Annual report pursuant to Section 13 and 15(d)

Fair Value of Financial Instruments

v3.23.1
Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
Fair value of financial instruments

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

Nonrecurring Measurements

We have certain assets and liabilities that are not measured at fair value on an ongoing basis but were subjected to fair value adjustments at the time of acquisition. These include long-lived assets and liabilities acquired through our business combination activities and purchase consideration in the form of seller-financed long-term notes payable, the fair values of which were determined using applicable valuation models based on significant unobservable inputs classified as level 3 in the fair value hierarchy. See “Note 4 - Business Combinations and Asset Acquisition,” for additional information.

Recurring Measurements

The following table presents the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2022. There were no assets or liabilities measured at fair value on a recurring basis at December 31, 2021.

 

 

Fair value measurements using

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

   BPC Investment

 

$

-

 

 

$

-

 

 

$

53.6

 

Liabilities:

 

 

 

 

 

 

 

 

 

   Earnout Payments

 

$

-

 

 

$

-

 

 

$

6.6

 

   Public warrants

 

 

1.1

 

 

 

-

 

 

 

-

 

Total liabilities

 

$

1.1

 

 

$

-

 

 

$

6.6

 

The estimated fair value of the BPC Investment was determined using a combination of the market and income approaches.

The fair value of the earnout payment from the REV Acquisition has been estimated using a Black-Scholes model, adjusted for the capped amount as described in “Note 4 - Business Combinations and Asset Acquisition.” Furthermore, the adjusted earnout payment was discounted using a company-specific credit spread to account for the counterparty credit risk in making the payments. The significant inputs used in the fair value measurement include the risk free rate, credit spread of the acquirer, discount rate, EBITDA forecast, and volatility.

The fair value of the public warrants is determined using quoted market prices, as they are traded in active markets.

The following is a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from inception to December 31, 2022:

Fair value as of January 1, 2022

 

$

-

 

Acquisition of Flotek Convertible Notes

 

 

20.0

 

Acquisition of investment in BPC

 

 

47.2

 

Transfer of cost method BPC investment to Level 3 fair value measurement

 

 

4.2

 

Change in Flotek fair value up to acquisition date

 

 

10.2

 

Elimination of Flotek Convertible Notes at acquisition date

 

 

(30.2

)

Change in BPC fair value

 

 

2.2

 

Fair value as of December 31, 2022

 

$

53.6

 

The estimated fair value of the Flotek Convertible Notes prior to our consolidation of Flotek on May 17, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of Flotek’s common stock, the expected volatility of the Flotek’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate adjusted based on the credit risk of Flotek.

The key inputs into the Monte Carlo simulation used to estimate the fair value the Flotek Convertible Notes were as follows:

 

 

May 17,
2022

 

Risk-free interest rate

 

 

1.82

%

Expected volatility

 

 

90.0

%

Term until liquidation (years)

 

 

0.72

 

Stock price

 

$

1.29