In June 2020, the Company issued $400 million aggregate principal amount of 0.375% convertible senior notes due June 1, 2025 (the “2025 Notes”) in a private offering and an additional $60 million aggregate principal amount of the 2025 Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers. The interest rate is fixed at 0.375% per annum and is payable semi-annually in arrears on June 1 and December 1 of each year. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $450.1 million.

Each $1,000 of principal amount of the 2025 Notes will initially be convertible into 3.5396 shares of the Company’s common stock (the “Conversion Option of the 2025 Notes”), which is equivalent to an initial conversion price of approximately $282.52 per share, subject to adjustment upon the occurrence of certain specified events. On or after March 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2025 Notes at any time. The 2025 Notes will be convertible at the option of the holders prior to the close of business on the business day immediately preceding March 1, 2025 under certain circumstances as described in the indenture governing the 2025 Notes (the “Indenture”). Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company expects to settle the principal amount of the 2025 Notes in cash. Because the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended December 31, 2021 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the 2025 Notes are convertible at the option of the holders thereof during the calendar quarter ending March 31, 2022. Between the end of the most recently completed fiscal quarter and February 11, 2022, the Company settled $0.9 million of principal balance of the 2025 Notes in cash in response to conversion notices received prior to December 31, 2021. As of February 11, 2022, the Company has not received additional conversion notices.

The 2025 Notes are classified as long-term debt, except for $0.7 million classified as current as of December 31, 2021 for conversion notices received prior to year-end, for which the principal amount is expected to be cash-settled during the quarter ended March 31, 2022. The equity component of the 2025 Notes is classified as additional paid-in capital as the Company has the option to settle the principal amount in shares and the maturity date of the 2025 Notes is more than 12 months away. However, it is the Company’s intent to settle the principal amount of the 2025 Notes in cash.

In accounting for the issuance of the 2025 Notes, the Company separated the 2025 Notes into liability and equity components. The 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 carrying amount of the equity component representing the Conversion Option was $98.7 million and was determined by deducting the fair value of the liability component from the par value of the 2025 Notes. The equity component is recorded in additional paid-in capital in the consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (the "Debt Discount") is amortized to interest expense at an effective interest rate of 5.71% over the contractual term of the 2025 Notes.

In accounting for the debt issuance costs of $9.9 million related to the 2025 Notes, the Company allocated the total amount incurred to the liability and equity components of the 2025 Notes based on their relative values. Issuance costs attributable to the liability component were $7.8 million and will be amortized to interest expense using the effective interest method over the contractual terms of the 2025 Notes. Issuance costs attributable to the equity component were $2.1 million and are netted with the equity component of the 2025 Notes in stockholders’ equity.

The difference in the book and tax allocation between the liability and equity components of the 2025 Notes resulted in a difference between the carrying amount and tax basis of the 2025 Notes. This taxable temporary difference resulted in the Company recognizing a deferred tax liability and a corresponding reduction in the Company's valuation allowance on its US deferred tax assets, resulting in no net deferred tax impact.

The net carrying amount of the liability component of the 2025 Notes is as follows:


	As of December 31, 2021			As of December 31, 2020
	(in thousands)
Principal	$	459,999		$	460,000
Unamortized debt discount		(70,594	)		(88,756	)
Unamortized issuance costs		(5,544	)		(6,973	)
Net carrying amount	$	383,861		$	364,271

The net carrying amount of the equity component of the 2025 Notes is as follows:


	As of December 31, 2021			As of December 31, 2020
	(in thousands)
Debt discount for conversion option	$	98,730		$	98,730
Issuance costs		(2,120	)		(2,120	)
Net carrying amount	$	96,610		$	96,610

Interest expense related to the 2025 Notes is as follows:


	Year Ended December 31,
	2021		2020		2019
	(in thousands)
Contractual interest expense	$	1,725	$	987	$	—
Amortization of debt discount		18,171		9,974		—
Amortization of issuance costs		1,428		784		—
Total interest expense	$	21,324	$	11,745	$	—

In connection with the offering of the 2025 Notes, the Company purchased capped call options (“Capped Call Options”) with respect to its common stock for $50.6 million. The Capped Call Options are purchased call options that give the Company the option to purchase up to approximately 1.6 million shares of its common stock for $282.52 per share, which corresponds to the approximate initial conversion price of the 2025 Notes. The Capped Call Options were purchased in order to offset potential dilution to the Company’s common stock upon any conversion of the 2025 Notes, subject to a cap of $426.44 per share, and expire concurrently with the 2025 Notes. The Capped Call Options automatically settle in components commencing on April 16, 2025 and are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event; a tender offer; and a nationalization, insolvency or delisting involving the Company. In addition, the Capped Call Options are subject to certain specified additional disruption events that may give rise to a termination of the Capped Call Options, including changes in law, insolvency filings, and hedging disruptions. Since the transaction meets certain accounting criteria, the $50.6 million paid for the

Capped Call Options is recorded in stockholders’ equity as a reduction in additional paid-in capital and are not accounted for as separate derivative financial instruments.

In May 2017, the Company issued $350.0 million aggregate principal amount of 0.25% convertible senior notes due June 1, 2022 (the “2022 Notes”) in a private offering and an additional $50 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the initial purchasers of the 2022 Notes. The interest rate is fixed at 0.25% per annum and is payable semi-annually in arrears on June 1 and December 1 of each year. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $389.2 million.

