UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2019
2020 or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-38247
AYTU BIOSCIENCE, INC.
(www.aytubio.com)
Delaware
| | 47-0883144 |
(State (State or other jurisdiction of incorporation or organization) | | (IRS(IRS Employer Identification No.) |
373 Inverness Parkway, Suite 206
Englewood, Colorado 80112
(Address of principal executive offices, including zip code)
(720) 437-6580
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, par value $0.0001 per share | | AYTU | | The NASDAQ Stock Market LLC |
As of November 1, 2019,2020, there were 20,733,052127,928,522 shares of Common Stock outstanding.
AYTU BIOSCIENCE, INC. AND SUBSIDIARY
SUBSIDIARIES FOR THE QUARTER ENDED SEPTEMBER 30, 20182020
INDEX
PART I—FINANCIAL INFORMATION
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our anticipated future clinical and regulatory events, future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Forward looking statements are generally written in the future tense and/or are preceded by words such as “may,” “will,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” or similar words, or the negatives of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, without limitation: the planned expanded commercialization of our products and the potential future commercialization of our product candidates, our anticipated future cash position; our plan to acquire additional assets; our anticipated future growth rates; anticipated sales increases; anticipated net revenue increases;amounts of certain future expenses and costs of goods sold;anticipated increases to operating expenses, research and development expenses, and selling, general, and administrative expenses; and future events under our current and potential future collaborations.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Risk Factors” in Part I,II Item 1A of our most recent Annual Report on Form 10-K,10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.
This Quarterly Report on Form 10-Q includes trademarks, such as Aytu, Natesto, Tuzistra, ZolpiMist,Natesto®, Tuzistra®, ZolpiMist®, MiOXSYS®, Karbinal®, and MiOXSYSwhichPoly-Vi-Flor®, and the recently acquired consumer health products such as FlutiCare®, Diabasens®, Urivarx®, Sensum®, and Vesele®, as well as Beyond Human ®, a specialty marketing platform, which are protected under applicable intellectual property laws and we own or have the rights to. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names.
PART I—FINANCIAL INFORMATION
Consolidated Financial Statements
AYTUAYTU BIOSCIENCE, INC. AND SUBSIDIARYSUBSIDIARIESCondensed Consolidated Balance Sheets
| | | |
| | | |
| | | |
| Assets | | |
| Current assets | | |
| Cash and cash equivalents | $7,014,307 | $11,044,227 |
| Restricted cash | 250,000 | 250,000 |
| Accounts receivable, net | 1,705,428 | 1,740,787 |
| Inventory, net | 1,380,729 | 1,440,069 |
| Prepaid expenses and other | 573,199 | 957,781 |
| Note receivable | 1,000,000 | – |
| Other current assets | 59,014 | – |
| Total current assets | 11,982,677 | 15,432,864 |
| | | |
| | | |
| Fixed assets, net | 137,900 | 203,733 |
| Licensed assets, net | 18,293,199 | 18,861,983 |
| Patents, net | 214,278 | 220,611 |
| Right-of-use asset | 393,820 | – |
| Deposits | 2,200 | 2,200 |
| Total long-term assets | 19,041,397 | 19,288,527 |
| | | |
| Total assets | $31,024,074 | $34,721,391 |
| | | |
| Liabilities | | |
| Current liabilities | | |
| Accounts payable and other | $2,632,642 | $2,297,270 |
| Accrued liabilities | 1,151,181 | 1,147,740 |
| Accrued compensation | 1,002,409 | 849,498 |
| Current lease liability | 79,362 | – |
| Current contingent consideration | 1,236,625 | 1,078,068 |
| Total current liabilities | 6,102,219 | 5,372,576 |
| | | |
| Long-term contingent consideration | 22,272,068 | 22,247,796 |
| Long-term lease liability | 314,457 | – |
| Warrant derivative liability | 11,371 | 13,201 |
| Total liabilities | 28,700,115 | 27,633,573 |
| | | |
| Commitments and contingencies (Note 11) | | |
| | | |
| Stockholders' equity | | |
| Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 3,151,148 and 3,594,981, respectively as of September 30, 2019 (unaudited) and June 30, 2019. | 315 | 359 |
| Common Stock, par value $.0001; 100,000,000 shares authorized; shares issued and outstanding 17,981,094 and 17,538,071, respectively as of September 30, 2019 (unaudited) and June 30, 2019. | 1,798 | 1,754 |
| Additional paid-in capital | 113,640,376 | 113,475,205 |
| Accumulated deficit | (111,318,530) | (106,389,500) |
| Total stockholders' equity | 2,323,959 | 7,087,818 |
| | | |
| Total liabilities and stockholders' equity | $31,024,074 | $34,721,391 |
| | | |
| | | |
| | | |
| Assets |
| Current assets | | |
| Cash and cash equivalents | $37,911,065 | $48,081,715 |
| Restricted cash | 251,778 | 251,592 |
| Accounts receivable, net | 6,111,911 | 5,175,924 |
| Inventory, net | 11,479,557 | 9,999,441 |
| Prepaid expenses and other | 3,681,401 | 5,715,089 |
| Other current assets | 6,017,888 | 5,742,011 |
| Total current assets | 65,453,600 | 74,965,772 |
| Fixed assets, net | 106,153 | 258,516 |
| Right-of-use asset | 334,289 | 634,093 |
| Licensed assets, net | 16,018,064 | 16,586,847 |
| Patents and tradenames, net | 10,639,080 | 11,081,048 |
| Product technology rights, net | 20,619,166 | 21,186,666 |
| Deposits | 9,900 | 32,981 |
| Goodwill | 28,090,407 | 28,090,407 |
| Total long-term assets | 75,817,059 | 77,870,558 |
| Total assets | $141,270,659 | $152,836,330 |
See the accompanying Notes to the Consolidated Financial Statements
AYTUAYTU BIOSCIENCE, INC. AND SUBSIDIARYSUBSIDIARIESCondensed Consolidated Balance Sheets, cont’d
| | | |
| | | |
| | | |
| Liabilities |
| Current liabilities | | |
| Accounts payable and other | $5,773,768 | $11,824,560 |
| Accrued liabilities | 8,692,693 | 7,849,855 |
| Accrued compensation | 1,967,035 | 3,117,177 |
| Debt | 930,416 | 982,076 |
| Contract liability | 232,576 | 339,336 |
| Current lease liability | 97,458 | 300,426 |
| Current portion of fixed payment arrangements | 2,138,514 | 2,340,166 |
| Current portion of CVR liabilities | 954,800 | 839,734 |
| Current portion of contingent consideration | 718,647 | 713,251 |
| Total current liabilities | 21,505,907 | 28,306,581 |
| Long-term contingent consideration, net of current portion | 13,058,876 | 12,874,351 |
| Long-term lease liability, net of current portion | 237,497 | 725,374 |
| Long-term fixed payment arrangements, net of current portion | 10,679,903 | 11,171,491 |
| Long-term CVR liabilities, net of current portion | 4,714,359 | 4,731,866 |
| Other long-term liabilities | 11,371 | 11,371 |
| Total liabilities | 50,207,913 | 57,821,034 |
| Commitments and contingencies (Note 10) | | |
| Stockholders' equity | | |
| Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 0 and 0, respectively as of September 30, 2020 and June 30, 2020, respectively. | — | — |
| Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 125,837,357 and 125,837,357 respectively as of September 30, 2020 and June 30, 2020. | 12,584 | 12,584 |
| Additional paid-in capital | 215,366,272 | 215,012,891 |
| Accumulated deficit | (124,316,110) | (120,010,179) |
| Total stockholders' equity | 91,062,746 | 95,015,296 |
| Total liabilities and stockholders' equity | $141,270,659 | $152,836,330 |
See accompanying Notes to the Consolidated Financial Statements
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
| | | |
| | | |
| | | | |
| | | | |
| Revenues | | |
| Product revenue, net | $1,439,826 | $1,431,809 | $13,520,246 | $1,439,826 |
| | | |
| Operating expenses | | |
| Cost of sales | 375,720 | 410,959 | 3,819,156 | 375,720 |
| Research and development | 78,020 | 155,878 | 182,865 | 78,020 |
| Selling, general and administrative | 5,146,443 | 3,576,580 | 11,490,370 | 5,146,443 |
| Selling, general and administrative - related party | – | 253,709 | |
| Amortization of intangible assets | 575,117 | 451,957 | 1,584,581 | 575,117 |
| Total operating expenses | 6,175,300 | 4,849,083 | 17,076,972 | 6,175,300 |
| | | |
| Loss from operations | (4,735,474) | (3,417,274) | (3,556,726) | (4,735,474) |
| | | |
| Other (expense) income | | |
| Other (expense), net | (195,386) | (76,561) | (751,541) | (195,386) |
| Gain from change in fair value of contingent consideration | | 2,336 | — |
| Gain from warrant derivative liability | 1,830 | 47,352 | — | 1,830 |
| Total other (expense) income | (193,556) | (29,209) | (749,205) | (193,556) |
| | | |
| Net loss | $(4,929,030) | $(3,446,483) | $(4,305,931) | $(4,929,030) |
| | | |
| Weighted average number of common shares outstanding | 15,325,921 | 1,759,824 | 121,585,939 | 15,325,921 |
| | | |
| Basic and diluted net loss per common share | $(0.32) | $(1.96) | $(0.04) | $(0.32) |
See the accompanying Notes to the Consolidated Financial Statements.
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity (unaudited unless indicated otherwise)
| | | | |
| Total |
| | | | | | | | |
| BALANCE - June 30, 2019 (audited) | 3,594,981 | $359 | 17,538,071 | $1,754 | $113,475,205 | $(106,389,500) | $7,087,818 |
| Stock-based compensation | — | $— | — | $— | $165,171 | $— | $165,171 |
| Preferred stock converted in common stock | (443,833) | (44) | 443,833 | 44 | — | — | — |
| Net loss | — | — | — | — | — | (4,929,030) | $(4,929,030) |
| BALANCE - September 30, 2019 | 3,151,148 | $315 | 17,981,904 | $1,798 | $113,640,376 | $(111,318,530) | $2,323,959 |
| | | | |
| Total |
| | | | | | | | |
| BALANCE - June 30, 2020 (audited) | — | $— | 125,837,357 | $12,584 | $215,012,891 | $(120,010,179) | $95,015,296 |
| Stock-based compensation | — | $— | — | $— | $454,918 | $— | $454,918 |
| Issuance costs | — | $— | — | $— | $(101,537) | $— | $(101,537) |
| Net loss | — | $— | — | $— | $— | $(4,305,931) | $(4,305,931) |
| BALANCE - September 30, 2020 | — | $— | 125,837,357 | $12,584 | $215,366,272 | $(124,316,110) | $91,062,746 |
See the accompanying Notes to the Consolidated Financial Statements
AYTUAYTU BIOSCIENCE, INC. AND SUBSIDIARYSUBSIDIARIESCondensed Consolidated StatementStatements of Stockholders’ EquityCash Flows (unaudited)
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| BALANCE - June 30, 2019 | 3,594,981 | $359 | 17,538,071 | $1,754 | $113,475,205 | $(106,389,500) | $7,087,818 |
| | | | | | | | |
| Stock-based compensation | – | – | – | – | 165,171 | – | 165,171 |
| Preferred stock converted in common stock | (443,833) | (44) | 443,833 | 44 | – | – | – |
| Net loss | – | – | – | – | – | (4,929,030) | (4,929,030) |
| | | | | | | | |
| BALANCE - September 30, 2019 | 3,151,148 | $315 | 17,981,904 | $1,798 | $113,640,376 | $(111,318,530) | $2,323,959 |
| | |
| | |
| | | |
| | | |
| Operating Activities | | |
| Net loss | $(4,305,931) | $(4,929,030) |
| Adjustments to reconcile net loss to cash used in operating activities: | | |
| Depreciation, amortization and accretion | 2,092,618 | 869,312 |
| Stock-based compensation expense | 454,918 | 165,171 |
| Loss / (gain) from change in fair value of contingent consideration | (99,895) | — |
| Loss on sale of equipment | 112,110 | — |
| Gain on termination of lease | (343,185) | — |
| Changes in allowance for bad debt | 408 | — |
| Loss / (gain) from change in fair value of CVR | 97,559 | — |
| Derivative income | | (1,830) |
| Changes in operating assets and liabilities: | | |
| (Increase) decrease in accounts receivable | (928,895) | 35,359 |
| (Increase) decrease in inventory | (1,480,116) | 59,340 |
| Decrease in prepaid expenses and other | 2,027,358 | 384,582 |
| (Increase) in other current assets | (237,720) | - |
| (Decrease) increase in accounts payable and other | (4,519,601) | 276,917 |
| Increase in accrued liabilities | 412,328 | 3,441 |
| (Decrease) increase in accrued compensation | (1,150,142) | 152,911 |
| (Decrease) in contract liability | (106,760) | — |
| (Decrease) in deferred rent | — | (3,990) |
| Net cash used in operating activities | (7,974,946) | (2,987,817) |
| Investing Activities | | |
| Deposit | 2,200 | — |
| Contingent consideration payment | (19,140) | (42,103) |
| Note Receivable | | (1,000,000) |
| Net cash used in investing activities | (16,940) | (1,042,103) |
| Financing Activities | | |
| Issuance cost related to registered offering | (1,632,727) | — |
| Payments made to borrowings | (136,364) | — |
| Payments made to fixed payment arrangements | (409,487) | — |
| Net cash used by financing activities | (2,178,578) | — |
| Net change in cash, restricted cash and cash equivalents | (10,170,464) | (4,029,920) |
| Cash, restricted cash and cash equivalents at beginning of period | 48,333,307 | 11,294,227 |
| Cash, restricted cash and cash equivalents at end of period | $38,162,843 | $7,264,307 |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| BALANCE - June 30, 2018 | – | $– | 1,794,762 | $179 | $92,681,918 | $(79,257,592) | $13,424,505 |
| | | | | | | | |
| Stock-based compensation | – | – | – | – | 152,114 | – | 152,114 |
| Adjustment for rounding of shares due to stock split | – | – | 6,649 | 1 | (1) | – | – |
| Net loss | – | – | – | – | – | (3,446,483) | (3,446,483) |
| | | | | | | | |
| BALANCE - September 30, 2018 | – | $– | 1,801,411 | $180 | $92,834,031 | $(82,704,075) | $10,130,136 |
See the accompanying Notes to the Consolidated Financial StatementsStatements.
