DEBT

6 Months Ended

Jun. 30, 2018

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

NOTE 4 — DEBT

Debt is presented net of debt discounts and issuance costs (“DDIC”) in the Company’s balance sheets. As of June 30, 2018 and December 31, 2017, the net carrying value and balance sheet classification of debt is summarized as follows (in thousands):

	2018			2017
Credit Facility, net of discount	$	73,614		$	80,054
Note payable to GP Sponsor, net of discount		2,427			2,059
Total		76,041			82,113
Less current maturities		(3,677	)		(15,500	)
Long-term debt, net of current maturities	$	72,364		$	66,613

For purposes of classifying current maturities of long-term debt in the Company’s balance sheets, none of the discount is attributed to the current portion until the maturity date is less than one year from the balance sheet date. Accordingly, the $2.4 million net carrying amount of the related party note payable to GP Sponsor is classified as a current liability due to the revised maturity date in the first quarter of 2019. On July 2, 2018, the Company made a scheduled principal payment under the Credit Facility for $1.25 million. As discussed in Notes 11 and 12, the Company completed a private placement of Series A Preferred Stock and Common Stock on July 19, 2018 that resulted in gross cash proceeds of $133.0 million that were used to repay all remaining obligations under the Credit Facility. Accordingly, as of June 30, 2018, $1.25 million of the Credit Facility is classified as a current liability and the remainder of the net carrying value of $72.4 million is classified as a long-term liability due to the issuance of equity instruments that resulted in the refinancing on a long-term basis.

Credit Facility

Overview. In June 2016, the Company entered into a multi-draw term loan Financing Agreement (the “Credit Facility”) with a syndicate of lenders (the “Lenders”). The Credit Facility would have matured in June 2020 but was repaid and terminated in July 2018 as discussed in Note 12. The Credit Facility provided for an aggregate commitment of up to $125.0 million. An origination fee equal to 5.0% of the $125.0 million commitment was paid in cash to the Lenders from the proceeds of the initial term loan. The Credit Facility provided for an Original Issue Discount (“OID”) of 2.0% of the initial face amount of borrowings. Origination fees and OID have been accounted for as DDIC.

Borrowings under the Credit Facility were collateralized by substantially all assets of the Company, including certain cash depository accounts that were subject to control agreements with the Lenders. As of June 30, 2018 and December 31, 2017, the restricted cash balance under the control agreements totaled $10.2 million and $17.6 million, respectively. The Company was required to comply with various financial and operational covenants on a monthly or quarterly basis, including a leverage ratio, minimum liquidity, churn rate, asset coverage ratio, minimum gross margin, and certain budget compliance restrictions. Additionally, the covenants in the Credit Facility prohibited or limited the Company’s ability to incur additional debt, pay cash dividends, sell assets, merge or consolidate with another company, and other customary restrictions associated with debt arrangements.

Interest and Fees. The outstanding principal balance under the Credit Facility provided for monthly interest payments at 15.0% per annum, consisting of 12.0% per annum that was payable in cash and 3.0% per annum that was payable through the issuance of additional borrowings beginning on the interest payment due date (referred to as paid-in-kind, or “PIK” interest). In addition, a make-whole applicable premium payment of approximately 15.0% per annum through June 2019 was required for certain principal prepayments as defined in the Credit Facility. The Credit Facility provided for collateral monitoring fees at the rate of 2.5% of the outstanding principal balance. Until funding occurs, the Credit Facility required unused line fees of 5.0% per annum on the $17.5 million undrawn portion. All unused line fees and collateral monitoring fees were payable monthly in arrears and were recorded as a component of other debt financing expenses in the period incurred. Upon the occurrence and during the continuance of any event of default, the principal (including PIK interest), and all unpaid interest bear an additional interest rate of 2.0% per annum (the “Default Interest”) from the date such event of default occurred until it was cured or waived. The Lenders waived all Default Interest that would have otherwise been payable during periods when events of default existed.

