Item 1.01 Entry into a Material Agreement.
Convertible Notes and the Indenture
On September 4, 2019, Okta, Inc. (the “Company”) priced its private offering of $1.0 billion in aggregate principal amount of 0.125% Convertible Senior Notes due 2025 (the “Notes”). The Notes are senior unsecured obligations of the Company. The Notes were issued pursuant to an Indenture, dated September 9, 2019 (the “Indenture”), between the Company and Wilmington Trust, National Association, as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company after which the Notes become automatically due and payable. The Company also granted the initial purchasers of the Notes a 13-day option to purchase up to an additional $150.0 million aggregate principal amount of the Notes (the “Additional Notes”), which option has not been exercised as of the time of filing of this Current Report on Form 8-K.
The Notes will mature on September 1, 2025, unless earlier redeemed, repurchased or converted. The Notes will bear interest from September 9, 2019 at a rate of 0.125% per year payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020. The Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding June 1, 2025, only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s Class A common stock, par value $0.0001 per share (the “Class A 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 on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) 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 the Class A Common Stock and the conversion rate on each such trading day; (3) if the Company calls the Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; and (4) upon the occurrence of specified corporate events. On or after June 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash, shares of the Class A Common Stock or a combination of cash and shares of the Class A Common Stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the Indenture. The conversion rate for the Notes will initially be 5.2991 shares of the Class A Common Stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $188.71 per share of the Class A Common Stock. The initial conversion price of the Notes represents a premium of approximately 47.5% to the $127.94 per share closing price of the Class A Common Stock on September 4, 2019. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture.
The Company may not redeem the Notes prior to September 6, 2022. The Company may redeem for cash all or any portion of the Notes, at its option, on or after September 6, 2022, if the last reported sale price of the Class A 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 preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically.
A copy of the Indenture (including the form of the Note) is attached as an exhibit to this report and is incorporated herein by reference (and this description is qualified in its entirety by reference to such document).
The net proceeds from this offering were approximately $981.8 million, after deducting the initial purchasers’ discounts and commissions and the Company’s estimated offering expenses related to the offering. The Company used approximately $69.9 million of the net proceeds from the offering to pay the cost of the Capped Call Transactions (as defined below). If the initial purchasers exercise their option to purchase Additional Notes, the Company expects to use a portion of the net proceeds from the sale of such Additional Notes to enter into additional Capped Call Transactions with the Option Counterparties (as defined below). The Company intends to use the remainder of the net proceeds from the offering for general corporate purposes, including the use of approximately $224.4 million to finance the cash portion of the consideration the Company delivered in connection with the exchange transactions for its existing 0.25% Convertible Senior Notes due 2023 (the “2023 Notes”) described below.
Capped Call Transactions
On September 4, 2019, in connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the initial purchasers or their respective affiliates and other financial institutions (the “Option Counterparties”). The Capped Call Transactions will cover, subject to anti-dilution adjustments, the number of shares of Class A Common Stock underlying the Notes sold in the offering. The Capped Call Transactions are generally expected to reduce potential dilution to the Class A Common Stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions will initially be $255.88 per share, which represents a premium of 100.0% over the last reported sale price of the Class A Common Stock of $127.94 per share on September 4, 2019, and is subject to certain adjustments under the terms of the capped call transactions.
The Capped Call Transactions are separate transactions entered into by the Company with the Option Counterparties, and are not part of the terms of the Notes and will not affect any holder’s rights under the Notes. Holders of the Notes will not have any rights with respect to the Capped Call Transactions.
The foregoing descriptions of the Capped Call Transactions are qualified in their entirety by the copy of the form of call option transaction confirmation relating to the Capped Call Transactions, which is attached as an exhibit to this report and incorporated herein by reference.
Contemporaneous 2023 Notes Transactions and Unwind of Convertible Note Hedge and Warrant Transactions
Contemporaneously with the pricing of the offering of the Notes, the Company entered into privately negotiated transactions with certain holders of the 2023 Notes to exchange approximately $224.4 million in aggregate principal amount of the 2023 Notes for an aggregate of approximately $224.4 million in cash and 3.0 million shares of its Class A Common Stock. The Company expects that holders of 2023 Notes that exchange their 2023 Notes may enter into or unwind various derivatives with respect to the Class A Common Stock (including entering into derivatives with one or more of the initial purchasers or their respective affiliates) and/or purchase or sell shares of the Class A Common Stock concurrently with or shortly after the pricing of the Notes.
In connection with the issuance of the 2023 Notes, the Company entered into convertible note hedge transactions (the “Existing Convertible Note Hedge Transactions”) with certain financial institutions (the “Existing Counterparties”). The Company also entered into separate warrant transactions (the “Existing Warrant Transactions”) with the Existing Counterparties. Concurrently with the exchange transactions with respect to the 2023 Notes, the Company entered into agreements with the Existing Counterparties to terminate a portion of: (i) the Existing Convertible Note Hedge Transactions in a notional amount corresponding to the principal amount of such 2023 Notes exchanged and (ii) the Existing Warrant Transactions with respect to a number of shares equal to the notional shares underlying such 2023 Notes exchanged. In connection with such terminations and the related unwinding of the existing hedge position of the existing counterparties with respect to such transactions, such existing counterparties and/or their respective affiliates may sell shares of the Class A Common Stock in secondary market transactions, and/or unwind various derivative transactions with respect to the Class A Common Stock concurrently with or shortly after the pricing of the Notes.
In connection with such terminations, the Company received net proceeds from the existing counterparties equal to approximately $47.2 million, which it intends to use for general corporate purposes. The exchange of the 2023 Notes and the unwind of the Existing Convertible Note Hedge Transactions and the Existing Warrant Transactions described above, and the potential related market activities by exchanging holders of the 2023 Notes and the existing counterparties, as applicable, could increase (or reduce the size of any decrease in) or decrease (or reduce the size of any increase in) the market price of the Class A Common Stock, which may affect the trading price of the Notes at that time and the Company cannot predict the magnitude of such market activity or the overall effect it will have on the price of the Notes or its Class A Common Stock.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The information set forth under Item 1.01 of this Current Report on Form 8-K is incorporated herein by reference.