AYTUAYTU BIOSCIENCE, INC. AND SUBSIDIARYSUBSIDIARIESCondensed Consolidated Statements of Cash Flows, cont’d
(unaudited)
| | |
| | |
| | | |
| | | |
| Operating Activities | | |
| Net loss | $(4,929,030) | $(3,446,483) |
| Adjustments to reconcile net loss to cash used in operating activities: | | |
| Depreciation, amortization and accretion | 869,312 | 556,807 |
| Stock-based compensation expense | 165,171 | 152,114 |
| Derivative income | (1,830) | (47,352) |
| Changes in operating assets and liabilities: | | |
| Decrease (increase) in accounts receivable | 35,359 | (181,274) |
| Decrease in inventory | 59,340 | 28,870 |
| Decrease (increase) in prepaid expenses and other | 384,582 | (296,971) |
| Increase (decrease) in accounts payable and other | 276,917
| (7,889) |
| Increase in accrued liabilities | 3,441 | 242,969 |
| Increase in accrued compensation | 152,911 | 256,174 |
| (Decrease) in deferred rent | (3,990) | (1,450) |
| Net cash used in operating activities | (2,987,817) | (2,744,485) |
| | | |
| Investing Activities | | |
| Deposit | – | 2,888 |
| Purchases of fixed assets | – | (6,065) |
| Contingent consideration payment | (42,103) | – |
| Note receivable | (1,000,000) | – |
| Purchase of assets | – | (300,000) |
| Net cash used in investing activities | (1,042,103) | (303,177) |
| | | |
| Financing Activities | | |
| Net cash provided by financing activities | – | – |
| | | |
| Net change in cash, restricted cash and cash equivalents | (4,029,920) | (3,047,662) |
| Cash, restricted cash and cash equivalents at beginning of period | 11,294,227 | 7,112,527 |
| Cash, restricted cash and cash equivalents at end of period | $7,264,307 | $4,064,865 |
| | | |
| | | |
| Supplemental disclosures of cash and non-cash investing and financing transactions | | |
| Cash paid for interest | $3,390 | $– |
| Fair value of right-to-use asset and related lease liability upon adoption of Topic 842 - Leases | 412,691 | – |
| Contingent consideration included in accounts payable | 3,430 | – |
| Acquisition costs included in accounts payable | 59,014
| – |
| Exchange of convertible preferred stock into common stock | $44 | $– |
| | |
| | |
| Supplemental disclosures of cash and non-cash investing and financing transactions | | |
| Warrants issued to underwriters | $356,139 | $— |
| Cash paid for interest | 247,869 | 3,390 |
| Fair value of right-to-use asset and related lease liability | 20,438 | 412,691 |
| Contingent consideration included in accounts payable | — | 3,430 |
| Fixed payment arrangements included in accrued liabilities | 430,510 | — |
| Acquisition costs included in accounts payable | — | 59,014 |
| Exchange of convertible preferred stock into common stock | $— | $44 |
See the accompanying Notes to the Consolidated Financial Statements
AYTUAYTU BIOSCIENCE, INC. AND SUBSIDIARYSUBSIDIARIES
NotesNotes to Condensed Consolidated Financial Statements(unaudited)
1.
Nature of Business, Financial Condition, Basis of Presentation
Nature of Business. Aytu BioScience, Inc. (“Aytu”, the “Company” or “we”) is a commercial-stage specialty pharmaceutical company focused on commercializing novel products that address significant healthcare needs in both prescription and consumer health categories. The Company is currently focused on its Aytu BioScience business, consisting of the Primary Care Portfolio (the “Primary Care Portfolio”) and Pediatric Care Portfolio (the “Pediatric Portfolio”), and its Aytu Consumer Health business (the “Consumer Health Portfolio”). The Aytu BioScience business is focused on prescription pharmaceutical products treating hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, male infertility, and various pediatric conditions. The Aytu Consumer Health business is focused on consumer healthcare products. The Company plans to expand into other therapeutic areas as opportunities arise. The Company was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated in the state of Delaware on June 8, 2015. Aytu is
The Primary Care Portfolio consists of (i) Natesto®, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist®, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra® XR, the only FDA-approved 12-hour codeine-based antitussive syrup.
The Pediatric Care Portfolio, acquired on November 1, 2019, (the “Pediatric Portfolio”), includes (i) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various for infants and children with fluoride deficiency, (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; and (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions.
On February 14, 2020, the Company acquired Innovus Pharmaceuticals Inc. (“Innovus”), a specialty pharmaceutical company focusedcommercializing, licensing and developing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes twenty-two consumer health products competing in large healthcare categories including diabetes, men's health, sexual wellness and respiratory health. The Consumer Health Portfolio is commercialized through direct-to- consumer marketing channels utilizing Innovus’s proprietary Beyond Human® marketing and sales platform and on global commercialization of novel products addressing significant medical needs such as hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, and male infertility and plans to expand opportunistically into other therapeutic areas.eCommerce platforms.
The Company acquired U.S. distribution rights to a COVID-19 IgG/IgM rapid test. The coronavirus test is currentlya solid phase immunochromatographic assay used in the rapid, qualitative and differential detection of IgG and IgM antibodies to the 2019 Novel Coronavirus in human whole blood, serum or plasma. The rapid test has been validated in multi-center clinical trials. The Company entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in pre-clinical studies, and we plan to advance this technology and assess its safety and efficacy in human studies, initially focused on commercializationCovid-19 patients.
The Company’s strategy is to continue building its portfolio of fourrevenue-generating products, (i) Natesto®, a testosterone replacement therapy, or TRT, (ii) Tuzistra® XR, a codeine–based antitussive, (iii) ZolpiMist™, a short-term insomnia treatment and (iv), MiOXSYS®, a novel in vitro diagnostic system for male infertility assessment. In the future the Company will lookleveraging its commercial team’s expertise to acquire additional commercial-stage or near-market products, including existing products we believe can offer distinct clinical advantages and patient benefits over existing marketed products. The management team’s prior experience has involved identifying both clinical-stage and commercial-stage assets that can be launched or re-launched to increase value, with a focused commercial infrastructure specializing in novel, niche products.build leading brands within large therapeutic markets.
Financial Condition. As of September 30, 2020, the Company had approximately $38.2 million of cash, cash equivalents and restricted cash. The Company’s operations have historically consumed cash and are expected to continue to require cash, but at a declining rate.
Revenues for the three-months ended September 30, 2019 slightly2020 were $13.5 million and increased approximately 839% compared to $1.4 million for the three-months ended September 30, 2018,2019. Revenues increased 277% and revenues increased 100% and 14% for each of the years ended June 30, 20192020 and 2018,2019, respectively. Revenue is expected to continue to increase long-term, allowingover time, which will allow the Company to rely less on our existing cash and cash equivalents,balance and proceeds from financing transactions. Cash used inby operations during the three-months ended September 30, 20192020 was $3.0$8.0 million compared to $2.7$3.0 million for the three-months ended September 30, 2018,2019. The increase is due primarily to the Company’s focus on market development activities including significant product acquisitionan increase in working capital and launch-related activities, which consume additional cash resources.pay down of other liabilities.
On October 11, 2019, the Company entered into Securities Purchase Agreements (the “Purchase Agreement”) with two institutional investors (the “Investors”) providing for the issuance and sale by the Company (the “Offering”) of $10.0 million of, (i) shares of the Company’s Series F Convertible Preferred Stock (the “Preferred Stock”) which are convertible into shares of common stock (the “Conversion Shares”) and (ii) warrants (the “Warrants”) which are exercisable for shares of common stock (the “Warrant Shares”). The Warrants have an exercise price equal to $1.25 and contain cashless exercise provisions. Each Warrant will be exercisable after we obtain stockholder approval as required by applicable Nasdaq rules (“Shareholder Approval”) and will expire five years from the time a registration statement covering the Conversion Shares and Warrant Shares is declared effective by the Securities and Exchange Commission. The closing of the sale of these securities occurred on October 16, 2019.
The net proceeds that the Company received from the Offering were approximately $9.3 million. The net proceeds received by the Company from the Offering will be used for general corporate purposes, including working capital.
As of the date of this Report, the Company expects its commercial costs for its current operation to remain approximately flat oroperations to increase modestly as the Company integrates the acquisition of the Pediatrics Portfolio and Innovus and continues to focus on revenue growth through increasing product sales. The Company’s currenttotal asset position of $31.0totaling approximately $141.3 million plus the proceeds expected from ongoing product sales will be used to fund existing operations. The Company willmay continue to access the capital markets to fund operations if andfrom time-to-time when needed, and to the extent it is required.market conditions are favorable. The timing and amount of capital that may be raised is dependent on market conditions and the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms favorable to the Company and its stockholders, or at all. However,The Company raised approximately $6.6 million, net during its fourth quarter ended June 30, 2020 from the sale of new common equity using the Company’s at-the-market facility. There were zero funds raised during the quarter ended September 30, 2020. Between September 30, 2020, and the filing date of this quarterly report on Form 10-Q, the Company raised gross proceeds of approximately $3.1 million upon the issuance of approximately 3.0 million shares of the Company’s common stock under the Company’s at-the-market offering program. As of the date of this report, the Company has been successful in accessing theadequate capital markets in the past and is confident inresources to complete its ability to access the capital markets again, if needed. near-term operating objectives.
Since the Company does not havehas sufficient cash and cash equivalents on-hand as of September 30, 20192020 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) requires the Company to reportreports that there exists anno indication of substantial doubt about its ability to continue as a going concern.
If the Company is unable to raise adequate capital in the future when it is required, the CompanyAytu management can adjust its operating plans to reduce the magnitude of the capital need under its existing operating plan. Some of the adjustments that could be made include delays of and reductions to commercial programs, reductions in headcount, narrowing the scope of the Company’s commercial plans, or reductions to its research and development programs. Without sufficient operating capital, the Company could be required to relinquish rights to products or renegotiate to maintain such rights on less favorable terms than it would otherwise choose. This may lead to impairment or other charges, which could materially affect the Company’s balance sheet and operating results.
Recent acquisition agreements. During the three months ended September 30, 2019 and during the subsequent period thereafter, the Company entered into both (i) a definitive merger agreement (the “Merger Agreement”) between the Company and Innovus Pharmaceuticals, Inc. (“Innovus”) on September 12, 2019, and (ii) an asset purchase agreement (the “Asset Purchase Agreement”) between the Company and Cerecor, Inc. (“Cerecor”) to purchase and acquire certain of Cerecor’s pediatric and primary care product lines (the “Commercial Portfolio”) on October 10, 2019.
The Merger Agreement, agreed to on September 12, 2019, by both the Company and Innovus will cause, upon closing of the merger, for the Company to retire all of the outstanding common stock of Innovus for an aggregate of up to $8 million in shares of the Company’s common stock, less certain deductions (includes approximately $1.4 million in cash borrowed by Innovus from the Company during this time period (see Note 10)). This initial consideration to Innovus common shareholders is estimated to consist of primarily 4.2 million shares of the Company’s stock, and up to 1.5 million shares of the Company’s stock to satisfy certain warrant holders’ obligation. Additional consideration for up to $16 million in milestone payments in the form of contingent value rights (CVRs) may be paid to Innovus shareholders in cash or stock over the next five years if certain revenue and profitability milestones are achieved. Innovus specializes in commercializing, licensing and developing safe and effective over-the-counter consumer health products. The Company does not anticipate that this transaction will formally close until the quarter ended March 31, 2020 and is subject to approval by the shareholders of both the Company and Innovus.
The Asset Purchase Agreement agreed to on October 10, 2019, between the Company and Cerecor, caused upon the November 1, 2019 closing, the Company to pay $4.5 million in cash, issue approximately 9.8 million shares of Series G Convertible Preferred Stock and assume certain of Seller’s financial and royalty obligations, which includes approximately $16.6 million of fixed payment obligations to a third-party creditor and not more than $3.5 million of Medicaid rebates and products returns. The Commercial Portfolio consists of six pharmaceutical and other prescription products competing in markets exceeding $8 billion in annual sales in the United States. In addition, the Company will be assuming the majority of the Cerecor’s commercial sales, commercial contracts and customer relationship workforce.
In addition, the Company has assumed obligations due to an investor including fixed and variable payments. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million is due. The variable payment obligation continues until aggregate variable payments of approximately $9.5 million have been made.
Further, certain of the products in the Product Portfolio require royalty payments ranging from 15% to 23.5% of net revenue. One of the products in the Product Portfolio requires the Company to generate minimum annual sales sufficient to represent annual royalties of $1.8 million.
Nasdaq Listing Compliance. The Company’s common stock is listed on The Nasdaq Capital Market. In order to maintain compliance with Nasdaq listing standards, the Company must, amongst other requirements, maintain a stockholders’ equity balance of at least $2.5 million pursuant to Nasdaq Listing Rule 5550(b). In that regard, on September 30, 2019, the Company’s stockholders’ equity totaled approximately $2.3 million, thereby potentially resulting in a stockholders’ equity deficiency upon the filing of this Form 10-Q. However, subsequent to September 30, 2019, the Company completed (i) the Offering with the Investors, raising approximately $9.3 million in equity financing (see Note 1), and (ii) the “Asset Purchase Agreement” in which the Company issued approximately 9.8 million shares of Series G Convertible Preferred Stock worth an initial estimate of approximately $5.6 million, resulting in an increase in stockholders’ equity of approximately $14.8 million in the aggregate. Accordingly, as of the filing of this Form 10-Q for the three months ended September 30, 2019, the Company’s stockholders’ equity balance exceeds the minimum $2.5 million threshold and, therefore, the Company believe it is currently in compliance with all applicable Nasdaq Listing Requirements.
Basis of Presentation. The unaudited consolidated financial statements contained in this report represent the financial statements of Aytu and its wholly-owned subsidiary,subsidiaries, Aytu Women’s Health, LLC, Innovus Pharmaceuticals, Inc., and Aytu Therapeutics, LLC. The unaudited consolidated financial statements should be read in conjunction with Aytu’s Annual Report on Form 10-K for the year ended June 30, 2019,2020, which included all disclosures required by generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Aytu and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended September 30, 20192020 are not necessarily indicative of expected operating results for the full year. The information presented throughout this report, as of and for the three-month periods ended September 30, 2019,2020, and 2018,2019, is unaudited.
Interim Unaudited Condensed Consolidated Financial Statements. The accompanying condensed consolidated balance sheet as of September 30, 2020, and the condensed consolidated statements of operations, stockholders’ equity, for the three months ended, and the interim condensed consolidated statements of cash flows for the three months ended September 30, 2020 and 2019, are unaudited. The condensed consolidated balance sheet as of June 30, 2020 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial condition, its operations and cash flows for the periods presented. The historical results are not necessarily indicative of future results, and the results of operations for the three months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year or any other period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the determination of the fair value of equity awards, the fair value of identified assets and liabilities acquired in business combinations, the useful lives of property and equipment, intangible assets, impairment of long-lived and intangible assets, including goodwill, provisions for doubtful accounts receivable, certain accrued expenses, and the discount rate used in measuring lease liabilities. These estimates and assumptions are based on the Company’s historical results and management’s future expectations. Actual results could differ from those estimates.
