Table of Contents

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

  

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2022March 31, 2023
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

Commission file number:001-34743

 

“COAL KEEPS YOUR LIGHTS ON”		“COAL KEEPS YOUR LIGHTS ON”
HALLADOR ENERGY COMPANY (www.halladorenergy.com)

Colorado (State of incorporation)		84-1014610 (IRS Employer Identification No.)
1183 East Canvasback Drive, Terre Haute, Indiana (Address of principal executive offices)		47802 (Zip Code)

  

Registrant’s telephone number, including area code: 812.299.2800

  

Securities registered pursuant to Section 12(b) of the Act:
Title of each class		Trading Symbol		Name of each exchange on which registered
Common Shares, $.01 par value		HNRG		Nasdaq

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

  

Large accelerated filer ☐		Accelerated filer ☐☑
Non-accelerated filer ☑☐		Smaller reporting company ☑
		Emerging growth company ☐

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of November 11, 2022,May 8, 2023, we had 32,982,60533,137,011 shares of common stock outstanding.

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Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS  

Hallador Energy Company 

Condensed Consolidated Balance Sheets 

(in thousands, except per share data) 

(unaudited) 

See accompanying notes.

notes to the condensed consolidated financial statements.

Hallador Energy Company 

Condensed Consolidated Statements of Operations

(in thousands, except per share data) 

(unaudited) 

See accompanying notes.notes to the condensed consolidated financial statements.

Hallador Energy Company 

Condensed Consolidated Statements of Cash Flows 

(in thousands) 

(unaudited)

See accompanying notes.notes to the condensed consolidated financial statements.

 Hallador Energy Company 

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands) 

(unaudited)

See accompanying notes.notes to the condensed consolidated financial statements.

Hallador Energy Company

Notes to Condensed Consolidated Financial Statements

(unaudited) 

The interim financial data is unaudited; however, in our opinion, it includes all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements included herein have been prepared pursuant to the Securities and Exchange Commission's (the "SEC") rules and regulations; accordingly, certain information and footnote disclosures normally included in generally accepted accounting principles ("GAAP") financial statements have been condensed or omitted.

The results of operations and cash flows for the three and ninemonths ended September 30, 2022March 31, 2023, are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 20222023.

Our organization and business, the accounting policies we follow, and other information are contained in the notes to our consolidated financial statements filed as part of our 20212022 Annual Report on Form 10-K. This quarterly report should be read in conjunction with such Annual Report on Form 10-K.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. This was early adopted on January 1, 2022 and did not have a significant impact on our consolidated financial statements.

The condensed consolidated financial statements include the accounts of Hallador Energy Company (hereinafter known as “we, us, or our”) and its wholly owned subsidiaries Sunrise Coal, LLC (Sunrise)("Sunrise"), Hallador Power Company, LLC ("Hallador Power"), as well as Sunrise and Hourglass Sands, LLC (Hourglass), and Sunrise’sHallador Power's wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Sunrise is engaged in the production of steam coal from mines located in western Indiana. 

Hourglass operations ceased in August 2020.  We have remaining reclamation obligations estimated at $0.1 million, thus determined for the three months ended September 30, 2022 to distribute excess cash totaling $0.6 million to the redeemable noncontrolling interest and cancelling the remaining $3.4 million of redeemable noncontrolling interest during the same period. 

As announced in our Formthe result of Hallador Power’s acquisition of the Merom 8one-K filed on February 18, 2022, on February 14, 2022, Hallador Energy Company, through its subsidiary Hallador Power Company, LLC, entered into an Asset Purchase Agreement (the "Purchase Agreement") to acquire Hoosier Energy’s 1-Gigawatt Merom Generating Station (Merom) located gigawatt power plant in Sullivan County, Indiana in return for assuming certain decommissioning costs and environmental responsibilities. The transaction, which includes a 3.5-year power purchase agreement (PPA), closed in October 2022, as announced in our Form 8-K filed(the “Merom Power Plant”) from Hoosier Energy Rural Electric Cooperative, Inc. (“Hoosier”) on October 21, 2022.2022 (the “Merom Acquisition”), as further described in Note 14, beginning in the fourth quarter of 2022 we began to strategically view and manage our operations through two reportable segments:  Coal Operations and Electric Operations.  The remainder of our operations, which are not significant enough on a stand-alone basis to warrant treatment as an operating segment, are presented as "Corporate and Other" and primarily are comprised of unallocated corporate costs and activities, including a 50% interest in Sunrise Energy, LLC, a private gas exploration company with operations in Indiana, which we account for using the equity method, and our wholly-owned subsidiary Summit Terminal LLC, a logistics transport facility located on the Ohio River.  Prior periods have been recast to reflect Corporate and Other apart from Coal Operations, which previously were aggregated into a single reportable segment.

