Background on Convertible Notes

Alternative Financing Sources – Potential Opportunities for Public Companies

Mike Blankenship Cab Morris

Partner, Houston Partner, Chicago [email protected] [email protected]

Charlie Haag Christina Roupas

Partner, Dallas Partner, Chicago [email protected] [email protected]

Eric Johnson David Sakowitz

Partner, Houston Partner, New York [email protected] [email protected]

© 2020 Winston & Strawn LLP 2 Today’s Presentation • Convertible Notes and Concurrent Hedging Transactions • Rights Offerings • At-the-Market Offerings (ATMs) • Private Investment in Public Equity (PIPE) Offerings • Baby Bonds • Q&A

© 2020 Winston & Strawn LLP Background on Convertible Notes • Convertible notes are debt securities that may be converted into shares of the issuer’s common stock (or cash, at the issuer’s election) upon certain specified conditions • Significant recent uptick in convertible note offerings for issuers experiencing artificial stock price depression as a result of COVID-19 and other market conditions • Convertible notes are an attractive financing alternative for issuers in the current market for the following reasons: • Lower interest rates than non-convertible debt, allowing issuers to preserve cash flow • Typically unsecured • No financial or operating covenants restricting the issuer’s operations • Convertible only at a substantial premium to current market price of common stock, resulting in less dilution than an equity offering • Derivative products available to help companies mitigate potential dilution

Term Description Interest Lower than non-convertible debt; accrues semi-annually in arrears Ranking Senior unsecured debt; subordinated to any existing or future senior secured debt Maturity Five to six years Conversion Price 10% to 35% above last closing price of the issuer’s common stock; investors require higher interest rates for a higher conversion premium Shares Issuable Upon Conversion Face value of notes being converted divided by the conversion price

Conversion Triggers • The underlying stock trades at a substantial premium (20% to 30%) above the conversion price (usually 20 trading days in a 30-trading day period) • The notes trade below a specified value (97% to 98%) for a period of time (usually 10 trading days) • Upon certain corporate events such as mergers or delisting of the issuer’s common stock (a “fundamental change”) or the issuer calling notes for redemption • Free conversion for a period prior to maturity (usually 4½ to 6 months prior to maturity) Settlement Settled in shares of common stock or cash or both, at the issuer’s election Optional Redemption If there is an optional redemption feature, non-callable for first three years and may be provisionally redeemed if underlying stock trades at a substantial premium (120%-130%) to the conversion price; redemption constitutes a make- whole fundamental change

Fundamental Change Repurchase Right Upon a fundamental change, holders have a put right requiring the issuer to repurchase their notes for cash at face value, plus any accrued but unpaid interest Make-Whole Fundamental Change In the event of a fundamental change or the redemption of the notes, the conversion rate will be temporarily increased to compensate holders for the lost option value of their notes

• Lower interest rates than traditional debt allow issuers • Negative impact on the market price of the underlying to preserve cash flow common stock due to potential dilution as well as note investors selling stock to establish initial hedge position • Less dilution than an equity offering at depressed • Potential significant dilution upon conversion of a stock price large amount of notes

• No financial or operating covenants • Complex tax and accounting issues

• Can be executed in registered or unregistered • Authorization and stock exchange listing process for offerings without a rating, allowing quick execution shares underlying the convertible notes

• Ability to enter into call-spread or capped call • Significant up-front cash costs for hedging transactions to effectively increase conversion price transactions with broad discretion to counterparties and mitigate dilution

© 2020 Winston & Strawn LLP 7 Other Considerations for Issuers • Authorized Shares • An issuer must confirm that it has enough authorized shares available to issue the maximum number of shares required upon conversion (including in the case of a make- whole fundamental change) • Increasing the number of authorized shares requires a charter amendment requiring stockholder approval, which is likely to delay the offering • Existing Debt • Amendments to, or consents under, existing debt agreements may be necessary to issue convertible debt and/or enter into concurrent hedging transactions as well as to make interest or other payments on the notes

© 2020 Winston & Strawn LLP 8 Other Considerations for Issuers (Cont’d) • Stock Exchange Requirements • NYSE and NASDAQ rules generally require stockholder approval for issuances in excess of 20% of the outstanding shares • Convertible note issuances typically qualify for an exception to the stockholder approval requirements for issuances at a price that is equal to or in excess of the issuer’s stock price • However, if the proceeds of a convertible note offering are being used to finance an acquisition, the convertible note offering must be reviewed under the NYSE’s and NASDAQ’s acquisition rules, in which case shares issuable upon conversion of the notes must be aggregated with any shares issued in the acquisition to determine whether more than 20% of the outstanding shares may be issuable as part of an acquisition and require stockholder approval • Tax and Accounting Considerations • Issuers should engage tax and accounting advisors early to determine appropriate structuring (including as it relates to any concurrent hedging transactions) based on the issuer’s specific circumstances

