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Convertible Loan

12 Months Ended

Dec. 31, 2016

6. CONVERTIBLE LOAN

On November 13, 2013, the Company entered into a loan agreement (the “RCF Loan”) with RCF, whereby RCF agreed, subject to the terms and conditions set forth in the RCF Loan, to provide a secured convertible loan facility of up to $15.0 million to the Company, which was subsequently amended on April 29, 2014 to reduce the amount available thereunder from $15.0 million to $8.0 million, all of which has been drawn. No additional amounts may be drawn under the RCF Loan.

Amounts drawn under the RCF Loan originally matured on December 31, 2016 and bore interest at 10% per annum, payable quarterly in arrears in shares of the Company’s common stock or, at RCF’s election, in cash. The number of shares to be issued as payment for interest is determined based upon the VWAP of the Company’s common stock for the 20 trading days preceding the last day of each quarter. Accordingly, the Company issued 38,086 shares of common stock on January 4, 2016 for settlement of interest expense of $0.2 million related to the three-month period ended December 31, 2015. RCF elected to receive cash in lieu of shares for the March 31, 2016, June 30, 2016 and September 30, 2016 interest payments. On June 10, 2016, the Company paid $0.3 million to RCF which included $0.2 million in interest owing from March 31, 2016 and a $0.1 million interest penalty on the late payment. On July 10, 2016, the Company paid $0.2 million to RCF in interest owing from June 30, 2016 and on October 11, 2016, the Company paid $0.2 million to RCF in interest owing from September 30, 2016.

As of December 31, 2016, interest expense of $0.1 million relating to the three-month period ended December 31, 2016 was included in accrued liabilities on the Company’s Condensed Consolidated Balance Sheets. The Company and RCF agreed to defer the payment of interest and include the amount owing in the Tranche 2 commitment of the Esousa MEA (as defined and discussed below).

On December 5, 2016, the Company entered into an agreement to retire the RCF Loan. In accordance with the terms of a Note Purchase Agreement between RCF and Esousa, Esousa agreed to purchase an initial $2.5 million amount of notes from RCF. In addition, and separately, the Company and Esousa entered into a Master Exchange Agreement (“Esousa MEA”) to exchange the initial $2.5 million amount of notes for shares of the Company’s common stock. Esousa also agreed to purchase the remaining $5.5 million amount of notes from RCF and exchange such notes for shares of the Company’s common stock, subject to certain conditions, as described below.

Under the terms of the Note Purchase Agreement and the Esousa MEA, the retirement consists of two tranches:

Tranche 1 consisted of 2,487,562 shares of common stock exchanged for the $2.5 million in principal purchased by Esousa on December 5, 2016. The number of shares issued was determined based on the VWAP over the pricing period which began on December 5, 2016 and ended on December 22, 2016, when Esousa notified the Company that it was ending the pricing period.

Tranche 2 will consist of the exchange of the remaining $5.5 million in notes for shares of the Company’s common stock at an exchange price based on the lessor of: (i) the VWAP of the common stock for the trading day of January 19, 2017; and (ii) the VWAP of the common stock for the trading day immediately preceding the date on which the Company files the final amended registration statement.

In addition to the above, the Company and RCF amended the terms of the $5.5 million notes held by RCF as of December 5, 2016 in order to extend the maturity date from December 31, 2016 to March 31, 2017 to allow the Tranche 2 process to be completed in an orderly fashion. The amendment also required interest to accrue at a rate of 15% per annum beginning January 1, 2017, such rate being the default rate per the original note agreement. No other terms of the notes were changed.

The Tranche 2 exchange was subject to the Company’s receipt of stockholder approval at a Special Meeting which was to be held on February 8, 2017. However, the Company did not reach a quorum at the Special Meeting and as a result, the Esousa MEA was terminated without executing Tranche 2. Following the Special Meeting, the Company’s Board of Directors agreed to repay the remaining $5.5 million outstanding under the RCF Loan, which was completed on February 9, 2017. No further obligations remain under the RCF Loan, subsequent to the repayment on February 9, 2016.

Upon completion of Tranche 1, the Company recorded a loss on extinguishment of $3.3 million, which was the result of the transaction being accounted for as an inducement of convertible debt which required the Company to record a loss equal to the difference between the fair value of the shares issued under the Esousa MEA and the fair value of the shares pursuant to the original conversion terms.

The following table represents the key components of the RCF Loan:

	December 31,	December 31,
	2016	2015
	(thousands of dollars)
Debt principal, beginning of period	$ 8,000	$ 8,000
Repayment of principal amount	(2,500)	-
Unamortized discount	(69)	(1,846)
Carrying value of convertible loan, end of period	$ 5,431	$ 6,154

For the periods ended December 31, 2016 and 2015, the Company recorded amortization of debt discount of $1.8 million and $1.8 million, which has been included in interest expense in the Company’s Consolidated Statement of Operations. The remaining discount will be amortized over a period of 0.25 years.