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Fair Value Measurements
9 Months Ended
Sep. 30, 2023
Fair Value Disclosures [Abstract]  
Fair Value Measurements

7. Fair Value Measurements

Recurring Fair Value Measurement

The following tables present information about the fair value of the Company’s financial assets and liabilities as of September 30, 2023 and December 31, 2022 and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

 

 

Fair Value Measurements as of September 30, 2023 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

28,624

 

 

$

 

 

$

 

 

$

28,624

 

 

 

$

28,624

 

 

$

 

 

$

 

 

$

28,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 

 

$

 

 

$

15,336

 

 

$

15,336

 

Embedded derivatives

 

 

 

 

 

 

 

 

1,170

 

 

 

1,170

 

 

 

$

 

 

$

 

 

$

16,506

 

 

$

16,506

 

 

 

 

Fair Value Measurements as of December 31, 2022 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit—restricted cash

 

$

 

 

$

1,013

 

 

$

 

 

$

1,013

 

Money market mutual funds

 

 

90,984

 

 

 

 

 

 

 

 

 

90,984

 

 

 

$

90,984

 

 

$

1,013

 

 

$

 

 

$

91,997

 

During the nine months ended September 30, 2023 and 2022, there were no transfers between Level 1, Level 2 and Level 3.

Warrant Liability

On June 15, 2023, in connection with the closing of the Superpriority Term Loans, as discussed in Note 10, Debt, the Company issued Warrants, defined in Note 2, Summary of Significant Accounting Policies. The warrants are exercisable for a variable percentage of the Common Stock of the Company depending on how long the debt remains outstanding. Warrants representing the right to purchase an aggregate of 9,691 shares of the Company's common stock (the “10% Warrants”) were immediately vested as of the June 15, 2023 closing date. Warrants representing the right to purchase 4,846 shares of the Company's common stock (the “5% Warrants”) will vest on January 1, 2024, if the debt remains outstanding. Warrants representing the right to purchase 4,836 shares of the Company's common stock (the “4.99% Warrants”) will vest on January 1, 2025, if the debt remains outstanding. Due to the variable number of shares for which the warrants were exercisable, they failed to qualify for equity classification under the indexation guidance in ASC 815. Therefore, the Warrants are classified as liabilities and recorded at fair value on the condensed consolidated balance sheet. A summary of the warrants is as follows:

 

 

Number of Shares

 

Outstanding as of June 14, 2023

 

 

 

Granted

 

 

19,373

 

Exercised

 

 

(1,306

)

Outstanding at September 30, 2023

 

 

18,067

 

Warrants exercisable at September 30, 2023

 

 

8,385

 

Each reporting period, the Warrants are recorded at fair value, with changes in fair value recognized in the Company’s consolidated statement of operations. Changes in the fair value of the warrant liability from June 15, 2023 to September 30, 2023 were as follows:

 

 

Warrant liability fair value

 

Balance as of June 15, 2023

 

$

20,305

 

Exercise of warrants

 

 

(1,174

)

Change in fair value of warrant liability

 

 

(3,795

)

Balance at September 30, 2023

 

$

15,336

 

The Company’s liability for the Warrants is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company establishes the fair value for the Warrants using a Monte Carlo simulation model. The key inputs into the valuation models were as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2023

 

September 30, 2023

Risk-free interest rate

 

4.7%

 

3.9%–4.7%

Correlated random variable

 

0.2

 

0.20.3

Expected volatility - revenue

 

40.0%

 

40.0%–45.0%

Expected volatility - equity

 

93.0%

 

90.0%–93.0%

Vesting dates

 

1/1/2024
1/1/2025

 

6/15/2023
1/1/2024
1/1/2025

Simulated stock price

 

$0.85

 

$0.85–$1.01

Stock price at September 30, 2023

 

$0.85

 

$0.85

 

Embedded Derivatives

Further, in connection with the Superpriority Credit Agreement, the Company identified certain embedded features requiring bifurcation as derivatives under ASC 815. These embedded derivatives are required to be bifurcated from the debt host contract at fair value with subsequent changes in fair value recognized in earnings at each balance sheet date (see Note 8). The fair value of the embedded derivatives is based on a Monte Carlo valuation model utilizing a with and without analysis of the embedded features within the debt facility. The Company ran a Monte Carlo simulation model with the embedded derivatives, and then ran a separate Monte Carlo simulation model for the overall debt facility, without the embedded derivative features. The difference between these two Monte Carlo simulation models was used to obtain the value of the embedded features. The key inputs into the valuation models for both the with and without were as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2023

 

September 30, 2023

Risk-free interest rate

 

4.7%

 

3.9%–4.7%

Correlated random variable

 

0.2

 

0.20.3

Expected volatility - revenue

 

40.0%

 

40.0%–45.0%

The Company’s liability for the embedded derivatives is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. Changes in the fair value of the embedded derivatives were as follows:

 

 

Embedded derivatives fair value

 

Balance at June 15, 2023

 

$

1,240

 

Change in fair value of embedded derivatives

 

 

(70

)

Balance at September 30, 2023

 

$

1,170

 

Nonrecurring Fair Value Measurements

Assets held for sale

Property and equipment, net is identified as held for sale when it meets the held for sale criteria of Accounting Standards Codification Topic 360, Property, Plant, and Equipment ("ASC 360"). Depreciation is not recorded for assets that are classified as held for sale. When an asset meets the held for sale criteria, the lower of its carrying value or fair value less costs to sell the asset is reclassified from property and equipment, net and into noncurrent assets held for sale on the condensed consolidated balance sheets, where it remains until it is either sold or it no longer meets the held for sale criteria.

As a result of the sale of the Company's headquarters, as described in Note 5, Property and Equipment, the Company measured the related asset groups at their fair values and recorded an impairment charge of $4,718 during the three and nine months ended September 30, 2023 in selling, general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. The Company also recorded the fair value of $6,146 as noncurrent assets held for sale on the condensed consolidated balance sheet as of September 30, 2023, which represents a Level 1 measurement in the fair value hierarchy.

Superiority Term Loans

The Company initially recognized the Superpriority Term Loans at fair value in the application of extinguishment accounting (see Note 10, Debt). The Company established the fair value for the debt facility, which is a nonrecurring fair value calculation, using a discounted-cash flow analysis, for which the initial fair value measurement on June 15, 2023 was $186,990. Under the discounted-cash flow analysis, the Company discounts each principal and interest payment by an applicable discount rate determined by referencing the Company’s current public credit rating and seniority of the debt instrument in hand. The stream of principal and interest payments (discounted to present value) are used to calculate the fair value of the debt.

The key inputs in valuing the debt and embedded derivatives include management projections (i.e., revenue, gross margin, operating expenses, R&D expenses, depreciation and amortization, and employee stock compensation), the Company’s cash balance, penalty amounts under an event of default (only applicable to the embedded derivatives), the forward SOFR curve, revenue volatility, revenue discount rate (derived using asset beta, metric volatility, asset volatility, risk-free rate, equity risk premium, small stock risk premium, company specific risk premium), and risk discount rate. The fair value of the Superiority Term Loans is classified within Level 3 of the fair value hierarchy.

The principal amount of our outstanding Superpriority debt was $187,242 at September 30, 2023 and the estimated fair value of our outstanding debt was $181,680 at September 30, 2023, excluding unamortized debt discount.

Other than the valuation techniques used for the warrant liability, embedded derivatives and Superiority Term Loans, there were no changes to the valuation techniques used to measure asset and liability fair values during the nine months ended September 30, 2023 from those included in the Company’s consolidated financial statements for the year ended December 31, 2022.