Annual report pursuant to Section 13 and 15(d)

Merger with Private Molecular

v3.8.0.1
Merger with Private Molecular
12 Months Ended
Dec. 31, 2017
Business Combinations [Abstract]  
Merger with Private Molecular

NOTE 3— MERGER WITH PRIVATE MOLECULAR

On August 1, 2017, the Company, formerly known as Threshold, completed its business combination with Private Molecular, in accordance with the terms of the Merger Agreement, dated as of March 16, 2017, by and among Threshold, the Merger Sub, a wholly owned subsidiary of Threshold, and Private Molecular, pursuant to which Merger Sub merged with and into Private Molecular, with Private Molecular, surviving as a wholly-owned subsidiary of Threshold (the “Merger”). Immediately upon completion of the Merger, the former stockholders of Private Molecular stockholders held a majority of the voting interest of the combined company.

Also on August 1, 2017, in connection with, and prior to the completion of, the Merger, Threshold effected an 11-for-1 reverse stock split of its common stock (the “Reverse Stock Split”) and changed its name from Threshold Pharmaceuticals, Inc. to Molecular Templates, Inc. Under the terms of the Merger, at the effective time of the Merger, the Company issued shares of its common stock to Private Molecular stockholders, at an exchange ratio of 7.7844 shares of common stock (the “Exchange Ratio”), before taking into account the Reverse Stock Split, in exchange for each share of Private Molecular common stock outstanding immediately prior to the Merger.   Immediately following the closing of the Merger on August 1, 2017, the former Threshold stockholders owned approximately 34.4% of the aggregate number of shares of common stock of the Company and the former Private Molecular stockholders owned approximately 65.6% of the shares of common stock of the Company, subject to adjustments in accordance with the merger agreement.

All Private Molecular stock options granted under the 2009 Stock Plan (the “2009 Plan”) (whether or not then exercisable) outstanding prior to the effective time of the Merger were exchanged for options to purchase the Company’s common stock. All outstanding and unexercised Private Molecular stock options assumed by the Company may be exercised solely for shares of the Company’s common stock. The number of shares of the Company’s common stock subject to each Private Molecular stock option assumed by the Company was determined by multiplying (a) the number of shares of Private Molecular common stock that were subject to such Private Molecular stock option, as in effect immediately prior to the effective time of the merger by (b) the Exchange Ratio, then dividing by 11 (to account for the Reverse Stock Split); rounding the resulting number down to the nearest whole number of shares of the Company’s common stock. The per share exercise price for the Company’s common stock issuable upon exercise of each Private Molecular stock option assumed by the Company shall be determined by dividing (a) the per share exercise price of Private Molecular common stock subject to such Private Molecular stock option, as in effect immediately prior to the effective time of the merger, by (b) the Exchange Ratio, then multiplying by 11 (to account for the Reverse Stock Split); rounding the resulting exercise price up to the nearest whole cent. The exchange of the Private Molecular stock options for the Company’s stock options was treated as a modification of the awards.

Threshold equity awards issued and outstanding at the time of the Merger remain issued and outstanding. However, for accounting purposes, Threshold equity awards are assumed to have been exchanged for equity awards of Private Molecular, the accounting acquirer. As of August 1, 2017, Threshold had outstanding stock options to purchase 963,681 shares of common stock, of which all were vested and exercisable at a weighted average exercise price of $33.62 per share, after giving effect to the Reverse Stock Split. As all assumed options were fully vested at time of merger, no further stock based compensation expense will be recognized.

Allocation of Purchase Consideration

Pursuant to business combination accounting, the Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value with limited exceptions.

The purchase price for Threshold on August 1, 2017, the closing date of the Merger, was as follows (in thousands, except per share amounts):

 

 

 

August 1, 2017

 

 

Number of share of the combined company owned by Threshold stockholders

 

 

6,508

 

(1)

Multiplied by the price per share of Threshold common stock

 

$

5.94

 

(2)

Purchase price before options

 

$

38,658

 

 

Threshold options assumed

 

 

1,006

 

(3)

Settlement of preexisting bridge note with Threshold

 

 

(4,010

)

(4)

Total purchase price

 

$

35,654

 

 

 

1.

Represents the number of shares of common stock of the combined company that Threshold stockholders owned as of the closing of the Merger pursuant to the Merger Agreement. This amount is calculated as 6,508,356 shares from Threshold common stock outstanding as of August 1, 2017, adjusted for the 11-for-1 reverse stock split.

2.

The fair value of Threshold common stock used in determining the purchase price was $5.94, which was derived from the $0.54 per share closing price of Threshold on August 1, 2017, the current price at the time of closing, adjusted for the 11-for-1 reverse stock split.

3.

Because Private Molecular is considered to be the acquirer for accounting purposes, the pre-Merger vested stock options granted by Threshold under the 2014 Equity Incentive Plan are deemed to have been exchanged for equity awards of the Company and as such the portion of the acquisition date fair value of these equity awards attributable to pre-Merger service to Threshold were accounted for as a component of the consideration transferred.

4.

