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Fair Value Measurement and Financial Instruments
9 Months Ended
Sep. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurement and Financial Instruments Fair Value Measurement and Financial Instruments
Fair Value Hierarchy

Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Preferred Stock Warrants and Share-Settled Redemption Feature related to the Convertible Notes

At December 31, 2021, the Company did not have observable inputs for the valuation of its preferred stock warrant liabilities or the share-settled redemption feature related to the Company’s convertible promissory notes (the “Convertible Notes”).
The Convertible Notes were initially separated into debt and share-settled redemption feature components and assigned a fair value. The value assigned to the debt component was the estimated fair value as of the issuance date of similar debt without the share-settled redemption feature. The difference between the cash proceeds and the estimated fair value represented the value which was assigned to the share-settled redemption feature and was recorded as a debt discount. The significant unobservable input used in the fair value measurement of the Convertible Notes and the share-settled redemption feature was the fair value of the underlying stock at the valuation measurement date.
At December 31, 2021, the fair value of the preferred stock warrant liabilities was based in part on aggregate equity value indications, consistent with the analysis for the Company’s common stock valuation using the option pricing method. The significant unobservable input used in the fair value measurement of the preferred stock warrant liabilities was the fair value of the underlying preferred stock at the valuation measurement date.
On January 18, 2022, upon the closing of the Business Combination, the outstanding principal balance of the Convertible Notes, the accrued and unpaid interest of the Convertible Notes, and the preferred stock warrants were converted to equity. As such, there were no share-settled redemption features or preferred stock warrant liabilities at September 30, 2022.
SPAC Warrants
As part of the GMII initial public offering (“GMII IPO”), GMII issued 9,000,000 public warrants (the “Public Warrants”) and 5,500,000 private placement warrants (the “Private Placement Warrants”), each of which is exercisable at a price of $11.50 per share (collectively, the “SPAC Warrants”).
Management has determined that the Public Warrants issued in the GMII IPO, which remained outstanding at the closing of the Business Combination and became exercisable for shares of the Company’s common stock, are subject to treatment as a liability. At the closing of the Business Combination and at September 30, 2022, the Company used a Monte Carlo simulation methodology to value the Public Warrants using Level 3 inputs, as the Company did not have observable inputs for the valuation. The significant unobservable inputs used in the fair value measurement of the Public Warrants liability are related to expected share-price volatility of 56.3% and the expected term of 4.30 years years. At September 30, 2022, the Public Warrants were valued at $0.12 per warrant.
The fair value of the Private Placement Warrants was deemed to be equal to the fair value of the Public Warrants, as the Private Placement Warrants have similar terms and are subject to substantially the same redemption features as the Public Warrants. As a result, Level 3 inputs were used to value the Private Placement Warrants.
Refer to Note 7, Warrants and Stockholders’ Equity (Deficit), for additional information surrounding the SPAC Warrants.

Earn Out

In addition to the consideration paid at the closing of the Business Combination, certain investors may receive their pro rata share of up to an aggregate of 14,500,000 additional shares of the Company’s common stock as consideration upon the common stock achieving certain benchmark share prices, as set forth in the merger agreement (the “Earn Out”).
Management has determined that the Earn Out is subject to treatment as a liability. The Company used a Monte Carlo simulation methodology to value the Earn Out using Level 2 inputs. The key assumptions used in the Monte Carlo simulation are related to expected share-price volatility, expected term, risk-free interest rate, and dividend yield. The expected volatility at September 30, 2022 was derived from the volatility of comparable public companies.

Delayed Draw Warrants

The fair value of the Delayed Draw Warrants (as defined in Note 5, Debt) issued in connection with the Delayed Draw Notes (as defined in Note 5, Debt) was estimated by separating the Delayed Draw Notes into the debt and warrants components and assigning a fair value to each component. The value assigned to the debt component was the estimated fair value as of the issuance date of similar debt without the warrants. The difference between the cash proceeds and the estimated fair value represented the value which was assigned to the Delayed Draw Warrants and recorded as a debt discount. As of the closing of the Business Combination, the fair value of the Delayed Draw Warrants was $5.6 million and was included in additional paid in capital in the condensed consolidated balance sheet.

Disclosures about Fair Value of Financial Instruments

At September 30, 2022, there were no assets or liabilities measured using Level 1 inputs. At September 30, 2022, the Earn Out liability, Public Warrants liability, and Private Placement Warrants liability were included in other non-current liabilities in the condensed consolidated balance sheet. The following table summarizes the Company’s Level 2 and Level 3 financial liabilities measured at fair value on a recurring basis as of September 30, 2022 (in thousands):
Level 2Level 3Total
Earn Out liability$3,818 $— $3,818 
Public Warrants— 1,080 1,080 
Private Placement Warrants— 660 660 
Total financial liabilities measured and recorded at fair value$3,818 $1,740 $5,558 
At December 31, 2021, there were no assets or liabilities measured using Level 1 or Level 2 inputs. At December 31, 2021, the share-settled redemption feature and the preferred stock warrant liabilities were recorded in convertible notes and other non-current liabilities, respectively, in the consolidated balance sheet. The following table summarizes the Company’s Level 3 financial liabilities measured at fair value on a recurring basis as of December 31, 2021 (in thousands):
Level 3
Preferred stock warrant liabilities$3,288 
Share-settled redemption feature30,322 
Total financial liabilities measured and recorded at fair value$33,610 
The following table represents changes in the Company’s Level 3 liabilities measured at fair value for the nine months ended September 30, 2022 (in thousands):
Level 3
Beginning balance at January 1, 2022$33,610 
Public Warrants liability recognized upon closing of Business Combination23,670 
Private Placement Warrants liability recognized upon closing of Business Combination14,465 
Decrease in fair value of share-settled redemption feature upon conversion of Convertible Notes(30,322)
Decrease in fair value of Public Warrants liability(22,590)
Decrease in fair value of Private Placement Warrants liability(13,805)
Conversion of preferred stock warrant liabilities to equity(3,288)
Total financial liabilities measured and recorded at fair value$1,740 
The following table presents changes in Sonder’s Level 3 liabilities measured at fair value for the year ended December 31, 2021 (in thousands):
Level 3
Beginning balance at January 1, 2021$1,140 
Recognition of share-settled redemption feature45,156 
Decrease in fair value of share-settled redemption feature(14,834)
Increase in fair value of preferred stock warrant liabilities2,148 
Total financial liabilities measured and recorded at fair value$33,610 
There were no transfers of financial instruments between valuation levels during the three and nine months ended September 30, 2022 and the year ended December 31, 2021.

Management estimates that the fair values of its restricted cash, accounts receivable, prepaid rent, prepaid expenses, other current assets, accounts payable, accrued liabilities, sales tax payable, deferred revenue, current portion of long-term debt, convertible notes, and other current liabilities approximates their carrying values due to the relatively short maturity of the instruments. The fair value of the Company’s long-term debt approximates its carrying value because it bears interest at a market rate and all other terms are also reflective of current market terms.

These assumptions are inherently subjective and involve significant management judgment. Any change in fair value is recognized as a component of other expense (income), net, on the condensed consolidated statements of operations and comprehensive loss.