(5) Business Acquisition

On June 29, 2023 ("Effective Date"), the Company acquired TeraImmune, Inc., in accordance with the terms of the Agreement and Plan of Merger (the “Merger Agreement”). Under the terms of the Merger Agreement, at the closing of the Acquisition the Company issued to the common stockholders of TeraImmune (the “Target Stockholders”) an aggregate of 1,212,185 shares of common stock of Baudax Bio and 27,089.719 shares of Series X Preferred Stock, each share of which is convertible into 1,000 shares of common stock (subject to certain conditions as described below), of which 314,282 of common stock and 7,024 of preferred stock are classified as escrow shares at Closing. Under the terms of the Merger Agreement, all options to purchase or acquire shares of TeraImmune held by continuing employees (as defined in the Merger Agreement) were assumed by the Company and converted into options to purchase shares of common stock and Series X Preferred Stock on the same terms and conditions as applied to such options and restricted stock awards immediately prior to the Acquisition. Following the closing of the Acquisition, the Company had 6,961,867 shares of common stock issued and outstanding.

Pursuant to the Merger Agreement, the Company held a special meeting of shareholders (the “Special Meeting”) to submit (i) the approval of the conversion of the Series X Preferred Stock into shares of common stock in accordance with Nasdaq Listing Rule 5635(a) and (ii) the approval to effect a reverse stock split of all of the Company’s issued and outstanding shares of common stock, among other matters, to its shareholders for their consideration. The special meeting was held on October 12, 2023 and shareholders approved both the conversion of the Series X Preferred Stock into shares of common stock in accordance with Nasdaq Listing Rule 5635(a) and the reverse stock split of all of the Company’s issued and outstanding shares of common stock, among other matters.

The Company incurred transaction costs of $575 for the three and nine months ended September 30, 2023, which are included in the Company’s condensed consolidated statement of operations.

The transaction was accounted for under the acquisition method of accounting with Baudax Bio as the acquirer under the guidance of ASC 810-10, "Consolidation". Under the acquisition method, the total purchase price of the acquisition is allocated to the net identifiable tangible and intangible assets acquired and liabilities assumed based on the fair values as of the date of such acquisition. The preliminary fair value of the consideration totaled approximately $9,702, summarized as follows:

The Series X Preferred Shares are measured at fair value by taking the common stock equivalents at the Company's closing stock price on the Effective Date and discounting the value by 15% for a lack of marketability.

The Company recorded the assets acquired and liabilities assumed as of the date of the Acquisition based on the information available at that date. The following table presents the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the Acquisition date:

The above allocation of the purchase price is based upon certain preliminary valuations and other analyses that have not been completed as of the date of this filing. Any changes in the estimated fair values of the net assets recorded for this business combination upon the finalization of more detailed analyses of the facts and circumstances that existed at the date of the transaction will change the allocation of the purchase price. As such, the purchase price allocations for the acquisition are preliminary estimates, which are subject to change within the measurement period.

The Company determined the estimated fair values for the IPR&D assets as of the Acquisition Date using the income approach. This is a valuation technique that provides an estimate of fair value of the asset, based on the market participant's expectations of the cash flows that the asset are forecasted to generate. The cash flows were discounted at a rate commensurate with the level of risk associated with its projected cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value.

The fair value of IPR&D was capitalized as of the Acquisition date and accounted for as indefinite-lived intangible assets until completion or disposition of the assets or abandonment of the associated research and development efforts. Upon successful completion of the development efforts, the useful lives of the IPR&D assets will be determined based on the anticipated period of regulatory exclusivity and will be amortized within operating expenses. Until that time, the IPR&D assets will be subject to impairment testing and will not be amortized. The goodwill recorded related to the Acquisition is the excess of the fair value of the consideration transferred by the acquirer over the fair value of the net identifiable assets acquired and liabilities assumed at the date of such acquisition. The goodwill recorded is not deductible for tax purposes.

The Convertible bond payable with an outstanding balance and accrued interest of $1,239 (see note 11) and the shares held by an investor in TIT were not converted into Baudax Bio shares upon the closing of the Merger (collectively “Unconverted Securities”). The Unconverted Shares are convertible into the Escrow Shares of 314,282 common shares and 7,024 preferred shares and are not included in issued and outstanding shares. Based on the Merger Agreement, if the Escrow Shares remain undistributed twelve months from the Closing Date (“Escrow End Date”), these Escrow Shares will be distributed on a pro rata basis to the holders of TeraImmune common stock as of immediately prior to the Merger. The Company accounts for the Escrows Shares and the potential distribution to the TeraImmune common stockholders as contingent consideration. The contingent consideration is liability classified at the time of acquisition and again as of September 30, 2023, as the underlying securities to be issued are substantially comprised of the Company’s Series X Preferred Stock. Contingent consideration is recorded at its estimated fair value at each reporting period using a probability weighted method using management’s estimates, level 3 observable inputs, and the likelihood of 3% and 5% for the TIT investor and bondholder, respectively, that the Escrow Shares will not be issued to the holders of the Unconverted Securities on or prior to the Escrow End Date. Changes in fair value of contingent consideration are recorded within the accompanying consolidated statements of operations.

The derivative instrument represents the obligation of the Company to issue shares of its Series X Preferred Stock and common stock, at the option of the investor in TIT. The derivative liability is recorded at its estimated fair value at each reporting period using a probability weighted method using management’s estimates and are level 3 observable inputs. Changes in fair value of derivative liability are recorded within the accompanying consolidated statements of operations.

Pro Forma Financial Information

Nonrecurring pro forma transaction costs directly attributable to the Acquisition were $575 for the three and nine months ended September 30, 2023 and have been deducted from the net loss presented above.