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Takeda Asset Purchase and Stock Purchase Agreements
12 Months Ended
Dec. 31, 2022
Business Combinations [Abstract]  
Takeda Asset Purchase and Stock Purchase Agreements

6. Takeda Asset Purchase and Stock Purchase Agreements

Takeda Asset Purchase Agreement

On October 18, 2021, the Company entered into an Asset Purchase Agreement, or APA, with Millennium Pharmaceuticals, Inc. or Millennium, a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, or Takeda, pursuant to which the Company acquired and licensed from Millennium certain technology, intellectual property and other assets related to Takeda’s small molecule programs sapanisertib (CB-228, formerly known as TAK-228) and mivavotinib (CB-659, formerly known as TAK-659), or the Takeda Programs.

Under the APA, Millennium assigned or caused to be assigned to the Company certain patents and know-how solely related to the Takeda Programs and necessary for the exploitation of products containing the CB-228 and CB-659 compounds, as well as specified regulatory materials, agreements, materials and inventory related to the Takeda Programs. Takeda also granted to the Company a license under certain other intellectual property necessary for the exploitation of such products. The Company granted to Millennium a license under the intellectual property assigned by Takeda to the Company (including intellectual property controlled by the Company via the assigned contracts) in order for Millennium to perform its obligations under the APA, ancillary agreements executed in connection with the APA and other retained agreements and for Millennium’s internal research use.

The Company must use commercially reasonable efforts to develop and commercialize at least one CB-228 product and one CB-659 product in each of the United States, Japan and certain European countries.

Pursuant to the APA, in October 2021, the Company paid Millennium an upfront payment of $10.0 million in cash and issued to Millennium 1,000,000 shares of its Series A convertible preferred stock as referenced below. In determining the total purchase consideration paid to Millennium, the Series A convertible preferred stock shares were classified as level 3 in the valuation hierarchy due to the presence of significant unobservable inputs, and were valued upon issuance at $40.9 million using the Black-Scholes option-pricing model and the following assumptions:

 

 

Description

Credit spread

12.4%

Allowance for counterparty credit risk of the Company given the liquidation preference and obligation to issue more shares as the stock price decreases

Expected term

0.7 years

Weighted average remaining term, as determined upon issuance date

Volatility

55%

Based on the Company's trading history for its common stock over the estimated term to the Mandatory Pricing Date (as defined below)

Risk-free interest rate

0.08%

Based on the U.S. constant maturity treasury yield curve at the time of issuance over the expected term

Common stock price

$40.80

The Company's closing common stock price on October 15, 2021 (as adjusted for the Reverse Stock Split)

The estimated probability and timing of a Qualified Financing (as defined below) were also evaluated at the time of issuance to determine the estimated weighted-average expected term and the fair value of the Series A preferred stock.

Total consideration transferred was $50.9 million and was comprised of the $10 million cash payment and the estimated fair value of the shares of the Company’s Series A convertible preferred stock of $40.9 million. The Company recorded a charge of $50.9 million related to the assets acquired to “research and development related to asset acquisition” in the consolidated statements of operations as the assets acquired had no alternative future use at the time of the acquisition. There were no material direct transaction costs related to the transaction.

The Company will make tiered earn-out payments of high single-digits to low teens on net sales of CB-228 products and CB-659 products, subject to certain customary reductions. Millennium will be eligible to receive up to an aggregate of $470.0 million in clinical development, regulatory and sales milestone payments across both Takeda Programs.

The term of the APA will continue until the expiration of the Company's obligations to make earn-out payments, unless earlier terminated. Either party may terminate the APA in the event of an uncured material breach of the other party or in the case of insolvency of the other party.

Preferred Stock Purchase Agreement

On October 18, 2021, in accordance with the APA, the Company entered into a Preferred Stock Purchase Agreement, or the Purchase Agreement, with Millennium, pursuant to which it agreed to issue 1,000,000 shares of its Series A preferred stock. Each share of Series A preferred stock was initially convertible at the option of the holder into approximately 857,843 shares of common stock, based on the Company’s $40.80 per share closing stock price on October 15, 2021. The conversion rate of the Series A preferred stock is subject to anti-dilution adjustments that if triggered would result in the issuance of additional shares of common stock upon conversion.

On May 23, 2022, the Company filed a Certificate of Amendment to its Certificate of Designations of Preferences, Rights and Limitations of the Series A preferred stock, or the Certificate of Amendment, that limits the aggregate number of shares of common stock to be issued upon conversion of the Series A preferred stock to a maximum of 6,644,014 shares of common stock.

On June 1, 2022, at the annual meeting of stockholders, stockholders approved the issuance of more than 20% of the Company's issued and outstanding common stock related to the conversion of the Series A preferred stock.

 

On July 1, 2022, Millennium transferred their ownership interest in the Series A preferred stock to Takeda Ventures, Inc., a wholly-owned subsidiary of Takeda Pharmaceuticals Company Limited. The holder of the Series A preferred stock has the following rights, preferences and privileges:

Voting Rights

The holder of Series A preferred stock is entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A preferred stock are convertible on any matter presented to the stockholders of the Company or at any meeting of stockholders, subject to certain beneficial ownership limitations.

