SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: December 31, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission File No. 001-38247
AYTU BIOSCIENCE, INC.
(www.aytubio.com)
Delaware | 47-0883144 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
373 Inverness Parkway, Suite 206
Englewood, Colorado 80112
(Address of principal executive offices, including zip code)
(720) 437-6580
(Registrant’sRegistrant’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 February 1, 2019,2021, there were 23,018,05217,882,893 shares of Common Stock outstanding.
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
PART I—FINANCIAL INFORMATION
Page | ||
PART | ||
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, MiOXSYS, AcipHex® Sprinkle™Karbinal®, Cefaclor for Oral Suspension, Karbinal® ER, Flexichamber™Natesto®, Poly-Vi-Flor®, Tuzistra®, and Tri-Vi-Flor™ZolpiMist®, and the recently acquired consumer health products such as DiabaSens®, FlutiCare®, UriVarx® 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.
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 31, | June 30, | |||||||
2020 | 2020 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 62,032,642 | $ | 48,081,715 | ||||
Restricted cash | 251,964 | 251,592 | ||||||
Accounts receivable, net | 7,001,068 | 5,175,924 | ||||||
Inventory, net | 6,571,254 | 9,999,441 | ||||||
Prepaid expenses and other | 6,081,766 | 5,715,089 | ||||||
Other current assets | 10,598,771 | 5,742,011 | ||||||
Total current assets | 92,537,465 | 74,965,772 | ||||||
Fixed assets, net | 89,663 | 258,516 | ||||||
Right-of-use asset | 310,479 | 634,093 | ||||||
Licensed assets, net | 15,449,281 | 16,586,847 | ||||||
Patents and tradenames, net | 10,197,112 | 11,081,048 | ||||||
Product technology rights, net | 20,051,666 | 21,186,666 | ||||||
Deposits | 16,023 | 32,981 | ||||||
Goodwill | 28,090,407 | 28,090,407 | ||||||
Total long-term assets | 74,204,631 | 77,870,558 | ||||||
Total assets | $ | 166,742,096 | $ | 152,836,330 | ||||
December 31, | June 30, | |
2019 | 2019 | |
(Unaudited) | ||
| Assets | ||
| Current assets | ||
| Cash and cash equivalents | $5,259,492 | 11,044,227 |
| Restricted cash | 251,396 | 250,000 |
| Accounts receivable, net | 5,197,151 | 1,740,787 |
| Inventory, net | 2,491,807 | 1,440,069 |
| Prepaid expenses and other | 2,361,249 | 957,781 |
| Note receivable | 1,350,000 | – |
| Other current assets | 1,426,617 | – |
| Total current assets | 18,337,712 | 15,432,864 |
| Fixed assets, net | 122,064 | 203,733 |
| Licensed assets, net | 17,724,416 | 18,861,983 |
| Patents, net | 207,944 | 220,611 |
| Right-of-use asset | 374,568 | – |
| Product technology rights | 22,321,667 | – |
| Deposits | 2,200 | 2,200 |
| Goodwill | 15,387,064 | – |
| Total long-term assets | 56,139,923 | 19,288,527 |
| Total assets | $74,477,635 | $34,721,391 |
| Liabilities | ||
| Current liabilities | ||
| Accounts payable and other | $9,598,567 | $2,297,270 |
| Accrued liabilities | 2,114,060 | 1,147,740 |
| Accrued compensation | 786,769 | 849,498 |
| Current lease liability | 82,755 | – |
| Current contingent consideration | 705,880 | 1,078,068 |
| Current portion of fixed payment arrangements | 2,661,456 | – |
| Total current liabilities | 15,949,487 | 5,372,576 |
| Long-term contingent consideration | 17,739,964 | 22,247,796 |
| Long-term lease liability | 291,813 | – |
| Long-term fixed payment arrangements | 23,394,761 | – |
| Warrant derivative liability | 11,371 | 13,201 |
| Total liabilities | 57,387,395 | 27,633,573 |
| Commitments and contingencies (Note 12) | ||
| Stockholders' equity | ||
| Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 10,215,845 and 3,594,981, respectively as of December 31, 2019 (unaudited) and June 30, 2019. | 1,022 | 359 |
| Common Stock, par value $.0001; 100,000,000 shares authorized; shares issued and outstanding 20,733,052 and 17,538,071, respectively as of December 31, 2019 (unaudited) and June 30, 2019. | 2,073 | 1,754 |
| Additional paid-in capital | 128,619,922 | 113,475,205 |
| Accumulated deficit | (111,532,777) | (106,389,500) |
| Total stockholders' equity | 16,758,367 | 7,087,818 |
| Total liabilities and stockholders' equity | $74,477,635 | $34,721,391 |
See the accompanying Notes to the Condensed Consolidated Financial Statements
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, cont’d
December 31, | June 30, | |||||||
2020 | 2020 | |||||||
(Unaudited) | ||||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Accounts payable and other | $ | 7,157,208 | $ | 11,824,560 | ||||
Accrued liabilities | 8,877,715 | 7,849,855 | ||||||
Accrued compensation | 2,540,353 | 3,117,177 | ||||||
Debt | 41,318 | 982,076 | ||||||
Contract liability | 475,680 | 339,336 | ||||||
Current lease liability | 100,263 | 300,426 | ||||||
Current portion of fixed payment arrangements | 1,937,476 | 2,340,166 | ||||||
Current portion of CVR liabilities | 977,475 | 839,734 | ||||||
Current portion of contingent consideration | 3,705,931 | 713,251 | ||||||
Total current liabilities | 25,813,419 | 28,306,581 | ||||||
Long-term contingent consideration, net of current portion | 12,573,916 | 12,874,351 | ||||||
Long-term lease liability, net of current portion | 211,056 | 725,374 | ||||||
Long-term fixed payment arrangements, net of current portion | 9,945,554 | 11,171,491 | ||||||
Long-term CVR liabilities, net of current portion | 5,494,112 | 4,731,866 | ||||||
Other long-term liabilities | 11,371 | 11,371 | ||||||
Total liabilities | 54,049,428 | 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 December 31, 2020 and June 30, 2020, respectively. | - | - | ||||||
Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 17,882,893 and 12,583,736, respectively as of December 31, 2020 and June 30, 2020. | 1,788 | 1,259 | ||||||
Additional paid-in capital | 246,532,284 | 215,024,216 | ||||||
Accumulated deficit | (133,841,404 | ) | (120,010,179 | ) | ||||
Total stockholders' equity | 112,692,668 | 95,015,296 | ||||||
Total liabilities and stockholders' equity | $ | 166,742,096 | $ | 152,836,330 | ||||
See accompanying Notes to the Condensed Consolidated Financial Statements
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | ||||||||||||||||
Product revenue, net | $ | 15,147,034 | $ | 3,175,236 | $ | 28,667,280 | $ | 4,615,062 | ||||||||
Operating expenses | ||||||||||||||||
Cost of sales | 5,998,389 | 606,046 | 9,817,545 | 981,766 | ||||||||||||
Research and development | 286,572 | 66,675 | 469,437 | 144,695 | ||||||||||||
Selling, general and administrative | 12,852,614 | 6,516,160 | 24,342,983 | 11,662,603 | ||||||||||||
Amortization of intangible assets | 1,584,580 | 953,450 | 3,169,161 | 1,528,567 | ||||||||||||
Total operating expenses | 20,722,155 | 8,142,331 | 37,799,126 | 14,317,631 | ||||||||||||
Loss from operations | (5,575,121 | ) | (4,967,095 | ) | (9,131,846 | ) | (9,702,569 | ) | ||||||||
Other (expense) income | ||||||||||||||||
Other (expense), net | (378,958 | ) | (446,958 | ) | (1,130,499 | ) | (642,344 | ) | ||||||||
Loss from change in fair value of contingent consideration | (3,313,656 | ) | - | (3,311,320 | ) | - | ||||||||||
Gain from derecognition of contingent consideration | - | 5,199,806 | - | 5,199,806 | ||||||||||||
Gain from warrant derivative liability | - | - | - | 1,830 | ||||||||||||
Loss on debt exchange | (257,559 | ) | - | (257,559 | ) | - | ||||||||||
Total other (expense) income | (3,950,173 | ) | 4,752,848 | (4,699,378 | ) | 4,559,292 | ||||||||||
Net loss | $ | (9,525,294 | ) | $ | (214,247 | ) | $ | (13,831,224 | ) | $ | (5,143,277 | ) | ||||
Weighted average number of common shares outstanding | 13,281,904 | 1,753,815 | 12,717,180 | 1,642,599 | ||||||||||||
Basic and diluted net loss per common share | $ | (0.72 | ) | $ | (0.12 | ) | $ | (1.09 | ) | $ | (3.13 | ) | ||||
Three Months Ended December 31, | Six Months Ended December 31, | |||
2019 | 2018 | 2019 | 2018 | |
| Revenues | ||||
| Product revenue, net | $3,175,236 | $1,795,011 | $4,615,062 | $3,226,820 |
| Operating expenses | ||||
| Cost of sales | 606,046 | 525,138 | 981,766 | 936,097 |
| Research and development | 66,675 | 149,029 | 144,695 | 304,907 |
| Selling, general and administrative | 6,516,160 | 5,046,174 | 11,662,603 | 8,622,754 |
| Selling, general and administrative - related party | – | 91,337 | – | 345,046 |
| Amortization of intangible assets | 953,450 | 534,063 | 1,528,567 | 986,020 |
| Total operating expenses | 8,142,331 | 6,345,741 | 14,317,631 | 11,194,824 |
| Loss from operations | (4,967,095) | (4,550,730) | (9,702,569) | (7,968,004) |
| Other (expense) income | ||||
| Other (expense), net | (446,958) | (127,569) | (642,344) | (204,130) |
| Gain from derecognition of contingent consideration liability | 5,199,806 | – | – | – |
| Gain from warrant derivative liability | – | 20,637 | 1,830 | 67,989 |
| Total other (expense) income | 4,752,848 | (106,932) | 4,559,292 | (136,141) |
| Net loss | $(214,247) | $(4,657,662) | $(5,143,277) | $(8,104,145) |
| Weighted average number of common shares outstanding | 17,538,148 | 6,477,004 | 16,425,990 | 4,183,591 |
| Basic and diluted net loss per common share | $(0.01) | $(0.72) | $(0.31) | $(1.94) |
See the accompanying Notes to the Condensed Consolidated Financial StatementsStatements.
