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: MarchDecember 31, 2020
☐ 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 MayFebruary 1, 2020,2021, there were 120,261,42317,882,893 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® XR, ZolpiMistTTM, MiOXSYS®, AcipHex® Sprinkle™, Cefaclor for Oral Suspension, Karbinal®, Flexichamber™Natesto®, Poly-Vi-Flor®Poly-Vi-Flor®, Tuzistra®, and Tri-Vi-Flor™ ZolpiMist®, and the recently acquired consumer health products such as Fluticare®DiabaSens®, Diabasens®FlutiCare®, Urivarx®, Sensum®,UriVarx® and Vesele®Vesele®, as well as Beyond HumanHuman-®, 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.
Condensed Consolidated BalanceBalance 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 | ||||
March 31, | June 30, | |
2020 | 2019 | |
(Unaudited) | ||
| Assets | ||
| Current assets | ||
| Cash and cash equivalents | $62,264,676 | $11,044,227 |
| Restricted cash | 251,407 | 250,000 |
| Accounts receivable, net | 10,203,423 | 1,740,787 |
| Inventory, net | 3,854,685 | 1,440,069 |
| Prepaid expenses and other | 4,830,881 | 957,781 |
| Other current assets | 1,849,598 | – |
| Total current assets | 83,254,670 | 15,432,864 |
| Fixed assets, net | 288,415 | 203,733 |
| Right-of-use asset | 675,980 | – |
| Licensed assets, net | 17,155,632 | 18,861,983 |
| Patents and tradenames, net | 11,724,626 | 220,611 |
| Product technology rights, net | 21,754,166 | – |
| Deposits | 38,981 | 2,200 |
| Goodwill | 24,061,333 | – |
| Total long-term assets | 75,699,133 | 19,288,527 |
| Total assets | $158,953,803 | $34,721,391 |
| Liabilities | ||
| Current liabilities | ||
| Accounts payable and other | $6,956,091 | $2,133,522 |
| Accrued liabilities | 9,830,373 | 1,311,488 |
| Accrued compensation | 2,210,288 | 849,498 |
| Current lease liability | 289,238 | – |
| Current contingent consideration | 947,449 | 1,078,068 |
| Current portion of fixed payment arrangements | 17,395,219 | – |
| Current portion of CVR liabilities | 786,564 | – |
| Notes payable, net | 3,617,680 | – |
| Total current liabilities | 42,032,902 | 5,372,576 |
| Long-term contingent consideration, net of current portion | 17,806,573 | 22,247,796 |
| Long-term lease liability, net of current portion | 804,393 | – |
| Long-term fixed payment arrangements, net of current portion | 8,162,494 | – |
| Long-term CVR liabilities, net of current portion | 4,432,254 | – |
| Warrant derivative liability | 11,371 | 13,201 |
| Total liabilities | 73,249,987 | 27,633,573 |
| Commitments and contingencies (Note 12) | ||
| Stockholders' equity | ||
| Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 9,805,845 and 3,594,981, respectively as of March 31, 2020 (unaudited) and June 30, 2019. | 981 | 359 |
| Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 100,610,380 and 17,538,071, respectively as of March 31, 2020 (unaudited) and June 30, 2019. | 10,061 | 1,754 |
| Additional paid-in capital | 202,557,856 | 113,475,205 |
| Accumulated deficit | (116,865,082) | (106,389,500) |
| Total stockholders' equity | 85,703,816 | 7,087,818 |
| Total liabilities and stockholders' equity | $158,953,803 | 34,721,391 |
See the accompanying Notes to the Condensed Consolidated Financial StatementStatements
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 OperationsOperations
(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 March 31, | Nine Months Ended March 31, | |||
2020 | 2019 | 2020 | 2019 | |
| Revenues | ||||
| Product revenue, net | $8,156,173 | $2,372,016 | $12,771,235 | $5,598,836 |
| License revenue | 5,776 | 5,776 | ||
| Total revenue | $8,156,173 | $2,377,792 | $12,771,235 | $5,604,612 |
| Operating expenses | ||||
| Cost of sales | 1,998,659 | 616,853 | 2,980,425 | 1,552,950 |
| Research and development | 78,502 | 108,901 | 223,197 | 413,808 |
| Selling, general and administrative | 9,501,469 | 5,368,762 | 21,164,072 | 13,991,516 |
| Selling, general and administrative - related party | 6,797 | 351,843 | ||
| Amortization of intangible assets | 1,370,986 | 575,117 | 2,899,553 | 1,561,137 |
| Total operating expenses | 12,949,616 | 6,676,430 | 27,267,247 | 17,871,254 |
| Loss from operations | (4,793,443) | (4,298,638) | (14,496,012) | (12,266,642) |
| Other (expense) income | ||||
| Other (expense), net | (538,862) | (194,703) | (1,181,206) | (398,833) |
| Gain from derecognition of contingent consideration | 5,199,806 | |||
| Gain from warrant derivative liability | (2,521) | 1,830 | 65,468 | |
| Total other (expense) income | (538,862) | (197,224) | 4,020,430 | (333,365) |
| Net loss | $(5,332,305) | $(4,495,862) | $(10,475,582) | $(12,600,007) |
| Weighted average number of common shares outstanding | 35,275,296 | 9,061,023 | 22,616,962 | 5,785,669 |
| Basic and diluted net loss per common share | $(0.15) | $(0.50) | $(0.46) | $(2.18) |
See the accompanying Notes to the Condensed Consolidated Financial StatementsStatements.
