Note 7. Convertible Debt

In March 2018, the Company issued and sold $143.8 million aggregate principal amount of 0.875% convertible senior notes, or the Notes, in a private placement exempt from the registration requirements of the Securities Act of 1933. The Notes mature on April 1, 2023, unless earlier repurchased by the Company or converted by the holder pursuant to the terms of the Notes. Interest is payable semiannually in arrears on April 1 and October 1 of each year, commencing on October 1, 2018. The Company received net proceeds from the offering of approximately $139.4 million, net of initial purchase discounts and debt issuance costs.

The Notes are governed by an Indenture between the Company and U.S. Bank, National Association, as trustee. The Notes are unsecured and rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Company’s existing and future indebtedness that is not so subordinated; effectively subordinated in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all existing and future indebtedness and other liabilities incurred by the Company’s subsidiaries.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election.

The Notes have an initial conversion rate of 25.4544 shares of Class A common stock per $1,000 principal amount of Notes. This represents an initial effective conversion price of approximately $39.29 per share of Class A common stock and approximately 3.7 million shares issuable upon conversion. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of the Company’s Class A common stock or a combination of cash and shares of the Company’s Class A common stock paid or delivered, as the case may be, to the holder upon conversion of a Note.

Prior to the close of business on the business day immediately preceding January 1, 2023, the Notes will be convertible at the option of holders during certain periods, only upon satisfaction of certain conditions set forth below. On or after January 1, 2023, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion rate at any time regardless of whether the conditions set forth below have been met.

Holders may convert all or a portion of their Notes prior to the close of business on the business day immediately preceding January 1, 2023, in multiples of $1,000 principal amount, only under the following circumstances:

•

during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company’s Class A 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 on each applicable trading day;

•

during the five business day period after any five consecutive trading day period, or the Notes Measurement Period, in which the “trading price” (as the term is defined in the Indenture) per $1,000 principal amount of notes for each trading day of such Notes Measurement Period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day;

•

upon the occurrence of specified corporate events described in the Indenture.

The Company may not redeem the Notes prior to April 5, 2021. The Company may redeem for cash all or any portion of the Notes, at the Company’s option, on or after April 5, 2021 if the last reported sale price of our Class A 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 not more than three trading days preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to, but excluding the redemption date. No sinking fund is provided for the Notes.

As of March 31, 2018, the Notes are not yet convertible.

The Company estimated the implied interest rate of its Notes to be approximately 6.34%, assuming no conversion option. Assumptions used in the estimate were a five-year LIBOR swap rate plus the Company’s credit spread as the borrowing rate of a similar nonconvertible debt instrument to determine the present value of the liability component. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $110.0 million upon issuance, calculated as the present value of implied future payments based on the $143.8 million aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense over the term of the Notes. The $33.8 million difference between the aggregate principal amount of $143.8 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the Notes were not considered redeemable.

In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components based on their estimated relative fair values. Issuance costs attributable to the liability component, totaling $3.6 million, are being amortized to interest expense over the term of the Notes, and issuance costs attributable to the equity component, totaling $1.1 million, were netted with the equity component in shareholders’ equity.

The Notes consist of the following (in thousands):

	March 31, 2018			December 31, 2017
Liability component:
Principal	$	143,750		$	—
Less: debt discount, net of amortization		(37,176	)		—
Net carrying amount	$	106,574			—
Equity component ^(a)		32,643			—

(a) Recorded in the condensed consolidated balance sheet within additional paid-in capital, net of $1.1 million of issuance costs.

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

	Three Months Ended March 31,
	2018		2017
Contractual interest expense	$	35	$	—
Amortization of debt discount		159		—
Amortization of issuance costs		17		—
Total interest expense	$	211		—

As of March 31, 2018, the fair value of the Notes, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the Notes in an over-the-counter market (Level 2), and carrying value of debt instruments (carrying value excludes the equity component of the Company’s convertible notes classified in equity) were as follows (in thousands):

	March 31, 2018				December 31, 2017
	Fair Value		Carrying Value		Fair Value		Carrying value
Convertible senior notes	$	143,059	$	106,574		—		—

In connection with the issuance of the Notes, the Company entered into capped call transactions, or Capped Calls with certain counterparties affiliated with the initial purchasers and others. By entering into the Capped Calls, the Company mitigates potential dilution from the conversion of the Notes, effectively increasing the conversion price of the Notes. Under the Capped Calls, the Company purchased capped call options that in the aggregate relate to the total number of shares of the Company’s Class A common stock underlying the Notes, with an initial strike price of approximately $39.29 per share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $60.44, and is subject to certain adjustments under the terms of the Capped Calls. The cost of the purchased Capped Calls of $17.1 million was recorded to shareholders’ equity and will not be re-measured.

Based on the closing price of our Class A common stock of $28.34 on March 31, 2018, the if-converted value of the Notes was less than their respective principal amounts.