Significant Accounting Policies
The Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company’s unaudited condensed consolidated financial statements and related notes during the three months ended September 30, 2020.
Adoption of New Accounting Pronouncements
Leases (“ASU 2016-02”).In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02 –Topic 842 Leases.ASU 2016-02 requires that most leases be recognized on the financial statements, specifically the recognition of right-to-use assets and related lease liabilities, and enhanced disclosures about leasing arrangements. The objective is to provide improved transparency and comparability among organizations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard requires using the modified retrospective transition method and apply ASU 2016-02 either at (i) latter of the earliest comparative period presented in the financial statements or commencement date of the lease, or (ii) the beginning of the period of adoption. The Company has elected to apply the standard at the beginning period of adoption, July 1, 2019 which resulted in no cumulative adjustment to retained earnings.
The Company has elected to apply the short-term scope exception for leases with terms of 12 months or less at the inception of the lease and will continue to recognize rent expense on a straight-line basis. As a result of the adoption, on July 1, 2019, the Company recognized a lease liability of approximately $0.4 million, which represented the present value of the remaining minimum lease payments using an estimated incremental borrowing rate of 8%. As of September 30, 2019, the Company recognized a right-to-use asset of approximately $0.4 million. Lease expense did not change materially as a result of the adoption of ASU 2016-02.
Recently Accounting Pronouncements
Fair Value Measurements (“ASU 2018-13”). In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in the standard apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure requirements in ASC 820, Fair Value Measurement. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuanceThe Company adopted this as of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuanceJuly 1, 2020, the beginning of the Company’s fiscal year-ended June 30, 2021. The most relevant component of ASU 2018-13 to the Company’s financial statements relates to the need to disclose the range and delay adoptionweighted-average of significant unobservable inputs used in Level 3 fair value measurements. However, the additional disclosures until their effective date. The Company is currently assessing the impact that ASU 2018-13 will havediscloses on its financial statements.a discrete basis all significant inputs for all Level 3 Fair Value measurements.
Recent Accounting Pronouncements
Financial Instruments – Credit Losses (“ASU 2016-13”). In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard iswas effective for interim and annual reporting periods beginning after December 15, 2019. However, in October 2019, the FASB approved deferral of the adoption date for smaller reporting companies for fiscal periods beginning after December 15, 2022. Accordingly, the Company’s fiscal year of adoption will be the fiscal year ended June 30, 2024. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018.2018, but the Company did not elect to early adopt. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements, but does not anticipate there to be a material impact.no conclusion has been reached.
This Quarterly Report on Form 10-Q does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to itsthe Company’s financial condition, results of operations, cash flows or disclosures.
2. Revenue Recognition
Acquisitions
The Pediatric Portfolio
On October 10, 2019, the Company sells itsentered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to acquire the Pediatric Portfolio, which closed on November 1, 2019. The Pediatric Portfolio consists of four main prescription products principally(i) Poly-Vi-Flor® and Tri-Vi-Flor™, (ii) Cefaclor for Oral Suspension, (iii) and Karbinal® ER. Total consideration transferred to a limited numberCerecor consisted of wholesale distributors$4.5 million cash and pharmacies in the United States, which account for the largest portionapproximately 9.8 million shares of our total revenue. International sales are made primarilySeries G Convertible Preferred Stock. The Company also assumed certain of Cerecor’s financial and royalty obligations, and not more than $3.5 million of Medicaid rebates and up to specialty distributors, as well as hospitals, laboratories, and clinics, some$0.8 million of product returns, of which are government owned or supported (collectively, its “Customers”).$3.5 million has been incurred. The Company’s Customers inCompany also retained the United States subsequently resell the products to pharmaciesmajority of Cerecor’s workforce focused on sales, commercial contracts and patients. Revenue from product sales is recorded at the net sales price, or “transaction price,” which includes estimates of variable consideration that result from coupons, discounts, chargebacks and distributor fees, processing fees, as well as allowances for returns and government rebates.customer relationships.
In accordance with ASC 606,addition, the Company recognizesassumed Cerecor obligations due to an investor that include fixed and variable payments aggregating to $25.6 million. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenuesrevenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was paid to the investor. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026. In June 2020, the Company paid down a $15 million balloon payment originally owed on January 2021 to reduce the fixed liability.
Further, certain of the products in the Product Portfolio require royalty payments ranging from 12% to 15% of net revenue. One of the products in the Product Portfolio requires the Company to generate minimum annual sales sufficient to represent annual royalties of approximately $1.8 million, in the event the minimum sales volume is not satisfied.
While no equity was acquired by the Company, the transaction was accounted for as a business combination under the acquisition method of accounting pursuant to Topic 805. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remainder of the aggregate purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified product sales whenportfolio that is expected to provide revenue and cost synergies.
The following table summarized the Customer obtains controlpreliminary fair value of assets acquired and liabilities assumed at the date of acquisition. These estimates are preliminary, pending final evaluation of certain assets and liabilities, and therefore, are subject to revisions that may result in adjustments to the values presented below:
| |
| |
| Consideration | |
| Cash and cash equivalents | $4,500,000 |
| Fair value of Series G Convertible Preferred Stock | |
| Total shares issued | 9,805,845 |
| Estimated fair value per share of Aytu common stock | $0.567 |
| Estimated fair value of equity consideration transferred | 5,559,914 |
| Total consideration transaferred | $10,059,914 |
| Recognized amounts of identifiable assets acquired and liabilities assumed | |
| Inventory, net | $459,123 |
| Prepaid assets | 1,743,555 |
| Other current assets | 2,525,886 |
| Intangible assets - product marketing rights | 22,700,000 |
| Accrued liabilities | (300,000) |
| Accrued product program liabilities | (6,683,932) |
| Assumed fixed payment obligations | $(29,837,853) |
| Total identifiable net assets | (9,393,221) |
| Goodwill | $19,453,135 |
The fair values of intangible assets, including product technology rights were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 9).
The fair value of the net identifiable asset acquired was determined to be $22.7 million, which is being amortized over ten years.
Innovus Merger (Consumer Health Portfolio)
On February 14, 2020, the Company completed the Merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon the effectiveness of the Merger, the Company merged with and into Innovus, and all outstanding Innovus common stock was exchanged for approximately 3.8 million shares of the Company’s product, which typically occurscommon stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 million shares of Series H Convertible Preferred stock of the Company and retired. The remaining Innovus warrants outstanding, those without ‘cash- out’ rights, at the time of the Merger, continue to be outstanding, and upon deliveryexercise, retain the right to the Customer. The Company’s payment terms are between 30merger consideration offered to 60 daysInnovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus is now a 100% wholly-owned subsidiary of the Company, (“Aytu Consumer Health”).
On March 31, 2020, the Company paid out the first CVR Milestone in the United Statesform of approximately 1.2 million shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24 million revenue milestone for the calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million.
In addition, as part of the Merger, the Company assumed approximately $3.1 million of notes payable, $0.8 million in lease liabilities, and consistentother assumed liabilities associated with prevailing practice in international markets. Innovus. Of the $3.1 million of notes payable, approximately $2.2 million was converted into approximately 1.8 million shares of the Company’s common stock since February 14, 2020. Approximately $0.3 million remained outstanding as of September 30, 2020.
The following table summarized the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. These estimates are preliminary, pending final evaluation of certain assets and liabilities, and therefore, are subject to revisions that may result in adjustments to the values presented below:
| |
| |
| Consideration | |
| Fair Value of Aytu Common Stock | |
| Total shares issued at close | 3,810,393 |
| Estimated fair value per share of Aytu common stock | $0.756 |
| Estimated fair value of equity consideration transferred | $2,880,581 |
| Fair value of Seris H Convertile Preferred Stock | |
| Total shares issued | 1,997,736 |
| Estimated fair value per share of Aytu common stock | $0.756 |
| Estimated fair value of equity consideration transferred | $1,510,288 |
| Fair value of former Innovus warrants | $15,315 |
| Fair value of Contingent Value Rights | $7,049,079 |
| Forgiveness of Note Payable owed to the Company | $1,350,000 |
| Total consideration transferred | $12,805,263 |
| |
| |
| Total consideration transferred | $12,805,263 |
| Recongnized amounts of identifiage assets acquired and liabilities assumed | |
| Cash and cash equivalents | $390,916 |
| Accounts receivable, net | 278,826 |
| Inventory, net | 1,149,625 |
| Prepaid expenses and other current assets | 1,692,133 |
| Other long-term assets | 36,781 |
| Right-to-use assets | 328,410 |
| Property, plant and equipment | 190,393 |
| Trademarks and patents | 11,744,000 |
| Accounts payable and accrued other expenses | (7,202,309) |
| Other current liabilities | (629,601) |
| Notes payable | (3,056,361) |
| Lease liability | (754,822) |
| Total identifiable assets | $4,167,991 |
| Goodwill | $8,637,272 |
The fair values of intangible assets, including product distribution rights were determined using variations of the income approach, specifically the relief-from-royalties method. It also includes customer lists using an income approach utilizing a discounted cash flow model. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 10).
The fair value of the net identifiable assets acquired was determined to be $11.7 million, which is being amortized over a range between 1.5 to 10 years.
Unaudited Pro Forma Information
The following supplemental unaudited proforma financial information presents the Company’s results as if the following acquisitions had occurred on July 1, 2019:
●
Acquisition of the Pediatric Portfolio, effective November 1, 2019;
●
Merger with Innovus effective February 14, 2020.
The unaudited pro forma results have been prepared based on estimates and assumptions, which management believes are reasonable, however, the results are not necessarily indicative of the consolidated results of operations had the acquisition occurred on July 1, 2019, or of future results of operations:
| | Three Months Ended | |
| | September 30, 2020 | |
| | | |
| | | |
Total revenues, net
| $13,520,246 | $10,606,870 |
| Net (loss) | (4,305,931) | (8,256,982) |
| Net (loss) per share (aa) | $(0.04) | $(0.29) |
(aa) Pro forma net loss per share calculations excluded the impact of the issuance of the (i) Series G Convertible Preferred Stock and the, (ii) Series H Convertible Preferred Stock under the assumption those shares would continue to remain non-participatory during the periods reported above.
Revenues by Geographic location.location. The following table reflects our product revenues by geographic location as determined by the billing address of our customers:
Revenues by Geographic location
The following table reflects our product revenues by geographic location as determined by the billing address of our customers:
| | |
| | |
| | | |
| U.S. | $1,262,000 | $1,273,000 |
| International | 178,000 | 159,000 |
| Total net revenue | $1,440,000 | $1,432,000 |
3. Product Licenses
The Company currently licenses three of its existing product offerings from third parties: (i) Natesto; (ii) ZolpiMist, and (ii) Tuzistra XR. Each of these license agreements are subject to terms and conditions specific to each agreement. The Company capitalized the acquisition cost of each license, which included a combination of both upfront considerations, as well as the estimated future contingent consideration estimated at the acquisition date. Future adjustments to contingent consideration for the existing products will be recognized as an unrealized gain/loss due to the changes in the fair value of the contingent consideration.
License and Supply Agreement—Natesto
In April 2016, the Company entered into a license and supply agreement to acquire the exclusive U.S. rights to commercialize Natesto® (testosterone) nasal gel from Acerus Pharmaceuticals Corporation, or Acerus. The Company acquired the rights effective upon the expiration of the former licensee’s rights, which occurred on June 30, 2016. The term of the license runs for the greater of eight years or until the expiry of the latest to expire patent, including claims covering Natesto or until the entry on the market of at least one AB-rated generic product.
In addition to the previously disclosed upfront payments made to Acerus, the Company agreed to make one-time, non-refundable milestone payments to Acerus within 45 days of the occurrence of certain agreed upon milestones. The maximum aggregate amount payable under such milestone payments is $37.5 million.
The fair value of the net identifiable Natesto asset acquired was determined to be $10.5 million, which is being amortized over eight years. The aggregate amortization expense for each of the three-month periods ended September 30, 2019 and 2018 was $0.3 million.
The contingent consideration was initially valued at $3.2 million using a Monte Carlo simulation, as of June 30, 2016. As of June 30, 2019, the contingent consideration was revalued at $5.1 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expense for each of the three-month periods ended September 30, 2019 and 2018 was $79,000, and $15,000, respectively.
License Agreement—ZolpiMist
In June 2018, the Company signed an exclusive license agreement for ZolpiMist™ (zolpidem tartrate oral spray) from Magna Pharmaceuticals, Inc., (“Magna”). This agreement allows for the Company ’s exclusive commercialization of ZolpiMist in the U.S. and Canada.
The Company made an upfront payment of $0.4 million to Magna upon execution of the agreement. In July 2018, the Company paid an additional $0.3 million, of which, $0.3 million was included in current contingent consideration at June 30, 2018.
The ZolpiMist license agreement was valued at $3.2 million and will be amortized over the life of the license agreement up to seven years. The amortization expense for each of the three months ended September 30, 2019 and 2018 was $0.1 million.| | |
| | |
| | | |
| | | |
| U.S. | $12,144,000 | $1,262,000 |
| International | 1,376,000 | 178,000 |
| Total net revenue | $13,520,000 | $1,440,000 |
The CompanyRevenues by Product Portfolio. also agreed to make certain royalty payments to Magna which will be calculated as a percentage of ZolpiMist net sales and are payable within 45 days of the end of the quarter during which the applicable net sales occur.
The contingent consideration related to these royalty payments was valued at $2.6 million using a Monte Carlo simulation, as of June 11, 2018. As of June 30, 2019, the contingent consideration was revalued at $2.3 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and The Company's stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expenseNet revenue disaggregated by significant product portfolio for the three months ended September 30, 20192020 and 2018 was $0.1 million and $0.1 million, respectively.
License, Development, Manufacturing and Supply Agreement—Tuzistra XR
On November 2, 2018, the Company entered into a License, Development, Manufacturing and Supply Agreement (the “Tris License Agreement”) with TRIS Pharma, Inc. (“TRIS”). Pursuant to the Tris License Agreement, TRIS granted the Company an exclusive license in the United States to commercialize Tuzistra XR. In addition, TRIS granted the Company an exclusive license in the United States to commercialize a complementary antitussive referred to as “CCP-08” (together with Tuzistra XR, the “Products”) for which marketing approval has been sought by TRIS under a New Drug Application filed with the Food and Drug Administration (“FDA”). As consideration for the Products license, the Company: (i) made an upfront cash payment to TRIS; (ii) issued shares of Series D Convertible preferred stock to TRIS; and (iii) will pay certain royalties to TRIS throughout the license term in accordance with the Tris License Agreement.