© 2020 Winston & Strawn LLP 9 Concurrent Hedging Transactions • Hedging transactions are entered into with one or more financial institution counterparties, which may include the underwriters or initial purchasers in the note offering or their affiliates • Have the effect of effectively raising the conversion price of the notes (typically 75% to 100%), thereby limiting the dilution risk • Approximately 55% of all convertible note offerings since 2019 have included a concurrent hedging transaction • Typically structured as: • Call Spread Overlay • The issuer purchases a bond hedge that entitles the issuer to receive from the counterparty some or all of the shares or cash due upon conversion of the notes if and when they are converted • The issuer simultaneously issues warrants to the counterparties at an initial strike price that is higher than the conversion price • Effectively, the conversion price is increased to the strike price of the warrants

© 2020 Winston & Strawn LLP 10 Concurrent Hedging Transactions (Cont’d) • Capped Call Option • The issuer purchases a bond hedge that entitles the issuer to receive from the counterparty some or all of the shares or cash due upon conversion of the notes if and when they are converted, with a cap on the value of the shares or cash due upon settlement • Upfront cost of hedge is determined through a competitive bid process by potential counterparties and is a percentage of the face value of the notes to be issued; premium increases as effective conversion premium increases • Another way that issuers can limit dilution is to use a portion of the proceeds from the note offering to conduct a contemporaneous share repurchase that settles at the same time as the note offering • This approach can have the effect of reducing downward pressure on the stock as shares are purchased from note investors that would otherwise sell short to establish their initial hedge position

© 2020 Winston & Strawn LLP 11 Documents Needed for Convertible Note Offerings • Purchase / Underwriting Agreement • Sets forth the agreements of the issuer to sell the convertible notes and the initial purchasers or underwriters to purchase the notes, including related representations and warranties, indemnification and conditions to closing • Also contains a “clear market” provision prohibiting the issuer from issuing shares for a specified period of time following the offering (typically 45 to 90 days), subject to certain exceptions • Lock-Up Agreements • The underwriters or initial purchasers will require that executive officers, directors and certain significant stockholders of the issuer agree not to sell shares or engage in certain other activities relating to the stock for a specified period of time following the offering (typically 45 to 90 days), subject to certain exceptions

© 2020 Winston & Strawn LLP 12 Documents Needed for Convertible Note Offerings (Cont’d) • Registration Statement and Prospectus / Offering Memorandum • For a registered offering, an issuer will need to have an effective registration statement and a prospectus or prospectus supplement for an offering off a Form S-3 or F-3 registration statement that sets forth information about the issuer and the terms of the offering • For an unregistered offering under Rule 144A, an issuer will use an offering memorandum that contains substantially the same information that would be included in a prospectus • Indenture • Agreement between the issuer and the trustee setting forth the terms of the notes • Due Diligence Documents • As a part of the diligence process, the issuers will provide legal and business due diligence information, including back-up support for information contained in the offering document, and the issuer’s auditor will provide a comfort letter as it relates to certain financial information contained in the offering document

© 2020 Winston & Strawn LLP 13 Documents Needed for Convertible Note Offerings (Cont’d) • Exchange Listing of Additional Shares • Issuers need to notify the stock exchange on which their shares are listed as to the potential issuance of new shares upon conversion of the notes • Stock exchange approval is typically a condition to closing the offering; however, given COVID-19 related delays, initial purchasers and underwriters are typically willing to waive the closing condition if no issue is expected • Bond Hedge Confirmations / Warrants • Bond hedge confirmations and warrants set forth the terms of a call spread overlay transaction and must be entered into with each counterparty to the hedge (often two to three) • Bond hedge confirmations set forth the terms of a capped call transaction and also must be entered into with each counterparty to the hedge (often two to three) • If the option to purchase additional notes is exercised by the initial purchasers/underwriters, additional hedging documentation will be entered into with the same counterparties with respect to the additional notes

Total Total Pricing Proceeds Call Spread Optional First Put / Pricing Proceeds Call Spread Optional First Put / Date I ssuer Type ($M) Coupon Premium Premium Redemption Maturity Date I ssuer Type ($M) Coupon Premium Premium Redemption Maturity

05/28/20 Cerence Debt $150 3.000% 35.0% --- NC-3, PC 130% w/ MW 5.5 05/07/20 Huazhu Debt $500 3.000% 30.0% --- Non-callable 4.0

05/28/20 Datadog Debt 650 0.125% 37.5% 125.0% NC-3, PC 130% w/ MW 5.0 05/07/20 Spirit Airlines Debt 201 4.750% 27.5% --- Non-callable 5.0

05/28/20 Bilibili Debt 700 1.250% 32.5% --- Non-callable 7.0 05/07/20 Danaher Mand. 1,718 5.000% 22.5% --- Non-callable 3.0

05/27/20 Silicon Labs Debt 500 0.625% 35.0% --- NC-3, PC 130% w/ MW 5.0 05/07/20 Stanley Black & Decker Pfd. 750 5.000% 35.0% --- NC-1 NA

05/27/20 NuVasive Debt 400 1.000% 32.5% 65.0% Non-callable 3.0 05/07/20 Inseego Debt 115 3.250% 20.0% --- NC-3, PC 130% w/ MW 5.0

