Note

– Preferred Stock and

Common Stock Warrants

Preferred Stock

August 2018,

we sold an aggregate of

50,000

shares of Series A Convertible Preferred Stock, par value

$0.0001

per share (the “Series A Preferred Stock), at

$1,000

per share for an aggregate purchase price of

$50

million and we issued an additional

1,000

shares of Series A Preferred Stock in aggregate as origination fees to the purchasers of the Series A Preferred Stock. In

September 2018

and

May 2019,

we sold an aggregate of

29,055

shares and

20,945

shares, respectively, of Series B Convertible Preferred Stock, par value

$0.0001

per share (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, the “Convertible Preferred Stock”), at

$1,000

per share for a combined purchase price of

$50

million and we issued an additional

999

shares of Series B Preferred Stock in aggregate as origination fees to the purchasers of the Series B Preferred Stock. Warrants were issued together with the shares of Convertible Preferred Stock (the “Common Stock Warrants”).

The shares of Convertible Preferred Stock bear dividends at a rate of

12%

per annum, which are cumulative and accrue daily from the date of issuance on the

$1,000

stated value. Such dividends are payable quarterly and

may

be paid in cash or in-kind. During the

nine

months ended

September 30, 2019

, the Company paid-in-kind

$4.8

million and

$3.0

million of dividends to the holders of the Series A Preferred Stock and the Series B Preferred Stock, respectively. On

October 15, 2019,

the Company paid-in-kind

$1.7

million and

$1.6

million of dividends to the holders of the Series A Preferred Stock and the Series B Preferred Stock, respectively, as of the close of business on

September 15, 2019.

Common Stock Warrants

Pursuant to ASC

815

40,

Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock

, the fair value of the Common Stock Warrants was recorded as a non-current liability on our Consolidated Balance Sheet on the issuance dates. The Company revalues the Common Stock Warrants at each balance sheet date and recognized a gain of

$0.9

million and a loss of approximately

$1.0

million during each of the

three

and

nine

months ended

September 30, 2019

, respectively. The Common Stock Warrants are included in Level

of the fair value hierarchy.

The Common Stock Warrants have a fixed

three

-year term commencing on the closings of each issuance of the associated Convertible Preferred Stock. The Common Stock Warrants

may

only be exercised by the holders thereof at the expiration of such

three

-year term; however, the Company can force exercise of the Common Stock Warrants prior to expiration of such term if the volume weighted average trading price of shares of Company common stock for each trading day during any

of the prior

trading days is equal to or greater than

175%

of the Conversion Price (as defined in the certificate of designations of the applicable Convertible Preferred Stock) and, in the case of the warrants issued together with the Series B Preferred Stock (the “Series B Warrants”), also if the Company simultaneously elects to force a mandatory exercise of all other warrants then outstanding and unexercised and held by any holder of parity stock.

The Company used a Monte Carlo simulation model to estimate the fair value of the Common Stock Warrants using the following assumptions:

	September 30,			December 31,
	2019			2018
Stock price	$	5.76		$	5.40
Exercise price	$	0.01		$	0.01
Risk-free rate		1.6	%		2.5	%
Volatility		27.0	%		33.1	%
Term (years)		2.1			2.7

Beneficial Conversion Feature

ASC

470

–

Debt – Debt with conversion and Other Options

(“ASC

470

20”

) defines a beneficial conversion feature (“BCF”) as a nondetachable conversion feature that is in the money at the issuance date. The Company was required by ASC

470

to allocate a portion of the proceeds from the Series A Preferred Stock equal to the intrinsic value of the BCF to additional paid-in capital. We are recording the accretion of the

$2.5

million Series A Preferred Stock discount attributable to the BCF as a deemed dividend using the effective yield method over the period prior to the expected conversion date. Deemed dividends on the Series A Preferred Stock was

$0.3

million for each of the

three

months ended

September 30, 2019

and

2018

, and

$1.3

million and

$0.3

million for each of the

nine

months ended

September 30, 2019

and

2018

, respectively.

Initial Fair Value Allocation

Net cash proceeds from the sale of the Series B Preferred Stock in

May

2019

were allocated on a fair value basis to the Series B Warrants and on a relative fair value basis to the Series B Preferred Stock.

The allocation of the net cash proceeds is as follows (in thousands):

			Allocation of Proceeds
					Series B
			Series B		Preferred
			Warrants		Stock
Gross proceeds	$	20,945
Equity issuance costs		—
Net proceeds - Initial Fair Value Allocation	$	20,945	$	1,936	$	19,009
Per balance sheet upon issuance			$	1,936	$	19,009