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CONVERTIBLE NOTES
 9 Months Ended
Sep. 30, 2023
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES
NOTE 9. CONVERTIBLE NOTES

Convertible Notes

The information presented in this section summarizes the data related to the Company’s convertible notes, which consisted of the 2.50% Notes as of December 31, 2022 and both the 2.50% Notes and the 5.00% Notes as of September 30, 2023.

The carrying value of the convertible notes at September 30, 2023 and December 31, 2022 consisted of the following (in thousands):

September 30,December 31,
20232022
Outstanding principal at par
$66,944 $56,595 
Debt premium
5,641 — 
Unamortized debt discount
(35,744)— 
Unamortized debt issuance costs
(2,788)(182)
Net carrying amount
$34,053 $56,413 
At September 30, 2023 and December 31, 2022 the convertible notes were classified as follows (in thousands):

September 30,December 31,
20232022
Current portion of convertible notes$726 $56,413 
Convertible notes, non-current33,327 — 
Total convertible notes$34,053 $56,413 

Interest expense related to convertible notes during the three and nine months ended September 30, 2023 and 2022 was as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Contractual coupon interest$838 $79 $1,730 $1,528 
Amortization of premium, discount and issuance costs, net
1,367 121 2,060 386 
Total interest expense on convertible notes$2,205 $200 $3,790 $1,914 

Gain (loss) on extinguishment of exchanged convertible notes during the three and nine months ended September 30, 2023 and 2022 was as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Gain (loss) on extinguishment$51 $— $(6,499)$3,565 

2.50% Convertible Senior Notes due 2023 (the “2.50% Notes”)

On March 27, 2018, the Company issued $150.0 million aggregate principal amount of 2.50% Notes. In connection with the offering of the 2.50% 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 2.50% 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 2.50% Notes matured on March 15, 2023.

As of September 30, 2023, approximately $0.7 million aggregate principal amount of 2.50% Notes remains outstanding and in default accruing interest at 2.5% per annum. The Company continues to accrue interest on the remaining outstanding notes. As of September 30, 2023, the amount of accrued interest on these notes is immaterial.

The Company incurred issuance costs related to the issuance of the 2.50% Notes which were amortized over the five-year contractual term of the 2.50% Notes using the effective interest method. The effective interest rate on the 2.50% Notes, including accretion of the 2.50% Notes to par was 3.2%.

Holders had the option to convert the 2.50% 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 2.50% 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, and prior to the maturity date, a holder could have converted its 2.50% Notes in multiples of $1,000 principal amount. Holders of the 2.50% Notes who convert their 2.50% Notes in connection with a make-whole fundamental change (as defined in the 2.50% Notes 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 for the 2.50% Notes, holders, subject to certain conditions, had the right, at their option, to require the Company to repurchase for cash all or part of the 2.50% Notes at a repurchase price equal to 100% of the principal amount of the 2.50% Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date. None of the remaining 2.50% Notes outstanding as of September 30, 2023, are convertible pursuant to their original terms.

The carrying value of the 2.50% Notes at September 30, 2023 and December 31, 2022 consisted of the following (in thousands):

September 30,December 31,
20232022
Outstanding principal at par
$726 $56,595 
Unamortized debt issuance— (182)
Net carrying amount
$726 $56,413 

At September 30, 2023 and December 31, 2022 the 2.50% Notes were classified as follows (in thousands):

September 30,December 31,
20232022
Current portion of convertible notes$726 $56,413 
Convertible notes, non-current— — 
Total convertible notes$726 $56,413 

Interest expense for the 2.50% Notes during the three and nine months ended September 30, 2023 and 2022 was as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Contractual coupon interest$5 $79 $562 $1,528 
Amortization of debt issuance costs— 121 182 386 
Total interest expense on 2.50% Notes
$5 $200 $744 $1,914 

