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Long-Term Obligations and Commitments | 12 Months Ended
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Dec. 31, 2019
Long-Term Obligations and Commitments [Abstract] |
Long-Term Obligations and Commitments | 3. Long-Term Obligations and Commitments The carrying value of our long-term obligations was as follows (in thousands):
|  | December 31, |
|  | 2019 |  |  | 2018 |
0.125 percent convertible senior notes |  | $ | 434,711 |  |  | $ | — |
1 percent convertible senior notes |  |  | 275,333 |  |  |  | 568,215 |
Long-term mortgage debt |  |  | 59,913 |  |  |  | 59,842 |
Principal balance of fixed rate note with Morgan Stanley (1) |  |  | — |  |  |  | 12,500 |
Leases and other obligations |  |  | 17,569 |  |  |  | 6,163 |
Total |  | $ | 787,526 |  |  | $ | 646,720 |
Less: current portion |  |  | (2,026 | ) |  |  | (13,749 | )
Total Long-Term Obligations |  | $ | 785,500 |  |  | $ | 632,971 |
(1) | Our $12.5 million fixed rate note with Morgan Stanley was included in our current portion of long-term obligations on our consolidated balance sheet at December 31, 2018. We paid off our fixed rate note in the third quarter of 2019.
Convertible Notes and Call Spread 0.125 Percent Convertible Senior Notes In December 2019, we entered into privately negotiated exchange and/or subscription agreements with certain new investors and certain holders of our existing 1% Notes to exchange $375.6 million of our 1% Notes for $439.3 million of our 0.125% Notes, and to issue $109.5 million of our 0.125% Notes. We completed this exchange to reduce our cash interest payments, increase our conversion price and extend our maturity for a large portion of our debt. Additionally, in conjunction with the December 2019 exchange, we entered into a call spread transaction, which was comprised of purchasing note hedges and selling warrants, to minimize the impact of potential economic dilution upon conversion of our 0.125% Notes by increasing the effective conversion price even further. Interest is payable semi-annually on June 15 and December 15 of each year for the 0.125% Notes. The 0.125% Notes are convertible at the option of the note holders prior to August 1, 2024 only under certain conditions. On or after August 1, 2024, the 0.125% Notes are initially convertible into approximately 6.6 million shares of common stock at a conversion price of approximately $83.28 per share. We will settle conversions of the notes, at our election, in cash, shares of our common stock or a combination of both. We may not redeem the 0.125% Notes prior to maturity, and no sinking fund is provided for them. If we undergo a fundamental change, holders may require us to purchase for cash all or any portion of their 0.125% Notes at a purchase price equal to 100 percent of the principal amount of the notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date. At December 31, 2019, we had the following 0.125% Notes outstanding (amounts in millions except price per share data):
|  | 0.125% Notes |
Outstanding principal balance |  | $ | 548.8 |
Maturity date |  | December 15, 2024 |
Interest rate |  |  | 0.125 | %
Conversion price per share |  | $ | 83.28 |
Total shares of common stock subject to conversion |  |  | 6.6 |
The following table summarizes information about the equity and liability components of our outstanding 0.125% Notes (in millions). We measured the fair values of the convertible notes outstanding based on quoted market prices, which is a Level 2 measurement at December 31, 2019:
|  | 0.125% Notes |
Fair value of outstanding notes |  | $ | 558.7 |
Principal amount of convertible notes outstanding |  | $ | 548.8 |
Unamortized portion of debt discount |  | $ | 105.2 |
Long-term debt |  | $ | 434.7 |
Carrying value of equity component |  | $ | 105.8 |
Call Spread Additionally, in conjunction with the December 2019 exchange, we entered into a call spread transaction, which was comprised of purchasing note hedges and selling warrants, to minimize the impact of potential economic dilution upon conversion of our 0.125% Notes by increasing the conversion price even further. The call spread cost us $52.6 million, of which $108.7 million was for the note hedge purchase, offset by $56.1 million we received for selling the warrants. We increased our effective conversion price to $123.38 with the same number of underlying shares as our 0.125% Notes. Similar to our 0.125% Notes, our note hedges are subject to adjustment. Additionally, our note hedges are exercisable upon conversion of the 0.125% Notes. The