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CONVERTIBLE NOTES | 12 Months Ended
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Dec. 31, 2017
CONVERTIBLE NOTES [Abstract] |
CONVERTIBLE NOTES | NOTE 8 - CONVERTIBLE NOTES
| a. | 4.5% Convertible Notes (“2013 Notes”)
On September 18, 2013, the Company completed a private placement of $69.0 million in aggregate principal amount of Senior Convertible Notes (the “2013 Notes”), including $9.0 million aggregate principal amount of 2013 Notes related to the initial purchaser’s over-allotment option, which was exercised in full. In connection with the completion of the offering, the Company entered into an indenture with The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 2013 Notes. The 2013 Notes accrue interest at a rate of 4.50% per year, payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2014. In December 2016, $54.1 million aggregate principal amount of 2013 Notes were exchanged for 2016 Notes and shares of common stock (see also note 8b) and in July 2017, $9.0 million aggregate principal amount of 2013 Notes were exchanged for 2017 Notes as defined in note 8c (see also note 8c). Accordingly, $5.9 million aggregate principal amount of 2013 Notes remain outstanding as of December 31, 2017. The 2013 Notes mature on September 15, 2018. Holders may convert their 2013 Notes at any time prior to the close of business on the business day immediately preceding September 15, 2018. The initial conversion rate for the 2013 Notes is 173.6593 shares of the Common Stock for each $1,000 principal amount of 2013 Notes (equivalent to an initial conversion price of approximately $5.76 per share of the Common Stock). Upon conversion, the Company will deliver a number of shares of Common Stock, per $1,000 principal amount of 2013 Notes, equal to the conversion rate. The conversion rate is subject to adjustment for certain events but will not be adjusted for any accrued and unpaid interest. The following table sets forth total interest expense recognized for the years ended December 31, 2015, 2016 and 2017 related to the 2013 Notes:
|  | Year ended December 31, |
(U.S. Dollars in thousands) |  | 2015 |  | 2016 |  | 2017 |
Contractual interest expense |  | $ | 3,105 |  | $ | 2,943 |  | $ | 501 |
Amortization of debt issuance costs and debt discount |  |  | 444 |  |  | 421 |  |  | 71 |
Total |  | $ | 3,549 |  | $ | 3,364 |  | $ | 572 |
| b. | 7.5% Convertible Notes (“2016 Notes”)
On December 1, 2016, the Company entered into a note purchase agreement with institutional investors, which held part of the 2013 Notes (the “2016 Purchasers”), relating to the sale by the Company of $22.5 million aggregate principal amount of 7.50% Senior Secured Convertible Notes due 2021 in a private placement pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”). Concurrently with the consummation of the private placement of the 2016 Notes, the Company entered into a privately negotiated exchange agreement (the “2016 Exchange Agreement”) with certain existing note holders identified therein to exchange $54.1 million aggregate principal amount of the Company’s outstanding 2013 Notes for (i) $40.186 million aggregate principal amount of 2016 Notes, (ii) 23,846,735 shares of Common Stock and (iii) cash, equal to the accrued and unpaid interest on the 2013 Notes and any fractional shares. The closing date of the purchase agreement and the 2016 Exchange Agreement was December 7, 2016. The issuance of the 2016 Notes and shares in the exchange and the private placement were made in reliance on the exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof. The net proceeds from the private placement were $19.7 million, after deducting the placement agent’s fees and the Company’s estimated offering expenses. In connection with the completion of the exchange and the private placement, the Company entered into an indenture (the “2016 Indenture”) with The Bank of New York Mellon Trust Company, N.A., as trustee, governing the 2016 Notes. The 2016 Notes accrue interest at a rate of 7.50% per year, payable semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2017. A portion of the interest payable may be made in shares of Common Stock at the Company’s election. The Notes will mature on November 15, 2021; provided that all of the then-outstanding 2013 Notes, or any Permitted Refinancing Indebtedness (as defined in the 2016 Indenture) have been redeemed, repurchased, otherwise retired, discharged in accordance with their terms or converted into common stock of the Company, or have been effectively discharged, in each case on or prior to June 16, 2018 or the scheduled maturity date of the 2013 Notes (or any Permitted Refinancing Indebtedness incurred in respect thereof) is extended to a date that is after February 15, 2022, otherwise the 2016 Notes will mature on June 15, 2018. On July 24, 2017, the Company entered