Fair Value Measurement of Assets and Liabilities

9 Months Ended

Sep. 30, 2021

Fair Value Measurement of Assets and Liabilities

Fair Value Measurement of Assets and LiabilitiesFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). A fair value measurement reflects the assumptions

market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risk inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model.

The Company classifies inputs to measure fair value using a three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) and is defined as follows:

Level 1: Pricing inputs are based on quoted market prices for identical assets or liabilities in active markets (e.g., NYSE or NASDAQ). Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Pricing inputs include benchmark yields, trade data, reported trades and broker dealer quotes, two-sided markets and industry and economic events, yield to maturity, Municipal Securities Rule Making Board reported trades and vendor trading platform data. Level 2 includes those financial instruments that are valued using various pricing services and broker pricing information including Electronic Communication Networks and broker feeds.

Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources, including the Company’s own assumptions. The fair market value for level 3 securities may be highly sensitive to the use of unobservable inputs and subjective assumptions. Generally, changes in significant unobservable inputs may result in significantly lower or higher fair value measurements.

The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There have been no transfers of assets or liabilities between fair value measurement classifications during the nine months ended September 30, 2021.

The following tables summarize the Company’s financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021						December 31, 2020
	Total Fair Value		Level 3		Level 1		Total Fair Value		Level 3		Level 1
Assets
Cash equivalents
Money market funds	$	126	$	—	$	126	$	126	$	—	$	126
Total assets	$	126	$	—	$	126	$	126	$	—	$	126
Liabilities
2025 Notes
Interest make-whole payment	$	1,317	$	1,317	$	—	$	4,898	$	4,898	$	—
Total liabilities	$	1,317	$	1,317	$	—	$	4,898	$	4,898	$	—

The fair value of the interest make-whole payment derivative liability was determined using a Monte Carlo model with the following key assumptions:


	September 30, 2021		December 31, 2020
Volatility	50	%	50	%
Stock price	$6.66 per share		$15.47 per share
Credit spread	18.53	%	19.25	%
Term	3.59 years		4.34 years
Dividend yield	—	%	—	%
Risk-free rate	0.66	%	0.30	%

The following table sets forth a summary of changes in the fair value of Level 3 liabilities for the nine months ended September 30, 2021 (in thousands):


	Balance as of December 31, 2020		Additions		Conversions		Change in fair value		Balance as of September 30, 2021
Liabilities:
Interest make-whole payment	$	4,898	$	—	$	(146)	$	(3,435)	$	1,317

Other Financial Instruments

The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of the 2025 Notes.

On May 12, 2020, the Company issued $180.4 million in aggregate principal amount of 2025 Notes, and restructured its outstanding debt as described further in Note 5, Debt. The Company carries its 2025 Notes at amortized cost adjusted for changes in fair value of the embedded derivative. As of September 30, 2021, $161.9 million in principal amount of the 2025 Notes remain outstanding. It is not practicable to determine the fair value of the 2025 Notes due to the lack of information available to calculate the fair value of such notes.

The Company evaluated the 2025 Notes under ASC 815 and identified an embedded derivative that required bifurcation. The embedded derivative is an interest make-whole payment that was valued at $4.6 million on May 12, 2020.

Changes in the fair value of the interest make-whole payment totaling a gain of $1.6 million for the three months ended September 30, 2021 are included in the Company’s condensed consolidated statement of operations within other income, net. During the nine months ended September 30, 2021, certain holders of the 2025 Notes converted an aggregate of approximately $5.0 million in principal amount of the 2025 Notes into shares of the Company’s common stock in accordance with the terms of such notes and a portion of the embedded derivative was settled in shares of the Company’s common stock resulting in $0.1 million of the derivative liability being extinguished upon conversion. As of September 30, 2021, the embedded derivative had a fair value of $1.3 million and a $3.4 million gain on the change in fair value was recorded to other income, net, on the condensed consolidated statement of operations in the nine months ended September 30, 2021.

During the three and nine months ended September 30, 2021 and 2020, there were no transfers between the levels within the fair value hierarchy.

- 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.

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