Fair Value Measurements

9 Months Ended

Sep. 30, 2023

FAIR VALUE MEASUREMENTS

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3. The valuation methodologies used for the Company’s financial instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below.

The following table presents the Company’s assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2023.


	As of September 30, 2023				Fair Value Measurements As of September 30, 2023
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Money Market Funds in Cash Equivalents	$	94,686	$	94,686	$	94,686	$	—	$	—

Liabilities:
Debt:
Marathon Convertible Notes		14,635,200		14,635,200		—		—		14,635,200
Term Loans		18,152,344		18,152,344		—		—		18,152,344
	$	32,787,544	$	32,787,544	$	—	$	—	$	32,787,544


	As of December 31, 2022				Fair Value Measurements As of December 31, 2022
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Money Market Funds in Cash Equivalents	$	1,829,218	$	1,829,218	$	1,829,218	$	—	$	—

Liabilities:
Debt:
Marathon Convertible Notes		6,360,600		6,360,600		—		—		6,360,600
Term Loans		5,567,231		5,567,231		—		—		5,567,231
	$	11,927,831	$	11,927,831	$	—	$	—	$	11,927,831

A lattice-based model was used to estimate the fair value of the Marathon Convertible Notes at September 30, 2023. The lattice model utilizes a “decision tree,” whereby future movement in the Company’s common stock price is estimated based on a volatility factor. Additionally, the Company included in its decision tree, when relevant, a probability assessment of the approval of

ACER-001 and the resulting impact of such an event. The Company classified the fair value of the Marathon Convertible Notes as a Level 3 measurement due to the lack of observable market data. The lattice model requires the development and use of assumptions, including the Company’s stock price volatility returns, an appropriate risk-free interest rate, and derived credit spread, default probability rate, and expected recovery rate given default.

The Company updated its estimate of fair value of the Term Loans based on the probability-weighted net present value of future cash flows at September 30, 2023.

The significant unobservable inputs used in calculating the fair value of the Marathon Convertible Notes and Term Loans represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Any significant changes in the inputs described herein may result in significantly higher or lower fair value measurements.

In the nine months ended September 30, 2023 the Company recorded in “Other income (expense), net” as “Changes in fair value of debt instruments gain (loss)” a loss of $0.3 million, for change in fair value of the Original Term Loan pre-modification from December 31, 2022 through the date of modification, as well as a loss of $3.4 million related to the change in fair value of the post-modification Term Loans from the date of modification through September 30, 2023. Additionally, during the nine months ended September 30, 2023, the adjustment to fair value for the Term Loans during the three months ended March 31, 2023 includes $2.7 million of increase in the post-modification cash flows of the instrument, which was recognized as a loss on extinguishment during the period. During the three months ended September 30, 2023, the Company recorded a loss of $0.2 million for the change in fair value of the Term Loans post-modification from June 30, 2023 through September 30, 2023.

In the nine months ended September 30, 2023, the Company recorded in “Other income (expense), net” as “Changes in fair value of debt instruments gain (loss)” a gain of $0.5 million for changes in the fair value of the pre-modification Marathon Convertible Note from December 31, 2022 through the date of modification, as well as a loss of $4.2 million for changes in fair value of the Marathon Convertible Note from the date of modification through September 30, 2023. Additionally, during the nine months ended September 30, 2023, the adjustment to fair value for the Marathon Convertible Note during the three months ended March 31, 2023 includes $5.0 million of increase in the post-modification cash flows of the instrument, which was recognized as a loss on extinguishment during the period. During the three months ended September 30, 2023, the Company recorded a loss of $1.6 million for the change in fair value of the Marathon Convertible Note post-modification from June 30, 2023 through September 30, 2023.


	For the Three Months Ended September 30, 2023			For the Nine Months Ended September 30, 2023
Activity recorded as change in fair value gain (loss), Term Loans
Loss from change in fair value from December 31, 2022 to date of modification	$	—		$	(299,923	)
Loss from change in fair value from date of modification to September 30, 2023		(165,496	)		(3,442,552	)
Loss from extinguishment of debt related to increase in post-modification cashflows					(2,710,194	)
Total change in fair value recognized, Term Loans		(165,496	)		(6,452,669	)

Activity recorded as change in fair value gain (loss), Marathon Convertible Note
Gain from change in fair value from December 31, 2022 to date of modification	$	—		$	498,600
Loss from change in fair value from date of modification to September 30, 2023		(1,557,000	)		(4,173,633	)
Loss from extinguishment of debt related to increase in post-modification cashflows					(5,008,800	)
Total change in fair value recognized, Marathon Convertible Note		(1,557,000	)		(8,683,833	)

Total change in fair value recognized during the three and nine months ended September 30, 2023	$	(1,722,496	)	$	(15,136,502	)


	December 31, 2022		Loan Received		Payments			Accretion/ Interest Accrued		Adjustment to Fair Value Mark to Market			September 30, 2023
Marathon Convertible Notes	$	6,360,600	$	—	$	(409,233	)	$	—	$	8,683,833	(1)	$	14,635,200
Term Loans		5,567,231		7,000,000		(1,189,862	)		—		6,774,975	(2)		18,152,344
	$	11,927,831	$	7,000,000	$	(1,599,095	)	$	—	$	15,458,808		$	32,787,544

(1) The Adjustment to Fair Value for the Marathon Convertible Notes during the nine months ended September 30, 2023, includes $5.0 million of increase in the post-modification cash flows of the instrument, which was recognized as a loss on extinguishment during the period.

(2) The Adjustment to Fair Value for the Term Loans during the nine months ended September 30, 2023, includes $2.7 million of increase in the post-modification cash flows of the instrument, which was recognized as a loss on extinguishment during the period, as well as $0.3 million of interest expense reflected as such in the statement of operations.

(3) Balance as of December 31, 2022, includes accrued interest of $0.3 million recorded as part of accrued expense as of that date.

- 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 + Details

Acer Therapeutics Inc. 10-Q