Accretion and Amortization. DDIC that relates to the entire Credit Facility was allocated pro rata between the funded and unfunded portions of the Credit Facility based on the relative amounts that were cumulatively borrowed versus the undrawn portion of the $125.0 million commitment. DDIC related to funded debt was accreted to interest expense using the effective interest method based on the aggregate principal obligations to the Lenders and consulting and Trigger Event obligations to one of the lenders that served as the origination agent (the “Origination Agent”). DDIC associated with unfunded debt was amortized using the straight-line method from the date incurred through the maturity date of the Credit Facility, which was included in other debt financing expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

As of June 30, 2018 and December 31, 2017, accretion of DDIC related to the funded portion of the Credit Facility was at an annual rate of 28.4% and 26.3%, respectively. Excluding the impact of unused line fees, collateral monitoring fees, and amortization of DDIC related to the unfunded portion of the Credit Facility, the overall effective rate was 43.4% as of June 30, 2018 and 41.3% as of December 31, 2017.

Principal Prepayments. Under the Credit Facility, the Company was required to make payments to the Lenders when certain extraordinary cash receipts were received. Extraordinary receipts include certain insurance settlements, and court awards from litigation and appeals of judgments. As discussed in Note 7, on March 30, 2018, the Company received $21.5 million from the appeal of the Oracle litigation, of which approximately $0.5 million is payable to a third party that previously provided insurance coverage related to the litigation. On April 3, 2018, the Company paid $21.0 million consisting of $17.9 million of principal, and $3.1 million for make-whole applicable premium due to the Lenders. Since the make-whole applicable premium obligation was incurred on March 30, 2018, the Company recognized the $3.1 million expense during the first quarter of 2018. As of March 31, 2018, the Company also recognized a write off of DDIC for $7.2 million related to the $17.9 million principal prepayment that was triggered by collection of the appeal proceeds.

Funded Credit Facility Activity. Presented below is a summary of activity related to the funded debt, including allocated DDIC, for the six months ended June 30, 2018 (in thousands):

	December 31,			PIK		Liability		Cash Payments						Write-off			Accretion			June 30,
	2017			Accrual		Adjustments		Scheduled			Prepayments			DDIC			Expense			2018
Contractual liabilities:
Principal balance	$	125,872		$	1,724	$	-	$	(6,000	)	$	(17,932	)	$	-		$	-		$	103,664
Mandatory trigger event exit fees		9,672			-		3,952		-			-			-			-			13,624
Mandatory consulting fees		4,000			-		-		(2,000	)		-			-			-			2,000
Total contractual liability		139,544			1,724		3,952		(8,000	)		(17,932	)		-			-			119,288
DDIC:
Original issue discount		1,816			-		-		-			-			(234	)		-			1,582
Origination fee		4,538			-		-		-			-			(586	)		-			3,952
Amendment fee		11,521			-		-		-			-			(1,487	)		-			10,034
Fair value of warrants		6,424			-		-		-			-			(829	)		-			5,595
Consulting fees to lenders		6,519			-		-		-			-			(841	)		-			5,678
Mandatory trigger event exit fees		55,200			-		3,952		-			-			(7,314	)		-			51,838
Other issuance costs		3,600			-		-		-			-			(465	)		-			3,135
Total DDIC		89,618			-		3,952		-			-			(11,756	)		-			81,814
Cumulative accretion		(30,128	)		-		-		-			-			4,587			(10,599	)		(36,140	)
Net DDIC		59,490			-		3,952		-			-			(7,169	)		(10,599	)		45,674
Net carrying value	$	80,054		$	1,724	$	-	$	(8,000	)	$	(17,932	)	$	7,169		$	10,599		$	73,614

Related Party Note Payable

Upon consummation of the Merger Agreement with GPIA, the Company assumed an outstanding loan payable to GPIC Ltd., a Bermuda company (“GP Sponsor”) with a face amount of approximately $3.0 million. This loan is non-interest bearing and was due and payable upon the outstanding principal balance under the Credit Facility being less than $95.0 million. At inception of this loan, the maturity date was expected to occur in June 2020 based on the scheduled principal payments under the Credit Facility. Due to the $17.9 million principal prepayment on April 3, 2018 discussed above, the maturity date was accelerated to March 2019. The maturity date was subsequently changed to January 2019 effective upon the closing of the private placement discussed in Note 11.

