Exchange and Subscription Transactions
On November 12, 2020, Q2 Holdings, Inc. (the “Q2,” “we,” “us” or “our”) issued a press release announcing that it had entered into privately negotiated exchange and/or subscription agreements (the “Exchange and Subscription Agreements”), with certain holders of its outstanding 0.75% Convertible Senior Notes due 2023 (the “2023 Notes”) and certain new investors pursuant to which Q2 will issue $350 million principal amount of 0.125% Convertible Senior Notes due 2025 (the “New Notes”) consisting of (a) $210.7 million of New Notes and either shares of Q2’s common stock, $0.0001 par value, or cash in exchange for approximately $181.9 million principal amount of the 2023 Notes (the “Exchange Transactions”) and (b) $139.3 million principal amount of New Notes for cash (the “Subscription Transactions”), in each case, pursuant to exemptions from registration under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations thereunder. Following the closing of the Exchange Transactions, $48.1 million in aggregate principal amount of 2023 Notes will remain outstanding with terms unchanged.
The Exchange Transactions and the Subscription Transactions are expected to close concurrently on or about November 18, 2020, subject to customary closing conditions. The issuance of the New Notes will occur under an indenture related to the New Notes, to be dated on or around November 18, 2020, between Q2 and Wilmington Trust, National Association, as trustee.
The New Notes will represent senior unsecured obligations of Q2 and will pay interest semi-annually in arrears on each May 15 and November 15, commencing on May 15, 2021, at a rate of 0.125% per annum. The New Notes will mature on November 15, 2025, unless earlier converted, redeemed or repurchased. Prior to the close of business on the business day immediately preceding August 15, 2025, the New Notes will be convertible at the option of holders only upon the satisfaction of certain conditions and during certain periods. On or after August 15, 2025 until close of business on the second scheduled trading day preceding maturity, the New Notes will be convertible at the option of the holders at any time regardless of these conditions. The New Notes will be convertible into cash, shares of Q2’s common stock or a combination of cash and Q2’s common stock, at Q2’s election. The initial conversion rate is 7.1355 shares of Q2’s common stock per $1,000 principal amount of New Notes, which is equivalent to an initial conversion price of approximately $140.14 per share, and will be subject to customary anti-dilution adjustments. On or after November 20, 2023, Q2 may redeem for cash all or any portion of the New Notes if the last reported sale price of Q2’s common stock has been at least 130% of the conversion price for the New Notes for at least 20 trading days during any 30 consecutive trading day period.
If Q2 undergoes a fundamental change (as defined in the indenture governing the New Notes), holders may require Q2 to purchase for cash all or part of their New Notes at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest, if any, up to, but excluding, the fundamental change repurchase date. In addition, if certain make-whole fundamental changes occur or Q2 calls the New Notes for redemption, Q2 will, in certain circumstances, increase the conversion rate for any New Notes converted in connection with such make-whole fundamental change or redemption.
Q2 will not receive any cash proceeds from the Exchange Transactions. In exchange for issuing the New Notes pursuant to the Exchange Transactions, Q2 will receive and cancel the exchanged 2023 Notes. Q2 estimates that net cash proceeds from the Subscription Transactions will be approximately $132.1 million after deducting estimated offering expenses for both the Exchange Transactions and the Subscription Transactions. Q2 intends to use net cash proceeds from the Subscription Transactions to pay the cost of the capped call transactions described below and for general corporate purposes.
The foregoing description of the Exchange and Subscription Agreements does not purport to be complete and is qualified in its entirety by reference to the form of the Exchange and Subscription Agreement, a copy of which was filed as Exhibit 10.1 to this Current Report on Form 8-K.
A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K.
Capped Call Transactions
On November 11, 2020, in connection with the exchange and/or subscription agreements, Q2 entered into capped call transactions with certain dealers (the “Option Counterparties”). The funding of the capped call transactions is anticipated to occur on November 18, 2020. The capped call transactions are expected generally to reduce the potential dilution to Q2’s common stock upon any conversion of New Notes and/or offset any cash payments Q2 is required to make in excess of the principal amount of converted New Notes, as the case may be, in each case upon conversion of the New Notes. The strike price of the capped call transactions is set at 32.5% above the closing sale price of Q2’s stock on November 11, 2020, subject to a cap price of 200% above the closing sale price of Q2’s stock on November 11, 2020. Q2 expects to use approximately $39.8 million of the net proceeds from the Subscription Transactions to pay the cost of capped call transactions.