Fair Value of Financial Instruments |
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Fair Value of Financial Instruments | 6. Fair Value of Financial Instruments The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 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):
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, 2023 and December 31, 2022 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 expired unexercised in June 2022, and Note Hedge Warrants, which expired unexercised in April 2023, were recorded as derivative assets and liabilities, respectively, and were classified as Level 3 measurements under the fair value hierarchy. These derivatives were not actively traded and were valued using the Black-Scholes -pricing model, which required the use of subjective assumptions.The following inputs were used in the fair market valuation of the Note Hedge Warrants:
(1)Based on U.S. Treasury yield curve, with terms commensurate with the expected term of the Note Hedge Warrants. (2)The closing price of the Company’s Class A Common Stock on the last trading day of the quarter ended December 31, 2022. (3)As per the agreements for the Note Hedge Warrants. (4)Expected volatility based on historical volatility of the Company’s Class A Common Stock.
The Convertible Note Hedges and the Note Hedge Warrants were recorded at fair value at each reporting date and changes in fair value were recorded in other income (expense), net within the Company’s condensed consolidated statements of income (loss). The following table reflects the change in the Company’s Level 3 Note Hedge Warrants from December 31, 2022 through September 30, 2023 (in thousands):
Convertible Senior 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 (Note 9). 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 2024 Convertible Notes was $198.1 million and $215.9 million as of September 30, 2023 and December 31, 2022, respectively. The estimated fair value of the 2026 Convertible Notes was $195.0 million and $219.0 million as of September 30, 2023 and December 31, 2022, 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 9). 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 9). Revolving Credit Agreement Outstanding borrowings under the revolving credit facility (Note 9) are carried at amounts that approximate fair value based on their nature, terms, credit spreads, and variable interest rates, which are Level 3 inputs. Non-recurring Fair Value Measurements Acquired In-Process Research & Development The fair value of the acquired IPR&D asset, apraglutide, was determined using the multi-period excess earnings method using Level 3 fair-value measurements and inputs including estimated cash flows and probabilities of success. Assembled Workforce The fair value of the assembled workforce was determined using the replacement cost method using Level 3 fair-value measurements and inputs including estimated costs and productivity metrics.
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