(unaudited unless indicated otherwise)
Preferred Stock | Common Stock | Additional paid-in | Accumulated | Total Stockholders' | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | Deficit | Equity | ||||||||||||||||||||||
BALANCE - June 30, 2019 (audited) | 3,594,981 | $ | 359 | 1,753,808 | $ | 176 | $ | 113,476,783 | $ | (106,389,500 | ) | $ | 7,087,818 | |||||||||||||||
Stock-based compensation | - | - | - | - | 165,171 | - | 165,171 | |||||||||||||||||||||
Preferred stock converted in common stock | (443,833 | ) | (44 | ) | 44,384 | 5 | 39 | - | - | |||||||||||||||||||
Net loss | - | - | - | - | - | (4,929,030 | ) | (4,929,030 | ) | |||||||||||||||||||
| BALANCE - September 30, 2019 | 3,151,148 | $ | 315 | 1,798,192 | $ | 181 | $ | 113,641,993 | $ | (111,318,530 | ) | $ | 2,323,959 | |||||||||||||||
| Stock-based compensation | $ | - | - | $ | - | $ | 162,264 | $ | - | $ | 162,264 | |||||||||||||||||
| Issuance of Series F preferred stock from October 2019 private placement financing, net of $741,650 issuance costs | 10,000 | 1 | - | - | 5,249,483 | - | 5,249,484 | |||||||||||||||||||||
| Warrants issued in connection with the private placement | - | - | - | - | 4,008,866 | - | 4,008,866 | |||||||||||||||||||||
| Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics | 9,805,845 | 981 | 5,558,933 | 5,559,914 | ||||||||||||||||||||||||
| Preferred stock converted in common stock | (2,751,148 | ) | (275 | ) | 275,115 | 28 | 247 | - | - | |||||||||||||||||||
| Net loss | - | - | - | - | (214,247 | ) | $ | (214,247 | ) | |||||||||||||||||||
BALANCE - December 30, 2019 | 10,215,845 | $ | 1,022 | 2,073,307 | $ | 209 | $ | 128,621,786 | $ | (111,532,777 | ) | $ | 17,090,240 | |||||||||||||||
Preferred Stock | Common Stock | Additional paid-in | Accumulated | Total Stockholders' | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | Deficit | Equity | ||||||||||||||||||||||
BALANCE - June 30, 2020 (audited) | - | $ | - | 12,583,736 | $ | 1,259 | $ | 215,024,216 | $ | (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 | - | $ | - | 12,583,736 | $ | 1,259 | $ | 215,377,597 | $ | (124,316,110 | ) | $ | 91,062,746 | |||||||||||||||
| Stock-based compensation | - | $ | - | - | $ | - | $ | 508,059 | $ | - | $ | 508,059 | ||||||||||||||||
| Exchange of debt for common stock | - | - | 130,081 | 13 | 1,057,546 | - | 1,057,559 | |||||||||||||||||||||
| Issuance of common stock, net of issue costs and warrants | - | - | 5,169,076 | 516 | 28,316,928 | - | 28,317,444 | |||||||||||||||||||||
| Warrants issued in connection with common stock offering | - | - | 1,272,154 | 1,272,154 | ||||||||||||||||||||||||
| - | - | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (9,525,294 | ) | (9,525,294 | ) | |||||||||||||||||||
BALANCE - December 31, 2020 | - | $ | - | 17,882,893 | $ | 1,788 | $ | 246,532,284 | $ | (133,841,404 | ) | $ | 112,692,668 | |||||||||||||||
Preferred Stock | Common Stock | Additional paid-in | Accumulated | Total Stockholders' | |||
Shares | Amount | Shares | Amount | capital | Deficit | Equity | |
| 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 (unaudited) | – | – | – | – | 165,171 | – | 165,171 |
| Preferred stock converted in common stock (unaudited) | (443,833) | (44) | 443,833 | 44 | – | – | – |
| Net loss (unaudited) | – | – | – | – | – | (4,929,030) | (4,929,030) |
| BALANCE - September 30, 2019 (unaudited) | 3,151,148 | $315 | 17,981,904 | $1,798 | $113,640,376 | $(111,318,530) | $2,323,959 |
| Stock-based compensation (unaudited) | – | – | – | – | 162,264 | – | 162,264 |
| Issuance of Series F preferred stock from October 2019 private placement financing, net of $741,650 issuance costs (unaudited) | 10,000 | 1 | – | – | 5,249,483 | – | 5,249,484 |
| Warrants issued in connection with the private placement (unaudited) | – | – | – | – | 4,008,866 | – | 4,008,866 |
| Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics (unaudited) | 9,805,845 | 981 | – | – | 5,558,933 | 5,559,914 | |
| Preferred stock converted in common stock (unaudited) | (2,751,148) | (275) | 2,751,148 | 275 | – | – | – |
| Net loss (unaudited) | – | – | – | – | – | (214,247) | (214,247) |
| BALANCE - December 31, 2019 (unaudited) | 10,215,845 | $1,022 | 20,733,052 | $2,073 | $128,619,922 | $(111,532,777) | $17,090,240 |
Preferred Stock | Common Stock | Additional paid-in | Accumulated | Total Stockholders' | |||
Shares | Amount | Shares | Amount | capital | Deficit | Equity | |
| BALANCE - June 30, 2018 | – | $– | 1,794,762 | $179 | $92,681,918 | $(79,257,592) | $13,424,505 |
| Stock-based compensation (unaudited) | – | – | – | – | 152,114 | – | 152,114 |
| Adjustment for rounding of shares due to stock split | – | – | 6,649 | 1 | (1) | – | – |
| Net loss (unaudited) | – | – | – | – | – | (3,446,483) | (3,446,483) |
| BALANCE - September 30, 2018 (unaudited) | – | $– | 1,801,411 | $180 | $92,834,031 | $(82,704,075) | $10,130,136 |
| Stock-based compensation (unaudited) | – | – | 2,707,022 | 270 | 193,792 | – | 194,062 |
| Common stock issued to employee (unaudited) | – | – | 9,000 | 1 | 11,689 | – | 11,690 |
| Issuance of preferred and common stock, net of $1,479,963 in cash issuance costs (unaudited) | 8,342,993 | 834 | 1,777,007 | 178 | 11,810,373 | – | 11,811,385 |
| Warrants issued in connection with the registered offering (unaudited) | – | – | – | – | 1,827,628 | – | 1,827,628 |
| Warrants issued in connection with the registered offering to the placement agents, non-cash issuance costs (unaudited) | – | – | – | – | 61,024 | – | 61,024 |
| Preferred stocks issued in connection with the purchase of assets (unaudited) | 400,000 | 40 | – | – | 519,560 | – | 519,600 |
| Preferred stocks converted into common stock (unaudited) | (4,210,329) | (421) | 4,210,329 | 421 | – | – | – |
| Net loss (unaudited) | – | – | – | – | – | (4,657,662) | (4,657,662) |
BALANCE - December 31, 2018 (unaudited) | 4,532,664 | $453 | 10,504,769 | $1,050 | $107,258,097 | $(87,361,737) | $19,897,863 |
See the accompanying Notes to the Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended | ||||||||
December 31, | ||||||||
2020 | 2019 | |||||||
Operating Activities | ||||||||
Net loss | $ | (13,831,224 | ) | $ | (5,143,277 | ) | ||
Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
Depreciation, amortization and accretion | 4,012,909 | 2,157,540 | ||||||
Stock-based compensation expense | 962,977 | 327,435 | ||||||
| Loss from change in fair value of contingent consideration | 2,411,333 | |||||||
(Gain) from derecognition of contingent consideration | - | (5,199,806 | ) | |||||
Loss on sale of equipment | 112,110 | - | ||||||
(Gain) on termination of lease | (343,185 | ) | - | |||||
| Loss on debt exchange | 257,559 | |||||||
Changes in allowance for bad debt | 147,627 | - | ||||||
Loss from change in fair value of CVR | 899,987 | - | ||||||
Derivative income | (1,830 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in accounts receivable | (1,965,271 | ) | (3,456,364 | ) | ||||
Increase in inventory | (3,615,662 | ) | (132,199 | ) | ||||
Increase in prepaid expenses and other | (379,337 | ) | (171,430 | ) | ||||
Decrease (increase) in other current assets | 2,295,055 | (136,694 | ) | |||||
(Decrease) increase in accounts payable and other | (3,136,163 | ) | 2,806,973 | |||||
Increase in accrued liabilities | 1,711,466 | 145,467 | ||||||
Decrease in accrued compensation | (576,824 | ) | (62,729 | ) | ||||
| Decrease in fixed payment arrangements | - | (216,150 | ) | |||||
Increase in contract liability | 136,344 | - | ||||||
Decrease in deferred rent | - | (3,990 | ) | |||||
Net cash used in operating activities | (10,900,299 | ) | (9,087,054 | ) | ||||
Investing Activities | ||||||||
Deposit | (3,923 | ) | - | |||||
Contingent consideration payment | (42,760 | ) | (104,635 | ) | ||||
| Note receivable | - | (1,350,000 | ) | |||||
| Purchase of assets | - | (4,500,000 | ) | |||||
Net cash used in investing activities | (46,683 | ) | (5,954,635 | ) | ||||
Financing Activities | ||||||||
| Issuance of preferred, common stock and warrants | 32,249,652 | 10,000,000 | ||||||
Issuance cost related to registered offering | (4,292,781 | ) | (741,650 | ) | ||||
Payments made to borrowings | (272,727 | ) | - | |||||
Payments made to fixed payment arrangements | (2,785,863 | ) | - | |||||
Net cash provided by financing activities | 24,898,281 | 9,258,350 | ||||||
Net change in cash, restricted cash and cash equivalents | 13,951,299 | (5,783,339 | ) | |||||
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 | $ | 62,284,606 | $ | 5,510,888 | ||||
Six Months Ended December 31, | ||
2019 | 2018 | |
| Operating Activities | ||
| Net loss | $(5,143,277) | $(8,104,145) |
Adjustments to reconcile net loss to cash used in operating activities: | ||
| Depreciation, amortization and accretion | 2,157,540 | 1,230,671 |
| Stock-based compensation expense | 327,435 | 346,176 |
| Derecognition of contingent consideration | (5,199,806) | – |
| Issuance of common stock to employee | – | 11,690 |
| Derivative income | (1,830) | (67,989) |
| Changes in operating assets and liabilities: | ||
| (Increase) in accounts receivable | (3,456,364) | (903,708) |
| (Increase) in inventory | (132,199) | (305,888) |
| (Increase) in prepaid expenses and other | (171,430) | (504,757) |
| (Increase) in other current assets | (136,694) | – |
| Increase in accounts payable and other | 2,806,973 | 252,113 |
| Increase in accrued liabilities | 145,467 | 760,798 |
| (Decrease) Increase in accrued compensation | (62,729) | 203,160 |
| (Decrease) in fixed payment arrangements | (216,150) | – |
| Increase in interest payable | – | 36,164 |
| (Decrease) in deferred rent | (3,990) | (1,450) |
| Net cash used in operating activities | (9,087,054) | (7,047,165) |
| Investing Activities | ||
| Deposit | – | 2,888 |
| Purchases of fixed assets | – | (12,954) |
| Contingent consideration payment | (104,635) | (50,221) |
| Note receivable | (1,350,000) | – |
| Purchase of assets | (4,500,000) | (800,000) |
| Net cash used in investing activities | (5,954,635) | (860,287) |
| Financing Activities | ||
| Issuance of preferred, common stock and warrants | 10,000,000 | 15,180,000 |
| Issuance costs related to preferred, common stock and warrants | (741,650) | (1,479,963) |
| Issuance of debt | – | 5,000,000 |
| Net cash provided by financing activities | 9,258,350 | 18,700,037 |
| Net change in cash, restricted cash and cash equivalents | (5,783,339) | 10,792,585 |
| 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 | $5,510,888 | $17,905,112 |
| Supplemental disclosures of cash and non-cash investing and financing transactions | ||
| Cash paid for interest | $161,890 | $– |
| Fair value of right-to-use asset and related lease liability | 374,568 | – |
| Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics (unaudited) | 5,559,914 | – |
| Inventory payment included in accounts payable | 460,416 | – |
| Contingent consideration included in accounts payable | 16,014 | – |
| Fixed payment arrangements included in accounts payable | 291,666 | – |
| Exchange of convertible preferred stock into common stock | 319 | – |
| Return deductions received by Cerecor | 1,309,365 | – |
| Fair value of warrants issued to investors and underwriters | – | 1,888,652 |
| Issuance of preferred stock related to purchase of asset | – | 519,600 |
| Contingent consideration related to purchase of asset | $– | $8,833,219 |
See the accompanying Notes to the Condensed Consolidated Financial StatementsStatements.
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, cont’d
(unaudited)
Six Months Ended | ||||||||
December 31, | ||||||||
Supplemental disclosures of cash and non-cash investing and financing transactions | 2020 | 2019 | ||||||
Warrants issued to underwriters | $ | 356,139 | $ | - | ||||
Cash paid for interest | 306,752 | 3,390 | ||||||
Fair value of right-to-use asset and related lease liability | 43,082 | 412,691 | ||||||
Contingent consideration included in accounts payable | - | 3,430 | ||||||
| Debt exchange | 1,057,559 | - | ||||||
Fixed payment arrangements included in accrued liabilities | 1,050,000 | - | ||||||
| Inventory swap | 7,043,849 | - | ||||||
Acquisition costs included in accounts payable | - | 59,014 | ||||||
Exchange of convertible preferred stock into common stock | $ | - | $ | 44 | ||||
See the accompanying Notes to the Condensed Consolidated Financial Statements
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.
Nature of Business, Financial Condition, Basis of PresentationNature 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 currently operates its Aytu BioScience business, consisting of the primary care product portfolio (the “Primary Care Portfolio”), the prescription pediatric portfolio (the “Pediatric Portfolio”), and its Aytu consumer healthcare products business (the “Consumer Health Portfolio”). The Aytu BioScience business is focused on commercializing 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 commercializing 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.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 formulations 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 focusedlicensing, developing and commercializing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes over twenty 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, male infertility, various pediatric conditions ande-commerce platforms.
On December 10, 2020, the Company plans to expand opportunistically into other therapeutic areas.
In connection with the execution of the Merger Agreement, the Company and Neos have entered into a Commitment Letter (the “Bridge Commitment Letter”) for the Company to provide financing to Neos under an unsecured convertible note, in an aggregate amount of up to $5,000,000, subject to the terms set forth therein (the "Bridge Financing"). Interest accrues on the principal amount outstanding under the note at a rate of 6.0% per annum, compounding monthly and commencing if and when such Bridge Financing is provided. If an event of default has occurred and is continuing, the interest rate then in effect will be increased by 2.0% per annum, and all overdue obligations under the note will bear interest at the interest rate in effect at such time plus the additional 2.0% per annum. The Company's rights under the note, including rights to payment, are subordinated to the rights of Neos’s existing senior lenders. The maturity date of the note is the earlier of the acceleration of the obligations evidenced thereby and November 7, 2022. In the event that Neos draws down on the note, the exchange ratio will be adjusted downward by an amount equal to 0.00011 for every $100,000 of financing funded to Neos under the note.
In April of 2020, 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 COVID-19 patients.
The Company recently established a purchasing relationship with a U.S. supplier of Emergency Use Authorization (EUA) authorized antigen tests. Antigen tests rapidly detect the presence of the SARS-CoV-2 virus antigen via a nasopharyngeal swab and are used without laboratory equipment. Demand for rapid antigen tests has increased in recent months across the U.S.
The Company’s strategy is to continue building its portfolio of revenue-generating products, leveraging its commercial team’s expertise to build leading brands within large therapeutic markets.
Financial Condition. As of December 31, 2020, the Company had approximately $5.5$62.3 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-monthsthree- and six- months ended December 31, 2020were $15.1 million and $28.7 million, compared to $3.2 million and $4.6 million for the same periods ended December 31, 2019, increased 77% compared to the three-months ended December 31, 2018,an increase of approximately 377% and revenues increased 100% and 14% for each of the years ended June 30, 2019 and 2018,521%, respectively. Revenue is expected to continue to increase long-term, allowingover time, which will allow the Company to rely less on ourthe Company's existing cash and cash equivalents,balance and proceeds from financing transactions. Cash used inby operations during the six-months ended December 31, 2020 was $10.9 million compared to $9.1 million for the six-months ended December 31, 2019 was $9.1 million compared to $7.0 million for the six-months ended December 31, 2018,. The increase is due primarily to the Company’s acquisitionan increase in working capital and integrationpay down of the Pediatric Portfolio, which consumed additional cash resources.other liabilities.
As of the date of this Report, the Company expects its commercial costs for its current operationoperations to increase modestly as the Company integratescontinues to integrate the acquisition of the Pediatrics Portfolio, Innovus and if approved by the Company's and Neos' shareholders, the Neos Merger, continues to focus on revenue growth through increasing product sales.sales and additional acquisitions. The Company’s total asset positioncurrent assets totaling $74.5approximately $92.5 million as of December 31, 2020 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 operationsfrom 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 $29.6 million, net during the three months ended December 31, 2020, from the sale of approximately 0.4 million shares using the Company’s at-the-market facility and from the issuance of approximately 4.8 million shares of the Company's common stock and 0.3 million placement agent warrants on December 15, 2020. On December 10, 2020, the Company exchanged $0.8 million of debt into 0.1 million shares of the Company's common stock, eliminating the use cash to satisfy this obligation (see Note 15). Between December 31, 2020, and the filing date of this quarterly report on Form 10-Q, the Company has been successful in accessingnot issued common stock under the Company’s at-the-market offering program. As of the date of this report, the Company has adequate 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 December 31, 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 CompanyCompany's 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.
Basis of Presentation.