The Coal Operations reportable segment includes currently operating mining complexes Oaktown 1 and 2 underground mines, Prosperity surface mine, Freelandville surface mine, and Carlisle wash plant.

The Electric Operations reportable segment includes electric power generation facilities of the Merom Power Plant.

Long-lived assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable.  For the three and nine month periods ended September 30, 2022 and for the three and nine-month periods ended September 30,March 31, 2023 and 2021,March 31, 2022, there were no impairment charges recorded for long-lived assets.

Inventory is valued at a lower of average cost or net realizable value (NRV).  As of September 30, 2022March 31, 2023, and December 31, 20212022, coal inventory includes NRV adjustments of $5.8$3.0 million and $3.8$4.9 million, respectively.

On March 25, 2022,13, 2023, we executed an amendment to our credit agreement with PNC Bank, National Association (in its capacity as administrative agent, "PNC"), administrative agent for our lenders.lenders under our credit agreement, which was accounted for as a debt modification. The primary purpose of the amendment was to returnconvert $35 million of the allowable leverage ratio and debt service coverage ratio to their December 31, 2021 levels through September 30, 2022, outstanding balance on the revolver into a new term loan with the debt service coverage waived fora maturity of March 31, 2022.2024,

Onand extend the maturity date of the revolver to May 20, 2022,31, 2024. we executed an additionalThe amendment reduced the total capacity under the revolver to our credit agreement with PNC, administrative agent$85 million from $120 million and waived the maximum annual capital expenditure covenant for our lenders.  The primary purpose of this amendment was to modify the allowable leverage ratio and debt service coverage ratio through June 30, 2022, to provide relief for current and anticipated covenant violations.

On August 5, 2022, we executed an additional amendment to our credit agreement with PNC, administrative agent for our lenders.  The primary purpose of this amendment was to modify the allowable leverage ratio and debt service coverage ratio through September 30, 2022, and increased the covenant for 2023to provide relief for anticipated covenant violations.$75 million.

Bank debt was reduced by $17$10.0 million during the three months ended September 30, 2022.March 31, 2023.  Bank debt is comprised of term debt ($11.035.0 million as of September 30, 2022March 31, 2023) ) and a $120an $85 million revolver ($102.740.2 million borrowed as of September 30, 2022)March 31, 2023).  The term debt amortization concludes requires payments of $10 million each quarter commencing in June 2023, with the final payment inof $5.0 million by March 2023.  The revolver matures in September 2023.31, 2024. Our debt is recorded at amortized cost, which approximates fair value due to the variable interest rates in the agreement, and is collateralized primarily by our assets.

Liquidity

As of September 30, 2022March 31, 2023, with the provisions of the amendments, we had additional borrowing capacity of $11.6$33.6 million and total liquidity of $18.6$36.0 million.  Our additional borrowing capacity is net of $5.7$11.2 million in outstanding letters of credit as of September 30, 2022March 31, 2023, that were required to maintain surety bonds.  Liquidity consists of our additional borrowing capacity and cash and cash equivalents.

We entered into new contracts during the three months ended June 30, 2022, with significantly higher prices, thatwhich began shipping during the three months ended September 30, 2022.  These contracts substantially increaseincreased our cash flow for the remainder of 2022 and 2023.  While it is our intention to refinance our bank debt in early 2023 under similar terms, we believe we have the ability to pay off the remaining balance with operating cash flows when due in September 2023.

Fees

Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled $4.0$2.5 million as of December 31, 2021.2022. Additional costs incurred with the March 25, 2022, May 20, 2022, 13,and August 5, 2022 2023amendments totaled $2.1$1.6 million.  These costs were deferred and are being amortized over the term of the loan. Unamortized costs as of September 30, 2022March 31, 2023, and December 31, 20212022, were $3.6$2.9 million and $4.0$2.5 million, respectively.

