Senior Secured Convertible Notes

6 Months Ended

Sep. 30, 2022

Senior Secured Convertible Notes Abstract

Senior Secured Convertible Notes

Note 11 — Senior Secured Convertible Notes

The Company’s senior secured convertible notes at September 30, 2022 and March 31, 2022 were as follows (in thousands): 

	September 30, 2022			March 31, 2022
Senior Secured Convertible Notes	$	15,000		$	15,000
Fair value of embedded derivatives		122			18
Less: Discount		(1,388	)		(1,368	)
Net		13,734			13,650
Less: Current Portion, accrued interest		-			-
Senior Secured Convertible Notes, long-term	$	13,734		$	13,650

On September 15, 2020 (the “Closing Date”), the Company issued two-year senior secured convertible notes in the aggregate principal amount of $15.0 million (the “Harvest Notes”) to Harvest Small Cap Partners, L.P. and Harvest Small Cap Partners, Ltd. (collectively, the “Purchaser”). The Purchaser are funds affiliated with No Street Capital, a San Francisco-based investment firm.

The Harvest Notes, as amended, mature on June 3, 2024, accrue interest at 8.5% per year with interest payable quarterly in cash in arrears, and are convertible into shares of the Company’s common stock at a conversion price of $4.50 per share at the applicable Purchaser’s option, subject to certain customary adjustments such as stock splits, stock dividends and stock combinations (the “Conversion Price”). The Company does not have the right to prepay any or all of the Harvest Notes prior to their maturity.

The current portion of accrued interest related to the Harvest Notes is included in Accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.

The Company’s obligations under the Harvest Notes may be accelerated upon the occurrence of certain customary events of default (as defined in the Harvest Notes) and are guaranteed under a Subsidiary Guarantee, dated as of the Closing Date (the “Subsidiary Guarantee”), entered into by all of the Company’s subsidiaries (the “Guarantors”) in favor of the Purchaser. The Company’s obligations under the Harvest Notes and the Guarantors’ obligations under the Subsidiary Guarantee are secured under a Security Agreement, dated as of the Closing Date (the “Security Agreement”), and an Intellectual Property Security Agreement, dated as of the Closing Date (the “IP Security Agreement”), by a lien on all of the Company’s and the Guarantors’ assets and intellectual property, subject to certain exceptions. The Harvest Notes require the Company to maintain aggregate cash deposits of $7.0 million until the Harvest Notes are paid in full. In May 2021 and in connection with the Company entering into a $7 million secured revolving credit facility, the holders of the Harvest Notes subordinated their security interest and extended the maturity date of the notes to June 3, 2023. In consideration of the above, the Company issued 60,000 shares of its common stock valued at $0.3 million to the Purchaser. In July 2022, the holders of the Harvest Notes extended the maturity date of the notes to June 3, 2024.

In May 2021, the Company evaluated this agreement and determined that it was required to be accounted for as troubled debt restructuring under ASC 470-60, Troubled Debt Restructurings by Debtors. As a result, the Company recorded the shares of common stock issued to the Purchaser as an increase to Additional Paid In Capital and a corresponding debt discount included in Secured Convertible Notes, net in the accompanying condensed consolidated balance sheets.

The Company and the Purchaser also entered into a Registration Rights Agreement, dated as of the Closing Date (the “RRA”), which granted the Assignees “demand” and “piggyback” registration rights to register the shares of Common Stock issuable upon the conversion of the Notes and the Shares (collectively, the “Registrable Securities”) with the SEC for resale or other disposition. Pursuant to the RRA, the Company filed a resale Registration Statement on Form S-3 on October 14, 2020, and it was declared effective by the SEC on October 21, 2020. The Company also agreed to keep the initial Registration Statement continuously effective until the earliest to occur of (i) the date on which all of the Registrable Securities registered thereunder have been sold and (ii) the date on which all of the Registrable Securities covered by such Registration Statement may be sold without volume restriction pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”).

In connection with the SPA, and the Harvest Notes subsequent extension, Robert S. Ellin, the Company’s CEO, Chairman, director and principal stockholder, agreed not to dispose of any equity securities of the Company owned by Mr. Ellin or any entity of which he is the beneficial owner and not to cease to be the beneficial owner of any other equity securities of the Company of which Mr. Ellin was the beneficial owner as of June 3, 2021 until the Harvest Notes are paid in full (subject to certain customary exceptions), without the Purchaser’s prior written consent.