The unaudited consolidated financial statements contained in this report represent the financial statements ofOn December 8, 2020, the Company effected a reverse stock split in which each common stockholder received one share of common stock for every 10 shares held (herein referred to collectively as the “Reverse Stock Split”). All share and per share amounts in this report have been adjusted to reflect the effect of the Reverse Stock Split.
Interim Unaudited Condensed Consolidated Financial Statements. The accompanying condensed consolidated balance sheet as of December 31, 2020, and the condensed consolidated statements of operations, stockholders’ equity, for the three- and six- months ended, and the interim condensed consolidated statements of cash flows for the six-months ended December 31, 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 and six-months ended December 31, 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 consideration, contingent value rights ("CVRs"), and fixed payment obligations 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 December 31, 2020.
Adoption of New Accounting Pronouncements
Fair Value Measurements (“(“ASU 2018-03”2018-13”).
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 and delay adoption ofto the additional disclosures until their effective date. The Company is currently assessing the impact that ASU 2018-13 will have on itsCompany’s financial statements
Recent Accounting Pronouncements
Financial Instruments – Credit Losses (“(“ASU 2016-13”2016-13”).
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. Acquisitions
The Pediatric Portfolio
On October 10, 2019, the Company entered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to purchase and acquire Cerecor’sthe Pediatric Portfolio, which closed on November 1, 2019. The Pediatric Portfolio consists of sixfour main prescription products consisting of (i) AcipHex® Sprinkle™, (ii) CefaclorCefaclor™ for Oral Suspension, (iii) Karbinal® ER (iii) Poly-Vi-Flor®, and (iv) Flexichamber™, (v) Poly-Vi-Flor® and Tri-Vi-Flor™.
In addition, the Company assumed 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 revenue generated from a subset of the ProductPediatric 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 duewas 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.
Further, certain of the products in the ProductPediatric 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 remainingremainder 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 pediatric product portfolio that is expected to provide revenue and cost synergies. Transaction costs of $0.3 million were included as general and administrative expense in the consolidated statements of operations for the three and six months ended December 31, 2019.
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 therefore, are subject to revisions that may result in adjustments to the values presented below:
As of | ||||
November 1, 2019 | ||||
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 transferred | $ | 10,059,914 | ||
Recognized amounts of identifiable assets acquired and liabilities assumed | ||||
Inventory | $ | 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 10)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, a subsidiary of the Company merged with and into Innovus, and all outstanding Innovus common stock was exchanged for approximately 380 thousand shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The aggregate amortization expense was $0.4outstanding Innovus warrants with cash out rights were exchanged for approximately 200 thousand shares of Series H Convertible Preferred stock of the Company and $0,retired. The remaining Innovus warrants outstanding, those without ‘cash- out’ rights, at the time of the Merger, continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus 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 form of approximately 120 thousand 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 three and six monthscalendar year ended December 31, 20192019. 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 2018 respectively.other assumed liabilities associated with Innovus. Of the $3.1 million of notes payable, approximately $2.2 million was converted into approximately 180 thousand shares of the Company’s common stock since February 14, 2020. Approximately $41 thousand remained outstanding as of December 31, 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:
As of | ||||
February 14, 2020 | ||||
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 Series H Convertible 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 | ||
As of | ||||
February 14, 2020 | ||||
Total consideration transferred | $ | 12,805,263 | ||
Recognized amounts of identified assets acquired and liabilities assumed | ||||
Cash and cash equivalents | $ | 390,916 | ||
Accounts receivable | 278,826 | |||
Inventory | 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 CVRs were valued using a Monte-Carlo model. 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 Impact of Business Combination
The following supplemental unaudited proforma financial information presents the Company’s results as if the acquisition of the Pediatric Portfolio, which was completed on November 1, 2019,following acquisitions had occurred on July 1, 2018. Due to limitations2019:
● | 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 information on revenuesestimates and expenses for certain gap periods within each fiscal year, this unaudited proforma financial information mayassumptions, which management believes are reasonable, however, the results are not fully reflect hownecessarily indicative of the acquisition would impact the Companyconsolidated results of operations had the acquisition occurred aton July 1, 2019, or of future results of operations:
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, 2020 | December 31, 2019 | December 31, 2020 | December 31, 2019 | |||||||||||||
Actual | Pro forma | Actual | Pro forma | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Total revenues, net | $ | 15,147,034 | $ | 8,929,802 | $ | 28,667,280 | $ | 20,541,401 | ||||||||
Net (loss) | (9,525,294 | ) | (2,450,247 | ) | (13,831,224 | ) | (11,255,247 | ) | ||||||||
Net (loss) per share (aa) | $ | (0.72 | ) | $ | (1.40 | ) | $ | (1.09 | ) | $ | (6.85 | ) | ||||
(aa) Pro forma net loss per share calculations excluded the beginningimpact of the earliest fiscal year presented in these financial statements.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.
Three Months Ended December 31, | Six Months Ended December 31, | |||
2019 | 2018 | 2019 | 2018 | |
Unaudited (aa) | Pro forma Unaudited | Pro forma Unaudited | Pro forma Unaudited | |
| Total revenues, net | $3,175,236 | $8,016,356 | $8,027,106 | $14,207,635 |
| Net income (loss) | 306,314 | (2,532,910) | (5,997,071) | (3,854,640) |
| Net income / (loss) per share (bb) | $0.01 | $(0.39) | $(0.38) | $(0.92) |
3. Revenue Recognition
Revenues by Geographic location
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
U.S. | $ | 13,757,000 | $ | 3,047,000 | $ | 25,901,000 | $ | 4,309,000 | ||||||||
International | 1,390,000 | 128,000 | 2,766,000 | 306,000 | ||||||||||||
Total net revenue | $ | 15,147,000 | $ | 3,175,000 | $ | 28,667,000 | $ | 4,615,000 | ||||||||
Three Months Ended December 31, | Six Months Ended December 31, | |||
2019 | 2018 | 2019 | 2018 | |
| U.S. | $3,047,000 | $1,730,000 | $4,309,000 | 3,001,000 |
| International | 128,000 | 65,000 | 306,000 | 226,000 |
| Total net revenue | $3,175,000 | $1,795,000 | $4,615,000 | 3,227,000 |
Revenues by Product Licenses and Acquisitions
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Primary care and devices portfolio | $ | 4,097,000 | $ | 1,190,000 | $ | 7,130,000 | $ | 2,630,000 | ||||||||
Pediatric portfolio | 3,115,000 | 1,985,000 | 5,834,000 | 1,985,000 | ||||||||||||
Consumer Health portfolio | 7,935,000 | - | 15,703,000 | - | ||||||||||||
Total net revenue | $ | 15,147,000 | $ | 3,175,000 | $ | 28,667,000 | $ | 4,615,000 | ||||||||
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. Aytu 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, Aytu will record a write-down to net realizable value in the period that the impairment is first recognized. The Company wrote down $0.1 million and $0.2 million of inventory during the three and six-months ended December 31, 2020, respectively. There was no inventory write-down duringwritten down for the three and six monthssix-months ended December 31, 2019 or 2018,, respectively.
Inventory balances consist of the following:
As of | As of | |||||||
December 31, | June 30, | |||||||
2020 | 2020 | |||||||
Raw materials | $ | 590,000 | $ | 397,000 | ||||
Finished goods, net | 5,981,000 | 9,603,000 | ||||||
| $ | 6,571,000 | $ | 10,000,000 | |||||
As of | As of | |
December 31, | June 30, | |
2019 | 2019 | |
| Raw materials | $182,000 | $117,000 |
| Finished goods | 2,310,000 | 1,323,000 |
$2,492,000 | $1,440,000 |
5. Fixed Assets
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:
As of | As of | ||||||||||
Estimated | December 31, | June 30, | |||||||||
Useful Lives in years | 2020 | 2020 | |||||||||
Manufacturing equipment | 2 - 5 | $ | 112,000 | $ | 112,000 | ||||||
Leasehold improvements | 3 | 111,000 | 229,000 | ||||||||
Office equipment, furniture and other | 2 - 5 | 281,000 | 312,000 | ||||||||
Lab equipment | 3 - 5 | 90,000 | 90,000 | ||||||||
Less accumulated depreciation and amortization | (504,000 | ) | (484,000 | ) | |||||||
Fixed assets, net | $ | 90,000 | $ | 259,000 | |||||||
Estimated Useful Lives in | As of December 31, | As of June 30, | |
years | 2019 | 2019 | |
| Manufacturing equipment | 2 - 5 | $83,000 | $83,000 |
| Leasehold improvements | 3 | 112,000 | 112,000 |
| Office equipment, furniture and other | 2 - 5 | 265,000 | 315,000 |
| Lab equipment | 3 - 5 | 90,000 | 90,000 |
| Less accumulated depreciation and amortization | (428,000) | (396,000) | |
| Fixed assets, net | $122,000 | $204,000 |
During the six months ended December 31, 2020, the Company recognized a loss of $0.1 million on sale of equipment due to termination of leases.
Depreciation and amortization expense totaled $18,000 and $16,000 for each of the three-months ended December 31, 20192020 and 2018,2019, respectively, and $32,000$51,000 and $44,000$32,000 for the six monthssix-months ended December 31, 20192020 and 2018.2019, respectively.
6. Leases, Right-to-Use Assets and Related Liabilities
The Company entered into a 37-month operating lease in Englewood, Colorado. This lease had an initial base rent of approximately $9 thousand 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 approximately $9 thousand per month. In April 2019, the Company extended the lease for an additional 36 months beginning October 1, 2020.
As of December 31, 2020, the maturities of the Company’s future minimum lease payments were as follows:
Operating | Finance | |||||||
2021 (remaining 6 months) | $ | 37,000 | $ | 61,000 | ||||
2022 | 18,000 | 124,000 | ||||||
2023 | - | 127,000 | ||||||
2024 | - | 35,000 | ||||||
2025 | - | 3,000 | ||||||
Total lease payments | 55,000 | 350,000 | ||||||
Less: Imputed interest | (39,000 | ) | ||||||
Lease liabilities | $ | 311,000 | ||||||
Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | |
| Remaining Office leases | $445,000 | $54,000 | $113,000 | $117,000 | $121,000 | $40,000 | − |
| Less: Discount Adjustment | (70,000) | ||||||
| Total lease liability | 375,000 | ||||||
| Lease liability - current portion | 83,000 | ||||||
| Long-term lease liability | $292,000 |
Cash paid for amounts included in the measurement of finance lease liabilities for the six months ended December 31, 2020 and 2019 was $147,000 and $63,000, respectively, and was included in net cash used in operating activities in the consolidated statements of cash flows.
As of December 31, 2020, the weighted average remaining lease term is 2.28 years, and the weighted average discount rate used to determine operating lease liabilities was 8.0%. Rent expense for the three-months ended December 31, 2020 and 2019 totaled $90,000 and $30,000. Rent expense for the six-months ended December 31, 2020 and 2019 totaled $160,000 and $63,000, 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 six months ended December 31, 2020.
On October 1, 2020, the Company's Innovus subsidiary entered into a short-term lease for warehouse space in Carlsbad, CA. The lease term is for one-year with an option to terminate after six months with ninety days' notice. This lease is accounted for as a short-term lease and is not included as a component of the Company's right-to-use assets and related liability.
7. Intangible Assets – Amortizable
The Company currently holds the following intangible asset portfolios as of December 31, 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, and the Acquired customer lists.
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 December 31, 2020 and June 30, 2020, respectively.
December 31, 2020 | ||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Impairment | Net Carrying Amount | Weighted-Average Remaining Life (in years) | ||||||||||||||||
Licensed assets | $ | 23,649,000 | $ | (8,200,000 | ) | $ | - | $ | 15,449,000 | 11.72 | ||||||||||
Acquired product technology right | 22,700,000 | (2,648,000 | ) | - | 20,052,000 | 8.84 | ||||||||||||||
Acquired product distribution rights | 11,354,000 | (1,319,000 | ) | - | 10,035,000 | 7.27 | ||||||||||||||
Acquired customer lists | 390,000 | (227,000 | ) | - | 163,000 | 0.62 | ||||||||||||||
| $ | 58,093,000 | $ | (12,394,000 | ) | $ | - | $ | 45,699,000 | 9.44 | |||||||||||
June 30, 2020 | ||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Impairment | Net Carrying Amount | 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 | 7.78 | ||||||||||||||
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:
Amortization | ||||
2021 | $ | 3,157,000 | ||
2022 | 6,085,000 | |||
2023 | 6,045,000 | |||
2024 | 6,033,000 | |||
2025 | 4,480,000 | |||
Thereafter | 19,899,000 | |||
| $ | 45,699,000 | |||
Certain of the Company’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 $0.9 million for the three months ended December 31, 20192020 and 2018 totaled $30 thousand2019, respectively. Amortization expense of intangible assets was $3.2 million and $31 thousand, respectively. Rent expense$1.5 million for the six months ended December 31, 20192020 and 2018 totaled $63 thousand and $63 thousand, respectively2019, respectively.
8. Patents
As of | As of | |
December 31, | June 30, | |
2019 | 2019 | |
| Patents | $380,000 | $380,000 |
| Less accumulated amortization | (172,000) | (159,000) |
| Patents, net | $208,000 | $221,000 |
Accrued liabilities consist of the following:
As of | As of | |||||||
December 31, | June 30, | |||||||
2020 | 2020 | |||||||
Accrued settlement expense | $ | 150,000 | $ | 315,000 | ||||
Accrued program liabilities | 1,386,000 | 959,000 | ||||||
Accrued product-related fees | 2,332,000 | 2,471,000 | ||||||
Credit card liabilities | 712,000 | 510,000 | ||||||
Medicaid liabilities | 2,094,000 | 1,842,000 | ||||||
Return reserve | 1,656,000 | 1,329,000 | ||||||
Sales taxes payable | 175,000 | 175,000 | ||||||
Other accrued liabilities* | 373,000 | 249,000 | ||||||
Total accrued liabilities | $ | 8,878,000 | $ | 7,850,000 | ||||
As of | As of | |
December 31 | June 30, | |
2019 | 2019 | |
| Accrued accounting fee | $63,000 | $85,000 |
| Accrued program liabilities | 1,087,000 | 736,000 |
| Accrued product-related fees | 601,000 | 295,000 |
| Other accrued liabilities* | 100,000 | 32,000 |
| Accrued note payable | 263,000 | – |
| Total accrued liabilities | $2,114,000 | $1,148,000 |
* 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 asset and liability classified 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, including those acquired or assumed on November 1, 2019 as a result of the acquisition of the Cerecor Portfolio of Pediatrics Therapeutics. The fair value of the warrant derivative liability was valued using the lattice valuation methodology.maturities. 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.models. 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: 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 December 31, 20192020 and June 30, 2019,2020, by level within the fair value hierarchy.