05/26/20 1Life Debt 275 3.000% 30.0% --- NC-3, PC 130% w/ MW 5.0 05/06/20 Apellis Pharmaceuticals (Tack-on) Debt 300 3.500% 10.1% 76.2% NC-4, PC 130% w/ MW 7.0 05/06/20 Varonis Debt 253 1.250% 30.0% 100.0% NC-3, PC 130% w/ MW 5.3 05/21/20 Under Armour Debt 440 1.500% 27.5% 75.0% NC-2.5, PC 130% w/ MW 4.0 05/05/20 Norwegian Cruise Line Debt 863 6.000% 25.0% --- Non-callable 4.0 05/21/20 Five9 Debt 650 0.500% 30.0% 100.0% NC-3, PC 130% w/ MW 5.0 05/05/20 Bloomin' Brands Debt 230 5.000% 25.0% 75.0% NC-3, PC 130% w/ MW 5.0 05/21/20 Boston Scientific Mand. 1,006 5.500% 22.5% --- Non-callable 3.0 05/04/20 Chewy Mand. 690 6.500% 20.0% --- Non-callable 3.0 05/20/20 Beckton Dickinson Mand. 1,500 6.000% 20.0% --- Non-callable 3.0 04/29/20 NeoGenomics Debt 201 1.250% 27.5% --- NC-3, PC 130% w/ MW 5.0 05/20/20 Cryoport Debt 115 3.000% 15.0% --- NC-3, PC 130% w/ MW 5.0 04/29/20 Callaway Golf Debt 259 2.750% 30.0% 100.0% NC-3, PC 130% w/ MW 6.0 05/19/20 Tricida Debt 200 3.500% 25.0% --- NC-4, PC 130% w/ MW 7.0 04/28/20 Southwest Airlines Debt 2,300 1.250% 35.0% --- Non-callable 5.0 05/19/20 Model N Debt 173 2.625% 27.5% --- NC-3, PC 130% w/ MW 5.0 04/28/20 CNX Resources Debt 345 2.250% 20.0% 70.0% NC-3, PC 130% w/ MW 6.0 05/19/20 Sea Limited Debt 1,150 2.375% 32.5% 100.0% NC-3, PC 130% w/ MW 5.5 04/28/20 Rapid7 Debt 230 2.250% 30.0% 100.0% NC-3, PC 130% w/ MW 5.0 05/19/20 RealPage Debt 345 1.500% 30.0% 100.0% NC-3, PC 130% w/ MW 5.0 04/27/20 Copa Holdings Debt 350 4.500% 25.0% --- NC-3, PC 130% w/ MW 5.0 05/18/20 Gossamer Bio Debt 200 5.000% 22.5% --- NC-4, PC 130% w/ MW 7.0 04/27/20 Farfetch Debt 400 3.750% 35.0% --- NC-4, PC 130% w/ MW 7.0 05/18/20 Envista Holdings Debt 518 2.375% 32.5% 50.0% NC-3, PC 130% w/ MW 5.0 04/23/20 EQT Debt 500 1.750% 20.0% 50.0% NC-3, PC 130% w/ MW 6.0 05/14/20 PetIQ Debt 144 4.000% 25.0% 75.0% NC-3, PC 130% w/ MW 6.0 04/23/20 Snap Debt 1,000 0.250% 35.0% 100.0% NC-3, PC 130% w/ MW 5.0 05/14/20 Colliers International Debt 230 4.000% 32.5% --- NC-3, PC 130% w/ MW 5.0 04/22/20 American Eagle Outfitters Debt 415 3.750% 30.0% --- NC-3, PC 130% w/ MW 5.0 05/14/20 Teladoc Debt 1,000 1.250% 35.0% --- NC-4, PC 130% w/ MW 7.0 04/21/20 Inphi Debt 506 0.750% 32.5% 100.0% NC-3, PC 130% w/ MW 5.0 05/13/20 Plug Power Debt 200 3.750% 22.5% 60.0% NC-3, PC 130% w/ MW 5.0 04/20/20 2U Debt 380 2.250% 27.5% 100.0% NC-3, PC 130% w/ MW 5.0 05/13/20 Veeco Instruments Debt 125 3.750% 32.5% 75.0% NC-4, PC 130% w/ MW 7.0 04/16/20 Cree Debt 575 1.750% 32.5% --- NC-3, PC 130% w/ MW 6.0 05/12/20 Cantel Medical Debt 168 3.250% 30.0% --- NC-3, PC 130% w/ MW 5.0 04/14/20 Dick's Sporting Goods Debt 575 3.250% 35.0% 100.0% NC-3, PC 130% w/ MW 5.0

05/12/20 Tandem Diabetes Care Debt 288 1.500% 30.0% 100.0% NC-3, PC 130% w/ MW 5.0 04/14/20 Coherus Debt 230 1.500% 30.0% 75.0% Non-callable 6.0

05/12/20 Cloudflare Debt 575 0.750% 30.0% 100.0% NC-3, PC 130% w/ MW 5.0 04/13/20 Natera Debt 288 2.250% 30.0% --- NC-4, PC 130% w/ MW 7.0

