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STARBOARD INVESTMENT | 9 Months Ended
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Sep. 30, 2023
Starboard Investment [Abstract] |
STARBOARD INVESTMENT | STARBOARD INVESTMENT In order to establish a strategic and ongoing relationship between the Company and Starboard, on November 18, 2019, the Company and Starboard entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), pursuant to which Starboard acquired (i) 350,000 shares of Series A Redeemable Convertible Preferred Stock with a stated value of $100 per share, (ii) Series A Warrants to purchase up to 5,000,000 shares of common stock (the “Series A Warrants”) and (iii) Series B Warrants to purchase up to 100,000,000 shares of common stock. On November 12, 2021, the Board formed a Special Committee comprised of directors not affiliated or associated with Starboard in order to explore the possibility of simplifying the Company’s capital structure. Management of the Company believed that the Company’s capital structure, with multiple different series of securities, made it difficult for investors to understand and value the Company and created an impediment to new public investment. As a result, on October 30, 2022, and following the unanimous recommendation of the Special Committee of the Board, the Company entered into the Recapitalization Agreement with Starboard and the Investors in order to simplify the Company’s capital structure, pursuant to which, among other things, (1) effective as of November 1, 2022, the Investors exercised the Series A Warrants in full and received 5,000,000 shares of the Company’s common stock, (2) the Investors purchased 15,000,000 shares of the Company’s common stock pursuant to the Concurrent Private Rights Offering (as defined below) and the Unadjusted Series B Warrants (as defined below) were cancelled, and (3) on July 13, 2023, (a) Starboard converted 350,000 shares of Series A Redeemable Convertible Preferred Stock into 9,616,746 shares of the Company’s common stock, and (b) Starboard exercised 31,506,849 of the Series B Warrants through a combination of a “Note Cancellation” and a “Limited Cash Exercise” (each as defined in the Series B Warrants), resulting in the receipt by Starboard of 31,506,849 shares of common stock, the cancellation of $60.0 million aggregate principal amount of the Company’s senior secured notes held by Starboard (as described further below, the “Senior Secured Notes”) and the receipt by the Company of aggregate gross proceeds of approximately $55.0 million. As a result, Starboard beneficially owned 61,123,595 shares of common stock as of July 13, 2023, representing approximately 61.2% of the common stock based on 99,886,322 shares of common stock issued and outstanding as of such date. Accordingly, no shares of Series A Redeemable Convertible Preferred Stock, no Series B Warrants, nor any Senior Secured Notes remain outstanding. As applicable, the following discussion of Starboard’s investments in the Company reflect the transactions effected pursuant to the Recapitalization Agreement. Series A Redeemable Convertible Preferred Stock Per its terms, the Series A Redeemable Convertible Preferred Stock could be converted into a number of shares of common stock equal to (i) the stated value thereof plus accrued and unpaid dividends, divided by (ii) the conversion price of $3.65 (subject to certain anti-dilution adjustments) and holders of the Series A Redeemable Convertible Preferred Stock could elect to convert the Series A Redeemable Convertible Preferred Stock into common stock at any time. Further, the Series A Redeemable Convertible Preferred Stock accrued cumulative dividends quarterly at annual rate of 3.0% on the stated value. In connection with an approved investment in June 2020, the Company and the Investors agreed that the dividend rate on the Series A Redeemable Convertible Preferred Stock would accrue at 3.0% so long as no triggering event occurred and the Company maintained $35.0 million in escrow. Series A Redeemable Convertible Preferred Stock also could participate on an as-converted basis in any regular or special dividends paid to common stockholders. Upon consummation of the Printronix acquisition in October 2021, $35.0 million was released to the Company from escrow and the dividend rate increased to 8.0% on the stated value. There were no accrued and unpaid dividends as of September 30, 2023 and December 31, 2022. Under the Recapitalization Agreement, the Company and Starboard agreed to take certain actions related to the Series A Preferred Stock in connection with the Recapitalization, including submitting a proposal for stockholder approval to remove the “4.89% blocker” provision contained in the Company's Amended and Restated Certificate of Designations (the "Amendment to the Amended and Restated