Note 10 – Debt and Financing

When multiple securities are issued in a single transaction, the proceeds are first allocated to the securities that are subsequently recorded at fair value. Any residual proceeds are then allocated to the debt and other securities not accounted for at fair value. During the second quarter of 2015, the Company issued debt along with warrants, as further described below, in addition to Series C preferred stock. Because the fair value of the CT Warrant, which has been determined to be a liability, and certain embedded derivatives in the related debt agreements, exceeded the proceeds from the debt, the carrying value of the 9.0% and 15.0% Notes has been reduced to zero, and no value was assigned to the Series C preferred stock on our consolidated condensed balance sheet at inception. The excess of the fair value of the CT Warrant and embedded derivatives over the proceeds received was recognized immediately on our consolidated condensed statement of operations and comprehensive income (loss).



	Nine Months Ended
	September 30,
Long-Term Debt	2015
	(in thousands)
Beginning balance	$	—
Proceeds from 9.0% Convertible and 15% Notes to CT Energy		32,200
Proceeds from note payable to CT Energy		1,300
Repayment of note payable of CT Energy		(1,300)
Value assigned to embedded derivatives		(32,200)
Conversion of 9.0% Note, net of unamortized discount		(10)
Accretion of discount on debt		116
	$	106

On June 19, 2015, we issued the CT Warrant, 9.0% and 15.0% Notes, the additional draw note and Series C preferred stock in connection with the Purchase Agreement with CT Energy and received proceeds of $30.6 million, net of financing fees of $1.6 million. We identified embedded derivative assets and derivatives liabilities in the notes and determined that the warrant did not meet the required conditions to qualify for equity classification and was required to be classified as a warrant liability (see Note 11 – Warrant Derivative Liabilities). The estimated fair value, at issuance, of the embedded derivative asset, described below, was $2.5 million, the embedded derivative liability, described below, was $13.5 million and the warrant liability was $40.0 million. In accordance with ASC 815, the proceeds were first allocated to the fair value of the embedded derivatives and warrants, which resulted in no value being attributable to the Series C preferred stock and the 9.0% and 15.0% Notes. As a result of the allocation, we recognized a loss on the issuance of these securities of $0.0 million and $20.4 million, respectively, in our consolidated condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2015.

The face value of the 15.0% Note of $25.2 million has been recorded net of the discount related to the value allocated to the embedded derivatives and warrant. The unamortized discount was $25.1 million at September 30, 2015. The Company will accrete the discount over the life of the notes using the interest method. During the three and nine months ended September 30, 2015 the Company recognized accretion on the discount of $0.0 million and $0.1 million, respectively.

15.0% Non-Convertible Senior Secured Note due June 19, 2020

On June 19, 2015, in connection with the transaction with CT Energy described in Note 1 – Organization, we issued the five-year, 15.0% Note in the aggregate principal amount of $25.2 million with interest that is compounded quarterly at a rate of 15.0% per annum and is payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2015. If by June 19, 2016, the volume weighted average price of the Company’s common stock over any consecutive 30-day period has not equaled or exceeded $2.50 per share, the maturity date of the 15.0% Note will be extended by two years and the interest rates on the 15.0% Note will adjust to 8% (the “15.0 % Note Reset Feature”). During an event of default, the outstanding principal amount bears additional interest at a rate of 2% per annum higher than the rate otherwise applicable.

The Company may prepay all or a portion of the note at a prepayment price equal to a make-whole price, as of the prepayment date, with respect to the principal amount of the note being prepaid, plus accrued and unpaid interest. The make-whole price is defined as the greater of (i) 100% of such outstanding principal amount of the 15.0% Note and (ii) the sum of the present values as of such date of determination of (A) such outstanding principal amount of the 15.0% Note, assumed, for the purpose of determining the present value thereof, to be paid on the earlier of the stated maturity of this 15.0% Note or the date that is two years after the date of determination, and (B) all remaining payments of interest (excluding interest accrued to the prepayment date) scheduled to become due and payable after the date of determination and on or before the date that is two years after the date of determination with respect to such outstanding principal amount of the 15.0% Note, in the case of each of the foregoing clauses (ii)(A) and (B), computed using a discount rate equal to the Treasury Rate as of the date of determination plus 50 basis points.

If an event of default occurs (other than an event of default related to certain bankruptcy events), holders of at least 25% of the outstanding principal of the 15.0% Note and the 9.0% Note (as discussed below) may declare the principal, premium, if any, and accrued and unpaid interest of such notes immediately due and payable. If an event of default related to specified bankruptcy events occurs, an amount equal to the make-whole price for the 15.0% Note plus accrued and unpaid interest is immediately due and payable.