Represent the bridge loan at the date of merger between Threshold and Molecular. Since the receivable on Threshold’s balance sheet was settled as part of the merger, it is deemed to be a reduction in the purchase price.

Under the acquisition method of accounting, the total purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed of Threshold on the basis of their estimated fair values as of the transaction closing date on August 1, 2017.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed based on their fair values as of August 1, 2017 (in thousands):

 

 

 

August 1, 2017

 

Cash and cash equivalents

 

$

11,216

 

Prepaid expenses and other current assets

 

 

945

 

In-process research and development (IPR&D)

 

 

26,623

 

Accounts payable, accrued expenses

 

 

(2,009

)

Warrant liability

 

 

(1,121

)

Net assets acquired

 

$

35,654

 

 

The Company believes that the historical values of Threshold’s current assets and current liabilities approximate fair value based on the short-term nature of such items. The final allocation of the purchase price is dependent on the finalization of the valuation of the fair value of assets acquired and liabilities assumed and may differ from the amounts included in these financial statements. The Company expects to complete the final allocation as soon as practical but no later than one year from the acquisition date.

Correction of purchase price and allocation of purchase price

During the three months ended December 31, 2017, the Company corrected the purchase price as well as the allocation of the purchase price. In the September 30, 2017 financial statements, the Company originally recorded the settlement of the $4.0 million Threshold bridge loan as a reduction in additional paid-in capital and increase in goodwill.  This correction resulted in the elimination of previously recorded goodwill and a reduction in IPR&D of $677,000. The tables above reflect this correction.

In Process Research and Development

The Company used the risk adjusted discounted cash flow method to value the in-process research and development intangible asset.  Under the valuation method, the present value of future cash flows expected to be generated from the in-process research and development of the acquired product candidate, evofosfamide, was determined using a discount rate of 12%, and identified projected cash flows from evofosfamide were risk adjusted to take into consideration the probabilities of moving through the various clinical stages.  

Transaction Costs

Transaction costs associated with the Merger of approximately $2.0 million are included in general and administrative expense.

Threshold Promissory Note

On March 24, 2017, the Company received $2.0 million from Threshold in the form of a promissory note at an interest rate of 1% per annum. The Company received an additional $2.0 million on June 1, 2017. The note was settled as part of the Merger as a reduction to purchase consideration.

Share Based Awards

The exchange of Private Molecular stock options to purchase Threshold common stock, as renamed Molecular, was accounted for as a modification of the awards because the legal exchange of the awards is considered a modification of Private Molecular stock options.  The modification of the stock options did not result in any incremental compensation expense as the modification did not increase the fair value of the stock options. Options to purchase 963,681 shares of common stock were assumed as a result of the merger.  As all assumed options were vested at the time of the merger, no additional stock based compensation will be recognized related to these assumed options.  

Additionally, pursuant to the terms of the Merger Agreement, participants in the 2014 Equity Incentive Plan received accelerated vesting for all or a portion of their pre-merger awards as well as a modification of the exercise period. The Company recorded $1.2 million in stock compensation associated with the transaction. See Note 13, Equity Incentive Plans and Stock Based Compensation, for further details about stock based compensation recorded.

Pro Forma Results in connection with the Merger

The Company’s operating results include $320,000 of operating expenses attributable to the former Threshold business activities for the period of August 1, 2017 to December 31, 2017.

The unaudited financial information in the following table summarizes the combined results of operations of the Company and Threshold, on a pro forma basis, as if the Merger occurred at the beginning of the periods presented (in thousands, except per share data).

 

 

 

Unaudited

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

Revenue

 

$

6,395

 

 

$

1,880

 

Net loss

 

$

(15,599

)

 

$

(35,008

)

 

The above unaudited pro forma information was determined based on historical GAAP results of Molecular and Threshold. The unaudited pro forma combined results do not necessarily reflect what the Company’s combined results of operations would have been, if the acquisition was completed on January 1, 2016. The unaudited pro forma combined net loss includes pro forma adjustments primarily related to the following non-recurring items directly attributable to the business combinations:

 

Elimination of combined transaction costs of $5.4 million for the year ended December 31, 2017. No such costs were incurred in 2016.

 

Elimination of the loss on conversion of notes of $4.6 million for the year ended December 31, 2017. No such loss was incurred in 2016.

 

Elimination of stock-based compensation expenses of $1.2 million related to the acceleration of vesting and modification of post-termination exercise periods of Threshold stock options awards in connection with the Merger for the year ended December 31, 2017. No such costs were incurred in 2016.

 

Elimination of severance payments of $2.9 million related to former Threshold executives, in connection with the Merger for the year ended December 31, 2017. No such costs were incurred in 2016.

 

Elimination of interest expense of $0.3 million and $0.2 million for the years ended December 31, 2017 and 2016, respectively, related to the Threshold bridge loan to Private Molecular that was paid down with the Merger.

 

Elimination of the change in the fair value of the Threshold warrant liabilities of $0.1 million and $0.1 million of loss for the years ended December 31, 2017 and 2016, respectively.