Canoo Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

6 Months Ended

Jun. 30, 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 June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023
	Fair Value		Level 1		Level 2		Level 3
Liability
Contingent earnout shares liability	$	449	$	—	$	—	$	449
Derivative liability, current	$	4,359	$	—	$	—	$	4,359
Warrant liability, non-current	$	25,269	$	—	$	25,269	$	—


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

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

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 as of December 21, 2022. The second tranche will be issued if the share price reaches $25 within four years of the closing of the Earnout Date. The third tranche will be issued if the share price reaches $30 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 June 30, 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 six months ended June 30, 2023 and June 30, 2022 (in thousands).


	Six Months Ended June 30,
Earnout Shares Liability	2023		2022
Beginning fair value	$	3,013	$	29,057

Change in fair value during the period	$	(2,564)	$	(24,936)
Ending fair value	$	449	$	4,121

The Company issued convertible debt whose conversion features meet the definition of a derivative liability 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: the price of the Company’s common stock of $0.48; a risk-free interest rate of 5.3%; expected volatility of the Company’s common stock of 128.2%; expected dividend yield of 0%; and simulation period period of 0.98 years. The fair value of the conversion feature derivative measured at issuance and as of June 30, 2023 was $3.7 million resulting in a nominal amount reflected as a loss within the condensed consolidated statement of operations.

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 $0.48; shares subject to Market Value shortfall of 2.3 million shares; a risk-free interest rate of 5.4%; expected volatility of the Company’s common stock of 121.9%; expected dividend yield of 0%; and remaining term of 0.77 years. The fair value of the Market Value Shortfall derivative measured at issuance and as of June 30, 2023 was $0.6 million resulting in a nominal amount reflected as a loss within the condensed consolidated statement of operations.


	Six months ended June 30, 2023
Derivative liability	2023		2022
Beginning fair value	—		—

Change in fair value during the period	$	4,359	—
Ending fair value	$	4,359	—

- 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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