Acquisition of Txcell S.A.

6 Months Ended

Jun. 30, 2019

ACQUISITION OF TXCELL S.A.

On July 20, 2018, Sangamo entered into several agreements with TxCell S.A. (“TxCell”), a French publicly-listed company specialized in the development of cellular immunotherapy products based on regulator T-cells (“Tregs”) to treat severe autoimmune and inflammatory diseases, and certain of its shareholders, with the goal of eventually acquiring 100% of TxCell’s share capital.

Under a Share Purchase Agreement (“SPA”) signed with certain shareholders of TxCell, the Company acquired 13,519,036 ordinary shares of TxCell (“TxCell Ordinary Shares”), representing approximately 53% of the outstanding share capital and voting rights of TxCell, (the “Block Transaction”) at a price of €2.58 per share. The Block Transaction closed on October 1, 2018 (the “Acquisition Date”).

Additionally, the Company and TxCell entered into a Tender Offer Agreement (“TOA”), pursuant to which the Company agreed to acquire 11,981,867 TxCell Ordinary Shares not acquired as part of the Block Transaction following a public tender offer (the “Tender Offer”) at a price of €2.58 per share. The Tender Offer closed on November 23, 2018.

Following the Block Transaction and the Tender Offer, the Company owns 98.2% of TxCell Ordinary Shares.

In addition, the Company also entered into arrangements with the holders of approximately 477,000 “free shares” of TxCell pursuant to which the Company has the right to purchase such shares from the holders thereof (a call option) and such holders have the right to sell to the Company such shares from time to time through mid-2021 (a put option) (collectively the “Free Shares Options”) so as to increase the Company’s ownership of TxCell to 100% should all free shares be acquired following through the exercise of either the call or the put options.

The purchase price for each such free share acquired by the Company upon exercise of a Free Shares Option will be based on the performance of the Company’s stock price from the announcement of the transactions contemplated by the SPA and TOA through the Acquisition Date. At the Acquisition Date, the Free Shares Options purchase price was valued at €2.58 per share or approximately $2.99 per share using an exchange rate of $1.16. If the Company’s stock price increases during that time period, the Free Shares Options purchase price per share will proportionately increase. If the Company’s stock price decreases, the Free Shares Options purchase price will proportionately decrease, the minimum purchase price of €2.58 per share only applies to vested Free Shares Options that are not yet transferable shares, subject to certain exceptions.

At the Acquisition Date, the fair value of the Free Shares Options was estimated to be a liability of $0.2 million based on an option pricing method. The value was included in the purchase consideration and is recorded as a non-controlling interest on the Condensed Consolidated Balance Sheets. The fair value of the Free Shares Options will vary based on future changes in the Company’s stock price during the option period. The Company assesses this fair value on a quarterly basis with changes in fair value being recognized in operations. The fair value of the Free Shares Options was estimated to be an asset of $0.4 million as of June 30, 2019.

In September 2018, the Company provided TxCell with a $5.2 million loan (the “TxCell Loan”) that was deemed to be part of the purchase consideration for accounting purposes. The TxCell Loan, together with $40.5 million cash paid to acquire the TxCell Ordinary Shares and the $0.2 million estimated fair value of the Free Shares Options, comprise the aggregate purchase consideration of $45.9 million as of the Acquisition Date.

Management estimated the fair value of tangible and intangible assets and liabilities in accordance with the applicable accounting guidance for business combinations and utilized the services of third-party valuation consultants. Balances subject to adjustment primarily include the valuations of acquired assets (tangible and intangible), liabilities assumed, as well as tax-related matters. During the measurement period, the Company may record adjustments to the provisional amounts recognized. There were no adjustments to the provisional values subsequent to the Acquisition Date.

The acquisition of TxCell was accounted for as a business combination in accordance with ASC Topic 805, Business Combinations. The operating results of TxCell after the Acquisition Date have been included in the Company’s Condensed Consolidated Statements of Operations. In June 2019, TxCell became a sociéte par actions simplifiée (S.A.S.) and was renamed “Sangamo Therapeutics France.”

