Annual report pursuant to Section 13 and 15(d)

Fair Value

v3.24.1
Fair Value
 12 Months Ended
Dec. 31, 2023
Fair Value Disclosures [Abstract]  
Fair Value Fair Value
Contingent Consideration
Each period the Company revalues its contingent consideration obligations associated with business acquisitions to their fair value. The estimate of the fair value of contingent consideration is determined by applying probability of success, discount rate, and updated timing of the payment. The outstanding payments relate to obligation from acquisitions made by the Company. Below is the list of obligations for each relevant transaction as of December 31, 2023 as follows:
Acquisition Milestone Achievement Condition Contingent Consideration Payable
Bayon  
Successful completion of Phase 2 $ 1.0  million
Successful completion of Phase 3 $ 4.0  million
FDA approval $ 1.7  million
Panoptes  
Beginning of Phase 3 $ 4.8  million
FDA approval $ 4.8  million
Jade  
FDA approval $ 2.2  million
Changes in the fair value of contingent consideration are included within “Operating Expenses” in the Company's Consolidated Statements of Operations and Comprehensive Loss. Below are the status of each transaction's contingent consideration:
Bayon: The Bayon acquisition closed on October 21, 2021. As of December 31, 2022, the Company recorded contingent consideration of $1.1 million. During the year ended December 31, 2023, the Company recorded an increase in estimated fair value of $1.7 million, partially offset by a milestone payment of $0.5 million. The estimated fair value of contingent consideration as of December 31, 2023 was $2.4 million.
Panoptes: The Panoptes transaction closed December 18, 2020. As of December 31, 2022, the Company recorded contingent consideration of $1.7 million. During the year ended December 31, 2023, the Company recorded an increase in estimated fair value of $0.2 million. The estimated fair value of contingent consideration as of December 31, 2023 was $2.0 million.
Jade: As of December 31, 2022, the Company recorded contingent consideration of $0.7 million. During the year ended December 31, 2023, the Company recorded an increase in estimated fair value of $37.4 thousand. The estimated fair value of contingent consideration as of December 31, 2023 was $0.8 million.
At December 31, 2023 and 2022, the Company had no other assets or liabilities that are subject to fair value methodology and estimation in accordance with U.S. GAAP.
The Company initially values contingent consideration related to business combinations using a probability-weighted calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows for certain milestones. Key assumptions used to estimate the fair value of contingent consideration include projected financial information, market data and the probability and timing of achieving the specific targets as discussed above. Fair Value of Financial Instruments. After the initial valuation, the Company generally uses its best estimate to measure contingent consideration at each subsequent reporting period using the following unobservable Level 3 inputs:
Valuation Technique Unobservable Inputs December 31, 2023 December 31, 2022
Discounted cash flow Payment discount rate 13.1% 14.7%
Bayon Payment period
2025 - 2027
2023 - 2028
Panoptes Payment period
2026 - 2028
2024 - 2028
Jade Payment period 2027 2026
Bayon Probability of Success for milestone
42% - 71%
17% - 67%
Panoptes Probability of Success for milestone
30% - 33%
17% - 36%
Jade Probability of Success for milestone 56% 56%
Significant changes in these assumptions could result in a significantly higher or lower fair value. The contingent consideration reported in the above table is adjusted quarterly based upon the passage of time or the anticipated success or failure of achieving certain milestones. The changes in contingent consideration of $1.5 million as of December 31, 2023, was primarily driven by higher estimated probabilities of success and a decreased discount factor and was recorded as a change in fair value of contingent consideration of $2 million within the Consolidated Statements of Operations and Comprehensive Loss, which was partially offset by a milestone payment of $0.5 million.
In-process R&D
The Company records in-process R&D projects acquired in asset acquisitions that have not reached technological feasibility and which have no alternative future use. For in-process R&D projects acquired in business combinations, the Company capitalizes the in-process R&D project as an indefinite-lived intangible asset and evaluates this asset annually for impairment until the R&D process has been completed. Once the R&D process is complete, the Company amortizes the R&D asset over its remaining useful life.
ASC 350 allows an entity to first assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired. If it is more likely than not that the asset is impaired, the entity must calculate the fair value of the asset and record an impairment charge if the carrying amount exceeds fair value. If an entity concludes that it is not more likely than not that the asset is impaired, no further action is required. An indefinite-lived intangible asset should be tested for impairment if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. If such events or changes have occurred, a quantitative assessment is required.
If an entity bypasses the qualitative assessment or determines from its qualitative assessment that an indefinite-lived intangible asset is more likely than not impaired, a quantitative impairment test should be performed. The quantitative impairment test compares the fair value of an indefinite-lived intangible asset with the asset’s carrying amount. If the fair value of the indefinite-lived intangible asset is less than the carrying amount, an impairment loss should be recognized in an amount equal to the difference in accordance with ASC 350-30-35-19.
The Company values in-process R&D related to asset acquisitions using the Income Approach which measures the value of an asset by the present value of its future economic benefits. These benefits can include earnings, cost savings, tax deductions, or proceeds from its disposition. Value indications are developed by discounting expected cash flows at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. The selected discount rate is the Company’s weighted average cost of capital (“WACC”), which provides an expected rate of return based on the Company’s capital structure, the required yield on the Company’s equity, and the required yield on the interest-bearing debt of which there is currently none.
Management completed, with the assistance of a third party valuation firm, a quantitative assessment of in-process R&D as of August 31, 2023, the Company's annual impairment test date, which includes the following unobservable Level 3 inputs:
Valuation Technique Unobservable Inputs Input Discount Rate
KIO-101 Relief from Royalty Method Probability of success for next development phase 17% 30%
KIO-104 Multi-Period Excess Earnings Method Probability of success for next development phase
17% to 36%
 25%
KIO-201 Relief from Royalty Method Probability of success for next development phase
17% to 46%
 30%
KIO-301 Multi-Period Excess Earnings Method Probability of success for next development phase
17% to 67%
 25%