That is true. That 700K is the amount of discount accounted to the issued toxic shares. It is saying that out of $1.8M the discount is $700K. The VCs will be paying $1.1M for $1.8M worth of shares which they sell to the rubes and collect $3-5M for. The $700K is only the estimate of the discount. Only separated in the 10K for accounting purposes.
They will not issue shares to pay that down. They need to pay down the 1.8M and then use that ($700K) loss in their taxes.
That is a pretty good way to see how much the company has taken from the shareholders wallets. Shareholders paid for that discount and then they paid the VCs profits on top of it.
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