Convertible debt (Notes)

9 Months Ended

Sep. 30, 2023

Convertible Senior Notes

The following is a summary of the Company's convertible senior notes as of September 30, 2023 (in thousands):


	Date of Issuance	Unpaid Principal Balance		Contractual Interest Rates



1% Convertible Notes due in 2024 ("2024 Notes")	May 2019	$	21,713		1%
1% Convertible Notes due in 2024 ("2024 Notes") - subject to the exchange agreements	May 2019	122,037			1%
2.25% Convertible Notes due in 2027 ("2027 Notes")	September 2020	150,000			2.25%
Total Notes		$	293,750

The 2027 and 2024 Notes (collectively, the "Notes") are general unsecured obligations and rank senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with all of the Company's existing and future liabilities that are not so subordinated, are effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries (including trade payables but excluding intercompany obligations owed to the Company or its subsidiaries).

Interest related to the 2027 Notes is payable semi-annually in arrears in cash on March 15 and September 15 of each year, beginning on March 15, 2021. Interest related to the 2024 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2019.

The 2027 Notes mature on September 15, 2027 and the 2024 Notes mature on May 15, 2024, unless redeemed or converted in accordance with their terms prior to such date.

Each $1,000 of principal of the 2027 Notes will initially be convertible into 23.9137 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $41.82 per share. Each $1,000 of principal of the 2024 Notes will initially be convertible into 15.1394 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $66.05 per share. The initial conversion price for the 2027 and the 2024 Notes is subject to adjustment upon the occurrence of certain specified events.

On August 23, 2023, the Company entered into legally binding exchange agreements with a limited number of existing holders of the 2024 Notes to exchange approximately $122.0 million aggregate principal amount of the existing 2024 Notes for a principal amount of 2027 Notes at an exchange ratio to be determined based on the daily volume-weighted average trading price of the Company’s common stock over a thirty-day trading period beginning August 24, 2023 (such exchange transactions, the “Exchange”). The Exchange will reduce near-term cash required to settle debt obligations.

Although the Exchange was not completed as of September 30, 2023, the Company determined that, from an accounting perspective, the Exchange was a legally binding restructuring of the debt that represented a substantial modification of the terms of the 2024 Notes subject to the Exchange, and therefore is required to be accounted for as an extinguishment transaction. The Company derecognized the portion of the carrying value of the 2024 Notes to be exchanged and recorded the new debt resulting from the substantial modification of terms at fair value as of August 23, 2023, which was approximately $123.3 million, and recorded a $1.8 million loss on debt extinguishment during the quarter ended September 30, 2023. The loss on debt extinguishment is included in other (expense) income, net in the unaudited condensed consolidated statements of comprehensive loss. The Company incurred debt issuance cost of $2.3 million related to the Exchange which is recorded in convertible debt, net and was not paid as of September 30, 2023.

The Company concluded that the variability in the principal amount of the 2027 Notes to be issued in connection with the Exchange due to changes in stock price is a feature embedded in the restructured debt that is required to be accounted for as an embedded derivative and remeasured to fair value until settlement. This feature is recorded in convertible debt, net, with an initial value at the time of the transaction equal to zero, and subsequently remeasured as of September 30, 2023 with a fair value of $3.8 million. During the three months ended September 30, 2023, the Company recorded a derivative loss of $3.8 million which is included in other (expense) income, net in the unaudited condensed consolidated statements of comprehensive loss. The estimated fair value was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price, interest rates and the value of the 2027 Notes, which represent level 2 in the fair value hierarchy.

As of September 30, 2023, the 2027 and 2024 Notes are not yet convertible and their remaining term is approximately 47 months and 7 months, respectively.

As of September 30, 2023 and December 31, 2022, the fair value of the principal amount of the Notes in the aggregate was $296.3 million and $263.7 million, respectively. The estimated fair value was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price and interest rates, which represents level 2 in the fair value hierarchy.

The Notes consist of the following (in thousands):


	September 30, 2023		December 31, 2022

Principal	$	293,750	$	293,750
Debt premium, embedded derivative and debt issuance cost, net of amortization	427		(3,971)
Net carrying amount	$	294,177	$	289,779

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Coupon interest	$	1,203	$	1,203	$	3,609	$	3,609
Amortization of debt issuance costs	294		373		1,040		1,119

Total	$	1,497	$	1,576	$	4,649	$	4,728

Capped call transactions

In September 2020 and in May 2019, in connection with the offering of the 2027 and 2024 Notes, respectively, the Company entered into privately negotiated capped call transactions (collectively, the "Capped Call") with certain option counterparties. The Capped Call transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock initially underlying the Notes, at a strike price that corresponds to the initial conversion price of the Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The Capped Call transactions are intended to reduce potential dilution to the Company’s common stock and/or offset any cash payments the Company will be required to make in excess of the principal amounts upon any conversion of Notes, and to effectively increase the overall conversion price of the 2027 Notes from $41.82 to $78.90 per share, and for the 2024 Notes from $66.05 to $101.62 per share. As the Capped Call transactions meet certain accounting criteria, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of the Capped Call was $25.3 million and $16.4 million for the 2027 and 2024 Notes, respectively, and was recorded as part of additional paid-in capital.

In August 2023, in connection with the Exchange, the Company entered into additional capped call transactions (the “Additional Capped Call”) with certain option counterparties. The Company will pay a premium to the option counterparties for the Additional Capped Call in an amount to be determined based on the volume-weighted average trading price of the Company’s common stock over a thirty-day reference period beginning August 24, 2023. The conversion price of the Additional Capped Call is the same as the 2027 Notes Capped Call above. Initial funding of the Additional Capped Call occurred in the quarter ended September 30, 2023. The Additional Capped Call has a deferred premium component indexed to the Company's stock price and required to be settled in cash, and therefore, the Additional Capped Call is a derivative instrument that, at inception, does not meet the qualifications for equity classification. As such, the Company recorded the initial value of the Additional Capped Call of $22.8 million as a derivative asset, noncurrent. As of September 30, 2023, the fair

value of the Additional Capped Call derivative asset was remeasured at $22.3 million and the Company recorded a derivative loss of $0.5 million for the three months ended September 30, 2023, which is included in other (expense) income, net in the unaudited condensed consolidated statements of comprehensive loss. The estimated fair value was determined based on valuation methods using inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price and interest rates, and other unobservable inputs such as volatility which represent level 3 in the fair value hierarchy. The Company expects the Additional Capped Call to be reclassified to equity when the deferred premium is settled, and the instrument meets the requirements for equity classification. The final value of the Additional Capped Call upon settlement of the Exchange was $22.2 million, see Note 13 for additional details on the subsequent event.