Convertible Notes

3 Months Ended

Mar. 31, 2020

Convertible Notes

Convertible Notes

8. Convertible Notes

In October 2018, the Company sold, through the initial purchasers, convertible senior notes (“Convertible Notes”) to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended, for gross proceeds of $201,250. The Convertible Notes are senior, unsecured obligations with interest payable semi-annually in cash at a rate of 1.00% per annum on April 1^st and October 1^st of each year. The Convertible Notes will mature on October 1, 2023 unless they are redeemed, repurchased or converted prior to such date. Prior to April 1, 2023, the Convertible Notes are convertible at the option of holders only during certain periods and upon satisfaction of certain conditions. Thereafter, the Convertible Notes will be convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the Convertible Notes may be settled in shares of the Company’s common stock, cash or a combination of cash and shares of the Company’s common stock, at the Company’s election.

The Convertible Notes have an initial conversion rate of 23.6323 shares of common stock per $1,000 principal amount of the Convertible Notes, which will be subject to customary anti-dilution adjustments in certain circumstances. This represents an initial effective conversion price of approximately $42.31 per share, which represents a premium of approximately 30% to the $32.55 per share closing price of the Company’s common stock on October 2, 2018, the date the Company priced the offering.

The Company may redeem all or any portion of the Convertible Notes, at its option, on or after October 5, 2021, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, if the last reported sale price of the Company’s 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 the Company provides written notice of redemption.

Holders of Convertible Notes may require the Company to repurchase their Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if the Company issues a notice of redemption prior to the maturity date, it will, under

certain circumstances, increase the conversion rate for holders who elect to convert their Convertible Notes in connection with such corporate event or notice of redemption.

In connection with the pricing of the Convertible Notes, the Company entered into privately negotiated capped call transactions with a financial institution. The capped call transactions initially cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock that initially underlie the Convertible Notes. The cap price of the capped call transactions is initially $65.10 per share of the Company’s common stock, representing a premium of 100% above the closing price of $32.55 per share of the Company’s common stock on October 2, 2018, and is subject to certain adjustments under the terms of the capped call transactions. The capped call transactions are expected generally to reduce potential dilution to the Company’s common stock upon conversion of the Convertible Notes and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction and/or offset subject to a cap based on the cap price.

The following table summarizes the Convertible Notes as of March 31, 2020:

	March 31,
	2020
Par value of the Convertible Notes	$	201,250
Unamortized debt discounts		(34,657)
Unamortized debt issuance costs		(3,453)
Net carrying value of Convertible Notes	$	163,140

The fair value of our Convertible Notes was $177,100 as of March 31, 2020. The estimated fair value of Convertible Notes is based on market rates and the closing trading price of the Convertible Notes as of March 13, 2020 and is classified as Level 2 in the fair value hierarchy. As of March 31, 2020, the if-converted value of the Convertible Notes did not exceed the principal amount.

Debt issuance costs are amortized on an effective interest basis over the term of the Convertible Notes. Debt issuance cost amortization expense, net of amounts capitalized, is included in interest expense and amortization of debt discount in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2020. The following table sets forth interest expense related to the Convertible Notes for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
	2020			2019
Contractual interest expense	$	503		$	503
Amortization of debt issuance costs		220			208
Amortization of debt discount		2,156			2,006
Total	$	2,879		$	2,717
Effective interest rate of the liability component		7.1	%		7.1	%

During the three months ended March 31, 2020 and 2019, we capitalized $650 and $465, respectively, of amortization and interest expense related to the Convertible Notes.

Amortization expense for our debt discount and debt issuance costs through 2023 are as follows:

	Debt		Debt Issuance
	Discounts		Costs
April 1, 2020―December 31, 2020	$	6,708	$	681
January 1, 2021―December 31, 2021		9,528		955
January 1, 2022―December 31, 2022		10,241		1,015
January 1, 2023―December 31, 2023		8,180		802
	$	34,657	$	3,453