Redwire Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value of Financial Instruments

Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2022

Note D – Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, salaries and benefits payable, accrued interest, other accrued expenses and current liabilities are reflected on the consolidated balance sheets at amounts that approximate fair value because of the short-term nature of these financial assets and liabilities.

The fair value of the Company’s debt approximates its carrying value and is classified as Level 2 within the fair value hierarchy as it is based on discounted cash flows using a current borrowing rate.

Contingent Consideration

As of December 31, 2022 and December 31, 2021, contingent consideration consisted of estimated future payments related to the Company’s acquisition of Roccor in October 2020. As certain inputs are not observable in the market, contingent consideration payments are classified as Level 3 instruments and included in notes payable to seller on the consolidated balance sheets. Significant changes in the significant unobservable inputs used in the Black-Scholes OPM to determine the fair value of contingent consideration would result in a significantly lower or higher fair value measurement. The Company adjusts the previous fair value estimate of contingent consideration at each reporting period based on changes in forecasted financial performance and overall risk as well as the period of time elapsed.

The purchase agreement with the sellers of Roccor awarded such sellers with a contingent right to an earnout payment from the Company upon the achievement of certain revenue milestones for the year ended December 31, 2021. The earnout amount would be based on one of the following: (i) $0 if Roccor revenue for the year ended December 31, 2021 is less than $30.0 million, (ii) $1.0 million if Roccor revenue for the year ended December 31, 2021 is equal to or greater than $30.0 million but less than $40.0 million, (iii) $2.0 million if Roccor revenue for the year ended December 31, 2021 is equal to or greater than $40.0 million. The fair value of the Roccor contingent earnout was estimated using the Black-Scholes OPM.

The assumptions used in the Black-Scholes OPM were as follows:


Roccor Black-Scholes OPM Assumptions
Risk-free interest rate	0.1	%
Revenue discount rate	7.0	%
Revenue volatility	30.0	%
Earnout payment discount rate	4.0	%

During the first quarter of 2023, the Company paid the Roccor sellers the contingent earnout in accordance with the acquisition agreement.

Committed Equity Facility

During the second quarter of 2022, the Company evaluated the Purchase Agreement with B. Riley and determined that the committed equity facility was not indexed to the Company’s own common stock and, therefore, should be accounted for in accordance with ASC 815. Accordingly, the Company recorded a derivative asset with an initial fair value of $0.8 million based on the 127,751 shares of common stock issued to B. Riley as consideration for its irrevocable commitment to purchase up to $80.0 million in shares of the Company’s common stock. Subsequent changes in the fair value of the derivative asset are dependent upon, among other things, changes in the closing share price of the Company’s common stock, the quantity and purchase price of shares purchased by B. Riley during the reporting period, the unused capacity under the committed equity facility as of the balance sheet date and the cost of raising other forms of capital. The Company adjusts the previous fair value estimate of the committed equity facility at each reporting period based on changes in the weighted average purchase price of shares purchased by B. Riley during the period, the unused capacity available under the committed equity facility, expected stock price volatility and other macroeconomic factors which impact the cost of raising comparable forms of capital. The changes in the fair value of the committed equity facility were a decrease of $0.5 million for the year ended December 31, 2022, which is included in other (income) expense, net on the consolidated statements of operations and comprehensive income (loss).

Pursuant to the Purchase Agreement, the purchase price for each share of common stock is equal to 97% of the volume weighted average price (“VWAP”) on the applicable purchase date, which results in a 3% fee on the purchase of the Company’s common stock. During the year ended December 31, 2022, the VWAP of shares purchased by B. Riley ranged from $2.73 to $4.29 per share.

Based on the December 31, 2022 closing price of $1.98 per share and registered shares available for purchase under the committed equity facility of 8,090,331, the Company had $16.0 million of unused capacity under the committed equity facility as of December 31, 2022. Please refer to Note P for additional information.

Private Warrants

As part of the Merger, the private warrants were established as a liability and the public warrants were established as equity. Classification of the private warrants as liability instruments and public warrants as equity instruments was based on management’s analysis of the guidance in ASC 815 and in a statement issued by the Staff of the SEC regarding the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies.” Management determined that while the public warrants meet the definition of a derivative, they meet the equity scope exception in ASC 815-10-15-74(a) to be classified in stockholders’ equity and are not subject to remeasurement provided that the Company continues to meet the criteria for equity classification. Management considered whether the private warrants display the three characteristics of a derivative under ASC 815, and concluded that the private warrants meet the definition of a derivative. However, the private warrants fail to meet the equity scope exception in ASC 815-10-15-74(a) and thus are classified as a liability measured at fair value, subject to remeasurement at each reporting period. The Company measured the private warrant liability at fair value at the closing of the Merger and then at each reporting period with changes in fair value recognized as other (income) expense, net in the consolidated statements of operations and comprehensive income (loss).

The private warrants were valued using a modified Black-Scholes OPM, which is classified as Level 3 within the fair value hierarchy. The following table presents the fair value per warrant and the valuation assumptions under the Black-Scholes OPM as of December 31, 2022 and December 31, 2021:


	December 31, 2022			December 31, 2021
Fair value	$	0.17		$	2.47
Exercise price	$	11.50		$	11.50
Common stock price	$	1.98		$	6.75
Expected option term (years)	3.67 years			4.67 years
Expected volatility	60.70		%	60.50		%
Risk-free rate of return	4.10		%	1.21		%
Expected annual dividend yield	—		%	—		%

The changes in the fair value of the private warrant liability were a decrease of $17.8 million and $2.6 million for the years ended December 31, 2022 and December 31, 2021 respectively, which are included in other (income) expense, net in the consolidated statements of operations and comprehensive income (loss).

The following table presents information about the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021 were as follows:



		December 31, 2022
	Balance Sheet Location	Level 1		Level 2		Level 3		Total
Assets:
Committed equity facility	Other non-current assets	$	—	$	—	$	216	$	216

Total assets		$	—	$	—	$	216	$	216

Liabilities:
Private warrants	Warrant liabilities	$	—	$	—	$	1,314	$	1,314
Contingent consideration	Notes payable to sellers	—		—		1,000		1,000
Total liabilities		$	—	$	—	$	2,314	$	2,314


		December 31, 2021
	Balance Sheet Location	Level 1		Level 2		Level 3		Total
Liabilities:
Private warrants	Warrant liabilities	$	—	$	—	$	19,098	$	19,098
Contingent consideration	Notes payable to sellers	—		—		1,000		1,000
Total liabilities		$	—	$	—	$	20,098	$	20,098

Changes in the fair value of Level 3 financial assets and liabilities were as follows:


Assets:	Committed Equity Facility		Total Level 3













December 31, 2020	$	—	$	—
Additions	—		—
Changes in fair value	—		—
Settlements	—		—
December 31, 2021	$	—	$	—
Additions	756		756
Changes in fair value	(540)		(540)
Settlements	—		—
December 31, 2022	$	216	$	216


Liabilities:	Contingent Consideration		Private Warrants		Total Level 3













December 31, 2020	$	1,257	$	—	$	1,257
Additions	450		21,727		22,177
Changes in fair value	10,891		(2,629)		8,262
Settlements	(11,598)		—		(11,598)
December 31, 2021	$	1,000	$	19,098	$	20,098
Additions	—		—		—
Changes in fair value	—		(17,784)		(17,784)
Settlements	—		—		—
December 31, 2022	$	1,000	$	1,314	$	2,314

- 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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