Interest was initially imputed under this note payable assuming a maturity date in June 2020 and based on the estimated market rate of 15.0% per annum, which resulted in a discount of approximately $1.0 million as of October 10, 2017. Based on the revised maturity date of March 2019, the imputed interest rate changed to 27.7% which resulted in accretion expense of $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively.

Interest Expense

The components of interest expense for the three and six months ended June 30, 2018 and 2017 are presented below (in thousands):

	Three Months Ended				Six Months Ended
	June 30:				June 30:
	2018		2017		2018		2017
Credit Facility:
Interest expense at 12.0%	$	3,156	$	2,722	$	6,882	$	5,938
PIK interest at 3.0%		793		648		1,724		1,456
Accretion expense for funded debt		5,181		6,527		10,599		12,397
Make-whole applicable premium		-		4,607		3,103		4,607
Accretion expense for GP Sponsor note payable		160		-		367		-
Interest on other borrowings		33		37		57		79
Total interest expense	$	9,323	$	14,541	$	22,732	$	24,477

Other Debt Financing Expenses

The components of other debt financing expenses for the three and six months ended June 30, 2018 and 2017 are presented below (in thousands):

	Three Months Ended				Six Months Ended
	June 30:				June 30:
	2018		2017		2018		2017
Write-off of DDIC related to Credit Facility	$	-	$	9,668	$	7,169	$	9,668
Collateral monitoring fees		659		577		1,435		1,251
Amortization of DDIC related to unfunded debt		343		275		686		550
Unused line fees		223		226		439		445
Amortization of prepaid agent fees and other		114		113		227		227
Total other debt financing fees	$	1,339	$	10,859	$	9,956	$	12,141

Embedded Derivatives

The Credit Facility includes features that were determined to be embedded derivatives requiring bifurcation and accounting as separate financial instruments. As of June 30, 2018, the Company determined that embedded derivatives include the requirements to pay make-whole applicable premium in connection with certain mandatory prepayments of principal, and default interest due to non-credit-related events of default. These embedded derivatives are classified within Level 3 of the fair value hierarchy and have an aggregate fair value of $7.8 million and $1.6 million as of June 30, 2018 and December 31, 2017, respectively. The change in the fair value of embedded derivative liabilities resulted in a loss of $6.7 million and $0.7 million for the three months ended June 30, 2018 and 2017, respectively. The change in the fair value of embedded derivative liabilities resulted in a loss of $6.2 million and $5.8 million for the six months ended June 30, 2018 and 2017, respectively. Gains and losses resulting from changes in fair value are reflected in the Company’s unaudited condensed consolidated statements of operations.

The fair value of these embedded derivatives was estimated using the “with” and “without” method. Accordingly, the Credit Facility was first valued with the embedded derivatives (the “with” scenario) and subsequently valued without the embedded derivatives (the “without” scenario). The fair values of the embedded derivatives were estimated as the difference between these two scenarios. The fair values were determined using the income approach, specifically the yield method. As of June 30, 2018, key Level 3 assumptions and estimates used in the valuation of the embedded derivatives include timing of projected principal payments, remaining term to maturity of approximately 2.0 years, probability of refinancing the Credit Facility in July 2018 of 95%, and a discount rate of 17.0%. As of June 30, 2018, the discount rate is comprised of a risk-free rate of 2.5% and a credit spread of 14.5%. The implied credit spread of 14.5% is within the range of option-adjusted spread indications from bonds of companies with similar credit quality. As of December 31, 2017, key Level 3 assumptions and estimates used in the valuation of the embedded derivatives include timing of projected principal payments, remaining term to maturity of approximately 2.5 years, probability of default of approximately 35%, and a discount rate of 20.9%. As of December 31, 2017, the discount rate is comprised of a risk-free rate of 1.9% and a credit spread of 19.0% determined based on option-adjusted spreads from public companies with similar credit quality.