Fair Value Measurements at December 31, 2020 | ||||||||||||||||
Fair Value at December 31, 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 | 16,280,000 | – | – | 16,280,000 | ||||||||||||
CVR liability | 6,472,000 | – | – | 6,472,000 | ||||||||||||
| $ | 22,752,000 | – | – | $ | 22,752,000 | |||||||||||
Fair Value Measurements at June 30, 2020 | ||||||||||||||||
Fair Value at June 30, 2020 | Quoted Priced in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
Recurring: | ||||||||||||||||
Contingent consideration | 13,588,000 | – | – | 13,588,000 | ||||||||||||
CVR liability | $ | 5,572,000 | – | – | $ | 5,572,000 | ||||||||||
| $ | 19,160,000 | – | – | $ | 19,160,000 | |||||||||||
Fair Value Measurements at December 31, 2019 | ||||
Fair Value at December 31, 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 | $11,000 | – | – | $11,000 |
| Contingent consideration | 18,446,000 | – | – | 18,446,000 |
$18,457,000 | – | – | $18,457,000 | |
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 | |
As of December 31, 2019 | As of June 30, 2019 | |
| Warrant Derivative Liability | ||
| Volatility | 163.2% | 163.2% |
| Equivalent term (years) | 2.88 | 3.13 |
| Risk-free interest rate | 1.71% | 1.71% |
| Dividend yield | 0.00% | 0.00% |
Contingent Consideration.
The Company classifies its contingent consideration liability in connection with the acquisition ofAs of November 2, 2018, the contingent consideration, liability related to Natestothis Tuzistra XR, was valued at $8.8 million using a Monte Carlo simulation. As of December 31,2020, the contingent consideration was revalued at $15.8 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. As of December 31, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made. However, approximately $3.0 million is expected to be paid in November 2021, as this milestone will be satisfied.
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 December 31, 2020, the contingent consideration was revalued at $0.3 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. As of December 31, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.
The Company recognized approximately $0.2 million in product related contingent consideration as a result of the December 1, 2019 effectivenessFebruary 14, 2020 Innovus Merger. The fair value was based on a discounted value of the Acerus Amendment, which eliminated product milestone payments underlyingfuture contingent payment using a 30% discount rate based on the estimates risk that the milestones are achieved. The contingent consideration liability. Due toaccretion expense for the derecognition of the Natesto contingent consideration, the Company recognized a, non-operating gain of approximately $5.2 million during the three and six monthssix-months ended December 31, 2019.
| Fair Value Measurements at December 31, 2019 | |||||||||
| Fair Value at December 31, 2019 | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs(Level 2) | Significant Unobservable Inputs(Level 3) | ||||||
| Non-recurring | |||||||||
| Product technology rights | $ | 22,321,667 | – | – | $ | 22,321,667 | |||
| Goodwill | 15,387,064 | – | – | 15,387,064 | |||||
| Fixed payment arrangements | 26,056,217 | – | – | 26,056,217 | |||||
| $ | 63,764,948 | – | – | $ | 63,764,948 | ||||
Fair Value Measurements at November 1, 2019 (*) | ||||
Fair Value at November 1, 2019 (*) | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |
| Product technology rights | $22,700,000 | – | – | $22,700,000 |
| Goodwill | 15,387,064 | – | – | 15,387,064 |
| Fixed payment arrangements | 26,457,162 | – | – | 26,457,162 |
$64,544,226 | – | – | $64,544,226 | |
Contingent value rights.
Summary of Level 3 Input Changes
The following table sets forth a summary of changes to those fair value measures using Level 3 inputs for the sixthree months ended December 31, 2019:2020:
CVR Liability | Contingent Consideration | |||||||
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 | $ | 900,000 | $ | 2,735,000 | ||||
Included in other comprehensive income | – | – | ||||||
Purchases, issues, sales and settlements | – | – | ||||||
Purchases | – | – | ||||||
Issues | – | – | ||||||
Sales | – | – | ||||||
Settlements | – | $ | (43,000 | ) | ||||
Balance as of December 31, 2020 | $ | 6,472,000 | $ | 16,280,000 | ||||
Significant Assumptions
Contingent consideration. The Company estimates the fair value of the Contingent Consideration at each reporting date using management's forecast as the baseline for developing a Monte-Carlo model.The other significant assumptions used in the Monte Carlo Simulation as of December 31, 2020, were as follows:
As of December 31, 2020 | ||
Contingent Consideration | ||
Credit risk assumption | 19.10% | |
Sales volatility | 45.00% | |
Credit spread | 4.00% | |
Time steps per year | 1 | |
Number of iterations | 500 |
Contingent value rights. The Company estimates the fair value of the Contingent Value Rights at each reporting date using management's forecast as the baseline for developing a Monte-Carlo model. The other significant assumptions used in the Monte Carlo Simulation as of December 31, 2020 were as follows:
As of December 31, 2020 | ||
Contingent Value Rights | ||
Credit risk assumption | 9.6% | |
Time steps per year | 30.00 | |
Number of iterations | 10,000 |
Product Technology Rights | Goodwill | Liability Classified Warrants | Contingent Consideration | Fixed Payment Arrangements | |
| Balance as of June 30, 2019 | $– | $– | $13,000 | $23,326,000 | $– |
| Transfers into Level 3 | – | – | – | – | – |
| Transfer out of Level 3 | – | – | – | – | – |
| Total gains, losses, amortization or accretion in period | (378,000) | – | – | ||
| Included in earnings | – | – | (2,000) | (4,760,000) | 264,000 |
| Included in other comprehensive income | – | – | – | – | |
| Purchases, issues, sales and settlements | |||||
| Purchases | 22,700,000 | 15,387,000 | – | – | – |
| Issues | – | – | – | – | 26,457,000 |
| Sales | – | – | – | – | – |
| Settlements | – | – | – | (120,000) | (665,000) |
| Balance as of December 31, 2019 | $22,322,000 | $15,387,000 | $11,000 | $18,446,000 | $26,056,000 |
10. Commitments and Contingencies
Commitments and contingencies are described below and summarized by the following as of December 31, 2019:2020:
Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||
Prescription database | $ | 1,278,000 | $ | 545,000 | $ | 733,000 | - | - | - | - | ||||||||||||||||||
Pediatric portfolio fixed payments and product minimums | 15,825,000 | 1,650,000 | 3,300,000 | 3,300,000 | 3,300,000 | 3,300,000 | 975,000 | |||||||||||||||||||||
Inventory purchase commitment | 1,717,000 | 981,000 | 736,000 | - | - | - | - | |||||||||||||||||||||
CVR liability | 14,000,000 | 2,000,000 | 2,000,000 | 5,000,000 | 5,000,000 | - | - | |||||||||||||||||||||
Product contingent liability | 2,500,000 | - | - | - | - | - | 2,500,000 | |||||||||||||||||||||
Product milestone payments | 3,000,000 | - | 3,000,000 | - | - | - | - | |||||||||||||||||||||
| �� | ||||||||||||||||||||||||||||
| $ | 38,320,000 | $ | 5,176,000 | $ | 9,769,000 | $ | 8,300,000 | $ | 8,300,000 | $ | 3,300,000 | $ | 3,475,000 | |||||||||||||||
Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | |
| Prescription database | $1,342,000 | $296,000 | $534,000 | $512,000 | $– | $– | $– |
| Pediatric portfolio fixed payments and product minimums | 29,824,000 | 2,107,000 | 18,471,000 | 2,950,000 | 2,950,000 | 1,346,000 | 2,000,000 |
| Product milestone payments | 3,000,000 | – | – | – | 3,000,000 | – | – |
$34,166,000 | $2,403,000 | $19,005,000 | $3,462,000 | $5,950,000 | $1,346,000 | $2,000,000 |
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 duepaid in January 2020. There is
On May 29, 2020, the potential forCompany entered into an Early Payment Agreement and Escrow Instruction (the “Early Payment Agreement”) pursuant to which the secondCompany agreed to pay $15.0 million to the investor in early satisfaction of the Balloon Payment Obligation. The parties to the Early Payment Agreement acknowledged and agreed that the remaining fixed obligationpayments other than the Balloon Payment Obligation remain due and payable pursuant to rise an additional $1.8 million depending on product sales, which could trigger additional amounts to be paid.
In addition, the Company acquired a Supply and Distribution Agreement with TRISTris 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 iswas 20 years. The Company will pay TRIS a royalty equal to 23.5% of net sales. Avadel hasA 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$2,100,000 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 2023.2025. The Company is required to pay TRIS a royalty make whole payment of $30 for each unit under the 70,000 unit70,000-unit annual minimum sales commitment through 2033.2025. 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.
Inventory Purchase Commitment
On May 1, 2020, the Company's Innovus subsidiary 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.
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, a subsidiary of 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 120 thousand 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 December 31, 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 each when certain levels of FlutiCare sales are achieved. The discounted value as of December 31, 2020, is approximately $0.2 million.
Product Milestone Payments
In connection with the Company’s intangible assets, Aytu has certain milestone payments, totaling $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 10)9).
11. Capital Structure
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.
Included in the common stock outstanding are 2,307,854365,869 shares of restricted stock issued to executives, directors, employees, and consultants.
In June 2020, the quarterCompany initiated an at-the-market offering program, which allows the Company to sell and issue shares of our common stock from time-to-time. The company issued 430,230 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 December 31, 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 holding2020. During the three months ended December 31, 2020, the Company issued 352,912 shares of Series C preferredcommon stock, with total gross proceeds of approximately $3.6 million before deducting underwriting discounts, commissions, and other offering expenses payable by the Company of $0.1 million.
In July 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 92,302 warrants to purchase 92,302 shares of the Company's common stock with an weighted-average exercise price of $15.99 to an investment bank 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.
On December 10, 2020, the Company entered into an exchange agreement to exchange the $0.8 million of debt outstanding for 130,081 shares of the Company's common stock (see Note 15).
On December 10, 2020, the Company entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“Wainwright”) (as amended and restated, the “Underwriting Agreement”). Pursuant to the Underwriting Agreement, the Company agreed to sell, in an upsized firm commitment offering, 4,166,667 shares (the “Shares”) of the Company’s common stock, $0.0001 par value per share (the “Common Stock”), to Wainwright at an offering price to the public of $6.00 per share, less underwriting discounts and commissions. In addition, pursuant to the Underwriting Agreement, the Company has granted Wainwright a 30-day option to purchase up to an additional 625,000 shares of Common Stock at the same offering price to the public, less underwriting discounts and commissions. Wainwright exercised their rightover-allotment option in full, purchasing total common stock of 4,791,667 shares. In connection with the offering, the Company issued 311,458 underwriter warrants to convert 443,833 shares of Series C preferred stock into 443,833purchase up 311,458 shares of common stock. AsThe exercise price per share of September 30, 2019, there are no remaining Series C preferred stock outstanding.
12. 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 December 31, 2019, we have 692,204 shares that are available for grant underOn February 13, 2020, the 2015 Plan.
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 quartersthree- and six-months ended December 31, 20192020 and 2018, respectively, therefore, no assumptions are used for this quarter.
Stock option activity is as follows:
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding June 30, 2020 | 76,614 | $ | 19.39 | 9.67 | $ | - | ||||||||||
Granted | - | - | ||||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited/Cancelled | (3,187 | ) | - | |||||||||||||
Expired | (2 | ) | - | |||||||||||||
Outstanding December 31, 2020 | 73,425 | 19.71 | 9.08 | - | ||||||||||||
Exercisable at December 31, 2020 | 9,095 | $ | 67.62 | 7.81 | $ | - | ||||||||||
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | |
| Outstanding June 30, 2019 | 1,607 | $325.73 | 6.13 |
| Expired | (125) | 328.00 | – |
| Outstanding December 31, 2019 | 1,482 | 325.54 | 6.07 |
| Exercisable at December 31, 2019 | 1,482 | $325.54 | 6.07 |
As of December 31, 2019,2020, there was $0$494,000 unrecognized option-based compensation expense related to non-vested stock options.
Restricted Stock
Restricted stock activity is as follows:
Number of Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Life in Years | ||||||||||
Unvested at June 30, 2020 | 418,454 | $ | 14.69 | 6.4 | ||||||||
Granted | ||||||||||||
Vested | (52,743 | ) | ||||||||||
Forfeited | ||||||||||||
Unvested at December 31, 2020 | 365,711 | $ | 15.66 | 6.3 | ||||||||
Number of Shares | 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 | (39,900) | 2.57 | – |
| Unvested at December 31, 2019 | 2,306,314 | $1.81 | 8.6 |
Under the 2015 Plan, there was $3,573,000$4.3 million of total unrecognized stock-based compensation expense related to the non-vested restricted stock as of December 31, 2019.2020. The Company expects to recognize this expense over a weighted-average period of 8.576.3 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 December 31, | Six Months Ended December 31, | |||||||||||||||
Selling, general and administrative: | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Stock options | $ | 94,000 | $ | 2,000 | $ | 166,000 | $ | 7,000 | ||||||||
Restricted stock | 414,000 | 160,000 | 797,000 | 320,000 | ||||||||||||
Total stock-based compensation expense | $ | 508,000 | $ | 162,000 | $ | 963,000 | $ | 327,000 | ||||||||
Three Months Ended December 31, | Six Months Ended December 31, | |||
| Selling, general and administrative: | 2019 | 2018 | 2019 | 2018 |
| Stock options | $2,000 | $41,000 | $7,000 | $107,000 |
| Restricted stock | 160,000 | 153,000 | 320,000 | 239,000 |
| Total stock-based compensation expense | $162,000 | $194,000 | $327,000 | $346,000 |
13. Warrants
In July 2020, the Company issued 92,302 shares of warrants with a weighted average exercise price of $15.99 in connection with the October 2019 private placement financing,March Offerings. The warrants have a term of one year from the issuance date. These warrants have a fair value of $356,000 and are classified within stockholders' equity.
