Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Liabilities

4.Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:

	Fair Value Measurements as of September 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	40,234	$	—	$	—	$	40,234
Convertible note receivable		—		—		3,920		3,920
	$	40,234	$	—	$	3,920	$	44,154
Liabilities:
Contingent stock consideration	$	—	$	—	$	415	$	415
Acquisition-related contingent consideration obligations		—		—		158,781		158,781
Short-term debt - Yorkville		—		—		39,255		39,255
Warrant liability - May 2022 PIPE Warrants		—		—		3,813		3,813
Warrant liability - Sponsor Warrants		—		—		4,675		4,675
Warrant liability - Public Warrants		5,606		—		—		5,606
	$	5,606	$	—	$	206,939	$	212,545

	Fair Value Measurements as of December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	36,700	$	—	$	—	$	36,700
Convertible note receivable		—		—		2,488		2,488
	$	36,700	$	—	$	2,488	$	39,188
Liabilities:
Acquisition-related contingent consideration obligations	$	—	$	—	$	232,222	$	232,222
Warrant liability - Sponsor Warrants		—		—		13,600		13,600
Warrant liability - Public Warrants		12,362		—		—		12,362
	$	12,362	$	—	$	245,822	$	258,184

During the nine months ended September 30, 2022 and 2021, there were no transfers between Level 1, Level 2 and Level 3.

The Company’s cash equivalents consisted of money market funds. The money market fund was valued using inputs observable in active markets for similar securities, which represents a Level 1 measurement in the fair value hierarchy.

The carrying values of accounts receivable and accounts payable approximate fair value in the accompanying condensed consolidated financial statements due to the short-term nature of those instruments.

Valuation of Contingent Consideration

The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs and is based on a probability-weighted income approach. The measurement is based upon unobservable inputs supported by little or no market activity based on the Company’s own assumptions.

The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using Level 3 inputs as of September 30, 2022 and December 31, 2021:

	Balance as of December 31, 2021		Net transfers in to (out of) Level 3		Purchases, settlements and other net		Fair value adjustments			Balance as of September 30, 2022
Liabilities:
Contingent stock consideration	$	—	$	—	$	—	$	415		$	415
Acquisition-related contingent consideration obligations		232,222		—		—		(73,441	)		158,781
	$	232,222	$	—	$	—	$	(73,026	)	$	159,196
	Balance as of December 31, 2020		Net transfers in to (out of) Level 3		Purchases, settlements and other net		Fair value adjustments			Balance as of December 31, 2021
Liabilities:
Acquisition-related contingent consideration obligations	$	273,367	$	—	$	—	$	(41,145	)	$	232,222

The fair value of the liability to make potential future milestone and earn-out payments was estimated by the Company at each reporting date based, in part, on the results of a third-party valuation using a discounted cash flow analysis based on various assumptions, including the probability of achieving specified events, discount rates, and the period of time until earn-out payments are payable and the conditions triggering the milestone payments are met. The actual settlement of contingent consideration could differ from current estimates based on the actual occurrence of these specified events.

At each reporting date, the Company revalues the contingent consideration obligation to estimated fair value and records changes in fair value as income or expense in the Company’s condensed consolidated statements of operations. Changes in the fair value of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the various contingent consideration obligations. The Company has classified all of the contingent consideration as a long-term liability in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021. See Note 10, “Commitment and Contingencies”, for more information on contingent consideration.

Valuation of Warrant Liability

The warrant liability at September 30, 2022 is composed of the fair value of warrants to purchase shares of Class A Common Stock. The private placement warrants assumed upon the Business Combination (the “Sponsor Warrants”) and the May 2022 PIPE Warrants (see Note 11) were recorded at their respective Closing Date fair values based on a Black-Scholes option pricing model that utilizes inputs for: (i) value of the underlying asset, (ii) the exercise price, (iii) the risk-free rate, (iv) the volatility of the underlying asset, (v) the dividend yield of the underlying asset and (vi) maturity. The Black-Scholes option pricing model’s primary unobservable input utilized in determining the fair value of the Sponsor Warrants and May 2022 Pipe Warrants is the expected volatility of the Class A Common Stock. Prior to the Mergers, Legacy Celularity was historically a private company and lacks company-specific historical and implied volatility information for its stock. Therefore, it estimates its expected stock price volatility based on the historical volatility of publicly traded peer companies. Inputs to the Black-Sholes option pricing model for the warrants are updated each reporting period to reflect fair value. The public warrants assumed upon the Business Combination (the “Public Warrants”) were recorded at the closing date fair value based on the close price of such warrants. Each subsequent reporting period, the Public Warrants are marked-to-market based on the period-end close price.

As of September 30, 2022 and December 31, 2021, the fair value of the warrant liabilities was $14,094 and $25,962, respectively. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the estimated remaining term of the warrants.

The following table provides a roll-forward of the aggregate fair values of the Company’s warrant liabilities for which fair values are determined using either Level 1 or Level 3 inputs:

Balance as of December 31, 2020	$	76,640
Gain recognized in earnings from change in fair value		(13,482	)
Warrant liability assumed at Closing Date (Sponsor Warrants)		34,764
Warrant liability assumed at Closing Date (Public Warrants)		24,438
Reclassification of Legacy Celularity Warrants to equity		(96,398	)
Balance as of December 31, 2021	$	25,962
Balance as of December 31, 2021	$	25,962
May 2022 PIPE warrant issuance		19,745
Gain recognized in earnings from change in fair value		(31,613	)
Balance as of September 30, 2022	$	14,094

The fair value of the Public Warrants was $5,606 and $12,362 as of September 30, 2022 and December 31, 2021, respectively, based on the publicly stated closing price. The fair value of the Sponsor Warrants was $4,675 and $13,600 as of September 30, 2022 and December 31, 2021, respectively. The fair value of the May 2022 PIPE Warrants was $3,813 as of September 30, 2022.