We have evaluated the 15.0% Note Reset Feature related to the interest rate and maturity date using “ASC 815 Derivatives and Hedging”. Because the interest rate and maturity date reset are linked to achievement of a certain stock price, the feature is not considered clearly and closely related to the debt host. In addition, the interest rate at the reset date is not tied to any approximation of the expected market rate at the date of the term extension as required by ASC 815. As a result, we are accounting for the 15.0% Note Reset Feature as an embedded derivative asset that has been measured at fair value with current changes in fair value reflected in our consolidated condensed statements of operations and comprehensive income (loss).

The embedded 15.0% Note Reset Feature in the 15.0% Note was valued using the ‘with’ and ‘without’ method. A Black-Derman-Toy (“BDT”) Model, which is a binomial interest rate lattice model, was used to value the 15.0% Note and the incremental value attributed to the embedded option was determined based on a comparison of the value of the 15.0% Note with the feature included and without the feature included. Key inputs into this valuation model are our current stock price, U.S. Treasury rate, our credit spread and the underlying yield volatility. As part of our overall valuation process, management employs processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value measurements and disclosures are appropriate, consistently applied, and reliable. We estimate the yield volatility for the 15.0% Note based on historical daily volatility of the USD denominated Venezuela Sovereign zero coupon yield over a look back period of 6.0 years. The risk-free interest rate is based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the 15.0% Note. The credit spread was estimated based on the option adjusted spread (“OAS”) of the Venezuelan yield over the USD Treasury yield and the implied OAS for the transaction as of the date the term sheet was signed to capture the investor’s assessment of the risk in their investment in the Company. This model requires Level 3 inputs (see Note 3 – Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements) which were based on our estimates of the probability and timing of potential future financings and fundamental transactions.

The assumptions summarized in the following table were used to calculate the fair value of the derivative asset associated with the 15.0% Note that was outstanding as of September 30, 2015 on our consolidated condensed balance sheet:



	Fair Value
	Hierarchy	As of September 30,
	Level	2015
Significant assumptions (or ranges):
Stock price	Level 1 input	$	1.39
Weighted Term (years)			5.73
Yield Volatility	Level 2 input		34	%
Risk-free rate	Level 1 input		1.3% to 1.7	%
Dividend yield	Level 2 input		0.0	%
Scenario probability:
Claim date extended with Stock Appreciation Date threshold met	Level 3 input		14.5	%
Claim date extended with Stock Appreciation Date threshold not met	Level 3 input		35.5	%
Claim date not extended with Stock Appreciation Date threshold met	Level 3 input		10.5	%
Claim date not extended with Stock Appreciation Date threshold not met	Level 3 input		39.5	%
Scenario probability (future draws/no future draws)	Level 3 input		50%/50	%

The fair value of the embedded derivative assets was $2.5 million at issuance and $3.5 million as of September 30, 2015. We recognized $0.8 million and $1.0 million, respectively, in derivative income related to this embedded derivative asset in our consolidated condensed statement of operations for the three and nine months ended September 30, 2015.

15.0% Non-Convertible Senior Secured Additional Draw Note

On June 19, 2015, in connection with the transaction with CT Energy described in Note 1 – Organization, the Company also issued the “additional draw note” which, under certain circumstances, CT Energy may elect to provide $2.0 million of additional funds to the Company per month for up to six months following the one-year anniversary of the closing date of the transaction (up to $12.0 million in aggregate). If funds are loaned under the additional draw note, interest will be compounded quarterly at a rate of 15.0% per annum and will be payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2016. If by the Claim Date, the volume weighted average price of the Company’s common stock over any consecutive 30-day period has not equaled or exceeded $2.50 per share, the maturity date of the additional draw note will be extended by two years and the interest rate on the additional draw note will adjust to 8.0%. During an event of default, the outstanding principal amount will bear additional interest at a rate of 2% per annum higher than the rate otherwise applicable.

The Company may prepay all or a portion of the additional draw note at a prepayment price equal to the make-whole price, as of the prepayment date, with respect to the principal amount of the additional draw note being prepaid, plus accrued and unpaid interest. The make-whole price with respect to the additional draw note has the same meaning described above with respect to the 15.0% Note under Note 10 – Debt and Financing.