The Tris License Agreement was valued at $9.9 million and will be amortized over the life of the Tris License Agreement up to twenty years. The amortization expense for each of the three-month periods ended September 30, 2019 and 2018 was $123,000 and $0, respectively.were as follows:
| | Three Months Ended September 30 |
| | | |
| | | |
| Primary care and devices portfolio | $3,033,000 | $1,440,000 |
| Pediatric portfolio | 2,719,000 | - |
Consumer Health portfolio | 7,768,000 | - |
| Consolidated revenue | $13,520,000 | $1,440,000 |
The Company also agreed to make certain quarterly royalty payments to TRIS which will be calculated as a percentage of our Tuzistra XR net sales, payable within 45 days of the end of the applicable quarter.
As of November 2, 2018, the contingent consideration, related to this asset, was valued at $8.8 million using a Monte Carlo simulation. As of June 30, 2019, the contingent consideration was revalued at $16.0 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and the Company's stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expense for the three months ended March 31, 2019 and 2018 was $96,000, and $0, respectively.4.
Inventories
4. Inventories
Inventories consist of raw materials work in process and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The CompanyAytu periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory, The CompanyAytu will record a write-down to net realizable value in the period that the impairment is first recognized. There was noThe Company wrote down $0.1 million and $0 inventory write-down during the three months ended September 30, 2020 or 2019, or September 30, 2018, respectively.
Inventory balances consist of the following:
| | | |
| | | | | |
| | | |
| Raw materials | $154,000 | $117,000 | $542,000 | $397,000 |
| Finished goods | 1,227,000 | 1,323,000 | |
| Finished goods, net | | 10,938,000 | 9,603,000 |
| | $1,381,000 | $1,440,000 | $11,480,000 | $10,000,000 |
Fixed assets are recorded at cost and, once placed in service, are depreciated on a straight-line basis over the estimated useful lives. Leasehold improvements are amortized over the shorter of the estimated economic life or related lease term. Fixed assets consist of the following:
| | | | |
| | | | | |
| | | | | | |
| | | | |
| Manufacturing equipment | 2 - 5
| $83,000 | 2 - 5 | $112,000 |
| Leasehold improvements | 3
| 112,000 | 3 | 111,000 | 229,000 |
| Office equipment, furniture and other | 2 - 5
| 265,000 | 315,000 | 2 - 5 | 281,000 | 312,000 |
| Lab equipment | 3 - 5
| 90,000 | 3 - 5 | 90,000 |
| Less accumulated depreciation and amortization | | (412,000) | (396,000) | | (488,000) | (484,000) |
| | | | |
| Fixed assets, net | | $138,000 | $204,000 | | $106,000 | $259,000 |
The depreciationDuring the quarter ended September 30, 2020, we recognized a loss of $112,000 on sale of equipment due to termination of leases.
Depreciation and amortization expense was $16 thousandtotaled $33,000 and $28 thousand$16,000 for the three-months ended September 30, 20192020 and 2018,2019, respectively.
6.
Leases, Right-to-Use Assets and Related Liabilities
In September 2015, the Company entered into a 37-month operating lease in Englewood, Colorado. This lease had an initial base rent of $9,000 a month with a total base rent over the term of the lease of approximately $318,000. In October 2017, the Company signed an amendment to the 37-month operating lease in Englewood, Colorado, extending the lease for an additional 24 months beginning October 1, 2018. The base rent remained $9,000 per month. In April 2019, the Company extended the lease for an additional 36 months beginning October1, 2020.
In June 2018, theThe Company entered into a 12-month operating lease, beginning on August 1, 2018, for office space in Raleigh, North Carolina. This lease has base rent of $1,100 a month, with total rent over the term of the lease of approximately $13,200.
As discussed within Note 1, the Companypreviously adopted the FASB issued ASU 2016-02, “Leases“Leases (Topic 842)” as of July 1, 2019. With the adoption of ASU 2016-02, the Company recorded an operating right-of-use asset and an operating lease liability on its balance sheet associated with itsthe lease of its corporate headquarters. The right-of-use asset represents the Company’s right to use the underlying asset for the lease term, and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations arewere recognized at the later of the commencement date or July 1, 2019; the date of adoption of Topic 842; based on the present value of remaining lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments. Rent expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. The lease liability is classified as current or long-term on the balance sheet.
| | | | | | | | |
| Remaining Office leases | $463,000 | $81,000 | $113,000 | $118,000 | $121,000 | $30,000 | $− |
| Less: Discount Adjustment | (69,000) | | | | | | |
| Total lease liability | 394,000 | | | | | | |
| | | | | | | | |
| Lease liability - current portion | 79,000 | | | | | | |
| Long-term lease liability | $315,000 | | | | | | |
Prior to the adoption of ASU 2016-02, the Company recognized deferred rent when the straight-line rent expense exceeded the actual lease payments and reduced deferred rent when the actual lease payments exceeded the straight-line rent expense. Deferred rent was also classified between current and long-term on the balance sheet.
Rent expenseAs of September 30, 2020, the maturities of the Company’s operating lease liabilities were as follows:
| |
| 2021 (remaining 9 months) | $90,412 |
| 2022 | 123,883 |
| 2023 | 126,883 |
| 2024 | 35,883 |
| 2025 | 2,942 |
| Total lease payments | 380,003 |
| Less: Imputed interest | (45,048) |
| Lease liabilities | $334,955 |
Cash paid for amounts included in the respective periods totaled $32 thousandmeasurement of operating lease liabilities for the three months ended September 30, 2020 and 2019 was $66,000 and 2018,$0, respectively, and was included in net cash used in operating activities in the consolidated statements of cash flows.
As of September 30, 2020, the weighted average remaining lease term is 2.42 years, and the weighted average discount rate used to determine operating lease liabilities was 8.0%. Rent expense for the three months ended September 30, 2020 and 2019 totaled $70,000 and $32,000, respectively.
On August 28, 2020, the Company’s Innovus subsidiary signed a lease termination agreement with its lessor to terminate its lease effective September 30, 2020. The original lease termination date was April 30, 2023. As part of the agreement, Innovus agreed to make a cash payment to the landlord the equivalent of two additional months’ rent aggregating to $44,306 plus $125,000 less the security deposit of $20,881. The fair value of the lease liability related to this facility lease was approximately $0.7 million as of June 30, 2020. The Company recognized a gain of approximately $343,000 during the three months ended September 30, 2020.
7.
Intangible Assets – Amortizable
The Company currently holds the following intangible asset portfolios as of September 30, 2020: (i) Licensed assets, which consist of pharmaceutical product assets that were acquired prior to July 1, 2020; (ii) Product technology rights, acquired from the November 1, 2019 acquisition of the Pediatric Portfolio from Cerecor; and, as a result of the Merger with Innovus on February 14, 2020, both, (iii) the Acquired product distribution rights; consisting of patents and trade names) acquired February 14, 2020.
If acquired in an asset acquisition, the Company capitalized the acquisition cost of each licensed patent or tradename, which can include a combination of both upfront consideration, as well as the estimated future contingent consideration estimated at the acquisition date. If acquired in a business combination, the Company capitalizes the estimated fair value of the intangible asset or assets acquired, based primarily on a discounted cash flow model approach or relief-from-royalties model.
The following table provides the summary of the Company’s intangible assets as of September 30, 2020 and June 30, 2020, respectively.
| | |
| | | | | | Weighted-Average Remaining Life (in years) |
| Licensed assets | $23,649,000 | $(7,631,000) | $- | $16,018,000 | 11.80 |
| Acquired product technology right | 22,700,000 | (2,081,000) | - | 20,619,000 | 9.09 |
| Acquired product distribution rights | 11,354,000 | (943,000) | - | 10,411,000 | 4.37 |
| Acquired customer lists | 390,000 | (162,000) | - | 228,000 | 0.87 |
| | $58,093,000 | $(10,817,000) | $- | $47,276,000 | 8.93 |
| | |
| | | | | | Weighted-Average Remaining Life (in years) |
| Licensed assets | $23,649,000 | $(7,062,000) | $- | $16,587,000 | 11.88 |
| MiOXSYS Patent | 380,000 | (185,000) | (195,000) | - | - |
| Acquired product technology right | 22,700,000 | (1,513,000) | - | 21,187,000 | 9.34 |
| Acquired product distribution rights | 11,354,000 | (565,000) | - | 10,789,000 | 4.62 |
| Acquired customer lists | 390,000 | (98,000) | - | 292,000 | 1.12 |
| | $58,473,000 | $(9,423,000) | $(195,000) | $48,855,000 | 9.11 |
The following table summarizes the estimated future amortization expense to be recognized over the next five years and periods thereafter:
7. Patents| | |
| 2021 | $4,735,000 |
| 2022 | 6,086,000 |
| 2023 | 6,046,000 |
| 2024 | 6,033,000 |
| 2025 | 4,479,000 |
| Thereafter | 19,897,000 |
| | $47,276,000 |
The costCertain of the oxidation-reduction potential (“ORP”) technology related patentsCompany’s amortizable intangible assets include renewal options, extending the expected life of the asset. The renewal periods range between approximately 1 to 20 years depending on the license, patent, or other agreement. Renewals are accounted for when they are reasonably assured. Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of intangible assets was $1.6 million and $0.6 million for the MiOXSYS Systems was $380,000 when they were acquired and are being amortized over the remaining U.S. patent life of approximately 15 years as of the date, which expires in March 2028. Patents consist of the following:
| | | |
| | | |
| | | |
| | | |
| Patents | $380,000 | $380,000 |
| Less accumulated amortization | (166,000) | (159,000) |
| Patents, net | $214,000 | $221,000 |
The amortization expense was $7 thousand for the three-monthsthree months ended September 30, 20192020 and 2018,2019, respectively.
Accrued liabilities consist of the following:
| | | | |
| | | | | |
| | | | |
| Accrued accounting fee | $42,000 | $85,000 | |
| Accrued settlement expense | | $150,000 | $315,000 |
| Accrued program liabilities | 843,000 | 736,000 | 679,000 | 959,000 |
| Accrued product-related fees | 133,000 | 295,000 | 3,054,000 | 2,471,000 |
| Customer overpayment | 79,000 | − | |
| Credit card liabilities | | 652,000 | 510,000 |
| Medicaid liabilities | | 1,997,000 | 1,842,000 |
| Return reserve | | 1,537,000 | 1,329,000 |
| Sales taxes payable | | 180,000 | 175,000 |
| Other accrued liabilities* | 54,000 | 32,000 | 444,000 | 249,000 |
| Total accrued liabilities | $1,151,000 | $1,148,000 | $8,693,000 | $7,850,000 |
* Other accrued liabilities consist of franchise tax, samples and consultants,accounting fee, interest payable, merchant services charges, none of which individually represent greater than five percent of total current liabilities.
9.
Fair Value Considerations
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability, and contingent consideration. The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short maturities.maturities, including those acquired or assumed on November 1, 2019 as a result of the acquisition of the Pediatric Portfolio. The fair value of the warrant derivative liability was valued using the lattice valuation methodology. The fair value of acquisition-related contingent consideration is based on a Monte-Carlo methodology using estimated discounted future cash flows and periodic assessments of the probability of occurrence of potential future events. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
Level 1: | Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities; |
| |
Level 2: | Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and |
| |
Level 3: | Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities; Level 2: Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and Level 3: Unobservable inputs that are supported by little or no market activity. |
The Company’s assets and liabilities which are measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. Aytu has consistently applied the valuation techniques discussed below in all periods presented.
Recurring Fair Value Measurements
The following table presents the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of September 30, 20192020 and June 30, 2019,2020, by level within the fair value hierarchy.
| | | Fair Value Measurements at September 30, 2019 | | Fair Value Measurements at September 30, 2020 |
| | Fair Value at September 30, 2019 | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value at September 30, 2020 | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Recurring: | | |
| Warrant derivative liability | $11,000 | – | $11,000 | |
| Contingent consideration | 23,509,000 | – | 23,509,000 | 13,778,000 | – | 13,778,000 |
| CVR liability | | 5,669,000 | – | 5,669,000 |
| | $23,520,000 | – | $23,520,000 | $19,447,000 | – | $19,447,000 |
| | | Fair Value Measurements at June 30, 2019 |
| | Fair Value at June 30, 2019 | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Recurring: | | | | |
| Warrant derivative liability | $13,000 | – | – | $13,000 |
| Contingent consideration | 23,326,000 | – | – | 23,326,000 |
| | $23,339,000 | – | – | $23,339,000 |
The warrant derivative liability was valued using the lattice valuation methodology because that model embodies the relevant assumptions that address the features underlying these instruments. The warrants related to the warrant derivative liability are not actively traded and are, therefore, classified as Level 3 liabilities. Significant assumptions in valuing the warrant derivative liability, based on estimates of the value of the Company’s common stock and various factors regarding the warrants, were as follows as of issuance and as of September 30, 2019:
| | | | |
| Warrant Derivative Liability | | | |
| Volatility | 163.2% | 163.2% | 188.0% |
| Equivalent term (years) | 2.88 | 3.13 | 5.00 |
| Risk-free interest rate | 1.71% | 1.71% | 1.83% |
| Dividend yield | 0.00% | 0.00% | 0.00% |
The following table sets forth a reconciliation of changes in the fair value of the derivative financial liabilities classified as Level 3 in the fair value hierarchy:
| Liability Classified Warrants
|
| |
Balance as of June 30, 2019 | $13,000
|
Change in fair value included in earnings | (2,000)
|
Balance as of September 30, 2019 | $11,000
|
| | | Fair Value Measurements at June 30, 2020 |
| | Fair Value at June 30, 2020 | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Recurring: | | | | |
| Contingent consideration | 13,588,000 | – | – | 13,588,000 |
| CVR liability | $5,572,000 | – | – | $5,572,000 |
| | $19,160,000 | – | – | $19,160,000 |
Contingent Consideration.The Company classifies its contingent consideration liability in connection with the acquisition of Natesto, Tuzistra XR, ZolpiMist and ZolpiMist Innovus, within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. The Company estimates the fair value of our contingent consideration liability based on projected payment dates, discount rates, probabilities of payment, and projected revenues. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow methodology.
As of November 2, 2018, the contingent consideration, related to this Tuzistra XR, was valued at $8.8 million using a Monte Carlo simulation. As of June 30, 2020, the contingent consideration was revalued at $13.2 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $158,000, and $96,000, respectively. As of September 30, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.
The contingent consideration related to the ZolpiMist royalty payments was valued at $2.6 million using a Monte Carlo simulation, as of June 11, 2018. As of June 30, 2020, the contingent consideration was revalued at $0.2 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $0.1 million and $0.1 million, respectively. As of September 30, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.
The Company recognized approximately $0.2 million in contingent consideration as a result of the February 14, 2020 Innovus Merger. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimates risk that the milestones are achieved. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $13,000, and $0, respectively. There was no material change in this valuation as of September 30, 2020.
Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to 4.7 million shares of the Company’s common stock, or cash either upon the option of the Company or in the event there are insufficient shares available to satisfy such obligations. The fair value of the contingent value rights was based on a model in which each individual payout was deemed either (a) more likely than not to be paid out or (b) less likely than not to be paid out. From there, each obligation was then discounted at a 30% discount rate to reflect the overall risk to the contingent future payouts pursuant to the CVRs. This value is then remeasured both for future expected payout at well as the increase fair value due to the time value of money. As of September 30, 2020, the Company has paid out 1.2 million shares of the Company’s common stock to satisfy the first $2 million milestone, which relates to the Innovus achievement of $24 million in revenues during the 2019 calendar year. The unrealized loss for the three months ended September 30, 2020 and 2019 was $97,000, and $0, respectively.
Summary of Level 3 Input Changes
The following table sets forth a summary of changes in the contingent considerationto those fair value measures using Level 3 inputs for the periodthree months ended September 30, 2019:2020:
| |
| |
Balance as of June 30, 2019 | $23,326,000
|
Increase due to accretion | 229,000
|
Decrease due to contractual payment | (46,000)
|
Balance as of September 30, 2019 | $23,509,000
|
| | | |
| Balance as of June 30, 2020 | $5,572,000 | $13,588,000 |
| Transfers into Level 3 | – | – |
| Transfer out of Level 3 | – | – |
| Total gains, losses, amortization or accretion in period | – | – |
| Included in earnings | $97,000 | $209,000 |
| Included in other comprehensive income | – | – |
| Purchases, issues, sales and settlements | – | – |
| Purchases | – | – |
| Issues | – | – |
| Sales | – | – |
| Settlements | – | $(19,000) |
| Balance as of September 30, 2020 | $5,669,000 | $13,778,000 |
10.
10. Note Receivable
On September 12, 2019, the Company announced it had entered into a definitive merger agreement with Innovus (see Note 1) to acquire Innovus which specializes in commercializing, licensing and developing safe and effective over-the-counter consumer health products. As part of the negotiations with Innovus, the Company agreed to provide short-term, loan in the form of a $1.0 promissory note on August 8, 2019 (the “Innovus Note”). The Innovus Note will be used to offset a portion of the purchase price upon closing of the Innovus Merger Agreement (see Note 1) or, in the event the Merger Agreement does not close, is due on February 29, 2020, accruing interest at 10.0% per annum to be paid upon principal paydown. In the event of default, the interest rate increases to 15.0% per annum. In addition, on October 11, 2019, the Company amended the original promissory note, providing an additional approximately $0.4 million of bridge financing under the same terms and conditions as the Innovus Note.
11. Commitments and Contingencies
Commitments and contingencies are described below and summarized by the following as of September 30, 2019:2020:
| | | | | | | | | | | | | | | |
| Prescription database | $1,469,000 | $423,000 | $534,000 | $512,000 | $– | $1,411,000 | $678,000 | $733,000 | - |
| Pediatric portfolio fixed payments and product minimums | | 16,911,000 | 2,736,000 | 3,300,000 | 975,000 |
| Inventory purchase commitment | | 1,962,000 | 1,226,000 | 736,000 | - |
| CVR liability | | 14,000,000 | 2,000,000 | 5,000,000 | - |
| Product contingent liability | | 202,000 | - | 202,000 |
| Product milestone payments | 5,500,000 | – | 5,500,000 | – | 3,000,000 | - | 3,000,000 | - |
| | $6,969,000 | $423,000 | $534,000 | $512,000 | $5,500,000 | $– | |
| | | $37,486,000 | $6,640,000 | $9,769,000 | $8,300,000 | $3,300,000 | $1,177,000 |
Prescription Database
In May 2016, the Company entered into an agreement with a vendor that will provide it with prescription database information. The Company agreed to pay approximately $1.6 million over three years for access to the database of prescriptions written for Natesto. In January 2020, the Company amended the agreement and agreed to pay additional $0.6 million to add access to the database of prescriptions written for the Pediatric Portfolio. The payments have been broken down into quarterly payments.
Pediatric Portfolio Fixed Payments and Product Milestone
The Company assumed two fixed, periodic payment obligations to an investor (the “Fixed Obligation”). Beginning November 1, 2019 through January 2021, the Company will pay monthly payments of $86,840, with a balloon payment of $15,000,000 due in January 2021. A second fixed obligation requires the Company pay a minimum of $100,000 monthly through February 2026, except for $210,767 paid in January 2020.
In addition, the Company acquired a Supply and Distribution Agreement with Tris Pharma, Inc. ("TRIS"), (the “Karbinal Agreement”), under which the Company is granted the exclusive right to distribute and sell the product in the United States. The initial term of the Karbinal Agreement was 20 years. The Company will pay TRIS a royalty equal to 23.5% of net sales. A third party agreed to offset the 23.5% royalty payable by 8.5%, for a net royalty equal to 15%, in fiscal year 2018 and 2019 for net sales of Karbinal.
The Karbinal Agreement make-whole payment is capped at $1,750,000 each year. The Karbinal Agreement also contains minimum unit sales commitments, which is based on a commercial year that spans from August 1 through July 31, of 70,000 units through 2023. The Company is required to pay TRIS a royalty make whole payment of $30 for each unit under the 70,000-unit annual minimum sales commitment through 2033. The annual payment is due in August of each year. The Karbinal Agreement also has multiple commercial milestone obligations that aggregate up to $3.0 million based on cumulative net sales, the first of which is triggered at $40.0 million of net revenues.
CVR Liability
On February 14, 2020 the Company closed on the Merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon closing the Merger, the Company merged with and into Innovus and entered into a Contingent Value Rights Agreement (the “CVR Agreement”). Each CVR entitles its holder to receive its pro rata share, payable in cash or stock, at the option of Aytu, of certain payment amounts if the targets are met. If any of the payment amounts is earned, they are to be paid by the end of the first quarter of the calendar year following the year in which they are earned. Multiple revenue milestones can be earned in one year.
On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 1.2 million shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24.0 million revenue milestone for calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million during the fiscal year ended June 30, 2020. No additional milestone payments have been paid as of September 30, 2020.
Product Contingent Liability
In February 2015, Innovus acquired Novalere, which included the rights associated with distributing FlutiCare. As part of the Merger, Innovus is obligated to make 5 additional payments of $0.5 million when certain levels of FlutiCare sales are achieved.
Inventory Purchase Commitment
In May 1, 2020, the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Hikma Pharmaceuticals USA, Inc. (“Hikma”). Pursuant to the settlement agreement, Innovus has agreed to purchase and Hikma has agreed to manufacture a minimum amount of our branded fluticasone propionate nasal spray USP, 50 mcg per spray (FlutiCare®), under Hikma’s FDA approved ANDA No. 207957 in the U.S. The commitment requires Innovus to purchase three batches of product through fiscal year 2022 each of which amount to $1.0 million.
Milestone Payments
In connection with the Company’s intangible assets, Aytu has certain milestone payments, totaling $5.5$3.0 million, payable at a future date, are not directly tied to future sales, but upon other events certain to happen. These obligations are included in the valuation of the Company’s contingent consideration (see Note 9).
At September 30, 2019 and June 30, 2018, Aytu had 17,981,904 and 17,538,071 common shares outstanding, respectively, and 3,151,148 and 3,594,981 preferred shares outstanding, respectively. The Company has 100200 million shares of common stock authorized with a par value of $0.0001 per share and 50 million shares of preferred stock authorized with a par value of $0.0001 per share.
The Company has 50 million shares of non-voting, non-cumulative preferred stock authorized with a par value of $0.0001 per share, of which, 400,000 are designated as Series D Convertible preferred stock, and 2,751,148 are designated as Series E Convertible preferred stock as of At September 30, 2019. Liquidation rights for all series of2020 and June 30, 2020, Aytu had 125,837,357 and 125,837,357 common shares outstanding, respectively, and zero preferred stock are on an as-converted basis.shares outstanding, respectively.
Included in the common stock outstanding are 2,342,6044,230,766 shares of restricted stock issued to executives, directors, employees and consultants.
DuringIn June 2020, the quarterCompany completed an at-the-market offering program, which allows us to sell and issue shares of our common stock from time-to- time. The company issued 4,302,271 shares of common stock, with total gross proceeds of $6.8 million before deducting underwriting discounts, commissions and other offering expenses payable by the Company of $0.2 million through September 30, 2020. The Company did not issue any shares of common stock under the at-the-market offering program during the three months ended September 30, 2019, investors holding shares of Series C preferred stock exercised their right to convert 443,833 shares of Series C preferred stock into 443,8332020. After September 30, 2020, the Company issued approximately 3.0 million shares of common stock. Asstock, with total gross proceeds of September 30, 2019, there are no remaining Series C preferred stock outstanding.approximately $3.1 million between October 8, 2020 and the filing of this form 10-Q.
In October 2019, Armistice Capital converted 2,751,148July 2020, the Company paid $1.5 million issuance cost in cash related to the March 10, 12, and 19 offerings (the “March Offerings”), and issued 845,000 shares of Series E Preferred Stock into 2,751,148warrants with an exercise price of $1.5625 and 78,000 shares of common stock.warrants with an exercise price of $1.9938 to a third party in conjunction with the March 2020 offerings. The warrants have a term of one year from the issuance date. These warrants had at issuance a fair value of approximately $356,000 and were valued using a Black-Scholes model.
12.
13. Equity Incentive Plan
Share-based Compensation Plans
On June 1, 2015, Aytu’sthe Company’s stockholders approved the Aytu BioScience 2015 Stock Option and Incentive Plan (the “2015 Plan”), which, as amended in July 2017, provides for the award of stock options, stock appreciation rights, restricted stock and other equity awards for up to an aggregate of 3.0 million shares of common stock. The shares of common stock underlying any awards that are forfeited, canceled, reacquired by Aytu prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2015 Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. As of September 30, 2019,2020, we have 657,3804,837 shares that are available for grant under the 2015 Plan. On February 13, 2020, the Company’s stockholders approved an increase to 5.0 million total shares of common stock in the 2015 Plan.
Stock Options
Employee Stock Options:
The fair value of the options is calculated using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding components of the model, including the estimated fair value of the underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to valuation. Aytu estimates the expected term based on the average of the vesting term and the contractual term of the options. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity. There were no grants of stock options to employees during the quarters ended September 30, 20192020 and 2018,2019, respectively, therefore, no assumptions are used for fiscal 2019.2021.
Stock option activity is as follows:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years |
| Outstanding June 30, 2019 | 1,607 | $325.73 | 6.13 |
| Expired | (51) | 328.00 | – |
| Outstanding September 30, 2019 | 1,556 | 325.66 | 6.08 |
| Exercisable at September 30, 2019 | 1,544 | $325.64 | 6.08 |
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value |
| Outstanding June 30, 2020 | 765,937 | $1.85 | 9.67 | |
| Granted | - | - | | |
| Exercised | - | - | | |
| Forfeited/Cancelled | - | - | | |
| Expired | - | - | | |
| Outstanding September 30, 2020 | 765,937 | 1.85 | 9.44 | 70,320 |
| Exercisable at September 30, 2020 | 8,926 | $52.81 | 8.68 | $1,650 |
As of September 30, 2019,2020, there was $2,000 of total$601,000 unrecognized option-based compensation expense related to non-vested stock options. The Company expects to recognize this expense over a weighted-average period of 0.122.73 years.
Restricted Stock
Restricted stock activity is as follows:
| | | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Life in Years |
| | | | |
| Unvested at June 30, 2019 | 2,346,214 | $1.83 | 9.1 |
| Granted | – | – | – |
| Vested | – | – | – |
| Forfeited | (5,150) | $2.44 | – |
| Unvested at September 30, 2019 | 2,341,064 | $1.83 | 8.8 |
During the quarter ended September 30, 2019, 5,150 shares of restricted stock were exchanged with common stock, and the Company recognized an increase in aggregate stock compensation expense of $2,600.| | | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Life in Years |
| Unvested at June 30, 2020 | 4,184,516 | $1.47 | 6.4 |
| Granted | | | |
| Vested | (369,198) | | |
| Forfeited | | | |
| Unvested at September 30, 2020 | 3,815,318 | $1.53 | 6.3 |
Under the 2015 Plan, there was $3,755,000$4.7 million of total unrecognized stock-based compensation expense related to the non-vested restricted stock as of September 30, 2019.2020. The Company expects to recognize this expense over a weighted-average period of 8.826.3 years.
The Company previously issued 1,540 shares of restricted stock outside the Company’s 2015 Plan, which vest in July 2026. The unrecognized expense related to these shares was $1,347,000$1.1 million as of September 30, 20192020 and is expected to be recognized over the weighted average period of 6.785.8 years.
Stock-based compensation expense related to the fair value of stock options and restricted stock was included in the statements of operations as selling, general and administrative expenses as set forth in the table below:
| | Three Months Ended September 30, |
| Selling, general and administrative: | | |
| Stock options | $5,000 | $66,000 |
| Restricted stock | 160,000 | 86,000 |
| Total stock-based compensation expense | $165,000 | $152,000 |
14. Warrants
The Company has issued equity-based warrants and liability warrants in conjunction with equity raises.| | Three Months Ended September 30, |
| Selling, general and administrative: | | |
| Stock options | $72,000 | $5,000 |
| Restricted stock | 383,000 | 160,000 |
| Total stock-based compensation expense | $455,000 | $165,000 |
There were no
In July 2020, the Company issued 845,000 shares of warrants with an exercise price of $1.5625 and 78,000 shares of warrants with an exercise price of $1.9938 in connect with the March Offerings. The warrants have a term of one year from the issuance date. These warrants have a fair value of $356,000.
Significant assumptions in valuing the warrants issued during the three-months ended September 30, 2019 and the three-months ended September 30, 2018.quarter are as follows:
| Warrants Issued Three Months Ended September 30, 2020 |
| Expected volatility | 100% |
| Equivalent term (years) | 1 |
| Risk-free rate | - |
| Dividend yield | 0.00% |
A summary of equity-based warrants is as follows:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years |
| Outstanding June 30, 2019 | 16,218,908 | $3.15 | 4.36 |
| Warrants expired | – | – | – |
| Warrants exercised | – | – | – |
Outstanding September 30, 2019 | 16,218,908 | $3.15 | 4.11 |
A summary of liability warrants is as follows:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years |
| Outstanding June 30, 2019 | 240,755 | $72.00 | 3.16 | |
| Outstanding June 30, 2020 | | 22,884,538 | $3.06 | 2.00 |
| Warrants issued | | 923,000 | |
| Warrants expired | – | (8,361) | |
| Warrants exercised | – | – | - | |
Outstanding September 30, 2019 | 240,755 | $72.00 | 2.90 | |
| Outstanding September 30, 2020 | | 23,799,177 | $2.98 | 1.47 |
Net Loss per Common Share
15. Net Loss Per Common Share.
Basic income (loss) per common share is calculated by dividing the net income (loss) available to the common shareholders by the weighted average number of common shares outstanding during that period. Diluted net loss per share reflects the potential of securities that could share in the net loss of Aytu. Basicthe Company. For each three-month period presented, the basic and diluted loss per share waswere the same infor 2020 and 2019, and 2018,as they were not included in the calculation of the diluted net loss per share because they would have been anti-dilutive.
