Note 7 – Preferred Stock and Common Stock Warrants

Preferred Stock

In 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, we sold an aggregate of 29,055 shares 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 an aggregate purchase price of $29.055 million and we issued an additional 581 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 Series A Preferred Stock and the Series B Preferred Stock (collectively, “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 three months ended March 31, 2019, the Company paid-in-kind $1.6 million and $0.9 million of dividends to the holders of the Series A Preferred Stock and the Series B Preferred Stock, respectively. On March 22, 2019, the Company declared dividends to the holders of the Convertible Preferred Stock as of the close of business on March 15, 2019. On April 15, 2019, the Company paid-in-kind $1.6 million and $0.9 million of dividends to the holders of the Series A Preferred Stock and the Series B Preferred Stock, respectively.

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 revalued the Common Stock Warrants as of March 31, 2019 and recognized a loss of $0.2 million. The Common Stock Warrants are included in Level 3 of the fair value hierarchy.

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



	March 31,			December 31,
	2019			2018
Stock price	$	5.52		$	5.40
Exercise price	$	0.01		$	0.01
Risk-free rate		2.3	%		2.5	%
Volatility		29.2	%		33.1	%
Term (years)		2.5			2.7

Beneficial Conversion Feature

ASC 470-20-20 – 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 470-20 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 for each of the three months ended March 31, 2019 and March 31, 2018 was $0.5 million and zero, respectively.