Nutanix, Inc. - 10-Q filing on 2022-03-10

Fair Value Measurements

6 Months Ended

Jan. 31, 2022

NOTE 3. FAIR VALUE MEASUREMENTS

The fair value of our financial assets measured on a recurring basis is as follows:


	As of July 31, 2021
	Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Cash equivalents:
Money market funds	$	72,583	$	—	$	—	$	72,583
Commercial paper		—		29,997		—		29,997
Corporate bonds		—		2,002		—		2,002
Short-term investments:
Corporate bonds		—		513,688		—		513,688
Commercial paper		—		347,088		—		347,088
U.S. Government securities		—		67,230		—		67,230
Total measured at fair value	$	72,583	$	960,005	$	—	$	1,032,588
Cash								181,141
Total cash, cash equivalents and short-term investments							$	1,213,729


	As of January 31, 2022
	Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Cash equivalents:
Money market funds	$	80,527	$	—	$	—	$	80,527
U.S. Government securities		—		14,996		—		14,996
Commercial paper		—		44,944		—		44,944
Short-term investments:
Corporate bonds		—		448,951		—		448,951
Commercial paper		—		300,594		—		300,594
U.S. Government securities		—		141,481		—		141,481
Total measured at fair value	$	80,527	$	950,966	$	—	$	1,031,493
Cash								260,282
Total cash, cash equivalents and short-term investments							$	1,291,775

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We report our financial instruments at fair value, with the exception of the 2023 Notes, the 2026 Notes and the 0.25% convertible senior notes due 2027 (the "2027 Notes") (collectively, the "Notes"). Financial instruments that are not recorded at fair value on a recurring basis are measured at fair value on a quarterly basis for disclosure purposes. The carrying values and estimated fair values of financial instruments not recorded at fair value are as follows:


	As of July 31, 2021 (1)				As of January 31, 2022
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(in thousands)
2023 Notes	$	523,671	$	602,272	$	145,160	$	143,737
2026 Notes		532,023		1,128,953		560,218		1,022,732
2027 Notes (2)		—		—		566,243		489,147
Total	$	1,055,694	$	1,731,225	$	1,271,621	$	1,655,616

(1)

Prior period amounts have not been adjusted due to our adoption of ASU 2020-06 under the modified retrospective method. For additional information on our adoption of ASU 2020-06, refer to Note 1 and Note 5.

(2)

The 2027 Notes were issued in September 2021.

The carrying value of the 2023 Notes as of July 31, 2021 was net of an unamortized debt discount of $48.6 million and unamortized debt issuance costs of $2.7 million. The carrying value of the 2023 Notes as of January 31, 2022 was net of unamortized debt issuance costs of $0.5 million.

The carrying value of the 2026 Notes as of July 31, 2021 and January 31, 2022 included $8.9 million and $18.4 million, respectively, of non-cash interest expense that was converted to the principal balance, net of unamortized debt discounts of $203.6 million and $186.8 million, respectively, and unamortized debt issuance costs of $23.3 million and $21.3 million, respectively.

The carrying value of the 2027 Notes as of January 31, 2022 was net of unamortized debt issuance costs of $8.8 million.

The total estimated fair value of the 2023 Notes was determined based on the closing trading price per $100 of the 2023 Notes as of the last day of trading for the period. We consider the fair value of the 2023 Notes to be a Level 2 valuation due to the limited trading activity.

The total estimated fair value of the 2026 Notes is based on a binomial model. We consider the fair value of the 2026 Notes to be a Level 3 valuation, as the 2026 Notes are not publicly traded. The Level 3 inputs used are the same as those used to determine the estimated fair value of the associated derivative liability, as detailed below.

The total estimated fair value of the 2027 Notes was determined based on the closing trading price per $100 of the 2027 Notes as of the last day of the trading period. We consider the fair value of the 2027 Notes to be a Level 2 valuation due to the limited trading activity.

Derivative Liability

The conversion feature of the 2026 Notes represented an embedded derivative. The 2026 Notes are not considered to be conventional debt and we determined that the embedded conversion feature was required to be bifurcated from the host debt and accounted for as a derivative liability, as the 2026 Notes were convertible into a variable number of shares until the conversion price became fixed in September 2021, based on the level of achievement of the associated financial performance metric. As such, the initial fair value of the derivative instrument was recorded as a liability in the condensed consolidated balance sheet with the corresponding amount recorded as a discount to the 2026 Notes upon issuance. The derivative liability is considered a Level 3 valuation and was recorded at its estimated fair value at the end of each reporting period and as of September 15, 2021, when the conversion price became fixed, with the change in fair value recognized within other expense, net in the condensed consolidated statements of operations.

On September 15, 2021, the conversion price of the 2026 Notes became fixed and the bifurcated liability was no longer accounted for as a separate derivative because the conversion features are now considered indexed to our own equity and meet the equity classification conditions. We estimated the fair value of the derivative liability as of September 15, 2021 to be $698.2 million, which was reclassified to equity on that date.

The following table shows the change in the estimated fair value of the derivative liability through October 31, 2021:


	Three Months Ended October 31, 2021
	(in thousands)
Derivative liability at July 31, 2021	$	500,175
Change in fair value		198,038
Derivative liability at September 15, 2021		698,213
Reclass to equity upon conversion price becoming fixed		(698,213	)
Derivative liability at October 31, 2021	$	—

We estimated the fair value of the derivative liability using a binomial model, with the following valuation inputs:


	As of
	July 31, 2021	September 15, 2021
Conversion ratio (1)	Conversion price of $27.75 with a 36.036 conversion rate per $1,000	Conversion price of $27.75 with a 36.036 conversion rate per $1,000
Risk-free rate	0.7%	0.8%
Discount rate (2)	6.5%	6.5%
Volatility	40.0%	45.0%
Stock price	$36.02	$42.77

(1)

The conversion ratio was calculated based on the achievement of the associated financial performance metric.

(2)

The discount rate was estimated based on the implied rate for the 2023 Notes as well as a credit analysis.