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’Stockholders’ Equity
(auditedunaudited 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 | ||||||
Shares | Amount | Shares | Amount | Additional paid-in capital | Accumulated Deficit | Total Stockholders' 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 |
| Stock-based compensation (unaudited) | – | – | 1,067,912 | 107 | 263,284 | – | 263,391 |
| Cashless warrant exercise (unaudited) | – | – | 7,915,770 | 792 | (792) | – | – |
| Issuance of Series H preferred stock and common stock due to acquisition of Innovus (unaudited) | 1,997,902 | 200 | 3,809,712 | 381 | 4,405,603 | – | 4,406,184 |
| Preferred stock converted in common stock (unaudited) | (2,407,902) | (241) | 12,397,902 | 1,240 | 91,881 | – | 92,880 |
| Warrant exercises (unaudited) | – | – | 17,082,994 | 1,708 | 22,987,958 | – | 22,989,666 |
| Issuance of common stock, net of $4,523,884 in cash issuance costs (unaudited) | – | – | 36,365,274 | 3,637 | 33,275,119 | – | 33,278,756 |
| Warrants issued in connection with the registered offering (unaudited) | – | – | – | – | 9,723,161 | – | 9,723,161 |
| Warrants issued in connection with the registered offering to the placement agents, non-cash issuance costs (unaudited) | – | – | – | – | 1,458,973 | – | 1,458,973 |
| CVR payouts (unaudited) | – | – | 1,237,764 | 123 | 1,732,747 | – | 1,732,870 |
| Net loss (unaudited) | – | – | – | – | – | (5,332,305) | (5,332,305) |
| BALANCE - March 31, 2020 (unaudited) | 9,805,845 | $981 | 100,610,380 | $10,061 | $202,557,856 | $(116,865,082) | $85,703,816 |
See the accompanying Notes to the Condensed Consolidated Financial Statements
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated StatementStatements of Stockholders’ Equity, Cont’dCash 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 | ||||
Preferred Stock | Common Stock | ||||||
Shares | Amount | Shares | Amount | Additional paid-in capital | Accumulated Deficit | Total Stockholders' 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 (unaudited) | – | – | 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 | 271 | 193,791 | – | 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 | $1,051 | $107,258,096 | $(87,361,737) | $19,897,863 |
| Stock-based compensation (unaudited) | – | – | (25,600) | (2) | 376,668 | – | 376,666 |
| Preferred stocks converted into common stock (unaudited) | (2,196,999) | (219) | 2,196,999 | 219 | – | – | – |
| Warrant exercises (unaudited) | – | – | 172,331 | 17 | 258,495 | – | 258,512 |
| Net loss (unaudited) | – | – | – | – | – | (4,495,862) | (4,495,862) |
| BALANCE - March 31, 2019 (unaudited) | 2,335,665 | $234 | 12,848,499 | $1,287 | $107,893,259 | $(91,857,599) | $16,037,179 |
See the accompanying Notes to the Condensed Consolidated Financial StatementsStatements.