The following table sets-forth securities that could be potentially dilutive, but as of the quarters ended September 30, 20192020 and 20182019 are anti-dilutive, and therefore excluded from the calculation of diluted earnings per share.
| | | | | |
| | | | | |
| | | | | | | |
| Warrants to purchase common stock - liability classified | (Note 14) | 240,755 |
| 240,755 |
| Warrant to purchase common stock - equity classified | (Note 14) | 16,218,908 | 1,641,906 | (Note 13) | 23,799,177 | 16,218,908 |
| Employee stock options | (Note 13) | 1,556
| 1,787 | (Note 12) | 765,937 | 1,556 |
| Employee unvested restricted stock | (Note 13) | 2,342,604 | 37,890 | (Note 12) | 3,816,858 | 2,342,604 |
| Convertible preferred stock | (Note 12) | 3,151,148 | – | (Note 11) | - | 3,151,148 |
| | | 21,954,971
| 1,922,338 | | 28,622,727 | 21,954,971 |
The Aytu BioScience Note. On February 27, 2020, the Company issued a $0.8 million promissory note (the “Note”) and received consideration of approximately $0.6 million. The Note had an eight-month term with principal and interest payable on November 1, 2020 and the recognition of approximately $0.2 million of debt discount related to the issuance of promissory notes. The discount is amortized over the life of the promissory notes through the fourth quarter of calendar 2020. During the three months ended September 30, 2020 and 2019, the Company recorded approximately $42,000 and $0, respectively, of related amortization.
The Innovus Notes. On January 9, 2020, prior to the completion of the merger, Innovus Pharmaceuticals, Inc. entered into a note agreement upon which it received gross proceeds of $0.4 million with a principal amount of $0.5 million. The note requires twelve equal monthly payments of approximately $45,000. As of September 30, 2020, the net balance of the note was $135,000.
The Company’s chief operating decision maker (the “CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.
Aytu manages our Company and aggregates our operational and financial information in accordance with two reportable segments: Aytu BioScience and Aytu Consumer Health. The Aytu BioScience segment consists of the Company’s prescription products. The Aytu Consumer Health segment contains the Company’s consumers healthcare products line, which was the result of the Innovus Merger. Select financial information for these segments is as follows:
| | Three months Ended September 30, |
| | | |
| Consolidated revenue: | | |
| Aytu BioScience | $5,752,000 | $1,440,000 |
| Aytu Consumer Health | 7,768,000 | - |
| Consolidated revenue | 13,520,000 | 1,440,000 |
| | | |
| Consolidated net loss: | | |
| Aytu BioScience | (2,950,000) | (4,929,000) |
| Aytu Consumer Health | (1,356,000) | - |
| Consolidated net loss | (4,306,000) | (4,929,000) |
| | | |
| | | |
| | | |
| Total assets: | | |
| Aytu BioScience | $116,499,000 | $126,267,000 |
| Aytu Consumer Health | 24,772,000 | 26,569,000 |
| Total assets | $141,271,000 | $152,836,000 |
17.
Related Party Transactions
Tris Pharma, Inc.
On November 2, 2018, the Company entered into a License, Development, Manufacturing and Supply Agreement (the “Tris License Agreement”). On November 1, 2019, the Company acquired the rights to Karbinal as a result of the acquisition of the Pediatric Portfolio from Cerecor, Inc. (See Notes 2 and 10). Mr. Ketan Mehta serves as a Director on the Board of Directors of the Company and is also the Chief Executive Officer of TRIS. The Company paid TRIS approximately $257,000 and $7,000 during the three months ended September 30, 2020 and 2019, respectively for a combination of royalty payments, inventory purchases and other payments as contractually required. The Company’s liabilities, including accrued royalties, contingent consideration and fixed payment obligations were $22.7 million and $16.0 million as of September 30, 2020 and 2019, respectively. In October 2020, the Company paid Tris approximately $1.6 million related to its Karbinal fixed payment obligation.
See Footnotes 1 10 and 1217 for information relating to certain events occurring subsequent tobetween September 30, 2019.2020, and the filing of this report Form 10-Q, impacting information disclosed above.
ItemItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with Aytu BioScience, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2019,2020, filed on September 26, 2019.October 6, 2020. The following discussion and analysis containscontain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the risk factors included in Aytu’s Form 10-K filed with the Securities and Exchange Commission on September 26, 2019.October 6, 2020.
Overview Liquidity and Capital Resources
We are a commercial-stage specialty pharmaceutical company focused on commercializing novel products that address significant patienthealthcare needs such asin both prescription and consumer health categories. We are currently focused on our Aytu BioScience business, consisting of the Primary Care Portfolio (the “Primary Care Portfolio”) and Pediatric Care Portfolio (the “Pediatric Portfolio”), and our Aytu Consumer Health business (the “Consumer Health Portfolio”). Our Aytu BioScience business is focused on prescription pharmaceutical products treating hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, and male infertility, and plansvarious pediatric conditions. We plan to expand opportunistically into other therapeutic areas as opportunities arise. Aytu was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated in the state of Delaware on June 8, 2015.
The Primary Care Portfolio includes (i) Natesto, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra XR, the only FDA- approved 12-hour codeine-based antitussive syrup.
The Pediatric Care Portfolio, acquired on November 1, 2019, (the “Pediatric Portfolio”), includes (i) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various for infants and children with fluoride deficiency, (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; and (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions.
On February 14, 2020 we continueacquired Innovus Pharmaceuticals (“Innovus”), a specialty pharmaceutical company licensing, commercializing, and developing safe and effective consumer healthcare products designed to executeimprove health and vitality. Innovus commercializes over twenty-two consumer health products competing in large healthcare categories including diabetes, men's health, sexual wellness and respiratory health. The Innovus product portfolio is commercialized through direct-to-consumer marketing channels utilizing the Innovus’s proprietary Beyond Human® marketing and sales platform and on our growth plans.eCommerce platforms.
We recently acquired exclusive U.S. distribution rights to a COVID-19 IgG/IgM rapid test. The coronavirus test is solid phase immunochromatographic assay used in the rapid, qualitative and differential detection of IgG and IgM antibodies to the 2019 Novel Coronavirus in human whole blood, serum or plasma. The rapid test has been validated in multi-center clinical trials. Most recently we entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in pre-clinical studies, and we plan to advance this technology and assess its safety and efficacy in human studies, initially focused on COVID-19 patients.
Our operations have historically consumed cash and are expectedstrategy is to continue building our portfolio of revenue-generating products, leveraging our focused commercial team and expertise to require cash, but at a declining rate. We have incurred accumulated net losses since inception, and at September 30, 2019, we had an accumulated deficit of $111.3 million. Revenues for the three-months ended September 30, 2019 increased slightly compared to the three-months ended September 30, 2018, and revenues increased 100% and 14% for each of the years ended June 30, 2019 and 2018, respectively, and is expected to continue to increase long-term, allowing us to rely less on our existing cash and cash equivalents, and proceeds from financing transactions. Despite increased revenue, cash used in operations during the three-months ended September 30, 2019 was $3.0 million compared to $2.7 million for the three-months ended September 30, 2018, due to our focus on market development activities.build leading brands within large therapeutic markets.
On October 11, 2019, we entered into Securities Purchase Agreements (the “Purchase Agreement”) with two institutional accredited investors (the “Investors”) providing for the issuance and sale by the Company (the “Offering”) of $10.0 million of, (i) shares of the our Series F Convertible Preferred Stock (the “Preferred Stock”) which are convertible into shares of common stock (the “Conversion Shares”) and (ii) warrants (the “Warrants”) which are exercisable for shares of common stock (the “Warrant Shares”). The Warrants have an exercise price equal to $1.25 and contain cashless exercise provisions. Each Warrant will be exercisable after we obtain stockholder approval as required by applicable Nasdaq rules (“Shareholder Approval”) and will expire five years from the time a registration statement covering the Conversion Shares and Warrant Shares is declared effective by the Securities and Exchange Commission. The closing of the sale of these securities occurred on October 16, 2019.
The net proceeds we received from the Offering were approximately $9.3 million. The net proceeds we receive from the Offering will be used for general corporate purposes, including working capital.
As of the date of this Report, we expect our commercial costs for current operation to remain approximately flat or to increase modestly as we continue to focus on revenue growth. Our current asset position of $31.0 million plus the proceeds expected from ongoing product sales will be used to fund operations. We will access the capital markets to fund operations if and when needed, and to the extent it becomes probable that existing cash and cash equivalents, and other current assets may become exhausted. The timing and amount of capital that may be raised is dependent on market conditions and the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms that we consider to be favorable to us and our stockholders, or at all. However, we have been successful in accessing the capital markets in the past and is confident in our ability to access the capital markets again, if needed. Since we do not have sufficient cash and cash equivalents on-hand as of September 30, 2019 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) requires us to report that there exists an indication of substantial doubt about our ability to continue as a going concern.
If we are unable to raise adequate capital in the future when it is required, we can adjust our operating plans to reduce the magnitude of the capital need under its existing operating plan. Some of the adjustments that could be made include delays of and reductions to the Company’s commercial programs, reductions in headcount, narrowing the scope of our commercial efforts, or reductions to our research and development programs. Without sufficient operating capital, we could be required to relinquish rights to products or renegotiate to retain such rights on less favorable terms than it would otherwise choose. This may lead to impairment or other charges, which could materially affect our balance sheet and operating results.
Nasdaq Listing Compliance. Our common stock is listed on The Nasdaq Capital Market. In order to maintain compliance with Nasdaq listing standards, we must, amongst other requirements, maintain a stockholders’ equity balance of at least $2.5 million pursuant to Nasdaq Listing Rule 5550(b). In that regard, on September 30, 2019, the our stockholders’ equity totaled approximately $2.3 million, thereby potentially resulting in a stockholders’ equity deficiency upon the filing of this Form 10-Q. However, subsequent to September 30, 2019, we completed (i) the Offering with the Investors, raising approximately $9.2 million in equity financing (see Note 1), and (ii) the “Asset Purchase Agreement” in which we issued approximately 9.8 million shares of Series G Convertible Preferred Stock worth an initial estimate of approximately $5.6 million, resulting in an increase in stockholders’ equity of approximately $14.8 million in the aggregate. Accordingly, as of the filing of this Form 10-Q for the three months ended September 30, 2019, our stockholders’ equity balance exceeds the minimum $2.5 million threshold and, therefore, we believe we are currently in compliance with all applicable Nasdaq Listing Requirements.
Strategic Growth Initiatives
Pursuant to our strategy of identifying and acquiring complimentary assets, we have entered into two transactions that willwe expect to substantially increase theour revenue generating capacity of the Company and provide opportunities to reduce theour combined operating costs of Aytu.losses. The dual impact of the transactions on revenue and operating expenses is expected to position the Companyus to achieve positive cash flow earlier than previously expected.
During the three months ended September 30,Acquisition of Pediatric Portfolio. On October 10, 2019, and during the subsequent period thereafter, we entered into both (i) a definitive merger agreement (the “Merger Agreement”) between the Company and Innovus Pharmaceuticals, Inc. (“Innovus”) on September 12, 2019, and (ii) an asset purchase agreement (the “Asset Purchase Agreement”) between the Company andAgreement with Cerecor, Inc. (“Cerecor”) to purchase and acquire certainCerecor’s portfolio of Cerecor’sprescription pediatric therapeutics (the “Pediatric Portfolio”), which closed on November 1, 2019. The Pediatric Portfolio consists of six pharmaceutical and primary care product lines (the “Commercial Portfolio”) on October 10, 2019.
The Merger Agreement between Aytuother prescription products consisting of (i) AcipHex Sprinkle, (ii) Cefaclor for Oral Suspension, (iii) Karbinal ER, (iv) Flexichamber, (v) Poly- Vi-Flor and Innovus will cause, upon closingTri-Vi-Flor. Total consideration transferred consisted of the merger, for the Aytu retire all of the outstanding common stock of Innovus for an aggregate of up to $8$4.5 million in shares of the our common stock, less certain deductions (includescash and approximately $1.4 million in cash borrowed by Innovus from Aytu during this time period (see Note 10)). This initial consideration to Innovus common shareholders is estimated to consist of primarily 4.29.8 million shares of Series G Convertible Preferred Stock, plus the our stock, and up to 1.5 million shares of the our stock to satisfy certain warrant holders’ obligation. Additional consideration for up to $16 million in milestone payments in the form of contingent value rights (CVRs) may be paid to Innovus shareholders in cash or stock over the next five years if certain revenue and profitability milestones are achieved. Innovus specializes in commercializing, licensing and developing safe and effective over-the-counter consumer health products. We do not anticipate that this transaction will formally close until the quarter ended March 31, 2020 and is subject to approval by the shareholders of both Aytu and Innovus.
The Asset Purchase Agreement between Aytu and Cerecor caused upon the November 1, 2019 closing, Aytu to pay $4.5 million in cash, issuance of $9.8 million shares of convertible preferred stock and assumed certain of Seller’s financial and royalty obligations, which include approximately $16.6 million of fixed payment obligations to a third-party creditor andassumption not more than $3.5 million of Medicaid rebates and products returns. The Commercial Portfolio consists of five pharmaceutical prescription products competing in markets exceeding $8 billion in annual sales in the United States. In addition, the Company will be assumingwe absorbed the majority of the Cerecor’s workforce focused on commercial sales, commercial contracts and customer relationship workforce.relationships.
In addition, weWe have assumed obligations due to an investor including fixed and variable payments. We assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million is due. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made.made, or (ii) February 12, 2026. The Company subsequently paid down the $15 million balloon payment early in June 2020, removing this obligation from our balance sheet.
Further, certain of the products in the ProductPediatric Portfolio require royalty payments ranging from 15% to 23.5%38.0% of net revenue. One of the products in the ProductPediatric Portfolio requires us to generate minimum annual sales sufficient to represent annual royalties of $1.8approximately $1.75 million.
Acquisition of Innovus Pharmaceuticals. On February 14, 2020 we closed on the merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. The acquisition of Innovus has enabled the company to expand into the consumer healthcare market with Innovus’ over-the-counter medicines and other healthcare products. We expect Innovus to continue to develop additional consumer healthcare products and expand its portfolio. This, we expect, will drive additional revenue for the consumer health subsidiary and contribute meaningfully to the company's overall revenue growth.
