity financing until the Company has met the Qualified Financing Threshold. Effective
as of the Company’s achievement of the Qualified Financing Threshold, the automatic conversion provisions in the Agreement were
further amended to provide that the Adjuvant Notes will automatically convert into shares of the Company’s common stock at the
Conversion Price immediately following the earliest of the time at which the (i) 30 -day
value-weighted average price of the Company’s common stock is $ 18,750
per share, or (ii) the Company achieves cumulative
net sales from the sales of Phexxi of $ 100.0
million, provided such net sales are achieved
prior to July 1, 2023. The
Adjuvant Notes contain various customary affirmative and negative covenants agreed to by the Company. On September 12, 2022, the Company
was in default of the Adjuvant Notes due to the default with the Baker Notes under the cross-default provision. On September 15, 2022,
the Company entered into a (i) Forbearance Agreement (the Adjuvant Forbearance Agreement) with the Adjuvant Purchasers, pursuant to which
the Adjuvant Purchasers agreed to forbear from exercising any of their rights and remedies during the Forbearance Period as defined in
therein, but solely with respect to the specified events of default provided under the Adjuvant Forbearance Agreement. On
September 15, 2022, the Company also entered into the second amendment to the Adjuvant Purchase Agreement (the Second Adjuvant
Amendment), pursuant to which the conversion price per share was reduced to $ 26.25 ,
subject to adjustment for certain dilutive Company equity issuance adjustments for a two-year period.
In addition, the Company entered into an exchange agreement, pursuant to which the Adjuvant Purchasers agreed to exchange 10 %
of the outstanding amount of the Adjuvant Notes as of September 15, 2022 (or $ 2.9 million)
for rights to receive 109,842 shares
of common stock (Adjuvant Purchase Rights). The number of shares for each Adjuvant Purchase Right is initially fixed, but is subject
to certain customary adjustments, and, until the second anniversary of issuance, adjustments for certain dilutive Company equity
issuances. Refer to Note 8- Stockholders’ Deficit 1.625 per
share with the February 2023 Notes issuance, as discussed below. Subsequent to March 31, 2023, the conversion price adjusted to
$ 0.8125 ,
as discussed in Note 10– Subsequent Events The
Adjuvant Notes are accounted for in accordance with authoritative guidance for convertible debt instruments and are classified as current
liabilities in the condensed consolidated balance sheet. The aggregate proceeds of $ 25.0
million was initially classified as restricted
cash for financial reporting purposes due to contractual stipulations that specify the types of expenses the money can be spent on and
how it must be allocated. Its conversion feature is required to be bifurcated as an embedded derivative due to the fact that the Company
does not have sufficient number of shares reserved upon conversion as of March 31, 2023 and December 31, 2022; however, the fair value
of such feature is immaterial for both periods. As of March 31, 2023 and December 31, 2022, $ 0.9
million in proceeds remained, which are included
in restricted cash on the condensed consolidated balance sheets. See Note 7- Fair Value of Financial Instruments for a description of
the accounting treatment for the Adjuvant Purchase Rights. Due
to the execution of the Adjuvant Forbearance and the Second Adjuvant Amendment, the Company reviewed the Adjuvant Notes in accordance
with Topics ASC 470-50 – Modifications and Extinguishments Troubled Debt Restructurings by Debtors.
2.5
million upon extinguishment, included in change
in fair value of financial instruments within the condensed consolidated statements of operations for the third quarter of 2022. As
discussed above, on March 7, 2023, the Company received a Notice of Event of Default and Reservation of Rights (the Notice of Default)
from Baker Bros. resulting in a cross default under the all outstanding debt and as such, the Company was not in compliance with all
applicable covenants as of March 31, 2023. However, upon the 2023 Reverse Stock Split effectuated on May 18, 2023, the Company
now has sufficient required reserve number of shares. As
of March 31, 2023, the Adjuvant Notes are recorded in the condensed consolidated balance sheet as short-term convertible notes payable
with a total balance of $ 26.8
million. The balance is comprised of $ 22.3
million in principal, net of unamortized debt
issuance costs, and $ 4.5
million in accrued interest. As
of March 31, 2023 and assuming the current conversion price of $ 1.625
per share, the Adjuvant Notes could be converted
into 16,512,880
shares of common stock. Term
Notes January
and March 2022 Notes On
January 13, 2022, the Company entered into a Securities Purchase Agreement (the January 2022 Purchase Agreement) with institutional investors
(the January 2022 Purchasers) pursuant to which the Company agreed to sell in a registered direct offering (i) unsecured 5.0 %
Senior Subordinated Notes due 2025 with an aggregate issue price of $ 5.9
million (the January 2022 Notes), which included
an original issue discount of $ 0.9
million, and (ii) warrants (the January 2022
Warrants) to purchase up to 8,003
shares of the Company’s common stock, $ 0.0001
par value per share. The January 2022 Warrants
have an exercise price of $ 735.00
per share and were initially exercisable beginning
on July 15, 2022 with a five-year term. Pursuant to the terms of the March 2022 Purchase Agreement
(as defined below), the January 2022 Warrants became exercisable on March 1, 2022, as described in more detail below. On
March 1, 2022, the Company entered into a Securities Purchase Agreement (the March 2022 Purchase Agreement) with institutional investors
(the March 2022 Purchasers) pursuant to which the Company agreed to sell in a registered direct offering (i) unsecured 5.0 %
Senior Subordinated Notes due 2025 with an aggregate issue price of $ 7.45
million (the March 2022 Notes), which included
an original issue discount of $ 2.45
million, and (ii) warrants (the March 2022 Warrants)
to purchase up to 8,303
shares of the Company’s common stock, $ 0.0001
par value per share. The March 2022 Warrants
have an exercise price of $ 897.56
per share and are immediately exercisable with
a five-year term. The
January and March 2022 Notes carried an interest rate of 5 %
per annum, which was subject to increase to 18 %
upon an event of default. The January and March 2022 Notes were able to be prepaid, in whole or in part, at the Company’s option
together with all accrued and unpaid interest and fees as of the date of the repayment. The holders of the January and March 2022 Notes
were able to require the Company to redeem their respective notes upon the occurrence of an event of default with a redemption premium
of 25 %.
