Debt

9 Months Ended

Oct. 31, 2020

Convertible Senior Notes

In September 2020 the Company issued 0.125% convertible senior notes due September 15, 2025, for an aggregate principal amount of $575.0 million in a private placement to qualified institutional buyers. The Notes are senior unsecured obligations and interest is payable in cash in arrears at a fixed rate of 0.125% on March 15 and September 15 of each year, beginning on March 15, 2021. The Notes will mature on September 15, 2025, unless repurchased, redeemed, or converted pursuant to the terms of the Notes.

The terms of the Notes are governed by an Indenture (the Indenture) by and between the Company and U.S. Bank National Association, as trustee.

The initial conversion rate of the Notes is 25.4113 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $39.35 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain specified events in accordance with the Indenture.

The Company may redeem for cash all or any portion of the Notes, at its option, on or after September 20, 2023 and prior to the 41st scheduled trading day immediately preceding the maturity date, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereto, but excluding, the redemption date, if the last reported sale price of the Company’s 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 the Company provides written notice of redemption. No sinking fund is provided for the Notes.

Holders of the Notes may convert all or a portion of their Notes prior to the close of business on the business day immediately preceding June 15, 2025 in multiples of $1,000 principal amount, only under the following circumstances (the conditional conversion feature):

•during any fiscal quarter commencing after January 31, 2021 and only during such fiscal quarter, if the last reported sale price of the Company’s 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 fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;

•during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of the Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the Notes on each such trading day;

•upon the Company’s notice that it is redeeming any Notes, the Notes the Company calls for redemption (or, at the Company’s election, all outstanding Notes) may be converted at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or

•upon the occurrence of specified corporate events, as described in the Indenture.

On or after June 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes, holders of the Notes may convert all or any portion of their Notes regardless of the foregoing conditions, and such conversions will settle upon maturity. Upon conversion, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The Company intends to settle the principal amount of the Notes using cash.

Holders of the Notes who convert their Notes in connection with such make-whole fundamental change or during the relevant redemption period (each as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, upon the occurrence of a fundamental change (as defined in the Indenture) prior to the maturity date, subject to certain conditions, holders of the Notes may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

As of October 31, 2020 the Notes are classified as noncurrent in the unaudited condensed consolidated balance sheets since the criteria for conversion was not met.

The Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component of $122.5 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. This difference represents the debt discount that is amortized to interest expense over the term of the Notes at an effective interest rate of 5.00%.

The Company allocated the total amount of issuance costs incurred to the liability and equity components based on the respective values of the liability and equity components of the Notes. Issuance costs attributable to the liability component were recorded as a reduction to the convertible senior notes, net in the unaudited condensed consolidated balance sheets and are being amortized to interest expense over the term of the Notes using the effective interest rate method. The issuance costs attributable to the equity component were recorded as a reduction to additional paid-in capital in the unaudited condensed consolidated balance sheets. Upon issuance of the Notes, the Company recorded liability issuance costs of $13.2 million and equity issuance costs of $3.6 million.

The net carrying amount of the liability component of the Notes recorded in convertible senior notes, net in the unaudited condensed consolidated balance sheets was as follows (in thousands):


	October 31, 2020
Principal	$	575,000
Unamortized debt discount	(119,954)
Unamortized issuance costs	(12,961)
Net carrying amount of the liability component	$	442,085

The net carrying amount of the equity component of the Notes recorded in additional paid-in capital in the unaudited condensed consolidated balance sheets was $118.7 million, net of issuance costs of $3.6 million as of October 31, 2020.

The following table sets forth the interest expense related to the Notes recognized in interest income and other income (expense), net on the unaudited condensed consolidated statements of operations (in thousands):


	Three and Nine Months Ended October 31, 2020
Contractual interest expense	$	84
Amortization of debt discount	2,532
Amortization of issuance costs	230
Total interest expense related to the Notes	$	2,846

Capped Call Transactions

In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions (the Capped Calls) with respect to its common stock at a cost of approximately $61.9 million. The Capped Calls each have an initial strike price of approximately $39.35 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls cover, subject to anti-dilution adjustments, approximately 14.6 million shares of the Company’s common stock. The Capped Calls were purchased in order to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Notes, subject to a cap of $58.30 per share and certain adjustments. The Capped Calls settle in components with the last component scheduled to expire on September 11, 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 Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including changes in law, failures to deliver, insolvency filings, and hedging disruptions.

The Capped Calls are separate transactions and are not part of the terms of the Notes. The $61.9 million paid for the Capped Calls was included as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets because they are not designated as separate derivative financial instruments.

Wells Fargo Bank Revolving Line of Credit

On September 4, 2020 the Company entered into the Wells Fargo Bank, National Association (Wells Fargo) credit facility to provide for a senior secured revolving line of credit of up to $50.0 million with the right (subject to certain conditions) to add incremental revolving commitments of up to $50.0 million in the aggregate. The revolving line of credit provides a sublimit of up to $40.0 million to be available for the issuance of letters of credit. The outstanding balance, if any, is due at the maturity date in September 2023. Loans bear interest, at the Company’s option, at an annual rate based on LIBOR or a base rate. Loans based on LIBOR shall bear interest at a rate of LIBOR plus 1.75%. Loans based on the base rate shall bear interest at a rate of the base rate plus 0.75%. The Company is required to pay a commitment fee equal to 0.25% per annum on the undrawn portion available under the revolving line of credit.

As of October 31, 2020 $50.0 million was available for borrowing under the revolving line of credit. As of October 31, 2020 the Company was in compliance with the financial covenants contained in the revolving line of credit.

Silicon Valley Bank Revolving Line of Credit

The Company maintained a revolving line of credit that matured in September 2020 and provided for aggregate borrowings of up to $50.0 million. On September 4, 2020 the Company paid all outstanding amounts owing under the Silicon Valley Bank revolving line of credit and terminated the credit facility. The Company continues to have unsecured letters of credit issued by Silicon Valley Bank in the face amount of $4.5 million outstanding as of October 31, 2020.