Each $1,000 principal amount of the 2022 Notes are currently convertible into 10.5519 shares of the Company’s common stock (the “Conversion Option of the 2022 Notes”), which is equivalent to an initial conversion price of approximately $94.77 per share, subject to adjustment upon the occurrence of specified events. Because the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended December 31, 2021 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the 2022 Notes are convertible at the option of the holders on the business day immediately preceding February 1, 2022. On or after February 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company expects to settle the principal amount of the 2022 Notes in cash. In 2021, the Company settled $106.5 million of principal balance of the 2022 Notes in cash. The Company compared the consideration attributed to the fair value of the debt component with the carrying value of the debt component, which includes the proportionate amounts of the unamortized debt discount and the remaining unamortized debt issuance costs and recorded a loss on early extinguishment of $4.9 million for the year ended December 31, 2021 within interest expense on the Company’s statements of operations. As of February 11, 2022, the Company has not received any conversion notices.

In connection with the offering of the 2022 Notes, the Company entered into convertible note hedge transactions (the “Convertible Note Hedges”) with certain counterparties in which the Company has the option to purchase (subject to adjustment for certain specified events) up to approximately 4.2 million shares of the Company’s common stock at a price of approximately $94.77 per share. The Convertible Note Hedges will be settled in cash or shares, or any combination thereof, in accordance with the settlement method of the 2022 Notes in excess of the par amount, and are expected to settle concurrently with the conversion of the 2022 Notes. The total cost of the Convertible Note Hedges was $78.9 million. In addition, the Company sold warrants (the “Warrants”) to certain bank counterparties whereby the holders of the Warrants have the option to initially purchase (subject to adjustment for certain specified events) a total of approximately 4.2 million shares of the Company’s common stock at a price of $115.8 per share. The amount by which the settlement price exceeds the strike price may be settled in shares or cash at the Company’s election. The Warrants are expected to settle three business days from each trading day commencing on September 1, 2022 and ending on the 79th trading day thereafter. The Company received $58.9 million in cash proceeds, net of issuance costs of $200 thousand, from the sale of these Warrants. The purchase of the Convertible Note Hedges and the sale of Warrants is intended to effectively increase the overall conversion price from $94.77 to $115.83 per share. As these transactions meet certain accounting criteria, the net $20.0 million paid for the Convertible Note Hedges and Warrants is recorded in stockholders’ equity and are not accounted for as separate derivative financial instruments.

In June 2020, the Company used part of the net proceeds from the issuance of the 2025 Notes for the partial repurchase of the 2022 Notes, which consisted of a repurchase of $272.1 million aggregate principal amount of the 2022 Notes for an aggregate purchase price of approximately $283.0 in cash and approximately 1.6 million shares of its common stock at $207.17 per share. Of the $613.5 million in aggregate consideration, $248.7 million was allocated to the fair value of the debt component of the repurchase, and $364.8 million was allocated to the equity component (the associated Conversion Option of the 2022 Notes) of the repurchases, utilizing a discount rate of 4.9% to determine the fair value of the liability component. As of the partial repurchase date, the carrying value of the 2022 Notes subject to the 2022 Notes partial repurchase, net of unamortized debt discount and issuance costs, was $238.2 million. The 2022 Notes partial repurchase and issuance of the 2025 Notes were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange, and accordingly, the 2022 Notes partial repurchase was accounted for as a debt extinguishment. The 2022 Notes partial repurchase resulted in a $10.5 million loss on early extinguishment of debt, which is recorded within interest expense on the Company’s statements of operations in 2020. In connection with the partial repurchase of the 2022 Notes, the consideration allocated to the equity component of $364.8 million was recorded as a reduction to additional paid-in capital on the Company’s consolidated balance sheet. The Company also reversed a corresponding portion of the associated deferred tax liability and increased the Company’s valuation allowance on its US deferred tax assets, resulting in no net deferred tax impact.

In connection with the partial repurchase of the 2022 Notes, the Company terminated Convertible Note Hedges corresponding to approximately 2.9 million shares of the Company’s common stock in exchange for cash consideration of $362.5 million, and certain counterparties terminated Warrants corresponding to approximately 2.9 million shares of the Company’s common stock in exchange for cash consideration of $327.6 million. The net proceeds of $34.9 million received from these transactions were recorded as an increase to additional paid-in capital. In the year ended December 31, 2021, the Company exercised and net-share-settled a portion of the Convertible Note Hedges, corresponding to approximately $106.5 million in principal amount of 2022 Notes and received approximately 0.9 million shares of common stock and a $9.0 million cash payment. As of December 31, 2021, Convertible Note Hedges giving the Company the option to purchase approximately 0.2 million shares of the Company’s common stock and Warrants giving certain counterparties the option to acquire up to 1.3 million shares of the Company’s common stock remain outstanding.

The 2022 Notes are classified as short-term debt and the equity component of the 2022 Notes is classified as additional paid-in capital. As of December 31, 2021, $19.4 million of principal remains outstanding on the 2022 Notes.

The net carrying amount of the liability component of the 2022 Notes is as follows:


	As of December 31, 2021			As of December 31, 2020
	(in thousands)
Principal	$	19,382		$	125,839
Unamortized debt discount		(477	)		(10,397	)
Unamortized issuance costs		(35	)		(777	)
Net carrying amount	$	18,870		$	114,665

The net carrying amount of the equity component of the 2022 Notes is as follows:


	As of December 31, 2021			As of December 31, 2020
	(in thousands)
Debt discount for conversion option	$	5,136		$	33,349
Issuance costs		(138	)		(898	)
Net carrying amount	$	4,998		$	32,451

Interest expense related to the 2022 Notes is as follows:


	Year Ended December 31,
	2021		2020		2019
	(in thousands)
Contractual interest expense	$	154	$	614	$	1,000
Amortization of debt discount		3,636		13,150		20,277
Amortization of issuance costs		272		982		1,513
Total interest expense	$	4,062	$	14,746	$	22,790