v3.22.2.2
Convertible Notes
 9 Months Ended
Sep. 30, 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’s Notes have a fixed coupon rate of 2.5% per annum on the principal amount.

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. As of September 30, 2022 and December 31, 2021, no Notes were convertible pursuant to their original terms.

Interest expense during the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Contractual coupon interest$79 $1,024 $1,528 $3,168 
Amortization of debt issuance costs121 185 386 539 
Amortization of the debt discount— $2,987 $— $8,711 
Total interest expense on convertible notes$200 $4,196 $1,914 $12,418 

Gain on extinguishment of exchanged Notes during the three and nine months ended September 30, 2022 and 2021 was as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Gain on extinguishment$— $4,999 $3,565 $4,999 
The carrying value of the Notes at September 30, 2022 consisted of the following (in thousands):

September 30,
2022
Outstanding principal at par
$56,595 
Unamortized debt issuance(270)
Net carrying amount
$56,325 

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.

2021 Exchange Transactions

In September 2021, the Company entered into separate exchange agreements with certain holders of the Notes. Under the terms of the exchange agreements, such holders agreed to exchange Notes held by them for shares of the Company’s common stock (the “2021 Exchange Transactions”). During the nine months ended September 30, 2021, such holders exchanged $46.0 million in aggregate principal amount of Notes held by them for 5,945,718 shares of the Company’s common stock. The net carrying value of the Notes exchanged was $40.4 million which the Company repurchased for $34.5 million of common stock. The Company also incurred $0.8 million of reacquisition costs, which was recorded as an offset to gain on extinguishment of debt. The 2021 Exchange Transaction resulted in a net gain of $5.0 million reflected in other income (expense), net for the three and nine months ended September 30, 2021. See Note 18, Stockholders' Equity for additional information.

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 “March 2022 Exchange Transaction”). The closing of the March 2022 Exchange Transaction occurred in eight tranches (“Obligation to Exchange”), with the first closing occurring on March 29, 2022 and the last closing on May 18, 2022.

On March 21, 2022 the Obligation to Exchange the $14.0 million of Notes in the March 2022 Exchange Transaction 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 were 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 was exclusive to the New Notes and did not extend to other Notes. The embedded feature was no longer outstanding on September 30, 2022 as the New Notes were exchanged and the Obligation to Exchange retired on May 18, 2022.
During the nine months ended September 30, 2022 the holder of the Notes exchanged $14.0 million in aggregate principal amount of Notes held by it for 10,798,482 shares of the Company’s common stock pursuant to the March 2022 Exchange Agreement. The net carrying value of the Notes exchanged was $14.0 million which the Company repurchased for $10.2 million of common stock. The Company also incurred $0.2 million of reacquisition costs, which was recorded as an offset to gain on extinguishment of debt. This exchange transaction resulted in a net gain of $3.6 million reflected in other income (expense), net for the nine months ended September 30, 2022. See Note 18, Stockholders' Equity for additional information.

August 2022 Exchange Transaction

On August 15, 2022, the Company entered into an exchange agreement (the “August 2022 Exchange Agreement”) with the Jack W. Schuler Living Trust (the “Schuler Trust”), as discussed in Note 11, Long-Term Debt Related-Party. Under the terms of the August 2022 Exchange Agreement, the Schuler Trust agreed to exchange with the Company $49.9 million in aggregate principal amount of Notes held by it for (a) the Secured Note in an aggregate principal amount of $34.9 million and (b) the Warrant to acquire the Company’s common stock.

Under ASC 470-50-40, the transaction qualified as an extinguishment of debt. Under extinguishment accounting, the Notes were derecognized and the new instruments, which include the Secured Note and the Warrant, were recorded at their fair values. The difference between the fair values of the new instruments and the net carrying amount of the Notes being extinguished was included in the calculation of gain. The gain from the extinguishment of the Notes was treated as a capital transaction. The Secured Note includes various features that were advantageous to the Company, including a lower interest rate compared to current market rates and a share conversion feature. There were no other negotiating parties that had similar terms or economic outcomes. As such, the exchange was considered not to be an arm’s length transaction, and therefore the resulting gain was accounted for as a capital transaction. The net carrying amount of the extinguished Notes was $49.6 million. The estimated fair value of the Secured Note and the Warrant on August 15, 2022 was $16.0 million and $3.8 million, respectively, which resulted in a net gain of $29.8 million that was recorded to contributed capital. See Note 18, Stockholders' Equity and Note 11, Long-Term Debt Related-Party for additional information.