Item 1.01
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Entry into a Material Definitive Agreement
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Purchase Agreement
On February 21, 2018, Q2 Holdings, Inc. (the
Company
,
we
,
us
or
our
) entered into a purchase agreement (the
Purchase Agreement
) with Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and Stifel, Nicolaus & Company, Incorporated, as
representatives of the several initial purchasers named therein (collectively, the
Initial Purchasers
), to issue $200 million in aggregate principal amount of 0.75% Convertible Senior Notes due February 15, 2023
(the
Notes
) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the
Securities Act
). The Notes will be issued to the Initial
Purchasers pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act. In addition, the Company granted the Initial Purchasers a
13-day
option to purchase up to an additional $30 million aggregate principal amount of the Notes on the same terms and conditions. The Initial Purchasers exercised this option in full on
February 22, 2018.
The Purchase Agreement includes customary representations, warranties and covenants by the Company and customary closing
conditions. Under the terms of the Purchase Agreement, the Company has agreed to indemnify the Initial Purchasers against certain liabilities.
The
description of the Purchase Agreement contained herein is qualified in its entirety by reference to the Purchase Agreement which is attached as Exhibit 10.1 to this Current Report on Form
8-K
and is
incorporated herein by reference.
Indenture
On
February 26, 2018, the Company issued $230 million in aggregate principal amount of the Notes under an indenture, dated as of February 26, 2018, (the
Indenture
) between the Company and Wilmington Trust,
National Association, as trustee (the
Trustee
). We offered and sold the Notes in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. The Initial Purchasers offered and sold
the notes to qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A under the Securities Act. The Notes and any common stock issuable upon conversion of the Notes have not been registered under
the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
The
Notes will bear interest at a rate of 0.75% per year, payable semiannually in arrears in cash on February 15
th
and August 15
th
of each year,
beginning on August 15, 2018. The Notes are our general unsecured obligations and will rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to the Notes, will rank equally in right of
payment with all of our existing and future liabilities that are not so subordinated, will be effectively junior to any of the Companys secured indebtedness to the extent of the value of the assets securing such indebtedness and will be
structurally subordinated to all indebtedness and other liabilities (including trade payables) of the Companys current or future subsidiaries.
Holders may convert their Notes at their option on any day prior to the close of business on the business day immediately preceding November 15, 2022
only under the following circumstances: (1) 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 our 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; (2) at any time during the five business day period after any five consecutive trading day period (the
measurement period
) in which the trading price per $1,000 principal amount of Notes for
each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the Notes on each such trading day; or (3) upon the occurrence of specified corporate
events. The Notes will be convertible, regardless of the foregoing circumstances, at any time from, and including, November 15, 2022 until the close of business on the second scheduled trading day immediately preceding the applicable maturity
date.
Upon conversion we will pay cash or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common
stock, at our election. If we satisfy our conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of our common stock, the amount of cash and shares of common stock, if any, due
upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period. The initial conversion rate for the Notes will be 17.4292 shares of common stock per $1,000 in
principal amount of Notes, equivalent to a conversion price of approximately $57.38 per share of common stock. The conversion rate will be subject to adjustment in certain circumstances.
Subject to certain exceptions, holders may require the Company to repurchase, for cash, all or part of their
Notes upon a Fundamental Change (as defined in the Indenture) at a price equal to 100% of the principal amount of the Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the Fundamental Change
Repurchase Date (as defined in the Indenture). In addition, upon a Make-Whole Fundamental Change (as defined in the Indenture) prior to the maturity date of the Notes, we will, in some cases, increase the conversion rate for a
holder that elects to convert its Notes in connection with such Make-Whole Fundamental Change. The Company may not redeem the Notes prior to maturity.
The Indenture contains certain events of default after which the Notes may be due and payable immediately. Such events of default include, without limitation,
the following: failure to pay interest on any Note when due and payable and such failure continues for 30 days; failure to pay any principal of any Note when due and payable at maturity, upon required repurchase, upon acceleration or otherwise;
failure to comply with our obligation to convert the Notes, in accordance with the Indenture, upon exercise of a holders conversion right and such failure continues for 3 business days; failure to comply with our obligations under the
Indenture with respect to our consolidation with or merger with or into or sale, transfer or lease of all or substantially all of our properties and assets to another person; failure by us to provide timely notice of a Fundamental Change, Make-Whole
Fundamental Change or certain specified corporate transactions; our failure in performance with any other agreements under the Indenture (other than those described above in this paragraph) and such failure or breach continues for 60 days after
written notice has been given to us by the holders of at least 25% in principal amount of the notes then outstanding; default by us or one of our significant subsidiaries with respect to any mortgage, agreement or other instrument under which there
may be outstanding, or by which there may be secured or evidenced any indebtedness for money borrowed in excess of $20.0 million; certain events of bankruptcy, insolvency or reorganization of us or one of our Subsidiaries; or a final judgment
or judgments for the payment of $20.0 million or more rendered against us or any of our subsidiaries, which judgment is not discharged or stayed within 60 days after the date on which the right to appeal has expired if no such appeal has
commenced or the date on which all rights to appeal have been extinguished.
Bond Hedge and Warrant Transactions
In connection with the offering of the Notes, on February 21, 2018 and February 22, 2018, the Company entered into bond hedge and warrant
transactions with each of Morgan Stanley & Co. International plc, JPMorgan Chase Bank, National Association, Royal Bank of Canada and Bank of Montreal (collectively, the
Option Counterparties
). Funding of the bond
hedge and warrant transactions occurred on February 26, 2018. The bond hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Companys 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 bond hedge transactions are intended to reduce potential dilution to the Companys common
stock and/or offset any cash payments the Company will be required to make in excess of the principal amount upon any conversion of Notes. However, the warrant transactions will separately have a dilutive effect to the extent that the market value
per share of the Companys common stock, as measured under the terms of the warrant transactions, exceeds the applicable strike price of the warrants at the expiration of the warrant transactions.
The initial strike price of the warrants is approximately $78.75 per share, which is 75% above the closing sale price of the Companys common stock on
February 21, 2018. The Company paid an aggregate of approximately $19.3 million to the Option Counterparties for the bond hedge transactions, after taking into account the proceeds to the Company from the warrant transactions.
The Company will not be required to make any cash payments to the Option Counterparties upon the exercise of the options that are evidenced by the bond hedge
transactions. In connection with the conversion of any Notes, the Company will be entitled to receive from the Option Counterparties an aggregate amount of cash and/or number of shares of the Companys common stock, based on our settlement
method election for the Notes, for all Notes converted on a conversion date generally corresponding to the amount by which the conversion settlement amount exceeds the $1,000 principal amount for each Note that the Company is obligated to deliver to
holders of the Notes under the Indenture. Additionally, if the market price per share of the Companys common stock, as measured under the terms of the warrant transactions, exceeds the strike price of the warrants evidenced by the warrant
transactions on any expiration date of such warrants, the Company will owe the Option Counterparties a number of shares of the Companys common stock based on the excess of such market price per share of the Companys common stock over the
strike price of such warrants.