Condensed Consolidated Statements of CashCash Flows,
(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 | ||||
Nine Months Ended March 31, | ||
2020 | 2019 | |
| Operating Activities | ||
| Net loss | $(10,475,582) | $(12,600,007) |
| Adjustments to reconcile net loss to cash used in operating activities: | ||
| Depreciation, amortization and accretion | 3,780,310 | 1,974,213 |
| Stock-based compensation expense | 590,826 | 722,842 |
| Derecognition of contingent consideration | (5,199,806) | – |
| Gain on the change in fair value of CVR payout | (267,130) | – |
| Issuance of common stock to employee | – | 11,690 |
| Derivative income | (1,830) | (65,468) |
| Changes in operating assets and liabilities: | ||
| (Increase) in accounts receivable | (8,183,810) | (797,576) |
| (Increase) in inventory | (345,452) | (191,110) |
| (Increase) in prepaid expenses and other | (1,611,681) | (364,831) |
| (Increase) in other current assets | (358,022) | – |
| (Decrease) in accounts payable and other | (4,912,245) | (191,331) |
| Increase in accrued liabilities | 6,761,319 | 758,370 |
| Increase in accrued compensation | 271,560 | 250,912 |
| (Decrease) in fixed payment arrangements | (657,655) | – |
| Increase in interest payable | – | 134,795 |
| Net cash used in operating activities | (20,609,198) | (10,357,501) |
| Investing Activities | ||
| Deposit | – | 2,888 |
| Purchases of fixed assets | – | (59,848) |
| Contingent consideration payment | (151,648) | (408,917) |
| Cash received from acquisition | 390,916 | – |
| Purchase of assets | (5,850,000) | (500,000) |
| Net cash used in investing activities | (5,610,732) | (965,877) |
| Financing Activities | ||
| Issuance of preferred, common stock and warrants | 58,999,666 | 15,180,000 |
| Issuance costs related to preferred, common stock and warrants | (5,280,426) | (1,479,963) |
| Warrant exercises | 22,989,666 | 258,512 |
| Preferred stock converted in common stock | 92,880 | – |
| Issuance of note payable | 640,000 | 5,000,000 |
| Net cash provided by financing activities | 77,441,786 | 18,958,549 |
| Net change in cash, restricted cash and cash equivalents | 51,221,856 | 7,635,171 |
| 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 | $62,516,083 | $14,747,698 |
See the accompanying Notes to the Condensed Consolidated Financial Statements
| Supplemental disclosures of cash and non-cash investing and financing transactions | ||
| Cash paid for interest | $392,641 | $– |
| Fair value of right-to-use asset and related lease liability | 354,929 | – |
| Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics | 5,559,914 | – |
| Issuance of Series H preferred stock due to acquisition of the Innovus | 12,805,263 | – |
| Inventory payment included in accounts payable | 460,416 | – |
| Contingent consideration included in accounts payable | 27,571 | 29,348 |
| Fixed payment arrangements included in accounts payable | 501,766 | – |
| Exchange of convertible preferred stock into common stock | 1,559 | – |
| Return deductions received by Cerecor | 2,000,000 | – |
| Issuance of restricted stock | 107 | – |
| Cashless warrant exercises | 792 | – |
| 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 |
(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 novel products addressing significant medical needs such as hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, male infertility, various pediatric conditions and the Company’s plans to expand opportunistically into other therapeutic areas.
The Company’s recentlyPediatric Care Portfolio, acquired prescription pediatric portfolioon November 1, 2019, (the “Pediatric Portfolio”), includes (i) AcipHex® Sprinkle™, a granule formulation of rabeprazole sodium, a commonly prescribed proton pump inhibitor; (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; (iii) Karbinal® ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions;Poly-Vi-Flor and (iv) 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.
On February 14, 2020, the Company acquired Innovus Pharmaceuticals Inc. (“Innovus”), a specialty pharmaceutical company commercializing, licensing, developing and developingcommercializing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes over thirty-five twenty consumer health products competing in large healthcare categories including diabetes, men's health, sexual wellness and respiratory health (the “Consumer Health Portfolio”).health. The Consumer Health Portfolio is commercialized through direct-to-consumerdirect-to- consumer marketing channels utilizing Innovus’s proprietary Beyond Human® marketing and sales platform.
