Merger Accounting

12 Months Ended

Dec. 31, 2022

16. Merger Accounting

On April 1, 2021, the Company, acquired Zikani (the "Zikani Merger"), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”). Under the terms of the Merger Agreement, the Company issued 189,920 shares of common stock, $0.01 par value per share (“Eloxx Common Stock”), in exchange for all of the issued and outstanding equity interests of Zikani (the “Merger Consideration”). In addition, the Company issued 11,054 restricted stock units under the Eloxx Pharmaceuticals, Inc. 2018 Equity Incentive Plan (the “Equity Plan”) to certain employees of Zikani in respect of each individual’s prospective service as an employee, officer, consultant or director of the Company.

The Company has been determined to be the acquiring company for accounting purposes and has concluded the merger represents an asset acquisition by the Company of Zikani. To determine the accounting for this transaction under U.S. GAAP, a company must assess whether an integrated set of assets and activities will be accounted for as an acquisition of a business or an asset acquisition. The guidance requires an initial screen test to determine if substantially all of the relative fair value of the gross assets acquired is concentrated in a single asset or group of similar non-financial assets. If that screen is met, the set is not a business. In connection with the Zikani Merger, substantially all of the consideration paid is allocable to the fair value of acquired in-process research and development (“IPR&D”) and, as such, the acquisition is treated as an asset acquisition. Zikani’s assets and liabilities have been initially recognized by allocating the accumulated cost of the acquisition based on their relative fair values, as estimated in good faith by management. The net assets acquired as of the transaction date has been combined with the assets, liabilities, and results of operations of the Company on consummation of the Merger. In accordance with ASC 730, Research and Development, the portion of the Merger Consideration allocated to the acquired IPR&D based on its relative fair value is included as an operating expense as there is no alternative future use.

The total consideration for the Merger is as follows (in thousands, except per share data):


Number of shares of Eloxx common stock issued to Zikani stockholders (1)					190
Actual closing price per share of Company common stock as reported on the Nasdaq Global Market on April 1, 2021	$	134.40
Adjusted for a discount for lack of marketability (“DLOM”) (1)		87.5	%	$	117.60
Fair value of common stock consideration					22,335
Transaction costs					1,003
Total purchase price				$	23,338

(1)

The shares of common stock issued as merger consideration are unregistered and subject to trading restriction under Rule 144. The Company estimated the DLOM based on consideration of multiple valuation methods. A DLOM is applied to the Company’s quoted common stock price to estimate the value of Eloxx common stock issued on a minority, non-marketable basis. The Eloxx Common Stock issued was offered and sold in transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(a)(2) thereof and Regulation D thereunder.

The following table summarizes the allocation of the cost of the acquisition to the respective assets acquired and liabilities assumed, based on their relative fair values.


Cash and cash equivalents	$	1,954
Restricted cash		191
Prepaid expenses and other current assets		296
Operating lease right-of-use asset		1,810
Property and equipment (2)		192
Intangible assets (3)		467
Total Assets		4,910

Accounts payable		1,219
Accrued expenses		748
Current portion of operating lease liability		588
Operating lease liability		1,222
Total liabilities		3,777

Net assets acquired		1,133
In process research and development acquired (4)		22,205
Purchase price		23,338

(2)

Zikani’s property and equipment consists principally of laboratory and computer equipment, furniture and fixtures and leasehold improvements.

(3)

Employee-related intangible assets relate to Zikani’s assembled workforce acquired in the Zikani Merger.

(4)

IPR&D represents the allocated consideration based on the estimated fair value of Zikani’s IPR&D. In accordance with ASC 730, Research and Development, the fair value of IPR&D acquired in an asset acquisition with no alternative future use be allocated a portion of the consideration transferred and charged to expense at the acquisition date.

In addition, the Company incurred and expensed costs directly related to the Zikani Merger totaling approximately $1.0 million during the year ended December 31, 2021, included in general and administrative expenses in the consolidated statement of operations.

Since the closing date of the Zikani Merger, the results of Zikani’s operations have been included in the Company’s consolidated financial statements.