| Acquisitions | Note 5 — Acquisitions ENTADFI On April 19, 2023, the Company and Veru,
Inc. (“Veru”) entered into an Asset Purchase Agreement (the “Veru APA”). Pursuant to, and subject to the terms
and conditions of, the Veru APA, the Company purchased substantially all of the assets related to Veru’s ENTADFI product (“ENTADFI”)
(the “Transaction”) for a total possible consideration of $100 million. In accordance with the Veru APA, the Company agreed
to provide Veru with initial consideration totaling $20.0 million, consisting of (i) $6.0 million paid upon the closing of the Transaction
on April 19, 2023, (ii) an additional $4.0 million in the form of a non-interest bearing note payable due on September 30, 2023, and (iii)
an additional $10.0 million in the form of two $5.0 million non-interest bearing notes payable, each due on April 19, 2024 and September
30, 2024. Additionally, the terms of the Veru APA require
the Company to pay Veru up to an additional $80.0 million based on the Company’s net sales of ENTADFI after closing (the “Milestone
Payments”). The Milestone Payments are payable as follows: (i) $10.0 million is payable upon the first time the Company achieves
net sales from ENTADFI of $100.0 million during a calendar year, (ii) $20.0 million is payable upon the first time the Company achieves
net sales from ENTADFI of $200.0 million during a calendar year, and (3) $50.0 million is payable upon the first time the Company achieves
net sales from ENTADFI of $500.0 million during a calendar year. In connection with the Transaction, the Company
also assumed royalty and milestone obligations under an asset purchase agreement for tadalafil-finasteride combination entered into
by Veru and Camargo Pharmaceutical Services, LLC on December 11, 2017 (the “Camargo Obligations”). The Camargo Obligations
assumed by the Company include a 6% royalty on all sales of tadalafil-finasteride and sales milestone payments of up to $22.5 million,
payable to Camargo as follows: (i) $5.0 million is payable upon the first time the Company achieves net sales from ENTADFI of $100.0
million during a calendar year, (ii) $7.5 million is payable upon the first time the Company achieves net sales from ENTADFI of $200.0
million during a calendar year, and (3) $10.0 million is payable upon the first time the Company achieves net sales from ENTADFI of $300.0
million during a calendar year. On September 29, 2023, the Company entered into
an amendment to the Veru APA (the “Veru APA Amendment”), which provides that the $4.0 million note payable originally due
on September 30, 2023 was deemed paid and fully satisfied upon (1) the payment to the Seller of $1.0 million in cash on September 29,
2023, and (2) the issuance to the Seller of 3,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”)
of the Company (see Note 9). Pursuant to the Veru APA Amendment, the Series A Preferred Stock will convert to common stock of the Company
one year from the date of issuance if the required stockholder approval is obtained. The Series A Preferred Stock, which was issued to
the Seller on October 3, 2023 is initially convertible, in the aggregate, into 5,709,935 shares of the Company’s common stock, subject
to adjustment and certain stockholder approval limitations specified in the Certificate of Designations. Pursuant to the Veru APA Amendment,
the Company agreed to use commercially reasonable efforts to obtain such stockholder approval by December 31, 2023, however, such shareholder
approval has not yet been obtained. The Company also agreed to include the shares of common stock issuable upon conversion of the Series
A Preferred Stock in the next resale registration statement filed with the SEC. Subsequent to March 31, 2024, the Company entered
into a Forbearance Agreement with Veru, specifically related to the note payable that was due on April 19, 2024 (see Note 15). Also, in connection with the Transaction, and
pursuant to the Veru APA, the Company entered into non-competition and non-solicitation agreements (the “Non-Competition Agreements”)
with two of Veru’s key stockholders and employees (the “Restricted Parties”). The Non-Competition Agreements generally
prohibit the Restricted Parties from either directly or indirectly engaging in the Restricted Business (as such term is defined in the
Veru APA) for a period of five years from the closing of the Transaction. The acquisition of ENTADFI has been accounted
for as an asset acquisition in accordance with ASC 805-50 because substantially all of the fair value of the assets acquired is concentrated
in a single asset, the ENTADFI product rights. The ENTADFI products rights consist of trademarks, regulatory approvals, and other records,
