Derivative Financial Instruments

6 Months Ended

Jun. 30, 2022

Note 5 - Derivative Financial Instruments

Warrants

Each whole warrant entitles the holder to purchase one share of the Company’s Class A common stock at a price of $11.50 per share, subject to adjustment. The Public Warrants will become exercisable on the later of (a) 30 days after the consummation of a Business Combination or (b) 12 months from the closing of the IPO. In addition, if (x) the Company issues additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of the initial Business Combination at an issue price or effective issue price of less than $9.20 per share of Class A common stock (with such issue price or effective issue price to be determined in good faith by the Company’s board and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or its affiliates, as applicable, prior to such issuance) (the “newly issued price”) and (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of the initial Business Combination on the date of the consummation of the initial Business Combination (net of redemptions), the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the newly issued price, the $18.00 per share redemption trigger price described below under “Redemption of warrants for cash when the price per share of Class A common stock equals or exceeds $18.00” will be adjusted (to the nearest cent) to be equal to 180% of the newly issued price, and the $10.00 per share redemption trigger price described below under “Redemption of warrants when the price per share of Class A Common Stock equals or exceeds $10.00 but is lower than $18.00” will be adjusted (to the nearest cent) to be equal to the newly issued price.

The warrants will expire at 5:00 p.m., New York City time on the warrant expiration date, which is five years after the completion of the initial Business Combination or earlier upon redemption or liquidation. On the exercise of any warrant, the warrant exercise price will be paid directly to the Company and not placed in the Trust Account.

The Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act with respect to the shares of Class A common stock underlying the warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations described below with respect to registration. No warrant will be exercisable and the Company will not be obligated to issue shares of Class A common stock upon exercise of a warrant unless the Class A common stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants. In the event that the conditions in the two immediately preceding sentences are not satisfied with respect to a warrant, the holder of such warrant will not be entitled to exercise such warrant and such warrant may have no value and expire worthless. In no event will the Company be required to net cash settle any warrant. In the event that a registration statement is not effective for the exercised warrants, the purchaser of a Unit containing such warrant will have paid the full purchase price for the Unit solely for the share of Class A common stock underlying such Unit.

The Company has agreed that as soon as practicable, but in no event later than fifteen (15) business days, after the closing of the initial Business Combination, the Company will use its best efforts to file with the SEC a registration statement for the registration, under the Securities Act, of the shares of Class A common stock issuable upon exercise of the warrants. The Company will use its best efforts to cause the same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the warrants in accordance with the provisions of the warrant agreement. Notwithstanding the above, if the Class A common stock is at the time of any exercise of a warrant not listed on a national securities exchange such that it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to file or maintain in effect a registration statement, but the Company will be required to use its best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.

Redemption of warrants when the price per share of Class A common stock equals or exceeds $18.00

Once the warrants become exercisable, the Company may redeem the outstanding Public Warrants for cash:

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in whole and not in part;

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at a price of $0.01 per warrant;

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upon a minimum of 30 days’ prior written notice of redemption; and

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if, and only if, the last reported sale price of the Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which we send the notice of redemption to the warrant holders (such price, the “market value”).

Redemption of warrants when the price per share of Class A common stock equals or exceeds $10.00 but is lower than $18.00

Once the warrants become exercisable, the Company may redeem the outstanding Public Warrants:

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in whole and not in part;

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at a price of $0.10 per warrant, provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of shares based on the redemption date and the fair market value of the shares of Class A common stock;

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upon a minimum of 30 days’ prior written notice of redemption;

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if, and only if, the last reported sale price of the Class A common stock equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) on the trading day prior to the date on which we send the notice of redemption to the warrant holders; and

●

if the last reported sale price of the Class A common stock on the trading day prior to the date on which we send the notice of redemption to the warrant holders is less than $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like), the Private Placement Warrants must also be concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above.

The “fair market value” of the Class A common stock shall mean the average reported last sale price of the Class A common stock for the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of warrants. The Company will provide its warrant holders with the final fair market value no later than one business day after the ten-trading day period described above ends. In no event will the warrants be exercisable in connection with this redemption feature for more than 0.361 shares of Class A common stock per whole warrant (subject to adjustment).

