Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.22.2
Fair Value Measurements
 6 Months Ended
Jun. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2022 and December 31, 2021. The carrying amounts of accounts receivable, inventory, prepaid expenses and other current assets, accounts payable, accrued expenses and other liabilities, and deferred revenue approximated fair value as they are short term in nature. The fair value of warrants issued for settlement and services are estimated based on the Black-Scholes model. The carrying value of the Company’s debt and operating lease liabilities approximated its fair value, as the obligation bears interest at rates currently available for debt with similar maturities and collateral requirements.
Fair Value on a Recurring Basis
The Company follows the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. The estimated fair value of the warrant liabilities represents Level 3 measurements. The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
Description Level June 30,
2022		 December 31,
2021
Liabilities:  
Warrant liabilities 3  $ 77  $ 2,274 
Earnout consideration
 3  $ 2,900  $ — 
Warrant Liabilities
The Company had outstanding 4,110,000 warrants (the “Private Warrants”) that were issued upon the consummation of the initial public offering of Galileo. Additionally, at the Closing, a lender holding a convertible note issued by the Company with an aggregate principal amount of $500 converted the note into 500,000 warrants (the “Sponsor Warrants”) exercisable for Common Stock at a purchase price of $1.00 per warrant.
The Private Warrants and Sponsor Warrants are identical to the Public Warrants except that the Private Warrants and Sponsor Warrants (i) are not redeemable by the Company and (ii) may be exercised for cash or on a cashless basis, so long as they are held by the initial purchaser or any of its permitted transferees. If the Private Warrants or Sponsor Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants or Sponsor Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. Upon the transfer of a Private Warrant or Sponsor Warrant to a party other than an initial purchaser or any of its permitted transferees, the Private Warrants or Sponsor Warrants become Public Warrants and the fair market value of the Private Warrants at the date of the transfer is reclassified to equity.
The Private Warrants and Sponsor Warrants are not indexed to the Company’s common shares in the manner contemplated by ASC 815-40-15 because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares. The Company classifies the Private Warrants and Sponsor Warrants as derivative liabilities in its unaudited condensed consolidated balance sheet as of June 30, 2022.
The Company utilizes a Binomial Lattice model approach to value the Private Warrants and Sponsor Warrants at each reporting period with changes in fair value recognized in the statement of operations. The estimated fair value of the warrant liabilities is determined using Level 3 inputs. Inherent in a binomial options pricing model are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its Common Stock based on historical volatility 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. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero.
The significant unobservable inputs used in the Binomial Lattice Model to measure the warrant liabilities that are categorized within Level 3 of the fair value hierarchy are as follows:
June 30,
2022		 December 31,
2021
Stock price on valuation date $ 1.17  $ 3.71 
Exercise price per share $ 11.50  $ 11.50 
Expected life 4.25 years 4.75 years
Volatility
67.0%
56.4%
Risk-free rate
3.0%
1.2%
Dividend yield —  % —  %
Fair value per warrant $ 0.10  $ 0.73 
The following table provides a summary of changes in fair value of the Company’s Level 3 financial instruments that are measured at fair value on a recurring basis:
Warrant
Liabilities
Balance at December 31, 2021
 $ 2,274 
Transfer of Private Warrants to Public Warrants
 (670)
Change in fair value (1,527)
Balance at June 30, 2022
 $ 77 
For the three and six months ended June 30, 2022, the Company recognized income resulting from a change in the fair value of warrant liabilities of $765 and $1,527, respectively. There was no change in fair value for the three and six months ended June 30, 2021 as there were no warrant liabilities outstanding as of June 30, 2021.
As of June 30, 2022 and December 31, 2021, there were 772,408 and 3,114,388 Private Warrants outstanding, respectively.
Earnout Consideration
Any change in the fair value of the earnout consideration is included in selling, general and administrative expenses on the Company's unaudited condensed consolidated statements of operations and comprehensive (loss) income. There were no changes to the fair value for the three and six months ended June 30, 2022.
Fair Value on a Non-Recurring Basis
At the Closing, there were 3,510,405 shares of Common Stock issued as part of the Merger consideration (the “Earnout Shares”) subject to vesting and forfeiture conditions (the “Earnout Terms”) based upon the volume-weighted average trading price of Common Stock reaching targets of $14.00 and $16.00, respectively (with 50% released at each target) for a period of 30 consecutive trading days during the three-year period after the Closing, with the portion of such shares that would otherwise be deliverable to Legacy Shapeways shareholders at the Closing being withheld and deposited into escrow. The fair value of the Earnout Shares was estimated using the trading price of the Common Stock at Closing ($7.70), discounted based on the probability of the Earnout Terms being met as determined at Closing, and thus represents
a Level 2 fair value measurement as defined in ASC 820. The Earnout Shares, if achieved, would be issued to Legacy Shapeways shareholders. The Earnout Shares are a fixed number of shares to be issued to such shareholders on a pro rata basis. The fair value of the Earnout Shares was recognized as a deemed dividend. Upon closing of the Merger, the estimated fair value of the Earnout Shares was $18,132 with such amount recognized as a deemed dividend. As the Company was in an accumulated deficit position as of the measurement date, the resulting deemed dividend was recorded as a reduction of additional paid-in capital with a corresponding offset recorded to additional paid-in capital. As of June 30, 2022, there were 3,510,405 Earnout Shares unvested and remaining subject to the Earnout Terms.