Canoo Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

Dec. 31, 2023

The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis as required by ASC 820, by level, within the fair value hierarchy as of December 31, 2023 and 2022 (in thousands):


	December 31, 2023
	Fair Value		Level 1		Level 2		Level 3
Liability
Contingent earnout shares liability	$	41	$	—	$	—	$	41
Derivative liability, current	$	860	$	—	$	—	$	860
Convertible debt, current	$	16,052	$	—	$	—	$	16,052
Derivative liability, non-current	$	25,919	$	—	$	—	$	25,919
Warrant liability, non-current	$	17,390	$	—	$	17,390	$	—


	December 31, 2022
	Fair Value		Level 1		Level 2		Level 3
Liability
Contingent earnout shares liability	$	3,013	$	—	$	—	$	3,013
Warrant liability	$	17,171	$	—	$	17,171	$	—

The Company’s Contingent Earnout liability, Convertible Debentures and derivative liabilities are considered “Level 3” fair value measurement. Refer to Note 2 for discussion of the Company’s methods for valuation.

The Company issued Convertible Debentures with Yorkville as discussed in Note 9, whereby the Company elected to account for the transactions under the fair value option of accounting upon issuance. The Company estimated the fair value of the August and September Initial Loans, as defined in Note 9, based on assumptions used in the Monte Carlo simulation model using the following inputs as of the end of the reporting period:


	August Convertible Debenture			September Convertible Debenture
Expected term (in years)	0.75			0.90
Stock price	$	0.26		$	0.26
Interest rate	3.0		%	3.0		%
Expected volatility	121.3		%	121.0		%
Expected dividend rate	—			—
Risk free rate	5.0		%	4.8		%

Following is a summary of the change in fair value of the Convertible debt accounted for under the fair value option for the years ended December 31, 2023 and 2022 (in thousands).


	Year Ended December 31,
Convertible Debt	2023		2022
Beginning fair value	$	—	$	—
Addition during the year	71,438		—
Payments during the year	(48,533)		—
Change in fair value during the year	(6,853)		—
Ending fair value	$	16,052	$	—

As the fair value of the freestanding instruments identified within the Convertible Debentures exceeded the proceeds, a loss on issuance on convertible debenture was recognized. Refer to Note 9 for further information.

The Company has a contingent obligation to issue shares of Common Stock to certain stockholders and employees upon the achievement of certain market share price milestones within specified periods. Issuances are made in three tranches of 5.0 million shares, for a total of 15.0 million shares, each upon reaching share price targets within specified time frames from December 21, 2020 ("Earnout Date"). The first tranche was not issued given the share price did not reach $18.00 as of December 21, 2022. The second tranche will be issued if the share price reaches $25.00 within four years of the closing of the Earnout Date. The third tranche will be issued if the share price reaches $30.00 within five years of the Earnout Date. The tranches may also be issued upon a change of control transaction that occurs within the respective timeframes and results in per share consideration exceeding the respective share price target. As of December 31, 2023, the Company has a remaining contingent obligation to issue 10.0 million shares of Common Stock.

Following is a summary of the change in fair value of the Earnout Shares liability for the years ended December 31, 2023 and 2022 (in thousands).


	Year Ended December 31,
Earnout Shares Liability	2023		2022
Beginning fair value	$	3,013	$	29,057

Change in fair value during the year	(2,972)		(26,044)
Ending fair value	$	41	$	3,013

The Company issued the April Convertible Debenture whose conversion feature meets the definition of a derivative liability which requires bifurcation. The remaining debt of $1.3 million remaining under this debenture was assumed by the August Convertible Debenture. The Company estimated the fair value of the conversion feature derivative embedded in the convertible debt based on assumptions used in the Monte Carlo simulation model using the following inputs on the date the debt was assumed by the August Convertible Debenture: the price of the Company’s Common Stock of $0.63; a risk-free interest rate of 5.3%; expected volatility of the Company’s Common Stock of 130.4%; expected dividend yield of 0.0%; and simulation period of 0.89 years. The fair value of the conversion feature derivative was $3.7 million at issuance and $0.8 million when the remaining debt under the April Convertible Debenture was assumed by the August Convertible Debenture resulting in a gain of $2.9 million.

The Company entered into a Lease Agreement ("Lease Agreement") with I-40 OKC Partners LLC ("I-40") which contained a "Market Value Shortfall" provision that meets the definition of a derivative. The Company estimated the fair value of the Market Value Shortfall based on assumptions used in the Monte Carlo simulation model using the following inputs as of the end of the reporting period: the price of the Company’s Common Stock of $0.26; shares subject to Market Value shortfall of 2.3 million shares; a risk-free interest rate of 5.3%; expected volatility of the Company’s Common Stock of 118.4%; expected dividend yield of 0.0%; and remaining term of 0.27 years. The fair value of the Market Value Shortfall derivative measured at issuance and as of December 31, 2023 was $0.5 million and $0.9 million respectively resulting in a loss of $0.4 million included within the Consolidated Statement of Operations.

The Company entered into the Preferred Stock Purchase Agreement with the Preferred Stock Purchaser whose conversion feature meets the definition of a derivative liability which requires bifurcation. The Company estimated the fair value of the conversion feature derivative embedded in the Preferred Stock Purchase Agreement based on assumptions

used in the Monte Carlo simulation model using the following inputs as of the end of the reporting period: the price of the Company’s Common Stock of $0.26 ; a risk-free interest rate of 3.8%; expected volatility of the Company’s Common Stock of 121.7%; expected dividend yield of 0.0%; and remaining term of 4.8 years. The fair value of the conversion feature derivative measured at issuance and as of December 31, 2023 was $34.1 million and $25.9 million, respectively, resulting in a gain of $8.2 million included within Consolidated Statement of Operations.


	Year Ended December 31,
Derivative liability	2023		2022
Beginning fair value	$	—	$	—
Addition during the year	38,427		—
Change in fair value during the year	(10,874)		—
Derecognition of liability upon extinguishment of convertible debt	(774)		—
Ending fair value	$	26,779	$	—

The Company entered into the Fifth Pre-Paid Advance whose conversion features meet the definition of a derivative asset which requires bifurcation. The Company estimated the fair value of the conversion feature derivative embedded in the convertible debt based on assumptions used in the Monte Carlo simulation model using the following inputs as of October 5, 2023 (date of the special meeting of Company stockholders): the price of the Company’s Common Stock of $0.49; a risk-free interest rate of 5.3%; expected volatility of the Company’s Common Stock of 111.2%; expected dividend yield of 0.0%; and simulation period of 1.20 years. The fair value of the conversion feature derivative at issuance was $6.0 million and was written off on October 5, 2023 when the special shareholder meeting approved the change in floor price, resulting in a loss of $6.0 million included within the Consolidated Statement of Operations for the year ended December 31, 2023.


	Year Ended December 31,
Derivative asset	2023		—	2022
Beginning fair value	$	—		$	—
Addition during the year	5,966			—
Change in fair value during the year	(5,966)			—
Ending fair value	—			—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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