Convertible Notes

3 Months Ended

Mar. 31, 2022

Debt Disclosure [Abstract]

Convertible Notes

NOTE 10. CONVERTIBLE NOTES

The Notes are the Company's senior unsecured obligations and mature on March 15, 2023 (the “Maturity Date”), unless earlier repurchased or converted into shares of common stock under certain circumstances described below. Upon conversion of the Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company’s election. The initial conversion rate of the Notes is 32.3428 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 pays interest on the Notes semi-annually in arrears on March 15 and September 15 of each year.

The Company incurred issuance costs related to the issuance of the Notes which is amortized over the five-year contractual term of the Notes using the effective interest method. The effective interest rate on the Notes, including accretion of the Notes to par was 3.2%.

The Notes include customary terms and covenants, including certain events of default upon 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 pursuant to which the Notes were issued) 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.

Interest expense during the three months ended March 31, 2022 were as follows (in thousands):

	Three Months Ended March 31,
	2022		2021
Contractual coupon interest	$	753	$	1,072
Amortization of debt issuance costs	162		175
Amortization of the debt discount	—		$	2,821
Total interest expense on convertible notes	$	915	$	4,068

As of March 31, 2022 and December 31, 2021, no Notes were convertible pursuant to their original terms.

On March 21, 2022, the Company entered into a privately negotiated exchange agreement (the “Exchange Agreement”) with a holder of the Company’s Notes. Under the terms of the Exchange Agreement, the note holder agreed to exchange with the Company $14.0 million in aggregate principal amount of Notes held by it in eight equal tranches as follows for each tranche: (a) 22.64 shares per $1,000 principal amount of Notes exchanged, plus (b) an additional number of shares of the Company’s common stock per $1,000 principal amount of Notes exchanged equal to the sum, for each of the trading days during a separate agreed upon reference period for each tranche commencing on March 21, 2022 for the first tranche, of the quotient of (i) $155.67 divided by (ii) the daily volume-weighted average price for such trading day (collectively, the “Exchange Transaction”).

The closing of the Exchange Transaction is expected to occur in eight tranches (“Obligation to Exchange”), subject to customary closing conditions, with the first closing occurring on March 29, 2022. The remaining seven tranches are expected to close during the three months ended June 30, 2022.

On March 21, 2022 the Obligation to Exchange the $14.0 million of Notes was accounted for as an extinguishment and was replaced by new notes with an embedded feature (the “New Notes”). The New Notes were elected to be carried using the fair value option. The New Notes are recorded at fair value on initial measurement and remeasured at fair value (“mark to market”) at each reporting period with changes in fair value reported in other income and expense, net. This fair value election is exclusive to the New Notes and does not extend to other Notes.

On March 21, 2022, the New Notes were determined to have a fair value of $11.5 million. The fair value of the New Notes was determined using a common share price of $1.86 per share, applied using the settlement method described above. The original carrying value of the Notes was $14.0 million which resulted in a gain on extinguishment of $2.5 million, which was recorded as a gain on extinguishment during the three months ended March 31, 2022.

On March 29, 2022, the holder of the New Notes legally exchanged approximately $1.8 million (the “Exchanged Principal”) in aggregate principal amount of New Notes held by the holder for 849,713 shares of the Company's common stock pursuant to their respective exchange agreement. The legal exchange of the New Notes resulted in an additional gain of $0.2 million. Using the closing stock price on March 29, 2022 of $1.48, the 849,713 shares of the Company's common stock were determined to have a value of $1.3 million, which was recorded to contributed capital during the three months ended March 31, 2022.

After giving effect for the Exchanged Principal the remaining principal of the New Notes was $12.3 million on March 31, 2022. On March 31, 2022, the remaining New Notes were determined to have a fair value of $10.1 million. The fair value of the New Notes was determined using the common stock share prices on March 31, 2022 (the “Second Tranche”) applied using the settlement method described above.

After giving effect to such Exchanged Principal, the total principal amount of the Notes and New Notes as of March 31, 2022 was $118.8 million.

The carrying value of the Notes and New Notes at March 31, 2022 consisted of the following (in thousands):

	March 31,
	2022
Outstanding principal at par and balances measured at fair value	$	116,551
Unamortized debt issuance	(793)
Net carrying amount of the liability component	$	115,758

In connection with the Notes 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 its issuance of 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.