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 2.50% Notes, the Trustee and any other owner of the 2.50% Notes who executed and delivered 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 2.50% Notes Indenture in connection with certain events of default under the 2.50% Notes Indenture, such as (i) failure to timely pay in full the principal of any 2.50% Note when due and payable on March 15, 2023, (ii) failure to pay any interest on any 2.50% Note when due and payable, (iii) failure to convert any 2.50% 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 2.50% Notes Indenture arising from the failure of the Company to timely pay in full the principal of any 2.50% Note when due and payable on the maturity date for the 2.50% Notes. The Forbearance Agreement was initially effective for the period commencing on March 13, 2023 and ending on April 21, 2023, the date of the Restructuring Support Agreement.
The holders of the 2.50% Notes that joined the Forbearance Agreement received a fee (the “Forbearance Premium”) equal to $5.00 per $1,000 principal amount of the 2.50% Notes held by such party, by executing and delivering a joinder to the Forbearance Agreement to the Company. During the nine months ended September 30, 2023 the Ad Hoc Noteholder Group received $0.2 million in Forbearance Premiums were capitalized and amortized as interest expense during the period commencing on March 13, 2023 through March 31, 2023.

Restructuring Support Agreement and June 2023 Exchange Transaction

On April 21, 2023, the Company entered into the Restructuring Support Agreement with certain holders of the 2.50% 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. On June 9, 2023, the Company completed the Restructuring Transactions contemplated by the Restructuring Support Agreement whereby the Company (i) exchanged approximately $55.9 million aggregate principal amount of the 2.50% Notes for approximately $56.9 million aggregate principal amount of newly issued 5.00% Notes, which was inclusive of additional 5.00% Notes in respect of interest accrued on the 2.50% Notes from September 15, 2022, for $1.0 million; (ii) issued and sold an additional $10.0 million aggregate principal amount of 5.00% Notes; (iii) repurchased the Secured Note, plus accrued interest, by issuing approximately 3.4 million shares of the Company’s common stock; (iv) issued approximately 0.4 million shares of the Company’s common stock upon conversion of all of the Company’s outstanding Series A Preferred Stock; (v) amended the March 2022 Securities Purchase Agreement (as defined in Note 17) and issued and sold approximately 0.5 million shares of the Company’s common stock for proceeds of $4.0 million; and (vi) entered into a new securities purchase agreement with the Schuler Trust pursuant to which the Schuler Trust is required, prior to December 15, 2023, to either purchase an aggregate of $10 million of the Company’s common stock from the Company or to backstop an underwritten public offering by the Company of its common stock for aggregate proceeds of $10 million, at the Company’s option. See Note 10, Long-Term Debt Related-Party, Note 17, Stockholders' Equity and Note 18, Related-Party Transactions for additional information.

The exchange agreement described above (the “June 2023 Exchange Transaction”) was accounted for as an extinguishment which resulted in the $56.9 million in aggregate principal of the 5.00% Notes replacing the $55.9 million aggregate principal of the 2.50% Notes and the $1.0 million of accrued interest expense. The 5.00% Notes were recorded at fair value on initial measurement, while the $55.9 million aggregate principal of 2.50% Notes and the $1.0 million of related accrued interest expense was retired. During June 2023, the extinguishment of the 2.50% Notes resulted in a loss of $6.6 million. See further discussion of the 5.00% Notes below.

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 2.50% 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 2.50% Notes held by it in eight equal tranches as follows for each tranche: (a) 2.26 shares per $1,000 principal amount of 2.50% Notes exchanged, plus (b) an additional number of shares of the Company’s common stock per $1,000 principal amount of 2.50% 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) $15.567 divided by (ii) the daily volume-weighted average price for such trading day (collectively, the “Exchange Transaction”). The closing of the March 2022 Exchange Agreement occurred in eight tranches (“2022 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 2022 Obligation to Exchange $14.0 million of 2.50% Notes was accounted for as an extinguishment and was replaced by new notes with an embedded feature (the “2022 New Notes”). The 2022 New Notes were elected to be carried using the fair value option. The 2022 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 2022 New Notes and did not extend to other 2.50% Notes. As of September 30, 2023 and 2022 none of the 2.50% Notes were carried using the fair value option.

