Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

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FAIR VALUE OF FINANCIAL INSTRUMENTS
6 Months Ended
Jun. 30, 2022
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is 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 and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly, and fair value is determined through the use of models or other valuation methodologies
Level 3 - Inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The inputs into the determination of fair value are based upon the best information in the circumstances and may require significant management judgment or estimation.
Assets and liabilities measured and recorded at Fair Value on a recurring basis
As of June 30, 2022 and December 31, 2021, the Company’s financial assets and liabilities measured and recorded at fair value on a recurring basis were classified within the fair value hierarchy as follows (in thousands):
June 30, 2022 December 31, 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets
Cash equivalents $ 120  $ 98,184  $ —  $ 98,304  $ 27,389  $ —  $ —  $ 27,389 
Investments:
Commercial paper, available for sale —  121,368  —  121,368  —  76,930  —  76,930 
Corporate Bonds, available for sale —  99,215  —  99,215  —  84,588  —  84,588 
Municipal bonds, available for sale —  10,748  —  10,748  —  5,847  —  5,847 
Total investments —  231,331  —  231,331  —  167,365  —  167,365 
Total assets $ 120  $ 329,515  $ —  $ 329,635  $ 27,389  $ 167,365  $ —  $ 194,754 
Liabilities
Warrant liability:
RTI warrants $ —  $ —  $ 3,379  $ 3,379  $ —  $ —  $ 5,175  $ 5,175 
Private warrants —  —  681  681  —  —  938  938 
Series A warrants —  47,321  —  47,321  —  —  —  — 
Total warrant liability $ —  $ 47,321  $ 4,060  $ 51,381  $ —  $ —  $ 6,113  $ 6,113 
Measurement of the Private Warrants

The private warrants are measured at fair value on a recurring basis using a Black-Scholes model. The private warrants are classified as Level 3 and were valued using the following assumptions:
June 30, 2022 December 31, 2021
Expected annual dividend yield —  % —  %
Expected volatility 76.1  % 69.5  %
Risk-free rate of return 2.97  % 1.14  %
Expected option term (years) 3.72 4.22
The expected term of the warrants granted are determined based on the duration of time the warrants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility was based on the implied volatility calculated for the Company’s public warrants, which have similar characteristics to the private warrants. The dividend yield on the Company’s warrants is assumed to be zero as the Company has not historically paid dividends. The fair value of the underlying Company shares was determined using the Black-Scholes calculation.
The aggregate values of the private warrants were $0.7 million and $0.9 million on June 30, 2022 and December 31, 2021, respectively.
A summary of the private warrants activity from December 31, 2021 to June 30, 2022 is as follows:
Fair value
(Level 3)
Balance at December 31, 2021 $ 938 
Change in fair value (257)
Balance at June 30, 2022 $ 681 
Refer to Note 6 – Warrants for further information.
Measurement of the RTI warrants
Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.
The Company has determined its warrant to be a Level 3 fair value measurement and has remeasured using a Binomial Tree option pricing model to calculate its fair value using the following assumptions:
June 30, 2022 December 31, 2021
Expected annual dividend yield —  % —  %
Expected volatility 58.4  % 59.6  %
Risk-free rate of return 2.39  % 0.97  %
Expected option term (years) 2.5 3.0
The expected term of the warrants granted are determined based on the duration of time the warrants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility was based on the Company’s capital structure and volatility of similar entities referred to as guideline companies. In determining similar entities, the Company considered industry, stage of life cycle, size and financial leverage. The dividend yield on the Company’s warrants is assumed to be zero as the Company has not historically paid dividends. The fair value of the underlying Company shares was determined using the Binomial Tree model calculation.
The Company has an option to repurchase the Warrants at any time. The maximum fair value of the Warrants is limited by the fair value of the repurchase option, which cannot exceed $15.0 million.
Changes in Level 3 liabilities measured at fair value for six months ended June 30, 2022 are as follows (in thousands):
Fair value
(Level 3)
Balance at December 31, 2021 $ 5,175 
Change in fair value (1,796)
Balance at June 30, 2022 $ 3,379 
Measurement of the Series A Warrants

The Series A Warrants meet the definition of derivative instruments and are measured at fair value on a recurring basis using the market price of the Company’s publicly traded warrants, with changes in fair value recorded in current earnings. The Company has determined the publicly traded warrants to be an appropriate proxy to value the Series A Warrants as both warrants have similar redemption features and the same exercise price. The Series A Warrants are classified as Level 2 for both initial measurement at issuance and subsequent measurement each period. The Series A Warrants were initially valued at $43.9 million upon closing of the 2022 PIPE Offering.
Assets and liabilities recorded at carrying value
In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value measurements.
The Company records cash and accounts payable at cost, which approximates fair value due to their short-term nature or stated rates. The Company records debt at cost.