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Convertible Notes | 12 Months Ended
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Dec. 31, 2018
Convertible Notes |
Convertible Notes | 10. 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, beginning on April 1, 2019. 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. It is our current intent to settle the principal and interest amounts of the Convertible Notes with cash. 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 Company paid $23,969 for the capped call transactions, which was recorded as additional paid-in capital, using a portion of the gross proceeds from the sale of the Convertible Notes. The capped call is expected to be tax deductible as the Company elected to integrate the capped call into the Convertible Notes for tax purposes. The tax effect on the equity component of the Convertible Notes of $5,686 was recorded as additional paid-in capital. The following table summarizes the Convertible Notes as of December 31, 2018:
|  | December 31,
|  | 2018
Par value of the Convertible Notes |  | $ | 201,250
Unamortized debt discounts |  |  | (45,058)
Unamortized debt issuance costs |  |  | (4,522)
Net carrying value of Convertible Notes |  | $ | 151,670
The fair value of our Convertible Notes was $169,970 as of December 31, 2018. The estimated fair value of Convertible Notes is based on market rates and the closing trading price of the Convertible Notes as of December 31, 2018 and is classified as Level 2 in the fair value hierarchy. As of December 31, 2018, the if-converted value of the Convertible Notes did not exceed the principal amount. The Company incurred debt issuance costs of $6,169 in October 2018. In accordance with FASB ASC 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. $1,442 of issuance costs were recorded as additional paid-in capital and such amounts are not subject to amortization. The remaining issuance costs of $4,727 are recorded as debt issuance costs in the net carrying value of Convertible Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Convertible Notes. Debt issuance cost amortization expense was $205 for the year ended December 31, 2018, which was included in interest and other expense, net in the accompanying consolidated statements of operations for the year ended December 31, 2018. The following table sets forth interest expense related to the Convertible Notes for the year ended December 31, 2018:
|  | December 31, |
|  | 2018 |
Contractual interest expense |  | $ | 2,677 |
Amortization of debt issuance costs |  |  | 205 |
Amortization of debt discount |  |  | 1,992 |
Total |  | $ | 4,874 |
Effective interest rate of the liability component |  |  | 7.1 | %
During the year ended December 31, 2018, we capitalized $508 of amortization and interest expense related to the Convertible Notes. Amortization expense for our debt discount and debt issuance costs for fiscal years 2019 through 2023 is as follows:
|  |  |  | Debt Issuance
Year |  | Debt Discounts |  | Costs
2019 |  | $ | 8,245 |  | $ | 849
2020 |  |  | 8,864 |  |  | 901
2021 |  |  | 9,528 |  |  | 956
2022 |  |  | 10,241 |  |  | 1,015
2023 |  |  | 8,180 |  |  | 801
|  | $ | 45,058 |  | $ | 4,522

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