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CONVERTIBLE NOTES
 3 Months Ended
Mar. 31, 2023
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES
NOTE 9. CONVERTIBLE NOTES

On March 27, 2018, the Company issued $150.0 million aggregate principal amount of 2.50% Senior Convertible Notes due 2023. In connection with the offering of the Notes, the Company granted the initial purchasers of the Notes a 13-day option to purchase up to an additional $22.5 million aggregate principal amount of the Notes on the same terms and conditions. On April 4, 2018 the option was partially exercised, which resulted in $21.5 million of additional proceeds, for total proceeds of $171.5 million. The Notes matured on March 15, 2023 (the “Maturity Date”) and became due and payable.

The Company incurred issuance costs related to the issuance of the Notes which was 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 had 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 could have converted 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) were, 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, subject to certain conditions, had 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, 2023, $56.6 million aggregate principal amount of the Notes were outstanding and are no longer convertible pursuant to their original terms. None of the Notes converted prior to the Maturity Date.

As of March 31, 2023, the Company carried $0.7 million of accrued interest which was payable on March 15, 2023.

Forbearance Agreement

On March 9, 2023, the Company entered into the Forbearance Agreement, which became effective on March 13, 2023, with the Ad Hoc Noteholder Group holding approximately 85% of the Company’s outstanding Notes, the Trustee and any other owner of the Notes who executes and delivers to the Company a joinder to the Forbearance Agreement (collectively with the Trustee and Ad Hoc Noteholder Group, the “Counterparties”). Pursuant to the Forbearance Agreement, the members of the Ad Hoc Noteholder Group agreed, and directed the
Trustee, to forbear from exercising their rights and remedies under the Indenture in connection with certain events of default under the Indenture, such as (i) failure to timely pay in full the principal of any Note when due and payable on March 15, 2023, (ii) failure to pay any interest on any Note when due and payable, (iii) failure to convert any Notes, (iv) default under any agreement with outstanding indebtedness for money borrowed in excess of $15.0 million and (v) any other breach, default or event of default under the Indenture arising from the failure of the Company to timely pay in full the principal of any Note when due and payable on the Maturity Date. The Forbearance Agreement was initially effective for the period commencing on March 13, 2023 and ending on March 29, 2023, which was subsequently extended by the parties to April 21, 2023. The notes associated with the remaining approximately 15% of holders that did not join the Ad Hoc Noteholder Group is considered in default as of March 31, 2023.

The holders of the Notes that joined the Forbearance Agreement received a fee (the “Forbearance Premium”) equal to $5.00 per $1,000 principal amount of Notes held by such party, by executing and delivering a joinder to the Forbearance Agreement to the Company. As of March 31, 2023 the Ad Hoc Noteholder Group held $48.3 million aggregate principal amount of the Notes and received $0.2 million in Forbearance Premiums. As of March 31, 2023, holders of $8.3 million aggregate principal amount of the Notes had not joined the Ad Hoc Noteholder Group and did not receive a Forbearance Premium. The Forbearance Premium of $0.2 million paid during the three months ended March 31, 2023 was capitalized and amortized to expense for the period commencing on March 13, 2023 through March 29, 2023.

Restructuring Support Agreement

On April 21, 2023, the Company entered into the Restructuring Support Agreement with certain holders of the Notes, the holder of the Secured Note and the holders of the Company’s Series A Preferred Stock to negotiate in good faith to effect the restructuring of the Company’s capital structure, including the Notes, the Secured Note and the Company’s Series A Preferred Stock, as well as a contemplated amendment to the March 2022 Securities Purchase Agreement, as an Out-of-Court Restructuring. See Note 19, Subsequent Events for additional information.

