CONVERTIBLE NOTES

12 Months Ended

Dec. 31, 2022

CONVERTIBLE NOTES

CONVERTIBLE NOTES

NOTE 10  - CONVERTIBLE NOTES

On August 25, 2021, the Company completed exchanges (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.

a.    7.5% Convertible Notes Due 2021

On December 1, 2016, the Company entered into a note purchase agreement with institutional investors, which held part of the 2018 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. Concurrently with the consummation of the private placement of the 2021 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 2018 Notes for (i) $40.186 million aggregate principal amount of 2021 Notes, (ii) 2,384,673 shares of Common Stock and (iii) cash, equal to the accrued and unpaid interest on the 2018 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 2021 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 the Indenture, dated as of December 7, 2016, with 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 (the “2016 Indenture”). The 2021 Notes accrued interest at a rate of 7.50% per year. A portion of the interest payable was allowed to be made in shares of Common Stock at the Company’s election.

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 2021 Notes. The 2021 Notes were issued pursuant to the 2016 Indenture. The net proceeds from this purchase agreement were $9.5 million, after deducting the Company’s offering expenses.

On November 15, 2021, all the then outstanding 2021 Notes matured and were paid in full, and the 2016 Indenture expired.

The following table sets forth total interest expense recognized related to the 2021 Notes:

	Year Ended December 31,
(U.S. Dollars in thousands)	2020		2021
Contractual interest expense	$	4,344	$	2,855
Debt discount amortization		3,470		2,575
Loss from extinguishment		-		831
Other expenses		1,300		-
Total	$	9,114	$	6,261

b.    7.5% Convertible Notes Due 2024

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 (the “2024 Indenture”). Interest on the Notes is payable semi-annually at a rate of 7.50% per annum. The Notes 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.

For accounting purposes, as the terms of the 2021 Notes and the 2024 Notes are substantially different, the Exchanges were 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 and a reduction of stockholders’ equity of $12.2 million.

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 net of transaction costs 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.

Holders may convert their 2024 Notes at any time. 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). Upon conversion, the Company may settle the 2024 Notes by paying or delivering, as the case may be, cash, shares of Common Stock or a combination thereof, at the Company’s election.

To date, there has been no conversion of 2024 Notes. As of December 31, 2022, a total of $28.75 million aggregate principal amount of the 2024 Notes were outstanding.

Prior to the maturity date, the Company may redeem in cash:

a)any or all of the 2024 Notes if, on or after March 31, 2023, 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 130% of the conversion price on each applicable trading day, or

b)all of the 2024 Notes then outstanding if the aggregate principal amount of the 2024 Notes then outstanding is less than 15% of the aggregate principal amount of the notes issued on August 25, 2021.

To date, there has been no redemption of 2024 Notes.

The 2024 Notes are guaranteed by the Restricted Subsidiaries (as defined in the 2024 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 2024 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 2024 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 2024 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 2024 Notes, in its existing and future foreign subsidiaries, subject to certain exceptions.

Upon (i) the occurrence of a fundamental change (as defined in the 2024 Indenture) or (ii) if the Company calls the 2024 Notes for redemption as described below (either event, a “make-whole fundamental change”) and a holder elects to convert its 2024 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 746.2686 shares per $1,000 principal amount of 2024 Notes, which amount is inclusive of repayment of the principal of the 2024 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 2024 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 2024 Note is equal to 100% of the principal amount of such 2024 Note plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. Under the terms of the 2024 Indenture, the Company is required to meet certain covenants including the requirement to maintain a minimum cash balance of at least $7.5 million. Failure to meet covenants can be considered an event of default and, accordingly, may result in the acceleration of the payment of the notes or in additional interest payments. As of December 31, 2022, the Company was in compliance with all covenants.

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:

	2021 Notes		2024 Notes
Stock price (USD)	1.34		1.34
Expected term	0.23		3.03
Risk free rate	0.05	%	0.44	%
Volatility	78.95	%	91.35	%
Yield	7.87	%	7.66	%

The following table sets forth total interest expense recognized related to the 2024 Notes:

	Year Ended December 31,
(U.S. dollars in thousands)	2021		2022
Contractual interest expense	$	767	$	2,156
Amortization of debt issuance costs and debt discount		97		300
Total	$	864	$	2,456