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Convertible Notes

12 Months Ended

Dec. 31, 2019

Convertible Notes

Convertible Notes

Note 10. Convertible Notes

The components of the convertible notes were as follows (in thousands):


						Carrying Amount
		Interest Rates				December 31,
Debt		December 31, 2019		Maturities		2019			2018
1.25% Convertible Senior Notes due 2020		1.25	%	2020		$	18,300		$	17,434

The carrying amount and fair value of our convertible notes were as follows (in thousands):


		December 31,
		2019						2018
		Carrying						Carrying
		Amount			Fair Value			Amount			Fair Value
1.25% Convertible Senior Notes due 2020		$	18,300		$	32,511		$	17,434		$	25,073

On November 14, 2013, we issued, in a private placement, $375.0 million aggregate principal amount of 0.375% Convertible Senior Notes (the “2018 Notes”) and $375.0 million aggregate principal amount of 1.25% Convertible Senior Notes (the “2020 Notes”). The 2018 Notes bore interest at a rate of 0.375% per annum and the 2020 Notes bear interest at a rate of 1.25% per annum, in each case payable semi-annually in arrears in cash on May 15 and November 15, beginning on May 15, 2014. The 2018 Notes matured on November 15, 2018 and the 2020 Notes will mature on November 15, 2020, unless earlier purchased or converted. We may not redeem the 2020 Notes prior to their relevant scheduled maturity dates.

The fair value of the 2020 Notes is based on data from readily available pricing sources which utilize market observable inputs and other characteristics for similar types of instruments, and, therefore, is classified within Level 2 in the fair value hierarchy.

Prior to May 14, 2014, the 2020 Notes were not convertible except in connection with a make-whole fundamental change, as defined in the indenture. Beginning on, and including, May 15, 2014, the 2020 Notes are convertible prior to the close of business on the business day immediately preceding May 15, 2020 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2020 Notes on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2020 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2020 Notes on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after May 15, 2020 until the close of business on the second scheduled trading day immediately preceding the relevant maturity date, the 2020 Notes are convertible at any time, regardless of the foregoing circumstances. Upon conversion we will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election. Management’s intent is to settle any conversions of the 2020 Notes in shares of our common stock. On January 1, 2020, the 2020 Notes became convertible through at least March 31, 2020, based on meeting the conversion criteria related to the sale price of our common stock during the calendar quarter ended December 31, 2019 as described in (i) above.

The initial conversion rate for the 2020 Notes is 19.3207 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $51.76 per share. The conversion rate for the 2020 Notes will be subject to adjustment for certain events but will not be adjusted for any accrued and unpaid interest. Upon the occurrence of certain fundamental changes, the holders of the 2020 Notes may require us to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes, plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the fundamental change purchase date. In addition, if, and to the extent, a holder elects to convert any 2020 Notes in connection with a make-whole fundamental change transaction, as defined in the indenture, we will, under certain circumstances, increase the applicable conversion rate by a number of additional shares of our common stock.

Since the 2020 Notes can be settled in cash or common shares or a combination of cash and common shares at our option, we determined the embedded conversion options in the 2020 Notes are not required to be separately accounted for as a derivative. However, since the 2020 Notes are within the scope of the accounting guidance for cash convertible instruments, we are required to separate the 2020 Notes into a liability and equity component. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option is determined by deducting the fair value of the liability component from the initial proceeds. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification in the accounting guidance for contracts in an entity’s own equity.

The liability component of the 2020 Notes on the date of issuance was estimated at $274.8 million, and accordingly, the equity component on the date of issuance was $100.2 million. The discount on the 2020 Notes is being amortized to interest expense over the term of the 2020 Notes, using the effective interest method. The carrying value of the 2020 Notes was $18.3 million and $17.4 million, respectively, (net of $0.8 million and $1.7 million debt discount and issuance costs, respectively) at December 31, 2019 and 2018.

During the year ended December 31, 2017, we recognized $54.9 million of expense related to senior note conversions on the consolidated statement of operations for the conversion of $367.2 million in aggregate principal amount of the 2018 Notes and $355.6 million in aggregate principal amount of the 2020 Notes in exchange for shares of our common stock and cash. Included in the conversions were those with entities affiliated with Julian C. Baker, one of our directors and principal stockholders, which agreed to exchange $259.0 million in aggregate principal amount of the 2018 Notes and $274.5 million in aggregate principal amount of the 2020 Notes for shares of our common stock.