Convertible Senior Notes and Capped Calls

3 Months Ended

Mar. 31, 2020

Convertible Senior Notes and Capped Calls

In August 2018, we issued $200.0 million aggregate principal amount of convertible senior notes due August 1, 2023 and an additional $30.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the 2023 Notes). The 2023 Notes are our senior unsecured obligations and bear interest at a fixed rate of 1.25% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on February 1, 2019. The 2023 Notes will mature on August 1, 2023, unless earlier converted, redeemed or repurchased. The Notes do not contain any financial covenants. The total net proceeds from the 2023 Notes offering, after deducting initial purchase discounts and estimated debt issuance costs was $223.1 million. The 2023 Notes are governed by an indenture between the Company, as issuer, and U.S. Bank National Association, as trustee (the Indenture).

Each $1,000 principal amount of the 2023 Notes is initially convertible into 24.0460 shares of our common stock, the Conversion Option, which is equivalent to an initial conversion price of approximately $41.59 per share, subject to adjustment upon the occurrence of specified events. The holders of the 2023 Notes may convert their 2023 Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2023, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 (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, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the 2023 Notes on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (measurement period) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the 2023 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 of the 2023 Notes on each such trading day; (3) if we call any or all of the 2023 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events (as set forth in the Indenture).

On or after February 1, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion,

we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the Indenture.

If we undergo a fundamental change (as set forth in the Indenture) at any time prior to the maturity date, holders of the 2023 Notes, will have the right, at their option, to require us to repurchase for cash all or any portion of their 2023 Notes at a repurchase price equal to 100% of the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, in each case as described in the Indenture, we will increase the conversion rate for a holder of the 2023 Notes who elects to convert its 2023 Notes in connection with such a corporate event or during the related redemption period in certain circumstances.

During the three months ended December 31, 2019, the conversion feature of the 2023 Notes was triggered as the last reported price of our common stock was more than or equal to 130% of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on, and including, December 31, 2019, and therefore the 2023 Notes were convertible, in whole or in part, at the option of the holders between January 1, 2020 through March 31, 2020. However, no holders of the 2023 Notes elected to convert their 2023 Notes during the January 1, 2020 through March 31, 2020 period. As of March 31, 2020, the 2023 Notes are not convertible at the option of the holder.

We may not redeem the 2023 Notes prior to August 6, 2021. On or after August 6, 2021, we may redeem for cash all or any portion of the 2023 Notes, at our option, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including the trading day immediately preceding, the date on which we provide the redemption notice at a redemption price equal to 100% principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

The foregoing description is qualified in its entirety by reference to the text of the Indenture and the Form of the 2023 Notes, which were incorporated by reference as Exhibits 4.4 and 4.5 to our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020.

In accounting for the transaction, the 2023 Notes have been separated into liability and equity components. The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The initial carrying amount of the equity component representing the Conversion Option was $53.8 million and was determined by deducting the fair value of the liability component from the par value of the 2023 Notes. The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the 2023 Notes over the initial carrying amount of the liability component, or the debt discount, is amortized to interest expense over the contractual term of the 2023 Notes at an effective interest rate of 7.36%.

In accounting for the debt issuance costs of $6.9 million related to the 2023 Notes, we allocated the total amount incurred to the liability and equity components of the 2023 Notes based on their relative values. Issuance costs attributable to the liability component were $5.3 million and will be amortized to interest expense using the effective interest method over the contractual term of the 2023 Notes. Issuance costs attributable to the equity component of $1.6 million were netted with the equity component in additional paid-in capital.

The net carrying amount of the liability component of the 2023 Notes was as follows:


	As of March 31, 2020		As of December 31, 2019
	(in thousands)
Principal	$	230,000	$	230,000
Unamortized debt discount	(38,271)		(40,768)
Unamortized issuance costs	(3,785)		(4,032)
Net carrying amount	$	187,944	$	185,200

The net carrying amount of the equity component as March 31, 2020 and December 31, 2019 was as follows (in thousands):


Debt discount for conversion option	$	53,820
Issuance costs	(1,626)
Net carrying amount	$	52,194

Interest expense related to the 2023 Notes was as follows:


	Three Months Ended March 31,
	2020		2019
	(in thousands)
Contractual interest expense	$	719	$	719
Amortization of debt discount	2,496		2,284
Amortization of issuance costs	247		226
Total interest expense	$	3,462	$	3,229

In connection with the offering of the 2023 Notes, we entered into privately negotiated capped call transactions with certain counterparties, the (Capped Calls). The Capped Calls each have an initial strike price of $41.59 per share, subject to certain adjustments, which correspond to the initial conversion price of the 2023 Notes. The Capped Calls have initial cap prices of $63.98 per share, subject to certain adjustments. The Capped Calls are expected to offset potential dilution to our common stock upon conversion of the 2023 Notes, with such offset subject to a cap based on the cap price. The Capped Calls cover, subject to anti-dilution adjustments, approximately 5.5 million shares of our common stock. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the 2023 Notes. The Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. Accordingly, the cost of $26.9 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.

The net impact to our stockholders' equity, included in additional paid-in capital, of the above components of the 2023 Notes was as follows (in thousands):


Conversion option	$	53,820
Purchase of capped calls	(26,910)
Issuance costs	(1,626)
Total	$	25,284