On December 15, 2020, the Company issued warrants (the October 2019 Warrants) to the investors to purchase an aggregate of 10,000,000311,458 shares of the Company’s common stock atwarrants with an exercise price of $1.25 and a term of five years.$7.50 in connection with the December 15, 2020 offering. These warrants featurehave a contingent cashless exercise provision. During the three months ended December 31, 2019, the cashless exercise contingency was satisfied, reducing the strike price of the October 2019 Warrants to $0. In January 2020, an investor exercised 2 million October 2019 Warrants using the cashless exercise feature.
Significant assumptions in valuing the warrants issued during the quarter are as follows:
Warrants Issued Three Months Ended December 31, 2020 | ||||
Expected volatility | 100 | % | ||
Equivalent term (years) | 5.0 | |||
Risk-free rate | 37 | % | ||
Dividend yield | 0.00 | % | ||
A summary of equity-based warrants is as follows:
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | ||||||||||
Outstanding June 30, 2020 | 2,288,528 | $ | 30.26 | 2.00 | ||||||||
Warrants issued | 403,760 | |||||||||||
Warrants expired | (842 | ) | ||||||||||
Warrants exercised | - | |||||||||||
Outstanding December 31, 2020 | 2,691,446 | $ | 26.94 | 1.65 | ||||||||
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | |
| Outstanding June 30, 2019 | 16,218,908 | $3.15 | 4.36 |
| Warrants issued (*) | 10,000,000 | 1.25 | 5.00 |
| Warrants expired | – | – | – |
| Warrants exercised | – | – | – |
| Outstanding December 31, 2019 | 26,218,908 | $2.43 | 4.21 |
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | |
| Outstanding June 30, 2019 | 240,755 | $72.00 | 3.16 |
| Warrants expired | – | – | – |
| Warrants exercised | – | – | – |
| Outstanding December 31, 2019 | 240,755 | $72.00 | 2.65 |
14. Net Loss Perper 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 ofThe following table sets-forth securities that could be potentially dilutive, but as of the quartersthree and six-months ended December 31, 20192020 and 20182019 are anti-dilutive, and therefore excluded from the calculation of diluted earnings per share.
Three Months Ended | |||||||||
December 31, | |||||||||
2020 | 2019 | ||||||||
Warrants to purchase common stock - liability classified | 24,105 | 24,105 | |||||||
Warrant to purchase common stock - equity classified | (Note 13) | 2,691,446 | 1,621,891 | ||||||
Employee stock options | (Note 12) | 73,425 | 156 | ||||||
Employee unvested restricted stock | (Note 12) | 365,869 | 234,261 | ||||||
Convertible preferred stock | (Note 11) | - | 315,115 | ||||||
| 3,154,845 | 2,195,528 | ||||||||
Six Months Ended | |||
December 31 | |||
2019 | 2018 | ||
| Warrants to purchase common stock - liability classified | (Note 15) | 240,755 | 240,755 |
| Warrant to purchase common stock - equity classified | (Note 15) | 26,218,908 | 12,065,506 |
| Employee stock options | (Note 14) | 1,482 | 1,787 |
| Employee unvested restricted stock | (Note 14) | 2,307,854 | 2,744,912 |
| Performance-based options | (Note 14) | – | 75,000 |
| Convertible preferred stock | (Note 13) | 10,215,845 | 4,532,664 |
38,984,844 | 19,660,624 | ||
15. Notes Payable
The Aytu BioScience Note. On February 27, 2020, 2.0the Company issued a $0.8 million equity classified warrants were cashless exercised pursuantpromissory 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 termsissuance of promissory notes. The discount was amortized over the life of the Octoberpromissory notes through the fourth quarter of calendar 2020. During the three and six-months ended months ended December 31, 2020 and 2019 warrants.the Company recorded approximately $15,000 and $70,000, respectively, of related amortization. There was no amortization for the same period in 2019. On December 10, 2020, the Company agreed to exchange the Note for 130,081 shares of the Company's common stock. The Company recognized a non-cash loss of approximately $0.3 million as a result of this exchange, saving the Company $0.8 million in cash that otherwise would have been used to satisfy this obligation on December 31, 2020.
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 December 31, 2020, the net balance of the note was $41,000.
16. Segment reporting
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.
The Company manages and aggregates its 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, which was the result of the Innovus Merger. Select financial information for these segments is as follows:
Three months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Consolidated revenue: | ||||||||||||||||
Aytu BioScience | $ | 7,212,000 | $ | 3,175,000 | $ | 13,000,000 | $ | 4,615,000 | ||||||||
Aytu Consumer Health | 7,935,000 | - | 16,000,000 | - | ||||||||||||
Consolidated revenue | 15,147,000 | 3,175,000 | 29,000,000 | 4,615,000 | ||||||||||||
Consolidated net loss: | ||||||||||||||||
Aytu BioScience | (8,267,000 | ) | (214,000 | ) | (11,218,000 | ) | (5,143,000 | ) | ||||||||
Aytu Consumer Health | (1,258,000 | ) | - | (2,613,000 | ) | - | ||||||||||
Consolidated net loss | (9,525,000 | ) | (214,000 | ) | (13,831,000 | ) | (5,143,000 | ) | ||||||||
As of | As of | |||||||
December 31, | June 30, | |||||||
2020 | 2020 | |||||||
Total assets: | ||||||||
Aytu BioScience | $ | 140,647,000 | $ | 126,267,000 | ||||
Aytu Consumer Health | 26,095,000 | 26,569,000 | ||||||
Total assets | $ | 166,742,000 | $ | 152,836,000 | ||||
17. Subsequent EventsRelated 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 $1.9 million and $0.2 million during the three months ended December 31, 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 $24.1 million and $24.8 million as of December 31, 2020 and 2019, respectively. In October 2020, the Company paid Tris approximately $1.6 million related to its Karbinal fixed payment obligation.
18. Subsequent Events
Except for below, see Footnote 1 14, 15 and 16 for information relating to certain events occurring subsequent to between December 31, 2019.2020, and the filing of this report Form 10-Q, impacting information disclosed above.
MiOXSYS® Licensing Agreement
On January 20, 2021, the Company signed an Exclusive License Agreement (the “ MiOXSYS Agreement”)to exclusively license the intellectual property surrounding the use of the Company's rapid in vitro diagnostic test that accurately measures seminal oxidative stress, including all components of the MiOXSYS® commercial system (the “Product”). The Agreement has been entered into with Avrio Genetics, LLC (“Avrio Genetics”), a Pennsylvania-based limited liability company focused on reproductive health.
Under the MiOXSYS Agreement, Avrio Genetics will purchase existing inventory, commercialize, and market the Product under a royalty on Product net sales with a minimum annual payment fee structure for a term of ten (10) years, with the term continuing in perpetuity with a fixed percentage royalty rate based on Product sales payable annually to the Company. The Company will continue to own the intellectual property in the Product, with Avrio Genetics bearing all related patent maintenance and prosecution fees, commercial expenses, and regulatory fees. Further, Avrio Genetics will foster and expand all related customer, manufacturing, marketing, and distribution relationships in their effort to increase the commercialization of the Product. With Avrio’s assumption of the Product-related expenses and management of the Product programs, the Company expects to eliminate expenses associated the Product while maintain future revenue potential in the form of royalty and minimum annual payments from Avrio Genetics.
ItemItem 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with Aytu BioScience, Inc.’s’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’sAytu’s Form 10-K filed with the Securities and Exchange Commission on September 26, 2019.
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 operate 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, male infertility, and various pediatric conditions and weconditions. Our Consumer Health business is focused on consumer health products. We plan to expand opportunistically into other therapeutic areas as we continue to executeopportunities arise. Aytu was incorporated as Rosewind Corporation on our growth plans.
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 following products (i) Natesto®, a testosterone replacement therapy, or TRT, (ii) Tuzistra®only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra XR, a codeine–basedthe only FDA- approved 12-hour codeine-based antitussive (iii) ZolpiMist™, a short-term insomnia treatment and (iv), MiOXSYS®, a novel in vitro diagnostic system for male infertility assessment. Additionally, we completed an Asset Purchase Agreement (the “Purchase Agreement”) with Cerecor, Inc (“Cerecor”)syrup.
The pediatric care portfolio, acquired on November 1, 2019, acquiring six products,(the “Pediatric Portfolio”), includes (i) AcipHex® Sprinkle™,Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various formulations for infants and children with fluoride deficiency, (ii) Cefaclor, for Oral Suspension,a second-generation cephalosporin antibiotic suspension; and (iii) Karbinal®Karbinal ER, (iv) Flexichamber™an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions.
On February 14, 2020 we acquired Innovus Pharmaceuticals (“Innovus”), (v) Poly-Vi-Flor®a specialty pharmaceutical company licensing, developing and Tri-Vi-Flor™commercializing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes over twenty 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 e-commerce platforms.
On December 10, 2020, Aytu and Neutron Acquisition Sub, Inc., our wholly owned subsidiary (“Merger Sub”), entered into an Agreement and Plan of Merger (the “ “Pediatric Portfolio”“Merger Agreement”) with Neos Therapeutics, Inc. (“Neos”). WeThe Merger Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Neos, with Neos surviving as a wholly owned subsidiary of Aytu (the “Neos Merger”). The Neos Merger is subject to the approval of both the shareholders of Aytu and Neos. Based on the number of shares of our common stock anticipated to be immediately beganissued to include these acquired Pediatric PortfolioNeos stockholders upon closing of the merger (which could be impacted by changes in Neos stock price leading to exercise of options not otherwise being assumed by Aytu or by additional issuances of Neos common stock that we may consent to) and the number of shares of our commercialization efforts.
In connection with the October 2019 Offeringexecution of the Merger Agreement, Aytu and Neos have entered into a Commitment Letter (the “Bridge Commitment Letter”) for us to provide financing to Neos under an unsecured convertible note, in an aggregate amount of up to $5,000,000, subject to the terms set forth therein (the "Bridge Financing"). Interest accrues on the principal amount outstanding under the note at a rate of 6.0% per annum, compounding monthly and commencing if and when such Bridge Financing is provided. If an event of default has occurred and is continuing, the interest rate then in effect will be used for general corporate purposes,increased by 2.0% per annum, and all overdue obligations under the note will bear interest at the interest rate in effect at such time plus the additional 2.0% per annum. Our rights under the note, including working capital.
In April of 2020, 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 COVID-19 patients.
We recently established a purchasing relationship with a U.S. supplier of Emergency Use Authorization (EUA) authorized antigen tests. Antigen tests rapidly detect the presence of the SARS-CoV-2 virus antigen via a nasopharyngeal swab and are used without laboratory equipment. Demand for rapid antigen tests has increased in recent months across the U.S.
Our strategy is to continue building our portfolio of revenue-generating products, leveraging our focused commercial team was partially offset by a reduction in force completed by the Company in October 2019. Our current asset position of $74.5 million plus the receipts expected from ongoing product sales will be usedand expertise to fund operations. We will access the capital markets to fund operations 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 December 31, 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.
Strategic Growth Initiatives
Pursuant to our strategy of identifying and acquiring complimentary assets and companies, we have entered into two transactions that willexpect to substantially increase theour revenue generating capacity of the Company and provide opportunities to reduce theour combined operating losses through a combination of Aytu.our recent acquisitions during the twelve months ended June 30, 2020, coupled with the December 10, 2020 announcement of our planto merge with Neos. The dualcombined impact of thethese transactions on revenue and operating expenses is expected to position the Companyus to achieve positive cash flow earlier than previously expected.
Strategic Rx Acquisitions. On December 10, 2020, we entered in a Merger Agreement with Neos Therapeutics, Inc. The merger is subject the approval by shareholders of Pediatric Portfolio.
On October 10,November 1 2019, we entered intoacquired the Purchase Agreement with Cerecor, Inc. (“Cerecor”'s ("Cerecor") to purchase and acquire Cerecor’s Portfolioportfolio of Pediatric Therapeuticsprescription pediatric therapeutics (the “Pediatric Portfolio”), which closed on November 1, 2019.. The Pediatric Portfolio consists of sixfour pharmaceutical and other prescription products consisting of (i) AcipHex® Sprinkle™, (ii) Cefaclor for Oral Suspension, (ii) Karbinal ER, (iii) Karbinal® ER,Poly- Vi-Flor, and (iv) Flexichamber™, (v) Poly-Vi-Flor® and Tri-Vi-Flor™Tri-Vi-Flor. . Total consideration transferred consisted of $4.5 million cash and approximately 9.8 million shares of Series G Convertible Preferred Stock, plus the assumption not more than $3.5 million of Medicaid rebates and products returns. In addition, we absorbedhired the majority of the Cerecor’s workforce focused on commercial sales, commercial contracts, and customer relationships.
We have assumed obligations due to an investor including fixed and variable payments. The CompanyWe 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.was due and paid. 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.
Further, certain of the products in the ProductPediatric Portfolio require royalty payments ranging from 15% to 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 approximately $1.75 million.
Consumer Health Acquisitions. On February 14, 2020, we closed on the merger agreement (the “Merger Agreement”) between us andwith Innovus Pharmaceuticals Inc. (“Innovus”) on September 12, 2019.The Merger was approvedafter approval by the shareholdersstockholders of both Aytu and Innovuscompanies on February 13, 2020 and is expected to close February 14, 2020.
Additionally, we expect to continue to participate in the U.S. COVID-19 testing market. We have purchased 1,600,000 COVID-19 IgG/IgM rapid antibody 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 for rights to a medical device technology platform that is a prospective treatment for COVID-19 for seriously ill patients in the ICU. We expect to advance this transaction will formally close on February 14, 2020, subjecttechnology through development and, if proven clinically effective and able to shareholder approval.
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 consumer healthcare product portfolio. 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, contingenciescontingent consideration, contingent value rights ("CVR"), fixed payment arrangements 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.