Additionally, certain matters require the approval of the Series A preferred stock, voting as a separate class, including to (i) amend the Company’s organizational documents in a way that has an adverse effect on the Series A preferred stock, (ii) create or authorize the creation of any new security, or reclassify or amend any existing security, of the Company that are senior to, or equal in priority with, the Series A preferred stock, including any shares of Series A preferred stock, with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption or (iii) purchase or redeem, or pay or declare, any dividend or make any distribution on, any shares of capital stock of the Company, subject to certain exceptions.

Mandatory Conversion

The Series A preferred stock will automatically convert, subject to certain beneficial ownership limitations, on the earlier of (i) the 18-month anniversary of the date of issuance, or the Mandatory Pricing Date, into 857,843 shares of common stock, subject to adjustment into additional shares of common stock if the volume weighted-average price of common stock on the thirty (30) trading days prior to the Mandatory Pricing Date is lower than $40.80 and (ii) a qualified financing that results in net proceeds to the Company of at least $40 million, excluding the conversion of the Series A preferred stock into 857,843 shares of common stock, or a Qualified Financing, subject to adjustment into additional shares of common stock if the weighted-average price paid by investors in the Qualified Financing is lower than $40.80 per share.

Optional Conversion

The Series A preferred stock is convertible, subject to certain beneficial ownership limitations, at the option of the holder thereof, at any time prior to the Mandatory Pricing Date or a Qualified Financing into 857,843 shares of common stock, subject to adjustment into additional shares of common stock if the volume weighted-average sales price per share of certain shares of common stock sold from the issuance date of the Series A preferred stock through the date of the election to convert is lower than $40.80 per share.

Dividends

The Series A preferred stock will be entitled to dividends or distributions on shares of Series A preferred stock equal to and in the same form as dividends or distributions actually paid on shares of the common stock when, as and if such dividends or distributions are paid. No dividends had been declared by the Board of Directors as of December 31, 2022.

Liquidation Preference

The Series A preferred stock will have preference over the common stock with respect to distribution of assets or available proceeds, as applicable, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or any other deemed liquidation event, and will be entitled to a liquidation preference equal to the greater of the original issuance price of the Series A preferred stock and the payment such holder would have received had the Series A preferred stock been converted into shares of common stock immediately prior to such liquidation event.

Redemption Rights

The holders of the Series A preferred stock have no redemption rights. However, prior to June 1, 2022, if the Company was unable to obtain stockholder approval, and as a result the Series A preferred stockholders were unable to convert all the shares into common stock, then the parties would have promptly negotiated in good faith the timing and amount per share to be paid to compensate the holder for such inability, or a Redemption Event; provided, however that the Company would not have been required to make any cash redemption payment until at least three years after the issuance date of the Series A preferred stock without the Company’s consent. On June 1, 2022, at the annual meeting of stockholders, the Company obtained stockholder approval.

At issuance, the Company has recorded the Series A preferred stock at an estimated fair value at the time of issuance of $40.9 million, net of issuance costs of approximately $0.2 million. The Company also classified the Series A preferred stock as temporary equity due to the uncertainty of having sufficient authorized common stock reserved for issuance to cover the potential conversion of the Series A preferred stock into common stock if any of the conversion features (optional or automatic) are triggered.

Prior to June 1, 2022, if the Company did not receive the stockholder approval, then the Company may be required to compensate the holder, upon occurrence of a Redemption Event. At the end of each reporting period, the Company adjusted the Series A preferred stock carrying value to the greater of the issuance date fair value of $40.9 million or the current redemption amount in accordance with ASC 480-10-S99-3A, Distinguishing Liabilities from Equity.

On May 23, 2022, upon Millennium's consent, the Company filed the Certificate of Amendment that limits the aggregate number of shares of common stock to be issued upon conversion of the Series A preferred stock to a maximum of 6,644,014 shares of common stock. The Company accounted for the amendment as an extinguishment of the existing Series A preferred stock due to the significance of the change in the conversion feature. The Company estimated the fair value of the new Series A preferred stock to be $22.3 million on the date of issuance and classified the new Series A preferred stock as stockholders' equity. The difference of $18.4 million between the carrying value of the existing Series A preferred stock and the estimated fair value of the new Series A preferred stock was recorded as an adjustment to accumulated deficit as a deemed contribution.

The new Series A preferred stock was recorded at $22.3 million and was classified as level 3 in the valuation hierarchy due to the presence of significant unobservable inputs. The new Series A preferred stock was valued at the time of the amendment using the Black-Scholes options-pricing model and the following key assumptions:

 

 

 

Description

Credit spread

22.4%

Allowance for counterparty credit risk of the Company given the liquidation preference and obligation to issue more shares as the stock price decreases

Expected term

0.9 years

Weighted average remaining term, as determined upon the amendment date

Volatility

55%

Blended volatility

Risk-free interest rate

1.95%

Based on the U.S. constant maturity treasury yield curve at the time of the amendment over the expected term

Common stock price

$4.44

The Company's closing common stock price on May 23, 2022 (as adjusted for the Reverse Stock Split)

In addition, the Company considered the estimated probability and timing of a Qualified Financing in determining the weighted-average expected term and the estimated fair value of the new Series A preferred stock.