Certificate of Designations"). The Company’s stockholders approved the Amendment to the Amended and Restated Certificate of Designations at the Company’s annual meeting of stockholders held on May 16, 2023 which became effective on June 30, 2023. Subsequently, and in accordance with the terms of the Series A Redeemable Convertible Preferred Stock, as amended, and the Recapitalization Agreement, on July 13, 2023, Starboard converted an aggregate amount of 350,000 shares of Series A Redeemable Convertible Preferred Stock into 9,616,746 shares of common stock, which included 27,704 shares of common stock issued in respect of accrued and unpaid dividends. The Company determined that certain features of the Series A Redeemable Convertible Preferred Stock should be bifurcated and accounted for as a derivative. Each of these features were bundled together as a single, compound embedded derivative. During 2019, total proceeds received and transaction costs incurred from the issuance of the Series A Redeemable Convertible Preferred Stock amounted to $35.0 million and $1.3 million, respectively. Proceeds received were allocated based on the fair value of the instrument without the Series A Warrants and of the Series A Warrants themselves at the time of issuance. The proceeds allocated to the Series A Redeemable Convertible Preferred Stock were then further allocated between the host preferred stock instrument and the embedded derivative, with the embedded derivative recorded at fair value and the Series A Redeemable Convertible Preferred Stock recorded at the residual amount. The portion of the proceeds allocated to the Series A Warrants, embedded derivative, and Series A Redeemable Convertible Preferred Stock was $4.8 million, $21.2 million, and $8.9 million, respectively. Transaction costs were also allocated between the Series A Redeemable Convertible Preferred Stock and the Series A Warrants on the same basis as the proceeds. The transaction costs allocated to the Series A Redeemable Convertible Preferred Stock were treated as a discount to the Series A Redeemable Convertible Preferred Stock. The transaction costs allocated to the Series A Warrants were expensed as incurred. The Company classified the Series A Redeemable Convertible Preferred Stock as mezzanine equity as the instrument would become redeemable at the option of the holder in various scenarios or otherwise on November 15, 2027. As it was probable that the Series A Redeemable Convertible Preferred Stock would become redeemable, the Company accreted the instrument to its redemption value using the effective interest method and recognized any changes against additional paid in capital in the absence of retained earnings. The Company determined that upon entering into the Recapitalization Agreement, the Series A Redeemable Convertible Preferred Stock was not modified related to the redemption, as such action was subject to the receipt of stockholder approval at the Company’s next annual meeting of stockholders. Accordingly, the Series A Redeemable Convertible Preferred Stock continued to be classified as temporary equity and continued to be accreted to its redemption value to the earliest redemption date of November 15, 2024. Accretion for the three months ended September 30, 2023 and 2022 was zero and $1.3 million, respectively, and for the nine months ended September 30, 2023 and 2022 was $3.2 million and $3.7 million, respectively. The following features of the Series A Redeemable Convertible Preferred Stock are required to be bifurcated from the host preferred stock and accounted for separately as an embedded derivative: (i) the right of the holders to redeem the shares (the “put option”), (ii) the right of the holders to receive common stock upon conversion of the shares (the “conversion option”), (iii) the right of the Company to redeem the shares (the “call option”), and (iv) the change in dividend rate upon consummation of an approved investment or a triggering event (the “contingent dividend rate feature”). These features are required to be accounted for separately from the Series A Redeemable Convertible Preferred Stock because the features were determined to be not clearly and closely related to the debt-like host and also did not meet any other scope exceptions for derivative accounting. Therefore, these features are bundled together and are accounted for as a single, compound embedded derivative liability. Accordingly, we have recorded an embedded derivative liability representing the combined fair value of each of these features. The embedded derivative liability was adjusted to reflect fair value at each period end with changes in fair value recorded as other income or (expense) in the “Change in fair value of the Series A and B warrants and embedded derivatives” financial statement line item of the consolidated statements of