The Harvest Notes and the Shares were issued in private placement transaction that was not registered under the Securities Act, in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder.

 In July 2022, the Company entered into an amendment of notes agreement (collectively, the “Amendments”) with each of the holders of the Harvest Notes (the “Noteholders”) pursuant to which the parties agreed to (i) extend the maturity date of the Harvest Notes to June 3, 2024, (ii) defer the June 30, 2022 quarterly cash interest payment to July 18, 2022, and defer the quarterly cash interest payment for the fiscal quarter ending September 30, 2022 to be due and payable at the same time as the quarterly cash interest payment due and payable to the Noteholders for the fiscal quarter ending December 31, 2022, (iii) reduce the amount of Free Cash (as defined in the Harvest Notes) as follows (x) $7,000,000 from the Effective Date through December 31, 2022 (inclusive), (y) $8,000,000 from January 1, 2023 and until June 30, 2023 (inclusive), and (z) $10,000,000 from July 1, 2023 and until the Harvest Notes are repaid in full at their new maturity date of June 3, 2024; provided, that in the event that the Harvest Notes are repaid or prepaid by the Company, the amount of required Free Cash shall be then permanently reduced to the amount equal to the product of the aggregate principal amount of the Harvest Notes then outstanding multiplied by 2/3, and (iv) permit the Company to prepay the Harvest Notes at any time without any repayment/prepayment penalties and without the written consent of the Noteholders, subject to approval from the Company’s senior secured lender, which approval was subsequently obtained; provided, that the Company shall give the Noteholders at least five days prior written notice of any such prepayment or repayment (collectively, “Loan Modification”).

The Company and the Noteholders also agreed that if (i) at least $5,000,000 of the original principal amount of the Harvest Notes is not repaid by the Company on or prior to January 1, 2023, the conversion price of the Harvest Notes shall be amended to $3.00 per share, and the Company shall issue to the Noteholders in aggregate an additional 250,000 shares of the Company’s restricted common stock; (ii) at least $7,500,000 of the original principal amount of the Harvest Notes is not repaid by the Company on or prior to June 30, 2023, the conversion price of the Harvest Notes shall be further amended to $2.50 per share, and the Company shall then issue to the Noteholders in aggregate an additional 500,000 shares of the Company’s common stock; and (iii) the entire principal amount of the Harvest Notes then outstanding is not repaid by the Company on or prior to January 1, 2024, the conversion price of the Harvest Notes shall be further amended to $2.25 per share, and the Company shall then issue to the Noteholders in aggregate an additional 750,000 shares of the Company’s restricted common stock. In addition, in consideration of the Loan Modification, the Company issued to the Noteholders in aggregate 500,000 shares of the Company’s restricted common stock.

The Company and the Noteholders further agreed to certain Harvest Note repayment conditions as provided in the Amendments in the event that the Company or any of its subsidiaries completes an equity or debt financing in the future or if Mr. Ellin ceases to be the Company’s Chief Executive Officer and unless an equally or better qualified CEO, as determined by the majority of the Company’s then-independent directors is appointed within the time provided by the Amendments, in each case prior to the full repayment of the Harvest Notes.

In July 2022, the Company evaluated the Amendments and determined that it was not required to be accounted for as troubled debt restructuring under ASC 470-60, Troubled Debt Restructurings by Debtors. The Company also evaluated if the Amendments were required to be accounted for as an extinguishment under ASC 470-50, Debt – Modifications and Extinguishment. The Company recorded the debt as a modification and recorded the derivative associated with the conversion feature as a derivative. The Company determined the value of the derivative to be $0.1 million.

The Company recorded $0.4 million and $0.3 million in interest expense associated with the Harvest Notes for the three months ended September 30, 2022 and 2021, respectively, of which $0.2 million and $0.1 million was attributed to the accretion of the debt discount associated with the senior secured convertible notes. The Company recorded $0.5 million and $0.6 million in interest expense associated with the Harvest Notes for the six months ended September 30, 2022 and 2021, respectively, of which $0.3 million and $0.2 million, respectively, was attributed to the accretion of the debt discount associated with the senior secured convertible notes.

The Company was in compliance with all debt covenants associated with their senior secured convertible debt as of September 30, 2022.