FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2022

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 3 — FAIR VALUE MEASUREMENTS

The Company follows the accounting guidance in ASC Topic 820 for its fair value measurements of financial assets and liabilities measured at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing

an asset or a liability. The three-tiered fair value hierarchy, which prioritizes when inputs should be used in measuring fair value, is comprised of: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than quoted prices in active markets that are observable either directly or indirectly and (Level III) unobservable inputs for which there is little or no market data. The fair value hierarchy requires the use of observable market data when available in determining fair value.

The Company has short-term investments which are primarily commercial paper that are classified as Level II. The valuation inputs for the short-term investments are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.

The Company has issued the following warrants: (i) warrants (the “Public Warrants”) to purchase shares of Class A common stock with an exercise price of $11.50 per share, (ii) warrants (the “Private Warrants”) to purchase Class A common stock with an exercise price of $11.50 per share, (iii) warrants (the “BGL Warrants”) to purchase Class A common stock with an exercise price of $10.00 per share, and (iv) the Foxconn Warrants to purchase shares of Class A common stock with an exercise price of $10.50. The BGL Warrants were issued as part of Business Combination in October 2020 which are set to expire in October 2023 classified as equity as they qualify as share-based compensation under ASC Topic 718.

The Public Warrants and the Private Warrants were recorded in the Company’s consolidated financial statements as a result of the Business Combination between DiamondPeak and Lordstown EV Corporation (formerly known as Lordstown Motors Corp.) and the reverse recapitalization that occurred on October 23, 2020 and did not impact any reporting periods prior to the Business Combination. The Company determined that the fair value of the Public Warrants and Private Warrants was $100.9 million as of the date of the Business Combination.

On January 27, 2021, we redeemed all of the Public Warrants originally issued for cash proceeds of approximately $82.0 million.

As of December 31, 2022, we had 1.7 million Foxconn warrants, 2.3 million private warrants and 1.6 million BGL warrants outstanding.

As of December 31, 2021, we had 2.3 million Private Warrants, 1.6 million BGL Warrants outstanding and no Public Warrants outstanding.

During  2021, approximately 6.7 million Public Warrants and 0.6 million of the Private Warrants were exercised which resulted in cash proceeds of $82.0 million.

The fair value of the Foxconn Warrants was $0.3 million at issuance. The Private Warrants and the Foxconn Warrants are, and the Public Warrants were classified as a liability with any changes in the fair value recognized immediately in our condensed consolidated statements of operations.

The following table summarizes the net gain (loss) on changes in fair value (in thousands) related to the Public Warrants, Private Warrants and Foxconn Warrants.

	Year ended		Year ended
	December 31, 2022		December 31, 2021
Public Warrants	$	—	$	(27,180)
Private Warrants		231		15,307
Foxconn Warrants		153		—
Net (loss) gain on changes in fair value	$	384	$	(11,873)

As of December 31, 2022, we had 1.7 million Foxconn Warrants and 2.3 million Private Warrants outstanding.

As of December 31, 2021, we had 2.3 million Private Warrants outstanding.

Foxconn Warrants are measured at fair value using Level 3 inputs. These instruments are not actively traded and are valued using Black-Scholes Option Pricing Model. The following table provides quantitative information regarding Level 3 fair value measurements inputs at their measurement dates:

The following table provides quantitative information regarding Level 3 fair value measurements inputs at their measurement date for Foxconn Warrants. . The risk-free rate utilized was 4.237% for the valuation as of December 31, 2022.

	Year ended
	December 31, 2022
Foxconn Warrants
Stock Price	$	1.14
Strike Price	$	10.5
Volatility		90%
Expected term		2.4 years
Risk Free Rate		4.284%

	Year ended
	December 31, 2022
Private Warrants
Stock Price	$	1.14
Strike Price	$	11.5
Volatility		90%
Expected term		2.8 years
Risk Free Rate		4.237%

The Private Warrants are measured at fair value using Level 3 inputs. These instruments are not actively traded and are valued using a Monte Carlo option pricing model that uses observable and unobservable market data as inputs.

A Monte Carlo model was used to simulate a multitude of price paths to measure fair value of the Private Warrants. The Monte Carlo models two possible outcomes for the stock price each trading day – up or down – based on the prior day’s price. The calculations underlying the model specify the implied risk-neutral probability that the stock price will move up or down, and the magnitude of the movements, given the stock’s volatility and the risk-free rate. This analysis simulates possible paths for the stock price over the term of the Private Warrants. For each simulated price path, we evaluate the conditions under which the Company could redeem each Private Warrant for a fraction of whole shares of the underlying as detailed within the Warrant Agreement applicable to the Private Warrants. If the conditions are met, we assume redemptions would occur, although the Private Warrant holders would have the option to immediately exercise if it were more advantageous to do so. For each simulated price path, if a redemption does not occur the holders are assumed to exercise the Private Warrants if the stock price exceeds the exercise price at the end of the term. Proceeds from either the redemption or the exercise of the Private Warrants are reduced to a present value amount at each measurement date using the risk-free rate for each simulated price path. Present value indications from iterated priced paths were averaged to derive an indication of value for the Private Warrants.

We used a stock price volatility input of 90% and 50% as of December 31, 2022 and 2021, respectively, for the Monte Carlo model. This assumption considers observed historical stock price volatility of other companies

operating in the same or similar industry as the Company over a period similar to the remaining term of the Private Warrants, as well as the volatility implied by the traded options of the Company. The risk-free rates utilized were 4.237% and 1.123% for the valuations as of December 31, 2022 and 2021, respectively.

Observed prices for the Public Warrants are used as Level 1 inputs as they were actively traded until being redeemed in January 2021.

The following tables summarize the valuation of our financial instruments (in thousands):

	Total		Quoted prices in active markets (Level 1)		Prices with observable inputs (Level 2)		Prices with unobservable inputs (Level 3)
December 31, 2022
Cash and cash equivalents	$	121,358	$	121,358	$	—	$	—
Short-term investments		100,297		—		100,297		—
Private Warrants		254		—		—		254
Foxconn Warrants		170		—		—		170

	Total		Quoted prices in active markets (Level 1)		Prices with observable inputs (Level 2)		Prices with unobservable inputs (Level 3)
December 31, 2021
Cash and cash equivalents	$	244,016	$	244,016	$	—	$	—
Short-term investments		—		—		—		—
Private Warrants		485		—		—		485

The following table summarizes the changes in our Level 3 financial instruments (in thousands):

	Balance at December 31, 2021		Additions		Settlements		Loss on fair value adjustments included in earnings		Balance at December 31, 2022
Private Warrants	$	485		—		—		(231)	$	254
Foxconn Warrants		—		323		—		(153)		170