Bank debt, less debt issuance costs, is presented below (in thousands):

Covenants

The credit facility includes a Maximum Leverage Ratio (consolidated funded debt/trailing twelve months adjusted EBITDA), calculated as of the end of each fiscal quarter for the trailing twelve months, not to exceed the amounts below:

As of September 30, 2022March 31, 2023, our Leverage Ratio of 3.501.20 was in compliance with the 4.502.25 covenant defined in the current and prior amendments.amendment.

Beginning December 31, 2022, the credit facility requires a Minimum Debt Service Coverage Ratio (consolidated adjusted EBITDA/annual debt service) calculated as of the end of each fiscal quarter for the trailing twelve months of 1.25 to 1.00 through the maturity of the credit facility. As of March 31, 2023, our Debt Service Coverage Ratio of 2.50 was in compliance with the requirements of the credit agreement.

Interest Rate

The interest rate on the facility ranges from LIBORSOFR plus 2.75%4.00% to LIBORSOFR plus 4.00%5.00%, depending on our Leverage Ratio, with a LIBOR floor of 0.50%.  We entered into swap agreements to fix the LIBOR component of the interest rate at 2.92% on the entire amount of the declining term loan balance and on $52.7 million of the revolver. The swap agreements matured in May 2022.  Ratio.  At September 30, 2022March 31, 2023, we are paying LIBORSOFR plus 4.0%4.25% on the outstanding bank debt.

Paycheck Protection Program

As previously reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2020, we entered into a Paycheck Protection Program Promissory Note and Agreement on April 15, 2020, evidencing an unsecured $10 million loan (the “PPP Loan”) under the Paycheck Protection Program (or “PPP”) made through First Financial Bank, N.A., (the "Lender"). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”).

Under the terms of the CARES Act, PPP loan recipients can apply for forgiveness. The SBA can grant forgiveness of all, or a portion of loans made under the PPP if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company used the PPP Loan proceeds for qualifying expenses and applied for the forgiveness of the PPP Loan in accordance with the terms of the CARES Act.

On July 23, 2021, we received a notification from the Lender that the SBA approved our PPP Loan forgiveness application for the entire PPP Loan balance of $10 million, together with interest accrued thereon. The Lender notified us that the forgiveness payment was received on July 26, 2021.  The forgiveness of the PPP Loan was recognized as other income.

The SBA retains the right to review the Company's loan file for a period subsequent to the date the loan is forgiven, with the potential for the SBA to pursue legal remedies at its discretion.

Revenue from Contracts with Customers

We account for a contract with a customer when the parties have approved the contract and are committed to performing their respective obligations, the rights of each party are identified, payment terms are identified, the contract has commercial substance, and collectabilityit is probable substantially all of the consideration is probable.will be collected. We recognize revenue when we satisfy a performance obligation by transferring control of a good or service to a customer.

Coal operations

Our coal revenue is derived from sales to customers of coal produced at our facilities. Our customers typically purchase coal directly from our mine sites or our rail facility in Princeton, Loop,Indiana, where the sale occurs and where title, risk of loss, and control pass to the customer at that point. Our customers arrange for and bear the costs of transporting their coal from our mines to their plants or other specified discharge points. Our customers are typically domestic utility companies. Our coal sales agreements with our customers are fixed-priced, fixed-volume supply contracts or include a pre-determined escalation in price for each year. Price re-opener and index provisions may allow either party to commence a renegotiation of the contract price at a pre-determined time. Price re-opener provisions may automatically set a new price based on the prevailing market price or, in some instances, require us to negotiate a new price, sometimes within specified ranges of prices. The terms of our coal sales agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these contracts vary by customer.

Coal sales agreements will typically contain coal quality specifications. With coal quality specifications in place, the raw coal sold by us to the customer at the delivery point must be substantially free of magnetic material and other foreign material impurities and crushed to a maximum size as set forth in the respective coal sales agreement. Price adjustments are made and billed in the month the coal sale was recognized based on quality standards that are specified in the coal sales agreement, such as Btu factor, moisture, ash, and sulfur content, and can result in either increases or decreases in the value of the coal shipped.

Electric operations

The Company concluded that the definition of a contract and the criteria in ASC 606, Revenue from Contracts with Customers ("ASC 606"), is met at the time a Power Purchase Agreement ("PPA") is executed by the parties, as this is the point at which enforceable rights and obligations are established. Accordingly, the Company concluded that a PPA constitutes a valid contract under ASC 606.

The Company will recognize revenue daily for the actual capacity made available as part of any stand-ready obligations to provide electricity for contract capacity performance obligations and daily for actual delivered electricity, plus the amortization of the contract liability as a result of the Asset Purchase Agreement with Hoosier, for the delivered energy performance obligation.