and are considered a single asset as they are inextricably linked. The following table summarizes the aggregate consideration
transferred for the assets acquired by the Company in connection with the Veru APA:
Consideration
Consideration transferred at closing $ 6,000,000
Fair value of notes payable issued 12,947,000
Transaction costs 79,771
Total consideration transferred $ 19,026,771 The fair value of the non-interest bearing notes
payable was estimated using a net present value model using discount rates averaging 8.2%. The resulting fair value is being accreted
to the face value of the notes, through the respective maturity dates. Management evaluated the Milestone Payments and determined that
at the close of the Transaction, they are not considered probable, and as such, the Company did not recognize any amount related to the
Milestone Payments in the consideration transferred. Management evaluated the Camargo Obligations and
determined that at the close of the Transaction, the related sales milestone payments are not considered probable, and as such, the Company
did not recognize any related liability at the date of the Transaction. In addition, royalties under the Camargo Obligations will be recorded
as cost of sales, as the related sales are generated and recognized. The following table summarizes the assets acquired with the Veru APA:
Assets Recognized
Inventory $ 1,120,000
ENTADFI Intangible 17,906,771
Total fair value of identifiable assets acquired $ 19,026,771 In accordance with ASC 805-50, the acquired inventory
was recorded at fair value. The remaining consideration transferred was allocated to the ENTADFI intangible asset, which will be amortized
over its estimated useful life, starting when ENTADFI sales begin. Acquired inventory is comprised of work-in-process and raw
materials. The fair value of work-in-process inventory was determined based on an estimated sales price of the finished goods, adjusted
for costs to complete the manufacturing process, costs of the selling effort, a reasonable profit allowance for the remaining
manufacturing and selling effort, and an estimate of holding costs, and resulted in a fair value adjustment of approximately
$0.3 million. The fair value of raw materials was determined to approximate replacement cost. The Company recorded an impairment charge on the ENTADFI
asset group of approximately $2.3 million during the three months ended March 31, 2024 (see Note 4). In addition, during the fourth quarter
of 2023, the Company recorded an impairment charge of approximately $14.7 million on the ENTADFI asset group, as well as an impairment
charge on the ENTADFI acquired inventory of approximately $1.2 million, which included impairment of 100% of the acquired work-in-process
inventory. WraSer: On June 13, 2023 (the “Execution Date”),
the Company entered into an asset purchase agreement with WraSer, LLC, and affiliates (the “WraSer Seller”) (the “WraSer
APA”). Pursuant to, and subject to the terms and conditions of, the WraSer APA, on the WraSer Closing Date (as defined below) the
Company was to purchase six FDA-approved pharmaceutical assets across several indications, including cardiology, otic infections, and
pain management (the “WraSer Assets”). Under the terms of the WraSer APA, the Company
was to purchase the WraSer Assets for (i) $3.5 million in cash at signing of the WraSer APA; (ii) $4.5 million in cash on the later of
(x) 90 days after the signing of the WraSer APA or (y) the date that all closing conditions under the WraSer APA are met or otherwise
waived (the “WraSer Closing Date”); (iii) 1.0 million shares of the Company’s common stock (the “Closing Shares”)
issuable on the WraSer Closing Date, and (iv) $500,000 in cash one year from the WraSer Closing Date. In conjunction with the WraSer APA, the Company
and the WraSer Seller entered into a Management Services Agreement (the “MSA”) on the Execution Date. Pursuant to the terms
of the MSA, the Company would act as the manager of the WraSer Seller’s business during the period between the Execution Date and
the WraSer Closing Date. During this period, the Company would make advances to WraSer, if needed. If, on the WraSer Closing Date, the
WraSer Seller’s cash balance is in excess of the target amount (“Cash Target”) specified in the MSA, the Company would
apply that excess to the $4.5 million cash payment due upon closing. Conversely, if there is a shortfall, the Company would be required
to remit the difference to the WraSer Seller over time. The WraSer APA could be terminated prior to the
closing upon agreement with all parties or upon breach of contract of either party, uncured within 20 days of notice. If the WraSer APA