The holders of the January and March 2022 Notes were also able to require the Company to redeem their respective notes upon the occurrence
of certain subsequent transactions. Pursuant
to the terms of the January and March 2022 Purchase Agreements, the Company agreed to certain restrictions on effecting variable rate
transactions so long as the January and March 2022 Notes were outstanding. Also, pursuant to the terms of the January and March 2022
Purchase Agreements, the January and March 2022 Purchasers had certain rights to participate in subsequent issuances of the Company’s
securities, subject to certain exceptions. The
Company evaluated the January and March 2022 Notes to determine if any embedded components qualified as a derivative requiring bifurcation
in accordance with ASC 815. The Company determined that the embedded put option and interest rate increase feature would both require
bifurcation and separate accounting. Therefore, the Company elected to use the fair value option under ASC 825, Financial Instruments
The
Company evaluated the January and March 2022 Warrants and determined that in accordance with ASC 815 the warrants should be recorded
at fair value and classified as a derivative liability in the condensed consolidated balance sheet. Both the January and March 2022 Notes
and Warrants were marked-to-market at each reporting date. Under
the valuation methods as described in Note 6- Fair Value of Financial Instruments 0.2
million in notes at issuance; (ii) $ 10.6
million in warrants at issuance as a derivative
liability; (iii) a $ 0.9
million loss on issuance; and (iv) a $ 2.8
million gain in fair value of financial instruments
as a result of the mark-to-market adjustment on the January and March 2022 Warrants. On May 4, 2022, the January and March 2022 Notes
were exchanged pursuant to the May 2022 Exchange, as defined below, and therefore no longer outstanding since May 2022. Interest
pertaining to the January 2022 Notes and March 2022 Notes for the three months ended March 31, 2022 was approximately $ 0.1
million and immaterial, respectively. Since the
Company accounts for the January and March 2022 Notes under the fair value method, the interest was included in the determination of
the fair value, and the debt issuance costs were expensed. May
2022 Notes On
May 4, 2022, the Company entered into amendment and exchange agreements (the May 2022 Exchange) with the holder of issued and outstanding
Series B-2 and C Preferred Stock, Seven Knots, and the January and March 2022 Notes Purchasers (collectively, the May 2022 Notes Purchasers),
pursuant to which they agreed to exchange all of the January and March 2022 Notes, 2,100
shares of Series B-2 Convertible Preferred Stock,
1,700
shares of Series C Convertible Preferred Stock,
and 4,266 shares
of the Company’s Common Stock for (i) new 5.0 %
Senior Subordinated Notes with an aggregate principal amount of $ 22.3
million (the May 2022 Notes), (ii) 1,666
new shares of Common Stock and (iii) new warrants
to purchase up to 6,666
shares of Common Stock (the May 2022 Warrants).
The May 2022 Warrants have an exercise price of $ 309.56
per share and were exercisable immediately with
a five-year
term. The 2,100
shares of Series B-2 Convertible Preferred Stock,
1,700
shares of Series C Convertible Preferred Stock,
and 4,266 shares
of the Company’s Common Stock that were exchanged in the May 2022 Exchange were retired by the Company. All exchange transactions
aforementioned were cashless. The
May 2022 Notes are substantially similar to the January and March 2022 Notes, except that (i) the maturity date of the May 2022 Notes
was August 1, 2022 and (ii) the holders of the May 2022 Notes may require the Company to redeem or exchange up to 100 %
of the May 2022 Notes upon the occurrence of certain subsequent transactions (each, a Subsequent Transaction Optional Redemption). Pursuant
to the terms of the May 2022 Notes and subject to certain conditions described in the May 2022 Notes, if the Company completed an underwritten
public offering of at least $ 20
million complying with certain conditions (a
Qualified Underwritten Offering) and the holder of the May 2022 Notes did not participate in the Qualified Underwritten Offering, then
the holder would have forfeited their right to Subsequent Transaction Optional Redemption solely with respect to that Qualified Underwritten
Offering and amounts that may have been due pursuant to the May 2022 Notes would not have been due and payable until the three-month
anniversary of the Qualified Underwritten Offering. The
May 2022 Public Offering qualified as the Qualified Underwritten Offering and, in connection with the May 2022 Public Offering, the holders
of the May 2022 Notes waived certain of their preemptive and redemption rights and the Company redeemed $ 5.9
million of the May 2022 Notes. The holders of
the May 2022 Notes also waived the maturity date of the May 2022 Notes until October 31, 2022. The
May 2022 Notes contain various customary affirmative and negative covenants agreed to by the Company. The May 2022 Notes also include
other customary events of default, which include the suspension of trading of shares of the Company’s common stock on the Nasdaq
Capital Market for a period of more than five
trading days. On September 12, 2022, the Company
was in default of the May Notes due to the default with the Baker Notes under the cross-default provision. As a result, the interest
rate was increased to 18 %
for the duration of the default and the holders of the May 2022 Notes had the right to request redemption for 125 %