The carrying value of the Notes at March 31, 2023 and December 31, 2022 consisted of the following (in thousands):

March 31,December 31,
20232022
Outstanding principal at par
$56,595 $56,595 
Unamortized debt issuance— (182)
Net carrying amount
$56,595 $56,413 

At March 31, 2023 and December 31, 2022 the Notes were classified as follows (in thousands):

March 31,December 31,
20232022
Current portion of convertible notes$56,595 $56,413 
Non-current portion of convertible notes— — 
Total convertible notes$56,595 $56,413 

Interest expense during the three months ended March 31, 2023 and 2022 were as follows (in thousands):

Three Months Ended March 31,
20232022
Contractual coupon interest$236 $753 
Amortization of debt issuance costs182 162 
Total interest expense on convertible notes$418 $915 
Gain on extinguishment of exchanged Notes during the three months ended March 31, 2023 and 2022 was as follows (in thousands):

Three Months Ended March 31,
20232022
Gain on extinguishment$— $3,366 

March 2022 Exchange Transaction

On March 21, 2022, the Company entered into a privately negotiated exchange agreement (the “March 2022 Exchange Agreement”) with a holder of the Notes. Under the terms of the March 2022 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 occurred in eight tranches (“Obligation to Exchange”), with the first closing occurring on March 29, 2022. The remaining seven tranches closed 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 Exchange Notes”). The New Exchange Notes were elected to be carried using the fair value option. The New Exchange 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 Exchange Notes and does not extend to other Notes.

On March 21, 2022, the New Exchange Notes were determined to have a fair value of $11.5 million. The fair value of the New Exchange Notes was determined using a common share price of $1.86 per share, applied using the settlement method described above. After giving effect for all mark to market adjustments during the three months ended March 31, 2022, the total net mark to market gain on extinguishment was $2.9 million.

On March 29, 2022, the holder of the New Exchange Notes legally exchanged approximately $1.8 million (the “Exchanged Principal”) in aggregate principal amount of New Exchange Notes held by the holder for 849,713 shares of the Company’s common stock pursuant to the March 2022 Exchange Agreement. The legal exchange of the New Exchange Notes resulted in an additional gain of $0.5 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.

The total net gain recorded during the three months ended March 31, 2022 was $3.4 million. This gain was comprised of mark to market adjustments during the period and a legal exchange of the New Exchange Notes.

Closing of Prepaid Forward

In connection with the offering of the Notes, we entered into a prepaid forward stock repurchase transaction (the “Prepaid Forward”) with a financial institution. Pursuant to the Prepaid Forward, we used approximately $45.1 million of the proceeds from the offering of the Notes to pay the prepayment amount. The aggregate number of our common stock underlying the Prepaid Forward is approximately 1,858,500 shares (based on the sale price of $24.25). On March 24, 2023, 1,858,500 shares of common stock were returned to the Company pursuant to our agreement with the counterparty. As of March 31, 2022, these shares purchased under the Prepaid Forward were treated as treasury stock on the condensed consolidated balance sheet (and not outstanding for purposes of the calculation of basic and diluted earnings per share), but remain outstanding for corporate law purposes, including for purposes of any future stockholders’ votes.
Fair Value of the Notes

As of December 31, 2022, the Notes were instruments measured at fair value using Level 2 inputs, as the Notes were traded on an active market with observable inputs. The estimated fair value of the Notes at December 31, 2022 was $51.9 million.

At March 31, 2023, the fair value of the Notes are determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used the Probability-Weighted Expected Return Method (“PWERM”) to value the Notes. This approach involved the estimation of future potential outcomes for the Company, as well as values and probabilities associated with each respective potential outcome, which consisted of the probability of the Notes remaining outstanding until the maturity date of the Forbearance Agreement and the probability of default on the Notes. The Company calculated the present value of the Notes payoff on the maturity date using the estimated effective interest rate of the Notes. Key assumptions used in the calculation included a discount rate of 27.6%. After taking into consideration the PWERM of this scenario, the Company arrived at the estimated fair value of the Notes of $16.9 million as of March 31, 2023.

See Note 4, Fair Value of Financial Instruments for additional information.