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 December 31, 2019)2020) are presented in Note 1 to the condensed consolidated financial statements.
Results of Operations –Three and Six months endedMonths Ended December 31, 20192020 compared to the Three and Six Months Ended December 31, 2018
Three Months Ended December 31, | ||||
2019 | 2018 | Change | % | |
| Revenues | ||||
| Product revenue, net | $3,175,236 | 1,795,011 | 1,380,225 | 77% |
| Operating expenses | ||||
| Cost of sales | 606,046 | 525,138 | 80,908 | 15% |
| Research and development | 66,675 | 149,029 | (82,354) | -55.3% |
| Selling, general and administrative | 6,516,160 | 5,046,174 | 1,469,986 | 29.1% |
| Selling, general and administrative - related party | – | 91,337 | (91,337) | -100% |
| Amortization of intangible assets | 953,450 | 534,063 | 419,387 | 79% |
| Total operating expenses | 8,142,331 | 6,345,741 | 1,796,590 | 34% |
| Loss from operations | (4,967,095) | (4,550,730) | (416,365) | 9% |
| Other (expense) income | ||||
| Other (expense), net | (446,958) | (127,569) | (319,389) | 250% |
| Gain from derecognition of contingent consideration | 5,199,806 | – | 5,199,806 | 100% |
| Gain from warrant derivative liability | – | 20,637 | (20,637) | -100% |
| Total other (expense) income | 4,752,848 | (106,932) | 4,859,780 | -4545% |
| Net loss | $(214,247) | $(4,657,662) | 4,443,415 | -95% |
Six Months Ended December 31, | ||||
2019 | 2018 | Change | $ | |
| Revenues | ||||
| Product revenue, net | $4,615,062 | $3,226,820 | $1,388,242 | $43% |
| Operating expenses | ||||
| Cost of sales | 981,766 | 936,097 | 45,669 | 5% |
| Research and development | 144,695 | 304,907 | (160,212) | -52.5% |
| Selling, general and administrative | 11,662,603 | 8,622,754 | 3,039,849 | 35.3% |
| Selling, general and administrative - related party | 345,046 | (345,046) | -100% | |
| Amortization of intangible assets | 1,528,567 | 986,020 | 542,547 | 55% |
| Total operating expenses | 14,317,631 | 11,194,824 | 3,122,807 | 28% |
| Loss from operations | (9,702,569) | (7,968,004) | (1,734,565) | 22% |
| Other (expense) income | ||||
| Other (expense), net | (642,344) | (204,130) | (438,214) | 215% |
| Gain from derecognition of contingent consideration liability | 5,199,806 | - | 5,199,806 | 100% |
| Gain from warrant derivative liability | 1,830 | 67,989 | (66,159) | -97% |
| Total other (expense) income | 4,559,292 | (136,141) | 4,695,433 | -3449% |
| Net loss | $(5,143,277) | $(8,104,145) | $2,960,868 | -37% |
Three months Ended December 31, | ||||||||||||||||
2020 | 2019 | Change | % | |||||||||||||
Revenues | ||||||||||||||||
Product and service revenue, net | $ | 15,147,034 | $ | 3,175,236 | $ | 11,971,798 | 377 | % | ||||||||
Operating expenses | ||||||||||||||||
Cost of sales | 5,998,389 | 606,046 | 5,392,343 | 890 | % | |||||||||||
Research and development | 286,572 | 66,675 | 219,897 | 330 | % | |||||||||||
Selling, general and administrative | 12,852,614 | 6,516,160 | 6,336,454 | 97 | % | |||||||||||
Amortization of intangible assets | 1,584,581 | 953,450 | 631,131 | 66 | % | |||||||||||
Total operating expenses | 20,722,156 | 8,142,331 | 12,579,825 | 154 | % | |||||||||||
Loss from operations | (5,575,122 | ) | (4,967,095 | ) | (608,027 | ) | 12 | % | ||||||||
Other (expense) income | ||||||||||||||||
Other (expense), net | (378,958 | ) | (446,958 | ) | 68,000 | -15 | % | |||||||||
Loss from change in fair value of contingent consideration | (3,313,656 | ) | - | (3,313,656 | ) | − | ||||||||||
| Gain from derecognition of contingent consideration | - | 5,199,806 | (5,199,806 | ) | -100 | % | ||||||||||
| Loss on debt exchange | (257,559 | ) | - | (257,559 | ) | − | ||||||||||
| Total other (expense) income | (3,950,173 | ) | 4,752,848 | (8,703,021 | ) | -183 | % | |||||||||
| Net loss | $ | (9,525,295 | ) | $ | (214,247 | ) | $ | (9,311,048 | ) | 4346 | % | |||||
| Six Months Ended December 31, | ||||||||||||||||
| 2020 | 2019 | Change | % | |||||||||||||
| Revenues | ||||||||||||||||
| Product and service revenue, net | $ | 28,667,280 | $ | 4,615,062 | $ | 24,052,218 | 521 | % | ||||||||
| Operating expenses | ||||||||||||||||
| Cost of sales | 9,817,545 | 981,766 | 8,835,779 | 900 | % | |||||||||||
| Research and development | 469,437 | 144,695 | 324,742 | 224 | % | |||||||||||
| Selling, general and administrative | 24,342,983 | 11,662,603 | 12,680,380 | 109 | % | |||||||||||
| Amortization of intangible assets | 3,169,161 | 1,528,567 | 1,640,594 | 107 | % | |||||||||||
Total operating expenses | 37,799,126 | 14,317,631 | 23,481,495 | 164 | % | |||||||||||
| Loss from operations | (9,131,846 | ) | (9,702,569 | ) | 570,723 | -6 | % | |||||||||
| Other (expense) income | ||||||||||||||||
| Other (expense), net | (1,130,499 | ) | (642,344 | ) | (488,155 | ) | 76 | % | ||||||||
| Loss from change in fair value of contingent consideration | (3,311,320 | ) | - | (3,311,320 | ) | − | ||||||||||
| Gain from derecognition of contingent consideration | - | 5,199,806 | (5,199,806 | ) | -100 | % | ||||||||||
Gain from warrant derivative liability | - | 1,830 | (1,830 | ) | -100 | % | ||||||||||
| Loss on debt exchange | (257,559 | ) | - | (257,559 | ) | − | ||||||||||
| Total other (expense) income | (4,699,378 | ) | 4,559,292 | (9,258,670 | ) | -203 | % | |||||||||
Net loss | $ | (13,831,224 | ) | $ | (5,143,277 | ) | $ | (8,687,947 | ) | 169 | % | |||||
Product revenue.
We recognized net revenue from product sales ofCost of sales
.Research and Development. Research and development expenses increased $0.2 million, or 230%, for the three months ended December 31, 2020, compared to the three months ended December 31, 2019. Research and development expenses increased approximately $0.3 million, or 224% for the six months ended December 31, 2020, compared to the six months ended December 31, 2019. The increase was due primarily to costs associated with the Company’s Healight Platform license and initial development and clinical costs.
Selling, General and Administrative. Selling, general and administrative costs increased $6.3 million, or 97%, for the three months ended December 31, 2020, compared the three months ended December 31, 2019. Selling, general and administrative costs increased $12.7 million, or approximately 109% for the six months ended December 31, 2020. The increase was primarily due to the Pediatric Portfolio and Innovus acquisition that occurred in the prior year ended June 30, 2020, of which, only the Pediatric Portfolio was a component of our financial results for November and December of 2019.
Amortization of Intangible Assets. Amortization expense for the remaining intangible assets was approximately $1.6 million and $1.0 million for the for the three months ended December 31, 2020 and 2019, respectively.
Amortization expense for the remaining intangible assets was approximately $3.2 million and $1.5 million, respectively, for the six months ended December 31, 2020. 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.Interest (expense) income, net. Interest (expense) income, net for the three months ended December 31, 2020, was expense of approximately $0.4 million, compared to expenses of $0.5 million for the three months ended December 31, 2019. Interest (expense) income, net for the six months ended December 31, 2020, was expense of approximately $1.1 million, compared to interest expense of $0.6 million for the three months ended December 31, 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 closedof the Pediatric Portfolio from Cerecor, Inc. and (ii) the February 14, 2020, Merger with Innovus.
Loss from change in this quarter.
Liquidity and Capital Resources
As of December 31, 2020, we had approximately $62.3 million of cash, cash equivalents and restricted cash. Our operations have historically consumed cash and are expected to continue to require cash, but at a declining rate.
Revenues for the three and six-months ended December 31, 2020, were approximately $15.1 million and $28.7 million, compared to $3.2 million and $4.6 million for the same periods ended December 31, 2019, an increase of 377% and 521%, respectively. 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 and six-months ended December 31, 2020 was $10.9 million compared to $9.1 million for the three and six-months ended December 31, 2019. The increase is due primarily to an increase in working capital and pay down of other liabilities.
As of the date of this report, we expect costs for current operations to increase modestly as we continue to integrate the acquisition of the Pediatrics Portfolio and Innovus and continue to focus on revenue growth through increasing product sales. Our current assets totaling approximately $92.5 million as of December 31, 2020, 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 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 and our stockholders, or at all. We raised approximately $29.6 million, net during the three months ended December 31, 2020, from the sale of approximately 0.4 million shares using the Company’s at-the-market facility and from the issuance of approximately 4.8 million shares of our common stock and 0.3 million placement agent warrants on the December 15, 2020 offering. Finally, on December 10, 2020, we exchanged $0.8 million of debt into 0.1 million shares of our common stock, reducing the need to use cash to satisfy this obligation. Between December 31, 2020, and the filing date of this quarterly report on Form 10-Q, we have not issued any common stock under our at-the-market offering program. As of the date of this report, we have adequate capital resources to complete our near-term operating objectives.
Since we have sufficient cash on-hand as of December 31, 2020, to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, we report that there is no 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 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 our commercial plans, or reductions to its research and development programs. Without sufficient operating capital, we 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 our balance sheet and operating results.
The following table shows cash flows for the three months ended December 31, 2020 and 2019:
Six Months Ended December 31, | ||||||||
2020 | 2019 | |||||||
Net cash used in operating activities | $ | (10,900,299 | ) | $ | (9,087,054 | ) | ||
Net cash used in investing activities | (46,683 | ) | (5,954,635 | ) | ||||
Net cash provided by financing activities | $ | 24,898,281 | $ | 9,258,350 | ||||
December 31, | ||
2019 | 2018 | |
| Net cash used in operating activities | $(9,087,054) | $(7,047,165) |
| Net cash used in investing activities | (5,954,635) | (860,287) |
| Net cash provided by financing activities | $9,258,350 | $18,700,037 |
Net Cash Used in Operating Activities
During the six monthssix-months ended December 31, 2020, our operating activities used $10.9 million in cash, which was less than the net loss of $13.8 million, primarily due to the non-cash depreciation, amortization and accretion, stock-based compensation, and loss from change in fair value of contingent consideration and CVR, a decrease in inventory and an increase in accrued liabilities. These charges were offset by increases in accounts receivable, prepaid expenses, and other current assets and decreases in accounts payables and accrued compensation.
During the six-months ended December 31, 2019, our operating activities used $9.1 million in cash, which was greater than the net loss of $5.1 million, primarily as a result of derecognition of contingent consideration and an increase in accounts receivable, offset by the non-cash depreciation, amortization and accretion, stock-based compensation charges to earnings, coupled with an increase in accounts payable.
Net Cash Used in Investing Activities
During the six monthssix-months ended December 31, 2020, we made a payment of $0.05 million in contingent consideration.
During the six-months ended December 31, 2019, we issued a note receivable to Innovus totaling $1.4 million. We also used $4.5 million for the Cerecor acquisition and we paid $105,000 in contingent consideration.
Net Cash from Financing Activities
Net cash provided by financing activities in the six monthssix-months ended December 31, 2020, was $24.9 million. This was primarily related to the December 2020 offering for gross proceeds cost of $28.8 million offset by the offering cost of $2.6 million. We also completed the ATM offering with gross proceeds of $3.5 million, which was offset by the offering cost of $1.7 million, driven by a one-time payment in July 2020 of approximately $1.5 million. We paid approximately $2.8 million related to fixed payment obligation and $0.3 million of debt.
Net cash provided by financing activities in the six-months ended December 31, 2019, was $9.3 million. This was primarily related to the October 2019 Offering for gross proceeds of $10.0 million, offset by the offering cost of $0.7 million which was paid in cash.
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 1210 to the Financial
ItemItem 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.
ItemItem 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 are being evaluated internally, and any changes as a result of that evaluation will be disclosed in future filings.
PART II. OTHER INFORMATION
ItemItem 1. Legal Proceedings.
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. Following that Hikma and Innovus began negotiations to settle the issues relating to 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 in exchange for Hikma agreeing to a product quality threshold and inspection and qualification of the product by a third party.
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 currentlywaiting 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 a partyotherwise possible to any material pending legal proceedings.
ItemItem 1A. Risk Factors.
In 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. 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 have beenare no material changes to theadditional risk factors other than those contained in our Annual Report, except as outlined below.
Risks Related to the Merger
Because the exchange ratioExchange Ratio is fixed and the market price of shares of Aytu common stock have fluctuated downwards and may continue to fluctuate, and because of the uncertainty of the value of, and the ultimate realization on, the
The Exchange Ratio is fixed and will only be adjusted in certain limited circumstances (including the Bridge Note Adjustment, recapitalizations, reclassifications, stock splits or combinations, exchanges, mergers, consolidations or readjustments of shares, or stock dividends or similar transactions involving Aytu or Neos) and the value of the mergerstock consideration they will receive in the merger.
The market price of shares of Aytu common stock after the merger will continue to fluctuate and may be affected by factors different from those that are currently affecting or historically have affected the market price of shares of InnovusNeos common stock or Aytu common stock.
