Note 2.       APP Acquisition 



On October 31, 2016, as part of the Company's strategy to diversify its product line to mitigate the risks of being a single product company, the Company completed its acquisition of APP through the APP Acquisition. The completion of the APP Acquisition transitioned us from a single product company selling only the FC2 Female Condom® to a biopharmaceutical company with multiple drug products under clinical development and commercialization.



The APP Acquisition was pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of October 31, 2016, (the Amended Merger Agreement), among the Company, APP, and the Company’s wholly owned subsidiary Blue Hen Acquisition, Inc. (APP Merger Sub). Pursuant to the Amended Merger Agreement, on October 31, 2016, APP became a wholly-owned subsidiary of the Company through the merger of APP Merger Sub with and into APP with APP continuing as the surviving corporation. Consummation of the APP Acquisition did not require the current approval of the Company’s shareholders.



Under the terms of the Amended Merger Agreement, pursuant to the APP Acquisition, the outstanding shares of APP common stock and preferred stock were converted into the right to receive in the aggregate 2,000,000 shares of the Company’s common stock and 546,756 shares of Series 4 Preferred Stock.



The terms of the Series 4 Preferred Stock include the following:





On July 28, 2017, the Company held a Special Meeting at which the Company’s stockholders approved, among other proposals, an increase in the number of authorized shares of common stock from 38,500,000 to 77,000,000 and approval of the issuance of common stock upon conversion of the Series 4 Preferred Stock pursuant to the NASDAQ Listing Rules.    The outstanding shares of Series 4 Preferred Stock automatically converted into shares of the Company’s common stock effective July 31, 2017.  In addition, the Stock Appreciation Rights and Restricted Stock Units described in Note 7 have been reclassified to the equity section of the balance sheet, as the Company now has available authorized shares to settle these awards.



Each of Harry Fisch, M.D., Karen Fisch, K&H Fisch Family Partners, LLC and Mitchell Steiner, M.D., has entered into an Amended and Restated Lock-Up Agreement (the Lock-Up Agreements) with the Company which generally prohibits each such holder from transferring 75% of the shares of the Company’s common stock and Series 4 Preferred Stock the holder is entitled to receive in the APP Acquisition for a period of 18 months following the closing of the APP Acquisition.



The shares of the Company’s common stock and Series 4 Preferred Stock that are subject to the Lock-Up Agreements are being held in escrow for a period of one-year following the closing of the APP Acquisition as the sole remedy for APP’s indemnification obligations set forth in the Amended Merger Agreement pursuant to the terms of an Escrow Agreement. Seventy-five percent of the shares held in escrow are eligible for release from escrow six months after the closing of the APP Acquisition, although any shares released from escrow will remain subject to the Lock-Up Agreements until the end of their term.



In connection with the APP Acquisition, the Company entered into a Registration Rights Agreement (the RRA) with the former APP stockholders granting them certain “Demand” and “Piggyback” registration rights for a period of up to 5 years. The Company will pay for the expenses of registration and related costs but not the selling expenses related thereto. The Company is only required to use its best efforts and in the event the registration does not occur, the Company is not required to pay any compensation to the former APP stockholders. The Company has evaluated the RAA under ASC 825-20, Registration Payment Arrangements, and determined accounting recognition is not required.



A summary of the total purchase consideration on October 31, 2016 is as follows:





