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Warrant Liabilities

12 Months Ended

Dec. 31, 2020

11. Warrant Liabilities

The Incremental Loan Warrants issued in conjunction with the Amended and Restated Credit Agreement contain a warrant repurchase provision which, upon an occurrence of a fundamental transaction, as defined in the warrant agreement, could have given rise to an obligation of the Company to pay cash to the warrant holders. In addition, upon the occurrence of any of the following events: (1) a fundamental transaction; (2) acquisition of 25% or more of the total voting power of all the securities of the entity by any one person or group of affiliated persons or entities; (3) Tony Pearce or Terry Pearce individually or together ceasing to beneficially own at least 50% of the voting securities of the Company; or (4) the Board of Directors ceasing to be comprised of a majority of independent directors as defined under NASDAQ Global Market rules, the exercise price of the warrant was subject to reduction by a value based upon a formula model established in the agreement. The formula model used was a Black Scholes valuation model which used the following inputs: (1) share price was the greater of the volume weighted average price (“VWAP”) of the common stock for the prior 30 days before the applicable event date or the VWAP of the trading day immediately preceding the event date; (2) exercise price of $5.74, unless previously adjusted under other terms of the warrant; (3) volatility was the greater of 100% and the historical volatility of the Company’s common stock for the ninety days preceding the date of the triggering event; and (4) the assumed risk-free interest rate corresponded to the US Treasury rate for a period equal to the remaining term of this warrant. In May 2020, Tony Pearce or Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company. As a result, the exercise price of the warrants was reduced to zero based on the formula established in the agreement.

The Company determined that the fundamental transaction provisions required the warrants to be accounted for as a liability at fair value on the date of the transaction under guidance prescribed in ASC 480 - Distinguishing Liabilities from Equity. The liability for the warrants was subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings.

On November 9, 2020, the Company issued 2.6 million shares of Class A common stock for the exercise of Incremental Loan Warrants held by the Incremental Lenders. The Company determined the fair value of the Incremental Loan Warrants to be $81.0 million at the time of the exercise. The fair value of the Incremental Loan Warrants was $21.6 million at December 31, 2019. The Company recorded losses of $59.4 million and $16.8 million related to increases in the fair value of the Incremental Loan Warrants for the years ended December 31, 2020 and 2019, respectively.

The fair value of the Incremental Loan Warrants was calculated using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model. The following are the assumptions used in calculating fair value on the date of the exercise:

Trading price of common stock on measurement date	$	31.00
Exercise price		—
Risk free interest rate		0.90	%
Warrant life in years		0.07
Expected volatility		45.46	%
Expected dividend yield		—
Probability of an event causing a warrant re-price		100.00	%

The following are the assumptions used in calculating fair value on December 31, 2019:

Trading price of common stock on measurement date	$	8.71
Exercise price	$	5.74
Risk free interest rate		1.69	%
Warrant life in years		4.2
Expected volatility		36.82	%
Expected dividend yield		—
Probability of warrant re-price		95	%