During the nine months ended September 30, 2022, the holder of the 2.50% Notes exchanged approximately $14.0 million in aggregate principal amount of 2.50% Notes held by the holder for approximately 1.1 million shares of the Company's common stock pursuant to the March 2022 Exchange Agreement. The legal exchange of these 2.50% Notes resulted in a gain of $3.6 million during the nine months ended September 30,
2022. The Company’s common stock was determined to have a fair value of $10.2 million, which was recorded to contributed capital during the nine months ended September 30, 2022.

August 2022 Exchange Transaction

On August 15, 2022, the Company entered into an exchange agreement (the “August 2022 Exchange Agreement”) with the Schuler Trust, as discussed in Note 10, 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 2.50% 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.

The transaction qualified as an extinguishment of debt. Under extinguishment accounting, these 2.50% Notes were derecognized and the new instruments, which include the Secured Note and the Warrant, were recorded at their fair values. The Secured Note included 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 2.50% Notes was $49.6 million. The estimated fair values of the Secured Note and the Warrant on August 15, 2022 were $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, Related-Party Transactions and Note 10, Long-Term Debt Related-Party for additional information.

Closing of Prepaid Forward

In connection with the initial offering of the 2.50% Notes, the Company 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 2.50% Notes to pay the prepayment amount. The aggregate number of our common stock underlying the Prepaid Forward was approximately 0.2 million shares (based on the sale price of $24.25). On March 24, 2023, approximately 0.2 million shares of common stock were returned to the Company pursuant to our agreement with the counterparty. On March 27, 2018 and forward, these shares purchased under the Prepaid Forward were treated as treasury stock in the condensed consolidated balance sheets (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.

5.00% Convertible Senior Notes due 2026 (the “5.00% Notes”)

As described above, on June 9, 2023, the Company entered into the June 2023 Exchange Transaction with holders of the 2.50% Notes. The June 2023 Exchange Transaction was accounted for as an extinguishment which resulted in the 5.00% Notes replacing the 2.50% Notes and associated accrued interest expense. The 5.00% Notes were recorded at fair value on initial measurement. In addition the Company issued an additional $10.0 million aggregate principal amount of 5.00% Notes, for cash proceeds with certain existing note holders. Following the June 2023 Exchange Transaction and the additional issuance of 5.00% Notes, the 5.00% Notes had an aggregate principal amount of $66.9 million and a maturity date of December 15, 2026 (the “Maturity Date”).

The 5.00% Notes bear interest at a rate of 5.00% per annum. The Company pays interest on the 5.00% Notes by payment-in-kind (“PIK”), through the issuance of additional 5.00% Notes (“PIK Notes”). The amount is paid to holders by increasing the principal amount of each outstanding 5.00% Note by an amount equal to the interest payable for the applicable interest period. The Company calculates PIK interest semi-annually on June 15 and December 15, on a compound basis based on the stated rate of 5.00%. The PIK Notes also incur interest at a rate of 5.00% per annum.

The 5.00% Notes are secured by substantially all of the assets of the Company and its subsidiaries.

Holders of the 5.00% Notes who convert their 5.00% Notes in connection with a make-whole fundamental change (as defined in the indenture governing the 5.00% Notes (the “5.00% Notes Indenture”)) are, under certain circumstances, entitled to an increase in the conversion rate. If a fundamental change occurs at any time prior to the Maturity Date, each holder will have the right, at such holder’s option, to require the Company to repurchase for cash all of such holder’s 5.00% Notes, at a repurchase price equal to 100% of the principal amount thereof, plus
accrued and unpaid interest.

Redeeming the 5.00% Notes before June 15, 2025 could trigger a make-whole fundamental change as described above. On or after June 15, 2025 the Company may, at its option, redeem for cash all or a portion of the 5.00% Notes. If the Company does not redeem 100% of the 5.00% Notes then the redeemed amount is subject to minimums as outlined in the 5.00% Notes Indenture.