note hedges will expire upon maturity of 0.125% Notes, or December 2024. The note hedges and warrants are separate transactions and are not part of the terms of our 0.125% Notes. The holders of the 0.125% Notes do not have any rights with respect to the note hedges and warrants. We recorded the aggregate amount paid for the note hedges and the aggregate amount received for the warrants in additional paid-in capital in our consolidated balance sheet. We excluded shares under the note hedges from our calculation of diluted earnings per share as they were antidilutive. We will include the shares issuable under the warrants in our calculation of diluted earnings per share when the average market price per share of our common stock for the reporting period exceeds the strike price of the warrants. 1 Percent Convertible Senior Notes In November 2014, we completed a $500 million offering of convertible senior notes, which mature in 2021 and bear interest at 1 percent. We used a substantial portion of the net proceeds from the issuance of the 1% Notes to repurchase $140 million in principal of our 2¾ percent convertible senior notes, or 2¾% Notes. In December 2016, we issued an additional $185.5 million of 1% Notes in exchange for the redemption of $61.1 million of our 2¾% Notes. In December 2019, we exchanged a portion of our 1% Notes for 0.125% Notes. As a result, the principal balance of 1% Notes was $309.9 million. Additionally, we recorded a $21.9 million non-cash loss on early retirement of debt, reflecting the early retirement of a significant portion of our 1% Notes in December 2019. At December 31, 2019, we had the following 1% Notes outstanding (amounts in millions except price per share data):
|  | 1% Notes |
Outstanding principal balance |  | $ | 309.9 |
Maturity date |  | November 30, 2021 |
Interest rate |  | 1 percent |
Conversion price per share |  | $ | 66.81 |
Total shares of common stock subject to conversion |  |  | 4.6 |
Interest is payable semi-annually in arrears on May 15 and November 15 of each year for the 1% Notes. The 1% Notes are convertible at the option of the note holders prior to July 1, 2021 only under certain conditions. On or after July 1, 2021, the 1% Notes are initially convertible into approximately 4.6 million shares of common stock at a conversion price of approximately $66.81 per share. We will settle conversions of the notes, at our election, in cash, shares of our common stock or a combination of both. We may not redeem the 1% Notes prior to maturity, and no sinking fund is provided for them. If we undergo a fundamental change, holders may require us to purchase for cash all or any portion of their 1% Notes at a purchase price equal to 100 percent of the principal amount of the notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date. The following table summarizes information about the equity and liability components of our outstanding 1% Notes (in millions). We measured the fair values of the convertible notes outstanding based on quoted market prices, which is a Level 2 measurement at December 31, 2019:
|  | December 31, |
|  | 2019 |  |  | 2018 |
Fair value of outstanding notes |  | $ | 354.8 |  |  | $ | 725.0 |
Principal amount of convertible notes outstanding |  | $ | 309.9 |  |  | $ | 685.5 |
Unamortized portion of debt discount |  | $ | 32.8 |  |  | $ | 110.8 |
Long-term debt |  | $ | 275.3 |  |  | $ | 568.2 |
Carrying value of equity component |  | $ | 33.5 |  |  | $ | 219.0 |
We account for our convertible notes using an accounting standard that requires us to assign a value to our convertible debt equal to the estimated fair value of similar debt instruments without the conversion feature and to record the remaining portion in equity. As a result, we recorded our convertible notes at a discount, which we are amortizing as additional non-cash interest expense over the expected life of the respective debt. We determined our nonconvertible debt borrowing rate using a combination of the present value of the debt’s cash flows and a Black-Scholes valuation model. The following table summarizes the nonconvertible borrowing rate, effective interest rate and amortization period of our debt discount for our convertible notes:
|  | 1% Notes |  | 0.125% Notes
Nonconvertible debt borrowing rate |  | 7.4 percent |  | 4.4 percent
Effective interest rate (1) |  | 7.5 percent |  | 4.9 percent
Amortization period of debt discount |  | 7 years |  | 5 years
(1) | For our 1% Notes, our effective interest rate represents our effective interest rate after our December 2019 debt exchange.