was terminated upon agreement with all parties or upon uncured breach of contract by the Company, the initial $3.5 million payment would
be retained by the WraSer Seller. If it was determined that there is an uncured breach of contract by the WraSer Seller, and the WraSer
APA was terminated, the Company would have an unsecured claim against WraSer for the $3.5 million payment made by the Company upon execution
of the WraSer APA. The closing of the transaction was subject to certain customary closing conditions, including submission of the FDA
transfer documentation to transfer ownership of the acquired product regulatory approvals to the Company. Management evaluated the terms of the WraSer APA
and the WraSer MSA, and determined that, at the Execution Date, control under the provisions of ASC 805, Business Combinations Consolidations The Company recorded the initial $3.5 million
payment as a deposit. The Company does not have any liabilities recorded as of March 31, 2024 and December 31, 2023 associated with its
variable interest in the WraSer Seller, and its exposure to the WraSer Seller’s losses is limited to no more than the shortfall,
if any, of the Cash Target amount of approximately $1.1 million compared to the WraSer Seller’s cash balance on the WraSer Closing
Date. On September 26, 2023, WraSer and its affiliates
filed for relief under chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. On October 4, 2023, the parties agreed to amend
the WraSer APA, which was subject to court approval. Shortly after its bankruptcy filing, WraSer filed a motion seeking approval of the
WraSer APA as amended. The amendment, among other things, eliminates the $500,000 post-closing payment due June 13, 2024 and
staggers the $4.5 million cash payment that the Company would otherwise have to pay at closing to: (i) $2.2 million to
be paid at closing, (ii) $2.3 million, to be paid in monthly installments of $150,000 commencing January 2024 and (iii) 789 shares
of Series A Preferred Stock to be paid at closing. The amendment also reduced the number of products the Company was acquiring by
excluding pain medications and including only (i) Ciprofloxacin 0.3% and Fluocinolone 0.025% Otic Solution, under the trademark OTOVEL
and its Authorized Generic Version approved under US FDA NDA No. 208251, (ii) Ciprofloxacin 0.2% Otic solution, under the trademark
CETRAXAL, and (iii) Vorapaxar Sulfate tablets under the trademark Zontivity approved under US FDA NDA N204886. In October 2023, WraSer alerted the Company
that its sole manufacturer for the active pharmaceutical ingredient (“API”) for Zontivity, the key driver for the WraSer acquisition,
would no longer manufacture the API for Zontivity. The Company believes that this development constituted a Material Adverse Effect under
the WraSer APA and the WraSer MSA, enabling the Company to terminate the WraSer APA and the WraSer MSA. On October 20, 2023, the Company
filed a motion for relief from the automatic stay in the Bankruptcy Court so that the Company can exercise the termination rights under
the WraSer APA, as amended. On December 18, 2023, the Bankruptcy Court entered into an Agreed Order lifting the automatic stay to
enable the Company to exercise its rights to terminate the WraSer APA and the WraSer MSA. On December 21, 2023, the Company
filed a Notice with the Bankruptcy Court terminating the WraSer APA and the WraSer MSA. WraSer has advised the Company that it does
not believe that a Material Adverse Effect occurred. In addition, WraSer recently filed a plan of reorganization that indicates it may
seek damages from the Company due to the termination of the APA and MSA. Due to the WraSer bankruptcy filing and the Company’s status
as an unsecured creditor of WraSer, it is unlikely that the Company will recover the $3.5 million initial payment made, or any costs and
resources in connection with services provided by the Company under the WraSer MSA, and therefore the Company recorded a loss on impairment
for the $3.5 million deposit during the year ended December 31, 2023. Proteomedix On December 15, 2023 (the “Acquisition Date”),
Onconetix entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Proteomedix and each of the holders
of outstanding capital stock or Proteomedix convertible securities (other than Proteomedix stock options) (collectively the “Sellers”),
pursuant to which 3,675,414 shares of common stock and 2,696,729 shares of
Series B Convertible Preferred Stock (the “PMX Transaction”). Subject
to any requirements related to the Committee on Foreign Investment in the United States, upon approval by the requisite vote of stockholders
of Onconetix at the Special Meeting of the Stockholders (“Stockholder Approval”), each share of Series B Convertible Redeemable