operations. In connection with the Recapitalization Agreement, the Company determined that the embedded features would continue to be bifurcated from the host Series A Redeemable Convertible Preferred Stock and accounted for separately as a compound derivative. Following Starboard’s conversion of its of 350,000 shares of Series A Redeemable Convertible Preferred Stock into 9,616,746 shares of common stock, which included 27,704 shares of common stock issued in respect of accrued and unpaid dividends, on July 13, 2023, the Company no longer had any shares of Series A Redeemable Convertible Preferred Stock outstanding. As a result, as of September 30, 2023 and December 31, 2022, the fair value of the Series A embedded derivative was zero and $16.8 million, respectively. Series A Warrants On November 18, 2019, in connection with the issuance of the Series A Redeemable Convertible Preferred Stock, the Company issued detachable Series A Warrants to acquire up to 5,000,000 shares of common stock at a price of $3.65 per share (subject to certain anti-dilution adjustments) at any time during a period of eight years beginning on the instrument’s issuance date of the Series A Warrants. The fair value of the Series A Warrants was $4.8 million upon issuance. On November 1, 2022, the Series A Warrants were fully exercised, and the Company recognized the common stock issued at its fair value in equity and an approximate $2.0 million charge as a component of the change in fair value of the Series A Warrants in other expense, which resulted in a fair value of zero. In accordance with the terms of the Recapitalization Agreement, effective as of November 1, 2022, the Investors consummated the Series A Warrants Exercise (exercising the Series A Warrants in full) and the Company issued an aggregate of 5,000,000 shares of the Company’s common stock to the Investors in consideration of their payment of the cash exercise price of $9.3 million, which amount represents a reduction in the exercise price to account for a negotiated settlement by the parties to account for the forgone time value of money of the Series A Warrants. As of September 30, 2023, no Series A Warrants were issued or outstanding. Series B Warrants On February 25, 2020, pursuant to the terms of the Securities Purchase Agreement with Starboard and the Investors, the Company issued Series B Warrants to purchase up to 100,000,000 shares of the Company’s common stock at an exercise price (subject to certain price-based anti-dilution adjustments) of either (i) $5.25 per share, if exercising by cash payment, within 30 months from the issuance date (i.e., August 25, 2022); or (ii) $3.65 per share, if exercising by cancellation of a portion of the Notes (as defined below). The Company issued the Series B Warrants for an aggregate purchase price of $4.6 million. The Series B Warrants had an expiration date of November 15, 2027. In connection with the issuance of the Notes on June 4, 2020, the terms of certain of the Series B Warrants were amended to permit the payment of the lower exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration date of November 15, 2027. 31,506,849 of the Series B Warrants were subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms (the Series B Warrants not subject to such adjustment, the “Unadjusted Series B Warrants”). During the third quarter of 2022, the cash exercise feature of the Unadjusted Series B Warrants expiration date of August 25, 2022 was extended to October 28, 2022. On October 28, 2022, the cash exercise feature of the Unadjusted Series B Warrants expired, which resulted in a fair value of zero for the related 68,493,151 warrants. In March 2023, the Unadjusted Series B Warrants were cancelled immediately following the completion of the Rights Offering (as described below). During the three months ended September 30, 2023, the remaining 31,506,849 Series B Warrants were exercised. As stated in Note 1 above, further to the terms of the Recapitalization Agreement and in accordance with the terms of the Series B Warrants, on July 13, 2023, Starboard completed the Series B Warrants Exercise. Pursuant to the Series B Warrants Exercise, the Company cancelled $60.0 million aggregate principal amount of Senior Secured Notes held by Starboard and received aggregate gross proceeds of approximately $55.0 million. At the closing of the Series B Warrants Exercise, the Company paid to Starboard an aggregate amount of $66.0 million (the “Recapitalization Payment”) representing a negotiated settlement of the foregone time value of the Series B Warrants and the Series A Redeemable Convertible Preferred Stock (which amount was paid through a reduction in the exercise price of the Series B Warrants). The Recapitalization Payment effectively modified the exercise price of the Series B Warrants. Upon the Series B Warrants