Quarterly report pursuant to Section 13 or 15(d)

Acquisition of Pelican Therapeutics

v3.10.0.1
Acquisition of Pelican Therapeutics
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Acquisition of Pelican Therapeutics

2. Acquisition of Pelican Therapeutics


On April 28, 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. Operations of Pelican are included in the consolidated statements of operations and comprehensive loss from the acquisition date. Pelican is a biotechnology company focused on the development and commercialization of monoclonal antibody and fusion protein-based therapies that are designed to activate the immune system. In exchange for 80% of the outstanding capital stock of Pelican on a fully diluted basis, the Company paid to the Pelican Stockholders that executed the Stock Purchase Agreement (the “Participating Pelican Stockholders”) an aggregate of $0.5 million minus certain liabilities (the “Cash Consideration”), and issued to the Participating Pelican Stockholders 133,106 shares of the Company’s restricted common stock representing 4.99% of the outstanding shares of our common stock on the date of the initial execution of the Purchase Agreement (the “Stock Consideration”). During the nine months ended September 30, 2018, the Cash Consideration of approximately $0.3 million was distributed to the Participating Pelican Stockholders and the remainder of approximately $0.2 million for certain Pelican liabilities not satisfied was recognized as other income in the Consolidated Statements of Operations and Comprehensive Loss.


Under the agreement, the Company is 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:


(1)

$2,000,000 upon Pelican’s dosing of the first patient in its first Phase 1 trial for an oncology indication;

(2)

$1,500,000 upon Pelican’s dosing of the first patient in its first Phase 2 trial for an oncology indication;

(3)

$3,000,000 upon successful outcome of the first Phase 2 trial for an oncology indication;

(4)

$6,000,000 upon Pelican’s dosing of the first patient in its first Phase 3 trial for an oncology indication;

(5)

$3,000,000 upon Pelican’s dosing of the first patient in its first Phase 3 trial for a non- oncology indication;

(6)

$7,500,000 upon successful outcome of the first Phase 3 trial for an oncology indication;

(7)

$3,000,000 upon successful outcome of the first Phase 3 trial for a non-oncology indication;

(8)

$7,500,000 upon acceptance of a Biologics License Application (BLA) submission for an oncology indication;

(9)

$3,000,000 upon acceptance of a BLA submission for a non-oncology indication;

(10)

$7,500,000 upon first product indication approval in the United States or Europe for an oncology indication;

(11)

$3,000,000 upon first product indication approval in the United States or Europe for a non-oncology indication.


The fair value of these future milestone payments is reflected in the contingent consideration account under long term liabilities on the balance sheet. The estimated fair value of the contingent consideration was determined using a probability-weighted income approach, at a discount of 5.51% based on the median yield of publicly traded non-investment grade debt of companies in the pharmaceutical industry. The Company performs an analysis on a quarterly basis and as of September 30, 2018, the Company determined the change in the estimated fair value of the contingent consideration was $665,936 for the nine months ended September 30, 2018.


The Company has recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with FASB ASC Topic 805: Business Combinations. The purchase price exceeded the fair value of the net assets acquired resulting in goodwill of approximately $2.2 million. The identifiable indefinite-lived intangible asset consists of in-process R&D of approximately $5.9 million. The estimated fair value of the IPR&D was determined using a probability-weighted income approach, which discounts expected future cash flows to present value. The projected cash flows were based on certain key assumptions, including estimates of future revenue and expenses, taking into account the stage of development of the technology at the acquisition date and the time and resources needed to complete development. The Company utilized corporate bond yield data observed in the bond market to develop the discount rate utilized in the cash flows that have been probability adjusted to reflect the risks of product commercialization, which the Company believes are appropriate and representative of market participant assumptions. Operations of the acquired entity are included in the consolidated statements of operations from the acquisition date. 


The purchase price has been allocated to the assets and liabilities as follows: 


Aggregate consideration:

 

 

 

Cash consideration

 

$

500,000

 

Stock consideration

 

$

1,052,000

 

Contingent consideration

 

$

2,385,000

 

Total Consideration

 

$

3,937,000

 

 

 

 

 

 

 

 

 

 

 

Purchase price allocation:

 

 

 

 

Cash acquired

 

$

31,199

 

In-process R&D

 

$

5,866,000

 

Goodwill

 

$

2,189,338

 

Deferred tax liability

 

$

(2,111,760

)

Net liabilities assumed

 

$

(1,102,777

)

Fair value of non-controlling interest

 

$

(935,000

)

Total purchase price

 

$

3,937,000

 


Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill resulting from this acquisition arises largely from synergies expected from combining the operations. The goodwill is not deductible for income tax purposes.


In-process R&D assets are treated as indefinite-lived until the completion or abandonment of the associated R&D program, at which time the appropriate useful lives will be determined.


The Company calculated the fair value of the non-controlling interest acquired in the acquisition as 20% of the equity interest of Pelican, adjusted for a minority interest discount.


In May 2016, Pelican was awarded a $15.2 million grant from CPRIT for development of Pelican’s lead product candidate, PTX-35. The CPRIT Grant is expected to allow Pelican to develop PTX-35 through a 70-patient Phase 1 clinical trial. The Phase 1 clinical trial will be designed to evaluate PTX-35 in combination with other immunotherapies. The CPRIT Grant is subject to customary CPRIT funding conditions including a matching funds requirement where Pelican will match $0.50 for every $1.00 from CPRIT. Consequently, Pelican is required to raise $7.6 million in matching funds over the three year project.


Pelican has contributed net revenue of $3.7 million and net loss of $2.2 million, respectively, which are included in the Company’s consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2018.


The following unaudited pro forma information presents the combined results of operations for the nine months ended September 30, 2017, as if the Company had completed the Pelican acquisition at the beginning of fiscal 2017. All expenses for Pelican have been included in the Company’s consolidated financials since the quarter ending September 30, 2017, therefore the nine months ended September 30, 2018 are not pro forma and the three months ended September 30, 2018 and 2017 are not applicable.  The pro forma financial information is provided for comparative purposes only for the nine months ended September 30, 2017 and is not necessarily indicative of what actual results would have been had the acquisition occurred on the date indicated, nor does it give effect to synergies, cost savings, fair market value adjustments, immaterial amortization expense and other changes expected to result from the acquisition. Accordingly, the pro forma financial results do not purport to be indicative of consolidated results of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period.


 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Revenue

 

$

3,735,713

 

 

$

906,313

 

Net loss

 

 

(11,463,927

)

 

 

(9,444,913

)

Net loss: Non-controlling interest

 

 

(668,219

)

 

 

(422,513

)

Net loss attributable to Heat Biologics, Inc.

 

$

(10,795,708

)

 

$

(9,022,400

)

 

  

 

 

 

 

 

 

  

Net loss per share attributable to Heat Biologics, Inc.—basic and diluted

 

$

(0.75

)

 

$

(2.65

)