Note 5. Convertible Instruments and Accrued Interest

Convertible Preferred Stock

The following table presents the number of potentially issuable shares of common stock should shares of preferred stock and amounts of undeclared and accrued preferred dividends be converted to common stock.

​

​

Under the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), dividends on its outstanding shares of Series B Convertible Preferred Stock (the “Series B preferred stock”) may be paid in cash or shares of the Company’s common stock at the option of the Company. Dividends on outstanding shares of Series C Convertible Preferred Stock (the “Series C preferred stock”) and Series D Convertible Preferred Stock (the “Series D preferred stock”) are payable in cash or shares of common stock at the election of the holder. The preferred stockholders have the right to dividends only when and if declared by the Company’s Board of Directors. Under Section 170 of the Delaware General Corporation Law, the Company is permitted to pay dividends only out of capital surplus or, if none, out of net profits for the fiscal year in which the dividend is declared or net profits from the preceding fiscal year.

Series B Convertible Preferred Stock

Each share of the Series B preferred stock is convertible into ten shares of the Company’s common stock. Dividends are cumulative and payable to the Series B preferred stockholders when and as declared by the Company’s Board of Directors (the “Board”). Dividends on the Series B preferred stock accumulate at the rate of $0.25 per share per annum, and may be paid, at the option of the Company at the time of conversion, either in cash or shares of the Company’s common stock valued at $0.50 per share. The Series B preferred stock has liquidation preferences over the common shares at $5.00 per share, plus any accrued and unpaid dividends. Except as provided by law, the Series B preferred stockholders have no voting rights. The Company does not accrue dividends on Series B preferred stock until such dividends are declared.

Series C and Series D Convertible Preferred Stock

The Series C and Series D Certificates of Designation provide, among other things, that holders of Series C and Series D preferred stock shall be entitled to receive, when and as declared by the Board and out of any assets at the time legally available therefor, cumulative dividends at the rate of ten percent (10%) per share per annum of the stated value of the Series C and Series D preferred stock, which is $1,000 per share (the “Stated Value”). Dividends on the Series C and Series D preferred stock are cumulative, and will accrue and be compounded annually, whether or not declared and whether or not there are any profits, surplus or other funds or assets of the Company legally available therefor. Dividends on the Series C and Series D preferred stock may be paid in cash or shares of the Company’s common stock at the option of the holder. Series C and Series D preferred stock does not have redemption rights. Each share of Series C and Series D preferred stock is convertible at the holder’s option into shares of common stock, with Series C stockholders having conversion price of $0.50 per share, and Series D stockholders having conversion price of $0.80 per share, together with accrued and unpaid dividends payable, at the option of the holder, in cash or shares of common stock based on the conversion price. Given the obligation to settle all dividends, including those in arrears, in cash at the election of the preferred stockholder upon conversion, whether or not declared by the Company, the Company accrues dividends on Series C and D preferred stock as a liability in its consolidated financial statements.

In the event of liquidation, dissolution or winding up of the Company, the holders of Series D preferred stock will be entitled to receive, on a pari passu basis with the holders of the Series C preferred stock and in preference to any payment or distribution to holders of the Series B preferred stock and common stock, an amount per share equal to the Stated Value plus the amount of any accrued and unpaid dividends. If, at any time while the Series C and Series D preferred stock is outstanding, the Company effects any reorganization, merger or consolidation of the Company, sale of substantially all of its assets, or other specified transaction (each, as defined in the Series C and the Series D Certificates of Designation, a “Fundamental Transaction”), a holder of Series C and Series D preferred stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the Series C and Series D preferred stock immediately prior to the Fundamental Transaction. Except as otherwise provided in the Series C and Series D Certificates of Designation or as otherwise required by law, the Series C and Series D preferred stock have no voting rights.

​

Convertible Notes and Accrued Interest

​

​

Changes to the outstanding balance of convertible notes, including accrued interest, were as follows:

​

​

Long-term Convertible Note – April 2, 2021 Note

On April 2, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued a secured convertible promissory note with a two-year term in the initial principal amount of $28.5 million (the “April 2, 2021 Note”). The Company received consideration of $25.0 million, reflecting an original issue discount of $3.4 million and issuance costs of $0.1 million. Interest accrues at an annual rate of 10% on the outstanding balance, with the rate increasing to the lesser of 22% per annum or the maximum rate permitted by applicable law upon occurrence of an event of default. In addition, upon any event of default, the investor may accelerate the outstanding balance payable under the April 2, 2021 Note; upon such acceleration, the outstanding balance will increase automatically by 15%, 10% or 5%, depending on the nature of the event of default. The events of default are listed in Section 4 of the April 2, 2021 Note filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 8, 2021. The April 2, 2021 Note is secured by all the assets of the Company, excluding the Company’s intellectual property.