Preferred Stock (“Series B Preferred Stock”) shall automatically convert into 100 shares of common stock in accordance with
the terms of the Series B Certificate of Designation (the “Conversion”). If Stockholder Approval is not obtained by January
1, 2025, Onconetix may, at the option of the holders, be obligated to cash settle the Series B Preferred Stock. The Series B Preferred
Stock outstanding as a result of the PMX Transaction is convertible into 269,672,900 shares of common stock. The
consummation (the “Closing”) of the PMX Transaction was subject to customary closing conditions and the agreement to enter
into a subscription agreement (see Note 8) with (the “PMX Investor”). In addition, each option
to purchase shares of Proteomedix (each, a “Proteomedix Stock Option”) outstanding immediately before the Closing, whether
vested or unvested, remains outstanding until the Conversion unless otherwise terminated in accordance with its terms. At the Conversion,
each outstanding Proteomedix Stock Option, whether vested or unvested, shall be assumed by Onconetix and converted into the right to receive
(a) an option to acquire shares of common stock (each, an “Assumed Option”) or (b) such other derivative security as Onconetix
and Proteomedix may agree, subject in either case to substantially the same terms and conditions as were applicable to such Proteomedix
Stock Option immediately before the Closing. Each Assumed Option shall: (i) represent the right to acquire a number of shares of common
stock equal to the product of (A) the number of Proteomedix common shares that were subject to the corresponding Proteomedix Option immediately
prior to the Closing, multiplied by (B) the Exchange Ratio (as defined in the Share Exchange Agreement”); and (ii) have an exercise
price (as rounded down to the nearest whole cent) equal to the quotient of (A) the exercise price of the corresponding Proteomedix Option,
divided by (B) the Exchange Ratio. Management determined
that the PMX Transaction was a business combination as defined within ASC 805 , Proteomedix is a healthcare company whose mission
is to transform prostate cancer diagnosis. Proteomedix has identified novel biomarker signatures with utility in prostate cancer diagnosis,
prognosis and therapy management. The Company expects Proteomedix’s diagnostic expertise to complement its existing prostate related
treatment portfolio. The assets acquired and liabilities assumed are
recognized provisionally in the accompanying condensed consolidated balance sheets at their estimated fair values as of the acquisition
date. The initial accounting for the business combination is not complete as the Company is in the process of obtaining additional information
for the valuation of acquired intangible assets and deferred tax liabilities. The provisional amounts are subject to change to the extent
that additional information is obtained about the facts and circumstances that existed as of the acquisition date. Under U.S. GAAP, the
measurement period shall not exceed one year from the acquisition date and the Company will finalize these amounts no later than December
15, 2024. The estimated fair values as of the acquisition date are based on information that existed as of the acquisition date. During
the measurement period the Company may adjust provisional amounts recorded for assets acquired and liabilities assumed to reflect new
information that the Company has subsequently obtained regarding facts and circumstances that existed as of the acquisition date. The acquisition-date fair value of the consideration
transferred totaled approximately $65.1 million, which consisted of the following:
Consideration
Common stock $ 875,484
Series B Preferred Stock 64,236,085
Total consideration transferred $ 65,111,569 The fair value of the Company’s common shares
issued as consideration was based on the closing price of the Company’s common stock as of the Acquisition Date. The fair value
of the Series B Preferred Stock issued as consideration was based on the underlying fair value of the number of common shares that the
Series B Preferred Stock converts into, also based on the closing price of the Company’s common stock as of the Acquisition Date. The fair value of the Proteomedix stock options
assumed as part of the PMX Transaction was determined using a Black-Scholes option pricing model with the following significant assumptions:
Exercise price $1.15 – 28.83
Stock price $128.11
Term (years) 0.17 – 3.59
Expected stock price volatility 90%
Risk-free rate of interest 4.07% – 5.47% The following table summarizes the preliminary
estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Net Assets
Cash $ 1,056,578
