Fair Value Measurements

6 Months Ended

Jun. 30, 2022

Note 9 - Fair Value Measurements

The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value.

	Fair Value Measured as of June 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Investments held in Trust Account - U.S. Treasury Securities (1)	$	230,301,214	$	-	$	-	$	230,301,214
Liabilities:
Derivative warrant liabilities - Public warrants	$	-	$	766,670	$	-	$	766,670
Derivative warrant liabilities - Private warrants	$	-	$	-	$	440,000	$	440,000

(1)

Includes approximately $151,621 of cash

	Fair Value Measured as of December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Investments held in Trust Account	$	230,026,133	$	-	$	-	$	230,026,133
Liabilities:
Derivative warrant liabilities - Public warrants	$	3,910,000	$	-	$	-	$	3,910,000
Derivative warrant liabilities - Private warrants	$	-	$	-	$	2,288,000	$	2,288,000

Transfers to/from Levels 1, 2, and 3 are recognized in the beginning of the reporting period. The estimated fair value of Public Warrants was transferred from a Level 3 fair value measurement to a Level 1 measurement, when the Public Warrants were separately listed and traded in April 2021, and subsequently transferred to a Level 2 measurement during the quarter ending June 30, 2022 due to low trading volume.

Level 1 assets include investments substantially in U.S. Treasury securities at June 30, 2022 and money market funds that invest solely in U.S. government securities at December 31, 2021. The Company uses inputs such as actual trade data, quoted market prices from dealers or brokers, and other similar sources to determine the fair value of its investments.

For periods where no observable traded price is available, the fair value of the Public Warrants and Private Placement Warrants has been estimated using a Monte-Carlo simulation to estimate the fair value of the warrants at each reporting period, with changes in fair value recognized in the statements of operations. The estimated fair value of the Private Placement Warrants, and the Public Warrants prior to being separately listed and traded, was determined using Level 3 inputs. As of June 30, 2022, a Black-Scholes Merton formula and a Monte Carlo simulation analysis were employed to estimate the fair value of Private Placement Warrants.

For three months ended June 30, 2022 and 2021, the Company recognized a decrease in the fair value of warrant liabilities resulting in a gain of approximately $2.8 million and $6.5 million, respectively, presented as change in fair value of derivative warrant liabilities on the accompanying condensed statements of operations. For six months ended June 30, 2022 and 2021, the Company recognized a decrease in the fair value of warrant liabilities resulting in a gain of approximately $5.0 million and $7.0 million, respectively, presented as change in fair value of derivative warrant liabilities on the accompanying condensed statements of operations.

Inherent in a Monte-Carlo simulation are assumptions related to expected stock-price volatility, expected life and risk-free interest rate. The Company estimates the volatility of its common stock based on historical volatility of select peer companies that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. Significant increases (decreases) in the expected volatility in insolation would result in a significantly higher (lower) fair value adjustment.

The following table provides quantitative information regarding Level 3 fair value measurements inputs as their measurement dates:

	As of June 30, 2022			As of December 31, 2021
Exercise price	$	11.50		$	11.50
Stock Price	$	9.77		$	9.73
Option term (in years)		5.25			5.50
Volatility		1.40	%		12.00	%
Risk-free interest rate		3.01	%		1.31	%

The changes in the fair value of the derivative warrant liabilities, classified as Level 3, for the three and six months ended June 30, 2022 and 2021 are summarized as follows:

Three and six months ended June 30, 2022:

Derivative warrant liabilities at December 31, 2021 - Level 3 measurements	$	2,288,000
Change in fair value of derivative warrant liabilities - Level 3 measurements		(836,000	)
Derivative warrant liabilities at March 31, 2022 - Level 3 measurements		1,452,000
Change in fair value of derivative warrant liabilities - Level 3 measurements		(1,012,000	)
Derivative warrant liabilities at June 30, 2022 - Level 3 measurements	$	440,000

Three and six months ended June 30, 2021:

Derivative warrant liabilities at January 1, 2021 - Level 3 measurements	$	-
Issuance of Public and Private Warrants - - Level 3 measurements		6,468,000
Change in fair value of derivative warrant liabilities - - Level 3 measurements		(176,000	)
Derivative warrant liabilities at March 31, 2021 - Level 3 measurements	$	6,292,000
Change in fair value of derivative warrant liabilities - Level 3 measurements		(2,376,000	)
Derivative warrant liabilities at June 30, 2021 - Level 3 measurements	$	3,916,000

- 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.

+ References + Details

Velocity Acquisition Corp. 10-Q