Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Fair Value Measurements

4. Fair Value Measurements

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, notes payable, convertible promissory notes, warrant commitment liability, and warrant liability. The recorded carrying amounts of cash, accounts receivable and accounts payable approximates fair value due to their short-term nature. The balances outstanding under the notes payable agreements are considered to approximate their estimated fair values as the interest rates approximate market rates.

Assets and liabilities recognized at fair value on a recurring basis in the consolidated balance sheets consists of cash and cash equivalents, convertible promissory notes, warrant commitment liability, and warrant liability. These items are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The following tables summarize the Company’s financial instruments at fair value based on the fair value hierarchy for each class of instrument (in thousands):

	Fair Value Measurement
December 31, 2022	Level 1		Level 2		Level 3
Assets:
Money market account	$	38	$	—	$	—
Liabilities:
Warrant liability	$	—	$	—	$	(247	)
Warrant commitment liability		—		—		(320	)
Mudrick convertible notes		—		—		(56,743	)

	Fair Value Measurement
September 30, 2023	Level 1		Level 2		Level 3
Assets:
Money market account	$	—	$	—	$	—
Liabilities:
Warrant liability	$	—	$	—	$	(78	)
Warrant commitment liability		—		—		—
Mudrick convertible notes		—		—		(48,880	)

Warrants

The Company measures its warrant commitment liability and warrant liability at fair value based on significant inputs not observable in the market, which caused them to be classified as Level 3 measurements within the fair value hierarchy. Changes in the fair value of the warrant commitment liability and warrant liability related to updated assumptions and estimates were recognized as a warrant liability fair value adjustment within the consolidated statements of operations and comprehensive loss.

The fair value of the warrant liability, as of September 30, 2023 were estimated using a Monte Carlo simulation model. The significant unobservable inputs for the Monte Carlo model include the stock price, exercise price, risk-free rate of return, time to expiration, and the volatility. An increase or decrease in the unobservable inputs in isolation could result in a material increase or decrease in the estimated fair value. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the estimated fair value.

The Company calculated the estimated fair value of the warrant commitment liability and private warrants as of September 30, 2023 and December 31, 2022, respectively, using the following assumptions:

	September 30, 2023
Stock price	$	0.35
Exercise price	$	11.50
Risk-free interest rate		4.63	%
Time to expiration (years)		4.19
Expected volatility		78.62	%
Fair value per warrant	$	0.02

	December 31, 2022
Stock price	$	0.65
Exercise price	$	11.50
Risk-free interest rate		3.96	%
Time to expiration (years)		4.94
Expected volatility		70.70	%
Fair value per warrant	$	0.05

The following table presents changes in the Level 3 liabilities measured at fair value for the periods indicated (in thousands):

	September 30, 2023
	Warrant Commitment Liability			Private Warrants
Balance (beginning of period)	$	320		$	247
Additions		—			—
Fair value measurement adjustments		(40	)		(169	)
Exercised		(280	)		—
Balance (end of period)	$	—		$	78

During the three months ended September 30, 2023 and year ended December 31, 2022, the Company had no transfers between levels of the fair value hierarchy of its assets and liabilities that are measured at fair value.

Convertible Notes Payable

The Company measures its convertible promissory notes at fair value based on significant inputs not observable in the market, which caused them to be classified as Level 3 measurements within the fair value hierarchy. Changes in the fair value of the convertible promissory notes related to updated assumptions and estimates were recognized as a convertible promissory note fair value adjustment within the consolidated statements of operations and comprehensive loss.

In determining the fair value of the Mudrick Convertible Notes as of September 30, 2023, the Company used a market-based approach. The valuation method utilized a negotiated discount rate and a market yield rate which are unobservable inputs.

An increase or decrease in any of the unobservable inputs in isolation could result in a material increase or decrease in the estimated fair value. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the estimated fair value.

The Company calculated the estimated fair value of the Mudrick Convertible Notes and Mudrick Super Priority Note as of September 30, 2023 and December 31, 2022, respectively, using the following assumptions:

	September 30, 2023			December 31, 2022
	Mudrick Convertible Note
Issuance date	12/8/2022			12/8/2022
Maturity date	12/8/2027			12/8/2027
Interest rate (PIK)		9.75	%		9.50	%
Expected volatility factor		90.40	%		95.23	%
Risk-free interest rate		4.70	%		4.00	%
Estimated market yield		50.00	%		30.00	%

	September 30, 2023
	Mudrick Super Priority Note
Inception date	9/8/2023
Valuation date	9/30/2023
Maturity date	8/7/2024
Interest rate		15.00	%
Estimated market yield		30.00	%
Discount period (years)		0.86
Discount factor		0.79

The following table presents changes in the Level 3 convertible promissory notes measured at fair value for the periods indicated (in thousands):

	September 30, 2023
	Mudrick Convertible Notes			Mudrick Super Priority Note
Balance (beginning of period)	$	56,743		$	—
Additions		—			14,416
Fair value measurement adjustments		7,765			245
OCI - Change in fair value of the convertible instrument liability		(15,628	)		—
Exercised		—			—
Balance (end of period)	$	48,880		$	14,661

The change in fair value of the convertible instrument liability classified in OCI is a result of a change to instrument specific credit risk.