Accounts receivable 87,445
Inventories 80,593
Prepaid expenses and other current assets 114,615
Right of use asset 149,831
Property and equipment, net 39,779
Trade name 9,018,000
Customer relationships 1,891,000
Product rights for developed technology 10,541,000
Goodwill 53,914,055
Total assets acquired 76,892,896
Accounts payable (234,029 )
Accrued expenses (732,814 )
Operating lease liability (149,831 )
Deferred tax liability (2,994,669 )
Pension benefit obligation (548,384 )
Note payable (115,096 )
Total liabilities assumed (4,774,823 )
Net assets 72,118,073
Less non-controlling interest (7,006,504 )
Net assets acquired $ 65,111,569 The goodwill recognized as a result of the PMX
Transaction is attributable primarily to expected synergies and the assembled workforce of Proteomedix. None of the goodwill is expected
to be deductible for income tax purposes. The fair values of the acquired tangible and intangible
assets were determined using variations of the cost, income approach using the excess earnings, lost profits and relief from royalty methods.
The income approach valuation methodology used for the intangible assets acquired in the PMX Transaction makes use of Level 3 inputs. The trade name intangible asset represents the
value of the Proclarix™ brand name and was valued using a relief from royalty method under an income approach. A royalty rate of
6% was utilized in determining the fair value of this intangible asset. The fair value of this asset was determined based on a cash flow
model using forecasted revenues and expenses specifically tied to Proclarix™. Those cash flows were then discounted at 10% determined
by the use of a weighted average return on assets analysis. The life of this intangible asset was determined to be indefinite as the branded
name will persist beyond the life of the product rights and customer relationships. The customer relationship intangible assets represent
the value of the existing customer contract with Labcorp (see Note 6) and was valued using the lost profits method under the income approach.
The fair value of this asset was determined based on a cash flow model using forecasted revenues specifically tied to Proteomedix’s
Labcorp contract. Those cash flows were then discounted at 10% determined by the use of a weighted average return on assets analysis.
The estimated useful life of this asset was determined by reference to the estimated life of the product rights associated with the Labcorp
contract. The product rights for developed technology acquired
in the PMX Transaction represents know-how and patented intellectual property held by PMX pertaining to its commercial-ready prostate
cancer diagnostic system, Proclarix™. The fair value of this asset was determined based on a cash flow model based on forecasted
revenues and expenses specifically tied to Proclarix™. Those cash flows were then discounted at 8% for the period prior to patent
expiration and 16% for the period thereafter. The discount rates were determined by the use of a weighted average return on assets analysis.
The estimated useful life of the product rights was determined based on the underlying patent’s remaining life. The fair value of the non-controlling interest
in Proteomedix is estimated to be $7.0 million and represents the fair value of the vested Proteomedix stock options outstanding as of
the Acquisition Date. The fair value of the non-controlling interest was valued using the methodology applicable to the Proteomedix stock
options disclosed above. As Proteomedix was a private company as of the Acquisition Date, the fair value measurement is based on significant
inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurement The Company recognized approximately $1.5 million
of acquisition related costs that were expensed during 2023, including the fair value of the related party subscription agreement liability,
which was a closing condition for the PMX Transaction (see Note 8). The following summary, prepared on a pro forma
basis, presents the Company’s unaudited consolidated results of operations for the three months ended March 31, 2023, as if the
PMX Transaction had been completed as of January 1, 2023. The pro forma results below include the impact of amortization of intangible
assets. This pro forma information is presented for illustrative purposes only, is not necessarily indicative of future results of operations
and does not include any impact of transaction synergies. In addition, the pro forma results are not necessarily indicative of the results
of operations that actually would have been achieved had the PMX Transaction been consummated as of that date:
Unaudited For the Three Months Ended
Revenue $ 1,011,714
Net loss 2,576,001 |
