Convertible debt (Notes)

9 Months Ended

Sep. 30, 2020

Convertible Senior Notes

The following is a summary of the Company's convertible senior notes as of September 30, 2020 (in thousands):


	Date of Issuance	Unpaid Principal Balance		Net Carrying Amount				Contractual Interest Rates
				Current		Noncurrent


1% Convertible Notes due in 2024 ("2024 Notes")	May 2019	$	143,750	$	—	$	115,880	1%
2.25% Convertible Notes due in 2027 ("2027 Notes")	September 2020	$	150,000	$	—	$	98,871	2.25%

In September 2020, the Company issued the 2027 Notes in an aggregate principal amount of $150.0 million and in May 2019, the Company issued the 2024 Notes in an aggregate principal amount of $143.8 million. The interest rate for the 2027 Notes is fixed at 2.25% per year and the effective interest rate related to the amortization of the liability component is 8.5%, Interest is payable semiannually in arrears in cash on March 15 and September 15 of each year, beginning on March 15, 2021. Interest related to the 2024 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2019. The 2027 Notes mature on September 15, 2027 and the 2024 Notes mature on May 15, 2024, unless redeemed or converted in accordance with their terms prior to such date.

Each $1,000 of principal of the 2027 Notes will initially be convertible into 23.9137 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $41.82 per share. Each $1,000 of principal of the 2024 Notes will initially be convertible into 15.1394 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $66.05 per share. The initial conversion price for the 2027 and the 2024 Notes is subject to adjustment upon the occurrence of certain specified events.

On or after June 15, 2027 to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2027 Notes regardless of the contingent conversion conditions described herein. Upon conversion, the Company will pay or deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, as described in the indenture governing the 2027 Notes.

Holders may convert their 2027 Notes at their option at any time prior to the close of business on the business day immediately preceding June 15, 2027 only under the following circumstances:

•during the five consecutive business day period immediately following any five consecutive trading day period (the "Measurement Period") in which the trading price per 2027 Note for each day of that Measurement Period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such day;

•during any calendar quarter commencing after the calendar quarter ending on December 31, 2020, if the last reported sale price of the common stock for 20 or more trading days (whether or not consecutive) in 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 on each applicable trading day; or

•upon the occurrence of specified corporate events.

The 2024 and 2027 Notes, along with the previously issued convertible notes with original due dates in 2019 and 2047 (the "2019 Notes" and "2047 Notes," and together with the 2024 and 2027 Notes, collectively, the "Notes"), are general unsecured obligations and rank senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with all of the Company's existing and future liabilities that are not so subordinated, are effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries (including trade payables but excluding intercompany obligations owed to the Company or its subsidiaries). The 2019 Notes and 2047 Notes were settled as of December 31, 2019 and no longer remain outstanding.

As of September 30, 2020, the 2027 and 2024 Notes are not yet convertible and their remaining term is approximately 83 months and 43 months, respectively.

As of September 30, 2020 and December 31, 2019, the fair value of the principal amount of the 2027 and 2024 Notes was $276.5 million and $163.2 million, respectively. The estimated fair value was determined based on inputs that are

observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price and interest rates, which represents level 2 in the fair value hierarchy.

In accounting for the transaction costs for the Notes issuance, the Company allocated the costs incurred to the liability and equity components in proportion to the allocation of the proceeds from issuance to the liability and equity components. Issuance costs attributable to the liability component, totaling $2.8 million and $3.4 million for the 2027 and 2024 Notes, respectively, are being amortized to expense over the expected life of the notes using the effective interest method. Issuance costs attributable to the equity component related to the conversion option, totaling $1.3 million and $1.1 million for the 2027 and 2024 Notes, respectively, were netted with the equity component in stockholders' equity.

The Notes consist of the following (in thousands):


	September 30, 2020		December 31, 2019
Liability component:
Principal	$	293,750	$	143,750
Less: debt discount and issuance cost, net of amortization	(78,999)		(33,046)
Net carrying amount	$	214,751	$	110,704

Equity component(1)	$	80,098	$	32,883

(1) Recorded within additional paid-in capital in the unaudited condensed consolidated balance sheet. As of September 30, 2020, it included $47.2 million and $32.9 million related to the 2027 and 2024 Notes, respectively, which was net of $1.3 million and $1.1 million issuance cost in equity, respectively. As of December 31, 2019, it included $32.9 million related to the 2024 Notes, which was net of $1.1 million issuance cost in equity.

The following table sets forth total interest expense recognized related to the Notes (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Coupon interest	$	500	$	863	$	1,219	$	3,219
Amortization of debt issuance costs	174		286		488		992
Amortization of debt discount	1,824		2,568		4,938		8,136
Total	$	2,498	$	3,717	$	6,645	$	12,347

Note Hedge and Warrant Transactions

Concurrently with the offering of the 2019 Notes, the Company entered into separate convertible note hedge (the "Note Hedge") and warrant (the "Warrant") transactions. Taken together, the purchase of the Note Hedge and the sale of the Warrant were intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price of the 2019 Notes from $33.79 to $45.48 per share. The Warrant was not part of the 2019 Notes or Note Hedge. Both the Note Hedge and Warrant were recorded as part of additional paid-in capital.

As of December 31, 2019, the Note Hedge was settled through certain note hedge termination agreements and exercise of any remaining Note Hedge. In 2019, the Company entered into certain warrant termination agreements which terminated certain of the Warrants that were entered into by the Company in connection with the offering of the 2019 Notes. The remaining Warrants expired in August 2020.

Capped Call Transactions

In September 2020 and in May 2019, in connection with the offering of the 2027 and 2024 Notes, respectively, the Company entered into privately negotiated capped call transactions (collectively, the "Capped Call") with certain option counterparties. The Capped Call transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock initially underlying the Notes, at a strike price that corresponds to the initial conversion price of the Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The Capped Call transactions are intended to reduce potential dilution to the Company’s common stock and/or offset any cash payments the Company will be required to make in excess of the principal amounts upon any conversion of Notes, and to effectively increase the overall conversion price of the 2027 Notes from $41.82 to $78.90 per share, and for the 2024 Notes from $66.05 to $101.62 per share. As the Capped Call transactions meet certain accounting criteria, they are recorded in stockholders’ equity and are not accounted for as

derivatives. The cost of the Capped Call was $25.3 million and $16.4 million for the 2027 and 2024 Notes, respectively, and was recorded as part of additional paid-in capital.