Acquisitions

9 Months Ended

Sep. 30, 2023

Acquisitions

Acquisitions

3. Acquisitions

Pelican Therapeutics

In 2017, the Company consummated the acquisition of 80% of the outstanding equity of Pelican, a related party, and Pelican became a majority owned subsidiary of the Company. During the quarter ended March 31, 2018, cash consideration of approximately $300,000 was distributed to the participating Pelican stockholders and the remainder of approximately $200,000 for certain Pelican liabilities not satisfied was recognized as other income in the statements of operations and comprehensive loss for the period. In October 2018, the Company entered into an agreement with the University of Miami (“UM”) whereby UM exchanged its shares of stock in the Company’s subsidiaries, Heat I, Inc. and Pelican. The stock exchange resulted in the Company increasing its controlling ownership in Pelican from 80% to 85%.

Under the agreement, the Company was also obligated to make future payments based on the achievement of certain clinical and commercialization milestones, as well as low single digit royalty payments and payments upon receipt of sublicensing income. However, due to the discontinuation of PTX-35 no future milestone payments are expected to be made. The goodwill and in-process R&D resulting from the acquisition were fully impaired as of December 31, 2022.

Elusys Therapeutics

On April 18, 2022 (“Closing Date”), the Company closed on the acquisition of Elusys. The Company paid at the closing a cash upfront payment of $3,000,000 to the former owners (“Sellers”) of Elusys. The Company was obligated to pay the Sellers $2,000,000 of deferred cash consideration (“Merger Consideration”) at the same time that the payment of the receivable consideration was to be distributed to the Sellers as described below, which was paid in the second quarter of 2022. Earn out payments will be paid to the Sellers for a period of 12 years from the date of the closing equal to 10% of the gross dollar amount of payments received during each one year period during such twelve year period with respect to any sale, license or commercialization anywhere in the world of ANTHIM® that either: (a) occurs during the first nine

years after the Closing Date in any respect; or (b) occurs thereafter pursuant to any contract, agreement, commitment or order that is placed, granted, awarded, or entered into during the first nine years after the Closing Date.

Per the merger agreement that was executed in connection with the acquisition of Elusys (the “Merger Agreement”), upon collection of the Elusys contract receivables of $24.5 million, The Company is obligated to remit payment of $22.3 million (the “Receivable Consideration”) to the Sellers. In April 2022, $20.8 million was remitted to the Sellers less a hold back of $1.5 million related to future fulfillment cost. Elusys is expected to receive additional revenue from the future fulfillment of an existing U.S. Government contract, and the Company agreed to fulfill the future obligations of Elusys under such contract and pass through and distribute to the Sellers the payments received under such contract minus the costs associated with such fulfillment obligations, subject to certain adjustments to the Merger Consideration specified in the Merger Agreement, including income taxes payable with respect to such payments (the “Contract Deferred Consideration”). The Merger Agreement further provides that 80% of any amounts paid to and received by Elusys (the “Additional Earn Out”) after the Closing Date and prior to June 30, 2023, shall be paid to the Sellers, subject to certain adjustments specified in the Merger Agreement.

The Company acquired Elusys to expand its role in the biodefense space, complementing its focus to target emerging biological threats. The Company initially expected to leverage the capabilities of its Scorpius biomanufacturing facility in Manhattan, Kansas, to manufacture Elusys’s therapies internally and therefore benefit from significant operating synergies, cost savings, as well as enhanced oversight, quality control, and speed to market.  However, the Company is unable to manufacture the Elusys’ therapies internally.  In addition, the Company has been unable to generate sufficient revenue from its current manufacturing facility or raise sufficient capital to enable it to build the biomanufacturing facility in Manhattan, Kansas and instead has been required to place contract with third parties for the manufacture of the Elusys’ therapies. See Note 15-Commitments and Contingencies.

The fair value of the purchase consideration was approximately $42.9 million. The purchase consideration consists of $3.0 million in cash and $2.0 million in deferred cash consideration, and the estimated fair value of the contingent and deferred consideration liabilities related to the receivable consideration, contract deferred consideration, earn out and additional earn out totaling $37.9 million. The valuation of the contract deferred consideration and earn out liabilities were valued using a discounted cash flow analysis that utilized discount rates of 24% and 14%, respectively. The value of the additional earn out liability was calculated as 80% of the estimated gross sales price of 1,500 pre-filled vials of ANTHIM®, less estimated fulfillment costs to be incurred. The value of the receivable consideration was equal to the value of the contract receivables acquired, less holdback expenses, as this liability was settled within 30 days of the Closing Date.

The acquisition of Elusys was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805, Business Combinations. The acquired Elusys’ assets, including identifiable intangible assets and liabilities assumed, have been recorded at their fair values with the excess purchase price assigned to goodwill. The recognition of goodwill is largely attributed to the value paid for Elusys’ capabilities, which will broaden NightHawk’s role in the biodefense space. The goodwill recorded for this transaction is valued at $3.9 million and will be deductible for tax purposes over 15 years.

The purchase price of $42.9 million has been allocated to the underlying assets and liabilities based on their fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill:

Aggregate consideration:
Cash consideration	$	3,000,000
Deferred cash consideration		2,000,000
Earn out		5,900,000
Additional earn out		4,735,000
Receivable consideration		22,318,685
Contract deferred consideration		4,900,000
Total purchase consideration	$	42,853,685

The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed as of the closing date based on their respective fair values summarized below:

Purchase price allocation:
Cash and cash equivalents	$	5,719,899
Contract receivables		24,526,232
Prepaid expenses and other current assets		1,818,278
Inventory		5,844,000
Intangible asset – definite-lived (Note 7)		9,700,000
Property and equipment		50,224
Operating lease right of use assets		352,906
Other assets		1,329,153
Total assets acquired		49,340,692
Accounts payable		(204,794)
Accrued expenses and other current liabilities		(5,155,363)
Operating lease obligations		(352,906)
Deferred income tax liability		(3,644,120)
Other liabilities		(1,002,904)
Total liabilities assumed		(10,360,087)
Net assets acquired and liabilities assumed		38,980,605
Goodwill		3,873,080
Total purchase consideration	$	42,853,685

From the Elusys acquisition date through September 30, 2022, $6.0 million of total revenue and a net loss before income taxes of $2.7 million associated with Elusys operations are included discontinued operations in the condensed consolidated statements of operations and comprehensive loss for the three months ended September 30, 2022. $6.0 million of total revenue and a net loss before income taxes of $3.9 million associated with Elusys operations are included discontinued operations in the condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2022.

The following unaudited pro forma financial information assumes the companies were combined as of January 1, 2021. The unaudited pro forma financial information as presented below is for informational purposes only and is based on estimates and assumptions that have been made solely for purposes of developing such pro forma information. This is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2021, nor is it necessarily indicative of future results. Consequently, actual results could differ materially from the unaudited pro forma financial information presented below. The following table presents the pro forma operating results as if Elusys had been included in the Company’s Consolidated Statements of Operations and Comprehensive Loss as of January 1, 2021 (unaudited):

	Three months ended		Nine months ended
	September 30,		September 30,
	2022		2022
	(unaudited)		(unaudited)
Revenue	$	29,347,513	$	29,892,585
Net loss	$	(1,296,510)	$	(21,282,125)
Net income (loss) per share, basic and diluted	$	(0.05)	$	(0.83)