The total purchase price of approximately $19,807,980 is based on the issuance to the APP stockholders of a total of 2,000,000 shares of the Company’s common stock and 546,756 shares of Series 4 Preferred Stock.  The common stock issued was valued based on the share price of the Company’s common stock on October 31, 2016 less an 8 percent discount on the shares subject to the Lock-Up Agreements, due to the lack of liquidity since the shares are not freely tradeable for a set time period.  The Series 4 Preferred Stock were valued using an as-converted basis based on the share price of the Company’s common stock on October 31, 2016 less a 12 percent discount on approximately 49 percent of the preferred shares that are subject to an 18 month lockup agreement and a 6 percent discount on the remaining preferred shares. The discount is applied since the preferred shares are not registered and inherently difficult to sell prior to the conversion to common stock.  The valuation of the Series 4 Preferred Stock also applied a 95 percent probability that the preferred stock would convert to common stock rather than be redeemed, which was assigned a 5 percent probability.  After giving effect to the conversion of the Series 4 Preferred Stock to common stock, the Company issued a total of 23,870,240 shares of the Company’s common stock to the former APP stockholders, constituting approximately 45 percent of the outstanding shares of the Company’s common stock as of October 31, 2016.



The value of the Series 4 Preferred Stock was initially classified on the Mezzanine section of the balance sheet because the potential conversion to common stock was considered substantive and, as long as the conversion feature exists, the Series 4 Preferred Stock is not considered mandatorily redeemable. Also, since the increase in authorized shares required to convert the Series 4 Preferred Stock to common stock is outside the control of the Company and, therefore, the settlement for cash is outside the control of the Company, the Series 4 was classified as temporary equity outside of the permanent equity section in the mezzanine section between liabilities and permanent equity until sufficient common stock is authorized or until the expiration of the maturity date.



Upon issuance on October 31, 2016, the value of the Series 4 Preferred Stock, on a per share basis, was less than the fair value of the Company’s common stock into which it would be converted, thus creating a beneficial conversion feature.



The contingent beneficial conversion feature was measured upon issuance, but was not recognized until the contingency was resolved. In this case, the conversion of the Series 4 Preferred Stock was based on the Company obtaining shareholder approval for the authorization of the additional shares of common stock. On July 28, 2017, the Company obtained shareholder approval for the increase in authorized common stock and the Series 4 automatically converted to common stock. As such, $2.0 million was recognized as a dividend to the Series 4 Preferred Stock.



The results of operations and the estimated fair values of the acquired assets and liabilities assumed have been included in the accompanying consolidated financial statements since the acquisition date.



The Company incurred $935,781 in acquisition-related costs which were recorded within operating expenses for the fiscal year ended September 30, 2017, compared to $1,482,539 for the fiscal year ended September 30, 2016.



The following table summarizes the fair value of assets acquired and liabilities assumed on October 31, 2016:





APP has a developed technology in PREBOOST®. In-process research and development represents incomplete research and development projects at APP. The fair value of the developed technology and in-process research and development were determined using the income approach, which was prepared based on forecasts by management.



Purchase price in excess of assets acquired and liabilities assumed is recorded as goodwill.  Goodwill from the APP acquisition principally relates to intangible assets that do not qualify for separate recognition (for instance, APP’s assembled workforce), our expectation to develop and market new products, and the deferred tax liability generated as a result of the transaction.  Goodwill is not tax deductible for income tax purposes and was assigned to the Research & Development reporting segment.



The weighted average amortization periods for intangible assets recognized in the APP acquisition are 10 years for the developed technology, 7 years for covenants not-to-compete. Our IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval, the IPR&D assets are then accounted for as finite-lived intangible assets and amortized on a straight-line basis over its estimated useful life.



Net loss in the Consolidated Statement of Operations for the year ended September 30, 2017 includes expense from APP from the date of acquisition to September 30, 2017 of $3.2 million. Revenues from APP were not material to our financial results.



Pro Forma Financial Information



The amounts of pro forma, unaudited net revenues and net (loss) income of the combined entity had the acquisition date been October 1, 2015 are as follows:





The unaudited pro forma financial information is presented for information purposes only. The unaudited pro forma financial information may not necessarily reflect our future results of operations or what the results of operations would have been had we owned and operated APP as of the beginning of the period presented.



In connection with the APP Acquisition, a consolidated complaint has been filed against the Company and its directors alleging breach of fiduciary duty. The Company intends to vigorously defend this lawsuit.  See Note 11 for additional detail.