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Fair Value Measurements

6 Months Ended

Jun. 30, 2023

7. Fair Value Measurements

The following tables present information about the fair value of the Company’s financial assets and liabilities as of June 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 June 30, 2023 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Money market mutual funds	$	36,265	$	—	$	—	$	36,265
	$	36,265	$	—	$	—	$	36,265

Liabilities:
Warrant liability	$	—	$	—	$	20,305	$	20,305
Embedded derivatives		—		—		1,240		1,240
	$	—	$	—	$	21,545	$	21,545


	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 six months ended June 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 defined and discussed in Note 10, Debt, the Company issued certain penny warrants (the "Warrants"). 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 at fair value on the condensed consolidated balance sheet. Each reporting period, the Warrants will be recorded at fair value, with changes in fair value recognized in the Company’s consolidated statement of operations within interest expense. Changes in the fair value of the warrant liability from June 15, 2023 to June 30, 2023 were immaterial.

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
		June 30, 2023
Risk-free interest rate		3.9%
Correlated random variable		(0.3)
Expected volatility - revenue		45.0%
Expected volatility - equity		90.0%
Vesting dates		6/15/2023 1/1/2024 1/1/2025
Simulated stock price		$1.01

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
		June 30, 2023
Risk-free interest rate		3.9%
Correlated random variable		(0.3)
Expected volatility - revenue		45.0%
Expected volatility - equity		90.0%
Revenue discount rate		11.3%
Discount rate		17.0%

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 from June 15, 2023 to June 30, 2023 were immaterial.

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.

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 on a recurring basis during the six months ended June 30, 2023 from those included in the Company’s consolidated financial statements for the year ended December 31, 2022.

- 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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