Each holder of the 5.00% Notes has the right at their option, to convert any portion of the 5.00% Notes at an initial conversion rate of 138.88889 shares of common stock per $1,000 principal amount of the 5.00% Notes. The Company cannot require the holders of the 5.00% Notes to convert at any time, but the holders can convert up to the Maturity Date. Effective October 18, 2023, the initial conversion rate was to be adjusted to a conversion rate calculated based on a conversion price of $7.20 per share of common stock plus 50% of the difference between the Post-Closing VWAP (as defined in the 5.00% Notes Indenture) and $7.20 (if such difference is a positive number), provided that in no event will the adjusted conversion rate be lower than 120.48193 per $1,000 principal amount of the 5.00% Notes, based on a conversion price of $8.30 per share of common stock (the “Conversion Option”). On October 18, 2023, the Company evaluated the conversion rate per the terms outlined above and determined the initial conversion rate of 138.88889 shares of common stock per $1,000 principal amount will continue to be the conversion rate through the remaining term of the 5.00% Notes.

The number of shares of common stock issuable upon conversion of the 5.00% Notes based on the initial conversion rate (and after the conversion rate was fixed on October 18, 2023) is 9.2 million shares.

The Conversion Option provides the Company with a choice of cash, shares or combination settlement. Management determined the Conversion Option met the derivative bifurcation criteria under ASC 815 at inception through October 17, 2023, the date at which the conversion rate became fixed. During that period the derivative instrument was bifurcated and adjusted to fair value through earnings, using Level 3 inputs, at each reporting date with a final mark-to-market adjustment once the Conversion Option became fixed at the end of the day on October 17, 2023 and no longer met the bifurcation criteria.

The derivative financial instrument activity for the three and nine months ended September 30, 2023 and 2022 is comprised of the following (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Beginning balance$42,786 $— $— $— 
Initial measurement— — 38,160 — 
Extinguishment(380)— (380)— 
Change in value - gain(16,808)— (12,182)— 
Ending balance$25,598 $— $25,598 $— 

Under ASC 470-50-40, the June 2023 Exchange Transaction qualified as an extinguishment of debt. Under extinguishment accounting, the 2.50% Notes were derecognized and the new instruments, which included the 5.00% Notes and the Conversion Option derivative, were recorded at their respective fair values. The 5.00% Notes represent an instrument measured at fair value on a non-recurring basis using Level 3 inputs. The estimated fair value of the 5.00% Notes on June 9, 2023, the initial measurement, date was $38.2 million, which included a $6.0 million debt premium.

The fair value of the Conversion Option derivative liability of $38.2 million as of the transaction date was recorded as a debt issuance discount at inception on June 9, 2023. The Company also incurred issuance costs of $3.0 million. The debt premium, debt discount and debt issuance costs will be amortized using the effective interest method over the 3.5 year contractual term of the 5.00% Notes. The effective interest rate on the 5.00% Notes is 27.30%.
August 2023 Conversions

In August 2023, certain holders of 5.00% Notes converted portions of their aggregate principal amount of their 5.00% Notes for shares of common stock (the “August 2023 Conversions”). Per the terms described above as part of the Conversion Option, the note holders opted to convert portions of their 5.00% Notes, at a conversion rate of 138.88889 shares of common stock per $1,000 principal amount. Through the August 2023 Conversions, the note holders of the 5.00% Notes converted approximately $0.7 million of aggregate principal for approximately 0.1 million shares of the Company’s common stock.

Under ASC 470-50-40, the August 2023 Conversions qualified as an extinguishment. The conversion of 5.00% Notes included the bifurcated Conversion Option classified as a derivative liability. Both the 5.00% Notes and the derivative liability were derecognized at their carrying amounts and the common stock was measured at its then-current fair value, with the difference recorded as a gain on the extinguishment of the two separate liabilities.

The net carrying value of the 5.00% Notes derecognized as part of the August 2023 Conversions was $0.3 million. The carrying amount of the derivative liability, which was carried at fair value, derecognized as part of the August 2023 Conversions was $0.4 million. The August 2023 Conversions resulted in a gain on extinguishment of debt of $0.1 million, for the three and nine months ended September 30, 2023. The 0.1 million shares of common stock issued in connection wth the August 2023 Conversions was determined to have a value of $0.7 million which was recorded to contributed capital.

