Equity

9 Months Ended

Sep. 30, 2020

Issuance of $100 Million of Series B Convertible Preferred Stock

On July 2, 2020, the Company issued $100 million of the Company’s Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”) to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP (individually, the “Holder”, collectively the “Holders”) pursuant to a Securities Purchase Agreement with Falcon Fund 2 Holding Company, L.P., an affiliate of EW Healthcare Partners, and certain funds managed by Hayfin Capital Management LLP, dated as of June 30, 2020 (the “Securities Purchase Agreement”), for an aggregate purchase price of $100 million (the “Preferred Stock Transaction”).

The Series B Preferred Stock pays a 4.0% cumulative dividend per annum prior to the quarterly dividend payment ending on June 30, 2021, and a 6.0% cumulative dividend per annum thereafter. Dividends are declared at the sole discretion of the Company’s board of directors. Dividends are paid at the end of each quarter based for dividend amounts that accumulate beginning on the last payment date through the day prior to the end of each quarter. In lieu of paying a dividend, the Company may elect to accrue the dividend owed to shareholders. Accrued dividend balances accumulate dividends at the prevailing dividend rate for each dividend period for which they are outstanding.

Each share of Series B Preferred Stock, including any accrued and unpaid dividends, is convertible into Company’s common stock at any time at the option of the Holder at a conversion price of $3.85 per common share, or 259.74 common shares for each Series

B Preferred Share prior to any accrued and unpaid dividends. The Series B Preferred Stock, including any accrued and unpaid dividends, automatically converts into common stock at any time after the third anniversary of the issuance date, provided that the common stock has traded at 200% or more of the conversion price for 20 out of 30 consecutive trading days and on such date of conversion the common stock has traded at 200% or more of the conversion price.

Holders of the Series B Preferred Stock, voting as a class, are entitled to elect two members to the board of directors. Holders of the Series B Preferred Stock are entitled to vote on all matters to be voted on by the Company’s shareholders shall vote on an as-converted basis as a single class with the Common Stock not to exceed 19.9% of the total voting stock of the Company. Holders of the Series B Preferred Stock are also entitled to a liquidation preference in an amount equal to the original issue price plus all accrued and unpaid dividends in the event of a liquidation, dissolution, or winding-up of the Company.

The Company evaluated its Series B Preferred Stock and determined that it was considered an equity host under ASC 815, Derivatives and Hedging. As a result of the Company’s conclusion that the Series B Preferred Stock represented an equity host, the conversion feature of all Series B Preferred Stock was considered to be clearly and closely related to the associated Series B Preferred Stock host instrument. Accordingly, the conversion feature of all Series B Preferred Stock was not considered an embedded derivative that required bifurcation. The Company accounted for potential beneficial conversion features under ASC 470-20, Debt with Conversion and Other Options. At the time of the issuance of the Series B Preferred Stock, the Company’s common stock into which the Company’s Series B Preferred Stock is convertible had an estimated fair value exceeding the effective conversion price of the Series B Preferred Stock, giving rise to a beneficial conversion feature in the amount of $31.1 million. This amount was immediately recognized on the commitment date since there is no stated redemption date and the Series B Preferred Stock is immediately convertible. The amortization of the total beneficial conversion feature on the commitment date was accounted for as a deemed dividend.

The Series B Preferred Stock instrument contains an increasing-rate cumulative dividend feature. The Company determined the present value of the difference between the (1) dividends that will be payable, in the period preceding commencement of the perpetual dividend; and (2) the perpetual dividend amount for a corresponding number of periods to ascribe a fair value to this feature. The present value is calculated using a market rate for dividend yield. The Company calculated the amount of the increasing-rate dividend feature as $1.8 million. This amount is amortized as a deemed dividend to preferred shareholders using the effective interest method through the commencement date of the Perpetual Dividend Rate. During the three and nine months ended September 30, 2020, the Company recognized $0.5 million of deemed dividends related to the amortization of the increasing rate dividend feature.

If the Company undergoes a change of control, the Company will have the option to repurchase some or all of the then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference, subject to the rights of the holders of the Series B Preferred Stock in connection with such change in control. If the Company does not exercise such repurchase right, holders of the Series B Preferred Stock will have the option to (1) require the Company to repurchase any or all of its then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference or (2) convert the Series B Preferred Stock, including accrued and unpaid dividends into common stock and receive its pro rata consideration thereunder. Because the contingent redemption of the Series B Preferred Stock by the holder in the event of change in control is outside the Company’s control, the Series B Preferred Stock and related beneficial conversion feature were classified as temporary equity.

The below table illustrates changes in the Company’s balance of Series B Preferred Stock for the three months ended September 30, 2020 (in thousands except per share amounts):



	Series B Preferred Stock
	Shares	Amount
Balance at June 30, 2020	—	$	—
Issuance of Series B Preferred Stock	100,000	59,540
Deemed dividends	—	31,568
Balance at September 30, 2020	100,000	$	91,108

The below table illustrates the changes in shares and balance of the Company’s Series B Preferred Stock for the nine months ended September 30, 2020 (in thousands except per share amounts):



	Series B Preferred Stock
	Shares	Amount
Balance at December 31, 2019	—	$	—
Issuance of Series B Preferred Stock	100,000	59,540
Deemed dividends	—	31,568
Balance at September 30, 2020	100,000	$	91,108

The Company elected not to declare or pay the quarterly dividend on the Series B Convertible Preferred Stock for September 30, 2020. The dividend was $9.86 per share, or approximately $1.0 million. As this amount has not been declared, the Company has not recorded this amount on its unaudited condensed consolidated balance sheet as of September 30, 2020. Dividends in arrears as of September 30, 2020 was $1.0 million.

Based on accumulated dividends as of September 30, 2020, each share of Series B Convertible Preferred Stock was convertible into 262.33 shares of the Company’s common stock, or 26,233,055 common shares in total.