Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v3.23.1
Fair Value Measurements
 12 Months Ended
Dec. 31, 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 December 31, 2022 and 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 is 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 December 31, 2022 and 2021, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
December 31,
Description Level 2022 2021
Assets:
Marketable securities - U.S. Treasury Securities
 2 $ 29,680  $ — 
Liabilities:  
Warrant liabilities 3 $ —  $ 2,274 
Earnout liability
 3 $ 1,076  $ — 
Warrant Liabilities
The Company had outstanding 4,110,000 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 Sponsor Warrants exercisable for common stock at a purchase price of $1.00 per warrant.
In December 2022, the Company and the holders of the Private Warrants entered into letter agreements, pursuant to which such holders agreed that the Private Warrants will be exercisable for cash or on a cashless basis and redeemable on the same terms and subject to the same conditions as the Public Warrants.
The Private Warrants and Sponsor Warrants were identical to the Public Warrants except that the Private Warrants and Sponsor Warrants (i) were 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 were not indexed to the Company’s common stock in the manner contemplated by ASC 815-40-15 because the holder of the instrument was not an input into the pricing of a fixed-for-fixed option on equity shares. The Company classified the Private Warrants and Sponsor Warrants as derivative liabilities in its consolidated balance sheet as of December 31, 2022.
The Company utilized 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 was 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 estimated the volatility of its common stock based on historical volatility that matched the expected remaining life of the warrants. The risk-free interest rate was 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 was assumed to be equivalent to their remaining contractual term. The dividend rate was based on the historical rate, which the Company anticipated to remain at zero.
There was no warrant liability balance as of December 31, 2022. 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 as of December 31, 2021 were as follows:
Stock price on valuation date $ 3.71 
Exercise price per share $ 11.50 
Expected life 4.75 years
Volatility 56.4  %
Risk-free rate 1.2  %
Dividend yield —  %
Fair value per warrant $ 0.73 
The following table provides a summary of changes in the Company's warrant liabilities that are classified as Level 3 financial instruments measured at fair value on a recurring basis:
December 31,
2022 2021
Balance at beginning of year
 $ 2,274  $ — 
Additions pursuant to Merger —  11,865 
Transfer of Private Warrants to Public Warrants (690) (1,485)
Change in fair value (1,584) (8,106)
Balance at end of year
 $ —  $ 2,274 
For the years ended December 31, 2022 and 2021, the Company recognized income resulting from a change in the fair value of warrant liabilities of $1,584 and $8,106, respectively.
There were no private warrants outstanding as of December 31, 2022. Private warrants outstanding as of December 31, 2021 were 3,114,388.
Earnout Liability
The following table provides a summary of the change in the balance of the earnout liability associated with the acquisition of Linear which is included within the other current liabilities within the balance sheet (See Note 4 for information on the acquisition of Linear):
Earnout Liability
Balance at December 31, 2021
 $ — 
Recognition of Linear earnout liability 2,900 
Change in fair value (1,824)
Balance at December 31, 2022
 $ 1,076 
For the year ended December 31, 2022, the Company recognized income resulting from a change in the fair value of the earnout liability of $1,824.
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 stockholders 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 stockholders. The Earnout Shares are a fixed number of shares to be issued to such stockholders 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 December 31, 2022, there were 3,510,405 Earnout Shares unvested and remaining subject to the Earnout Terms.