Disaggregation of Revenue

Revenue is disaggregated by primary geographic markets, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. 70%

Coal operations

52% and 79%87% of our coal revenue for the years ended threeMarch 31, 2023, and nine months ended September 30, 2022, was sold to customers in the State of Indiana with the remainder sold to customers in Florida, Georgia, and North Carolina.  67% and 72% of our coal revenue for the three and nine months ended September 30, 2021 respectively, was sold to customers in the State of Indiana, with the remainder sold to customers in Florida, North Carolina, Georgia, and North Carolina.Alabama.

Performance Obligations

Coal operations

A performance obligation is a promise in a contract with a customer to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue recognition standard and therefore determine when and how revenue is recognized. In most of our coal contracts, the customer contracts with us to provide coal that meets certain quality criteria. We consider each ton of coal a separate performance obligation and allocate the transaction price based on the base price per the contract, increased or decreased, for quality adjustments.

We recognize revenue at a point in time as the customer does not have control over the asset at any point during the fulfillment of the contract. For substantially all of our customers, this is supported by the fact that title and risk of loss transfer to the customer upon loading of the truck or railcar at the mine. This is also the point at which physical possession of the coal transfers to the customer, as well as the right to receive substantially all benefits and the risk of loss in ownership of the coal.

We have remaining coal sales performance obligations relating to fixed-priced contracts of approximately $648$511 million, which represent the average fixed prices on our committed contracts as of September 30, 2022March 31, 2023. . We expect to recognize approximately 79%65% of this coal sales revenue in2022 and 2023, with the remainder recognized thereafter.

We have remaining performance obligations relating to unpriced coal sales contracts with price re-openers of approximately $166 million, which represents our estimate of the expected re-opener price on committed contracts as of September 30, 2022March 31, 2023. . We expect to recognize all of this coal sales revenue beginning in 2024.2024.

The coal tons used to determine the remaining performance obligations are subject to adjustment in instances of force majeure and exercise of customer options to either take additional tons or reduce tonnage if such an option exists in the customer contract.

Electric operations

The Company concluded that each megawatt-hour ("MWh") of delivered energy is capable of being distinct as a customer could benefit from each on its own by using/consuming it as a part of its operations.  The Company also concluded that the stand-ready obligation to be available to provide electricity to Hoosier is capable of being distinct as each unit of capacity provides an economic benefit to the holder and could be sold by the customer.

We have remaining delivered energy obligations through 2025 totaling $170 million as of March 31, 2023.

In addition to delivered energy, Hallador provides stand-ready obligations to provide electricity, also known as contract capacity.  We have remaining capacity obligations through 2025 totaling $100 million as of March 31, 2023.

Contract Balances

Under ASC 606, the timing of when a performance obligation is satisfied can affect the presentation of accounts receivable, contract assets, and contract liabilities. The main distinction between accounts receivable and contract assets is whether consideration is conditional on something other than the passage of time. A receivable is an entity’s right to consideration that is unconditional.

Under the typical payment terms of our contracts with customers, the customer pays us a base price for the coal, increased or decreased for any quality adjustments.adjustments, electricity, or capacity. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our condensed consolidated balance sheets. As of January 1, 2021,2022, accounts receivable for coal sales billed to customers was $14.4$12.8 million. We do not currently have any other contracts in place where we would transfer coal, electricity, or capacity in advance of knowing the final price, of the coal sold, and thus do not have any other contract assets recorded. Contract liabilities also arise when consideration is received in advance of performance. As of January 1, 2023, deferred revenue for payments related to coal operations in advance of performance was $8.9 million, and deferred revenue for payments related to electric operations in advance of performance was $26.6 million.  For the quarter ending March 31, 2023, we recognized revenue from coal operations of $2.5 million as tons of outstanding coal delivery obligations were fulfilled, and we recognized revenue from electric operations of $16.0 million as outstanding capacity obligations were fulfilled.

For the ninethree months ended SeptemberMarch 31, 2023, 30,and 2022, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items and statutory rates in states in which we operate. For the nine months ended September 30,2021, with the exception of removing the forgiveness of the PPP note as a discrete item, the Company recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items, and statutory rates in states in which we operate.  The effective tax rate for the ninethree months ended September 30, 2022March 31, 2023, and 20212022 was ~ (8%)13% and ~ 31%2%, respectively. Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion in excess of tax basis. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.