Pursuant to the terms of the April 2, 2021 Note, the Company must obtain the investor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $50.0 million. In the event of any such approval, the outstanding principal balance of the April 2, 2021 Note will increase automatically by 5% upon the issuance of such additional debt. The investor may convert all or any part the outstanding balance of the April 2, 2021 note into shares of common stock at an initial conversion price of $10.00 per share upon five trading days’ notice, subject to certain adjustments and volume and ownership limitations. In addition to standard anti-dilution adjustments, the conversion price of the April 2, 2021 Note is subject to full-ratchet anti-dilution protection, pursuant to which the conversion price will be automatically reduced to equal the effective price per share in any new offering by the Company of equity securities that have registration rights, are registered or become registered under the Securities Act of 1933, as amended (the “Securities Act”). The April 2, 2021 Note provides for liquidated damages upon failure to deliver common stock within specified timeframes and requires the Company to maintain a share reservation of 6.0 million shares of common stock. The investor may redeem any portion of the note, at any time beginning six months after the issue date upon three trading days’ notice, subject to a maximum monthly redemption amount of $3.5 million. The April 2, 2021 Note requires the Company to satisfy its redemption obligations in cash within three trading days of the Company’s receipt of such notice. The Company may prepay the outstanding balance of the note, in part or in full, plus a 15% premium, at any time upon 15 trading days’ notice.

Pursuant to the terms of the April 2, 2021 Note, the Company is obligated, at the discretion of the noteholder, to reduce the outstanding balance by $7.5 million per month for five months. During fiscal 2022, in partial satisfaction of debt reduction amounts, the Company and the April 2, 2021 Note holder entered into exchange agreements, pursuant to

which the April 2, 2021 Note was partitioned into new notes (the “Partitioned Notes”) with an aggregate principal amount of $18.7 million, which were exchanged concurrently with the issuance of approximately 25.3 million shares of common stock. The outstanding balance of the April 2, 2021 Note was reduced by the Partitioned Notes to a principal amount of $9.8 million. The Company accounted for the restructured partitioned notes and exchange settlements as induced conversion, and, accordingly, recorded an aggregate loss on convertible debt induced conversion of $18.8 million through May 31, 2022; none for the three months ended August 31, 2022 and 2021.

Long-term Convertible Note – April 23, 2021 Note

On April 23, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued a secured convertible promissory note with a two-year term to an institutional accredited investor affiliated with the holder of the April 2, 2021 Note in the initial principal amount of $28.5 million (the “April 23, 2021 Note”). The Company received consideration of $25.0 million, reflecting an original issue discount of $3.4 million and issuance costs of $0.1 million. Interest accrues at an annual rate of 10% on the outstanding balance of the April 23, 2021 Note, with the rate increasing to the lesser of 22% per annum or the maximum rate permitted by applicable law upon the occurrence of an event of default. In addition, upon any event of default, the investor may accelerate the outstanding balance payable under the April 23, 2021 Note; upon such acceleration, the outstanding balance will increase automatically by 15%, 10% or 5%, depending on the nature of the event of default. The events of default are listed in Section 4 of the April 23, 2021 Note filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 29, 2021. The April 23, 2021 Note is secured by all the assets of the Company, excluding the Company’s intellectual property.

Pursuant to the terms of the April 23, 2021 Note, the Company must obtain the investor’s consent before assuming additional debt with aggregate net proceeds to the Company of less than $75.0 million. In the event of any such approval, the outstanding principal balance of the April 23, 2021 Note will increase automatically by 5% upon the issuance of such additional debt. The investor may convert all or any part of the outstanding balance into shares of common stock at an initial conversion price of $10.00 per share upon five trading days’ notice, subject to certain adjustments and volume and ownership limitations specified in the April 23, 2021 Note. In addition to standard anti-dilution adjustments, the conversion price of the April 23, 2021 Note is subject to full-ratchet anti-dilution protection, pursuant to which the conversion price will be automatically reduced to equal the effective price per share in any new offering by the Company of equity securities that have registration rights, are registered or become registered under the Securities Act. The April 23, 2021 Note provides for liquidated damages upon failure to deliver common stock within specified timeframes and requires the Company to maintain a share reservation of 6.0 million shares of common stock. The investor may redeem any portion of the April 23, 2021 Note, at any time beginning six months after the issue date, upon three trading days’ notice, subject to a maximum monthly redemption amount of $7.0 million. The April 23, 2021 Note requires the Company to satisfy its redemption obligations in cash within three trading days of the Company’s receipt of such notice. The Company may prepay the outstanding balance of the April 23, 2021 Note, in part or in full, plus a 15% premium, at any time upon 15 trading days’ notice.

The holders of the April 2 and April 23 Notes waived provisions in the notes that could have triggered the imposition of a default interest rate, a downward adjustment of the conversion price, or specified other provisions relating to default, breach or imposition of a penalty. The related events included the grant of registration rights to investors in specified private offerings, the issuance of warrants to purchase 30 million shares of common stock with registration rights to certain parties and potential incurrence of debt pursuant to a Surety Bond Backstop Agreement (the “Backstop Agreement”), and the grant of a security interest in the Company’s intellectual property to certain parties to the Backstop Agreement. Refer to Note 6, Equity Awards and Warrants.