Business Acquisition

3 Months Ended

Mar. 31, 2023

Business Acquisition

Business Acquisition

Note 3. Business Acquisition

On the Effective Date, and in accordance with the terms of the Merger Agreement, the Company acquired 100% of the outstanding security interests of Legacy Aceragen in a “stock-for-stock” transaction whereby all Legacy Aceragen outstanding equity interests were exchanged for a combination of shares of Company common stock, shares of Series Z Preferred Stock, and shares of the newly designated Series X non-voting preferred stock, par value $0.01 per share (“Series X Preferred Stock”). Under the terms of the Merger Agreement, Legacy Aceragen stockholders received (i) 451,608 shares of the Company’s common stock (inclusive of unvested restricted common stock – see Note 12), (ii) 80,656 shares of Series Z Preferred Stock (inclusive of unvested restricted preferred stock – see Note 12) and (iii) five shares of Series X Preferred Stock. In addition, all outstanding options and warrants to purchase Legacy Aceragen common stock were assumed by the Company and converted into stock options and warrants to purchase shares of the Company’s common stock and Series Z Preferred Stock on terms substantially identical to those in effect prior to the Aceragen Acquisition, except for adjustments to the underlying number of shares and the exercise price based on the Merger Agreement exchange ratio. The Aceragen Acquisition was unanimously approved by the Board and the board of directors of Legacy Aceragen. The closing of the transaction was not subject to the approval of the Company’s stockholders.

Pursuant to the Merger Agreement, at the Special Meeting the Company’s stockholders approved, among other matters: (i) the conversion of Series Z Preferred Stock into shares of common stock in accordance with Nasdaq Listing Rule 5635(a) (the “Conversion Proposal”) and (ii) a proposal to amend the Company’s Restated Certificate of Incorporation to effect a reverse stock split of all of the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split Proposal” and, together with the Conversion Proposal, the “Merger Agreement Meeting Proposals”).

The transaction was accounted for under the acquisition method of accounting. Under the acquisition method, the total purchase price of the acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on the fair values as of the date of the acquisition. Consideration paid is comprised of the estimated fair value of various securities issued including the Series Z Preferred Stock, Series X Preferred Stock, stock options, restricted stock and warrants issued to Legacy Aceragen shareholders. The fair value of the consideration totaled approximately $65.6 million, summarized as follows:

(In thousands)
Common stock issued to Aceragen stockholders	$	2,809
Series Z issued to Aceragen stockholders (Note 8)		25,085
Series X liability in connection with Aceragen Acquisition (Note 6)		31,900
Stock options, restricted stock and warrants allocated to consideration paid		5,822
Total Consideration paid	$	65,616

The Company recorded the assets acquired and liabilities assumed as of the date of the Aceragen Acquisition based on the information available at that date. The following table presents the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the Aceragen Acquisition date:

(In thousands)
Assets acquired:
Cash and cash equivalents	$	5,482
Receivables		1,914
Prepaid expenses and other assets		575
In-process research and development assets		71,600
Goodwill		11,100
	$	90,671
Liabilities assumed:
Accounts Payable and accrued expenses	$	7,886
Acquisition Obligation (Note 7)		7,546
Operating lease liabilities		22
Deferred tax liabilities		9,601
	$	25,055
Net assets acquired	$	65,616

The fair value of IPR&D was capitalized as of the Aceragen Acquisition date and accounted for as indefinite-lived intangible assets until completion or disposition of the assets or abandonment of the associated research and development efforts. Upon successful completion of the development efforts, the useful lives of the IPR&D assets will be determined based on the anticipated period of regulatory exclusivity and will be amortized within operating expenses. Until that time, the IPR&D assets will be subject to impairment testing and will not be amortized. The goodwill recorded related to the acquisition is the excess of the fair value of the consideration transferred by the acquirer over the fair value of the net identifiable assets acquired and liabilities assumed at the date of the Aceragen Acquisition. The goodwill recorded is not deductible for tax purposes.

The following summarizes the Company’s indefinite-lived tangible assets acquired in connection with the Aceragen Acquisition and their carrying value as of March 31, 2023 (see Note 4 for further discussion):

					Carrying Value
	Acquisition				as of
	Date				March 31,
(In thousands)	Fair Value		Impairment		2023
ACG-701 for Cystic Fibrosis	$	50,700	$	(2,600)	$	48,100
ACG-701 for Melioidosis		14,900		—		14,900
ACG-801 for Farber Disease		6,000		(2,000)		4,000
Total in-process research and development costs (IPR&D)	$	71,600	$	(4,600)	$	67,000

Intangible asset fair values for the three IPR&D programs were determined using the Multi-Period Excess Earnings Method (“MPEEM”) which is a form of the income approach. Under the MPEEM, the fair value of an intangible asset is equal to the present value of the asset's incremental after-tax cash flows (excess earnings) remaining after deducting the market rates of return on the estimated value of contributory assets (contributory charge) over its remaining useful life. To calculate fair value of acquired IPR&D programs under the MPEEM, the Company uses probability-weighted cash flows discounted at a rate considered appropriate given the significant inherent risks associated with drug development by development-stage companies. Cash flows were calculated based on estimated projections of revenues and expenses related to each program and then reduced by a contributory charge on requisite assets employed. Contributory assets included debt-free working capital, net fixed assets and assembled workforce. Rates of return on the contributory assets were based on rates used for comparable market participants. Cash flows were assumed to extend through the market exclusivity period estimated to be provided by orphan drug designation. The resultant cash flows were then discounted to present value using a weighted-average cost of equity capital for companies with profiles substantially similar to that of each acquired IPR&D program, which the Company believes represents the rate that market participants would use to value the assets. The Company compensated for the phase of development of each program by probability-adjusting its estimation of the

expected future cash flows. The projected cash flows were based on significant assumptions, such as the time and resources needed to complete the development and approval of each IPR&D program, estimates of revenue and operating profit related to the program considering its stage of development, the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in drug development, such as obtaining marketing approval from the FDA and other regulatory agencies, and risks related to the viability of and potential alternative treatments in any future target markets. See Note 4.

Pro Forma Financial Information

The following pro forma financial information reflects the consolidated results of operations of the Company for the three months ended March 31, 2022 as if the Aceragen Acquisition had taken place on January 1, 2021. The unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed date.

	March 31,
(In thousands)	2022
Net revenues	$	5,688
Net loss	$	(7,354)