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Fair Value of Financial Assets and Liabilities | 3 Months Ended
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Mar. 31, 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 March 31, 2023 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash equivalents - money market funds |  | $ | 7,554 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,554 |
Convertible note receivable |  |  | — |  |  |  | — |  |  |  | 2,115 |  |  |  | 2,115 |
|  | $ | 7,554 |  |  | $ | — |  |  | $ | 2,115 |  |  | $ | 9,669 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Acquisition-related contingent consideration obligations |  | $ | — |  |  | $ | — |  |  | $ | 87,013 |  |  | $ | 87,013 |
Contingent stock consideration |  |  | — |  |  |  | — |  |  |  | 76 |  |  |  | 76 |
Short-term debt - Yorkville |  |  | — |  |  |  | — |  |  |  | 30,945 |  |  |  | 30,945 |
Warrant liability - May 2022 PIPE Warrants |  |  | — |  |  |  | — |  |  |  | 491 |  |  |  | 491 |
Warrant liability - Sponsor Warrants |  |  | — |  |  |  | — |  |  |  | 510 |  |  |  | 510 |
Warrant liability - Public Warrants |  |  | 862 |  |  |  | — |  |  |  | — |  |  |  | 862 |
|  | $ | 862 |  |  | $ | — |  |  | $ | 119,035 |  |  | $ | 119,897 |
|  | 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 three months ended March 31, 2023 and 2 0 22, 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 March 31, 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 March 31, 2023 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Acquisition-related contingent consideration obligations |  | $ | 105,945 |  |  | $ | — |  |  | $ | — |  |  | $ | (18,932 | ) |  | $ | 87,013 |
|  | 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. The Company has classified all of the contingent consideration as a long-term liability in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022. See Note 9, “Commitment and Contingencies”, for more information on contingent consideration. Valuation of Warrant Liability The warrant liability at March 31, 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 March 31, 2023 and December 31, 2022, the fair value of the warrant liabilities was $1,863 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 |  |  | (1,735 | )
Balance as of March 31, 2023 |  | $ | 1,863 |
The fair value of the liability classified warrants are as follows:
|  | March 31, 2023 |  |  | December 31, 2022 |
Public Warrants |  | $ | 862 |  |  | $ | 1,006 |
Sponsor Warrants |  |  | 510 |  |  |  | 1,190 |
May 2022 PIPE Warrants |  |  | 491 |  |  |  | 1,402 |
Total |  | $ | 1,863 |  |  | $ | 3,598 |
Significant inputs for the Sponsor Warrants are as follows:
|  | March 31, 2023 |  |  | December 31, 2022 |
Common share price |  | $ | 0.62 |  |  | $ | 1.29 |
Exercise price |  | $ | 11.50 |  |  | $ | 11.50 |
Dividend yield |  |  | 0 | % |  |  | 0 | %
Term (years) |  |  | 3.3 |  |  |  | 3.5 |
Risk-free interest rate |  |  | 3.78 | % |  |  | 4.16 | %
Volatility |  |  | 91.0 | % |  |  | 75.0 | %
Significant inputs for the May 2022 PIPE Warrants are as follows:
|  | March 31, 2023 |  |  | December 31, 2022 |
Common share price |  | $ | 0.62 |  |  | $ | 1.29 |
Exercise price |  | $ | 8.25 |  |  | $ | 8.25 |
Dividend yield |  |  | 0 | % |  |  | 0 | %
Term (years) |  |  | 4.1 |  |  |  | 4.4 |
Risk-free interest rate |  |  | 3.71 | % |  |  | 3.99 | %
Volatility |  |  | 89.6 | % |  |  | 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 March 31, 2023. As of March 31, 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 $2,115 and $2,514 as of March 31, 2023 and December 31, 2022, respectively. Significant inputs for the convertible note valuation model are as follows:
|  | March 31, 2023 |  |  | December 31, 2022 |
Face value |  | $ | 4,000 |  |  | $ | 4,000 |
Coupon rate |  | 12% - 17% |  |  | 12% - 17% |
Stock price |  | $ | 0.04 |  |  | $ | 0.02 |
Term (years) |  | .76 - 3.45 |  |  | 1.01 - 3.45 |
Risk-free interest rate |  |  | 4.79 | % |  |  | 4.73 | %
Volatility |  | n/a |  |  | n/a |
Valuation of the Contingent Stock Consideration The contingent stock consideration liability at March 31, 2023, 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. The fair value measurement of the contingent stock consideration obligation is determined using Level 3 inputs and is based on a PWERM. The measurement is largely 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 the contingent stock consideration obligation measured on a recurring basis using Level 3 inputs as of March 31, 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 March 31, 2023 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent stock consideration |  | $ | 186 |  |  | $ | — |  |  | $ | — |  |  | $ | (110 | ) |  | $ | 76 |
|  | 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: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent stock consideration |  | $ | - |  |  | $ | — |  |  | $ | — |  |  | $ | 186 |  |  | $ | 186 |
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 current liability in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022. 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 three months ended March 31, 2023, the Company applied a different valuation model for Yorkville given the movement in the Company's share price falling below the floor price 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 0.25 to 0.46 years (ii) risk-free rate ranging between 4.85% to 4.92% 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 |  |  | (3,510 | )
Principal repayments |  |  | (1,618 | )
Fair value adjustment through earnings |  |  | 1,280 |
Fair value adjustment through accumulated other comprehensive income |  |  | (2,810 | )
Balance as of March 31, 2023 |  | $ | 30,945 |
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 | %

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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