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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.

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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.

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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.

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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.

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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.

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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.

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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.