The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants and the Class A common stock issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or saleable until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants will be exercisable on a cashless basis and be non-redeemable, except as described above, so long as they are held by the Sponsor or its permitted transferees. If the Private Placement Warrants are held by someone other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

If a tender offer, exchange or redemption offer shall have been made to and accepted by the holders of the Class A common stock (other than a tender, exchange or redemption offer made by the Company in connection with redemption rights held by stockholders as provided for in the amended and restated certificate of incorporation or as a result of the repurchase of shares of Class A common stock by the Company if a proposed initial Business Combination is presented to the stockholders for approval) and upon completion of such offer, the offeror owns beneficially more than 50% of the outstanding shares of Class A common stock, the holder of the warrant shall be entitled to receive the highest amount of cash, securities or other property to which such holder would actually have been entitled as a stockholder if such warrant had been exercised, accepted such offer and all of the Class A common stock held by such holder had been purchased pursuant to the offer. If less than 70% of the consideration receivable by the holders of the Class A common stock in the applicable event is payable in the form of common equity in the successor entity that is listed on a national securities exchange or is quoted in an established over-the-counter market, and if the holder of the warrant properly exercises the warrant within thirty days following the public disclosure of the consummation of the applicable event by the Company, the warrant price shall be reduced by an amount equal to the difference (but in no event less than zero) of (i) the warrant price in effect prior to such reduction minus (ii) (A) the Per Share Consideration (as defined in the warrant agreement) minus (B) the value of the warrant based on the Black-Scholes Warrant Model for a Capped American Call on Bloomberg Financial Markets.

The Company accounts for the Public Warrants and Private Placement Warrants as liabilities in accordance with the guidance contained in ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity. Because the Company does not control the occurrence of events, such as a tender offer or exchange, that may trigger cash settlement of the warrants where not all of the stockholders also receive cash, the warrants do not meet the criteria for equity treatment thereunder, as such, the warrants must be recorded as a derivative liability.

Additionally, certain adjustments to the settlement amount of the Private Placement Warrants are based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under ASC 815-40, and thus the Private Placement Warrants are not considered indexed to the Company’s own stock and not eligible for an exception from derivative accounting.

Forward Purchase Agreements

On June 11, 2021, the Company entered into a forward purchase agreement (the “Committed FPA”) with ZP Master Utility Fund, Ltd., an affiliate of the Sponsor (the “Zimmer Entity”), and a forward purchase agreement (the “Uncommitted FPA” and, together with the Committed FPA, the “Forward Purchase Agreements”) with Bluescape Resources Company LLC (“Bluescape Resources” and, together with the Zimmer Entity, the “Forward Purchasers”). Pursuant to the Forward Purchase Agreements, the Zimmer Entity agreed to purchase 10,000,000 units and Bluescape Resources agreed to purchase up to 10,000,000 units, with each unit consisting of one share of Class A common stock and one-third of one warrant to purchase one share of Class A common stock, at $11.50 per share, subject to adjustment, for a purchase price of $10.00 per unit (the “Forward Purchase Units”). The shares of Class A common stock to be issued under the Forward Purchase Agreements will have no redemption rights and will have no right to liquidating distributions from the Trust Account. The warrants to be issued as part of the Forward Purchase Agreements will be identical to the Private Placement Warrants. The purchase of the Forward Purchase Units will take place in one or more private placements to occur concurrently and only in connection with the closing of the Business Combination. The forward purchase shares and forward purchase warrants (and underlying shares of Class A common stock) are subject to registration rights. The obligation of Bluescape Resources to purchase the Forward Purchase Units pursuant to the Uncommitted FPA is subject to the approval of its investment committee.

The Company accounts for the Forward Purchase Agreements in accordance with the guidance in ASC 815-40 and accounts for such agreements as derivative liability/asset. The value of the liability/asset is subject to re-measurement at each balance sheet date, with changes in fair value recognized in the unaudited condensed Statements of Operations. As of June 30, 2022, the re-measurement of the derivative associated with the Committed FPA resulted in a derivative asset with a fair value of $546,000 and the re-measurement of the derivative associated with the Uncommitted FPA resulted in the liability previously recognized by the Company being reduced to zero.

The following presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on non-recurring basis as of June 30, 2022.


