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Fair Value Measurements

9 Months Ended

Sep. 30, 2021

7. FAIR VALUE MEASUREMENTS

The Company follows the authoritative guidance for fair value measurements relating to financial and non-financial assets and liabilities, including presentation of required disclosures herein. This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

All of the Company's derivative assets and liabilities are classified as Level 3. The Company marks-to-market these assets and liabilities at each reporting date, or more frequently as deemed necessary, with the changes in fair value recognized in the Company’s condensed consolidated statements of operations.

Recurring Fair Value Measurements

The following tables provide a summary of the assets and liabilities measured at fair value on a recurring basis (in thousands):


	September 30, 2021
	(Level 1)		(Level 2)		(Level 3)		Total Balance
Assets:

Compound embedded derivative with the Second Lien Facility Agreement	$	—	$	—	$	613	$	613
Total assets measured at fair value	$	—	$	—	$	613	$	613

Liabilities:
Compound embedded derivative with the 2013 8.00% Notes	$	—	$	—	$	(2,660)	$	(2,660)


Total liabilities measured at fair value	$	—	$	—	$	(2,660)	$	(2,660)


	December 31, 2020
	(Level 1)		(Level 2)		(Level 3)		Total Balance
Assets:
Compound embedded derivative with the Second Lien Facility Agreement	$	—	$	—	$	286	$	286
Total assets measured at fair value	$	—	$	—	$	286	$	286

Liabilities:
Compound embedded derivative with the 2013 8.00% Notes	$	—	$	—	$	(123)	$	(123)


Total liabilities measured at fair value	$	—	$	—	$	(123)	$	(123)

2013 8.00% Notes

The significant quantitative Level 3 inputs utilized in the valuation models are shown in the tables below:


	September 30, 2021
	Stock Price Volatility	Risk-Free Interest Rate		Note Conversion Price	Discount Rate		Market Price of Common Stock
Compound embedded derivative with the 2013 8.00% Notes	125% - 146%	0.2	%	$0.69	17	%	$1.67


	December 31, 2020
	Stock Price Volatility	Risk-Free Interest Rate		Note Conversion Price	Discount Rate		Market Price of Common Stock
Compound embedded derivative with the 2013 8.00% Notes	40% - 85%	0.1	%	$0.69	19	%	$0.34

2013 8.00% Notes

Fluctuation in the Company’s stock price is a significant driver of the changes in the compound embedded derivative with the 2013 8.00% Notes during each reporting period. As the stock price increases, the value to the holder of the instrument generally increases, thereby increasing the liability on the Company’s condensed consolidated balance sheet. The Company's stock price increased almost 400% from December 31, 2020 to September 30, 2021, driving a significant increase in the liability at September 30, 2021. Stock price volatility is also a significant input used in the fair value measurement of the compound embedded derivative with the 2013 8.00% Notes. The simulated fair value of this liability is sensitive to changes in the expected volatility of the Company's stock price. Increases in expected volatility generally result in a higher fair value measurement.

Second Lien Facility Agreement

The compound embedded derivative with the Second Lien Facility Agreement is valued using a probability weighted discounted cash flow model. The most significant observable input used in the fair value measurement is the discount yield, which was 12% and 13% at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, the discount yield utilized in the valuation was lower than the blended interest rate of the underlying debt. As a result, the features embedded in the underlying debt resulted in an asset for the Company. When the discount yield decreases and is lower than the blended interest rate of the underlying debt, the fair value of the derivative asset increases. The unobservable inputs used in the fair value measurement include the probability of change of control and the estimated timing and amounts of cash flows associated with certain mandatory prepayments within the debt agreement.

Rollforward of Recurring Level 3 Assets and Liabilities

The following table presents a rollforward for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):




Balance at beginning of period, January 1, 2021 and 2020, respectively	$	163	$	(3,792)

Derivative adjustment related to conversions and exercises	—		1,058
Unrealized (loss) gain, included in derivative gain (loss)	(2,210)		2,897
Balance at end of period, September 30, 2021 and December 31, 2020, respectively	$	(2,047)	$	163

Fair Value of Debt Instruments

The Company believes it is not practicable to determine the fair value of the First Lien Facility Agreement, the Second Lien Facility Agreement and the PPP Loan without incurring significant additional costs. Unlike typical long-term debt, interest rates and other terms for these instruments are not readily available and generally involve a variety of factors, including due diligence by the debt holders. The following table sets forth the carrying values and estimated fair values of the Company's other debt instrument classified as a Level 3 financial instrument (in thousands):


	September 30, 2021				December 31, 2020
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value

2013 8.00% Notes	$	1,392	$	1,241	$	1,376	$	1,122

See Note 5: Long-Term Debt and Other Financing Arrangements for further discussion of the Company's debt instruments.

Nonrecurring Fair Value Measurements

Long-lived assets and intangible and other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. During the third quarter of 2021, the Company wrote off approximately $0.2 million of construction in progress related to unsatisfactory work that did not meet internal testing requirements and could not be used for its intended purpose.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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