Additionally, we expect to participate in the U.S. COVID-19 serology testing market. We have purchased 1,600,000 COVID-19 IgG/gM rapid tests from Zhejiang Orient Gene Biotech Limited via our distribution agreement with L.B. Resources, Ltd. We also signed an exclusive license with Cedars-Sinai Medical Center to a medical device technology platform that is a pre-clinical prospective treatment for coronavirus for seriously ill patients in the ICU. We expect to advance this technology through development and, if proven clinically effective and able to be manufactured at scale, expect to commercialize this product in the future.
In the near-term, we expect to create value for shareholders by implementing a focused strategy of increasing sales of our prescription therapeutics while leveraging our commercial infrastructure. Further, we expect to increase sales of our newly acquired consumer healthcare product portfolio following the closing of our acquisition of Innovus Pharmaceuticals. Additionally, we expect to expand both our Rx and consumer health product portfolios through continuous business and product development. Finally, we expect to identify operational efficiencies identified through our recent transactions and implement expense reductions accordingly.
ACCOUNTING POLICIES
Significant Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. On an on-goingongoing basis, management evaluates its estimates and judgments, including those related to recoverability and useful lives of long-lived assets, stock compensation, valuation of derivative instruments, allowances, contingencies and going concern. Management bases its estimates and judgments on historical experience and on various other factors, including COVID-19, that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these critical accounting policies have a significant impact on the results we report in our consolidated financial statements. Our significant accounting policies and estimates are included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019,2020, filed with the SEC on September 26, 2019.
October 6, 2020.
Information regarding our accounting policies and estimates can be found in the Notes to the consolidated Financial Statements.
Newly Issued Accounting Pronouncements
Information regarding the recently issued accounting standards (adopted and pending adoption as of September 30, 2019)2020) are presented in Note 1 to the condensed consolidated financial statements.
RESULTS OF OPERATIONS
Results of Operations – Three months ended September 30, 20192020 compared to September 30, 20182019
| | | | |
| | | | Three months Ended September 30, | |
| | | | | | | | |
| | | |
| Revenues | | |
| Product revenue, net | $1,439,826 | $1,431,809 | $8,017 | |
| Total product revenue | 1,439,826 | 1,431,809 | 8,017 | |
| | | |
| Product and service revenue, net | | $13,520,246 | $1,439,826 | $12,080,420 | 839% |
| Operating expenses | | |
| Cost of sales | 375,720 | 410,959 | (35,239) | 3,819,156 | 375,720 | 3,443,436 | 916% |
| Research and development | 78,020 | 155,878 | (77,858) | 182,865 | 78,020 | 104,845 | 134% |
| Selling, general and administrative | 5,146,443 | 3,576,580 | 1,569,863 | 11,490,370 | 5,146,443 | 6,343,927 | 123% |
Selling, general and administrative - related party
| – | 253,709 | (253,709) | |
| Amortization of intangible assets | 575,117 | 451,957 | 123,160 | 1,584,581 | 575,117 | 1,009,464 | 176% |
| Total operating expenses | 6,175,300 | 4,849,083 | 1,326,217 | 17,076,972 | 6,175,300 | 10,901,672 | 177% |
| | | |
| Loss from operations | (4,735,474) | (3,417,274) | (1,318,200) | (3,556,726) | (4,735,474) | 1,178,748 | -25% |
| | | |
| Other (expense) income | | |
| Other (expense), net | (195,386) | (76,561) | (118,825) | (751,541) | (195,386) | (556,155) | 285% |
| Gain from change in fair value of contingent consideration | | 2,336 | - | 2,336 | − |
| Gain from warrant derivative liability | 1,830 | 47,352 | (45,522) | - | 1,830 | (1,830) | -100% |
| Total other (expense) income | (193,556) | (29,209) | (164,347) | (749,205) | (193,556) | (555,649) | 287% |
| | | |
| Net loss | $(4,929,030) | $(3,446,483) | $(1,482,547) | $(4,305,931) | $(4,929,030) | $623,099 | -13% |
Product revenue. We recognized net revenue from product sales of $13.5 million and $1.4 million for the three months ended September 30, 2020 and 2019 , respectively. This increase was primarily driven by the acquisition of the Pediatric Care Portfolio on November 1, 2019 and 2018the Merger with Innovus on February 14, 2020, contributing approximately $2.7 million and $7.8 million for the three months ended September 30, 2020, respectively. Our product portfolio includes Natesto, Tuzistra XR, ZolpiMist, and the MiOXSYS System.
Cost of sales. The cost of sales of $376,000$3.8 million and $411,000$0.4 million recognized for the three months ended September 30, 20192020 and 2018,2019, respectively, are related to Natesto, Tuzistra XR, ZolpiMist, andCefaclor, Karbinal, Poly-Vi-Flor, Tri-Vi-Flor, the MiOXSYS System.System and consumer health products. We expect cost of sales to increase in the future due to and in line with growth in revenue from product sales, however, the decline in costs of sales was the result of efforts to improve product margins.
sales.
Research and Development. Research and development expenses decreased $78,000,increased $0.1 million, or 49.9%134%, for the three months ended September 30, 20192020 compared to the three months ended September 30, 2018.2019. The decreaseincrease was due primarily to a decrease in research and development costs associated with the MiOXSYS System. We anticipate researchCompany’s Healight Platform license and initial development expense to slightly increase in fiscal 2020 as we anticipate funding a study to further support theand clinical application of our MiOXSYS System.costs.
Selling, General and Administrative. Selling, general and administrative costs increased $1.6$6.3 million, or 43.9%123%, for the three months ended September 30, 20192020 compared the three months ended September 30, 2018.2019. The primary increase was primarily due to salesthe Pediatric Portfolio and marketing expenses related to launching Tuzistra XR, labor, occupancy, travel, expanding our commercial team, and stock-based compensation.Consumer Health acquisitions during the year-ended June 30, 2020.
Selling, General and Administrative – Related Party.Selling, general and administrative costs – related party are relates toThe increase was primarily driven by the cost of a services provided by TrialCard,personnel and the commercial support associated with generating additional revenues from the (i) acquisition of which onethe Pediatric Portfolio on November 1, 2019 and (ii) the Merger with Innovus on February 14, 2020. Additionally, we incurred significant expenses associated with the execution of our Directors, Mr. Donofrio, was an employee during the quarter ended September 30, 2018. Mr. Donofrio is no longer an employee of TrialCard.Merger and Pediatric Portfolio transactions.
Amortization of Intangible Assets. Amortization expense for the remaining intangible assets was $575,000approximately $1.6 million and $452,000$0.6 million for the for the three months ended September 30, 20192020 and 2018,2019, respectively. This expense is related to corresponding amortization of our finite-lived intangible assets. The increase of this expense is due to the Pediatric Portfolio acquisition from Cerecor and Innovus Merger that occurred in the 2020 fiscal year ended June 30, 2020.
Other (expense) income, net. Other (expense) income, net for the three months ended September 30, 2020 was income of approximately $0.8 million, compared to expenses of $0.2 million for the three months ended September 30, 2019. The increase was primarily due to the accretion and interest expense resulting from the assumed fixed payment obligations and other long-term liabilities that arose from the (i) November 1, 2019 acquisition of the Pediatric Portfolio from Cerecor, Inc. and (ii) the February 14, 2020 Merger with Innovus.
Liquidity and Capital Resources
| | |
| | |
| | | |
| | | |
| Net cash used in operating activities | (2,987,817) | (2,744,485) |
| Net cash used in investing activities | (1,042,103) | (303,177) |
| Net cash provided by financing activities | – | – |
Revenues for the three-months ended September 30, 2020 were $13.5 million and increased approximately 839% compared to $1.4 million for the three-months ended September 30, 2019. Revenues increased 277% and 100% for each of the years ended June 30, 2020 and 2019, respectively. Revenue is expected to increase over time, which will allow us to rely less on our existing cash balance and proceeds from financing transactions. Cash used by operations during the three-months ended September 30, 2020 was $8.0 million compared to $3.0 million for the three-months ended September 30, 2019. The increase is due primarily to our acquisition and integration of the Pediatric Portfolio and merger with Innovus, which consumed additional cash resources, coupled with an increase in working capital and paydown of other liabilities
As of the date of this Report, we expect costs for our current operations to increase modestly as we integrate the acquisition of the Pediatrics Portfolio and Innovus and continue to focus on revenue growth through increasing product sales. Our total current asset position totaling approximately $141.3 million plus the proceeds expected from ongoing product sales will be used to fund existing operations. We may continue to access the capital markets from time-to-time when market conditions are favorable. The timing and amount of capital that may be raised is dependent on the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms favorable to us, or at all. We did not raise any additional capital during the three-months ended September 30, 2020. Between September 30, 2020, and the filing date of this quarterly report on Form 10-Q, we raised gross proceeds of approximately $3.1 million upon the issuance of 3.0 million shares of the Company’s common stock under the Company’s at-the-market offering program. As of the date of this report, the Company has adequate capital resources to complete its near-term operating and transaction objectives.
Since we have sufficient cash on-hand as of September 30, 2020 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, the Company reports that there does not exist no indication of substantial doubt about its ability to continue as a going concern.
If we are unable to raise adequate capital in the future when it is required, we can adjust our operating plans to reduce the magnitude of the capital needs under our existing operating plan. Some of the adjustments that could be made include delays of and reductions to commercial programs, reductions in headcount, narrowing the scope of the Company’s commercial plans, or reductions to its research and development programs. Without sufficient operating capital, the Company could be required to relinquish rights to products or renegotiate to maintain such rights on less favorable terms than it would otherwise choose. This may lead to impairment or other charges, which could materially affect the Company’s balance sheet and operating results.
The following table shows cash flows for the three months ended September 30, 2020 and 2019:
| | Three Months Ended September 30, |
| | | |
| Net cash used in operating activities | $(7,974,946) | $(2,987,817) |
| Net cash used in investing activities | $(16,940) | $(1,042,103) |
| Net cash provided by financing activities | $(2,178,578) | $- |
Net Cash Used in Operating Activities
During the three months ended September 30, 2020, our operating activities used $8.0 million in cash, which was greater than the net loss of $4.3 million, primarily due to increases in working capital including increases in accounts receivable, inventory, prepaid and other assets. These charges were offset by depreciation, amortization and accretion and an increase in accrued liabilities and accrued compensation.
During the three months ended September 30, 2019, our operating activities used $3.0 million in cash, which was less than the net loss of $4.9 million, primarily as a result of the non-cash depreciation, amortization and accretion, stock-based compensation, a decrease in prepaid expenses and an increase in accrued compensation.
Net Cash Used in Investing Activities
During the three months ended September 30, 2018, our operating activities used $2.72020, we made a payment of $0.02 million in cash. Our cash use was a result of an increase in accrued liabilities and accrued compensation expense, with the recognition of non-cash expenses such as depreciation, amortization and accretion and stock-based compensation expense. These were offset by derivative income, an increase in accounts receivable and prepaid expenses.
Net Cash Used in Investing Activitiescontingent consideration.
During the three months ended September 30, 2019, we issued a $1.0 million note receivable to Innovus prior to the Innovus Merger, and we paid $42,000 in contingent consideration.
DuringNet Cash from Financing Activities
Net cash used by financing activities in the three months ended September 30, 2018,2020 was $2.2 million. This was primarily related to the offering cost of $1.6 million which was paid in cash; (ii) we used $306,000made payments of cash for investing activities to purchase$0.6 million in note payables and fixed and operating assets and received a $3,000 refund of our deposit for office space.
Net Cash from Financing Activitiespayment arrangements.
Net cash provided by financing activities in the three months ended September 30, 2019 was zero.
Net cash provided by financing activities in the three months ended September 30, 2018 was zero.
Off Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “variable interest entities.”
Contractual Obligations and Commitments
Information regarding our Contractual Obligations and Commitments is contained in Note 1110 to the Financial
Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are not currently exposed to material market risk arising from financial instruments, changes in interest rates or commodity prices, or fluctuations in foreign currencies. We have not identified a need to hedge against any of the foregoing risks and therefore currently engagesengage in no hedging activities.
Item 4. Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and are operating in an effective manner.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting, except as described below, known to the Chief Executive Officer or the Chief Financial Officer that occurred during the last fiscal quarterperiod covered by this Report that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
The Company’s assessment over changes in our internal controls over financial reporting excluded those processes or controls that exist at our Aytu Consumer Health reporting unit which we acquired from the February 14, 2020 Innovus Merger. Aytu Consumer Health comprises approximately 57.4% of net revenues, 31.5% of net losses, and 17.5% of the total assets.
PARTPART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are currentlyPresmar. In connection with our acquisition from Cerecor of the Poly-Vi-Flor product rights, the Company agreed to reimburse Cerecor for change of control payments Cerecor may owe to Presmar Associates, Inc. (“Presmar”) pursuant to an Agreement to Redeem Membership Interest among TRx Pharmaceuticals, LLC, Presmar, Fremantle Corporation, and LRS International, LLC, dated May 31, 2011 (the “Presmar Agreement”). Cerecor had inherited the Presmar Agreement as part of a prior transaction. The Company did not assume the Presmar Agreement, but agreed to reimburse Cerecor for any payment it was required to make in connection with the Presmar Agreement change of control provisions. Upon closing of the Cerecor transaction, Presmar disputed the agreed upon calculation by Company and Cerecor of the amount payable under the Presmar Agreement. The Company, Cerecor, and Presmar have had ongoing discussions regarding the appropriate amount owed to Presmar under the Presmar Agreement. Recently, the parties tentatively agreed on an approach under which: (i) Cerecor will make an initial payment to Presmar in the amount of $150,000, which will be reimbursed by the Company in six (6) equal monthly installments; (ii) the Company will issue to Presmar $150,000 worth of the Company’s common stock in a private placement pursuant to applicable exemptions under the Securities Act; and (iii) each party to any material pending legal proceedings.will provide a mutual release of liability in connection with the Poly-Vi-Flor product transfer (the “Settlement”). The Settlement remains contingent on approval from the parties’ respective board of directors.
Hikma. On May 8, 2017, Innovus entered into a Supply Agreement with Hikma (formerly West-Ward Pharmaceuticals Corp.) for the supply of FlutiCare®, a branded fluticasone propionate nasal spray. During the second year of the Supply Agreement, Innovus received multiple shipments of FlutiCare® products containing non-compliant labelling due to defective label adhesive. Since that time Hikma and Innovus have been in negotiations regarding responsibility for the defective products and the status of the Supply Agreement. On May 1, 2020, Hikma and Innovus (now a Company subsidiary) entered into the Settlement Agreement requiring Innovus to purchase three batches of FlutiCare® through the fiscal year 2022 at a price of $1 million per batch.
