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CONVERTIBLE NOTES
 9 Months Ended
Sep. 30, 2021
CONVERTIBLE NOTES  
CONVERTIBLE NOTES

NOTE 5 – CONVERTIBLE NOTES

On August 25, 2021, the Company completed the Exchanges of a substantial majority of the Company’s outstanding 2021 Notes with certain institutional note holders. The Exchanges involved the exchange of an aggregate of $54.65 million principal amount of the Company’s outstanding 2021 Notes for an aggregate of $28.75 million principal amount of newly issued 2024 Notes, $25.90 million in cash, and approximately $1.1 million in cash representing accrued and unpaid interest through the issue date. The initial conversion rate for the 2024 Notes is 563.2216 shares of Common Stock for each $1,000 principal amount of 2024 Notes (equivalent to an initial conversion price of approximately $1.7755 per share of the Common Stock), subject to adjustment in certain circumstances, which is based on a 32.5% premium to the closing price of the Common Stock on the NYSE American at the close of trading on August 13, 2021, the exchange date.

The 2024 Notes were issued pursuant to an indenture entered into between the Company, the guarantors party thereto, The Bank of New York Mellon Trust Company, N.A., as trustee and Wilmington Savings Fund Society, FSB, as collateral agent. Interest on the Notes will be paid semi-annually at a rate of 7.50% per annum. The Notes will mature three years after the issuance thereof, unless earlier purchased, converted, exchanged or redeemed and are guaranteed by the Company’s subsidiaries. The 2024 Notes are secured by perfected liens on all of the assets of the Company and its subsidiaries.

Under the terms of the indentures governing each of the 2021 Notes and 2024 Notes, The Company is required to maintain a minimum cash balance of at least $7.5 million. In addition, under the exchange agreements the Company entered into with each of the institutional note holders that participated in the Exchanges (the “Exchange Agreements”), the Company agreed to maintain unrestricted cash of not less than $3.27 million, which is the amount necessary to redeem or repay at maturity all of the 2021 Notes that remain outstanding following the closing of the Exchanges.

For accounting purposes, as the terms of the 2021 Notes and the 2024 Notes are substantially different, the Exchanges are considered an extinguishment of debt. The Company allocated the fair value of the consideration transferred to the participating note holders between the 2021 Notes and their equity component based on the fair value of the liability component before the extinguishment, and the remainder was allocated to the equity component. As a result, the Company recognized a loss from extinguishment in the statement of operations equal to $0.8 million due to derecognition of the liability component of $54.8 million and the repurchase of the original equity component for $12.0 million.

All of the Company’s outstanding convertible notes are accounted for using the guidance set forth in the Financial Accounting Standards Board 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 accounted for the 2024 Notes as a liability (debt) and equity component (conversion option) as the convertible notes may be settled wholly or partly in cash, at the option of the Company, when converted. The equity component with respect to the cash conversion feature of approximately $12.0 million was recognized in the Company’s additional paid in capital.

Transaction costs in the amount of approximately $869,000 were allocated to the liability and equity component. The debt discount and debt issuance costs regarding the issuance of the 2024 Notes are deferred and amortized over the convertible notes period using the effective interest rate.

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The Company prepared a valuation of the fair value of the 2024 Notes and 2021 Notes (a Level 3 valuation) as of August 25, 2021. The value was estimated by implementing the binomial model. The liability component was valued based on the Income Approach. The following parameters were used:

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2021 Notes

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2024 Notes

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Stock price (USD)

 

1.34

​

​

1.34

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Expected term

 

0.23

​

​

3.03

​

Risk free rate

 

0.05

%

​

0.44

%

Volatility

 

78.95

%

​

91.35

%

Yield

 

7.87

%

​

7.66

%

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