NOTE 5 – CONVERTIBLE NOTES

On July 24, 2017, the Company entered into a Note Purchase Agreement with certain institutional investors relating to the private issuance and sale by the Company of $10 million in aggregate principal amount of its 7.5% secured convertible promissory notes due 2021. The 7.5% convertible notes were issued pursuant to the base indenture dated December 7, 2016 (the existing 7.5% convertible notes).

Concurrently with the consummation of the purchase described in the Note Purchase Agreement, the Company entered into a privately negotiated exchange agreement with certain of its existing note holders to exchange $9.0 million in aggregate principal amount of the Company’s 4.5% convertible notes due 2018 for $8.55 million in aggregate principal amount of 4.5% convertible notes due 2022 (the “2017 Exchange Agreement”).

All of the Company’s outstanding convertible notes are accounted for using the guidance set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 815 requiring that the Company determine whether the embedded conversion option must be separated and accounted for separately. ASC 470-20 regarding debt with conversion and other options requires the issuer of a convertible debt instrument that may be settled in cash upon conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The Company accounts for the 4.5% convertible notes due 2018, and for the 4.5% convertible notes due 2022, as a liability, on an aggregated basis, in their entirety. The conversion feature for the Company’s existing 7.5% convertible notes is accounted for as a derivative which is bifurcated from the debt host contract and is measured at fair value through the statement of operations. On April 12, 2017, the Company received approval from its stockholders to issue shares of the Company’s Common Stock in excess of 19.9% of the Company’s outstanding shares of Common Stock to settle conversion requests and pay interest on the Company’s issued 7.5% convertible notes. As a result, the Company reclassified the embedded derivative to equity. During the nine months ended September 30, 2017 such measurement of the derivative resulted in a non-cash charge to the Company’s statement of operations of $38,061 thousand. The conversion feature of the 7.5% convertible notes issued in July 2017 is accounted for as equity, which is bifurcated from the debt host contract.

As the terms of the 4.5% convertible notes due 2018 and the 4.5% convertible notes due 2022 are substantially different, the 2017 Exchange Agreement was considered an extinguishment of debt, where the Company used fair value method to account for the 4.5% convertible notes due 2022. The Company recognized a loss of $1.3 million due to the extinguishment.

The debt discount and debt issuance costs regarding the issuance of the Company’s outstanding 4.5% convertible notes due 2018 are deferred and amortized over the applicable convertible period.

Issuance costs regarding the issuance of the Company’s 7.5% convertible notes were allocated to the liability, equity component, derivative and shares of Common Stock based on their relative fair values. Issuance costs regarding the issuance of the Company's 4.5% convertible notes due 2022 were allocated to the liability.

Issuance costs that were allocated to liability will be amortized using the effective interest rate, other than issuance costs that were allocated to derivative, which were expensed immediately.

During the nine months ended September 30, 2017, note holders converted (i) approximately $10.8 million in aggregate principal amount of the Company’s 7.5% convertible notes into a total of 5,044,484 shares of Common Stock and cash payments equal to approximately $11.0 million and (ii) approximately $3.55 million in aggregate principal amount of the Company’s 4.5% convertible notes due 2022 into a total of 4,666,751 shares of Common Stock.

The Company prepared a valuation of the fair value of the 4.5% convertible notes due 2018, for the 4.5% convertible notes due 2022 and for the 7.5% convertible notes due 2021 (a Level 3 valuation) as of September 30, 2017. The value of these notes were estimated by implementing the binomial model. The liability component was valued based on the Income Approach. The following parameters were used:

(U.S. Dollars in thousands)	4.5% notes due 2018		4.5% notes due 2022		7.5% notes due 2021
Stock price (USD)		0.58		0.58		0.58
Expected term		0.96		4.38		4.13
Risk free rate		1.33%		1.87%		1.83%
Volatility		103.71%		64.73%		66.34%
Yield		11.87%		14.22%		11.30%