Redwire Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 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 condensed 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 September 30, 2022 and December 31, 2021, contingent consideration consisted of estimated future payments related to the Company’s acquisition of Roccor. 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 condensed 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 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	%

As of September 30, 2022, the Company expects to pay the Roccor contingent earnout during the second half of 2022 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 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 $0.1 million for the three and nine months ended September 30, 2022, which are included in other (income) expense, net on the condensed 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 three months ended September 30, 2022, the VWAP of shares purchased by B. Riley ranged from $2.73 to $4.29 per share.

Based on the September 30, 2022 closing price of $2.38 per share and registered shares available for purchase under the committed equity facility of 8,090,331, the Company had $19.3 million of unused capacity under the committed equity facility as of September 30, 2022. Please refer to Note N for additional information.

Private Warrants

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 September 30, 2022 and December 31, 2021:


	September 30, 2022			December 31, 2021
Fair value	$	0.40		$	2.47
Exercise price	$	11.50		$	11.50
Common stock price	$	2.38		$	6.75
Expected option term (years)	3.92 years			4.67 years
Expected volatility	66.30		%	60.50		%
Risk-free rate of return	4.12		%	1.21		%
Expected annual dividend yield	—		%	—		%

The changes in the fair value of the private warrant liability were a decrease of $0.9 million and $16.0 million for the three and nine months ended September 30, 2022, respectively, which are included in other (income) expense, net in the condensed 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 September 30, 2022 and December 31, 2021 were as follows:



		September 30, 2022
	Balance Sheet Location	Level 1		Level 2		Level 3		Total
Assets:
Committed equity facility	Other non-current assets	$	—	$	—	$	616	$	616
Total assets		$	—	$	—	$	616	$	616

Liabilities:
Private warrants	Warrant liabilities	$	—	$	—	$	3,093	$	3,093
Contingent consideration	Notes payable to sellers	—		—		1,000		1,000
Total liabilities		$	—	$	—	$	4,093	$	4,093


		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 during the nine months ended September 30, 2022 were as follows:


Assets:	Committed Equity Facility		Total Level 3

















December 31, 2021	$	—	$	—
Additions	756		756
Changes in fair value	(140)		(140)
Settlements	—		—
September 30, 2022	$	616	$	616


Liabilities:	Contingent Consideration		Private Warrants		Total Level 3

















December 31, 2021	$	1,000	$	19,098	$	20,098
Additions	—		—		—
Changes in fair value	—		(16,005)		(16,005)
Settlements	—		—		—
September 30, 2022	$	1,000	$	3,093	$	4,093

- 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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