Earn-Out Shares

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

In accordance with the October 2021 Merger, former holders of shares of Legacy Science 37 preferred and common stock and former holders of options to purchase shares of Legacy Science 37 common stock are entitled to receive their respective pro rata shares of up to 12,500,000 additional shares of the Company’s common stock (the “Earn-Out Shares”) if certain triggering events are met within three years from the date of the Merger. For more information on the Merger transaction, please refer to Note 1 “Company Background and Basis of Presentation” and Note 3 “Business Combination” to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 6, 2023.

As of December 31, 2022, the stockholders and option holders were estimated to receive approximately 11,131,713 and 1,368,287 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 $0.02 (Trigger 1) and approximately $0.01 (Trigger 2) per share as of December 31, 2022.

As of March 31, 2023, the stockholders and option holders were estimated to receive approximately 11,184,437 and 1,315,563 Earn-Out Shares, respectively. The fair value of the Earn-Out Shares was approximately $0.01 (Trigger 1) and approximately $0.00 (Trigger 2) per share as of March 31, 2023.

Through the third quarter of 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. Based on the first year Monte Carlo simulation valuation model results, the change in the Company’s stock price and the relative immaterial

nature of the earn-out liability, the fair value of the Earn-Out Shares for both the three months ended March 31, 2023 and December 31, 2022 was determined using a valuation methodology that the Company believes approximates the fair value of the Earn-Out Shares that would be determined using the Monte Carlo simulation valuation model.

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 three months ended March 31, 2023, there was a decrease in the fair value of the earn-out liability of $0.1 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, 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 three months ended March 31, 2023:


(In thousands)	Earn-Out Liability
Balance at December 31, 2022	$	170
Change in fair value related to option holder forfeitures	—
Change in fair value related to share valuation inputs	(110)
Total change in fair value recognized in earnings	$	(110)
Balance at March 31, 2023	$	60

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 months ended March 31, 2023 and 2022, the Company recorded approximately $0.4 million and $1.9 million, respectively, in stock-based compensation expense related to the Earn-Out Shares. No unrecognized compensation expense was remaining at March 31, 2023