CONVERTIBLE SUBORDINATED NOTES

On March 19, 2014, we issued $143.75 million aggregate principal amount of our Convertible Notes. The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.

On May 7, 2018, we completed our exchange (the “Exchange”) of approximately $115.0 million in aggregate principal amount of Convertible Notes, which represented approximately 80% of the aggregate principal amount of our Convertible Notes then outstanding, in privately negotiated exchange agreements with a limited number of convertible noteholders, for approximately $74.8 million in cash (plus accrued interest of $0.4 million totaling $75.2 million) and 2,822,859 newly issued shares of our common stock, par value $.01 per share, pursuant to a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The cash portion of the exchange consideration was funded from our Former Credit Agreement. Following the settlement of the Exchange, the aggregate principal amount of our Convertible Notes outstanding was reduced to approximately $28.8 million. See Note 13 to the Consolidated Financial Statements included herein for further discussion of our Former Credit Agreement.

We recognized a net gain of approximately $1.2 million, which was recorded in Net loss on early extinguishment of debt, related to the Exchange of our Convertible Notes. The gain is composed of a difference of approximately $2.5 million between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding the Exchange, partially offset by a write-off of approximately $1.3 million in unamortized debt issuance costs related to the Exchange of our Convertible Notes. The gain does not include the impact of any transaction costs we incurred to exchange the Convertible Notes.

We incurred approximately $0.8 million in transactions costs related to the Exchange of our Convertible Notes, of which approximately $0.5 million was expensed and recorded in Net loss on early extinguishment of debt and approximately $0.3 million was allocated to the equity component and recorded in Additional paid-in capital.

The carrying values of the liability and equity components of the Convertible Notes at December 31, 2017 and September 30, 2018 are reflected in our Consolidated Balance Sheets as follows (in thousands):



	December 31, 2017			September 30, 2018
Long-term liabilities:
Principal amount	$	143,750		$	28,764
Unamortized discount of liability component	(17,559		)	(2,796		)
Convertible Notes issuance costs, net of accumulated amortization of $1,877 and $455, respectively	(1,750		)	(271		)
Carrying value of the liability component	$	124,441		$	25,697

Carrying value of the equity component	$	17,973		$	3,585

The Carrying value of the liability component and the Carrying value of the equity component are recorded in Convertible subordinated notes due 2021 and Additional paid-in capital, respectively, on our Consolidated Balance Sheets at December 31, 2017 and September 30, 2018.

The fair value of the Convertible Notes, which are Level 2 measurements, was approximately $31.9 million at September 30, 2018.

Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $1.0 million and $0.2 million for the three months ended September 30, 2017 and 2018, respectively and approximately $3.0 million and $1.7 million for the nine months ended September 30, 2017 and 2018, respectively. Accretion of the discount on the Convertible Notes was approximately $1.1 million and $0.2 million for the three months ended September 30, 2017 and 2018, respectively and approximately $3.2 million and $2.0 million for the nine months ended September 30, 2017 and 2018, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $130,000 and $27,000 for the three months ended September 30, 2017 and 2018, respectively and approximately $0.4 million and $0.2 million for the nine months ended September 30, 2017 and 2018, respectively.

The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at September 30, 2018, is 44.8913 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.28 per share of common stock.

The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized debt discount for both the three and nine months ended September 30, 2017 and 2018 was 11.4%. The effective interest rate on the unamortized debt issuance costs for both the three and nine months ended September 30, 2017 and 2018 was 3.2%.