Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements and Fair Value of Financial Instruments

v3.22.4
Fair Value Measurements and Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements and Fair Value of Financial Instruments Fair Value Measurements and Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. These levels are:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities 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 related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Financial instruments consist of cash equivalents, accounts payable, accrued liabilities, debt and convertible preferred stock warrant liability, Additional Shares, Earn-Out Shares and Public and Private Placement Warrants. Cash equivalents, convertible preferred stock warrant liability, Earn-Out Shares and Public and Private Placement Warrant are stated at fair value on a recurring basis. Accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value due to the short period time to the expected receipt or payment. The carrying amount of
the Company’s outstanding debt approximates the fair value as the debt bears interest at a rate that approximates prevailing market rate.
The Public Warrants are classified as Level 1 due to the use of an observable market quote in an active market. Private Placement Warrants are classified as Level 2 as the fair value approximates the fair value of the Public Warrants. The Private Placement Warrants are identical to the Public Warrants, with certain exceptions as discussed in Note 9, Common Stock and Warrants. The Additional Shares and Earn-Out Shares are classified as Level 3 and their fair values were estimated using a Monte Carlo options pricing model utilizing assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimated the expected volatility assumption using an average of the implied volatility of its publicly traded warrants and an implied volatility based on its peer companies.
The Structural Derivative Liability is a compound embedded derivative related to features within the Structural Debt Facility, including an increase in interest rate upon an event of default and the contingent issuance of the Structural Subsequent Shares as defined in Note 6, Debt. This liability is classified as Level 3 and is valued using a risk-neutral income approach related to an event of default occurring and expected cash flows in such a scenario and an income and Black-Scholes pricing model for the contingent issuance of the Structural Subsequent Shares utilizing assumptions related to expected stock price volatility, expected life, risk-free interest rate and dividend yield. The Company estimated the expected volatility assumption using an average of the implied volatility of its publicly traded warrants and an implied volatility based on its peer companies.
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021 by level within the fair value hierarchy (in thousands):
December 31, 2022
Level 1 Level 2 Level 3 Total
Financial Assets:
Cash equivalents:
Money market funds $ 74,990  $ —  $ —  $ 74,990 
Total $ 74,990  $ —  $ —  $ 74,990 
Financial Liabilities:
Additional Shares $ —  $ —  $ 580  $ 580 
Earn-Out Shares —  —  4,122  4,122 
Private Placement Warrants —  670  —  670 
Public Warrants 805  —  —  805 
Structural Derivative Liability —  —  7,050  7,050 
Total $ 805  $ 670  $ 11,752  $ 13,227 
December 31, 2021
Level 1 Level 2 Level 3 Total
Financial Assets:
Cash equivalents:
Money market funds $ 77,771  $ —  $ —  $ 77,771 
Total $ 77,771  $ —  $ —  $ 77,771 
Financial Liabilities:
Convertible preferred stock warrant liability $ —  $ —  $ 4,787  $ 4,787 
Total $ —  $ —  $ 4,787  $ 4,787 
There were no transfers of financial assets or liabilities into or out of Level 1, Level 2, or Level 3 during the periods presented.
Additional Shares Liability
At closing of the Business Combination, the Company recorded a liability of $15.3 million related to the potential issuance of the Backstop Additional Shares related to the Backstop Subscription Agreement. At the closing of the HGI Subscription Agreement discussed in Note 10, Common Stock and Warrants, the Company recorded a liability of $0.8 million related to the potential issuance of HGI Additional Shares. Subsequent changes in fair value of the Additional Shares liability until settlement is recognized in the consolidated statements of operations.
The following table provides a summary of changes in the estimated fair value of the Additional Shares liability (in thousands):

Balance at December 31, 2021 $ — 
Assumption of Backstop Additional Shares liability 15,340 
Change in fair value of Backstop Additional Shares liability 970 
Settlement of Backstop Additional Shares liability (16,310)
Issuance of HGI Additional Shares liability 823 
Change in fair value of HGI Additional Shares Liability (243)
Balance at December 31, 2022 $ 580 
Earn-Out Shares
At Closing of the Business Combination, certain Earn-Out Shares were accounted for as a liability totaling $70.5 million. Subsequent changes in fair value, until settlement or until equity classification is met, is recognized in the statements of operations.
The following table provides a summary of changes in the estimated fair value of the Earn-Out liability (in thousands):

Balance at December 31, 2021 $ — 
Assumption of Earn-Out liability 70,481 
Change in fair value (66,359)
Balance at December 31, 2022 $ 4,122 
Private Placement and Public Warrant Liabilities
As of December 31, 2022, the Company has Private Placement and Public Warrants defined and discussed in Note 10, Common Stock and Warrants. Such warrants are measured at fair value on a recurring basis.
The following table provides a summary of changes in the estimated fair value of the Private Placement Warrants and Public Warrants (in thousands):

Private Placement Warrants Public Warrants
Balance at December 31, 2021 $ —  $ — 
Assumption of Private Placement and Public Warrants 3,350  4,025 
Changes in fair value (2,680) (3,220)
Balance at December 31, 2022 $ 670  $ 805 
Structural Derivative Liability
At closing of the Structural Debt Facility, the Company recorded a liability of $7.1 million related to the features that are required to be bifurcated and accounted for as a compound derivative at fair value. Subsequent
changes in fair value of the Structural Derivative Liability until settlement is recognized in the consolidated statement of operations.
The following table provides a summary of changes in the estimated fair value of the Structural Derivative Liability (in thousands):

Balance at December 31, 2021 $ — 
Issuance of Structural Derivative Liability 7,050 
Change in fair value — 
Balance at December 31, 2022 $ 7,050 
Convertible Preferred Stock Warrant Liability
The fair value of the preferred stock warrant liability is determined using the Black-Scholes option pricing model, which involve inherent uncertainties and the application of management’s judgment. The following table provides a summary of changes in the estimated fair value of the preferred stock warrant liability (in thousands):
Balance at December 31, 2021 $ 4,787 
Change in fair value (1,616)
Net exercise of preferred stock warrants (989)
Balance before reclassification immediately prior to the Business Combination 2,182 
Reclassification to additional paid-in capital (2,182)
Balance at December 31, 2022 $ — 
The Company recorded a gain of $1.6 million for the year ended December 31, 2022 and losses of $1.2 million and $1.0 million on remeasurement of preferred stock warrant liability for the years ended December 31, 2021 and 2020, respectively. With the closing of the Business Combination, unexercised preferred stock warrants were converted into warrants of the Company to purchase shares of common stock and the preferred stock warrant liability is reclassified to additional paid-in capital.