Marin County DA. On August 24, 2018, Innovus received a letter from the Marin County District Attorney’s Office (the “Marin DA”) demanding substantiation for certain advertising claims made by Innovus related to DiabaSens®, and Apeaz®, which were sold and marketed in Marin County, California. The Marin DA is part of a larger Northern California task force comprising of district attorney offices from ten counties that agree to handle customer protection matters. Innovus responded to the Marin DA through its regulatory counsel in November 2018 and continued to exchange correspondence with the Marin DA through April 2019. In June 2019 Innovus met with the Northern California task force. In March 2020, Innovus (now a Company subsidiary) entered into a Stipulation for Entry of Final Judgement (the “Stipulation”), pursuant to which Innovus agreed to the following: (i) certain injunctive relief relating the advertising and sale of DiabaSens®, and Apeaz®; (ii) to pay a civil penalty of $150,000; (iii) to reimburse investigative costs of $11,500; and (iv) to pay restitution of $43,000. In May 2020, the Marin DA filed the judgement with the Superior Court for the County of Monterrey and the parties are waiting for the judge to approve the stipulation.
Pliscott. Between November 20, 2019 and December 17, 2019, four putative class action lawsuits were filed in Delaware state and federal courts in connection with: (i) Aytu’s proposal to approve, in accordance with Nasdaq Marketplace Rule 5635(d), the convertibility of the Company’s Series F convertible preferred stock and the exercisability of certain warrants, in each case, issued in a private placement offering that closed on October 16, 2019 (the “Nasdaq Rule 5635(d) Proposal”); (ii) Aytu’s proposal to approve an amendment to its Certificate of Incorporation to increase the number of its authorized shares of common stock from 100,000,000 to 120,000,000 shares of common stock (the “Authorized Share Increase Proposal”); and (iii) Aytu’s proposal to approve the adjournment of the special meeting, if necessary, to continue to solicit votes for the Nasdaq Rule 5635(d) Proposal and/or the Authorized Share Increase Proposal (“Adjournment Proposal” and, together with the Nasdaq Rule 5635(d) Proposal and the Authorized Share Increase Proposal, the “Proposal”). Three lawsuits were filed in the Court of Chancery of the State of Delaware: Carl Pliscott v. Joshua R. Disbrow, et al. , Case No. 2019-0933, filed on November 20, 2019 (the “Pliscott Action”); Adam Kirschenbaum v. Aytu Bioscience, Inc., et al. , Case No. 2019-0984, filed on December 10, 2019 (the “Kirschenbaum lawsuit”); and Michael Sebree v. Josh Disbrow, et al. , Case No. 2019-1011, filed on December 17, 2019 (the “Sebree Action”). The Kirschenbaum Action and Sebree Action were both assigned to Chancellor Andre G. Bouchard. The Pliscott Action was removed to the United States District Court for the District of Delaware on December 5, 2019, captioned as Carl Pliscott v. Joshua R. Disbrow, et al., Case No. 19-cv-02228-UNA, but was remanded to the Court of Chancery and assigned to Chancellor Andre G. Bouchard on January 14, 2020. One lawsuit was filed in the United States District Court for the District of Delaware and assigned to Chief Judge Leonard P. Stark: Adam Franchi v. Aytu Bioscience, Inc., et al., Case No. 19-cv-02204- LPS, filed on November 26, 2019 (the “Franchi Action”). The Pliscott Action, Kirschenbaum Action, and Sebree Action alleged that the members of the Aytu board breached their fiduciary duties to Aytu stockholders by failing to disclose all information material to the Proposals. The Franchi Action alleged that Aytu and the individual members of the Aytu board violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (and Rule 14a-9, promulgated thereunder) by virtue of allegedly false and misleading statements contained in the proxy statement filed by Aytu on November 21, 2019. All four lawsuits sought, among other things, declaratory relief allowing the action to be maintained as a class action, injunctive relief prohibiting any stockholder vote on the Proposals or other consummation of the Proposals, damages, attorneys’ fees and costs, and other and further relief. The Sebree Action further sought injunctive relief prohibiting consummation of the Asset Purchase Agreement, dated October 10, 2019. Aytu and the board have asserted that all claims asserted are meritless and vigorously defended against the four lawsuits. On January 30, 2020, the parties in the Pliscott Action, Kirschenbaum Action, and Sebree Action filed a stipulation voluntarily dismissing the cases as moot, with plaintiffs reserving the right to seek mootness fees. On February 5, 2020, the Chancery Court dismissed the cases while retaining jurisdiction to adjudicate anticipated mootness fee motions. No mootness fee motion has been filed to date. At this stage, it is not otherwise possible to predict the effect of lawsuits on Aytu.
YouIn addition to other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report, which could materially affect our business, financial condition, cash flows, and/or future results. There have been no material changes in our risk factors included in our Annual Report. The risk factors in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or future results.
There isare no guarantee that the recent merger between the Company and Innovus and acquisition of Cerecor(collectively, the “Acquisitions”) will prove successful and that we will be able to become profitable post-acquisitions.
In order to make the Acquisitions successful, we will need to both continue to achieve revenue growth and reduce overall costs and cash burn through efficiencies. There is no guarantee that we will be successfuladditional risk factors other than those contained in achieving these goals, both due to the competitive marketplace our products compete in, coupled with the fact that there are certain minimum required costs necessary to support our products and continue to increase market share.Annual Report.
The Acquisitions could result in operating difficulties, dilution, and other consequences that may adversely affect our business and results of operations.
The Acquisitions are important elements of our overall corporate strategy and use of capital, and these transactions could be material to our financial condition and results of operations. Effecting these strategic transactions could create unforeseen operating difficulties and expenditures. The areas where we face risks include, among others:
●
Diversion of management time and focus from operating our business to challenges related to the Acquisitions and other strategic transactions.
●
Failure to successfully develop the acquired businesses or products.
●
Implementation of controls, procedures, and policies of the acquired company.
●
Integration of the acquired company’s accounting, human resource, and other administrative systems, and coordination of manufacture, sales, and marketing functions.
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Transition of operations, manufacturers, and customers.
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Cultural challenges associated with integrating employees form the acquired companies into our organization, and retention of employees from the businesses we acquire.
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Known and unknown liabilities for activities of the acquired company before the acquisition.
●
Litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, and other third parties.
Our failure to address these risks or other problems encountered in connection with the Acquisitions and other strategic transactions could cause us to fail to realize their anticipated benefits, incur unanticipated liabilities, and harm our business generally.
The Acquisitions and other strategic transactions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results. Also, the anticipated benefits or value of our acquisitions and other strategic transactions may not materialize. In connection with past divestitures, we have agreed, and may in the future agree, to provide indemnification for certain potential liabilities, which may adversely affect our financial condition or results.
We may not be able to realize anticipated cost synergies from the pending acquisition.
The success of the pending acquisitions will depend, in part, on our ability to realize anticipated cost synergies. Our success in realizing these cost synergies, and the timing of this realization, depends on the successful integration of our business and operations with the acquired business and operations. Even if we are able to integrate the acquired businesses and operations successfully, this integration may not result in the realization of the full benefits of the cost synergies of the pending acquisition that we currently expect within the anticipated time frame or at all.
If we are unable to consummate the pending Acquisitions, our stock price may be adversely affected and our financial condition may materially suffer.
If the Acquisitions are not completed for any reason, the trading price of our common stock may decline to the extent that the market price of our common stock reflects positive market assumptions that the Acquisitions will be completed and the related benefits will be realized. In addition, if the Acquisitions are not completed our financial condition could materially suffer, including, but not limited to:
●
limiting our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions;
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limiting our flexibility to plan for and adjust to changing business and market conditions and increasing our vulnerability to general adverse economic and industry conditions; and
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potential disruption to our business and distraction of our workforce and management team
We will incur substantial transaction fees and costs in connection with the pending Acquisitions.
We expect to incur a significant amount of non-recurring expenses in connection with the pending Acquisitions, including legal, accounting, financial advisory and other expenses. Additional unanticipated costs may be incurred following consummation of thepending Acquisitions in the course of the integration of our businesses with that of Innovus and Cerecor. We cannot be certain that the elimination of duplicative costs or the realization of other efficiencies related to the integration of the businesses will offset the transaction and integration costs in the near term, or at all.
We cannot assure you that the common stock will remain listed on the NASDAQ Capital Market.
The common stock is currently listed on the NASDAQ Capital Market. Although we currently meet the listing standards of the NASDAQ Capital Market, we cannot assure you that we will be able to maintain the continued listing standards of the NASDAQ Capital Market. If we fail to satisfy the continued listing requirements of the NASDAQ Capital Market, such as the corporate governance requirements, minimum bid price requirement or the minimum stockholder’s equity requirement, the NASDAQ Capital Market may take steps to de-list our common stock. If we are delisted from the NASDAQ Capital Market then our common stock will trade, if at all, only on the over-the-counter market, such as the OTC Bulletin Board securities market, and then only if one or more registered broker-dealer market makers comply with quotation requirements. In addition, delisting of our common stock could depress our stock price, substantially limit liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable to us, or at all. Delisting from the NASDAQ Capital Market could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Exhibit Number | | Description |
| | |
| | Agreement and Plan of Merger dated September 12, 2019 (Incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed September 18, 2019)
|
| | |
| | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*. |
| | |
101 | | XBRL (eXtensible Business Reporting Language). The following materials from Aytu BioScience, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 formatted in XBRL: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Stockholders’ Equity (Deficit), (iv) the Consolidated Statement of Cash Flows, and (v) the Consolidated Notes to the Financial Statements. |
| Exhibit No. | Description | | | | |
| | | | | |
| 2.1 | Agreement and Plan of Merger, dated as of September 12, 2019, by and among Aytu BioScience, Inc., Aytu Acquisition Sub, Inc. and Innovus Pharmaceuticals, Inc. | 8-K | | 2.1 | |
| |
| 2.2 | Asset Purchase Agreement, dated October 10, 2019 | 8-K | | 2.1 | |
| |
| 3.1 | Certificate of Incorporation effective June 3, 2015 | 8-K | | 3.1 | |
| |
| 3.2 | Certificate of Amendment of Certificate of Incorporation effective June 1, 2016 | 8-K | | 3.1 | |
| |
| 3.3 | Certificate of Amendment of Certificate of Incorporation, effective June 30, 2016 | 8-K | | 3.1 | |
| |
| 3.4 | Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, filed on August 11, 2017 | 8-K | | 3.1 | |
|
| 3.5 | Certificate of Amendment of Certificate of Incorporation, effective August 25, 2017 | 8-K | | 3.1 | |
| |
| 3.6 | Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock filed on March 2, 2018 | S-1/A | | 3.6 | |
| |
| 3.7 | Certificate of Amendment to the Restated of Certificate of Incorporation, effective August 10, 2018 | 8-K | | 3.1 | |
| |
| 3.8 | Amended and Restated Bylaws | 8-K | | 3.2 | |
| |
| 3.9 | Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock | 10-Q | | 10.4 | |
| |
| 3.10 | Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock | 8-K | | 3.1 | |
| |
| 3.11 | Certificate of Designation of Preferences, Rights and Limitations of Series G Convertible Preferred Stock | 8-K | | 3.1 | |
| |
| 4.1 | Form of Placement Agent Warrant issued in 2015 Convertible Note Financing | 8-K | | 4.2 | |
| |
| 4.2 | Warrant Agent Agreement, dated May 6, 2016 by and between Aytu BioScience, Inc. and VStock Transfer, LLC | 8-K | | 4.1 | |
| |
| 4.3 | First Amendment to May 6, 2016 Warrant Agent Agreement between Aytu BioScience, Inc. and VStock Transfer LLC | S-1 | | 4.5 | |
| |
| 4.4 | Warrant Agent Agreement, dated November 2, 2016 by and between Aytu BioScience, Inc. and VStock Transfer, LLC | 8-K | | 4.1 | |
| |
| 4.5 | Form of Amended and Restated Underwriters Warrant (May 2016 Financing) | 8-K | | 4.1 | |
| | | | | | |
| 4.6 | Form of Amended and Restated Underwriters Warrant (October 2016 Financing) | 8-K | 3/1/17 | 4.2 | |
| | | | | | |
| 4.7 | Form of Common Stock Purchase Warrant issued on August 15, 2017 | 8-K | 8/16/17 | 4.1 | |
| | | | | | |
| 4.8 | Form of Common Stock Purchase Warrant for March 2018 Offering | S-1 | 2/27/18 | 4.8 | |
| | | | | | |
| 4.9 | Form of Pre-Funded Purchase Warrant | 8-K | 3/13/20 | 4.1 | |
| | | | | | |
| 4.10 | Form of Placement Agents Warrant | 8-K | 3/13/20 | 4.2 | |
| | | | | | |
| 4.11 | Form of Warrant | 8-K | 3/13/20 | 4.1 | |
| | | | | | |
| 4.12 | Form of Placement Agents Warrant | 8-K | 3/13/20 | 4.2 | |
| | | | | | |
| 4.13 | Form of Warrant | 8-K | 3/20/20 | 4.1 | |
| | | | | | |
| 4.14 | Form of Placement Agents Warrants | 8-K | 3/20/20 | 4.2 | |
| | | | | | |
| 4.15 | Form of Wainwright Warrant | 8-K | 7/2/20 | 4.1 | |
| | | | |
| 10.1 | | 10-K | 10/6/20
| 10.62 | |
| | | | |
| 10.2 | Amended Employment Agreement with David A. Green dated July 1, 2020 | 10-K | 10/6/20
| 10.63 | |
| | | | |
| 31.1 | Certificate of the Chief Executive Officer of Aytu BioScience, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | |
| | | | |
| 31.2 | Certificate of the Chief Executive Officer and the Chief Financial Officer of Aytu BioScience, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | |
| | | | |
| 101 | XBRL (extensible Business Reporting Language). The following materials from Aytu BioScience, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2020 formatted in XBRL: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Stockholders’ Equity (Deficit), (iv) the Statements of Cash Flows, and (v) the Notes to the Financial Statements | | | | |
* | The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
† Indicates is a management contract or compensatory plan or arrangement.
Pursuant to the requirements# The Company has received confidential treatment of certain portions of this agreement. These portions have been omitted and filed separately with the Securities and Exchange Act of 1934, the registrant has duly caused this reportCommission pursuant to be signed on its behalf by the undersigned thereunto duly authorized.
| AYTU BIOSCIENCE, INC. |
| | |
| By: | /s/ Joshua R. Disbrow |
| | Joshua R. Disbrow |
| | Chief Executive Officer (principal executive officer) |
| | Date: November 14, 2019 |
| | |
| By: | /s/ David A. Green |
| | David A. Green |
| | Chief Financial Officer (principal financial and accounting officer) |
| | Date: November 14, 2019 |
a confidential treatment request.
