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FAIR VALUE MEASUREMENTS | 9 Months Ended
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Sep. 30, 2022
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | FAIR VALUE MEASUREMENTS U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established to measure fair value is defined as follows: (i)Level 1 - Observable Inputs: Quoted prices in active markets for identical investments; (ii)Level 2 - Pricing Models with Significant Observable Inputs: Other significant observable inputs, including quoted prices for similar investments, interest rates, credit risk, etc.; and (iii)Level 3 - Unobservable Inputs: Unobservable inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs, including the entity’s own assumptions in determining the fair value of derivatives and certain investments. Whenever possible, the Company is required to use observable market inputs (Level 1) when measuring fair value. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. The Company held the following types of financial instruments at fair value on a recurring basis as of September 30, 2022 and December 31, 2021: Equity Securities at Fair Value. Equity securities includes investments in public company common stock and are recorded at fair value based on the quoted market price of each share on the valuation date. The fair value of these securities are within Level 1 of the valuation hierarchy. Equity investments that do not have regular market pricing, but for which fair value can be determined based on other data values or market prices, are recorded at fair value within Level 2 of the valuation hierarchy. T he Company has elected to apply the fair value method to one equity securities investment that would otherwise be accounted for under the equity method of accounting. As of September 30, 2022, the aggregate carrying amount of this investment was $33.8 million, and is included in equity securities at fair value, in the consolidated balance sheet (r efer to Note 3 for additional information). At December 31, 2021, our Level 2 equity securities included an investment measured with an applied pricing model that included significant observable inputs to the public company common stock value. The fair value of this Level 2 equity security investment as of December 31, 2021 was estimated based on a discount of 3 percent determined using the following significant inputs to the pricing model: expected term of restriction of 3 months and volatility of approximately 45 percent. Series A Warrants. Series A Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in estimate with regard to the calculation of the volatility assumption used in the Black-Scholes option-pricing model. As a result, the Series A Warrants are measured as Level 3 as opposed to Level 2 as measured previously. The fair value of the Series A Warrants as of September 30, 2022 was estimated based on the following significant assumptions: volatility of 42 percent, risk-free rate of 4.05 percent, term of 5.13 years and a dividend yield of 0 percent. The fair value of the Series A Warrants as of December 31, 2021 was estimated based on the following significant assumptions: volatility of 30 percent, risk-free rate of 1.33 percent, term of 5.79 years and a dividend yield of 0 percent. Refer to the "Embedded derivative liabilities" discussion below for additional information on assumptions. Series B Warrants. Series B Warrants are recorded at fair value, using Black-Scholes option-pricing model (Level 3). In the quarter ended March 31, 2021, there was a change in methodology used to an acceptable Black-Scholes option-pricing model from a Monte Carlo valuation technique used to value the Series B Warrants as of December 31, 2020. The fair value of the two Series B Warrants as of September 30, 2022 was estimated based on the following significant assumptions: (1) volatility of 42 percent, risk-free rate of 4.05 percent, term of 5.13 years and a dividend yield of 0 percent, and (2) volatility of 50 percent, risk-free rate of 2.79 percent, term of 0.08 years and a dividend yield of 0 percent. The fair value of the two Series B Warrants as of December 31, 2021 was estimated based on the following significant assumptions: (1) volatility of 30 percent, risk-free rate of 1.34 percent, term of 5.88 years and a dividend yield of 0 percent, and (2) volatility of 25 percent, risk-free rate of 0.25 percent, term of 0.65 years and a dividend yield of 0 percent. Refer to the "Embedded derivative liabilities" discussion below for additional information on assumptions. Embedded derivative liabilities. Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the host instrument. A binomial lattice framework is used to estimate the fair value of the embedded derivative in the Series A Redeemable Convertible Preferred Stock issued by the Company in 2019 (Level 3). The binomial model utilizes the Tsiveriotis and Fernandes implementation in which a convertible instrument is split into two separate components within a single lattice framework: a cash-only component which is subject to the selected risk-adjusted discount rate and an equity component which is subject only to the risk-free rate. The model considers the (i) implied volatility of the value of our common stock, (ii) appropriate risk-free interest rate, (iii) credit spread, (iv) dividend yield, (v) dividend accrual (and a step-up in rates), and (vi) event probabilities of the various conversion and redemption scenarios. The volatility of the Company’s common stock is estimated by analyzing the Company’s historical volatility, implied volatility of publicly traded stock options, and the Company’s current asset composition and financial leverage. The selected volatility, as described below, represents a haircut from the Company’s actual realized historical volatility. A volatility haircut is a concept used to describe a commonly observed occurrence in which the volatility implied by market prices involving options, warrants, and convertible debt is lower than historical actual realized volatility. The assumed base case term used in the valuation model is the period remaining until November 15, 2027, the Series A Redeemable Convertible Preferred Stock maturity date. The risk-free interest rate is based on the yield on the U.S. Treasury with a remaining term equal to the expected term of the conversion and early redemption options. The significant assumptions utilized in the Company’s valuation of the embedded derivative at September 30, 2022 are as follows: volatility of 42 percent, risk-free rate of 4.10 percent, term of 5.13 years, a dividend yield of 0 percent and a discount rate of 17.30 percent. The significant assumptions utilized in the Company’s valuation of the embedded derivative at December 31, 2021 are as follows: volatility of 30 percent, risk-free rate of 1.30 percent, term of 5.87 years, a dividend yield of 0 percent and a discount rate of 9.60 percent. The fair value measurement of the embedded derivative is sensitive to these assumptions and changes in these assumptions could result in a materially different fair value measurement. Financial assets and liabilities measured at fair value on a recurring basis were as follows:
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (In thousands)
Assets |  |  |  |  |  |  |
September 30, 2022: |  |  |  |  |  |  |
Equity securities at fair value | $ | 81,384 |  |  | $ | — |  |  | $ | — |  |  | $ | 81,384 |
December 31, 2021: |  |  |  |  |  |  |
Equity securities at fair value | $ | 113,630 |  |  | $ | 248,148 |  |  | $ | — |  |  | $ | 361,778 |
Liabilities |  |  |  |  |  |  |
September 30, 2022: |  |  |  |  |  |  |
Series A warrants | $ | — |  |  | $ | — |  |  | $ | 9,396 |  |  | $ | 9,396 |
Series A embedded derivative liabilities | — |  |  | — |  |  | 22,389 |  |  | 22,389 |
Series B warrants | — |  |  | — |  |  | 59,742 |  |  | 59,742 |
Total | $ | — |  |  | $ | — |  |  | $ | 91,527 |  |  | $ | 91,527 |
December 31, 2021: |  |  |  |  |  |  |
Series A warrants | $ | — |  |  | $ | — |  |  | $ | 11,291 |  |  | $ | 11,291 |
Series A embedded derivative liabilities | — |  |  | — |  |  | 18,448 |  |  | 18,448 |
Series B warrants | — |  |  | — |  |  | 96,378 |  |  | 96,378 |
Total | $ | — |  |  | $ | — |  |  | $ | 126,117 |  |  | $ | 126,117 |
The following table sets forth a summary of the changes in the estimated fair value of the Company’s Level 3 liabilities, which are measured at fair value as a on a recurring basis:
| Series A Warrant Liabilities |  | Series A Embedded Derivative Liabilities |  | Series B Warrant Liabilities |  | Total
| (In thousands)
Balance at December 31, 2020 | $ | — |  |  | $ | 26,728 |  |  | $ | 52,341 |  |  | $ | 79,069 |
Transfer to Level 3 | 6,640 |  |  | — |  |  | — |  |  | 6,640 |
Remeasurement to fair value | 11,887 |  |  | 14,683 |  |  | 177,296 |  |  | 203,866 |
Balance at September 30, 2021 | $ | 18,527 |  |  | $ | 41,411 |  |  | $ | 229,637 |  |  | $ | 289,575 |
Balance at December 31, 2021 | $ | 11,291 |  |  | $ | 18,448 |  |  | $ | 96,378 |  |  | $ | 126,117 |
Remeasurement to fair value | (1,895) |  |  | 3,941 |  |  | (36,636) |  |  | (34,590) |
Balance at September 30, 2022 | $ | 9,396 |  |  | $ | 22,389 |  |  | $ | 59,742 |  |  | $ | 91,527 |
For the three months ended September 30, 2022 and 2021, the changes in the estimated fair value of the Series A warrants, Series A embedded derivatives and Series B warrants were, $(3.4) million, $(1.2) million and $(37.0) million, and $63,000, $220,000 and $(902,000), respectively. In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of equity securities without readily determinable fair value, equity method investments and patents on a quarterly basis for indications of impairment, and other long-lived assets at least annually. When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets and record an adjustment for the carrying amount in excess of the fair value determined. Any fair value determination would be based on valuation approaches, which are appropriate under the circumstances and utilize Level 2 and Level 3 measurements as required.

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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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