Exercise, the Investors exercised the Series B Warrants at a reduced price and the Company issued an aggregate of 31,506,849 shares of the Company’s common stock to the Investors in consideration of their cash payment and cancellation of any outstanding Senior Secured Notes. The Series B Warrants are classified as a liability in accordance with ASC 480, "Distinguishing Liabilities from Equity", as the agreement provides for net cash settlement upon a change in control, which is outside the control of the Company. In connection with the Recapitalization Agreement and related warrant modification, the Company recognized the incremental fair value as a component of the change in fair value of the Series B Warrants in other expense as of December 31, 2022. The Series B Warrants were recognized at fair value at each reporting period until exercised, with changes in fair value recognized in other income or (expense) in the consolidated statements of operations. As of September 30, 2023, no Series B warrants were issued or outstanding. As of September 30, 2023 and December 31, 2022, the total fair value of the Series B Warrants was zero and $84.8 million, respectively. Senior Secured Notes On June 4, 2020, pursuant to the Securities Purchase Agreement dated November 18, 2019 with Starboard and the Investors, the Company issued $115.0 million in senior secured notes (the "Notes") to the Investors. Also on June 4, 2020, in connection with the issuance of the Notes, the Company entered into a Supplemental Agreement with Starboard (the “Supplemental Agreement”), as discussed further below. On June 30, 2020, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Merton and Starboard, on behalf of itself and on behalf of certain funds and accounts under its management, including the holders of the Notes. Pursuant to the Exchange Agreement, the holders of the Notes exchanged the entire outstanding principal amount for new senior notes (the “New Notes”) issued by Merton having an aggregate outstanding original principal amount of $115.0 million. The New Notes bore interest at a rate of 6.00% per annum and had an initial maturity date of December 31, 2020. The New Notes were fully guaranteed by the Company and were secured by an all-assets pledge of the Company and Merton and non-recourse equity pledges of each of the Company’s material subsidiaries. Pursuant to the Exchange Agreement, the New Notes (i) were deemed to be “Notes” for purposes of the Securities Purchase Agreement, (ii) were deemed to be “June 2020 Approved Investment Notes” for purposes of the Supplemental Agreement, and with the Company agreeing to redeem $80.0 million principal amount of the New Notes by September 30, 2020 and $35.0 million principal amount of the New Notes by December 31, 2020, and (iii) were deemed to be “Notes” for the purposes of the Series B Warrants, and therefore could be tendered pursuant to a Note Cancellation under the Series B Warrants on the terms set forth in the Series B Warrants and the New Notes. Delivery of notes in the form of the New Notes could also satisfy the delivery of "Exchange Notes" pursuant to Section 16(i) of the Certificate of Designations of the Company’s Series A Convertible Preferred Stock, par value $0.001 per share (the “Certificate of Designations”). The New Notes would not be deemed to be “Notes” for the purposes of the Registration Rights Agreement, dated as of November 18, 2019, by and among the Company, Starboard and the Investors. Because the New Notes, as amended (as described below), were to be settled within twelve months pursuant to their terms, they are classified as current liabilities in the consolidated balance sheets. The Company capitalized $4.6 million in lender fees associated with the issuance of the Notes and amortized such fees over the approximate seven month period ended December 31, 2020, which was the initial redemption date of the Notes. There was zero and $450,000 of accrued and unpaid interest on the New Notes as of September 30, 2023 and December 31, 2022, respectively. On January 29, 2021, the Company redeemed $50.0 million of the New Notes and on March 31, 2021, the Company reissued $50.0 million of the New Notes. On June 30, 2021, the Company issued $30.0 million in additional New Notes (the “June 2021 Merton Notes”) and amended the maturity date of the New Notes to October 15, 2021. On September 30, 2021, the Company issued $35.0 million in additional New Notes (the “September 2021 Merton Notes”) and amended the maturity date of the New Notes to December 1, 2021. The June 2021 Merton Notes and the September 2021 Merton Notes could not be used to exercise Series B Warrants issued to Starboard. On November 30, 2021, the Company amended the maturity date of the New Notes to January 31, 2022. On January 31, 2022, the Company amended the maturity date of the New Notes to April 15, 2022, and agreed to repay an aggregate of $15.