Note 3 – APP Merger Transaction



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 Merger. APP is a company focused on the development and commercialization of pharmaceutical and consumer health products for men's and women's health and oncology. For men, product and product candidates are in the areas of benign prostatic hyperplasia, male infertility, amelioration of side effects of hormonal prostate cancer therapies, gout, sexual dysfunction, and prostate cancer.  For women, product candidates are for advanced breast and ovarian cancers and for female sexual health. 



The APP Merger 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 Merger did not require the current approval of the Company’s shareholders.



Under the terms of the Amended Merger Agreement, pursuant to the APP Merger, 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:





The outstanding shares of Series 4 Preferred Stock automatically converted into shares of the Company’s common stock effective July 31, 2017 as described in Note 11, Subsequent Events



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 Merger for a period of 18 months following the closing of the APP Merger.



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 Merger 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 Merger, 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 Merger, 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.



The allocation of acquisition consideration for APP is based on estimates, assumptions, valuations and other studies which have not yet been finalized in order to make a definitive allocation.



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







The total estimated 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 since the shares are not registered and inherently difficult to sell prior to the conversion to common stock.  A 5 percent discount was also applied in the valuation due to the probability that the Series 4 Preferred Stock will never be converted to common stock.  After giving effect to the conversion of the Series 4 Preferred Stock to common stock, which is wholly dependent upon future shareholder approval, the former APP stockholders will own 23,870,240 shares of the Company’s common stock in total, constituting approximately 45% of the outstanding shares of the Company’s common stock as of October 31, 2016.



The results of operations and the provisional 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 $1,396 and $935,781 in acquisition-related costs which were recorded within operating expenses for the three and nine months ended June 30, 2017, respectively, compared to $833,739 and $1,014,037 for the three and nine months ended June 30, 2016, respectively.



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 is not deductible for tax purposes.



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:







In connection with the APP Merger, 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.