For the three and ninemonths ended September 30, March 31, 2023 and 2022, our stock compensation was $1.2 million and $0.1 million, and $0.2 million, respectively. For the three and nine months ended September 30, 2021, our stock compensation was $0.3 million and $0.8 million, respectively.

Non-vested RSU grants will vest as follows:

The outstanding RSUs have a value of $3.0$9.6 million based on the September 30, 2022March 31, 2023 closing stock price of $5.62.$9.19.

As of September 30, 2022,March 31, 2023, unrecognized stock compensation expense is $2.3$6.3 million, and we had 1,050,845387,049 RSUs available for future issuance.  RSUs are not allocated earnings and losses as they are considered non-participating securities.

Information related to leases was as follows (in thousands):

Future minimum lease payments under non-cancellable leases as of September 30, 2022March 31, 2023, were as follows:

At September 30, 2022March 31, 2023, and December 31, 20212022, we had approximately $280,000$179 and $424,000,$230, respectively, of right-of-use operating lease assets recorded within “buildings and equipment” on the condensed consolidated balance sheets.

We self-insure our underground mining equipment. Such equipment is allocated among seven mining units dispersed over ten miles. The historical cost of such equipment was approximately $276$285 million and $260$280 million as of September 30, 2022March 31, 2023, and December 31, 20212022, respectively.

Restricted cash of $3.5$3.9 million and $3.3$3.4 million as of September 30, 2022March 31, 2023, and December 31, 20212022, respectively, represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments.payments and cash collateral to provide power in the MISO grid.

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. We have no Level 1 instruments.

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. We have no Level 2 instruments.

Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). OurWe have no Level 3 instruments are comprised of interest rate swaps and impairment measurements.  The fair values of our swaps were estimated using discounted cash flow calculations based upon forward interest-rate yield curves.  The notional values of our two interest rate swaps were $52.7 million and $22.1 million when they matured in May 2022.  Although we utilize third-party broker quotes to assess the reasonableness of our prices and valuation, we do not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.  Certain properties' asset retirement obligation liabilities use Level 3 non-recurring fair value measures.instruments.

The following table summarizes our financial assets and liabilities measured on a recurring basis at fair value at December 31, 2021, by the respective level of the fair value hierarchy (in thousands):

The table below highlights the change in fair value of the interest rate swaps which are based on a discounted future cash flow model (in thousands):

We own a 50% interestinterest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment and generates revenue from gas sales. Sunrise Energy plans to continue developing and exploring for oil, gas, and coal-bed methane gas reserves on or near our underground coal reserves. The carrying value of the investment included in our condensed consolidated balance sheets as of September 30, 2022March 31, 2023, and December 31, 20212022, was $4.1$3.4 million and $3.5$4.0 million, respectively.

On May 2, 2022, and May 20, 2022,we issued senior unsecured convertible notes (the "Notes") to five parties, in the aggregate principal amount of $10 million, with $9 million going to related parties affiliated with independent members of our board of directors and the remainder to a non-affiliated party. The Notes were scheduled to mature on December 29, 2028, and accrue interest at 8% per annum, with interest payable on the date of maturity. Pursuant to the terms of the Notes, the holders of the Notes may convert the entire principal balance and all accrued and unpaid interest then outstanding during the period beginning June 1, 2022, and ending on May 31, 2027, into shares of the Company Common Stock (the "Conversion Shares") at a conversion price the greater of (i)$3.33 and (ii) the 30-day trailing volume-weighted average sales price for the Common Stock on the Nasdaq Capital Market ending on and including the date on which this Note is converted. At any time on or after June 1, 2025, the Company may, at its option and upon 30 days'days written notice provided to the Holders, elect to redeem the Notes (in whole and not in part), and the Holders shall be obligated to surrender the Notes, at a redemption price equal to 100% of the outstanding Principal Balance, together with any accrued but unpaid interest thereon to the redemption date. After receipt of such redemption notice from the Company, the Holder may, at its option, elect to convert the Principal Balance and accrued interest into Conversion Shares by giving written notice of such election to the Company no later than 5five days prior to the date fixed for redemption.

In June 2022, the four holders of the $9 million related party convertible notes converted them into 1,965,841 shares of common stock of the Company, and the one holder of the $1 million convertible note converted it into 231,697 shares of common stock pursuant to the terms of the notes and their related agreements.