	Level 1		Level 2		Level 3		Total
Assets:
Marketable securities held in Trust Account – U.S. Money Market	$	345,180,030	$	—	$	—	$	345,180,030
Forward purchase unit assets		—		—		546,000		546,000
Liabilities:
Warrant liabilities		(3,789,250)		(3,645,025)		—		(7,434,275)
Forward purchase unit liabilities		—		—		—		—
Total	$	341,390,780	$	(3,645,025)	$	546,000	$	338,291,755

The following presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on non-recurring basis as of December 31, 2021.


	Level 1		Level 2		Level 3		Total
Assets:
Marketable securities held in Trust Account – U.S. Money Market	$	345,015,191	$	—	$	—	$	345,015,191
Liabilities:
Warrant liabilities		(15,410,000)		(14,150,374)		—		(29,560,374)
Forward purchase unit liabilities		—		—		(3,297,294)		(3,297,294)
Total	$	329,605,191	$	(14,150,374)	$	(3,297,294)	$	312,157,523

Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. During the period ended December 31, 2021, the Public Warrants began trading separately on August 6, 2021 at the option of the holder and thus were transferred from Level 3 to Level 1. The Company transferred the Private Placement Warrants from Level 3 to Level 2 during the six months ended June 30, 2022, as the inputs significant to the valuation became observable as they are benchmarked to those used for the Public Warrants.

Taking into account that the estimated fair values of the Private Placement Warrants and Forward Purchase Units are determined using some unobservable inputs including the Company’s own data, adjusted for other reasonably available information. Inherent in a Black-Scholes-Merton model are assumptions related to expected stock-price volatility (pre-merger and post-merger), expected term, dividend yield and risk-free interest rate. The pre-merger volatility is based on management’s understanding of the volatility associated with instruments of other similar entities. The post-merger volatility is derived using a Monte Carlo simulation to solve for the volatility implied by the trading price of the Public Warrants as of the valuation date. The risk-free interest rate is based on the U.S. Treasury Constant Maturity similar to the expected remaining life of the warrants. The expected life of the warrants is estimated based on management assumptions regarding the timing and likelihood of completing a Business Combination. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero.

The estimated fair value of the Public Warrants is determined based on the publicly traded price of the Public Warrants which is Level 1 inputs.

The following table presents information about the assumptions used to value the Company’s liabilities classified as Level 3 in the fair value hierarchy that are measured at fair value on a recurring basis as of June 30, 2022.


	Forward Purchase
Inputs	Units
Exercise price	$	10.00
Volatility		4.00% pre-merger/ 4.00% post-merger
Expected term to business combination		0.48 year
Risk-free rate		2.50	%
Dividend yield		0.00	%
Stock price	$	9.71

The following table presents information about the Company’s Level 3 liabilities that are measured at fair value on a recurring basis as of December 31, 2021.


	Private Placement			Forward Purchase
Inputs	Warrants			Units
Exercise price	$	11.50		$	10.00
Volatility		5.0% pre-merger/ 20.5% post-merger			5.0% pre-merger/ 20.5% post-merger
Expected term to business combination		0.73 year (5 years exercise period after close of business combination)			0.73 year
Risk-free rate		1.33	%		0.28	%
Dividend yield		0	%		0	%
Stock price	$	9.69		$	9.69

The following table presents the changes in the fair value of warrant liabilities and Forward Purchase Units for the six months ended June 30, 2022:


	Public		Private		Forward Purchase
	Warrants		Warrants		Units
Fair value as of December 31, 2021	$	15,410,000	$	14,150,374	$	3,297,294
Change in valuation inputs or other assumptions		(10,292,500)		(9,429,741)		(4,397,294)
Fair value as of March 31, 2022		5,117,500		4,720,633		(1,100,000)
Change in valuation inputs or other assumptions		(1,328,250)		(1,075,608)		554,000
Fair value as of June 30, 2022	$	3,789,250	$	3,645,025	$	546,000

The following table presents the changes in the fair value of warrant liabilities and Forward Purchase Units for the period from February 25, 2021 (inception) through June 30, 2021:


	Public		Private		Forward Purchase
	Warrants		Warrants		Units
Fair value as of February 25, 2021	$	—	$	—	$	—
Initial measurement on June 18, 2021 (IPO)		14,261,682		13,379,377		366,779
Change in valuation inputs or other assumptions		693,261		623,733		2,951,562
Fair value as of June 30, 2021	$	14,954,943	$	14,003,110	$	3,318,341

Zimmer Energy Transition Acquisition Corp. 10-Q