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $165.0 million. On April 14, 2022, the Company amended the New Notes to extend the maturity date to July 15, 2022, permit the investment in certain types of derivative instruments and permit certain guarantees in connection with such derivative instruments, each as defined therein, and agreed to repay an aggregate of $50.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $115.0 million. On July 15, 2022, the Company amended the maturity date of the New Notes to July 14, 2023, and agreed to repay an aggregate of $55.0 million principal amount of the New Notes, resulting in a principal amount outstanding of $60.0 million (such remaining New Notes also referred to as the Senior Secured Notes). On July 13, 2023 pursuant to the Series B Warrants Exercise, the Company cancelled the remaining $60.0 million aggregate principal amount outstanding of the Senior Secured Notes. As of September 30, 2023, no Senior Secured Notes were issued or outstanding. As a result, the total principal amount outstanding of Senior Secured Notes as of September 30, 2023 and December 31, 2022 was zero and $60.0 million, respectively. Modifications to Series A Redeemable Convertible Preferred Stock and Series B Warrants The June 4, 2020 Supplemental Agreement also provided for (i) a waiver of increased dividends under the original terms of the Series A Redeemable Convertible Preferred Stock that would have otherwise accrued due to the Company’s use of the $35.0 million proceeds received from Starboard and the Investors upon the issuance of the Series A Redeemable Convertible Preferred Stock in November 2019, (ii) the replacement of original optional redemption rights for the Series A Redeemable Convertible Preferred Stock provided to both the Company and the holders that otherwise would have been nullified through the issuance of the Notes, and (iii) an amendment to the terms of the previously issued Series B Warrants to permit the payment of the lower exercise price of $3.65 through the payment of cash, rather than only through the cancellation of Notes outstanding, at any time until the expiration of the Series B Warrants on November 15, 2027. 31,506,849 of the Series B Warrants were subject to this adjustment with the remaining balance of 68,493,151 Series B Warrants continuing under their original terms. We analyzed the amendments to the Series A Redeemable Convertible Preferred Stock and determined that the amendments were not significant. Therefore, the amendments are accounted for as a modification on a prospective basis. The incremental fair value of the Series B Warrants associated with the modification of their terms in connection with the issuance of the Notes was $1.3 million and is recognized as a discount on the Notes and will be amortized to interest expense over the contractual life of the Notes. For the three and nine months ended September 30, 2023, no amount was amortized to interest expense as the discount was fully amortized during the quarter ended September 30, 2022. For the three and nine months ended September 30, 2022, $34,000 and $90,000, respectively, was amortized to interest expense. Rights Offering and Concurrent Private Rights Offering On February 14, 2023, pursuant to the requirements of the Recapitalization Agreement and in accordance with the terms of the Series B Warrants, the Company commenced a rights offering (the “Rights Offering”). Under the terms of the Rights Offering, the Company distributed non-transferable subscription rights to record holders (“Eligible Securityholders”) of the Company’s common stock held as of 5 p.m. Eastern time on February 13, 2023, the record date for the Rights Offering. The subscription period for the Rights Offering terminated at 5 p.m. Eastern time on March 1, 2023 (the “Expiration Time”). Pursuant to the Rights Offering, Eligible Securityholders received one non-transferable subscription right (a “Subscription Right”) for every four shares of common stock owned by such Eligible Securityholders. Each Subscription Right entitled an Eligible Securityholder to purchase, at such Eligible Securityholder’s election, one share of common stock at a price of $5.25 per share (the “Subscription Price”). The Investors received private subscription rights to purchase up to 28,647,259 shares of common stock at the Subscription Price pursuant to a concurrent private rights offering (the “Concurrent Private Rights Offering”) in connection with their ownership of common stock and, on an as-converted basis, the Company’s Series B Warrants and shares of the Company’s Series A Redeemable Convertible Preferred Stock. The private subscription rights provided to the Investors pursuant to the Concurrent Private Rights Offering were on substantially the same terms as