05/12/20 Lyft Debt 650 1.500% 30.0% 150.0% NC-3, PC 130% w/ MW 5.0 04/13/20 Burlington Stores Debt 805 2.250% 32.5% --- NC-3, PC 130% w/ MW 5.0

05/12/20 Zillow Group Debt 565 2.750% 40.0% --- NC-3, PC 130% w/ MW 5.0 04/13/20 Sabre Corporation Debt 345 4.000% 32.5% --- Non-callable 5.0

05/11/20 ArcelorMittal Mand. 1,250 5.500% 17.5% --- Non-callable 3.0 04/08/20 Health Catalyst Debt 230 2.500% 27.5% 75.0% NC-3, PC 130% w/ MW 5.0

05/11/20 BioMarin Pharmaceuticals Debt 600 1.250% 42.5% --- NC-4, PC 130% w/ MW 5.0 04/08/20 Booking Holdings Debt 863 0.750% 37.5% --- Non-callable 5.0

05/11/20 DexCom Debt 1,208 0.250% 42.5% --- NC-3, PC 130% w/ MW 5.5 04/07/20 Chimera Investment Debt 325 7.000% 0.0% 30.0% Non-callable 3.0

05/11/20 Penn National Gaming Debt 330 2.750% 30.0% --- NC-3, PC 130% w/ MW 6.0 04/06/20 Slack Technologies Debt 863 0.500% 27.5% 100.0% NC-3, PC 130% w/ MW 5.0

05/11/20 Pioneer Natural Resources Debt 1,323 0.250% 30.0% 85.0% NC-3, PC 130% w/ MW 5.0 04/01/20 Nevro Debt 190 2.750% 25.0% 75.0% Non-callable 5.0

05/07/20 Luminex Debt 260 3.000% 12.5% 80.0% Non-callable 5.0 04/01/20 Carnival Corporation Debt 2,013 5.750% 25.0% --- Non-callable 3.0

05/07/20 National Vision Debt 403 2.500% 27.5% --- NC-3, PC 130% w/ MW 5.0 Average: $560 2.781% 28.3% 86.0% 5.1

© 2020 Winston & Strawn LLP What are Rights Offerings? • Provides an issuer’s existing stockholders the opportunity to buy a pro rata portion of additional shares (the “rights”) at a set subscription price that is a discount to recent trading prices of the issuer’s common stock • Rights are distributed on a specified record date • No dilutive effect on stockholders that exercise their rights • Rights are generally non-transferable and a stockholder that does not exercise its rights will be diluted by the issuance of shares to stockholders that do exercise their rights • An issuer may elect to make rights transferable, which allows holders to trade their rights at a profit to offset their dilution in the offering • Transferable rights add significant complexity as the rights may need to be registered and listed on a stock exchange • Rights offerings are typically open for 16 to 30 days during which rights can be exercised • Over-subscription privilege allows stockholders that fully exercise their rights to subscribe for additional shares in the offering, which will be allocated pro rata among stockholders utilizing the over-subscription privilege • No stockholder approval required for issuances in excess of 20% of the outstanding shares

Backstopped Rights Offering Direct Rights Offering A third party, such as an investment bank, agrees to buy the No backstop commitment party or standby purchaser shares associated with any rights not exercised in the rights offering

Provides issuer with a guarantee that it will raise a specified Low subscription levels may leave the issuer without adequate amount of capital capital

Additional fees associated with backstop commitment need to Less expensive be factored into offering size

Most often used when there are specific capital needs (e.g., to Most often used by issuers that do not have a specific capital finance an acquisition) or the issuer’s stock price is volatile need and issuers that have had an identified interest in buying (which could result in the stock price being lower than the shares from one or more existing stockholders subscription price at the end of the offering period when most stockholders decide whether to exercise their rights)

An existing investor or related party of the issuer may backstop a rights offering for a small or no fee; however, consideration should be given to whether such backstop commitment party needs to register as a broker-dealer

© 2020 Winston & Strawn LLP 18 Documents Needed for Rights Offerings • Registration Statement and Prospectus • An issuer will need to have an effective registration statement and a prospectus or prospectus supplement for an offering off a Form S-3 or F-3 registration statement that sets forth information about the issuer and the terms of the offering • The registration statement will register the shares issuable upon exercise of the rights but does not need to register the rights themselves unless such rights are transferable • Standby Purchase Agreement • Sets forth the terms of the backstop, if any, being provided by a third party • Exchange Listing of Additional Shares • Issuers need to notify the stock exchange on which their shares are listed as to the potential issuance of new shares upon exercise of the rights and, if transferable, the rights themselves

© 2020 Winston & Strawn LLP 19 Documents Needed for Rights Offerings (Cont’d) • Press Release • The stock exchanges require public notification of a rights offering and record date at least ten days in advance of launching the offering • Subscription Documents • Letters to holders, election forms, subscription rights certificate (if rights are transferable) • Due Diligence Documents • Certain due diligence will be required if there is a standby purchaser