into another note purchase agreement with certain institutional investors relating to the private issuance and sale by the Company of $10.0 million in aggregate principal amount of its 2016 Notes. The 2016 Notes were issued pursuant to the 2016 Indenture dated (December 7, 2016). The net proceeds from this purchase agreement were $9.5 million, after deducting the Company’s offering expenses. Holders may convert their 2016 Notes at any time. The initial conversion rate for the 2016 Notes is 1,176.4706 shares of the Common Stock for each $1,000 principal amount of 2016 Notes (equivalent to an initial conversion price of approximately $0.85 per share of the Common Stock). Upon conversion, the Company may settle the 2016 Notes by paying or delivering, as the case may be, cash, shares of Common Stock or a combination thereof, at the Company’s election. During 2017, approximately $13.6 million aggregate principal amount of the Company’s 2016 Notes were converted. Settlement of the conversions resulted in the issuance of 8,827,624 shares of Common Stock and cash payments of approximately $11 million, in the aggregate. A total of $59.1 million aggregate principal amount of the 2016 Notes remains outstanding as of December 31, 2017. Prior to the maturity date, the Company may redeem in cash:
| a) | any or all of the 2016 Notes if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days exceeds 150% of the conversion price on each applicable trading day, or
| b) | all of the 2016 Notes then outstanding if the aggregate principal amount of the 2016 Notes then outstanding is less than 15% of the aggregate principal amount of the notes issued.
No redemption was made during the years 2016 and 2017. The 2016 Notes are guaranteed by the Restricted Subsidiaries (as defined in the 2016 Indenture) and are secured by a first-priority security interest in all of the present and after-acquired assets of the Company and each of the Restricted Subsidiaries (the “Collateral”), including, but not limited to, (i) 100% of the capital stock of the Guarantors (as defined in the 2016 Indenture) and each Restricted Subsidiary of the Company that is held by the Company or any Restricted Subsidiary, (ii) intellectual property, including all copyrights, copyright licenses, patents, patent licenses, software, trademarks, trademark licenses and trade secrets and other proprietary information, including, but not limited to, domain names, (iii) all cash, deposit accounts, securities accounts, commodities accounts and contract rights, (iv) all real property and leased property, subject to applicable minimum thresholds, as set forth in the 2016 Indenture, and (v) all other tangible and intangibles of the Company and the Guarantors. In connection with the grant of such liens, the Company entered into certain agreements with both Wilmington Savings Fund Society, FSB, as collateral agent in the United States, and with Altshuler Shaham Trusts Ltd., as security trustee in Israel. The 2016 Indenture restricts the ability of the Company, the Subsidiaries and any future subsidiaries to make certain investments, including transfers of the Company’s assets that constitute collateral securing the 2016 Notes, in its existing and future foreign subsidiaries, subject to certain exceptions. Upon (i) the occurrence of a fundamental change (as defined in the 2016 Indenture) or (ii) if the Company calls the 2016 Notes for redemption as described below (either event, a “make-whole fundamental change”) and a holder elects to convert its 2016 Notes in connection with such make-whole fundamental change, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares (the “Additional Shares”). In no event will the conversion rate exceed the maximum conversion rate, which is 1,787.3100 shares per $1,000 principal amount of 2016 Notes, which amount is inclusive of repayment of the principal of the 2016 Notes. If a fundamental change occurs at any time, holders will have the right, at their option, to require the Company to purchase for cash any or all of the 2016 Notes, or any portion of the principal amount thereof, that is equal to $1,000 or an integral multiple of $1,000 in excess thereof, on a date of the Company’s choosing that is not less than 20 calendar days nor more than 35 calendar days after the date of the applicable fundamental change company notice. The price the Company is required to pay for a 2016 Note is equal to 100% of the principal amount of such 2016 Note plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. For accounting purposes, since the terms of the 2013 Notes and the 2016 Notes are substantially different, the 2016 Exchange Agreement was considered as an extinguishment, which in essence means recording a gain due to the 2013 Notes that were exchanged for the 2016 Notes recorded at fair value as of the closing date. The gain on extinguishment of $14.1 million was recognized. As