Upon completion of the merger, holders of shares of InnovusNeos common stock will become holders of shares of Aytu common stock. The market price of Aytu common stock may fluctuate significantly following completion of the merger, and holders of shares of InnovusNeos common stock could lose the value of their investment in Aytu common stock if, among other things, the combined company is unable to achieve the expected growth in earnings, or if the operational cost savings estimates in connection with the integration of the InnovusNeos and Aytu business are not realized, or if the transaction costs relating to the merger are greater than expected, or if the financing related to the merger is on unfavorable terms.expected. The market price also may decline if the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the merger on the combined company’s financial position, results of operations or cash flows is not consistent with the expectations of financial or industry analysts. The issuance of shares of Aytu common stock in the merger could on its own have the effect of depressing the market price for Aytu common stock. In addition, many InnovusNeos stockholders may decide not to hold the shares of Aytu common stock they receive as a result of the merger. Other InnovusNeos stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of Aytu common stock they receive as a result of the merger. Any such sales of Aytu common stock could have the effect of depressing the market price for Aytu common stock.
The businesses of Aytu differ from those of InnovusNeos in important respects and, accordingly, the results of operations of the combined company after the merger, as well as the market price of shares of Aytu common stock, may be affected by factors different from those that are currently affecting, historically have affected or would in the future affect the results of operations of InnovusNeos and Aytu as stand-alone public companies, as well as the market price of shares of InnovusNeos common stock and Aytu common stock prior to completion of the merger.
Current Aytu entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Cerecor Inc. (“Cerecor”) to purchase and acquire certain of Cerecor’s pediatricNeos stockholders will have a reduced ownership and primary care product lines. voting interest in Aytu after the merger.
Upon closing, as up-front consideration, Aytu paid a cash payment of $4.5 million, issued Series G convertible preferred stock valued at $12.5 million and assumed certain of Cerecor’s financial and royalty obligations, which include approximately $16.575 million of fixed payment obligations to Deerfield CSF, LLC and not more than $3.5 million of Medicaid rebates and products returns. The Series G convertible preferred stock can only be converted following approvalthe completion of the Aytu shareholders. A preliminary proxy statement was filed on November 21, 2019 in anticipation of a shareholder meeting to vote on this proposal. The Series G convertible preferred stock andmerger, each Neos stockholder who receives shares of Aytu common stock will bebecome a stockholder of Aytu with a percentage ownership of Aytu that is substantially smaller than the stockholder’s current percentage ownership of Neos. Accordingly, the former Neos stockholders would exercise significantly less influence over Aytu after the merger relative to their influence over Neos prior to the merger, and thus would have a less significant impact on the approval or rejection of future Aytu proposals submitted to a stockholder vote. Immediately upon consummation of the merger, pre-closing Neos stockholders (other than Aytu and its subsidiaries) are expected to own approximately 24% of the outstanding shares of Aytu common stock and pre-closing Aytu stockholders are expected to own approximately 76% of the outstanding shares of Aytu common stock.
Aytu and Neos are subject to restrictive interim operating covenants during the pendency of the merger.
Until the merger is completed, the Merger Agreement restricts each of Aytu and Neos from taking specified actions without the consent of the other party, and requires each of Aytu and Neos to operate in the ordinary course of business consistent with past practice. Neos is subject to a lock-up through July 1, 2020, restricting any transfersnumber of customary interim operating covenants relating to, among other things, its capital expenditures, incurrence of indebtedness, entry into or amendment of certain types of agreements, issuances of securities and changes in director, officer, employee and independent contractor compensation. Although less restrictive than those imposed on Neos, the Merger Agreement also imposes certain restrictive interim operating covenants on Aytu. These restrictions may prevent Aytu and/or Neos from making appropriate changes to their respective businesses or pursuing financing transactions or attractive business opportunities that may arise prior to the completion of the merger. See the section entitled “The Merger Agreement – Conduct of Business Pending the Merger” for a description of the restrictive covenants applicable to Aytu and Neos, respectively.
Aytu and Neos directors and officers have interests in the merger that may be different from, or in addition to, the interests of Aytu stockholders and Neos stockholders.
Certain executive officers of Aytu participated in the negotiation of the terms of the Merger Agreement. The Aytu Board approved the Merger Agreement and the merger consideration, including the Common Stock Issuance, and determined that the Merger Agreement and the transactions contemplated thereby, including the merger consideration, are advisable and in the best interests of Aytu and its stockholders. The Neos Board approved the Merger Agreement and determined that the Merger Agreement, the merger and the other transactions contemplated by the Merger Agreement are fair to, advisable and in the best interests of Neos and its stockholders. In considering these facts and the other information contained in this joint proxy statement/prospectus, you should be aware that certain of Aytu’s directors and executive officers and certain of Neos’ directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of Aytu’s or Neos’ stockholders. For example, some Neos directors will serve as Aytu directors. These interests are described in more detail in the sections entitled “Interests of Neos’ Directors and Executive Officers in the Merger.”
Certain officers and directors of Aytu and Neos, have agreed to vote in favor of the merger consideration and the Merger Agreement, as applicable, regardless of how other Aytu and Neos stockholders vote.
Concurrently with the execution and delivery of the Merger Agreement, certain officers and directors of Aytu and Neos holding approximately 2% and 1%, respectively, of the companies’ outstanding voting shares entered into voting agreements with Neos and Aytu, as applicable (the “Voting Agreements”). Pursuant to the Voting Agreements, each of the stockholders of Aytu and Neos, as applicable, have agreed, among other things, to vote their shares of Aytu common stock, or Neos common stock, as applicable, that such securities per a lock-up agreement with Cerecor. The potentialstockholder owns in favor of the issuance of shares of Aytu common stock underlyingin connection with the convertible preferredmerger, or the merger proposal, as applicable. Accordingly, the Voting Agreements make it more likely that the necessary Aytu and Neos stockholder approval will be received for the merger consideration and the Merger Agreement than would be the case in the absence of the voting agreements.
The Aytu Board and the Neos Board have not requested, and do not anticipate requesting, an updated opinion from their respective financial advisors reflecting changes in circumstances that may have occurred since the signing of the Merger Agreement.
The opinions rendered to the respective boards of directors of Aytu and Neos by Cowen and MTS, respectively, were provided in connection with the Aytu Board’s and the Neos Board’s respective evaluation of the merger. Neither the Aytu Board nor the Neos Board has obtained an updated opinion from Cowen or MTS, respectively, as of the date of this joint proxy statement/prospectus or as of any other date, and the Aytu Board and the Neos Board have not requested, and do not anticipate requesting, an updated opinion from their respective financial advisors reflecting changes in circumstances that may have occurred since the signing of the Merger Agreement. As a result, neither the Aytu Board nor the Neos Board will receive an updated, revised or reaffirmed opinion prior to the consummation of the merger. Changes in the operations and prospects of Aytu or Neos, general market and economic conditions and other factors that may be beyond the control of Aytu or Neos, including the social, political and economic impact of the COVID-19 pandemic, may significantly alter the value of Aytu or Neos or the prices of Aytu common stock or Neos common stock by the time the merger is consummated. The opinions of Cowen and MTS speak as of the date each opinion was rendered, and do not speak as of the time the merger will be consummated or as of any date other than the date of each such opinion. The opinions of Cowen and MTS do not address the fairness of the Exchange Ratio, from a financial point of view, at any time other than the time each such opinion was delivered.
Failure to consummate the merger could negatively impact respective future stock prices, operations and financial results of Aytu and Neos.
If the merger is not consummated for any reason, the ongoing businesses of Aytu and/or Neos may be adversely affected, and Aytu and Neos will be subject to a number of risks, including the following:
● | being required to pay a termination fee to the other party under certain circumstances provided in the Merger Agreement; |
● | having to pay certain costs related to the merger, including, but not limited to, fees paid to legal, accounting and financial advisors, filing fees and printing costs; |
● | declines in the stock prices of Aytu common stock and Neos common stock to the extent that the current market prices reflect a market assumption that the merger will be consummated; and |
● | any negative impact of having the focus of management of each of Aytu and Neos on the merger, which may have the effect of diverting management’s attention and potentially causing Aytu or Neos, as applicable, not to pursue opportunities that could have been beneficial to Aytu or Neos, as applicable. |
If the merger is not completed, Aytu and Neos cannot assure their stockholders that these risks will not materialize and will not materially adversely affect the business, financial results and stock prices of Aytu or Neos. In addition, if the merger with Aytu does not close, Neos may be required to seek other strategic alternatives, including but not limited to, strategic partnerships, a potential business combination or a sale of Neos or its business, or otherwise reduce its operations. There can be no assurance that Neos would be able to take any of these actions or that any effort to sell additional debt or equity securities would be successful or would raise sufficient funds to meet its financial obligations, including the May 2021 debt payment of $15.0 million due to Deerfield. If additional financing is not available when required or is not available on acceptable terms, Neos may need to curtail, delay, modify or abandon its commercialization plans for its marketed products, reduce its investment in the development of its product candidate and Neos may be unable to take advantage of business opportunities or respond to competitive pressures, which could have a material adverse effect on Neos’ revenue, results of operations and financial condition. To preserve Neos’ cash resources, it may be required to reorganize its operations, such as through a reduction in force with respect to one or more functions within Neos or across Neos. If Neos is unable to fund its operations without additional external financing and therefore cannot sustain future operations, it may be required to cease its operations and/or seek bankruptcy protection.
In addition, if the merger does not close, Neos may be required to effectuate a reverse stock split of its common stock to increase the per-share market price of Neos common stock to satisfy the Minimum Bid Price Rule under the Nasdaq rules so that Neos common stock, which will remain outstanding and registered under the Exchange Act, will be issuedable to regain compliance with the applicable continued listing standards of Nasdaq and avoid being delisted from Nasdaq Global.
The merger may disrupt the attention of Aytu’s management or Neos’ management from ongoing business operations.
Each of Aytu and Neos has expended, and expects to continue to expend, significant management resources to complete the merger. Their respective management’s attention may be diverted away from the day-to-day operations of their respective businesses, implementing initiatives to improve performance and executing existing business plans in an effort to complete the merger. This diversion of management resources could disrupt their respective operations and may have an adverse effect on their respective businesses, financial conditions and results of operations.
Aytu and Neos stockholders will not be entitled to appraisal or dissenters’ rights in the Cerecormerger.
Appraisal rights are statutory rights that, if applicable under law, enable stockholders to dissent from an extraordinary transaction, could havesuch as a merger, and to demand that the effectcorporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of depressingreceiving the market priceconsideration offered to stockholders in connection with the extraordinary transaction. Appraisal rights are not available in all circumstances, and exceptions to these rights are provided under the DGCL. In the merger, because Neos common stock is listed on the Nasdaq, and because Neos stockholders are not required to accept in the merger any consideration in exchange for their shares of Neos common stock other than shares of Aytu common stock, which is listed on the Nasdaq, and cash in lieu of fractional shares (if applicable), holders of Neos common stock will not be entitled to any appraisal rights in connection with the merger with respect to their shares of Neos common stock.
Under Delaware law, Aytu stockholders are also not entitled to appraisal or dissenters’ rights in connection with the Aytu share issuance proposal.
Aytu and InnovusNeos may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger.
Aytu’s success after the transaction will depend in part on the ability of Aytu to retain key executives and other employees of Innovus.Neos. Uncertainty about the effect of the merger on Aytu and InnovusNeos employees may have an adverse effect on each of Aytu and InnovusNeos separately and consequently the combined business. This uncertainty may impair Aytu’s and/or Innovus’Neos’ ability to attract, retain and motivate key personnel. Employee retention may be particularly challenging during the pendency of the merger, as employees of Aytu and InnovusNeos may experience uncertainty about their future roles in the combined business.
Furthermore, if key employees of Aytu or InnovusNeos depart or are at risk of departing, including because of issues relating to the uncertainty and difficulty of integration, financial security or a desire not to become employees of the combined business, Aytu may have to incur significant costs in retaining such individuals or in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent, and the combined company’s ability to realize the anticipated benefits of the merger may be materially and adversely affected. No assurance can be given that the combined company will be able to attract or retain key employees to the same extent that InnovusNeos has been able to attract or retain employees in the past.
Completion of the merger is subject to a number of other conditions, and if these conditions are not satisfied or waived, the merger will not be completed.
The obligations of Aytu and InnovusNeos to complete the merger are subject to satisfaction or waiver of a number of conditions including among other conditions: (1) the adoptionapproval of the merger agreementproposal by a majority of the holders of the outstanding shares of InnovusNeos common stock, (2) approval of the issuance of Aytu common stock the CVRs and any other securities issued in connection with the merger by a majority of the votes cast by Aytu stockholders on the matter, (3) approval for listing onthat the Nasdaq Capital Market of Aytu common stockconditions to be issued in connection with the merger, (4) effectivenessDebt Facility Letters have been satisfied as of the registration statement fortime of closing, and that the Aytu common stock to be issued inlenders do not dispute the merger and the absence of any stop order suspending that effectiveness or any proceedings for that purpose pending before the SEC, (5) Entry of the parties into the CVR agreement, (6) the absence of any injunction or order issued by any court or other governmental authority of competent jurisdiction that enjoins, prevents or prohibits completion of the merger, (7) all required consents, approvals and other authorizations of any governmental entity, as described in the merger agreement, shall have been obtained, (8) Aytu and certain officers of Innovus shall have entered into an employment agreement or separation agreements, as applicable, (9)satisfaction thereof, (4) accuracy of the othereach party’s representations and warranties, subject to certain materiality standards set forth in the merger agreementMerger Agreement, (5) the absence of a material adverse effect of either party and (10)(6) compliance in all material respects with the othereach party’s obligations under the merger agreement. For a more complete summary of the conditions that must be satisfied or waived prior to completion of the merger, see “The Merger Agreement— Conditions to Closing the Merger” beginning on page 179 of the joint proxy statement/prospectus.Agreement and certain other conditions. There can be no assurance that the conditions to closing the merger will be satisfied or waived or that the merger will be completed within the expected time frame, or at all.
Aytu will assume a significant amount of debt in the merger, which, together with Aytu’s other debt, could limit Aytu’s operational flexibility or otherwise adversely affect Aytu’s financial condition.
If the merger closes, Aytu will indirectly assume approximately $30.6 million of term debt currently owed by Neos, of which $15.0 million will be due upon the closing of the merger, $0.6 will come due in April 2021, and $15.0 million which is due in May 2022. If Aytu fails to meet its obligations under the debt Aytu assumes in the merger, the lenders would be entitled to foreclose on all or some of the collateral securing such debt which could have a material adverse effect on Aytu and Innovusits ability to make expected distributions, and could threaten Aytu’s continued viability.
