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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2022
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement. •Level 1 — Quoted prices in active markets for identical assets or liabilities; •Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and •Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs. Fair Value of Other Financial Instruments The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts. The carrying amount of the Flotek PPP loan approximates its fair value as of March 31, 2022 and December 31, 2021. Liabilities Measured at Fair Value on a Recurring Basis The following table presents the Company’s liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):
|  |  |  |  |  | March 31, |  |  |  |  |  |  |  | December 31,
| Level 1 |  | Level 2 |  | Level 3 | 2022 |  | Level 1 |  | Level 2 |  | Level 3 |  | 2021
Contingent earnout consideration | $ | — |  |  | $ | — |  |  | $ | 702 |  | $ | 702 |  |  | $ | — |  |  | $ | — |  |  | $ | 608 |  |  | $ | 608 |
Contingent convertible notes | $ | — |  |  | $ | — |  |  | $ | 14,050 |  | $ | 14,050 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Total | $ | — |  |  | $ | — |  |  | $ | 14,752 |  | $ | 14,752 |  |  | $ | — |  |  | $ | — |  |  | $ | 608 |  |  | $ | 608 |
The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of March 31, 2022 and December 31, 2021. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility. The key inputs into the Monte Carlo simulation used to estimate the fair value the earn-out provision were as follows:
| March 31, 2022 | December 31, 2021
Risk-free interest rate | 2.45% | 1.02%
Expected volatility | 90.0% | 90.0%
Term until liquidation (years) | 3.13 | 3.38
Stock price | $1.26 | $1.13
Discount rate | 7.86% | 6.71%
The Contingent Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Contingent Convertible Notes Payable had an initial fair value of $10.0 million on February 2, 2022. The Contingent Convertible Notes Payable were classified as Level 2 at the initial measurement due to the use of a quoted price for a similar liability, and classified as Level 3 as of March 31, 2022 due to the use of unobservable inputs. The estimated value of the Contingent Convertible Notes Payable as of March 31, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios. The key inputs into the Monte Carlo simulation used to estimate the fair value the Contingent Convertible Notes Payable as of March 31, 2022 were as follows:
| March 31, 2022
Risk-free interest rate | 1.63%
Expected volatility | 90.0%
Term until liquidation (years) | 0.84
Stock price | $1.26
Discount rate | 7.2%
Assets Measured at Fair Value on a Nonrecurring Basis The Company’s non-financial assets, including property and equipment and operating lease right-of-use assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis The Company estimated the fair value of the remaining stock performance earn-out provision as of March 31, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $0.7 million and $1.1 million, respectively. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in cost of goods sold. The Company estimated the initial fair value of $10.0 million of the Contingent Convertible Notes Payable on February 2, 2022, by reference to the cash purchase price paid by third party investors for equivalent notes issued simultaneously by the Company. . The Company adjusted the estimated fair value of the Contingent Convertible Notes Payable to $14.1 million as of March 31, 2022. The following table presents the changes in the assets and liabilities measured at fair value on a recurring basis classified as Level 3 (in thousands):
|  |  | Three months ended March 31,
|  |  |  |  | 2022 |  | 2021
Balance - beginning of period |  |  |  |  | $ | 608 |  |  | $ | 1,416 |
Transfer of contingent convertible notes payable from Level 2 |  |  |  |  | 10,000 |  |  | — |
Increase in principle of convertible notes for paid-in-kind interest |  |  |  |  | 158 |  |  | — |
Change in fair value of contingent earnout consideration |  |  |  |  | 94 |  |  | (335) |
Change in fair value of contingent convertible notes payable |  |  |  |  | 3,892 |  |  | — |
Balance - end of period |  |  |  |  | $ | 14,752 |  |  | $ | 1,081 |

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- 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 Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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