of the amounts then owed pursuant to the May 2022 Notes. On
September 15, 2022, the Company entered into exchange agreements with each of the May 2022 Notes Purchasers (the May 2022 Notes Exchange
Agreements), pursuant to which the May 2022 Notes Purchasers agreed to exchange all outstanding balance of the May Notes as of September
15, 2022 using the higher interest rate and redemption premium aforementioned for purchase rights (the May Note Purchase Rights) to receive
832,237
shares of common stock. As a result, the May
Notes are no longer outstanding as of December 31, 2022. The number of right shares for each May Note Purchase Right is initially fixed,
but is subject to certain customary adjustments, and, until the second anniversary of issuance, adjustments for certain dilutive Company
equity issuances, as further discussed in Note 8- Stockholders’ Deficit The
Company evaluated the May 2022 Notes and determined that in accordance with ASC 470 the notes should be accounted for as a modification
of the January and March 2022 Notes. The Company further evaluated the May 2022 Notes to determine if any embedded components qualified
as a derivative requiring bifurcation in accordance with ASC 815. The Company determined that the embedded put options and interest rate
increase feature would all require bifurcation and separate accounting. Therefore, the Company elected to use the fair value option under
ASC 825, Financial Instruments The
Company evaluated the May 2022 Warrants and determined that, in accordance with ASC 815, the warrants should be recorded at fair value
and classified as a derivative liability in the condensed consolidated balance sheet. Both the May 2022 Notes and Warrants are marked-to-market
at each reporting date before the exchange as described above. December
2022 Notes On
December 20, 2022, the Company entered into a Securities Purchase Agreement (the December 2022 Purchase Agreement), with certain investors
(the December 2022 Notes Purchasers) pursuant to which the Company agreed to sell in a registered direct offering (i) unsecured 8.0 %
Senior Subordinated Notes due December 21, 2025 with an aggregate issue price of $ 2.3
million (the December 2022 Notes), which included
an original issue discount of $ 0.8
million (ii) warrants (the December 2022 Warrants)
to purchase up to 369,230
shares of the Company’s common stock, $ 0.0001
par value per share, and (iii) an aggregate 70
shares of Series D Preferred Stock (the Preferred
Shares) (collectively, the Offering). The Offering closed on December 21, 2022, with net proceeds to the Company from the Offering, after
deducting offering expenses, of $ 1.25
million. The December 2022 Notes are convertible
at $ 6.25 ,
and the December 2022 Warrants have a strike price of $ 6.25 . The
December 2022 Notes interest rate is subject to increase to 12 %
upon an event of default and have no Company right to prepayment prior to maturity, however, the Company can redeem the respective notes
at a redemption premium of 32.5 %.
The December 2022 Notes Purchasers can also require the Company to redeem their notes at the respective premium rate tied to the occurrence
of certain subsequent transactions, as well as require the Company to redeem the December 2022 Notes in the event of subsequent placements
(as defined). Also, pursuant to the terms of the December 2022 Purchase Agreement, the December 2022 Notes Purchasers have certain rights
to participate in subsequent issuances of the Company’s securities, subject to certain exceptions. Additionally, the December 2022
Notes conversion rate and warrant strike price are subject to adjustment upon the issuance of other securities (as defined) less than
the stated conversion rate and strike price of $ 6.25 .
Subsequent to December 31, 2022, the conversion and strike price adjusted to $ 1.625
as of March 31, 2023 and then to $ 0. | 5.
Debt Convertible
Notes Baker
Bros. Notes On
April 23, 2020, the Company entered into a Securities Purchase and Security Agreement (the Baker Bros. Purchase Agreement) with certain
affiliates of Baker Bros. Advisors LP, as purchasers (the Baker Purchasers), and Baker Bros. Advisors LP, as designated agent, pursuant
to which the Company agreed to issue and sell to the Baker Purchasers (i) convertible senior secured promissory notes (the Baker Notes)
in an aggregate principal amount of up to $ 25.0
million and (ii) warrants to purchase shares
of common stock (the Baker Warrants) in a private placement. At
the initial closing date of April 24, 2020 (the Baker Initial Closing), the Company issued and sold Baker Notes with an aggregate principal
amount of $ 15.0
million (the Baker First Closing Notes) and Baker
Warrants exercisable for 1,639
shares of common stock. Following
the Baker Initial Closing, the Baker Purchasers had an option to purchase from the Company up to $ 10.0
million of Baker Notes (the Baker Purchase Rights)
at the Baker Purchasers’ discretion at any time prior to the Company receiving at least $ 100.0
million in aggregate gross proceeds from one
or more sales of equity securities. On
June 5, 2020 (the Exercise Date), the Baker Purchasers exercised the Baker Purchase Rights. At the second closing date of June 9, 2020
(the Baker Second Closing), the Baker Purchasers acquired the remaining Baker Notes with an aggregate principal amount of $ 10.0
million and Baker Warrants exercisable for 1,092
shares of common stock. With the completion of
the underwritten public offering in June 2020 the exercise price of the Baker Warrants was $ 4,575 .