Aytu is subject to the risks normally associated with debt financing, including the following risks:
● | Aytu’s cash flow may be insufficient to meet required payments of principal and interest, or require Aytu to dedicate a substantial portion of its cash flow to pay its debt and the interest associated with its debt rather than to other areas of its business; |
● | it may be more difficult for Aytu to obtain additional financing in the future for its operations, working capital requirements, capital expenditures, debt service or other general requirements; |
● | Aytu may be more vulnerable in the event of adverse economic and industry conditions or a downturn in its business; |
● | Aytu may be placed at a competitive disadvantage compared to its competitors that have less debt; and |
● | Aytu may not be able to refinance at all or on favorable terms, as its debt matures. |
If any of the above risks occurred, Aytu’s financial condition and results of operations could be materially adversely affected.
Aytu and Neos may be targets of transaction related lawsuits which could result in substantial costs and may delay or prevent the merger from being completed. If the merger is completed, Aytu will also assume Innovus’Neos’ risks arising from various legal proceedings.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements.Merger Agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on Aytu’s and Innovus’Neos’ respective liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the merger, then that injunction may delay or prevent the merger from being completed, which may adversely affect Aytu’s and Innovus’Neos’ respective business, financial position and results of operation. See “Litigation Relating to the Merger” beginning on page 174 of the joint proxy statement/prospectus for more information about any litigation related to the merger and “Legal Proceedings” on page 107 of the joint proxy statement/prospectus for more information about certain litigation related to the Cerecor transaction that has been commenced prior to the date of the joint proxy statement/prospectus. There can be no assurance that no complaints will be filed with respect to the merger, or that any additional complaints will be filed with respect to the Aytu’s acquisition of a portfolio of pediatric primary care products from Cerecor, transaction.Inc. (“Cerecor”) in 2019 (the “Cerecor Transaction”). Currently, with regard to the merger, Aytu and InnovusNeos are not aware of any securities class action lawsuits or derivative lawsuits being filed with respect to the merger.
Aytu and Neos have incurred, and will incur, substantial direct and indirect costs as a result of the merger.
Aytu and Neos have incurred and expect to incur additional material non-recurring expenses in connection with the merger and completion of the transactions contemplated by the Merger Agreement. Both parties have incurred significant legal, advisory and financial services fees in connection with the process of negotiating and evaluating the terms of the merger. Additional significant unanticipated costs may be incurred in the course of coordinating the businesses of Neos and Aytu after completion of the merger.
Even if the merger is not completed, Aytu and Neos will each need to pay certain costs relating to the merger incurred prior to the date the merger was abandoned, such as legal, accounting, financial advisory, filing and printing fees. Such costs may be significant and could have an adverse effect on Aytu’s and Neos’ respective plans.
If the merger is completed, Aytu may fail to realize the anticipated benefits and cost savings of the merger, which could adversely affect the value of shares of Aytu common stock.
The success of the merger will depend, in part, on Aytu’s ability to realize the anticipated benefits and cost savings from combining the businesses of Aytu and Innovus.Neos. Aytu’s ability to realize these anticipated benefits and cost savings is subject to certain risks, including, among others:
● | Aytu’s ability to successfully combine the businesses of Aytu and Neos; |
● | the risk that the combined businesses will not perform as expected; |
● | the extent to which Aytu will be able to realize the expected synergies, which include potential savings from re-assessing priority assets and aligning investments, eliminating duplication and redundancy, adopting an optimized operating model between both companies and leveraging scale, and value creation resulting from the combination of the businesses of Aytu and Neos; |
● | the possibility that Aytu paid more for Neos than the value it will derive from the merger; |
● | the assumption of known and unknown liabilities of Neos; |
● | the possibility of a decline of the credit ratings of the combined company following the completion of the merger; and |
● | the possibility of costly litigation challenging the merger. |
If Aytu is not able to successfully combine the businesses of Aytu and InnovusNeos within the anticipated time frame, or at all, the anticipated cost savings and other benefits of the merger may not be realized fully or may take longer to realize than expected, the combined businesses may not perform as expected and the value of the shares of Aytu common stock may be adversely affected.
Aytu and InnovusNeos have operated and, until completion of the merger will continue to operate, independently, and there can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key Aytu or InnovusNeos employees, the disruption of either company’s or both companies’ ongoing businesses or in unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, issues that must be addressed in integrating the operations of InnovusNeos and Aytu in order to realize the anticipated benefits of the merger so the combined business performs as expected include, among others:
● | combining the companies’ separate operational, financial, reporting and corporate functions; |
● | integrating the companies’ technologies, products and services; |
● | identifying and eliminating redundant and underperforming operations and assets; |
● | harmonizing the companies’ operating practices, employee development, compensation and benefit programs, internal controls and other policies, procedures and processes; |
● | addressing possible differences in corporate cultures and management philosophies; |
● | maintaining employee morale and retaining key management and other employees; |
● | attracting and recruiting prospective employees; |
● | consolidating the companies’ corporate, administrative and information technology infrastructure; |
● | coordinating sales, distribution and marketing efforts; |
● | managing the movement of certain businesses and positions to different locations; |
● | maintaining existing agreements with customers and vendors and avoiding delays in entering into new agreements with prospective customers and vendors; |
● | coordinating geographically dispersed organizations; and |
● | effecting potential actions that may be required in connection with obtaining regulatory approvals. |
In addition, at times, the attention of certain members of each company’s management and each company’s resources may be focused on completion of the merger and the integration of the businesses of the two companies and diverted from day-to-day business operations, which may disrupt each company’s ongoing business and the business of the combined company.
The Innovus Board was aware of these interests and considered them, in addition to other matters, in evaluating and negotiating the merger agreement and in recommending that Innovus stockholders adopt the merger agreement.
The merger agreementMerger Agreement contains provisions that make it more difficult for InnovusNeos to sell its business to a party other than Aytu, or for Aytu to sell its business. These provisions include a general prohibition on each party soliciting any acquisition proposal. Further, there are only limited exceptions to each party’s agreement that its board of directors will not withdraw or modify in a manner adverse to the other party the recommendation of its board of directors in favor of the adoption of the merger agreement,proposal, in the case of Innovus,Neos, or the approval of the stock issuance,merger consideration, in the case of Aytu, and the other party generally has a right to match any acquisition proposal that may be made. However, at any time prior to the adoptionapproval of the merger agreementproposal by InnovusNeos stockholders, in the case of Innovus,Neos, or the approval of the stock issuancemerger consideration by Aytu stockholders, in the case of Aytu, such party’s board of directors is permitted to make an adverse recommendation change if it determines in good faith that the failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law. In the event that either the InnovusNeos Board or the Aytu Board make an adverse recommendation change and the Merger Agreement is terminated, then such party may be required to pay a $250,000$2,000,000 termination fee. Aytu and Innovus also will be required to pay certain transaction expenses and other costs incurred in connection with the merger, whether or not the merger is completed, including certain fees and expenses of the other party in connection with the Innovus fee reimbursement or the Aytu fee reimbursement, as applicable. See “The Merger Agreement—No Solicitation” and “The Merger Agreement—Termination Fees and Expenses” beginning on pages 184 and 189, respectively, of the joint proxy statement/prospectus.
The parties believe these provisions are reasonable and not preclusive of other offers, but these restrictions might discourage a third party that has an interest in acquiring all or a significant part of either InnovusNeos or Aytu from considering or proposing an acquisition proposal, even if that party were prepared to pay consideration with a higher per-share value than the currently proposed merger consideration, in the case of Innovus,Neos, or that party were prepared to enter into an agreement that may be favorable to Aytu or its stockholders, in the case of Aytu. Furthermore, the termination fees described above may result in a potential competing acquirer proposing to pay a lower per-share price to acquire the applicable party than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable by such party in certain circumstances.
The indebtedness of the combined company following completion of the merger will be greater than Aytu’s indebtedness on a stand-alone basis and greater than the combined indebtedness of Aytu and Innovus existing prior to the announcement of the merger agreement.basis. This increased level of indebtedness could adversely affect the combined company’s business flexibility, and increase its borrowing costs. Any resulting downgrades in Aytu’s and/or Innovus’ credit ratings could adversely affect Aytu’s Innovus’ and/or the combined company’s respective businesses, cash flows, financial condition and operating results.
As of December 18, 2019,January 26, 2021, the current outstanding indebtedness of InnovusNeos is $3.6$38.3 million, which is subject to change between December 18, 2019January 29, 2021 and the closing. As a result of the merger, Aytu will assume the outstanding indebtedness of InnovusNeos at the closing. In addition, in connection with the Cerecor transaction, Aytu assumed approximately $16.5 million of outstanding indebtedness of Cerecor. The amount of cash required to service Aytu’s increased indebtedness levels and thus the demands on Aytu’s cash resources will be greater than the amount of cash flows required to service the indebtedness of Aytu individually prior to the merger. The increased levels of indebtedness could also reduce funds available to fund Aytu’s efforts to combine its business with InnovusNeos and realize expected benefits of the merger and/or engage in investments in product development, capital expenditures, and other activities and may create competitive disadvantages for Aytu relative to other companies with lower debt levels. While Aytu successfully raised net proceeds of $26.1 million in a common stock financing after announcement of the merger in December 2020, Aytu may be required to raise additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes. Aytu’s ability to arrange additional financing or refinancing will depend on, among other factors, Aytu’s financial position and performance, as well as prevailing market conditions and other factors beyond Aytu’s control. Aytu cannot assure you that it will be able to obtain additional financing or refinancing on terms acceptable to Aytu or at all.
Aytu may not be able to service all of the combined company’s indebtedness and may be forced to take other actions to satisfy Aytu’s obligations under Aytu’s indebtedness, which may not be successful. Aytu’s failure to meet its debt service obligations could have a material adverse effect on the combined company’s business, financial condition and results of operations.
Aytu depends on cash on hand and revenue from operations to make scheduled debt payments. Aytu expects to be able to meet the estimated cash interest payments on the combined company’s debt following the merger through a combination of the expected revenue from operations of the combined company. However, Aytu’s ability to generate sufficient revenue from operations of the combined company and to utilize other methods to make scheduled payments will depend on a range of economic, competitive and business factors, many of which are outside of Aytu’s control. There can be no assurance that these sources will be adequate. If Aytu is unable to service Aytu’s indebtedness and fund Aytu’s operations, Aytu will be forced to reduce or delay capital expenditures, seek additional capital, sell assets or refinance Aytu’s indebtedness. Any such action may not be successful and Aytu may be unable to service Aytu’s indebtedness and fund Aytu’s operations, which could have a material adverse effect on the combined company’s business, financial condition or results of operations.
Aytu will incur significant transaction and integration-related costs in connection with the merger. In addition, the merger may not be accretive, and may be dilutive, to Aytu’s earnings per share, which may negatively affect the market price of shares of Aytu’s common stock.
Aytu expects to incur a number of non-recurring costs associated with the merger and combining the operations of the two companies. Aytu will incur significant transaction costs related to the merger. Aytu also will incur significant integration-related fees and costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. Aytu continues to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the merger and the integration of the two companies’ businesses. While Aytu has assumed that a certain level of transaction expenses will be incurred, factors beyond Aytu’s control, such as certain of Innovus’Neos’ expenses, could affect the total amount or the timing of these expenses. Although Aytu expects that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow Aytu to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
Following the closing of the merger, there is a risk that a significant amount of the combined company’s total assets will be related to acquired intangible assets and goodwill, which are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that the carrying value may not be recoverable. Because of the significance of these assets, any charges for impairment as well as amortization of intangible assets could have a material adverse effect on the combined company’s results of operations and financial condition.
The combined company will be subject to the risks that InnovusNeos faces, in addition to the risks faced by Aytu. In particular, the success of the combined company will depend on its ability to obtain, commercialize and protect intellectual property.
Neos and Aytu currently have a limited number of products (including products to be acquired by Aytu from Cerecor in the Cerecor transaction) and the combined company may not be successful in marketing and commercializing these products. In addition, following the merger Aytu may seek to develop current or new product candidates of both Aytu and Innovus.Neos. The testing, manufacturing and marketing of these productsproduct candidates would require regulatory approvals, including approval from the FDA and similar bodies in other countries. To the extent the combined company seeks to develop product candidates, the future growth of the combined company would be negatively affected if Aytu, InnovusNeos or the combined company fails to obtain requisite regulatory approvals within the expected time frames, or at all, in the United States and internationally for products in development and approvals for Aytu’s existing products for additional indications.
The future results of the combined company may be adversely impacted if the combined company does not effectively manage its expanded operations following completion of the merger.
Following completion of the merger, the size of the combined company’s business will be significantly larger than the current size of either Aytu’s or Innovus’Neos’ respective businesses. The combined company’s ability to successfully manage this expanded business will depend, in part, upon management’s ability to implement an effective integration of the two companies and its ability to manage a combined business with significantly larger size and scope with the associated increased costs and complexity. There can be no assurances that the management of the combined company will be successful or that the combined company will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the merger.
ItemItem 2. Unregistered Sales of Securities and Use of Proceeds.
None.
ItemItem 3. Defaults Upon Senior Securities.
None.
ItemItem 4. Mine Safety Disclosures.
Not Applicable.
ItemItem 5. Other Information.
ItemItem 6. Exhibits.
| 10.3 | License Agreement with Avrio Genetics, LLC, dated January 20, 2020* | X | |||||||||
| 31.1 | |||||||||||
X | |||||||||||
| 31.2 | X | ||||||||||
| 32.1 | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*. | X | |||||||||
| 101 | XBRL |
X | ||
† | Indicates is a management contract or compensatory plan or arrangement. |
* | Information in this exhibit identified by brackets is confidential and has been excluded pursuant to Item 601(b)(10)(iv) of Regulation S-K because it is not material and would likely cause competitive harm to the Company if publicly disclosed. An unredacted copy of this exhibit will be furnished to the Securities and Exchange Commission on a supplemental basis upon request. |