Convertible 3.75% Senior Notes

On December 16, 2014, the Company issued $125 million aggregate principal amount of 3.75% Convertible Senior Notes due 2019, or the Notes. On December 22, 2014, the Company announced the closing of the initial purchasers’ exercise in full of their option to purchase an additional $18.75 million aggregate principal amount. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the sale of the Notes were approximately $139 million, after deducting underwriting fees and other related expenses of approximately $4.8 million. Accrued interest in the amount of $1.6 million related to the Notes was included in accrued expenses.

The Notes bear interest at a fixed rate of 3.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015 and mature on December 15, 2019, unless earlier repurchased, redeemed or converted. The Notes are convertible into shares of the Company’s common stock, cash or a combination thereof. However, if the Company has not received stockholder approvals to increase the number of authorized shares of the Company’s common stock and comply with certain listing standards of the NYSE MKT, the Company would be required to satisfy any conversion obligations solely in cash or, at the Company’s option subject to certain conditions and limitations, in shares of the Company’s common stock. The Notes are convertible at an initial conversion price of approximately $11.29 per share, which is equivalent to an initial conversion rate of 88.5716 shares per $1,000 principal amount of Notes, subject to adjustment in certain events, such as distributions of dividends or stock splits. Holders may convert their Notes at their option prior to September 15, 2019, when or if certain conditions have been met or circumstances have occurred, such as the Company’s stock price exceeds 130% of the conversion price under the Notes for a designated period of time, or the trading price of the Notes is, for a designated period of time, less than 98% of the closing sale price of the Company’s common stock multiplied by the then-current conversion rate of the Notes, or the Company calls Notes for redemption, or certain specified corporate events occur. Holders may also convert their Notes at their option at any time on or after September 15, 2019 and prior to the close of business on the business day immediately preceding the stated maturity date. In addition, following the occurrence of certain changes of control of the Company described in the Indenture governing the Notes or termination of trading of the Company’s common stock or other securities into which the Notes are convertible (a “make-whole fundamental change”) or the delivery by the Company of a notice of redemption, the conversion rate for a holder who elects to convert its Notes in connection with such make-whole fundamental change or such notice of redemption will increase. Additionally, if certain conditions have been met or circumstances have occurred, such as the Company’s stock price exceeds 150% of the conversion price under the Notes for a designated period of time, or the trading of the Notes is, for a designated period of time, less than 98% of the closing sale price of the Company’s stock multiplied by the then-current conversion rate of the Notes, or the Company calls Notes for redemption, the Company may redeem for cash any or all outstanding Notes on or after December 19, 2017 in an amount equal to the outstanding principal amount of such Notes, plus accrued and unpaid interest.

The Notes and any common stock issuable upon conversion of the Notes have not been registered under the Securities Act, applicable state securities laws or the securities laws of any other jurisdiction, and may not be offered or sold in the United States without registration or an applicable exemption from registration requirements. The Company does not intend to file a registration statement for the resale of the Notes or any common stock issuable upon conversion of the Notes, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful.

Since the Company does not have sufficient authorized shares available to share-settle the conversion option in full, the embedded conversion option does not qualify for equity classification and instead is separately valued and accounted for as a derivative liability. On December 16, 2014, the initial value allocated to the derivative liability was $43.7 million of the $143.75 million principal amount of the Notes, which represents a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the Notes. Accordingly, the effective interest rate used to amortize the debt discount on the Notes is 12.94%. During each reporting period, the derivative liability is marked to fair value through the statement of operations. As of March 31, 2015, the derivative liability, which is classified in long-term liability, had a fair value of $32.8 million. This resulted in a change in the fair value of the derivative liability of $8.6 million for the three months ended March 31, 2015. If the Company receives shareholder approval for the increase in the number of shares of common stock authorized and available for issuance upon conversion of the Notes so the conversion option can be share-settled in full, the conversion option may qualify for equity classification and the bifurcated derivative liability would no longer need to be accounted for as a separate derivative on a prospective basis from the date of reassessment. Any remaining debt discount that arose at the date of debt issuance from the original bifurcation will continue to be amortized through interest expense.

The Notes are being accounted for in accordance with ASC 470-20. Under ASC 470-20, issuers of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components.

The application of ASC 470-20 resulted in the recognition of $32.8 million as the value for the liability at March 31, 2015. The remaining unamortized discount and unamortized debt financing costs will be amortized over the remaining term of 4.71 years. At March 31, 2015 the net carrying amount of the liability component and the remaining unamortized debt discount were as follows:

	March 31,
	2015
	(in thousands)

Face Amount of the Notes	$	143,750
Unamortized discount of the liability component		41,849
Carrying Amount of the Notes	$	101,901

Deferred financing costs associated with the Notes, include fees of $4.6 million at March 31, 2015. The assumptions used in connection with the valuation of the convertible option of the Notes issued December 16, 2014 utilizing the "with” and “without” method, discussed in Note 3 was as follows:

	Initial Measurement			Measurement			Measurement
	December 16,			December 31,			March 31,
	2014			2014			2015
Issue date		12/17/2014			12/17/2014			12/17/2014
Maturity date		12/15/2019			12/15/2019			12/15/2019
Term		4.99			4.92			4.71
Principal (millions)		143.75			143.75			143.75
Coupon		3.75	%		3.75	%		3.75	%
Seniority		Senior unsecured			Senior unsecured			Senior unsecured
Conversion shares		88.572			88.572			88.572
Conversion price	$	11.29		$	11.29		$	11.29

Stock price	$	9.45		$	8.80		$	8.16
Risk free rate		1.61	%		1.64	%		1.30	%

Volatility (rounded)		40.00	%		40.00	%		42.00	%

The table below provides a reconciliation of beginning and ending balances for the liability measured at fair value using significant observable and unobservable inputs (Level 3). The table reflects the gain for the three months ended March 31, 2015 associated with the decrease in fair value.

	Initial
	Measurement
	December 16,		Decrease in		December 31,		Decrease in		March 31,
	2014		Fair Value		2014		Fair Value		2015
Fair value of convertible feature of convertible 3.75% senior notes	$	43,700	$	2,300	$	41,400	$	8,625	$	32,775

For the three months ended March 31, 2015, the Company recorded the following expenses in relation to the Notes:

	March 31,
	2015
	(in thousands)

Interest Expense at 3.75% coupon rate (1)	$	1,348
Debt discount amortization (1)		1,590
Amortization of deferred financing costs (1)		173
	$	3,111

(1)

Included within “Interest and other expense, net” on the Condensed Consolidated Statements of Operations