The Baker Warrants have a five-year
term with a cashless exercise provision and are
immediately exercisable at any time from their respective issuance date. The
Baker Notes have a five-year
term, with no pre-payment ability during the
first three
years . Interest on the unpaid principal balance
of the Baker Notes (the Baker Outstanding Balance) accrues at 10.0 %
per annum with interest accrued during the first year from the two respective closing dates recognized as payment-in-kind. The effective
interest rate for the period was 10.0 %.
Accrued interest beyond the first year of the respective closing dates are to be paid in arrears on a quarterly basis in cash or recognized
as payment-in-kind, at the direction of the Baker Purchasers. The Baker Purchasers elected to have the accrued interest for the first
quarter of 2021 paid-in-kind, and the accrued interest going forward to be paid in cash. Interest expense pertaining to the Baker Notes
for the years ended December 31, 2021 was approximately $ 2.8
million. As of December 31, 2021, the accrued
interest is recorded in the consolidated balance sheet in other current liabilities with a total balance of $ 0.7
million. As discussed below, with the amendment
to the Baker Bros. Purchase Agreement, interest payments were paid-in kind. The Company accounts for the Baker notes under the fair value
method as described below and, therefore, the interest associated with the Baker Notes is included in the fair value determination. As
of December 31, 2022, the Baker Notes could be converted into 11,207,734
shares of common stock. The
Baker Notes are callable by the Company on 10
days’ written notice beginning on the third
anniversary of the Baker Initial Closing. The call price will equal 100 %
of the Baker Outstanding Balance plus accrued and unpaid interest if the Company’s common stock as measured using a 30 -day
volume weighted average price (VWAP) is greater than the benchmark price of $ 9,356.25
as stated in the Baker Bros. Purchase Agreement,
or 110 %
of the Baker Outstanding Balance plus accrued and unpaid interest if the VWAP is less than such benchmark price. The Baker Purchasers
also have the option to require the Company to repurchase all or any portion of the Baker Notes in cash upon the occurrence of certain
events. In a repurchase event, as defined in the Baker Bros. Purchase Agreement, the repurchase price will equal 110 %
of the Baker Outstanding Balance plus accrued and unpaid interest. In an event of default or the Company’s change of control, the
repurchase price will equal to the sum of (x) three times of the Baker Outstanding Balance plus (y) the aggregate value of future interest
that would have accrued (collectively, the Embedded Features of the Baker Notes), which was subsequently adjusted in an amendment to
the Baker Notes on September 15, 2022, as further described below. The Baker Notes were convertible at any time at the option of the
Baker Purchasers at the conversion price of $ 4,575
per share prior to the First Baker Amendment
as defined below. On
November 20, 2021, the Company entered into the first amendment to the Baker Bros. Purchase Agreement (the First Baker Amendment), in
which each Baker Purchaser shall have the right to convert all or any portion of the Baker Notes into Common Stock at a conversion price
equal to the lesser of (a) $ 4,575
and (b) 115 %
of the lowest price per share of common stock (or, as applicable with respect to any equity securities convertible into common stock,
115 %
of the applicable conversion price) sold in one or more equity financings until the Company had met a qualified financing threshold,
defined as one or more equity financings resulting in aggregate gross proceeds to the Company of at least $ 50.0
million (Financing Threshold). The
First Baker Amendment also extended, effective upon the Company’s achievement of the Financing Threshold, the affirmative covenant
to achieve $ 100.0
million in cumulative net sales of Phexxi by
June 30, 2022 to June 30, 2023. Additionally per the First Baker Amendment, if in any equity financing closing on or prior to the date
the Company has met the Financing Threshold, the Company was required to issue warrants to purchase capital stock of the Company (or
other similar consideration), the Company was also required to issue to the Baker Purchasers an equivalent coverage of warrants (or other
similar consideration) on the same terms as if the Baker Purchasers participated in the financing in an amount equal to the then outstanding
principal of the Baker Notes held by the Baker Purchasers. In satisfaction of this requirement and in connection with the closing of
the May 2022 Public Offering, the Company issued warrants to purchase 582,886
shares of the Company’s common stock at
an exercise price of $ 93.75
per share (the June 2022 Baker Warrants). As
required by the terms of the First Baker Amendment, the June 2022 Baker Warrants have substantially the same terms as the warrants issued
in the May 2022 Public Offering. Refer to Note 10 - Stockholders’ Equity (Deficit) 26.25
per share along with the change of the conversion
price per the Third Baker Amendment and further reset to $ 4.0625
per share with the December 2022 Notes issuance,
both as discussed below. On
March 21, 2022, the Company entered into the second amendment to the Baker Bros. Purchase Agreement (the Second Baker Amendment), pursuant
to which each Baker Purchaser now has the right to convert all or any portion of the Baker Notes into Common Stock at a conversion price
equal to the lesser of (a) $ 725.81
or (b) 100 %
of the lowest price per share of common stock (or as applicable with respect to any equity securities convertible into common stock,
100 %
of the applicable conversion price) sold in any equity financing until the Company has (i) met the qualified financing threshold by June
30, 2022, defined as a single underwritten financing resulting in aggregate gross proceeds to the Company of at least $ 20.0
million (Qualified Financing Threshold) and (ii)
the disclosure of its top-line results from its EVOGUARD 93.75 .