Significant inputs for the Sponsor Warrants are as follows:

	September 30, 2022			December 31, 2021
Common share price	$	2.31		$	5.12
Exercise price	$	11.50		$	11.50
Dividend yield		0	%		0	%
Term (years)		3.8			4.5
Risk-free interest rate		4.17	%		1.19	%
Volatility		78.0	%		63.0	%

Significant inputs for the May 2022 PIPE Warrants are as follows:

	September 30, 2022
Common share price	$	2.31
Exercise price	$	8.25
Dividend yield		0	%
Term (years)		4.6
Risk-free interest rate		4.06	%
Volatility		82.0	%

Valuation of the Convertible Note Receivable

The convertible note receivable was received in connection with the disposition of the UltraMIST/MIST business in 2020. At any time on or after January 1, 2021, at the sole discretion of the Company, amounts outstanding under the convertible note receivable (including accrued interest) may be converted into Sanuwave common stock at a defined rate. The convertible promissory note was to be paid on or before August 6, 2021, however, remains outstanding in full at September 30, 2022. As of September 30, 2022 and December 31, 2021, the Company utilized Level 3 inputs on a probability weighted model based on outcomes of a default, repayment and conversion of the note. The measurement is based upon unobservable inputs supported by little or no market activity based on the Company’s own assumptions.

Significant inputs for the convertible note valuation model are as follows:

	September 30, 2022		December 31, 2021
Face value	$	4,000	$	4,000
Coupon rate	12% - 17%		12% - 17%
Stock price	$	0.06	$	0.17
Term (years)	.76 - 3.45		.7 - 3.19
Risk-free interest rate	3.99% - 4.16%			0.29	%
Volatility	n/a		n/a

Valuation of the Contingent Stock Consideration

The contingent stock consideration liability at September 30, 2022, is comprised of the fair value of potential future issuance of Class A Common Stock to CariCord participating shareholders pursuant to a settlement agreement signed during the year ended December 31, 2021 (see Note 10). The fair value measurement of the contingent stock consideration obligation is determined using Level 3 inputs and is based on a probability-weighted expected return methodology (“PWERM”). The measurement is largely based upon unobservable inputs supported by little or no market activity based on the Company’s own assumptions. As of December 31, 2021, the applicable procurement targets were not probable of being achieved.

The following table presents a reconciliation of the contingent stock consideration obligation measured on a recurring basis using Level 3 inputs as of September 30, 2022 and December 31, 2021:

	Balance as of December 31, 2021		Net transfers in to (out of) Level 3		Purchases, settlements and other net		Fair value adjustments		Balance as of September 30, 2022
Liabilities:
Contingent stock consideration	$	-	$	—	$	—	$	415	$	415

The fair value of the liability to issue future shares of Class A Common Stock was estimated by the Company at each reporting date based on the results of a third-party valuation using a PWERM based on various inputs and assumptions, including the Company’s common share price, discount rates, and the probability of achieving specified future operational targets. The actual settlement of contingent stock consideration could differ from current estimates based on the actual achievement of these specified targets and movements in the Company’s common share price.

At each reporting date, the Company revalues the contingent stock consideration obligation to estimated fair value and records changes in fair value as income or expense in the Company’s condensed consolidated statements of operations. Changes in the fair value of the contingent stock consideration obligation may result from changes in discount rates, changes in the Company’s common share price, and changes in probability assumptions with respect to the likelihood of achieving specified operational targets. The Company has classified all of the contingent stock consideration as a long-term liability in the condensed consolidated balance sheets as of September 30, 2022. See Note 10, “Commitments and Contingencies”, for more information on contingent stock consideration.

Valuation of Short-Term Debt - Yorkville

The Company elected the fair value option to account for the financial instrument with Yorkville signed on September 15, 2022 (see Note 8). The estimate of the fair value was determined using a binomial lattice model. The fair value measurement of the debt is determined using Level 3 inputs and assumptions unobservable in the market. Changes in the fair value of debt that is accounted for at fair value, inclusive of related accrued interest expense, are presented as gains or losses in the accompanying condensed consolidated statements of operations and comprehensive income (loss) under change in fair value of debt. The portion of total changes in fair value of debt attributable to changes in instrument-specific credit risk are determined through specific measurement of periodic changes in the discount rate assumption exclusive of base market changes and are presented as a component of comprehensive income (loss) in the accompanying condensed consolidated statements of operations and comprehensive income (loss). The actual settlement of the short-term debt could differ from current estimates based on the timing of when and if Yorkville elects to convert amounts into common shares, potential cash repayment by the Company prior to maturity, and movements in the Company’s common share price.

The following table presents a reconciliation of the Yorkville debt measured on a recurring basis using Level 3 inputs as of the initial valuation date of September 15, 2022 and as of September 30, 2022:

Liabilities:
Balance as of September 15, 2022	$	39,200
Fair value adjustment through earnings		291
Fair value adjustment through accumulated other comprehensive income or loss		(236	)
Balance as of September 30, 2022	$	39,255

Significant inputs for the Yorkville short-term debt valuation model are as follows:

	September 30, 2022
Common share price	$	2.31
Credit spread		14.82	%
Dividend yield		0	%
Term (years)		1.0
Risk-free interest rate		4.04	%
Volatility		45.0	%
Discount yield		18.86	%