Fair Value Measurements

6 Months Ended

Jun. 30, 2021

The Company's fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2021, is as follows (in thousands):


	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents:
Money market funds	$	99,984	$	—	$	—	$	99,984
Government bonds	—		4,502		—		4,502
Short-term investments:
Corporate bonds	—		162,480		—		162,480
Government bonds	—		29,858		—		29,858
Asset-backed bonds	—		17,840		—		17,840
Restricted cash:
Money market funds	856		—		—		856


Total assets	$	100,840	$	214,680	$	—	$	315,520
Liabilities
Warrant liabilities	$	25,406	$	—	$	—	$	25,406
Earn-out liabilities	—		—		1,208		1,208
Total liabilities	$	25,406	$	—	$	1,208	$	26,614

The Company's fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2020, is as follows (in thousands):


	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents:
Money market funds	$	12,163	$	—	$	—	$	12,163
Government bonds	—		12,693		—		12,693
Short-term investments:
Corporate bonds	—		55,227		—		55,227
Government bonds	—		14,123		—		14,123
Asset-backed bonds	—		3,514		—		3,514
Restricted cash:
Money market funds	1,006		—		—		1,006


Total assets	$	13,169	$	85,557	$	—	$	98,726
Liabilities
Warrant liabilities	$	—	$	—	$	906	$	906
Earn-out liabilities	—		—		—		—
Total liabilities	$	—	$	—	$	906	$	906

The fair values of cash, accounts receivable, accounts payable, and accrued liabilities approximated their carrying values as of June 30, 2021 and December 31, 2020, due to their short-term nature. All other financial instruments except for warrant liabilities related to the preferred stock warrants, Private Placement Warrants, and earn-out liabilities are valued either based on recent trades of securities in active markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. The warrant liabilities related to the preferred stock warrants and Private Placement Warrants contain significant unobservable inputs including the expected term and with respect to the preferred stock warrants, the share exchange ratio in evaluating the fair value of underlying common stock and exercise price. Therefore, warrant liabilities associated with the preferred stock warrants and Private Placement Warrants were evaluated to be Level 3 fair value measurements.

In prior periods, the fair value of the preferred stock warrant liability had been measured using the BSM option-pricing model and Monte Carlo simulation. During 2020, the Company changed its valuation method as a result of increased probability that the Company's common shares would be publicly listed in the near term and began using a probability weighted expected returns methodology. As of December 31, 2020, the Company reverted to using a BSM option-pricing model to determine the value of the outstanding Series D preferred stock warrants (that replaced the Series C preferred stock warrants as discussed in Note 11 – Borrowing Arrangements). Subsequent to the Merger, the Series D preferred stock warrants were converted to Class A common stock warrants. As a result, the Series D preferred stock warrants were adjusted to fair value prior to the conversion resulting in a change in fair value of $0.3 million recognized as a component of other income (expense), net within the consolidated statements of operations and comprehensive loss, and then settled in additional paid-in capital as a result of the conversion to equity-classified Class A common stock warrants.

For the six months ended June 30, 2021, changes in warrant liabilities primarily related to changes in liabilities for warrants assumed as part of the recapitalization, including Private Placement Warrants and Public Warrants (defined and discussed in Note 15 – Common Stock). The Company valued the Private Placement Warrants using a Monte Carlo valuation simulation. Inherent in a Monte Carlo simulation are assumptions related to expected term, volatility, risk-free interest rate, and dividend yield. The expected term of the warrants was determined to be equivalent to their remaining contractual term and includes consideration of the redemption features that were incorporated into the Monte Carlo model. The Company derived the volatility of its Class A common stock based on average historical stock volatilities of a peer group of public companies that the Company considers to be comparable to its business over a period equivalent to the expected term of the Private Placement Warrants. The risk-free interest rate is based on the U.S. Treasury's rates of U.S. Treasury zero-coupon bonds with a maturity similar to the expected term of the Private Placement Warrants. The dividend rate is based on the historical rate, which the Company anticipates remaining at zero. The following assumptions were used for the valuation of the Private Placement Warrants on the settlement date:


Expected term	0.16
Volatility	65.0	%
Risk-free rate	—	%
Dividend yield	—	%

The Public Warrants were valued as of June 30, 2021 using the listed trading price of $3.35 per Public Warrant. On July 9, 2021, the Company called the Public Warrants and the Parent Warrants for redemption. Refer to Note 19 – Subsequent Events for additional detail.

The change in the fair value of warrant liabilities is as follows (in thousands):


Balance at December 31, 2020	$	906
Conversion of Series D preferred stock warrants to Class A common stock warrants	(1,160)
Private Placement Warrants and Public Warrants	51,814
Exercised warrants	(20,872)
Change in fair value of warrants	(5,282)
Balance at June 30, 2021	$	25,406

As of June 30, 2021, the Company had no transfers between levels of the fair value hierarchy of its assets or liabilities measured at fair value. Due to the exercise and conversion to Class A common stock warrants of all preferred stock warrants and exercise of all of the Private Placement Warrants during the period, there were no longer any Level 3 warrant liabilities.

The Company used Level 3 fair value measurements when determining earn-out liabilities as well as intangible assets obtained in the acquisition of HHL.

The fair value of the earn-out liabilities associated with the acquisition of HHL was determined based on revenue projections and probability of achievement of revenue targets as evaluated using a Monte Carlo simulation. This is considered a Level 3 fair value measurement containing significant unobservable inputs including estimates of achieving the revenue target. The undiscounted range of contingent consideration is nil to $3.3 million. The following assumptions were used to determine the fair value:


Revenue risk-adjusted discount rate	9.1	%
Revenue volatility	50.0	%
Counterparty discount rate	5.0	%

The fair value of the earn-out liabilities is remeasured at each reporting period. This change in fair value is related to contingent consideration as well as compensation costs (see Note 13 – Stock-Based Compensation) and is recognized in selling, general, and administrative expense in the condensed consolidated statements of operations and comprehensive loss. As of June 30, 2021, no earn-out liability had been paid and the Company determined the fair value of the liability had not changed since the acquisition date. Therefore, no fair value adjustment was recognized in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2021.

The fair value measurements of the identified intangible assets were based primarily on significant unobservable inputs and thus represent a Level 3 measurement as defined in ASC 820. The fair values of trade name and developed technology were determined using the relief-from-royalty method under the income approach. This involves forecasting avoided royalties, reducing them by taxes, and discounting the resulting net cash flows to a present value using an appropriate discount rate. Judgment was applied for a number of assumptions in valuing the identified intangible assets including revenue and cash flow forecasts, customer churn rate, technology life, royalty rate, and discount rate. The fair value of customer relationships was determined using the multi-period excess earnings method which involves forecasting the net earnings expected to be generated by the asset, reducing them by appropriate returns on contributory assets, and then discounting the resulting net cash flows to a present value using an appropriate discount rate.