Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Financial instruments consist of cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, payment-dependent notes receivable, payment-dependent notes payable, and warrant liabilities. Cash equivalents, payment-dependent notes receivable, payment-dependent notes payable, and warrant liabilities are stated at fair value on a recurring basis. Restricted cash, accounts receivable, accounts payable, and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (in thousands):


	As of September 30, 2022
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money market funds	$	148,979	$	—	$	—	$	148,979
Payment-dependent notes receivable, current	2		—		—		2
Payment-dependent notes receivable, non-current	—		—		6,508		6,508
Total financial assets	$	148,981	$	—	$	6,508	$	155,489
Payment-dependent notes payable, current	$	2	$	—	$	—	$	2
Payment-dependent notes payable, non-current	—		—		6,508		6,508
Legacy Forge warrant liabilities	—		—		410		410
Private Placement Warrants	—		—		222		222
Total financial liabilities	$	2	$	—	$	7,140	$	7,142


	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money market funds	$	24,240	$	—	$	—	$	24,240
Payment-dependent notes receivable, current	1,153		—		—		1,153
Payment-dependent notes receivable, non-current	—		—		13,453		13,453
Total financial assets	$	25,393	$	—	$	13,453	$	38,846
Payment-dependent notes payable, current	$	1,153	$	—	$	—	$	1,153
Payment-dependent notes payable, non-current	—		—		13,453		13,453
Legacy Forge warrant liabilities	—		—		7,844		7,844
Total financial liabilities	$	1,153	$	—	$	21,297	$	22,450

The Company classifies money market funds and certain payment-dependent notes receivable and payment-dependent notes payable within Level 1 of the fair value hierarchy because the Company values these investments using quoted market prices.

Payment-Dependent Notes Receivable and Payment-Dependent Notes Payable Classified as Level 3

The Company classifies certain payment-dependent notes receivable and payment-dependent notes payable within Level 3 of the fair value hierarchy if the underlying securities are equity of private companies whose regular financial and nonfinancial information is generally not available other than when it is publicly disclosed, or significant unobservable inputs are used to estimate fair value.

The Company estimates fair values of payment-dependent notes receivable and payment-dependent notes payable utilizing completed transactions made through the Company’s platform for the relevant private securities as relevant data inputs.

Legacy Forge Warrant Liabilities

The Company's Legacy Forge warrant liabilities consist of warrants to purchase Series B-1 preferred stock or subsequent round stock (the "Series B-1 Preferred Stock Warrants," see Note 11) and Junior Preferred Stock Warrants (as defined below, see Note 11). The Company used a hybrid method that incorporates the Black-Scholes option-pricing model and an adjusted backsolve model to estimate the fair value of the Legacy Forge warrant liabilities. To estimate the fair value of Junior Preferred Stock Warrants as of September 30, 2022 the Company used a binomial lattice model in a risk-neutral framework.

Subsequent to the Merger, the Series B-1 Preferred Stock Warrants and Junior Preferred Stock Warrants were converted to common stock warrants. As a result, the Series B-1 Preferred Stock Warrants were remeasured at fair value prior to the conversion resulting in a change in fair value of $0.1 million for the nine months ended September 30, 2022, which was recognized as a component of change in fair value of warrant liabilities within the unaudited condensed consolidated statements of operations, and subsequently settled in additional paid-in capital as a result of the conversion to equity-classified common stock warrants. The Junior Preferred Stock Warrants were remeasured at fair value prior to the conversion to common stock warrants, which did not result in a change in fair value as of the conversion date. These warrants remained liability-classified after the conversion into the common stock warrants as the Company's obligation with respect to these warrants is capped at a fixed monetary amount and may be settled in a variable number of common shares. The Junior Preferred Stock Warrants were remeasured at fair value as of September 30, 2022 which resulted in a $3.9 million gain for the three and nine months ended September 30, 2022.

The Company estimated the fair value of the Legacy Forge warrant liabilities, as of September 30, 2022 and December 31, 2021, respectively, using the following key assumptions:


	September 30, 2022		December 31, 2021

Fair value of underlying securities	$	1.75	$	30.8
Discounts for lack of marketability	0.0%		0.0%
Expected term (years)	4.0		3.4 – 8.8
Expected volatility	44.6%		40.4% – 44.3%
Risk-free interest rate	4.2%		1.0% – 1.5%
Expected dividend yield	0.0%		0.0%

Fair value per warrant	$	0.16	$5.0 - $22.0

Private Placement Warrants

The Company classifies the Private Placement Warrants within Level 3, because significant unobservable inputs are used to estimate fair value. To estimate the fair value of Private Placement Warrants, the Company used a binomial lattice model in a risk-neutral framework. The significant assumptions used in the analysis were the trading price of the Company’s Common Stock as of September 30, 2022 of $1.75 per share, the risk-free rate of 4.1% , the volatility of 42.1% , and the Company’s dividend yield of 0.0%.

Transfers Into and Out of Level 3

The Company transfers financial instruments out of Level 3 on the date when underlying input parameters are readily observable from existing market quotes. For Payment-dependent notes payable and receivable, transfers from Level 3 to Level 1 generally relate to a company going public and listing on a national securities exchange. During the nine months ended September 30, 2022, the transfer of Private Placement Warrants from Level 2 to Level 3 was due to the redemption and exercises of the Public Warrants (Note 11) which resulted in the lack of an identical instrument with a quoted price. During the nine months ended September 30, 2021, there were transfers of securities segregated for customers from Level 3 to Level 1, as one private company was acquired by a public company and became publicly-traded under the acquirer, and the Company was able to obtain independent market-quoted prices for the acquirer company.

The following tables provide reconciliation for all financial assets measured at fair value using significant unobservable inputs (Level 3) for nine months ended September 30, 2022 and 2021 (in thousands):


	Total Level 3 Financial Assets
Balance as of December 31, 2021	$	13,453
Change in fair value of payment-dependent notes receivable	(6,945)


Balance as of September 30, 2022	$	6,508


	Total Level 3 Financial Assets
Balance as of December 31, 2020	$	51,859
Acquisition of short-term investments	362
Change in fair value of short-term investments	(23)
Short-term investments transferred out of Level 3 to Level 1	(5,472)
Change in fair value of payment-dependent notes receivable	26,758
Settlement of payment-dependent notes receivable	(62,637)
Balance as of September 30, 2021	$	10,847

The following tables provide reconciliation for all financial liabilities measured at fair value using significant unobservable inputs (Level 3) for nine months ended September 30, 2022 and 2021 (in thousands):


	Total Level 3 Financial Liabilities
Balance as of December 31, 2021	$	21,297
Change in fair value of payment-dependent notes payable	(6,945)
Change in fair value of Series B-1 Preferred Stock Warrant liability	106
Settlement of Series B-1 Preferred Stock Warrant liability via conversion to equity-classified common stock warrants	(2,950)
Exercise of Junior Preferred Stock Warrants	(653)
Change in fair value of Junior Preferred Stock Warrants	(3,937)
Transfer of Private Placement Warrants out of Level 2 to Level 3	20,461
Change in fair value of Private Placement Warrants	(20,239)
Balance as of September 30, 2022	$	7,140


	Total Level 3 Financial Liabilities
Balance as of December 31, 2020	$	53,639
Change in fair value of payment-dependent notes payable	26,758
Settlement of payment-dependent notes payable	(62,637)
Change in fair value of Legacy Forge warrant liabilities	5,575
Payment-dependent notes payable transferred out of Level 3 to Level 1	(5,133)
Balance as of September 30, 2021	$	18,202

- 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.

+ References + Details