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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2023
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. 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):
|  |  |  |  |  | June 30, |  |  |  |  |  |  |  | December 31,
| Level 1 |  | Level 2 |  | Level 3 | 2023 |  | Level 1 |  | Level 2 |  | Level 3 |  | 2022
Contingent earnout consideration | $ | — |  |  | $ | — |  |  | $ | 260 |  | $ | 260 |  |  | $ | — |  |  | $ | — |  |  | $ | 583 |  |  | $ | 583 |
Initial ProFrac Agreement Contract Consideration Convertible Notes | — |  |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | 14,220 |  |  | 14,220 |
Amended ProFrac Agreement Contract Consideration Convertible Notes | — |  |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | 69,350 |  |  | 69,350 |
Total | $ | — |  |  | $ | — |  |  | $ | 260 |  | $ | 260 |  |  | $ | — |  |  | $ | — |  |  | $ | 84,153 |  |  | $ | 84,153 |
Contingent Earnout Consideration Key Inputs 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 June 30, 2023 and December 31, 2022. 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.
| June 30, 2023 | December 31, 2022
Risk-free interest rate | 4.93 | % | 4.34%
Expected volatility | 100.0 | % | 100.0%
Term until liquidation (years) | 1.88 | 2.38
Stock price | $0.73 | $1.12
Discount rate | 12.66 | % | 9.95%
Initial ProFrac Agreement Contract Consideration Notes Payable Key Inputs The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $10.0 million on February 2, 2022. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 due to the use of unobservable inputs. On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, upon maturity, to a fair value of $15.1 million based on the closing price of the shares of common stock of $1.19, on the date of conversion. The fair value adjustment was a $0.8 million increase in each of the three and six months ended June 30, 2023, and a $2.6 million decrease and a $1.3 million increase in the three and six months ended June 30, 2022, respectively. The estimated value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation. The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of December 31, 2022 were as follows:
|  | December 31, 2022
Risk-free interest rate |  | 4.12%
Expected volatility |  | 100.0%
Term until liquidation (years) |  | 0.09
Stock price |  | $1.12
Discount rate |  | 4.12%
Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $69.5 million. The Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation. On May 17, 2023, the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, at maturity, to a fair value of $40.6 million based on the closing price of the shares of common stock of $0.64, on the date of conversion. The fair value adjustment was a decrease of $3.9 million and $30.8 million in the three and six months ended June 30, 2023, and a decrease of $14.5 million in each of the three and six months ended June 30, 2022, respectively. The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable maturing May 17, 2023, as of December 31, 2022 were as follows:
| December 31, 2022
Risk-free interest rate | 4.59%
Expected volatility | 100.0%
Term until liquidation (years) | 0.38
Stock price | $1.12
Discount rate | 4.59%
Assets Measured at Fair Value on a Nonrecurring Basis The Company’s non-financial assets, including property and equipment and operating lease ROU assets, are measured at fair value on a non-recurring basis and are subject to adjustment to their fair value in certain circumstances. Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents the changes in balances of liabilities for the three and six months ended June 30, 2023 and 2022 classified as Level 3 (in thousands):
| Three months ended June 30, |  | Six months ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Balance - beginning of period | $ | 44,025 |  |  | $ | 14,752 |  |  | $ | 84,153 |  |  | $ | 608 |
Transfer of ProFrac Agreement Contract Consideration Convertible Notes Payable from Level 2 | — |  |  | — |  |  | — |  |  | 10,000 |
Issuance of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable | — |  |  | 69,460 |  |  | — |  |  | 69,460 |
Increase in principal of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest | — |  |  | 257 |  |  | 85 |  |  | 415 |
Increase in principal of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest | 712 |  |  | 611 |  |  | 2,043 |  |  | 611 |
Change in fair value of contingent earnout consideration | 35 |  |  | (228) |  |  | (323) |  |  | (134) |
Change in fair value of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable | — |  |  | (2,637) |  |  | 786 |  |  | 1,255 |
Change in fair value of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable | (3,874) |  |  | (14,521) |  |  | (30,755) |  |  | (14,521) |
Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity | — |  |  | — |  |  | (15,091) |  |  | — |
Conversion of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity | (40,638) |  |  | — |  |  | (40,638) |  |  | — |
Balance - end of period | $ | 260 |  |  | $ | 67,694 |  |  | $ | 260 |  |  | $ | 67,694 |

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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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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