Convertible Senior Notes

9 Months Ended

Sep. 30, 2020

Convertible Senior NotesOn September 28, 2020, we issued $200.0 million aggregate principal amount of 2.75% convertible senior Notes due 2027 (Initial Notes) to certain initial purchasers for resale to qualified institutional buyers in a private offering exempt from registration under the Securities Act of 1933. In connection with the offering, we granted the initial purchasers an option to purchase up to an additional $30.0 million in principal amount of notes (Option Notes), which was exercised in full on October 5, 2020. Total proceeds realized, net of issuance costs, from the sale of the Initial Notes and Option Notes (collectively, the Convertible Senior Notes, or the Notes) were approximately $222.5 million, of which $194.0 million were received upon closing of the Initial Notes in September 2020. The Notes are governed by an indenture (Indenture), dated as of September 28, 2020, between Zogenix and U.S. Bank National Association, as trustee. Under the Indenture, the Notes are senior, unsecured obligations of Zogenix, are equal in right of payment with its future senior, unsecured indebtedness of Zogenix, and structurally subordinated to all indebtedness and liabilities of its subsidiaries. The principal amount of the Notes was issued at par value and the Notes accrue interest at a rate of 2.75% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2021. The Notes mature on October 1, 2027, unless earlier converted by the holders or redeemed or repurchased by us in accordance with their terms prior to such date. The Indenture contains customary terms and covenants, including certain events of default upon which the Notes may be due and payable immediately, but does not contain any financial covenants.

The Notes are convertible, subject to certain conditions described below, into shares of our common stock at an initial conversion rate of 41.1794 shares per $1,000 principal amount of the Notes, which represents an initial conversion price of approximately $24.28 per share, subject to adjustments upon the occurrence of certain events. Certain corporate events described in the Indenture may increase the conversion rate for holders who elect to convert their Notes in connection with such corporate event should they occur. We also may choose to repurchase outstanding Notes through open-market transactions, including through Rule 10b5-1 trading plan to facilitate open-market repurchases, or otherwise, from time to time.

Holders may convert the Notes in multiples of $1,000 principal amount at any time prior to October 1, 2027, but only in the following circumstances:

•during any calendar quarter ending after December 31, 2020, if our closing stock price exceeds 130% of the conversion price on each of at least 20 trading days of the last 30 consecutive trading days of the immediately preceding calendar quarter;

•during the five consecutive business day period after any 10 consecutive trading day period in which the Notes’ trading price is less than 98% of the product of our closing stock price times the conversion rate; or

•the occurrence of certain corporate events, such as a change of control, merger, default or liquidation.

In addition, holders may also convert their Notes at their option at any time beginning on July 1, 2027 until the close of business on the second scheduled trading day immediately before the maturity date for the Notes, without regard to the foregoing circumstances.

Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination thereof at our election.

We may not redeem the Notes prior to October 7, 2024. On or after October 7, 2024, the Notes are redeemable for cash, in whole or in part (subject to minimum redemption amounts), at our option at any time, and from time to time, before the 40th scheduled trading day immediately before October 1, 2027, at a cash redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, but only if our closing stock price exceeds 130% of the conversion price on (1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (2) the trading day immediately before the date we send such notice. In addition, calling any note for redemption will constitute a make-whole fundamental change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.

In accounting for the issuance of the $200.0 million Initial Notes, we performed an assessment of all embedded features of the debt instrument to determine if (i) such features should be bifurcated and separately accounted for, and (ii) if bifurcation requirements are met, whether such features should be classified and accounted for as equity or liability instruments. If the embedded feature meets the requirements to be bifurcated and accounted for as a liability, the fair value of the embedded feature is measured initially, included as a liability on the condensed consolidated balance sheets and re‑measured to fair value at each reporting period.

We determined the embedded conversion feature in the Initial Notes is not required to be separately accounted for as a derivative liability instrument because it is considered to be indexed to our common stock. However, since the Initial Notes may be settled with a combination of cash and shares, at our election, we are required to separate the Initial Notes into debt and equity components. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar debt instrument issued by us without the conversion feature. The difference between the full principal amount of the Initial Notes and this estimated fair value was recorded as a debt discount on the Notes, with a corresponding offset to additional paid-in capital (the equity component). In addition, the underlying debt issuance costs of associated with the Initial Notes were allocated to the debt and equity components in proportion to the allocation of the full principal amount to those components. The Option Notes that settled in October 2020 will be accounted for similarly.

The debt component of the Initial Notes was estimated to have a fair value of $132.3 million based on the contractual cash flows discounted at our estimated non-convertible debt borrowing rate of 9.7%. Our determination of an appropriate discount rate was based on a yield curve derived from recent publicly traded bond offerings with a similar term for companies with similar credit ratings to us (Level 2 inputs). After the allocation of underlying debt issuance costs of $6.6 million to the debt and equity components, $65.5 million was attributable to additional-paid-in capital within stockholders’ equity and the corresponding offset was recorded as unamortized debt discount and issuance costs and included within the carrying amount of the Notes. The debt discount and issuance costs will be amortized as interest expense over the expected term of the Initial Notes of seven years using the effective interest method. The effective interest rate on the $200.0 million Initial Notes was 9.9%. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

The following table provides information on our Convertible Senior Notes balance as of September 30, 2020 (in thousands):


	September 30, 2020
Principal amount of Convertible Senior Notes	$	200,000
Less: Unamortized debt discount and issuance costs	(72,040)
Net carrying amount	$	127,960

For the three and nine months ended September 30, 2020, interest expense for the Initial Notes was not material. For the same periods in 2019, we had no interest expense as we had no borrowings..