Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements and Fair Value of Financial Instruments

v3.22.2.2
Fair Value Measurements and Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 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 exception discussed in Note 9, Common Stock and Warrants. The 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 based on the implied common stock volatilities of a set of publicly traded peer companies. Changes in this assumption, including the selection of or quantities of companies with the peer company set, could materially affect the estimate of the fair value of these instruments and the related change in fair value of these instruments.
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 by level within the fair value hierarchy (in thousands):
September 30, 2022
Level 1 Level 2 Level 3 Total
Financial Assets:
Cash equivalents:
Money market funds $ 102,094  $ —  $ —  $ 102,094 
Total $ 102,094  $ —  $ —  $ 102,094 
Financial Liabilities:
Earn-Out Shares —  —  24,345  24,345 
Public Warrants 1,851  —  —  1,851 
Private Placement Warrants —  1,541  —  1,541 
Total $ 1,851  $ 1,541  $ 24,345  $ 27,737 
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

At closing of the Mergers, the Company recorded a liability of $15.3 million related to the potential issuance of the Additional Shares related to the Backstop Subscription Agreement. Subsequent changes in fair value of the Additional Shares liability until settlement is recognized in the 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 Additional Shares liability 15,340 
Change in fair value 970 
Settlement of Additional Shares liability (16,310)
Balance at September 30, 2022 $ — 
Earn-Out Shares

At Closing of the Mergers, 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 (46,136)
Balance at September 30, 2022 $ 24,345 
Private Placement and Public Warrant Liabilities

As of September 30, 2022, the Company has Private Placement and Public Warrants defined and discussed in Note 9, 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 (1,809) (2,174)
Balance at September 30, 2022 $ 1,541  $ 1,851 

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 September 30, 2022 $ — 

The Company recorded a gain of $1.6 million and a loss of $1.5 million on remeasurement of preferred stock warrant liability for the nine months ended September 30, 2022 and 2021, 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.