© 2020 Winston & Strawn LLP What are ATMs? • Follow-on offerings where public companies sell newly issued shares into a secondary trading market through broker-dealers • As broker-dealers sell the shares on the secondary market, the issuing company receives cash, which can be used for a variety of purposes • The company can work with the broker-dealer to change the price and manner in which the shares are offered, depending on market conditions and the company’s needs, which gives companies much more flexibility than a traditional offering which has fixed prices and amounts

© 2020 Winston & Strawn LLP 22 Documents Needed for an ATM Offering • Registration Statement • Before an issuer can launch an ATM offering, it needs an effective registration statement on Form S-3 or Form F-3 • Distribution/Sales Agreement • Entered into with broker-dealers where the issuer engages the broker-dealers to sell shares of its common stock at various prices and the broker-dealers agree to use reasonable efforts to sell the shares at the issuer’s directives • Due Diligence • Issuers will have to provide substantial underwriting diligence, including auditor comfort letters, legal opinions and 10b-5 negative assurance, and back-up documentation • There is a quarterly bring-down to continue to keep the program open

Advantages Disadvantages Limited Market Impact Size • After disclosure of launch of an ATM program, issuers do not • ATMs are generally smaller than traditional offerings, and have to announce offerings, and can “trickle” or “dribble companies typically can’t raise large amounts of capital with out” shares into the market, rather than having them hit the ATMs at any one time market at one time Control/Flexibility Fluctuation • The timing/size of sales can be varied on a daily basis, and • As market conditions vary, the cost of entering into ATMs issuers can institute floors under which shares can’t be can vary offered or limits on how many shares can be sold at any one time Lower Cost Publicity • Issuers do not have to market their offerings, face lower • Unlike PIPEs and other private placements, ATMs are distribution costs than for standard offerings, and have more registered offerings that involve public disclosure limited disclosure requirements

Limited Board Involvement Documentation • § 152 of the DGCL permits the Board to issue a general • Issuers must have a Form S-3 or F-3 that is already effective authorizing resolution for the issuance of stock which in order to launch an ATM, and the ATM will require delegates authority to management to determine many of additional documents, like comfort letters, opinions, reps the specifics and warranties, and more, before sales can occur

Impact on Stock Price Moderate to Substantial Moderate

Timing Longer (Often 1 Month or More) Shorter (Often Same Day)

Frequency New Process per Offering ∞ Equity Sales for 3 Years

Control on Sale Terms Less Discretion More Discretion

Fees 4-7% to the Underwriter(s) 1-3% to the Sales Agent(s)

Management Involvement Substantial (Roadshows, etc.) Little to None

Lock-Ups Yes (Issuer’s Executives) No

© 2020 Winston & Strawn LLP 25 Applicability of ATMs to the Current Market • In 2020, 101 new ATMs have already been announced, covering $14.3 billion, with numbers increasing markedly as market volatility increases • ATMs are a great option for issuers looking for capital in volatile markets, because issuers can start and stop issuances as markets change day-to-day • Once the ATM has been set up, management can attend to it as necessary, instead of devoting its full attention to the marketing • The start-and-stop nature of ATMs, as well as the relatively small amounts of capital raised at any one period of time, may make this a less attractive option for companies seeking large infusions of capital in a single transaction

05/29/2020 UR-Energy Inc. $10 million $92 million

05/13/2020 Edison International $1.5 billion $22 billion REIT 03/04/2020 NexPoint Residential Trust, Inc. $225 million $777 million

02/26/2019 Healthpeak Properties, Inc. $1.25 billion $13.26 billion

02/27/2020 Plymouth Industrial REIT, Inc. $100 million $219 million Restaurant/Retail 06/01/2020 Chuy’s Holdings, Inc. $50 million $266 million

05/01/2020 Waitr Holdings, Inc. $30 million $57.5 million

04/17/2020 Shake Shack, Inc. $75 million $2.12 billion Industrial 01/23/2020 LGL Group, Inc. $15 million $44 million

05/15/2020 Akoustis Technologies $50 million $269.5 million

03/31/2020 Sequans Communications $35 million $122 million

03/09/2020 Netlist, Inc. $20 million $33 million Technology 02/10/2020 Alexandria Realties Equity, Inc. $800 million $19.4 billion

03/03/2020 Inpixon, Inc. $50 million $24.66 million

06/29/2019 One Stop Systems, Inc. $10 million $28 million

© 2020 Winston & Strawn LLP What are PIPEs? • Private placement of a public issuer’s equity or equity-linked securities to investors, where the sale is conditioned upon the issuer agreeing that a resale registration statement will be filed with, and declared effective by, the SEC following closing • In most cases, a PIPE is structured to comply with the Section 4(a)(2) exemption and Rule 506 of Regulation D for sales to selected accredited investors • Investors purchase a fixed number of securities (typically common stock or fixed rate/price preferred stock) at prices that are either fixed or which can fluctuate • The issuer undertakes to file a resale registration statement covering the securities

© 2020 Winston & Strawn LLP 29 What are PIPEs? (Cont’d) • Investors are typically institutional investors such as: • Mutual funds • Pension funds • Hedge funds • However, venture capital firms and private equity firms have participated more and more in recent years • Securities sold in a PIPE may consist of: • Common stock • Convertible preferred stock • Convertible debt • Warrants • Other equity or equity-linked securities of a public company, including a combination of any of these securities • Preferred stock is the current trend in this distressed market environment because of its marketability, flexibility, and priority advantages over common stock

Advantages Disadvantages Lower Transaction Costs Pricing • When compared to traditional public offerings, • To lure investors, common stock is usually the cost savings to issuers can be substantial discounted below market price.

