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 the APP Acquisition through the merger of a wholly owned subsidiary of the Company into APP. The completion of the APP Acquisition transitioned the Company from a single product company selling only FC2 to a biopharmaceutical company focused on urology and oncology with multiple drug products under clinical development.



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 included 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 21,870,240 shares of the Company’s common stock effective July 31, 2017.



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 five 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 evaluated the RRA under the guidance in ASC 825-20 and determined accounting recognition is not required.



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





The total purchase consideration was 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% discount on the shares subject to lock-up agreements, due to the lack of liquidity since the shares are not freely tradeable for a set time period. The shares of Series 4 Preferred Stock were valued on an as-converted basis based on the share price of the Company’s common stock on October 31, 2016 less a 12% discount on approximately 49% of the shares Series 4 Preferred Stock that are subject to an 18-month lockup agreement and a 6% discount on the remaining shares of Series 4 Preferred Stock. The discount was applied since the shares of Series 4 Preferred Stock 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% probability that the shares of Series 4 Preferred Stock would convert to common stock rather than be redeemed, which was assigned a 5% probability. 



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 Preferred Stock automatically converted to common stock. As such, approximately $2.0 million was recognized as a dividend to the holders of the Series 4 Preferred Stock.



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





As of the date of the APP Acquisition, APP had developed technology consisting of PREBOOST® medicated wipes for prevention of premature ejaculation.  IPR&D represents incomplete research and development projects at APP as of the date of the APP Acquisition. The fair value of the developed technology and IPR&D were determined using the income approach, which was prepared based on forecasts by management.



Purchase price in excess of assets acquired and liabilities assumed was recorded as goodwill.  Goodwill from the APP Acquisition principally relates to intangible assets that do not qualify for separate recognition, 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 Company’s Research and Development reporting unit.



The results of operations of APP have been included in the accompanying consolidated financial statements since the date of acquisition. The consolidated statement of operations for fiscal 2017 includes expenses from APP from the October 31, 2016 acquisition date to September 30, 2017 of $3.2 million. Revenues from APP were not material to our consolidated financial results.



The Company incurred acquisition-related costs of approximately $936,000 in fiscal 2017, which are presented on a separate line item in the accompanying consolidated statements of operations. The Company did not incur acquisition-related costs in fiscal 2018.



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.