Convertible Senior Notes

12 Months Ended

Dec. 31, 2020

Between September 2020 and October 2020, we issued $230.0 million principal amount of 2.75% convertible senior notes due 2027 in a private offering (collectively, the Convertible Senior Notes or Notes). Total proceeds realized from the sale of the Notes, net of issuance costs of $7.5 million, were $222.5 million. 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.

The Indenture contains representations and warranties by us, indemnification provisions in favor of the lenders and customary affirmative and negative covenants related to timing filings and reporting, and events of default. As of December 31, 2020, we were in compliance with all covenants under the Indenture.

In accounting for the issuance of the 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 consolidated balance sheets and re-measured to fair value at each reporting period.

We determined the embedded conversion feature in the 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 Notes may be settled with a combination of cash and shares, at our election, we are required to separate the 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 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, debt issuance costs associated with the Notes were allocated to the debt and equity components in proportion to the allocation of the full principal amount to those components.

At issuance, the debt component of the Notes was estimated to have a fair value of $152.1 million based on 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 then-recent publicly-traded bond offerings with a similar term for companies with similar credit ratings to us (Level 2 inputs). As a result, the equity component of $77.9 million, which represents the difference between the proceeds from the issuance of the Notes and the fair value of the debt component, was recognized as a debt discount. In addition, debt issuance costs of $7.5 million related to the issuance of the Notes were comprised of $4.9 million attributable to the debt component, and recorded as debt discount, with the remaining $2.5 million attributable to the equity component and netted with the equity component discussed above resulting in $75.3 million recorded to additional paid-in capital within stockholders’ equity on the consolidated balance sheet. The debt discount and issuance costs of $82.8 million are being amortized as interest expense over the expected term of the Notes of seven years using the effective interest rate of 9.9%. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. As of December 31, 2020, the outstanding Notes were not subject to conversion under the Indenture and no principal is due until 2027. At December 31, 2020, the Notes had a weighted-average remaining term of approximately 6.7 years and the equity component continues to meet the conditions for equity classification.

The following table provides information on our Convertible Senior Notes balance as of December 31, 2020:


(In thousands)	December 31, 2020
Liability component
Principal amount of Convertible Senior Notes	$	230,000
Less: Unamortized debt discount and issuance costs	(80,647)
Net carrying amount	$	149,353

Equity component - net carrying value	$	75,333

Interest expense related to the Convertible Senior Notes was included in other income (expense), net on the consolidated statements of operations as follows:


(In thousands)	Year Ended December 31, 2020
Contractual coupon interest	$	1,600
Amortization of debt discount and issuance costs	2,143
Total interest expense	$	3,743