The Company achieved the Clinical Trial Milestone in October 2022. Also, with the achievement of the Qualified Financing Threshold and
the Clinical Trial Milestone, the affirmative covenant to achieve $ 100.0
million in cumulative net sales of Phexxi was
extended to June 30, 2023. The Baker Warrants were reset to $ 26.25
per share per the Third Baker Amendment and further
reset to $ 4.0625
per share with the December 2022 Notes issuance,
both as discussed below. Subsequent to December 31, 2022, the conversion and strike price adjusted to $ 0.8125 ,
as discussed in Note 14 –
Subsequent Events On
September 15, 2022, the Company entered into the third amendment to the Baker Bros. Purchase Agreement (the Third Baker Amendment), pursuant
to which the conversion was amended to equal to $ 26.25 ,
subject to adjustment for certain dilutive Company equity issuance adjustments for a two-year
period, removal of an interest make-whole payment
due in certain circumstances, and certain change of control and liquidation payment amounts were reduced from three times the outstanding
amounts of the Baker Notes to two times the outstanding amounts. In addition, the Third Baker Amendment provides that the Company may
make future interest payments to the Baker Purchasers in kind or in cash, at the Company’s option. For the year ended December
31, 2022, the Company elected an in-kind interest payment and approximately $ 3.3
million was added to the outstanding principal
balance. The
Company evaluated whether any of the Embedded Features required bifurcation as a separate component of equity. The Company elected the
fair value option (FVO) under ASC 825, Financial Instruments (ASC 825), as the Baker Notes are qualified financial instruments and are,
in whole, classified as liabilities. Under the FVO, the Company recognized the hybrid debt instrument at fair value, inclusive of the
Embedded Features with changes in fair value related to changes in the Company’s credit risk being recognized as a component of
accumulated other comprehensive income in the consolidated balance sheets. All other changes in fair value were recognized in the consolidated
statements of operations. The
Baker Notes contain various customary affirmative and negative covenants agreed to by the Company, including timely payment, in cash,
of the quarterly interest payment and maintaining an active listing. On September 12, 2022, the Company received a default notice from
the Baker Purchasers due to its failure of making the required payments of accrued interest for the first and second quarters of 2022
in the aggregate amount of $ 1.4
million and being delisted from Nasdaq. As a
result of the cross-default provisions applicable to the Adjuvant Notes and the May 2022 Notes (both, as discussed below), the Company
was also in default of these Notes. On September 15, 2022, the Company entered into a (i) Forbearance Agreement (the Secured Creditor
Forbearance Agreement) with the Baker Purchasers, pursuant to which the Baker Purchasers agreed to forbear from exercising any of their
rights and remedies during the Forbearance Period (as defined), but solely with respect to the specified events of default (Forbearance
Termination Event) provided under the Secured Creditor Forbearance Agreement, which includes among other things, the first date after
December 31, 2022, on which the Company’s cash falls below $ 1.0
million. In exchange for the forbearance and
the Third Baker Amendment, the Company agreed to adjust the aggregate principal balance of the Baker Notes to $ 44.2
million, which includes the delinquent interest
payments of $ 1.4
million that the Baker Purchasers agreed to forego
in cash, as well as an immaterial amount of legal fees incurred by the Baker Purchasers’ counsel. On
December 19, 2022, the Company entered into the First Amendment to Forbearance Agreement (the Amendment) effective as of December 15,
2022 (the Amendment Effective Date) to amend certain provisions of the of the Secured Creditor Forbearance Agreement dated September
15, 2022. The Amendment revises the Secured Creditor Forbearance Agreement to (i) amend the Fifth Recital Clause to clarify that the
Purchasers consent to any additional indebtedness pari passu 5.0
million, and (ii) strike and entirely replace
Section 4 to clarify the terms of the Purchasers’ consent to Interim Financing (as defined therein). No other revisions were made
to the Secured Creditor Forbearance Agreements. As
described more fully in Note 14 – Subsequent Events 92.7
million representing two times the sum of
the outstanding balance and all accrued and unpaid interest thereon and all other amounts due under
the SPA and other documents is due and payable within three business days
of receipt of the Notice of Default. In addition, the Notice of Default resulted in a cross
default under all outstanding debt. During
the year ended December 31, 2022, using the valuation methods discussed in Note 7- Fair Value of Financial Instruments 42.4
million due to changes in fair value of the Baker
Notes, of which $ 2.0
million is recorded in the consolidated statements
of operations as a result of mark-to-market adjustments unrelated to instrument-specific credit losses and $ 44.4
million, recorded as a component of other comprehensive
income due to changes in the underlying instrument-specific credit risk for the Baker Notes. Through June 30, 2023, the change in fair
value attributed to the change in the underlying instrument-specific credit risk was determined by taking the difference between the
fair value of the Baker Notes with and without the credit risk change and value of the collateral. For the second half of 2022, the fair
value of the Baker Notes was determined by estimating the fair value of the Market Value of Invested Capital (“MVIC”) of
the Company. This was estimated using forms of the cost and market approaches. In the Cost approach, an adjusted net asset value method