Our total interest expense for our outstanding senior convertible notes for the years ended December 31, 2019, 2018 and 2017 included $39.3 million, $35.2 million and $32.5 million, respectively, of non-cash interest expense related to the amortization of the debt discount and debt issuance costs for our convertible notes. Financing Arrangements Line of Credit Arrangement In June 2015, we entered into a five-year revolving line of credit agreement with Morgan Stanley Private Bank, National Association, or Morgan Stanley, which we amended in February 2016. Under the amended credit agreement, Morgan Stanley provided a maximum of $30 million of revolving credit for general working capital purposes. During the third quarter of 2019, we paid off our total outstanding borrowings of $12.5 million under the agreement and subsequently terminated the agreement. Research and Development and Manufacturing Facilities In July 2017, we purchased the building that houses our primary R&D facility for $79.4 million and our manufacturing facility for $14.0 million. We financed the purchase of these two facilities with mortgage debt of $60.4 million in total. Our primary R&D facility mortgage has an interest rate of 3.88 percent. Our manufacturing facility mortgage has an interest rate of 4.20 percent. During the first five years of both mortgages, we are only required to make interest payments. Both mortgages mature in August 2027. As a result of the purchase, we extinguished the financing liability we had previously recorded on our balance sheet for our primary R&D facility. The difference between the purchase price of our primary R&D facility and the carrying value of our financing liability at the time of the purchase was $7.7 million. We recognized this amount as a non-cash loss on extinguishment of financing liability for leased facility in our consolidated results of operations in the third quarter of 2017. We previously accounted for the lease of our manufacturing facility as an operating lease. We capitalized the purchase price of the manufacturing facility as a fixed asset in the third quarter of 2017. Maturity Schedules Annual debt and other obligation maturities, including fixed and determinable interest, at December 31, 2019 are as follows (in thousands):
2020 |  | $ | 6,260 |
2021 |  |  | 316,114 |
2022 |  |  | 3,495 |
2023 |  |  | 4,180 |
2024 |  |  | 553,006 |
Thereafter |  |  | 64,429 |
Subtotal |  | $ | 947,484 |
Less: current portion |  |  | (2,026 | )
Less: fixed and determinable interest |  |  | (28,014 | )
Less: unamortized portion of debt discount |  |  | (137,975 | )
Plus: lease liabilities |  |  | 17,235 |
Total |  | $ | 796,704 |
Operating Leases Ionis Leases We lease a facility adjacent to our manufacturing facility that has laboratory and office space that we use to support our manufacturing facility. We lease this space under a non-cancelable operating lease with an initial term ending in June 2021 and an option to extend the lease for up to two five-year periods. We also lease additional office spaces. We sublease a portion of one of these spaces to Akcea. We lease these spaces under non-cancelable operating leases with initial terms ending in 2023 with options to extend the leases for one five-year period. The sublease with Akcea is eliminated in our consolidated financial statements. Akcea Lease Akcea entered into an operating lease agreement for office space located in Boston, Massachusetts for its new corporate headquarters in the second quarter of 2018. The lease commencement date was in August 2018 and Akcea took occupancy in September 2018. Akcea is leasing this space under a non-cancelable operating lease with an initial term ending after 123 months and an option to extend the lease for an additional five-year term. Under the lease agreement, Akcea received a three-month free rent period, which commenced on August 15, 2018, and a tenant improvement allowance up to $3.8 million. Akcea provided the lessor with a letter of credit to secure its obligations under the lease in the initial amount of $2.4 million, to be reduced to $1.8 million on the third anniversary of the rent commencement date and to $1.2 million on the fifth anniversary of the rent commencement date if Akcea meets certain conditions set forth in the lease at each such time. When we determined our lease term for our operating lease right-of-use assets and lease liabilities for these leases, we did not include the extension options for these leases. Amounts related to our operating leases were as follows (dollar amounts in millions):
|  | At December 31, 2019 |
Right-of-use operating lease assets (1) |  | $ | 12.6 |
Operating lease liabilities (2) |  | $ | 17.2 |
Weighted average remaining lease term |  | 8.1 years |
Weighted average discount rate |  |  | 7.6 | %
(1) | Included in deposits and other assets on our consolidated balance sheet.
(2) | Current portion of $2.0 million was included in current portion of long-term obligations on our consolidated balance sheet, with the difference included in long-term obligations.
During the year ended December 31, 2019, we paid $3.9 million of lease payments, which was included in operating activities in our consolidated statement of cash flows. As of December 31, 2019, the future payments for our operating lease liabilities are as follows (in thousands):
|  | Operating Leases |
Year ending December 31, |  | $ |  |
2020 |  |  | 3,285 |
2021 |  |  | 3,022 |
2022 |  |  | 2,781 |
2023 |  |  | 2,520 |
2024 |  |  | 2,396 |
Thereafter |  |  | 9,465 |
Total minimum lease payments |  |  | 23,469 |
Less: |  |  |  |
Imputed interest |  |  | (6,234 | )
Total operating lease liabilities |  | $ | 17,235 |
Rent expense was $3.6 million, $2.6 million and $1.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.

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- Definition The entire disclosure for debt and capital lease obligations can be reported. Information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. Also includes descriptions and amounts of capital leasing arrangements that consist of direct financing, sales type and leveraged leases. Disclosure may include the effect on the balance sheet and the income statement resulting from a change in lease classification for leases that at inception would have been classified differently had guidance been in effect at the inception of the original lease. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 840 -URI http://asc.fasb.org/topic&trid=2208923 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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