XML 22 R12.htm IDEA: XBRL DOCUMENT v3.22.2.2
Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2022
Disclosure Text Block  
Fair Value of Financial Instruments

5. Fair Value of Financial Instruments

The tables below present information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices for similar instruments in active markets, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the Company to develop its own assumptions for the asset or liability.

The Company’s investment portfolio may include fixed income securities that do not always trade on a daily basis. As a result, the pricing services used by the Company apply other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. In addition, model processes are used to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant credit information, perceived market movements, sector news and economic events. The inputs into these models may include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant data. The Company validates the prices provided by its third-party pricing services by obtaining market values from other pricing sources and analyzing pricing data in certain instances. The Company periodically invests in certain reverse repurchase agreements, which are collateralized by government securities and obligations for an amount not less than 102% of their principal amount. The Company does not record an asset or liability for the collateral as the Company is not permitted to sell or re-pledge the collateral. The collateral has at least the prevailing credit rating of U.S. Government Treasuries and Agencies. The Company utilizes a third-party custodian to manage the exchange of funds and ensure the collateral received is maintained at 102% of the reverse repurchase agreements principal amount on a daily basis.

The following tables present the assets and liabilities the Company has measured at fair value on a recurring basis (in thousands):

Fair Value Measurements at Reporting Date Using

    

  

  

Quoted Prices in

    

Significant Other

    

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

September 30, 2022

(Level 1)

(Level 2)

(Level 3)

Assets:

Cash and cash equivalents:

Money market funds

$

130,674

$

130,674

$

$

Repurchase agreements

268,000

268,000

Commercial paper

156,213

156,213

Corporate bonds

3,287

3,287

Restricted cash:

Money market funds

1,735

1,735

Total assets measured at fair value

$

559,909

$

132,409

$

427,500

$

Liabilities:

Note hedge warrants

$

1

$

$

$

1

Total liabilities measured at fair value

$

1

$

$

$

1

Fair Value Measurements at Reporting Date Using

    

  

  

Quoted Prices in

    

Significant Other

    

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

December 31, 2021

(Level 1)

(Level 2)

(Level 3)

Assets:

Cash and cash equivalents:

Money market funds

$

595,233

$

595,233

$

$

Restricted cash:

Money market funds

 

1,735

 

1,735

 

 

Convertible note hedges

1,115

1,115

Total assets measured at fair value

$

598,083

$

596,968

$

$

1,115

Liabilities:

Note hedge warrants

$

1,316

$

$

$

1,316

Total liabilities measured at fair value

$

1,316

$

$

$

1,316

Cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued research and development costs, accrued expenses and other current liabilities and current portion of operating lease obligations at September 30, 2022 and December 31, 2021 are carried at amounts that approximate fair value due to their short-term maturities.

Convertible Note Hedges and Note Hedge Warrants with Respect to 2022 Convertible Notes

The Company’s Convertible Note Hedges, which terminated unexercised upon expiry in June 2022, and Note Hedge Warrants are recorded as derivative assets and liabilities, respectively, and are classified as Level 3 measurements under the fair value hierarchy. These derivatives are not actively traded and are valued using the Black-Scholes option-pricing model, which requires the use of subjective assumptions.

The following inputs were used in the fair market valuation of the Convertible Note Hedges as of December 31, 2021 and Note Hedge Warrants as of September 30, 2022 and December 31, 2021:

September 30, 2022

December 31, 2021

Note Hedge

Convertible

    

Note Hedge

 

Warrants

 

Note Hedges

Warrants

 

Risk-free interest rate (1)

3.4

%

0.2

%  

0.4

%

Expected term

 

0.3

0.5

 

1.0

Stock price (2)

$

10.36

$

11.66

$

11.66

Strike price (3)

$

18.82

$

14.51

$

18.82

Common stock volatility (4)

32.1

%

27.0

%  

32.2

%

Dividend yield (5)

 

%

 

%  

 

%

(1)Based on U.S. Treasury yield curve, with terms commensurate with the expected terms of the Convertible Note Hedges and the Note Hedge Warrants.
(2)The closing price of the Company’s Class A Common Stock on the last trading days of the quarters ended September 30, 2022 and December 31, 2021, respectively.
(3)As per the respective agreements for the Convertible Note Hedges and Note Hedge Warrants.
(4)Expected volatility based on historical volatility of the Company’s Class A Common Stock.
(5)The Company has not paid and does not anticipate paying cash dividends on its shares of common stock in the foreseeable future; therefore, the expected dividend yield is assumed to be zero.

The Convertible Note Hedges and the Note Hedge Warrants are recorded at fair value at each reporting date and changes in fair value are recorded in other (expense) income, net within the Company’s condensed consolidated statements of income.

The following table reflects the change in the Company’s Level 3 Convertible Note Hedges and Note Hedge Warrants from December 31, 2021 through September 30, 2022 (in thousands):

Convertible

Note Hedge

    

 Note Hedges

    

 Warrants

Balance at December 31, 2021

$

1,115

$

(1,316)

Change in fair value, recorded as a component of gain on derivatives

(1,115)

1,315

Balance at September 30, 2022

$

$

(1)

Convertible Senior Notes

In June 2015, the Company issued $335.7 million aggregate principal amount of its 2022 Convertible Notes. In August 2019, the Company issued $200.0 million aggregate principal amount of its 2024 Convertible Notes and $200.0 million aggregate principal amount of its 2026 Convertible Notes, and used a portion of the proceeds from such issuances to repurchase $215.0 million aggregate principal amount of its 2022 Convertible Notes. In June 2022, the Company repaid the $120.7 million remaining aggregate principal amount of its 2022 Convertible Notes. Prior to the adoption of ASU 2020-06, the Company separately accounted for the liability and equity components of each of the 2022 Convertible Notes, 2024 Convertible Notes, and 2026 Convertible Notes, by allocating the proceeds between the liability component and equity component (Note 8). Following the adoption of ASU 2020-06 on January 1, 2022, the equity component was eliminated and each of the 2022 Convertible Notes, 2024 Convertible Notes, and 2026 Convertible Notes are measured as a single liability. The fair value of the respective convertible senior notes, which differs from their carrying value, is influenced by interest rates, the price of the Company’s Class A Common Stock and the volatility thereof, and the prices for the respective convertible senior notes observed in market trading, which are Level 2 inputs.

The estimated fair value of the 2022 Convertible Notes was $125.2 million as of December 31, 2021. The estimated fair value of the 2024 Convertible Notes was $200.9 million and $221.9 million as of September 30, 2022 and December 31, 2021, respectively. The estimated fair value of the 2026 Convertible Notes was $204.0 million and $227.2 million as of September 30, 2022 and December 31, 2021, respectively.

Capped Calls with Respect to 2024 Convertible Notes and 2026 Convertible Notes

In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, the Company entered into the Capped Calls with certain financial institutions. The Capped Calls cover 29,867,480 shares of Class A Common Stock (subject to anti-dilution and certain other adjustments), which is the same number of shares of Class A Common Stock that initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes. The Capped Calls have an initial strike price of approximately $13.39 per share, which corresponds to the initial conversion price of the 2024 Convertible Notes and the 2026 Convertible Notes, and have a cap price of approximately $17.05 per share (Note 8). The strike price and cap price are subject to anti-dilution adjustments generally similar to those applicable to the 2024 Convertible Notes and the 2026 Convertible Notes. These instruments meet the conditions outlined in ASC Topic 815, Derivatives and Hedging (“ASC 815”), to be classified in stockholders’ equity and are not subsequently remeasured as long as the conditions for equity classification continue to be met (Note 8).