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Surface Acquisition
 6 Months Ended
Jun. 30, 2023
Surface Acquisition  
Surface Acquisition

14.      Surface Acquisition

On June 15, 2023, the Company entered into the Merger Agreement by and among the Company, Merger Sub I, Merger Sub II, and Surface. Pursuant to the Merger Agreement, and subject to the terms and conditions set forth therein, Merger Sub I will merge with and into Surface, with Surface surviving such First Merger as a direct, wholly owned subsidiary of the Company, and, as part of the same overall transaction, promptly after the First Merger, the surviving corporation of the First Merger will merge with and into Merger Sub II, with Merger Sub II surviving the Second Merger. Pursuant to the Merger Agreement, at the effective time of the First Merger (the “Effective Time”), each share of common stock, $0.0001 par value per share, of Surface (the “Surface Common Stock”) issued and outstanding immediately prior to the Effective Time (other than treasury shares, any shares of Surface Common Stock held directly or indirectly by the Company or the Merger Subs and shares of Surface Common Stock held by any holder who properly demands appraisal for such shares) will be converted automatically into the right to receive, without interest:

●a number of shares of common stock, par value $0.0001 per share, of the Company (the “Company Common Stock”) equal to the exchange ratio (the “Exchange Ratio”) determined by dividing (x) the quotient obtained by dividing (1) $40.0 million plus Surface’s net cash as of the closing of the First Merger (the “Closing”), as calculated in accordance with the Merger Agreement, by (2) $5.2831 (the volume weighted average trading price per share of Company Common Stock for the five trading days through and including June 15, 2023) (the “Company Stock Price”), by (y) the total number of shares of Surface Common Stock issued and outstanding immediately prior to the Effective Time, on a fully-diluted and as-converted basis as determined in accordance with the Merger Agreement (collectively, the “Upfront Consideration”), and, if applicable, cash in lieu of fractional shares (without interest and less any applicable withholding taxes); and
●one contingent value right (a “CVR”) representing the right to receive the CVR Payment Amount (as defined below), as provided for in the CVR Agreement (as defined below) (together, with the Upfront Consideration, the “Merger Consideration”).

Under certain circumstances further described in the Merger Agreement, the Exchange Ratio may be adjusted upward or downward based on the level of Surface’s net cash at the Closing and certain other adjustments, as determined in accordance with the Merger Agreement.

As summarized above, a portion of the Merger Consideration comprises CVRs. At or prior to the Effective Time, the Company and Computershare Inc., a Delaware corporation, and its affiliate Computershare Trust Company, N.A., a federally chartered trust company (collectively, the “Rights Agent”), will enter into a Contingent Value Rights Agreement (the “CVR Agreement”), a form of which is attached as an exhibit to the Merger Agreement, governing the terms of each CVR. Each CVR entitles the holder thereof to receive contingent payments equal to (i) the dollar amount of the Net CVR

Payments (as defined below) received during the 10-year period following the execution of the CVR Agreement (the “CVR Term”) divided by (ii) the total number of outstanding CVRs (the “CVR Payment Amount”).

For each fiscal quarter during the CVR Term (each, a “CVR Payment Period”), the “Net CVR Payments” shall equal the sum of the following, less any permitted deductions (as set forth in the CVR Agreement).

●70% of all milestone- and royalty-based payments actually received by the Company, the Surviving Entity or their affiliates from GlaxoSmithKline Intellectual Property (No. 4) Limited (“GSK”) under the License Agreement, dated December 16, 2020, between Surface and GSK (the “Surface GSK Agreement”);
●70% of all milestone- and royalty-based payments actually received by the Company, the Surviving Entity or their affiliates from Novartis Institutes for Biomedical Research, Inc. (“Novartis Institutes”) under the Collaboration Agreement, dated January 9, 2016, between Surface and Novartis Institutes (the “Surface Novartis Agreement”);
●25% of any upfront payment actually received by the Company, the Surviving Entity or their affiliates under an agreement entered into by the Company, the Surviving Entity or their affiliates after the Closing granting a third party development, manufacture or commercialization rights for Surface’s SRF114 proprietary drug product candidate in any market outside of the United States, less development costs and expenses incurred by the Company, the Surviving Entity or their affiliates after the Closing for the development of SRF114 (as determined and calculated in accordance with the CVR Agreement); and
●50% of any upfront payment actually received by the Company, the Surviving Entity or their affiliates under an agreement entered into by the Company, the Surviving Entity or their affiliates after the Closing granting a third party development, manufacture or commercialization rights for Surface’s SRF388 proprietary drug product candidate in any market outside of the United States, less development costs and expenses incurred by the Company, the Surviving Entity or their affiliates after the Closing for the development of SRF388 (as determined and calculated in accordance with the CVR Agreement).

The Mergers are expected to close in the third quarter of 2023. The Company expensed approximately $1.9 million of acquisition-related costs during the three months ended June 30, 2023.