Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Financial Instruments and Fair Value Measurements

Financial Instruments and Fair Value Measurements

Note 14. Financial Instruments and Fair Value Measurements

The Company’s financial instruments subject to fair value measurements include cash and cash equivalents, accounts receivable and other receivables, trade accounts payable, accrued liabilities, long-term debt and warrant liabilities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial Assets— Cash and cash equivalents, generally consisting of investments in interest-bearing money market accounts, are measured at fair value on a recurring basis using Level 1 measurements. Fair value inputs for these investments are considered Level 1 measurements within the fair value hierarchy because money market account fair values are known and observable through daily published floating net asset values. The fair value of the Company’s cash and cash equivalents, being the same as their carrying value, were $59.8 million and $40.4 million at September 30, 2022 and December 31, 2021, respectively.

Financial Liabilities— The Senior Secured Notes, a material component of long-term debt (see Note 8), and our warrant liabilities, a material component of total liabilities have each been measured and carried at fair value since their issuance in October 2021. Such instruments represent financial liabilities whose measurement contains significant unobservable inputs, which management considers to be Level 3 measurements under the fair value hierarchy.

The Company uses a discounted cash flow technique, an income-based approach, to determine the fair value of the Senior Secured Notes. This technique relies upon an assumption of pricing the Senior Secured Notes to their maturity (without mandatory or voluntary prepayments) and incorporates inputs such as contractual repayment terms, maturity, and discount rate. The most significant unobservable input for the Senior Secured Notes is the discount rate which is estimated by performing a yield analysis that relies upon the discount rate observed in the initial issuance of the Senior Secured Notes as well as certain benchmark debt instruments with observable pricing from which conclusions are drawn on the change in the discount rate from period to period.

The Company uses the Black-Scholes Merton option-pricing model to value the warrants. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, and volatility. The most significant unobservable input for the warrant liabilities is volatility. Given the limited trading volume and period of time the Company’s stock has been traded in an active market, the expected volatility is estimated by taking the average historical price volatility for industry peers, consisting of several public companies in the Company’s industry that are similar in size, stage, or financial leverage, over a period of time commensurate to the expected term of the warrants.

The following tables show financial liabilities subject to fair value measurement on a recurring basis and related information on fair values, valuation techniques and unobservable inputs (dollars in thousands):

		At September 30, 2022
Financial Instrument	Fair Value		Valuation Technique	Unobservable Inputs
Senior Secured Notes	$	(55,900)	Income Approach - DCF	Discount rate	23.5	%
				Term (in years)	4.0
Warrants	$	(8,926)	Black-Scholes Merton	Equity volatility	57.5	%
				Term (in years)	2.5

		At December 31, 2021
Financial Instrument	Fair Value		Valuation Technique	Unobservable Inputs
Senior Secured Notes	$	(43,800)	Income Approach - DCF	Discount rate	17.9	%
				Term (in years)	4.8
Warrants	$	(3,220)	Black-Scholes Merton	Equity volatility	65.0	%
				Term (in years)	3.3

The following table shows changes in the fair value of financial liabilities subject to Level 3 fair value measurements on a recurring basis (in thousands):

		Senior Secured Notes		Warrants
Balance, At December 31, 2021	$	(43,800)	$	(3,220)
Principal issuance of second tranche notes (Note 8)		(20,000)		-
Cash payments for interest		4,843		-
Fair value adjustments through earnings (inclusive of related accrued interest expense)		4,757		(5,706)
Fair value adjustments through accumulated other comprehensive income or loss		(1,700)		-
Balance, At September 30, 2022	$	(55,900)	$	(8,926)

Changes in the fair value of debt that is accounted for at fair value, inclusive of related accrued interest expense, are presented as gains or losses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss under change in fair value of debt and interest expense. The portion of total changes in fair value of debt attributable to changes in instrument-specific credit risk are determined through specific measurement of periodic changes in the discount rate assumption exclusive of base market changes and are presented as a component of comprehensive income or loss in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

No financial liabilities were subject to fair value measurements on a recurring basis prior to October 2021.

Assets and Liabilities for Which Fair Value is Only Disclosed

The carrying amounts for accounts receivable and other receivables, trade accounts payable, accrued liabilities and the residual amounts of long-term debt not otherwise measured at fair value on a recurring basis approximate their relative fair values due to their short-term nature with relevant inputs considered Level 2 measurements within the fair value hierarchy.