was used to determine the net recoverable value of the Company, including an estimate of the fair of the Company’s intellectual
property. The estimated fair value of the Company’s intellectual property was valued using a relief from royalty method which required
management to make significant estimates and assumptions related to forecasts of future revenue, and the selection of the royalty and
discount rates. If the resulting fair value is not estimated as greater than the contractual payout, the fair value of the Baker Notes
then becomes the Company’s MVIC available for distribution. Adjuvant
Notes On
October 14, 2020, the Company entered into a Securities Purchase Agreement (the Adjuvant Purchase Agreement) with Adjuvant Global Health
Technology Fund, L.P., and Adjuvant Global Health Technology Fund DE, L.P. (together, the Adjuvant Purchasers), pursuant to which the
Company sold unsecured convertible promissory notes (the Adjuvant Notes) in aggregate principal amount of $ 25.0
million. The
Adjuvant Notes have a five-year
term, and in connection with certain Company
change of control transactions, the Adjuvant Notes may be prepaid at the option of the Company or will become payable on the date of
the consummation of a change of control transaction at the option of the Adjuvant Purchasers. The Adjuvant Notes have interest accruing
at 7.5 %
per annum on a quarterly basis in arrears to the outstanding balance of the Adjuvant Notes and are recognized as payment-in-kind. The
effective interest rate for the period was 7.7 %. Interest
expense for the Adjuvant Notes consist of the following, and is included in short-term convertible notes payable on the consolidated
balance sheet as of December 31, 2022 (in thousands): Schedule
of interest expense
2022 2021
Years
Ended December 31,
2022 2021
Coupon
interest $ 2,048 $ 1,959
Amortization
of issuance costs 129 39
Total $ 2,177 $ 1,998 The
Adjuvant Notes are convertible, subject to customary 4.99 %
and 19.99 %
beneficial ownership limitations, into shares of the Company’s common stock, par value $ 0.0001
per share, at any time at the option of the Adjuvant
Purchasers at a conversion price of $ 6,843.75
per share. To the extent not previously prepaid
or converted, the Adjuvant Notes will automatically convert into shares of the Company’s common stock at a conversion price of
$ 6,843.75
per share. In connection with certain Company
change of control transactions, the Adjuvant Notes may be prepaid at the option of the Company or will become payable at the option of
the Adjuvant Purchasers. To the extent not previously prepaid or converted, the Adjuvant Notes were originally automatically convertible
into shares of the Company’s common stock at a conversion price of $ 6,843.75
per share immediately following the earliest
of the time at which the (i) 30 -day
value-weighted average price of the Company’s common stock was $ 18,750
per share, or (ii) Company achieved cumulative
net sales from the sales of Phexxi of $ 100.0
million, provided such net sales are achieved
prior to July 1, 2022. On
April 4, 2022, the Company entered into the first amendment to the Adjuvant Purchase Agreement (the Adjuvant Amendment). The Adjuvant
Amendment extended, effective as of the date the Company achieved the Qualified Financing Threshold upon the closing of the May 2022
Public Offering, the affirmative covenant to achieve $ 100.0
million in cumulative net sales of Phexxi by
June 30, 2022 to June 30, 2023. The Adjuvant Amendment also provided for an adjustment to the conversion price of the Adjuvant Notes
such that the conversion price (the Conversion Price) for these Notes, effective as of the reverse stock split the conversion price will
now be the lesser of (i) $ 678.49
and (ii) 100 %
of the lowest price per share of common stock (or with respect to securities convertible into common stock, 100 %
of the applicable conversion price) sold in any equity financing until the Company has met the Qualified Financing Threshold. In the
second quarter of 2022 and upon the closing of the May 2022 Public Offering, the conversion price was reset to $ 93.75 .
Effective as of the Company’s achievement of the Qualified Financing Threshold, the automatic conversion provisions in the Agreement
were further amended to provide that the Adjuvant Notes will automatically convert into shares of the Company’s common stock at
the Conversion Price immediately following the earliest of the time at which the (i) 30 -day
value-weighted average price of the Company’s common stock is $ 18,750
per share, or (ii) the Company achieves cumulative
net sales from the sales of Phexxi of $ 100.0
million, provided such net sales are achieved
prior to July 1, 2023. The
Adjuvant Notes contain various customary affirmative and negative covenants agreed to by the Company. On September 12, 2022, the Company
was in default of the Adjuvant Notes due to the default with the Baker Notes under the cross-default provision. On September 15, 2022,
the Company entered into a (i) Forbearance Agreement (the Adjuvant Forbearance Agreement) with the Adjuvant Purchasers, pursuant to which,
the Adjuvant Purchasers agreed to forbear from exercising any of their rights and remedies during the Forbearance Period as defined in
therein, but solely with respect to the specified events of default provided under the Adjuvant Forbearance Agreement. On
September 15, 2022, the Company also entered into the second amendment to the Adjuvant Purchase Agreement (the Second Adjuvant Amendment),
pursuant to which the conversion price per share was reduced to $ 26.25 ,
subject to adjustment for certain dilutive Company equity issuance adjustments for a two-year
period. In addition, the Company entered into
an exchange agreement, pursuant to which the Adjuvant Purchasers agreed to exchange 10 %
of the outstanding amount of the Adjuvant Notes as of September 15, 2022 (or $ 2.9
million) for rights to receive 109,842
shares of common stock (Adjuvant Purchase Rights).
