BUSINESS COMBINATION

6 Months Ended

Jun. 30, 2023

BUSINESS COMBINATION

BUSINESS COMBINATION

3. BUSINESS COMBINATION

Summary

On March 10, 2022, the Company completed the acquisition of all the outstanding shares of Theriva Biologics, S.L, which at the time was known as VCN Biosciences, S.L.(the “VCN Shares”) from the shareholders of VCN. VCN is a clinical-stage biopharmaceutical company developing new oncolytic adenoviruses for the treatment of cancer. Theriva’s lead product candidate, VCN-01, is being studied in a Company sponsored Phase 2 clinical trial for pancreatic cancer with additional investigator sponsored trials in indications including head and neck squamous cell carcinoma (HNSCC), retinoblastoma, brain tumors and pancreatic and ovarian cancers. VCN-01 is designed to be administered systemically, intratumorally or intravitreally, either as a monotherapy or in combination with standard of care chemotherapies or immunotherapies, to treat a wide variety of cancer indications. VCN-01 is designed to replicate selectively and aggressively within tumor cells, and to degrade the tumor stroma barrier that serves as a significant physical and immunosuppressive barrier to cancer treatment. Degrading the tumor stroma has been shown to improve access to the tumor by the virus and additional therapies such as chemo- and immuno-therapies. Importantly, degrading the stroma exposes tumor antigens, turning “cold” tumors “hot” and enabling a sustained anti-tumor immune response. Theriva has the exclusive rights to four patent families for proprietary technologies, as well as technologies developed in collaboration with the Virotherapy Group of the Catalan Institute of Oncology (ICO-IDIBELL) and with Hospital Sant Joan de Deu (HSJD), with a number of additional patents pending. As consideration for the purchase of the VCN Shares and pursuant to the terms of a purchase agreement that the parties entered into (the “Purchase Agreement”), the Company paid $4,700,000 to Grifols Innovation and New Technologies Limited (“Grifols”), the owner of approximately 86% of the equity of VCN, and issued to the remaining sellers and certain key VCN employees and consultants of VCN an aggregate of 2,639,530 shares of its common stock, $0.001 par value per share (the “Common Stock”). In addition to the consideration described above, under the terms of the purchase agreement that the parties entered into, the Company assumed up to $2,390,000 of existing liabilities of VCN and has agreed to make cash payments of up to $70.2 million to Grifols upon the achievement of certain clinical and commercialization milestones. In September 2022, the Company received approval from the FDA to proceed with the Phase 2 clinical trial of VCN-01 in PDAC. Due to this approval, the Company paid Grifols $3.0 million in the fourth quarter of 2022.

In anticipation of the Acquisition, prior to the Closing, the Company loaned VCN $417,000 to help finance the costs of certain of VCN’s research and development activities. At the Closing, VCN and Grifols entered into a sublease agreement for the sublease by VCN of laboratory and office space as well as a transitional services agreement. As a post-Closing covenant, the Company has agreed to commit to fund VCN’s research and development programs, including but not limited to VCN-01 in a pancreatic ductal adenocarcinoma PDAC Phase 2 trial, VCN-01 in a retinoblastoma (RB) Phase 2/3 trial and necessary G&A within a budgetary plan of approximately $27.8 million.

Total purchase consideration including cash, common shares and contingent consideration was valued at approximately $22.8 million, as follows (in thousands):

Cash paid at Closing	$	4,700
Receivable from VCN “effectively settled”		417
Fair value of common shares issued		6,599
Fair value of contingent consideration		11,093
	$	22,809

As of June 30, 2023 and December 31, 2022, the fair value of the contingent consideration was approximately $10.8 million and 10.2 million, respectively. During the three and six months ended June 30, 2023, the Company recognized in operating expense a $432,000 and 568,000, respectively, fair value adjustment increase to contingent consideration. During the three months ended June 30, 2022 the Company recognized fair value adjustment decrease to contingent consideration of $432,000.

3. BUSINESS COMBINATION - (continued)

The allocation of the fair value of the VCN acquisition updated for measurement period and other adjustments is shown in the table below.

	Estimated fair value
	($in thousands)
Cash and cash equivalents	$	837
Receivables		1,889
Property and equipment		216
In-process research and development intangible asset		19,742
Goodwill		5,696
Deferred tax assets (liabilities), net		(3,209)
Accounts payable		(522)
Accrued expenses		(113)
Accrued employee benefits		(90)
Loan Payable-current		(67)
Other long-term liabilities		(1,570)
Total purchase consideration	$	22,809

The net assets were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations, and appropriate discount rates. In connection with the Acquisition, we recognized $19.7 million of indefinite-lived in-process research and development intangible assets.

Goodwill is considered an indefinite-lived asset and relates primarily to intangible assets that do not qualify for separate recognition, such as the assembled workforce and synergies between the entities. Goodwill of $5.7 million was established as a result of the Acquisition and is not tax deductible.

Theriva Biologics, S.L. operations recorded a net loss of $8.3 million from the date of Acquisition through June 30, 2023.

During the year ended December 31, 2022, the Company recognized the following measurement period adjustments:

● estimate of acquired liabilities resulting in a $277,000 reduction in accrued expenses and goodwill,

● estimate in the receivable from the prior owner resulting in a $176,000 increase in other receivables and reduction in goodwill.

● estimated fair value of its in-process R&D resulting in a $810,000 increase in in-process R&D, an increase of $202,000 in deferred tax liabilities and a decrease of $607,000 in goodwill.

The cumulative impact of the re-measurements as of the year ended December 31, 2022, was a reduction in accrued liabilities of $277,000, and increase in other receivables or $176,000, an increase in in-process R&D of $810,000; an increase in deferred tax liabilities of $202,000 and a decrease in goodwill of $1,061,000.

3. BUSINESS COMBINATION - (continued)

Pro Forma Consolidated Financial Information (unaudited)

The following unaudited pro forma consolidated financial information summarizes the results of operations for the periods indicated as if the VCN Acquisition had been completed as of January 1, 2022 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Net revenues	$	—	$	—		—	$	—
Net loss	$	(5,084)	$	(4,967)		(9,563)	$	(9,763)

Transaction Costs

In conjunction with the Acquisition, the Company incurred approximately $0.2 million in transaction costs during the three and six months ended June, 2022, which were expensed as general, and administrative expense in the consolidated statements of operations. There were no acquisition costs incurred during the three and six months ended June 31, 2023.