Fair Value of Financial Assets and Liabilities

6 Months Ended

Jun. 30, 2023

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Liabilities

3.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 June 30, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	2,679	$	—	$	—	$	2,679
Convertible note receivable		—		—		2,072		2,072
	$	2,679	$	—	$	2,072	$	4,751
Liabilities:
Acquisition-related contingent consideration obligations	$	—	$	—	$	1,606	$	1,606
Contingent stock consideration		—		—		66		66
Short-term debt - Yorkville		—		—		16,816		16,816
Warrant liability - April 2023 Registered Direct Warrants		—		—		3,349		3,349
Warrant liability - May 2022 PIPE Warrants		—		—		1,471		1,471
Warrant liability - Sponsor Warrants		—		—		595		595
Warrant liability - Public Warrants		862		—		—		862
	$	862	$	—	$	23,903	$	24,765

	Fair Value Measurements as of December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	12,174	$	—	$	—	$	12,174
Convertible note receivable		—		—		2,514		2,514
	$	12,174	$	—	$	2,514	$	14,688
Liabilities:
Acquisition-related contingent consideration obligations	$	—	$	—	$	105,945	$	105,945
Contingent stock consideration		—		—		186		186
Short-term debt - Yorkville		—		—		37,603		37,603
Warrant liability - May 2022 PIPE Warrants		—		—		1,402		1,402
Warrant liability - Sponsor Warrants		—		—		1,190		1,190
Warrant liability - Public Warrants		1,006		—		—		1,006
	$	1,006	$	—	$	146,326	$	147,332

During the six months ended June 30, 2023 and 2022, there were no transfers between Level 1, Level 2 and Level 3.

The Company’s cash equivalents consisted of a 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, accounts payable, deferred revenue and other current liabilities approximate fair value in the accompanying condensed consolidated financial statements due to the short-term nature of those instruments. The Company believes that the carrying value of its long-term debt approximates fair value because the stated terms of this debt is consistent with current market rates.

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 June 30, 2023 and December 31, 2022:

	Balance as of December 31, 2022		Net transfers in to (out of) Level 3		Purchases, settlements and other net		Fair value adjustments			Balance as of June 30, 2023
Liabilities:
Acquisition-related contingent consideration obligations	$	105,945	$	—	$	—	$	(104,339	)	$	1,606
	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 December 31, 2022
Liabilities:
Acquisition-related contingent consideration obligations	$	232,222	$	—	$	—	$	(126,277	)	$	105,945

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 probability-weighted expected return method ("PWERM") for the regulatory milestones and a real options technique for commercial and royalty milestones based on various estimates and 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. During 2023, the Company discontinued its unmodified NK cell and AML Cell Therapy clinical trials acquired from the Anthrogenesis acquisition and as a result the fair value of the contingent consideration obligation has decreased significantly as of June 30, 2023. The Company has classified all of the contingent consideration as a long-term liability in the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022. See Note 9, “Commitment and Contingencies”, for more information on contingent consideration.

Valuation of Warrant Liability

The warrant liability as of June 30, 2023 is composed of the fair value of warrants to purchase shares of Company Class A common stock, par value $0.0001 per share ("Class A common stock" or "common stock"). The liability classified warrants 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 liability classified warrants is the expected volatility of the Class A common stock. Prior to the Mergers, Legacy Celularity was historically a private company and lacks sufficient company-specific historical and implied volatility information for its stock. Therefore, it estimates 50% of its expected stock price volatility based on the historical volatility of publicly traded peer companies and 50% based on the Company's historical volatility. Inputs to the Black-Scholes 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 June 30, 2023 and December 31, 2022, the fair value of the warrant liabilities was $6,277 and $3,598, 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, 2021	$	25,962
May 2022 PIPE warrant issuance		19,745
Gain recognized in earnings from change in fair value		(42,109	)
Balance as of December 31, 2022	$	3,598
Balance as of December 31, 2022	$	3,598
Gain recognized in earnings from change in fair value		(1,601	)
April 2023 Registered Direct warrant issuance		4,280
Balance as of June 30, 2023	$	6,277

The fair value of the liability classified warrants are as follows:

	June 30, 2023		December 31, 2022
Public Warrants	$	862	$	1,006
Sponsor Warrants		595		1,190
April 2023 Registered Direct Warrants		3,349		—
May 2022 PIPE Warrants		1,471		1,402
Total	$	6,277	$	3,598

Significant inputs for the Sponsor Warrants are as follows:

	June 30, 2023			December 31, 2022
Common share price	$	0.53		$	1.29
Exercise price	$	11.50		$	11.50
Dividend yield		0	%		0	%
Term (years)		3.0			3.5
Risk-free interest rate		4.48	%		4.16	%
Volatility		103.0	%		75.0	%

Significant inputs for the May 2022 PIPE Warrants and April 2023 Registered Direct Warrants are as follows:

	June 30, 2023			December 31, 2022
Common share price	$	0.53		$	1.29
Exercise price	$	0.75		$	8.25
Dividend yield		0	%		0	%
Term (years)		5.3			4.4
Risk-free interest rate		4.13	%		3.99	%
Volatility		90.1	%		81.2	%

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 June 30, 2023. As of June 30, 2023 and December 31, 2022, 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. The fair value of the convertible note receivable was $2,072 and $2,514 as of June 30, 2023 and December 31, 2022, respectively.

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

	June 30, 2023			December 31, 2022
Face value	$	4,000		$	4,000
Coupon rate	12% - 17%			12% - 17%
Stock price	$	0.02		$	0.02
Term (years)	.51 - 3.45			1.01 - 3.45
Risk-free interest rate		5.47	%		4.73	%
Volatility	n/a			n/a

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 7). During the six months ended June 30, 2023, the Company applied a different valuation model for Yorkville given the movement in the Company's share price falling below the floor price at times and triggering of debt repayments. The estimate of the fair value was determined using a scenario analysis which incorporates various repayment and conversion scenarios and corresponding probabilities. The significant inputs to the scenario (PWERM) analysis used to determine the value of each scenario prior to weighting included the following (i) term between 0.17 to 0.21 years (ii) risk-free rate ranging between 5.34% to 5.39% and (iii) interest coupon rate from 6% to 15%. The estimate of the fair value as of December 31, 2022 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 accumulated comprehensive income in the accompanying condensed balance sheets. 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 provides a roll-forward of the aggregate fair values of the Company’s Yorkville debt for which fair values are determined using Level 3 inputs:

Liabilities:
Balance as of December 31, 2022	$	37,603
Conversion of debt into common shares		(3,792	)
Principal repayments		(16,811	)
Fair value adjustment through earnings		2,357
Fair value adjustment through accumulated other comprehensive income		(2,541	)
Balance as of June 30, 2023	$	16,816

Significant inputs for the Yorkville short-term debt valuation model as of December 31, 2022 were as follows:

	December 31, 2022
Common share price	$	1.29
Credit spread		13.71	%
Dividend yield		0	%
Term (years)		0.71
Risk-free interest rate		4.75	%
Volatility		45.0	%
Discount yield		18.46	%