The carrying value of the 5.00% Notes at September 30, 2023 and December 31, 2022 was as follows (in thousands):

September 30,December 31,
20232022
Outstanding principal at par
$66,218 $— 
Debt premium5,641 — 
Unamortized debt discount
(35,744)— 
Unamortized debt issuance(2,788)— 
Net carrying amount
$33,327 $— 

The net carrying amount of $33.3 million is recorded as a non-current liability as of September 30, 2023.

Interest expense for the 5.00% Notes during the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Contractual coupon interest$833 $— $1,168 $— 
Amortization of premium, discount and issuance costs, net
1,367 — 1,878 — 
Total interest expense on 5.00% Notes
$2,200 $— $3,046 $— 

As of September 30, 2023, the Company has recorded $1.2 million of accrued interest related to the 5.00% Notes.
Future principal payments on the 5.00% Notes as of September 30, 2023 are as follows (in thousands):

Remainder of 2023$— 
2024— 
2025— 
202678,124 
Total including PIK interest, before unamortized discount and issuance costs$78,124 
Less: unaccrued PIK interest(11,905)
Less: unamortized discount and deferred issuance costs(32,892)
Convertible notes, non-current$33,327 

Fair Value of the 5.00% Notes

The 5.00% Notes were measured at fair value on the issuance date of June 9, 2023 and will be subsequently measured at fair value for disclosure purposes using Level 3 inputs. As of September 30, 2023, the 5.00% Notes are carried at amortized cost with an estimated fair value of $37.0 million.

The discounted cash flow analysis consisted of the following steps:

•The Company modeled the PIK interest of the 5.00% Notes through the Maturity Date;

•The Company used a discount rate of 25%, which is consistent with the typical venture capital discount rate; and

•The Company discounted the PIK interest and principal payments to determine the value of the 5.00% Notes without the Conversion Option

The table below summarizes the significant inputs used to estimate the fair value of the 5.00% Notes as of September 30, 2023:

September 30,June 9,
20232023
Coupon rate5.00%5.00%
Term (years)3.23.5
Volatility55.00 %55.00 %
Risk-free rate4.78 %4.15 %
Discount yield25.00 %25.00 %
Discount factor47.00 %44.00 %

The volatility used to estimate the fair value of the 5.00% Notes is an unobservable input. As volatility is an estimate, there is a range of values that could be considered appropriate. Changes to this input could impact the fair value reported.

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

The Company’s Conversion Option is classified as a derivative financial instrument and carried at fair value using Level 3 inputs. To determine the fair value of the Conversion Option, the Company calculated the difference in the value of the 5.00% Notes with and without the Conversion Option. The estimated fair value of the Conversion Option as of September 30, 2023 was $25.6 million. The fair value of the Conversion Option was estimated using a Monte Carlo simulation. For each path, the Company simulated the stock price over time such that:

•The Company determined the 60-day average stock price to calculate the conversion price.

•At each date after the call option start date, the Company used a Tsiveriotis and Fernandes model to determine the continuation value and compare it to a call price. If the continuation value exceeds the call price, the Company assumed exercise of the call option. When the call option is exercised, the holders will receive the maximum of the conversion value or the call price.

•The valuation also considered the reset conversion price as well as the accrued PIK, the Company determined whether the holder elects to convert the 5.00% Notes at the Maturity Date for the simulation paths where the 5.00% Notes has not been called prior to such date.

The table below summarizes the significant inputs used to estimate the fair value of the Conversion Option as of September 30, 2023 and June 9, 2023:

September 30,June 9,
20232023
Stock price$5.75$7.40
Initial conversion price$7.20$7.20
Conversion cap$8.30$8.30
Term (years)3.23.5
Time to call (years)1.72.0
Volatility55.00 %55.00 %
Risk-free rate4.78 %4.15 %
Discount yield25.00 %25.00 %

The volatility used to estimate the fair value of the Conversion Option is an unobservable input, because volatility is an estimate, there is a range of values that could be considered appropriate. Changes to this input could impact the fair value reported.

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