The number of shares for each Adjuvant Purchase Right is initially fixed, but is subject to certain customary adjustments, and, until
the second anniversary of issuance, adjustments for certain dilutive Company equity issuances. Refer to Note 10 -
Stockholders’ Equity (Deficit) 4.0625
per share with the December 2022 Notes issuance,
as discussed below. Subsequent to December 31, 2022, the conversion price adjusted to $ 0.8125 ,
as discussed in Note 14 – Subsequent Events The
Adjuvant Notes are accounted for in accordance with authoritative guidance for convertible debt instruments and are classified as current
liabilities in the consolidated balance sheet. The aggregate proceeds of $ 25.0
million was initially classified as restricted
cash for financial reporting purposes due to contractual stipulations that specify the types of expenses the money can be spent on and
how it must be allocated. Its conversion feature is required to be bifurcated as an embedded derivative due to the fact that the Company
does not have sufficient number of shares reserved upon conversion. However, the fair value of such feature is immaterial as of December
31, 2022. As of December 31, 2022 and 2021, $ 0.9
million and $ 4.7
million in proceeds remained, which are included
in restricted cash on the consolidated balance sheets. See Note 7- Fair Value of Financial Instruments for a description of the accounting
treatment for the Adjuvant Purchase Rights. Due
to the execution of the Adjuvant Forbearance and the Second Adjuvant Amendment, the Company reviewed the Adjuvant Notes in accordance
with Topics ASC 470-50 – Modifications and Extinguishments Troubled Debt Restructurings by Debtors.
2.5
million upon extinguishment, included in change
in fair value of financial instruments within the consolidated statements of operations. As
discussed above and described more fully in Note 14 – Subsequent Events As
of December 31, 2022 and 2021, the Adjuvant Notes are recorded in the consolidated balance sheet as short-term convertible notes payable
with a total balance of $ 26.3
million and $ 27.2
million, respectively. As of December 31, 2022
and 2021, the balance is comprised of $ 22.3
million and $ 24.8
million, respectively, in principal, net of unamortized
debt issuance costs, and $ 4.0
million and $ 2.4
million, respectively, in accrued interest. As
of December 31, 2022 and assuming the current conversion price of $ 4.0625
per share, the Adjuvant Notes could be converted
into 6,527,898
shares of common stock. Term
Notes January
and March 2022 Notes On
January 13, 2022, the Company entered into a Securities Purchase Agreement (the January 2022 Purchase Agreement) with institutional investors
(the January 2022 Notes Purchasers) pursuant to which the Company agreed to sell in a registered direct offering (i) unsecured 5.0 %
Senior Subordinated Notes due 2025 with an aggregate issue price of $ 5.9
million (the January 2022 Notes), which included
an original issue discount of $ 0.9
million, and (ii) warrants (the January 2022
Warrants) to purchase up to 8,003
shares of the Company’s common stock, $ 0.0001
par value per share. The January 2022 Warrants
have an exercise price of $ 735.00
per share and were initially exercisable beginning
on July 15, 2022 with a five-year term. Pursuant to the terms of the March 2022 Purchase Agreement
(as defined below), the January 2022 Warrants became exercisable on March 1, 2022, as described in more detail below. On
March 1, 2022, the Company entered into a Securities Purchase Agreement (the March 2022 Purchase Agreement) with institutional investors
(the March 2022 Notes Purchasers) pursuant to which the Company agreed to sell in a registered direct offering (i) unsecured 5.0 %
Senior Subordinated Notes due 2025 with an aggregate issue price of approximately $ 7.5
million (the March 2022 Notes), which included
an original issue discount of approximately $ 2.5
million, and (ii) warrants (the March 2022 Warrants)
to purchase up to 8,303
shares of the Company’s common stock, $ 0.0001
par value per share. The March 2022 Warrants
have an exercise price of $ 897.56
per share and are immediately exercisable with
a five-year term. The
January and March 2022 Notes carried an interest rate of 5 %
per annum, which was subject to increase to 18 %
upon an event of default. The January and March 2022 Notes were able to be prepaid, in whole or in part, at the Company’s option
together with all accrued and unpaid interest and fees as of the date of the repayment. The holders of the January and March 2022 Notes
were able to require the Company to redeem their respective notes upon the occurrence of an event of default with a redemption premium
of 25 %.
The holders of the January and March 2022 Notes were also able to require the Company to redeem their respective notes upon the occurrence
of certain subsequent transactions. Pursuant
to the terms of the January and March 2022 Purchase Agreements, the Company agreed to certain restrictions on effecting variable rate
transactions so long as the January and March 2022 Notes were outstanding. Also, pursuant to the terms of the January and March 2022
Purchase Agreements, the January and March 2022 Purchasers had certain rights to participate in subsequent issuances of the Company’s
securities, subject to certain exceptions. The
Company evaluated the January and March 2022 Notes to determine if any embedded components qualified as a derivative requiring bifurcation
in accordance with ASC 815. The Company determined that the embedded put option and interest rate increase feature would both require
bifurcation and separate accounting. Therefore, the Company elected to use the fair value option under ASC 825, Financial Instruments
The
Company evaluated the January and March 2022 Warrants and determined that in accordance with ASC 815 the warrants should be recorded
at fair value and classified as a derivative liability in the consolidated balance sheet. Both the January and March 2022 Notes and Warrants
were marked-to-market at each reporting date. Under
the valuation methods as described in Note 7- Fair Value of Financial Instruments, 0.2
million in notes at issuance; (ii) $ 10.6
million in warrants at issuance as a derivative
liability; and (iii) a $ 0.9
million loss on issuance. During the year ended
December 31, 2022, the Company recognized gains in fair value of financial instruments as a result of the mark-to-market adjustment on
the January and March 2022 Warrants of $ 10.6
million. On
May 4, 2022, the January and March 2022 Notes were exchanged pursuant to the May 2022 Exchange, as defined below. May
2022 Notes On
May 4, 2022, the Company entered into amendment and exchange agreements (the May 2022 Exchange) with the holder of issued and outstanding
Series B-2 and C Preferred Stock, Seven Knots, and the January and March 2022 Notes Purchasers (collectively, the May 2022 Notes Purchasers),
pursuant to which they agreed to exchange all of the January and March 2022 Notes, 2,100
shares of Series B-2 Convertible Preferred Stock,
1,700
shares of Series C Convertible Preferred Stock,
and 4,266 shares
of the Company’s Common Stock for (i) new 5.0 %
Senior Subordinated Notes with an aggregate principal amount of $ 22.3
million (the May 2022 Notes), (ii) 1,666
new shares of Common Stock and (iii) new warrants
to purchase up to 6,666
shares of Common Stock (the May 2022 Warrants).
