3. Business Combination

The Company completed a merger with Napo on July 31, 2017. Napo now operates as a wholly-owned subsidiary of Jaguar focused on human health and the ongoing commercialization of Mytesi, a Napo drug product approved by the U.S. FDA for the symptomatic relief of noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy.

The merger was accounted for under the acquisition method of accounting for business combinations and Jaguar was considered to be the acquiring company. Under the acquisition method of accounting, total consideration exchanged was:


Fair value of Jaguar common stock	$	25,303,859
Fair value of Jaguar common stock warrants		630,859
Fair value of replacement restricted stock units		3,300,555
Fair value of replacement stock options		5,691
Cash		2,000,000
Effective settlement of receivable from Napo		464,295
Total consideration exchanged	$	31,705,259

The purchase price allocation to assets and liabilities assumed in the transaction was:


Current assets	$	2,578,114
Non-current assets		396,247
Identifiable intangible assets		36,400,000
Current liabilities		(4,052,180)
Convertible notes payable		(12,473,501)
Deferred tax liability		(13,181,242)
Net assets acquired		9,667,438
Goodwill on acquisition		22,037,821
Total consideration	$	31,705,259

Under the acquisition method of accounting, certain identifiable assets and liabilities of Napo including identifiable intangible assets, inventory, debt and deferred revenue were recorded based on their estimated fair values as of the effective time of the Napo Merger. Tangible and other assets and liabilities were valued at their respective carrying amounts, which management believes approximate their fair values.

Acquired intangible assets included Developed Technology (“DT”) related to the development and commercial processing of Mytesi™ (crofelemer 125mg delayed-release tablets), which is an antidiarrheal indicated for the symptomatic relief of noninfectious diarrhea in adult patients with HIV/AIDS on antiretroviral therapy. The DT is a definite lived asset and is being amortized over a 15‑year estimated useful life.

The acquired trademarks include Mytesi product trademark, domain names, and other brand related intellectual property. Trademark is a definite lived asset and is being amortized over a 15-year estimated useful life.

The acquired IPR&D projects relate to developing the proprietary technology into a commercially viable product for the several follow-on indications related to formulations of crofelemer. Crofelemer is in development for rare disease indications for infants and children with congenital diarrheal disorders (CDD) and short bowel syndrome (SBS), and for irritable bowel syndrome (IBS). These indications have completed some studies of clinical testing for safety and/or proof of concept efficacy at the time of the merger and the projects were determined to have substance. IPR&D is not amortized during the development period and is tested for impairment at least annually, or more frequently if indicators of impairment are identified. The Company terminated development of the indication for C. difficile infection (CDI) in the quarter ended December 31, 2017. This indication was included as part of IPR&D at the time of the merger, and an impairment loss of $2,300,000 was recorded in fiscal year 2017 as a result of the decision to abandon the project in favor of the prioritization of the following: Mytesi is in development for follow-on indications in cancer therapy-related diarrhea (CTD), an important supportive care indication for patients undergoing primary or adjuvant therapy for cancer treatment; as supportive care for post-surgical inflammatory bowel disease patients (IBD); and as a second-generation anti-secretory agent for use in cholera patients. These indications did not have substance at the time of the merger and were not recognized as an asset apart from Goodwill.

The fair value of IPR&D, trademark, and DT was determined using the income approach, which was based on forecasts prepared by management.

The Napo Merger resulted in $22,037,821 of goodwill relating principally to synergies expected to be achieved from the combined operations and planned growth in new markets. Goodwill has been allocated to the human health segment.

As none of the goodwill, IPR&D, and developed technology acquired are expected to be deductible for income tax purposes, it was determined that a deferred income tax liability of $14,498,120 was required to reflect the book to tax differences of the merger. A deferred tax asset of $1,316,878 was accounted as an element of consideration for the replacement share-based payment awards as the replacement awards are expected to result in a future tax deduction.

The Company valued convertible debt assumed in the Napo Merger based on the value of the debt and the conversion option at $12,473,501 (see note 8). The Company incurred acquisition related costs of $3,554,250 during the year ended December 31, 2017. The acquisition related costs for the year ended December 31, 2017 includes the fair value of $151,351 for 270,270 shares of Company’s common stock issued to a former creditor of Napo towards reimbursement of acquisition related costs. Acquisition related costs are expensed as incurred to general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.

In September 2018, the Company received a $1.2 million payment from Valeant, in a settlement agreement with Glenmark Pharmaceuticals, Valeant Pharmaceuticals Ireland, Limited, and Salix Pharmaceuticals, related to inventory that was in negotiations of title on July 31, 2017, the date of the merger with Napo. Accordingly, this was the settlement of a contingency acquired in the July 2017 Napo merger. The Company recorded the one-time settlement outside of operations as it was related to the July 2017 Napo merger. The $1.2 million gain on the Valeant settlement in fiscal year 2018 is recorded in the consolidated statements of operations.

Unaudited Proforma Information

The following table provides unaudited proforma results, prepared in accordance with ASC 805, for the year ended December 31, 2017, as if Napo had been acquired on January 1, 2016.


	For the year ended
	December 31,
	2017
Net sales	$	5,436,263
Net loss	$	(23,113,148)
Net income (loss) per share, basic and diluted	$	(0.53)

The unaudited proforma results include adjustments to eliminate the interest on Napo’s historical convertible debt not assumed by Jaguar and debt exchanged for Jaguar common stock, record interest on convertible debt assumed by Jaguar, eliminate Napo impairment of investment in related party, and eliminate Napo’s loss from investment in related party. The Company made proforma adjustments to exclude the acquisition related costs for the year ended December 31, 2017 and to exclude the acquisition related costs in the results for the year ended December 31, 2016, because such costs are nonrecurring and are directly related to the Napo Merger.

The unaudited pro forma condensed results do not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the Napo Merger. The Company made proforma adjustments to exclude the acquisition related costs for the years ended December 31, 2017 and 2016.

Unaudited pro forma amounts are not necessarily indicative of future results.