If an event of default occurs (other than an event of default related to certain bankruptcy events), holders of at least 25% of the outstanding principal of the 15.0% Note (including the additional draw note, if outstanding) may declare the principal, premium, if any, and accrued and unpaid interest of such notes immediately due and payable. If an event of default related to specified bankruptcy events occurs, an amount equal to the make-whole price for the additional draw note plus accrued and unpaid interest is immediately due and payable.

At issuance and at September 30, 2015, we have assigned no value to the additional draw note, as it does not meet the definition of a derivative in ASC 815 and there is no principal amount outstanding.

9.0% Convertible Senior Secured Note due June 19, 2020

On June 19, 2015, in connection with the transaction with CT Energy described in Note 1 – Organization we issued the five-year, 9.0% Note in the aggregate principal amount of $7.0 million, which was immediately convertible into 8,506,098 shares of the Company’s common stock, par value $0.01 per share, at an initial conversion price of $0.82 per share (“Beneficial Conversion Feature”). On September 15, 2015, the 9.0% Note and associated accrued interest were converted into 8,667,597 shares of the Company’s common stock.

Interest on the 9% Note was compounded quarterly at a rate of 9% per annum and is payable quarterly on the first business day of each January, April, July and October, commencing October 1, 2015. If by June 19, 2016, the volume weighted average price of the Company’s common stock over any consecutive 30-day period had not equaled or exceeded $2.50 per share, the maturity date of the 9% Note will be extended by two years and the interest rates on the 9% Note will adjust to 8% (the “9% Note Reset Feature”).

Regarding the 9.0% Note Reset Feature, because the interest rate and maturity date reset were linked to achievement of a certain stock price, the feature was not considered clearly and closely related to the debt host. In addition, the interest rate at the reset date was not tied to any approximation of the expected market rate at the date of the term extension as required by ASC 815. As a result, we accounted for the 9.0% Note Reset Feature as an embedded derivative asset that was measured at fair value with current changes in fair value reflected in our consolidated condensed statements of operations and comprehensive income (loss).

The conversion price was subject to adjustment upon the occurrence of certain events, including a stock issuance, dividend, or stock split. If the Company completes an issuance of common stock at a price less than the current conversion price, then the conversion price will be fully reduced to the new issuance price for such below-price issuance (the “9.0% Down-Round Provision”). This is a full ratchet down round provision that could compensate the holder for an amount greater than dilution related to a stock issuance. For example, in the event of an issuance of stock causing a 10% dilution, the note holder could theoretically be compensated greater than 10% under certain circumstances.

The embedded 9.0% Down-Round Provision and the 9.0% Note Reset Feature were valued using the ‘with’ and ‘without’ method. A Binomial Lattice Model was used to value the 9.0% Note and the incremental value attributed to the embedded options was determined based on a comparison of the value of the 9.0% Note with the features included and without the features included. Key inputs into this valuation model were our current stock price, U.S. Treasury rate, our credit spread and the underlying stock price volatility. As part of our overall valuation process, management employs processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value measurements and disclosures are appropriate, consistently applied, and reliable. We estimated the volatility of our common stock based on historical volatility that matches the expected remaining life of the longest instrument in the transaction, seven years. The risk-free interest rate was based on the U.S. Treasury yield curve as of the valuation dates for a maturity similar to the expected remaining life of the 9.0% Note. The credit spread was estimated based on the option adjusted spread (“OAS”) of the Venezuelan yield over the USD Treasury yield and the implied OAS for the transaction as of the date the term sheet was signed to capture the investor’s assessment of the risk in their investment in the Company. This model requires Level 3 inputs (see Note 3 – Summary of Significant Accounting Policies, Financial Instruments and Fair Value Measurements) which were based on our estimates of the probability and timing of potential future draws.

We have evaluated the 9% Down-Round Provision and the 9% Note Reset Feature using ASC 815. The Convertible Down-Round Provision is not consistent with a fixed-price-for-fixed-number of shares instrument and therefore precludes the conversion option from being indexed to the Company’s own stock. As a result, the conversion option did not meet the scope exception in ASC 815 and was bifurcated as a separate liability that has been measured at fair value with current changes in fair value reflected in our consolidated condensed statements of operations and comprehensive income (loss).

The fair value of the embedded derivative liability was $13.4 million at issuance, $13.0 million at June 30, 2015, and $11.2 million immediately prior to the conversion of the 9.0% Note. We recognized $1.9 million and $2.3 million, respectively, in derivative income related to this embedded derivative liability in our consolidated condensed statement of operations for the three and nine months ended September 30, 2015.