The May 2022 Warrants have an exercise price of $ 309.56
per share and were exercisable immediately
with a five-year
term. The 2,100
shares of Series B-2 Convertible Preferred Stock,
1,700
shares of Series C Convertible Preferred Stock,
and 4,266 shares
of the Company’s Common Stock that were exchanged in the May 2022 Exchange were retired by the Company. All exchange transactions
aforementioned were cashless. The
May 2022 Notes are substantially similar to the January and March 2022 Notes, except that (i) the maturity date of the May 2022 Notes
was August 1, 2022 and (ii) the holders of the May 2022 Notes may require the Company to redeem or exchange up to 100 %
of the May 2022 Notes upon the occurrence of certain subsequent transactions (each, a Subsequent Transaction Optional Redemption). Pursuant
to the terms of the May 2022 Notes and subject to certain conditions described in the May 2022 Notes, if the Company completed an underwritten
public offering of at least $ 20
million complying with certain conditions (a
Qualified Underwritten Offering) and the holder of the May 2022 Notes did not participate in the Qualified Underwritten Offering, then
the holder would have forfeited their right to Subsequent Transaction Optional Redemption solely with respect to that Qualified Underwritten
Offering and amounts that may have been due pursuant to the May 2022 Notes would not have been due and payable until the three-month
anniversary of the Qualified Underwritten Offering. The
May 2022 Public Offering qualified as the Qualified Underwritten Offering and, in connection with the May 2022 Public Offering, the holders
of the May 2022 Notes waived certain of their preemptive and redemption rights and the Company redeemed $ 5.9
million of the May 2022 Notes. The holders of
the May 2022 Notes also waived the maturity date of the May 2022 Notes until October 31, 2022. The
May 2022 Notes contain various customary affirmative and negative covenants agreed to by the Company. The May 2022 Notes also include
other customary events of default, which include the suspension of trading of shares of the Company’s common stock on the Nasdaq
Capital Market for a period of more than five
trading days. On September 12, 2022, the Company
was in default of the May Notes due to the default with the Baker Notes under the cross-default provision. As a result, the interest
rate was increased to 18 %
for the duration of the default and the holders of the May 2022 Notes had the right to request redemption for 125 %
of the amounts then owed pursuant to the May 2022 Notes. On
September 15, 2022, the Company entered into exchange agreements with each of the May 2022 Notes Purchasers (the May 2022 Notes
Exchange Agreements), pursuant to which the May 2022 Notes Purchasers agreed to exchange all outstanding balance of the May Notes as
of September 15, 2022 using the higher interest rate and redemption premium aforementioned for purchase rights (the May Note
Purchase Rights) to receive 832,237 shares
of common stock. As a result, the May Notes are no longer outstanding as of December 31, 2022. The number of right shares for each
May Note Purchase Right is initially fixed, but is subject to certain customary adjustments, and, until the second anniversary of
issuance, adjustments for certain dilutive Company equity issuances, as further discussed in Note 10 -
Stockholders’ Equity (Deficit) The
Company evaluated the May 2022 Notes and determined that in accordance with ASC 470 the notes should be accounted for as a modification
of the January and March 2022 Notes. The Company further evaluated the May 2022 Notes to determine if any embedded components qualified
as a derivative requiring bifurcation in accordance with ASC 815. The Company determined that the embedded put options and interest rate
increase feature would all require bifurcation and separate accounting. Therefore, the Company elected to use the fair value option under
ASC 825, Financial Instruments The
Company evaluated the May 2022 Warrants and determined that, in accordance with ASC 815, the warrants should be recorded at fair value
and classified as a derivative liability in the consolidated balance sheet. Both the May 2022 Notes and Warrants are marked-to-market
at each reporting date before the exchange as described above. Under
the valuation methods as described in Note 7- Fair Value of Financial Instruments 22.3
million in notes at issuance; and (ii) $ 1.6
million in warrants at issuance as a derivative
liability. During the year ended December 31, 2022, the Company recognized losses in fair value of financial instruments as a result
of the mark-to-market adjustment on the May 2022 Notes of $ 10.3
million and gains in fair value of financial
instruments as a result of the mark-to-market adjustment on the May 2022 Warrants of $ 1.6
million. December
2022 Notes On
December 20, 2022, the Company entered into a Securities Purchase Agreement (the December 2022 Purchase Agreement), with certain investors
(the December 2022 Notes Purchasers) pursuant to which the Company agreed to sell in a registered direct offering (i) unsecured 8.0 %
Senior Subordinated Notes due December 21, 2025 with an aggregate issue price of $ 2.3
million (the December 2022 Notes), which included
an original issue discount of $ 0.8
million (ii) warrants (the December 2022 Warrants)
to purchase up to 369,230
shares of the Company’s common stock, $ 0.0001
par value per share, and (iii) an aggregate 70
shares of Ser |
