Convertible Debenture

9 Months Ended

Sep. 30, 2021

Debt Disclosure [Abstract]

Convertible Debenture

Note 9. CONVERTIBLE DEBENTURE

The senior secured convertible debt comprises the following (in thousands):

	As of September 30, 2021		As of December 31, 2020
Senior secured convertible debenture	$	-	$	8,531
Unamortized original issuance discount and debt issuance costs		-		(458	)
Total convertible debt	$	-	$	8,074

On July 30, 2020, the Company consummated the Convertible Debt Financing pursuant to which the Company issued its Senior Secured Convertible Debenture in the principal amount of $8,640,000 for a purchase price of $8,000,000, which reflects an original issue discount of approximately 8% (the “Debenture”), issued pursuant to the Securities Purchase Agreement, dated as of July 30, 2020, with 3i, as collateral; agent (the “SPA”).  The maturity date of the Debenture was August 3, 2021, and the sale of the Debenture occurred on August 3, 2020.

The Debenture matured on the August 3, 2021. The Debenture accrued interest at 7% per year and was convertible into shares of common stock at the holder’s option, at a conversion price of $9.4125 per share, subject to certain customary adjustments (“Optional Conversion”).  If a holder elected to convert prior to maturity, the holder

was entitled to a cash payment for interest that would have been earned by the holder through the original maturity of the Debenture (the “Interest Make-Whole”).

Subject to the satisfaction of certain conditions, at any time, the Company could elect to redeem all or any portion of the Debenture for an amount equal to 115% of the outstanding principal balance being redeemed plus all accrued unpaid interest on the amount being redeemed and an amount due under the Interest Make-Whole (the “Optional Redemption”).

The Debenture also provided that in connection with future capital raising transactions (subject to certain exceptions), the Company must offer to use 20% of the funds raised to redeem amounts outstanding under the Debenture (“Mandatory Redemption”). Any redemption in this circumstance was to be at the election of the holder.   Consistent with the Optional Conversion or Optional Redemption provisions, the Mandatory Redemption was subject to the Interest Make-Whole.  During the nine month period ended September 30, 2021, the Company made payments under the Mandatory Redemption provision totaling $6,372,575 consisting of $5,955,678 for principal repayments and $416,897 for accrued and make-whole interest.  During the three and nine month periods ended September 30, 2021, the Company recorded amortization expense of the original issue discount on the Debenture of $86,789 and $457,737, respectively which is reflected in interest expense on its condensed consolidated statement of operations and comprehensive loss.

The Debenture contained customary representations and warranties and affirmative and restrictive covenants, including limitations on indebtedness, liens, dispositions of assets, organizational document amendments, change of control transactions, stock repurchases, indebtedness repayments, dividends, affiliate transactions and certain other matters. The Company’s obligations under the Debenture could be accelerated upon the occurrence of certain customary events of default and are secured under a security agreement by a lien on substantially all of the Company’s assets, subject to certain exceptions.  In the event of default and acceleration of the Company’s obligations, the Company would have been required to pay the outstanding principal balance of the Debenture plus all accrued unpaid interest and amounts due under the Interest Make-Whole, subject to alternate payment in the event that the event of default prevented the holder from converting the Debenture or disposing of the shares issuable thereunder, and all other amounts due in respect of the Debenture.

If the Company, at any time while this Debenture was outstanding: (i) paid a stock dividend or otherwise makes a distribution or distributions payable in shares of common stock on shares of common stock or any common stock equivalents, (ii) subdivided outstanding shares of common stock into a larger number of shares, (iii) combined (including by way of a reverse stock split) outstanding shares of common stock into a smaller number of shares or (iv) issued, in the event of a reclassification of shares of the common stock, any shares of capital stock of the Company, then the conversion price would be multiplied by a fraction, the numerator of which was to be the number of shares of common stock outstanding immediately before such event, and the denominator of which was to be the number of shares of common stock outstanding immediately after such event.

In addition to the adjustments above, if the Company granted, issued, or sold any common stock equivalents or rights to purchase stock, warrants, securities, or other property pro rata to the holders of any class of shares of common stock (the “Purchase Rights”), then upon subsequent conversion of the Debenture, the holder would be entitled to acquire the aggregate Purchase Rights which the holder could have acquired if the holder had held the number of shares of common stock acquirable upon complete conversion of the Debenture immediately before such grant, issuance or sale of Purchase Rights.

The Company evaluated the Debenture and determined that the Interest Make-Whole feature and Optional Redemption meet the definition of an embedded derivative liability measured at fair value. On the issuance date, August 3, 2020, the fair value of the bifurcated embedded derivative liability was $65,000.  

The Company incurred $50,000 in fees paid to 3i, LP (“3i”) in connection with the issuance of the Debenture. These costs were primarily allocated to the debt component and recognized as additional debt discount. The Company amortized the debt discount, including the initial value of the derivative liability of $65,000, allocated fees of $50,000 and the original issuance discount of $640,000, over the term of the Debenture using the effective interest method. The annual effective interest rate was 16.54%. Total interest expense under the Senior Secured

Convertible Debenture for the three and nine months ended September 30, 2021 was $52,000 and $358,000. As of August 3, 2021, the Company, repaid in full the Debenture by making a payment of $2,575,600 in principal and $180,292 in interest, representing all principal and interest due at maturity. The Company has no further obligation under the Debenture and incurred no early termination or prepayment penalties in connection with the repayment.

As result of the repayment of the Debenture, (i) the Security Agreement, dated as of July 31, 2020, between the Company and 3i, as collateral agent, pursuant to which the Company granted a security interest in certain assets of the Company as collateral to secure the Debenture, (ii) the Registration Rights Agreement, dated as of July 31, 2020, that provided for certain registration rights with respect to the shares of the Company’s common stock underlying the Debenture, and (iii) the SPA, were terminated.