Warrant Liabilities

6 Months Ended

Jun. 30, 2020

Warrant Liabilities [Abstract]

Warrant Liabilities

9. Warrant Liabilities

The Incremental Loan Warrants issued in conjunction with the Amended and Restated Credit Agreement contain a warrant repurchase provision which, upon an occurrence of a fundamental transaction, as defined in the warrant agreement, could give rise to an obligation of the Company to pay cash to the warrant holders. In addition, upon the occurrence of any of the following events: (1) a fundamental transaction; (2) acquisition of 25% or more of the total voting power of all the securities of the entity by any one person or group of affiliated persons or entities; (3) Tony Pearce or Terry Pearce individually or together ceasing to beneficially own at least 50% of the voting securities of the Company; or (4) the Board of Directors ceasing to be comprised of a majority of independent directors as defined under NASDAQ rules, the exercise price of the warrant will be reduced by a value based upon a formula model established in the agreement. The formula model is a Black Scholes valuation model which would use the following inputs: (1) share price would be the greater of the volume weighted average price (“VWAP”) of the common stock for the prior 30 days before the applicable event date or the VWAP of the trading day immediately preceding the event date; (2) exercise price of $5.74, unless previously adjusted under other terms of the warrant; (3) volatility would be the greater of 100% and the historical volatility of the Company’s common stock for the ninety days preceding the date of the triggering event; and (4) the assumed risk-free interest rate shall correspond to the US Treasury rate for a period equal to the remaining term of this warrant. In May 2020, Tony Pearce or Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company. As a result, the exercise price of the warrants were reduced to $0, based on the formula established in the agreement.

The Company has determined that the fundamental transaction provisions require the warrants to be accounted for as a liability at fair value on the date of the transaction under guidance prescribed in ASC 480 - Distinguishing Liabilities from Equity. The liability for the warrants is subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. 

The Company determined the fair value of the Incremental Loan Warrants to be $47.0 million and $21.6 million on June 30, 2020 and December 31, 2019, respectively using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following assumptions:

	June 30,			December 31,
	2020			2019
Trading price of common stock on measurement date	$	18.00		$	8.71
Exercise price	$	—		$	5.74
Risk free interest rate		0.24	%		1.69	%
Warrant life in years		3.7			4.2
Expected volatility		50.57	%		36.82	%
Expected dividend yield		—			—
Probability of an event causing a warrant re-price		100.00	%		95.00	%

The Company recorded a $39.0 million and $3.7 million loss on the increase in fair value of the Incremental Loan Warrants for the three months ended June 30, 2020 and 2019, respectively. The Company recorded a $25.3 million and $2.0 million loss on the increase in fair value of the Incremental Loan Warrants for the six months ended June 30, 2020 and 2019, respectively.