Acquisition of Zogenix International Limited

12 Months Ended

Dec. 31, 2015

Business Combinations [Abstract]

Acquisition of Zogenix International Limited

Acquisition of Zogenix International Limited

On October 24, 2014, Zogenix Europe Limited (Zogenix Europe), a wholly-owned subsidiary of the Company, acquired all the capital stock of Zogenix International Limited, a privately-held company organized under the laws of England and Wales. Zogenix International Limited owned worldwide development and commercialization rights to ZX008, low-dose fenfluramine, for the treatment of Dravet syndrome. The Company paid consideration of $20,000,000 in cash (plus $8,718,000 which represented the net cash position of Zogenix International Limited at the closing), of which $2,000,000 was deposited into escrow to fund potential indemnification claims for a period of six months, and 11,995,202 shares of the Company’s common stock, plus potential cash payments of up to $95,000,000 based on the achievement of certain milestones. The escrow fund was included in the aggregate consideration and was released to the sellers in April 2015.

The aggregate purchase price was determined to be $88,234,000, including the cash paid of $20,000,000, market value of the 11,995,202 shares of the Company's common stock of $15,234,000 and fair value of the contingent purchase consideration for milestones of $53,000,000. The Company has agreed to use commercially reasonable efforts to develop and commercialize ZX008 and to achieve the milestones. For the year ended December 31, 2014, transaction costs of $300,000 were expensed as incurred in selling, general and administrative expense.

An initial liability of $53,000,000 was recorded for an estimate of the acquisition date fair value of the contingent purchase consideration. Subsequent changes in the fair value of the contingent purchase consideration are recognized in operating expenses within the consolidated statements of operations. The Company recorded a change in fair value of the contingent purchase consideration of $(2,000,000) due primarily to changes in estimated milestone payment dates for the year ended December 31, 2015. There was no change in fair value of the contingent purchase consideration liability for the year ended December 31, 2014.

As of December 31, 2014, the allocation of the purchase price to the assets acquired and liabilities assumed on the acquisition date was as follows (in thousands):

Cash and cash equivalents	$	74
Prepaid expenses and other current assets	34
Property and equipment	4
Intangible assets	102,500
Goodwill	6,234
Accounts payable	(112		)
Deferred tax liability	(20,500		)
Total purchase price	$	88,234

Intangible assets represent IPR&D acquired related to ZX008. The in-process research and development currently has an indefinite life and is tested for potential impairment at least annually or whenever indicators of potential impairment are present. When appropriate, the IPR&D will be assigned a useful life and amortized over the estimated period of its future economic benefit, or impaired if the technology is abandoned and is not able to be used for another purpose. The fair value of the developed technology and trade name was estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The estimated fair value was developed by discounting future net cash flows to their present value at market-based rates of return.

The excess of the fair value of the total consideration over the estimated fair value of the net assets acquired was recorded as goodwill, which was primarily attributable to expected benefit derived from utilizing the Company's established research and development infrastructure. There was no change in balance of goodwill recorded for the years ended December 31, 2015 and 2014. The goodwill recognized is not deductible for income tax purposes.