Disclosure Investors • PIPEs are publicly disclosed after definitive • Only “accredited” investors may participate in purchase commitments are received, and the a PIPE, limiting the pool of capital due diligence process is much more limited (typically limited to public filings) Timing Limits • PIPE transactions are very quick, and they can • Issuers generally are capped at 20% of close and fund within a matter of days, not outstanding stock, without prior shareholder weeks or months approval (subject to temporary COVID-related exceptions)

© 2020 Winston & Strawn LLP 31 PIPEs Trends • PIPE offerings have declined in numbers as Confidentially Marketed Public Offerings (CMPOs) and other unannounced and accelerated public offering alternatives have grown in popularity • However, PIPE offerings have started growing in number again, especially when issuing companies find capital markets inaccessible due to market conditions, distress or general lack of investor interest

© 2020 Winston & Strawn LLP 32 Standard PIPE Documents • Engagement Letter • Defining the relationship between the issuer and placement agent (if any) • Confidentiality Agreement • Guaranteeing that investors maintain privacy • Marketing • Investor presentations (more limited than traditional offerings) • Purchase Agreement • Structuring the purchase of debt/equity securities • Certificate of Designations • Defining the rights of preferred equity (if any)

© 2020 Winston & Strawn LLP 33 Standard PIPE Documents (Cont’d) • Indenture • If convertible notes are issued, the indenture governs the terms of the notes • Shareholders’ Agreement • For governance matters • Closing Documents • Opinions, Form 8-K/6-K and press releases (to announce the transaction and file material agreements with the SEC)

© 2020 Winston & Strawn LLP 34 Shareholder Approval of PIPEs The 20% Rule • Both NASDAQ and NYSE require shareholder approval prior to the issuance of common stock (or securities convertible into or exercisable for common stock) in excess of 20% of common stock outstanding • Shareholder approval is not required under NYSE rules, even if the amount of the offering equals or is greater than 20% of the common stock outstanding, if the offering is a cash public offering, private financings for cash at a price at least equal to the “Minimum Price” or convertible securities at a price at least equal to the Minimum Price • The Minimum Price is the lower of: • (1) The official closing price immediately preceding the signing of the binding agreement at issue, or • (2) The average official closing price for the five trading days immediately preceding the signing of the binding agreement

© 2020 Winston & Strawn LLP 35 Shareholder Approval of PIPEs (Cont’d) Related Party Transactions • Additionally, NYSE rules require shareholder approval if the number of shares of common stock to be issued (or securities convertible into common stock) to a related party (e.g. director, officer, or significant shareholder) exceeds 1% of either the number of shares of common stock or voting power before the issuance OR 5% of either the number of shares of common stock or the voting power outstanding if the related party is a significant shareholder • NASDAQ doesn’t have a similar rule and doesn’t require shareholder approval for issuance of securities to related parties (presuming another rule has not been triggered)

© 2020 Winston & Strawn LLP 36 Shareholder Approval of PIPEs (Cont’d) Recent Temporary Exceptions • In May, NASDAQ and NYSE temporarily relaxed the 20% rule following COVID-19 for certain issuances (not used for acquisition financing) given the urgent need for some companies to raise capital as a result of COVID-19 • Any securities issued in reliance on the exemption must be issued by the later of June 30, 2020 and 30 calendar days following the date of the binding agreement governing the issuance, after the company has submitted a certification of its compliance with the requirements of the Temporary Rule and received approval from NYSE or NASDAQ • To take advantage of the exemption, a company would have to notify its shareholders and satisfy specific filing requirements (described below) • Note that shareholder approval is still required for any ‘change-of-control’ transaction

Recent Temporary Exceptions – NYSE • To qualify for the temporary exception under the NYSE, a company must submit a supplemental listing application and certification to the exchange demonstrating: • the need for the transaction is due to circumstances related to COVID-19 and the proceeds will not be used to finance any acquisition transaction; • the delay in securing shareholder approval would have a material adverse effect on the company’s ability to maintain operations under a pre-COVID-19 business plan, result in workforce reductions, adversely impact the company’s ability to undertake new initiatives in response to COVID-19, or seriously jeopardize its financial viability • the company undertook a process to ensure that the transaction represents the best terms available to the company; and • the audit committee (or comparable committee comprised of independent, disinterested directors) expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.