the Subscription Rights, and were distributed substantially concurrently with the distribution of the Subscription Rights and expired at the Expiration Time. In connection with the Rights Offering, Starboard purchased 15,000,000 shares of common stock. The Company determined that upon entering into the Recapitalization Agreement on October 30, 2022, the Rights Offering and Concurrent Private Rights Offering and related commitment required no recognition in the Company's financial statements. The Company recognized the proceeds received from the sale of the shares in equity when the sale occurred. The Company received aggregate gross proceeds of approximately $361,000 from the Rights Offering and aggregate gross proceeds of approximately $78.8 million from the Concurrent Private Rights Offering and issued an aggregate of 15,068,753 shares of common stock. The Rights Offering was made pursuant to a prospectus supplement to the Company’s shelf registration statement on Form S-3 (No. 333-249984), filed with the SEC on February 14, 2023. Governance Under the Recapitalization Agreement, the parties agreed that for a period from the date of the Recapitalization Agreement until May 12, 2026 (the “Applicable Period”), the Board of the Company will include at least two (2) directors that are independent of, and not affiliates (as defined in Rule 144 of the Securities Exchange Act of 1934, as amended) of, Starboard, with current Board members Maureen O’Connell and Isaac T. Kohlberg satisfying this initial condition under the Recapitalization Agreement. The parties also agreed that Katharine Wolanyk would continue to serve as a director of the Company until at least May 12, 2024 (or such earlier date if Ms. Wolanyk is unwilling or unable to serve as a director for any reason or resigns as a director). Additionally, the Company appointed Gavin Molinelli as a member and as Chair of the Board. The Company and Starboard also agreed that, following the closing of the Series B Warrants Exercise until the end of the Applicable Period, the number of directors serving on the Board will not exceed 10 members. Other Provisions of the Recapitalization Agreement On February 14, 2023, the Company entered into an amended and restated Registration Rights Agreement with Starboard as contemplated by the Recapitalization Agreement. Pursuant to the amended Registration Rights Agreement, the Company has agreed to file a registration statement covering the resale of the shares of common stock, issuable or issued to Starboard pursuant to or in accordance with Section 1.1 of the Recapitalization Agreement, including the shares issued to Starboard in the Concurrent Private Rights Offering, within 90 days after a written request made prior to the first anniversary of the Closing Date (as defined in the Registration Rights Agreement). The Registration Rights Agreement also provides Starboard with additional rights to require that the Company file a registration statement in other circumstances. The Registration Rights Agreement includes other customary terms. The Recapitalization Agreement includes a “fair price” provision requiring, in addition to any other stockholder vote required by the Company’s Certificate of Incorporation or Delaware law, the affirmative vote of the holders of a majority of the outstanding voting stock held by stockholders of the Company other than Starboard and its affiliates, by or with whom or on whose behalf, directly or indirectly, a business combination is proposed, in order to approve such a business combination; provided, that the additional majority voting requirement would not be applicable if either (x) the business combination is approved by the Board by the affirmative vote of at least a majority of the directors who are unaffiliated with Starboard or (y) (i) the consideration to be received by stockholders other than Starboard and its affiliates meets certain minimum price conditions, and (ii) the consideration to be received by stockholders other than Starboard and its affiliates is of the same form and kind as the consideration paid by Starboard and its affiliates. The Recapitalization Agreement also provided that, effective as of the later of the closing of the Recapitalization Transactions and the date on which no Senior Secured Notes remain outstanding, (i) the Securities Purchase Agreement and (ii) that certain Governance Agreement, dated as of November 18, 2019, as amended and restated on January 7, 2020 (the "Governance Agreement"), shall be automatically terminated and of no further force and effect without any further action by any party thereto. As a result of the closing of the Recapitalization Transactions, the Securities Purchase Agreement and the Governance Agreement have been terminated and are of no further force and effect.

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