Business Combinations-Merger Between Uroplasty, Inc and Vision-Sciences, Inc

12 Months Ended

Mar. 31, 2015

Business Combinations-Merger Between Uroplasty, Inc and Vision-Sciences, Inc [Abstract]

Business Combinations-Merger Between Uroplasty, Inc and Vision-Sciences, Inc

Note 2.  Business Combinations-Merger Between Uroplasty, Inc and Vision-Sciences, Inc

On March 31, 2015, UPI and VSCI completed their merger. Immediately prior to the closing of the merger, VSCI's shareholders approved a reverse split of VSCI’s shares at a ratio of 1 for 5.  Pursuant to the merger, VSCI issued to UPI stockholders 0.72662 VSCI shares for each share of UPI common stock outstanding.  Upon completion of the merger, the former holders of UPI common stock hold approximately 62.5% of the Company’s shares of common stock and the holders of VSCI shares retained approximately 37.5% of the Company’s shares of common stock.

At the completion of the merger, each outstanding option to purchase one share of UPI common stock was converted into an option to purchase 0.72662 shares of common stock of the Company at an exercise price equal to the original exercise of the UPI option, adjusted for the exchange ratio, and otherwise in accordance with the remaining original terms of the UPI option.  Under the terms of the VSCI options, all outstanding VSCI options became fully exercisable automatically as a result of the completion of the merger.

The merger has been accounted for as an acquisition of VSCI by UPI, in accordance with ASC Topic 805, "Business Combinations," using the acquisition method of accounting with UPI as the accounting acquirer. Since Cogentix. (formerly known as Vision-Sciences), as the parent company of UPI after the merger, is the legal acquirer, the merger has been accounted for as a reverse acquisition.  Under these accounting standards, UPI’s total purchase price is calculated as if UPI had issued its shares to VSCI stockholders and converted options to purchase VSCI shares to options to purchase UPI’s common stock, as follows:

Number of shares of VSCI shares outstanding on March 31, 2015 (after 1:5 reverse stock split)		9,589,539
Deemed conversion ratio		1.376
UPI shares deemed (for accounting purposes only) issued to VSCI shareholders		13,195,206
UPI closing price on March 31, 2015 (merger date)	$	1.22
Total fair value of stock consideration		16,098,151
Fair value of deemed (for accounting purposes only) conversion of VSCI stock options		272,000
Fair value of deemed (for accounting purposes only) conversion of VSCI warrants		98,849
Total purchase price	$	16,469,000

The deemed converted VSCI stock options and warrants represent the fair value using the stock price on the merger date as an input to the Black Scholes valuation model.  The following assumptions were applied in determining the fair value of the deemed (for accounting purposes only) conversion of VSCI stock options and warrants:

	Stock Options			Stock Warrants
Risk-free interest rate		0.26% - 1.37	%		1.37	%
Expected average term	3.75 years			4.5 years
Expected volatility		60% - 66	%		65	%

The Company’s computation of expected volatility is based on weighted average historical volatility of UPI’s and VSCI’s stock.  The expected option term was calculated in accordance with ASC 718.  The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of the merger.

Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets of VSCI acquired in the merger, based on their fair values at the merger date. The estimated fair values are preliminary and based on the information that was available as of the merger date. The Company believes that the information provides a reasonable basis for estimating the fair values, but the Company is waiting for additional information necessary to finalize these amounts, particularly with respect to the estimated fair value of intangible assets and debt. Thus the preliminary measurements of fair value reflected are subject to changes and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the merger date. The preliminary allocation of the purchase price to assets acquired and liabilities assumed is as follows:

Cash and cash equivalents	$	2,020,000
Accounts receivable		4,249,000
Inventories		4,462,000
Other current assets		369,000
Property, plant and equipment		817,000
Goodwill		18,750,000
Other intangibles		13,660,000
Other non-current assets		97,000
Total assets acquired		44,424,000
Accounts payable and other liabilities		5,209,000
Deferred revenue		176,000
Convertible debt – related party		22,530,000
Other non-current liabilities		40,000
Total liabilities assumed		27,955,000
Total purchase price	$	16,469,000

The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:

	Amount		Weighted Average Life-Years
Developed technology	$	6,200,000		7
Customer relationships		7,270,000		5
Trade names		190,000		10
	$	13,660,000

The fair value of customer relationships was estimated using a discounted present value income approach.  Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. The fair value of developed technology and the trade names were estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on the hypothetical royalty stream that would be received if the Company were to license the trade names or developed technology and was based on expected revenues. The useful life of the intangible assets was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of intangible assets.

The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the medical device field, expected corporate synergies and the assembled workforce.  None of the goodwill recognized is expected to be deductible for income tax purposes.

The fair value of the convertible notes payable was determined using the lattice model (see description in note 4).

The Company incurred $2.2 million of acquisition-related costs that were expensed during the year ended March 31, 2015. These costs are included in selling, general and administrative costs in the Company’s consolidated statements of operations.

The supplemental unaudited pro forma net sales and net loss of the combined entity had the acquisition been completed on April 1, 2013:

(Unaudited)	Year ended March 31,
	2015			2014
Supplemental pro forma combined results of operations:
Net sales	$	44,973,000		$	41,523,000
Net loss		(15,817,000	)		(21,477,000	)
Loss per share – basic and diluted	$	(0.62	)	$	(0.86	)

Adjustments to the supplemental pro forma combined results of operations are as follows:

(Unaudited)	Year ended March 31,
	2015			2014
Increase in amortization of intangibles	$	2,334,000		$	2,464,000
Adjust expenses related to merger (transaction costs, inventory step-up, deferred revenue adjustment)		(4,399,000	)		4,801,000
Interest expense imputed on debt		1,198,000			1,144,000
Increase (decrease) in net loss	$	(867,000	)	$	8,409,000

These unaudited pro forma condensed consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of the earliest period presented, or of future results of the consolidated entities.  The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.