(17) KOLLTAN ACQUISITION

In connection with the Kolltan Acquisition, effective November 29, 2016, the Company issued 18,257,996 shares of common stock of the Company in exchange for all of the share and debt interests in Kolltan. Following closing, certain officers of Kolltan will receive an aggregate of 437,901 shares of Celldex's common stock in lieu of cash severance obligations, less tax withholdings. In December 2016, the Company issued 111,111 shares of Celldex's common stock as partial payment of this obligation. In addition, in the event that certain specified preclinical and clinical development milestones related to Kolltan's development programs and/or Celldex's development programs and certain commercial milestones related to Kolltan's drug candidates are achieved, Celldex will be required to pay Kolltan's stockholders milestone payments of up to $172.5 million, which milestone payments may be made, at Celldex's sole election, in cash, in shares of Celldex's common stock or a combination of both, subject to NASDAQ listing requirements and provisions of the Merger Agreement.

The Company acquired Kolltan to gain access to Kolltan's programs including: (i) CLDX-0158 (formerly KTN0158) which is currently in a Phase 1 dose escalation study in patient with refractory gastrointestinal stromal tumors (GIST); (ii) CLDX-3379 (formerly KTN3379) which recently completed a Phase 1b study with combination cohorts where meaningful responses and stable disease were observed in cetuximab (Erbitux®) refractory patients in patients with head and neck squamous cell carcinoma and in BRAF-mutant non-small cell lung cancer (NSCLC); and (iii) a multi-faceted TAM program, a broad antibody discovery effort underway to generate antibodies that modulate the TAM family of RTKs, comprised of Tyro3, AXL and MerTK, which are expressed on tumor-infiltrating macrophages, dendritic cells and some tumors.

The transaction is being accounted for as a business combination with Celldex treated as the accounting acquirer. All of the assets acquired and liabilities assumed in the transaction are recognized at their acquisition-date fair values, while transaction costs associated with the transaction are expensed as incurred.

Purchase Price

The purchase price for Kolltan is based on the acquisition-date fair value of the consideration transferred, which was calculated based on the closing price of the Company's common stock of $4.02 per share on November 29, 2016. The acquisition-date fair value of the consideration transferred consisted of the following (in thousands):

Fair value of common stock issued for upfront payment	$	73,397
Fair value of contingent consideration		44,200
Kolltan transaction expenses paid in cash by the Company		3,768

Total consideration transferred	$	121,365

The contingent consideration relates to the achievement of certain regulatory and sales milestones as described in the agreement. The estimate of fair value of contingent consideration was $44.2 million at the acquisition date and at December 31, 2016, which was recorded as a noncurrent liability. The Company determined the fair value of these obligations to pay additional milestone payments using various estimates, including probabilities of success, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a cost of debt rate ranging from 10-11% for the milestones. The range of estimated milestone payments is from zero, if no milestones are achieved, to $172.5 million if all milestones are met.

In the future, if the estimate of the fair value of the contingent consideration changes, the changes in fair value will be recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to the passage of time as development work progresses towards the achievement of the milestones.

Allocations of Assets and Liabilities

The Company has allocated the consideration transferred for Kolltan to net tangible assets, intangible assets, and goodwill. The difference between the aggregate consideration transferred and the fair value of assets acquired and liabilities assumed was allocated to goodwill. This goodwill relates to the potential synergies from the Kolltan Acquisition and a deferred tax liability related to acquired IPR&D intangible assets. None of the goodwill is expected to be deductible for income tax purposes. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Cash and cash equivalents	$	8,160
Other current and long-term assets		799
Property and Equipment, Net		2,072
In-process research and development (IPR&D)		61,690
Goodwill		82,011
Deferred tax liabilities, net		(23,393	)
Other assumed liabilities		(9,974	)

Total	$	121,365

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the acquired assets and liabilities. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the acquisition date.

The estimated fair value attributed to IPR&D intangible assets represents an estimate of the fair value of purchased in-process technology for Kolltan's research programs that, as of November 29, 2016, had not reached technological feasibility and have no alternative future use. Only those research programs that had advanced to a stage of development where the Company believed reasonable net future cash flow forecasts could be prepared and a reasonable likelihood of technical success existed were included in the estimated fair value. Accordingly, the IPR&D programs primarily represent the estimated fair value of $40.0 million, $3.5 million and $18.0 million for the CDX-0158, CDX-3379 and TAM programs, respectively. The estimated fair value of the IPR&D programs was determined based on estimates of expected future net cash flows. These expected future net cash flows included estimates for revenue and associated costs for the IPR&D programs based on (i) relevant industry factors, (ii) current and expected trends in the product development life cycle, (iii) the ability to engage a strategic partner, (iv) the ability to obtain regulatory approval, and (v) the ability to manufacture and commercialize the products. The probability-adjusted future net cash flows which reflect the different stages of development of each program are then present valued utilizing an estimate of the appropriate discount rate which is consistent with the uncertainties of the cash flows utilized.

The expected future net cash flows for the CDX-0158, CDX-3379 and TAM programs were based on the expectation that a Biologics License Application ("BLA") would be filed with the FDA no earlier than the end of 2023, 2024, and 2028, respectively. The Company expects the commercial launch as promptly as commercially practicable after necessary regulatory approvals are received. The estimated development costs included in the expected future net cash flows was approximately $132 million. These assumptions require various levels of in-house and external testing, clinical trials and approvals from the FDA or comparable foreign regulatory authorities before the CDX-0158, CDX-3379 and TAM programs could be commercialized in the U.S. or other territories. Drug development involves a high degree of risk and most products that make it into clinical development do not receive marketing approval. Numerous risks and uncertainties can delay or stop clinical development of a pharmaceutical product prior to the receipt of marketing approval, including, but not limited to, results from clinical trials that do not support continuing development, issues related to manufacturing or intellectual property protection, and other events or circumstances that cause unanticipated delays, technical problems or other difficulties. Given these risks and uncertainties, there can be no assurance that the development of the CDX-0158, CDX-3379 and TAM programs will be successfully completed. If the development of the CDX-0158, CDX-3379 and TAM programs are not successful, in whole or in part, or completed in a timely manner, the Company may not realize the expected financial benefits from the development of the CDX-0158, CDX-3379 and TAM programs or the transaction as a whole.

The deferred tax liability, net of $23.4 million primarily relates to the temporary differences associated with the IPR&D intangible assets, which are not deductible for tax purposes.

Acquisition-Related Expenses, Including Severance

The Company incurred $0.7 million in acquisition-related expenses in the consolidated statements of operations for the year ended December 31, 2016. These costs include fees for legal, accounting, due diligence, tax, valuation, printing and other various services necessary to complete the transaction. In addition, the Company recorded $2.4 million and $0.7 million in Kolltan severance expenses to general and administrative and research and development, respectively, in the consolidated statements of operations for the year ended December 31, 2016 since the severance was determined to be for the benefit of the Company.

Pro Forma Financial Information

The operating results of Kolltan and pro forma adjustments including severance expense and transaction expenses of $3.1 million and $0.7 million, respectively, have been included in the accompanying consolidated financial statements from November 29, 2016 to December 31, 2016. Kolltan had no revenues from November 29, 2016 through December 31, 2016. The following unaudited pro forma financial summary is presented as if the operations of the Company and Kolltan were combined as of January 1, 2015. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated at that date or of the future operations of the combined entities.

	Unaudited Years Ended December 31,
	2016			2015
	(In thousands)
Revenue	$	6,786		$	5,480
Net loss	$	(146,905	)	$	(157,690	)
Basic and Diluted Net Loss Per Common Share	$	(1.24	)	$	(1.37	)