Fair Value Estimate of Assets Acquired and Liabilities Assumed

Under ASC Topic 805, an acquirer recognizes and consolidates assets acquired, liabilities assumed, and any non-controlling interest at 100% of their fair values as of the acquisition date (regardless of the acquirer’s percentage ownership in the acquiree). As goodwill is calculated as a residual, all goodwill of the acquired business, not just the acquirer’s share, is recognized under this “full-goodwill” approach. Recognized goodwill is allocated between the controlling and non-controlling interests. Although this allocation is not presented separately on the acquirer’s balance sheet, it is necessary so that a goodwill impairment charge recognized in a period following the business combination by an acquirer is appropriately allocated between controlling and non-controlling interests. There were no goodwill impairments during the six months ended June 30, 2019 or during 2018 and, as noted below, substantially all of the non-controlling interest on the Acquisition Date was subsequently acquired by the Company and, accordingly, substantially all of the goodwill is allocated to the Company as of June 30, 2019 and December 31, 2018.

The following table summarizes the estimated fair value of the net assets acquired as of the Acquisition Date (in thousands):



	October 1, 2018
Consideration transferred	$	45,911
Fair value of non-controlling interest	35,829
Fair value of TxCell	$	81,740

Cash	$	4,779
Current assets	2,427
Property and equipment	1,857
IPR&D	55,019
Other assets	155
Current liabilities	(9,761		)
Assumed debt liabilities	(4,933		)
Deferred tax liability, net	(6,798		)
Fair value of net identifiable assets acquired	42,745
Goodwill	38,995
Total fair value of net assets acquired	$	81,740

Consideration Transferred

Consideration transferred as of October 1, 2018 consisted of the 13,519,036 TxCell Ordinary Shares acquired by the Company on the Acquisition Date of approximately $2.99 per share, the $5.2 million TxCell Loan and approximately $0.2 million for the fair value of the Free Shares Options.

Non-controlling Interest

The fair value of the non-controlling interest at the Acquisition Date was based on the $2.99 acquisition price per share for the 11,981,867 Ordinary Shares that were not purchased by the Company on the Acquisition Date.

On November 1, 2018, pursuant to the TOA, the Company commenced a cash tender offer (the “Offer”) to acquire all of the TxCell Ordinary Shares not held by the Company for the same per share price paid in the Block Transaction. Following the completion of the Offer on November 23, 2018, the Company initiated compulsory squeeze-out procedures applicable to French public companies to acquire the remaining TxCell Ordinary Shares, other than the free shares that were subject to the Free Shares Options. Subsequent to the Acquisition Date and through December 31, 2018, the Company acquired 11,528,635 TxCell Ordinary Shares which, when aggregated with the 13,519,036 Ordinary Shares acquired at the Acquisition Date, resulted in the Company owning 98.2% of all TxCell Ordinary Shares as of December 31, 2018. The 11,528,635 shares acquired subsequent to the Acquisition Date were acquired for total consideration of approximately $33.9 million, or $2.94 per share. As of December 31, 2018, the aggregate purchase consideration was approximately $80.4 million through the completion of this purchase, with approximately 453,000 Ordinary Shares (vested free shares), which remain outstanding and are subject to purchase by the Company as noted above, with an estimated fair value of approximately $0.6 million as of June 30, 2019.

Non-controlling interest as of June 30, 2019 was as follows (in thousands):



Non-controlling interest at January 1, 2018	$	—
Non-controlling interest at Acquisition Date	35,829
Shares acquired post acquisition	(34,516		)
Non-controlling interest of acquired entity	1,313
Foreign currency effect	(19		)
Loss attributable to non-controlling interest	(555		)
Non-controlling interest at December 31, 2018	739
Loss attributable to non-controlling interest	(125		)
Non-controlling interest at June 30, 2019	$	614