Fair Value Measurements

6 Months Ended

Jun. 30, 2022

3. Fair Value Measurements

The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):


	Fair Value Measurements at June 30, 2022
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Marketable investments	$	63,259	$	1,700	$	—	$	61,559
Total assets	$	63,259	$	1,700	$	—	$	61,559
Liabilities:
Derivative liabilities - non-current	$	500	$	—	$	—	$	500
Contingent consideration		397		—		—		397
Contingent consideration - non-current		57,949		—		—		57,949
Total liabilities	$	58,846	$	—	$	—	$	58,846


	Fair Value Measurements at December 31, 2021
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Marketable investments	$	90,217	$	2,560	$	—	$	87,657
Total assets	$	90,217	$	2,560	$	—	$	87,657
Liabilities:
Derivative liabilities - non-current	$	35,700	$	—	$	—	$	35,700
Contingent consideration		397		—		—		397
Contingent consideration - non-current		124,349		—		—		124,349
Total liabilities	$	160,446	$	—	$	—	$	160,446

Marketable Investments

As disclosed in Note 4, the Company holds 20,422,124 shares of Class A Common Stock of Celularity, of which 19,922,124 shares with a value of approximately $61.6 million as of June 30, 2022 were subject to certain transfer restrictions. The transfer restrictions lapsed on July 16, 2022. The shares held by the Company are measured at fair value at each reporting period based on the closing price of Celularity’s common stock on the last trading day of each reporting period, and the shares subject to transfer restrictions are adjusted for a discount for lack of marketability. As of June 30, 2022, the discount for lack of marketability was determined using a Monte Carlo simulation model resulting in an implied discount for lack of marketability of 9%.

Changes in fair value of the Company’s investment in Celularity since December 31, 2021 are as follows (Level 3):


(in thousands)	Fair Value
Beginning Balance at December 31, 2021	$	87,657
Change in fair value measurement of Restricted Shares		(26,098	)
Ending Balance at June 30, 2022	$	61,559

Contingent Consideration

During the three and six months ended June 30, 2022, the Company recorded a gain of $64.3 million and $66.4 million, respectively, which related to the change in fair value of the contingent consideration associated with its acquisition of ACEA Therapeutics, Inc. (“ACEA”) (See Note 6 for details). The Company assesses the fair value of contingent consideration using a discounted cash flow method combined with a Monte Carlo simulation model. Significant Level 3 assumptions used in the measurement included revenue projections, a discount rate of 21.5% and estimated probabilities of successful commercialization.

Changes in estimated fair value of contingent consideration liabilities since December 31, 2021 are as follows (Level 3):


(in thousands)	Fair Value
Beginning Balance at December 31, 2021	$	124,746
Change in fair value measurement		(66,400	)
Ending Balance at June 30, 2022	$	58,346

Derivative liabilities

The Company recorded a loss on derivative liability of $2.7 million and a gain on derivative liability of $4.8 million for the three and six months ended June 30, 2022, respectively, which related to the derivative liability associated with the Scilex Notes. The fair value of the derivative liability associated with the Scilex Notes decreased by $30.4 million immediately after the entry into the Indenture Amendment associated with the Scilex Notes on June 2, 2022 (see Note 7 for additional details). The Indenture Amendment is accounted for as troubled debt restructuring; therefore, the carrying amount of the Scilex Notes, net, was adjusted to reflect the aforementioned change in fair value of the derivative liability. The fair value of the derivative liability associated with the Scilex Notes was estimated using the discounted cash flow method combined with a Monte Carlo simulation model including consideration of the terms of the Indenture Amendment. Significant Level 3 assumptions used in the measurement included a 6.1% risk adjusted net sales forecast and an effective debt yield of 21.5%.

The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the six months ended June 30, 2022:


(in thousands)	Fair Value
Beginning Balance at December 31, 2021	$	35,700
Change in fair value measurement		(35,200	)
Ending Balance at June 30, 2022	$	500

- 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.

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