NOTE 11. CONVERTIBLE NOTES

On March 27, 2018 the Company issued $150.0 million aggregate principal amount of 2.50% Convertible Notes due 2023 (“Notes”). The Notes are the Company's senior unsecured obligations and mature on March 15, 2023 (Maturity Date), unless earlier repurchased or converted into shares of common stock under certain circumstances described below. The Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of 32.343 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $30.92 per share of common stock, subject to adjustment. The Company will pay interest on the Notes semi-annually in arrears on March 15 and September 15 of each year.

The $150.0 million of proceeds received from the issuance of the Notes were allocated between long-term debt (the “liability component”) of $102.0 million and contributed capital (the “equity component”) of $48.0 million. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the Notes. The liability component will be accreted up to the face value of the Notes of $150.0 million, which will result in additional non-cash interest expense being recognized through the Notes’ Maturity Date. The effective interest rate on the Notes, including accretion of the Notes to par and debt issuance cost amortization, was 11.52%.

The equity component will not be remeasured as long as it continues to meet the conditions for equity classification. The Company incurred approximately $4.3 million of issuance costs related to the issuance of the Notes, of which $2.9 million and $1.4 million were recorded to long-term debt and contributed capital, respectively. The $2.9 million of issuance costs recorded as long-term debt on the condensed consolidated balance sheet are being amortized over the five-year contractual term of the Notes using the effective interest method.

The Notes include customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately. Holders have the option to convert the Notes in multiples of $1,000 principal amount at any time prior to December 15, 2022, but only in the following circumstances:


•	if the Company’s stock price exceeds 130% of the conversion price for 20 of the last 30 trading days of any calendar quarter after June 30, 2018;


•	during the 5 business day period after any 5 consecutive trading day period in which the Notes’ trading price is less than 98% of the product of the common stock price times the conversion rate; or


•	the occurrence of certain corporate events, such as a change of control, merger or liquidation.

At any time on or after December 15, 2022, a holder may convert its Notes in multiples of $1,000 principal amount. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change or event of default prior to the Maturity Date, holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date.

As of March 31, 2018, the outstanding principal on the Notes was $150.0 million, the unamortized debt discount was $48.0 million, the unamortized debt issuance cost was $2.9 million and the net carrying amount of the liability component was $99.2 million, which was recorded as convertible notes within the condensed consolidated balance sheet. For the three months ended March 31, 2018, the Company recorded interest expense of $158,000 for contractual coupon interest, $6,000 for amortization of debt issuance costs, $100,000 for amortization of the debt discount, and $52,000 of accrued interest expense. As of March 31, 2018 no Notes were available for conversion.

In connection with the debt issuance, the Company entered into a prepaid forward stock repurchase transaction (“Prepaid Forward”) with a financial institution (“Forward Counterparty”). Pursuant to the Prepaid Forward, the Company used approximately $45.1 million of the net proceeds from the Notes to fund the Prepaid Forward. The aggregate number of shares of the Company’s common stock underlying the Prepaid Forward was approximately 1,858,500. The expiration date for the Prepaid Forward is March 15, 2023, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to the Company the number of shares of common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward are treated as treasury stock and not outstanding for purposes of the calculation of basic and diluted earnings per share, but will remain outstanding for corporate law purposes, including for purposes of any future stockholders’ votes, until the Forward Counterparty delivers the shares underlying the Prepaid Forward to the Company. The Company’s Prepaid Forward hedge transaction exposes the Company to credit risk to the extent that its counterparty may be unable to meet the terms of the transaction. The Company mitigates this risk by limiting its counterparty to a major financial institution.