Earn-Out Shares

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

In accordance with the Merger Agreement, former holders of shares of Legacy Science 37 common stock (including shares received as a result of the conversion of Legacy Science 37 preferred stock) and former holders of options to purchase shares of Legacy Science 37 are entitled to receive their respective pro rata shares of up to 12,500,000 Earn-Out Shares if, during the three years following the consummation of the Merger, the volume weighted average price of Science 37’s Common Stock for a period of at least 20 days out of 30 consecutive trading days:

i.is equal to or greater than $15.00, a one-time aggregate issuance of 5,000,000 Earn-Out Shares will be made (“Trigger 1”); and

ii.is equal to or greater than $20.00, a one-time aggregate issuance of 7,500,000 Earn-Out Shares will be made (“Trigger 2”).

As of December 31, 2021, the stockholders and option holders were estimated to receive approximately 10,914,421 and 1,585,579 Earn-Out Shares, respectively, based on the fully diluted capitalization table of Legacy Science 37. The fair value of the Earn-Out Shares was approximately $10.35 (Trigger 1) and approximately $8.20 (Trigger 2) per share as of December 31, 2021.

As of September 30, 2022, the stockholders and option holders are estimated to receive approximately 11,098,317 and 1,401,683 Earn-Out Shares, respectively. The fair value of the Earn-Out Shares was approximately $0.16 (Trigger 1) and approximately $0.09 (Trigger 2) per share as of September 30, 2022.

The estimated fair value of the Earn-Out Shares was determined using a Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis over the earn-out Period using the most reliable information available. This valuation method falls into Level 3 fair value hierarchy for inputs used in measuring fair value and is based on inputs that are unobservable and significant to the overall fair value measurement. Unobservable inputs are inputs that

reflect the Company's judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. To the extent that the valuation is based on models or inputs that are unobservable in the market, the determination of fair value requires management to exercise a high degree of judgment. Change in significant unobservable inputs could result in a higher or lower fair value measurement of the liability associated with of the Earn-Out shares. Assumptions used in the valuation were as follows:


	September 30, 2022			December 31, 2021
Stock price	$	1.61		$	12.47
Expected volatility	80.0		%	55.0		%
Risk-free interest rate	4.22		%	0.91		%
Forecast period (in years)	2.0			2.8

Former Science 37 Shareholders

The Company has determined that the contingent obligation to issue Earn-Out Shares to former Science 37 shareholders is not indexed to the Company's stock under ASC Topic 815-40, Derivatives and Hedging - Contracts in Entity’s Own Equity, and therefore equity treatment is precluded. The Triggering Event that determines the issuance of the Earn-Out Shares includes terms that are not solely indexed to the common stock of the Company and, as such, liability classification is required. For the nine months ended September 30, 2022, there was a decrease in the fair value of the earn-out liability of $97.6 million, which was recorded as a gain in “Change in fair value of earn-out liability” within the condensed consolidated statements of operations. In accordance with the Merger Agreement, Earn-Out Shares attributable to former Science 37 option holders who discontinue providing service before the occurrence of the Triggering Event are reallocated to the remaining eligible former stockholders and former option holders.

The earn-out liability is recorded on the balance sheet as a non-current liability because potential payment of the liability will be settled in the Company’s common shares. The following table presents a reconciliation of changes in the carrying amount of the contingent earn-out liability classified as Level 3 fair value hierarchy using significant unobservable inputs for the nine months ended September 30, 2022:


(In thousands)	Earn-Out Liability
Balance at December 31, 2021	$	98,900
Change in fair value related to option holder forfeitures	181
Change in fair value related to share valuation inputs	(97,781)
Total change in fair value recognized in earnings	$	(97,600)
Balance at September 30, 2022	$	1,300

Former Science 37 Option Holders

The contingent obligation to issue Earn-Out Shares to former Science 37 option holders falls within the scope of ASC 718, Compensation - Stock Compensation, because the option holders are required to continue providing service until the occurrence of the Triggering Event(s). For the three and nine months ended September 30, 2022, the Company recorded approximately $1.5 million and $5.3 million, respectively, in stock-based compensation expense related to the Earn-Out Shares. Approximately $1.4 million of unrecognized compensation expense was remaining at September 30, 2022, which is expected to be recognized over the remaining derived service period of 0.1 years (Trigger 1) and 0.4 years (Trigger 2).