Partner Company Convertible Preferred Shares
|6 Months Ended|
Jun. 30, 2021
|Partner Company Convertible Preferred Shares|
|Partner Company Convertible Preferred Shares||
11. Partner Company Convertible Preferred Shares
In March 2021, our partner company Journey commenced an offering of Journey 8% Cumulative Convertible Class A Preferred Stock (the “Journey Offering”) in an aggregate minimum amount of $12.5 million and an aggregate maximum amount of $30.0 million, which may be increased if Journey and the placement agent agree to do so. The Journey Offering commenced on March 31, 2021 and terminated on July 18, 2021.
Although the Journey 8% Cumulative Convertible Class A Preferred Stock (“Journey Preferred A”) is a form of preferred stock, in substance this instrument is accounted for as a liability on the Company’s condensed consolidated balance sheet.
Dividends on the Journey Preferred A will be paid quarterly in shares of the Company’s common stock based upon a 7.5% discount to the average trading price over the 10-day period preceding the dividend payment date. In addition, if the Journey Preferred A has not been converted into Journey common stock upon a sale of Journey or a qualified financing of Journey in a gross amount of at least $25.0 million within a year of the closing (extendable by another six months at Journey’s option), then the Journey Preferred A will be exchanged for shares of the Company’s common stock, also based upon a 7.5% discount to the average Company common stock trading price over the 10-day period preceding such exchange. Furthermore, the Company is obligated to file one or more registration statements covering the issuance of shares that result from such dividends/exchange. As consideration for the foregoing, Journey will issue to the Company additional shares of Journey common stock, debt securities, or a combination of the foregoing. At June 30, 2021 the Company recorded Shares Issuable of $0.3 million representing the dividend payable on June 30, 2021 to the Journey Preferred A shareholders, the payment of which was contingent upon an effective registration statement, which was effective on July 30, 2021.
National Securities Corporation (“National”) was the primary placement agent for the Journey Offering and received a 10% fee on gross proceeds raised, plus either warrants to purchase 5% of the Journey common stock into which the Journey Preferred A converts (in the event of a sale of Journey or a qualified financing) or 5% of the Company common stock for which the Journey Preferred A is exchanged (in the event neither a sale of Journey nor a qualified financing occurs), in addition to reimbursement of legal and other expenses.
The Company evaluated the terms of the Journey Offering under ASC 480, Distinguishing Liabilities from Equity, and determined the instrument met the criteria to be recorded as a liability. The value at conversion does not vary with the value of Journey’s common shares, so the settlement provision would not be considered a conversion feature. Accordingly, the Company determined a liability classification is appropriate.
As of June 30, 2021, Journey completed three closings and issued an aggregate of 573,280 Journey Preferred A shares at a price of $25.00 per share, for gross proceeds of $14.3 million. Following the payment of placement agent fees of $1.4 million, and other expenses of $0.3 million, Journey received $12.6 million of net proceeds. A non-cash contingent warrant value of $0.4 million was also recorded in debt discount (see Note 6). This warrant was revalued at June 30, 2021 and the change in fair value of $0.2 million was recorded on the condensed consolidated statement of operations.
The Company recorded this transaction on the condensed consolidated balance sheet as a liability of $14.3 million of partner company convertible preferred shares, which is the fair value at initial recognition, and $1.8 million of debt discount associated with the share settled debt. The initial carrying value of the Journey Preferred A is accreted to the settlement value. The discount to the settlement value is accreted to interest expense using the effective interest method.
In July 2021, Journey completed two additional closings, raising a combined additional $4.6 million and paid placement agent fees of $0.5 million for net proceeds of $4.2 million.