Recent Temporary Exceptions – Nasdaq • To qualify for the temporary exception under the Nasdaq, a company must submit a listing of additional shares and a written supplement to the exchange certifying that: • the need for the transaction is due to circumstances related to COVID-19; • the delay in securing shareholder approval would have a material adverse effect on the company’s ability to maintain operations under a pre-COVID-19 business plan, result in workforce reductions, adversely impact the company’s ability to undertake new initiatives in response to COVID-19, or seriously jeopardize its financial viability; • the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company; and • the company’s audit committee (or comparable committee comprised of independent, disinterested directors) has expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.

© 2020 Winston & Strawn LLP 39 Hart-Scott-Rodino (HSR) Filings • May be required if the parties meet the ‘size-of-transaction’ and ‘size-of- person’ tests • The 2020 “smaller” size-of-transaction threshold is only $94 million • No HSR Act notification will be required if the value of voting securities and assets held as a result of the transaction is below this threshold • If the filing is required, the transaction can’t close during the 30-day statutory waiting period, unless early termination is granted (following the filing of a term sheet with the FTC)

© 2020 Winston & Strawn LLP 40 Key Negotiation Points for PIPEs • Type of Security • Typically convertible preferred stock • Pricing • Discount and risk allocation (fixed vs. variable pricing) • Dividends • Amount potentially increases over time and whether or not payable in kind • Registration Rights including • limitations on the number and length of black-out periods and • timing

© 2020 Winston & Strawn LLP 41 Key Negotiation Points for PIPEs (Cont’d) • Governance • Board seats, board observer, consent rights, information rights, and ownership thresholds to maintain those rights • Standstill provisions • Prohibiting the acquisition of additional securities • Convertible instrument deal points • Optional conversion by issuer (e.g., when closing price is greater than conversion price; daily trading volume requirements, etc.) • Automatic conversion • Redemption • Anti-dilution provisions • Preemptive rights

© 2020 Winston & Strawn LLP 42 PIPEs and Preferred Stock and the New Marketplace • Recent Deals • US Wells Services – $21 million for 21,000 shares of Class B Redeemable Convertible Stock • Roark/Cheesecake Factory – $200 million for 200,000 preferred shares • KKR/US Foods – $500 million for convertible preferred shares with a 7% dividend • Applicability to the Current Market • In Q1 2020, $30.31 billion was raised using PIPEs, compared to $20.2 billion in Q1 2019 • As traditional capital markets may become distorted as a result of COVID-19, companies will likely find PIPEs to be an attractive way to quickly raise money for immediate needs • Especially in pressured industries, like energy, tourism, and aviation, which may have difficulty attracting large, institutional investors in the near term, PIPEs are a great tool to gather the resources needed to react to a rapidly changing marketplace

© 2020 Winston & Strawn LLP What are Baby Bonds? • A form of fixed income security issued in small-dollar denominations (less than $1,000) and most commonly, $25, which attract smaller, retail investors • They are exchange-traded debt issues, very similar to regular bonds, but they are traded on stock exchanges instead of the bond markets • Investors buy and sell them just like stocks • Most frequently issued by: • Utilities (Algonquin Power, CMS Energy, DTE Energy, Duke Energy, Entergy, Georgia Power, TVA) • Business Development Companies (BDCs) • Corporate Issuers (AT&T, Brunswick, eBay, Ford, GATX, U.S. Cellular)

© 2020 Winston & Strawn LLP 45 Why Use Baby Bonds? • Offers Flexibility to Make Smaller-Sized Issuance • A company that cannot or does not want to issue a large debt offering can issue baby bonds as a way to generate demand and liquidity from retail investors • Most institutional investors are uninterested • Can place a much smaller issuance: $25 million - $150 million • NYSE/NASDAQ listing liquidity replaces need for index eligibility level of $350 million • Permanent Capital • At longer end of maturity curve, can be viewed as “permanent” capital • Very stable holder group, as retail investors tend to be more “sticky” than institutional investors because many buy with a “hold to maturity” strategy

© 2020 Winston & Strawn LLP 46 Why Use Baby Bonds? (Cont’d) • Security • Baby bonds are typically unsecured debt • Accordingly, issuers don’t place critical assets at risk during default • Callability • In general, after expiration of a no-call period tailored to length of maturity, baby bonds are callable at par (100%) at the discretion of the issuer • Covenant Light • No financial maintenance or incurrence covenants that could trigger default • Covenants generally limited to payment of principal and interest

© 2020 Winston & Strawn LLP 47 Unique Features and Terms of Baby Bonds • Always SEC Registered • Given retail component and exchange listing, baby bonds must be SEC-registered (if issuer is eligible, can use a Form S-3 shelf; BDCs, however, generally must use Form S-1) • Like equity, baby bond issuances typically have a 15% greenshoe or overallotment option • Exchange Listed • Must meet the NYSE/NASDAQ listing standards – both the corporate issuer and the offering itself ($25 million minimum offering size) • Term • Many baby bonds carry maturities of 30/50 years or more, although some have maturities of just 5-10 years