the settlement upon conversion was subject to compliance with the listing standards of the NYSE American, until the Company’s stockholders’ approval was obtained, the Company was prohibited by these rules from issuing shares in excess of 20% of its outstanding shares (calculated as of December 1, 2016). The accounting guidance assumed that the conversion will be settled in cash and, as such, is precluded from equity classification for any part of the 2016 Notes that may have cash settlement. As such, that part of the conversion feature was accounted for as a derivative which is bifurcated from the debt host contract and was measured at fair value through the statement of operations until the Company’s stockholders approved, in April 2017, the issuance of shares in excess of 20% of its outstanding shares. On April 12, 2017, the Company’s stockholders approved the issuance of shares of the Company’s Common Stock in excess of 20% 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 additional paid in capital. During 2017, the 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. With respect to the remainder of the 2016 Notes, for which the conversion feature qualifies for equity classification (since upon conversion the Company at its election may settle the 2016 Notes by paying cash, shares of Common Stock or a combination of cash and shares of Common Stock) separate liability (debt) and equity (conversion option) components of such 2016 Notes were recorded. The Company measures the liability according to amortized cost using the effective interest method. The Company prepared a valuation of the fair value of the 2016 Notes (a Level 3 valuation) for the issuance dates. The value of the 2016 Notes was estimated by implementing the binomial model. The liability component was valued based on the Income Approach. The following parameters were used:
|  | December 7, 2016 |  |  | July 24, 2017 |
Stock price (USD) |  |  | 0.3 |  |  |  | 0.77 |
Expected term |  |  | 4.94 |  |  |  | 4.32 |
Risk free rate |  |  | 1.86 | % |  |  | 1.74 | %
Volatility |  |  | 54.12 | % |  |  | 63.79 | %
Yield |  |  | 13.98 | % |  |  | 11.56 | %
The following table sets forth total interest expense recognized related to the 2016 Notes:
|  | Year Ended December 31, |
|  | 2016 |  | 2017 |
(U.S. Dollars in thousands) |  |  |  |  |  |  |
Contractual interest expense |  | $ | 313 |  | $ | 4,434 |
Debt discount amortization |  |  | 147 |  |  | 2,309 |
Gain on extinguishment |  |  | (14,063) |  |  |  |
Change in fair value of convertible note embedded derivative |  |  | 6,473 |  |  | 38,061 |
Interest payment in connection with conversions |  |  |  |  |  | 3,918 |
Income in connection with conversions |  |  |  |  |  | (1,643) |
Total |  | $ | (7,130) |  | $ | 47,079 |
| c. | 4.5% Convertible Notes Due 2022 (“2017 Notes”)
On July 24, 2017, the Company entered into a privately negotiated exchange agreement (the “2017 Exchange Agreement”) with certain existing note holders identified therein to exchange $9.0 million aggregate principal amount of the Company’s outstanding 2013 Notes for (i) $8.55 million aggregate principal amount of the Company’s 4.5% convertible promissory notes due 2022, (ii) $275,000 in cash consideration and (iii) cash, equal to the accrued and unpaid interest on the exchanged 2013 Notes. As the terms of the 2013 Notes and the 2017 Notes are substantially different, the 2017 Exchange Agreement was considered an extinguishment of debt, which in essence means recording a loss due to the 2013 Notes that were exchanged for the 2017 Notes recorded at fair value as of the closing date. The Company recognized a loss of $1.3 million due to the extinguishment. The Company prepared a valuation of the fair value of the 2017 Notes (a Level 3 valuation) for the issuance date. The value of the 2017 Notes was estimated by implementing the binomial model. The liability component was valued based on the Income Approach. The following parameters were used:
|  | July 24, 2017 |
Stock price (USD) |  |  | 0.77 |
Expected term |  |  | 4.57 |
Risk free rate |  |  | 1.78 | %
Volatility |  |  | 62.68 | %
Yield |  |  | 15.21 | %
The Company accounts for the convertible notes as a liability, on an aggregated basis, in their entirely. The debt discount and debt issuance costs are deferred and amortized over the applicable convertible period. All of the 2017 Notes were converted during the year ended December 31, 2017 into 11,239,641 shares of Common Stock. The following table sets forth total interest expense recognized related to the 2017 Notes:
|  | Year Ended December 31, 2017 |
(U.S. Dollars in thousands) |  |  |  |
Contractual interest expense |  | $ | 55 |
Debt premium amortization |  |  | (46) |
Loss on extinguishment |  |  | 1,325 |
Total |  | $ | 1,334 |

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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