Fair Value Measurements

3 Months Ended

Mar. 31, 2023

Fair Value Measurements

Fair Value Measurements

Note 4. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company applies the guidance in ASC 820, Fair Value Measurement, to account for financial assets and liabilities measured on a recurring basis. Fair value is measured at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.

The Company uses a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity's own assumptions (unobservable inputs). The guidance requires that fair value measurements be classified and disclosed in one of the following three categories:

● Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

● Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability

● Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period. There were no transfers between Level 1, 2 and 3 during the three months ended March 31, 2023.

The table below presents the assets and liabilities measured and recorded in the condensed consolidated financial statements at fair value on a recurring basis at March 31, 2023 and December 31, 2022 categorized by the level of inputs used in the valuation of each asset and liability.

	March 31, 2023
(In thousands)	Total		Level 1		Level 2		Level 3
Assets
Cash	$	500	$	500	$	—	$	—
Cash equivalents – money market funds		1,618		1,618		—		—
Total assets	$	2,118	$	2,118	$	—	$	—
Liabilities
Series X Preferred Stock liability	$	34,800	$	—	$	—	$	34,800
Total liabilities	$	34,800	$	—	$	—	$	34,800

	December 31, 2022
(In thousands)	Total		Level 1		Level 2		Level 3
Assets
Cash	$	3,342	$	3,342	$	—	$	—
Cash equivalents – money market funds		8,702		8,702		—		—
Total assets	$	12,044	$	12,044	$	—	$	—
Liabilities
Warrant liability	$	2,819	$	—	$	—	$	2,819
Series X Preferred Stock liability		34,300		—		—		34,300
Total liabilities	$	37,119	$	—	$	—	$	37,119

The Level 1 assets consist of money market funds, which are actively traded daily.

Changes in Level 3 Liabilities Measured at Fair Value on a Recurring Basis

Warrant Liability and Series X Preferred Stock Liability

The reconciliation of the Company's warrant and Series X Preferred Stock liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:

			Series X
	Warrant		Preferred Stock
(In thousands)	Liability		Liability
Balance, December 31, 2022	$	2,819	$	34,300
Change in fair value		874		500
Reclassification to stockholders' equity (1)		(3,693)		—
Balance, March 31, 2023	$	—	$	34,800

(1) During the three months ended March 31, 2023, the Company’s liability-classified warrants, representing warrants exercisable for Series Z Preferred Stock, were reclassified to stockholders’ equity upon conversion of such warrants to warrants exercisable for common stock in January 2023.

Assumptions Used in Determining Fair Value of Liability-Classified Series X Preferred Stock

The fair value of the Series X Preferred Stock represents the present value of estimated future payments that include royalty payments, as well as potential payments contingent upon the Company being awarded a priority review voucher (“PRV”). The Company utilized an income approach and Monte Carlo simulation method to determine the estimated fair value of the Series X Preferred Stock. The inputs used in the valuation approach are based on many factors such as estimated sales proceeds related to the PRV, the relevant market size, the estimated probability of regulatory success rates, anticipated patent protection, expected pricing, expected treated population, sales by region, estimated royalty payments and discount rate.

Assets measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, which primarily consist of goodwill and IPR&D assets are not required to be measured at fair value on a recurring basis, and instead are reported at their carrying amount. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying values may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial assets are assessed for impairment. If the fair value is determined to be lower than the carrying amount, an impairment charge is recorded to write down the asset to its fair value. As a result of the decrease in the Company’s market capitalization during the quarter ended March 31, 2023, the Company determined that a sufficient indicator existed to trigger the performance of an interim impairment analysis for goodwill and IPR&D assets. The IPR&D asset related to ACG-701 for Cystic Fibrosis with a carrying amount of $50.7 million was written down to a fair value of $48.1 million (Level 3 fair value measurement) and the IPR&D asset related to ACG-801 for Farber Disease with a carrying amount of $6.0 million was written down to a fair value of $4.0 million (Level 3 fair value measurement) during the three months ended March 31, 2023. The fair value associated with the IPR&D asset related to ACG-701 for Melioidosis exceeded its carrying value at March 31, 2023. Goodwill with a carrying value of $11.1 million was written down to a fair value of $4.6 million during the three months ended March 31, 2023. The

fair value of the Company’s one reporting unit for interim goodwill impairment testing was determined using a market approach. See Note 3.