© 2020 Winston & Strawn LLP 48 Unique Features and Terms of Baby Bonds (Cont’d) • Redemption Rights • Generally non-callable for initial period (3 years on a 10-year bond; 5 years on a 50-year bond) • Thereafter, callable at par (100%) at $25 per share, plus accrued interest • Higher Coupon • To compensate holders for the call risk prior to maturity, and lack of institutional demand, baby bonds have relatively higher coupon rates, ranging from around 5 percent to 8 percent • Higher interest rates than regular corporate bonds (for the same type of risk) also reflect lack of institutional demand and many retail investors are not aware they exist • Quarterly Interest Payments • Most baby bonds pay interest on a quarterly basis compared to the semi-annual interest payment convention for standard bonds

© 2020 Winston & Strawn LLP 49 Unique Features and Terms of Baby Bonds (Cont’d) • Security/Ranking • Typically unsecured debt • Baby bond issues, in general, are "junior" to the company's secured debt, equal to other unsecured debt and senior to preferred and common stock • No Covenants • No financial maintenance or incurrence covenants • Higher Underwriting Commissions • Typically 3.15% • Compared to 0.650% – 0.875% for corporate bonds

© 2020 Winston & Strawn LLP 50 Documents Needed in a Baby Bond Issuance • Registration Statement • Form S-3 or Form S-1 depending upon issuer eligibility • Prospectus • Provides details pertaining to the offering, the issuer’s business, risks, and financial statements and what the proceeds will be used to fund • Exchange Listing Application • Form required by exchange to evidence compliance with listing requirements • Underwriting Agreement • Standard form used by investment bank syndicate to purchase and distribute public securities • Significant indemnification obligation to underwriters

© 2020 Winston & Strawn LLP 51 Documents Needed in a Baby Bond Issuance (Cont’d) • Term Sheet • Short document detailing the final basic terms of the baby bond offering • Indenture • Agreement between issuer and indenture trustee formally laying out the relationship between the bond holders and the issuer, as well as the detailed terms of the baby bonds • Marketing Materials • Baby bonds, especially when they’re using to fund major projects, often have significant marketing materials in order to persuade extended dealer network and would-be investors

© 2020 Winston & Strawn LLP 52 Baby Bond Market • In May 2020, there were 192 issues of baby bonds traded on the primary national exchanges totaling more than $5.4 billion • In 2016, eBay issued $750 million of its 6.00% Notes Due 2056 with 5-year optional redemption period ending March 2021, $25 par • In the near future, distressed companies may not be able to tap capital markets for traditionally large denominated offerings, but they may be able to gather large amounts of capital (See eBay offering) even if they’re sold in smaller individual quantities • Baby bonds are a great solution for companies looking to find cash on terms that are friendly to issuers

© 2020 Winston & Strawn LLP 53 Risks of Baby Bonds • Since exchanges report baby bond trading activity like stock – daily close based upon their face value ($25) – their trading prices will be impacted by both the issuer’s business results and prospects and by interest rate movements in the market generally • While generally covenant-free, baby bond issuers must have sufficient cash flow to timely make all quarterly interest payments through maturity or the no-call period – it’s very difficult to seek a waiver from disparate group of retail holders • If a bond holder’s consent is ever required, the process to obtain an amendment or waiver is lengthy (20-business day minimum solicitation period) and complex (comprehensive disclosure document required) and governed by the debt tender rules (Rule 14(e)) of the Securities Exchange Act of 1934

© 2020 Winston & Strawn LLP 54 Risks of Baby Bonds (Cont’d) • While retail holder groups are benign when times are good, they are notoriously unresponsive to consent solicitations and tender offers • Given expense, delay and difficulty of obtaining a consent, waiver or amendment from retail holders, never agree to include any covenant other than payment of principal and interest • Understand that a baby bond issuer has limited to no flexibility to retire bonds prior to expiration of no-call period as customary market practice available to corporate bond issuers to voluntarily call a large portion of outstanding bonds through a “make-whole” debt tender will likely not be successful with retail holders

© 2020 Winston & Strawn LLP Comparing Financing Structures Convertible Notes Rights Offering ATM Offering PIPE Offering Registered X X X Offering Unregistered X X Offering Stockholder Not required unless it is used to X Approval if >20% finance an acquisition of Outstanding Shares Issued Fixed Amount of X None, unless the X Capital offering is backstopped Guaranteed Low Cost / X X X Limited Marketing Issuances Qualified If a Rule 144A notes offering, Can only be sold to accredited Investors the notes can only be sold to investors QIBs or institutional accredited investors

© 2020 Winston & Strawn LLP 57 Key Take-Away Points • Companies in today’s capital markets are often facing significant headwinds, especially when they pursue traditional offerings • Alternative financing structures, like convertible notes offerings, rights offerings, ATMS, PIPEs, and baby bonds, may be potential options for companies that have become financially stressed as a result of COVID-19, the oil and gas price war, and other recent market shifts • They offer access to capital, while often allowing more limited due diligence, lower costs, and quicker access • Winston & Strawn has a strong capital markets team ready and able to help companies find the right fit, whether it is a traditional offering or one of the alternatives discussed today