On December 10, 2020, the Company and Neutron Acquisition Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Neos Therapeutics, Inc. (“Neos”). The 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 the Company recently acquired exclusive U.S. distribution(the “Neos Merger”). The Neos Merger is subject to the approval of both the shareholders of the Company and Neos. Based on the number of shares of the Company’s common stock anticipated to be immediately issued to Neos stockholders upon closing of the merger (which could be impacted by changes in Neos stock price leading to the exercise of options not otherwise being assumed by the Company) and the number of shares of the Company’s common stock outstanding as of December 31, 2020, it is expected that, immediately after completion of the merger, former Neos stockholders will own approximately 24% of the outstanding shares of the Company’s common stock. Existing Company stockholders are expected to own approximately 76% of the outstanding shares of the Company’s common stock. In addition, each unvested option to acquire shares of Neos common stock that is outstanding as of immediately prior to the close of the Neos Merger (the "Effective Time") with an exercise price equal to or less than $0.95 shall be assumed by the Company and converted into an option to acquire shares of the Company’s common stock on the same terms and conditions. The number of shares of Company’s common stock subject to each such assumed option shall be equal to (i) the number of shares of Neos common stock subject to the corresponding assumed option immediately prior to the close multiplied by (ii) 0.1088 (the "Exchange Ratio"), rounded down, if necessary, to the nearest whole share of the Company’s common stock, and such assumed option shall have an exercise price per share (rounded up to the nearest whole cent) equal to (A) the exercise price per share of Neos common stock otherwise purchasable pursuant to the corresponding assumed option divided by (B) the Exchange Ratio. As of February 5, 2021, the total estimated shares to be issued in connection with this merger totaled approximately 5.4 million with an estimated fair value of $44.2 million.
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 two COVID-19 IgG/IgM rapid tests. These coronavirus testspayment, are solid phase immunochromatographic assays used in the rapid, qualitative and differential detection of IgG and IgM antibodiessubordinated to the 2019 Novel Coronavirus in human whole blood, serum or plasma. These rapid tests have been validated in multi-center clinical trials. Most recently,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 signedentered into a licensing agreement with Cedars-Sinai Medical Center forto 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 the Company planswe plan to advance this technology and assess its safety and efficacy in human studies.
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 focused commercial team andteam’s expertise to build leading brands within large therapeutic markets.
Financial Condition.
As ofRevenues for the three-monthsthree- and six- months ended MarchDecember 31, 2020 increased approximately 243%were $15.1 million and $28.7 million, compared to $3.2 million and $4.6 million for the three-monthssame periods ended MarchDecember 31, 2019, 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 nine-monthssix-months ended MarchDecember 31, 2020 was $20.6$10.9 million compared to $10.4$9.1 million for the nine-monthssix-months ended MarchDecember 31, 2019.2019. The increase is due primarily to the Company’s acquisition and integration of the Pediatric Portfolio and merger with Innovus, which consumed additional cash resources, coupled with an increase in working capital.
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, and 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 approximately $168.5$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 may 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 has sufficient cash and cash equivalents on-hand as of MarchDecember 31, 2020 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) the Company reports that there does not existexists no 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 nine- month periodssix- months ended, Marchand the interim condensed consolidated statements of cash flows for the six-months ended December 31, 2020 and 2019 is, are unaudited.
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 was paid to the investor. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026.
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 product portfolio that is expected to provide revenue and cost synergies. Transaction costs of $0.0 and $0.7 million were included as general and administrative expense in the consolidated statements of operations for the three and nine months ended March 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 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. The aggregate amortization expense was $0.6 million and $0, for the three months ended March 31, 2020 and 2019 respectively. The aggregate amortization expense was $0.9 million and $0, for the nine months ended March 31, 2020 and 2019 respectively.
Innovus Merger (Consumer Health Portfolio)
On February 14, 2020, the Company completed the mergerMerger 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 3.8 million380 thousand shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 million200 thousand shares of Series H Convertible Preferred stock of the Company and retired. The remaining Innovus warrants outstanding, those without ‘cash- out’ rights, at the time of the Merger, continue to be outstanding, and upon 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 will continue asis now a 100% wholly-owned subsidiary of the Company.
On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 1.2 million120 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 calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million.
In addition, as part of the Merger, the Company assumed approximately $3.1 million of notes payable, $0.8 million in lease liabilities, and 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. Goodwill recorded in connection with the acquisition represents, among other things, future economic benefits expect to be recognized from the Company's expansion of products and customer base.As this was a tax-exempt transaction, goodwill is not tax deductible in future periods. These estimates are preliminary, pending final evaluation of certain assets acquired and liabilities, assumed, and therefore, are subject to revisions that may result in adjustments to the values presented below. The estimates of the fair value of the assets acquired assumed at the date of the Acquisition are subject to adjustment during the measurement period (up to one year from the Acquisition date). While the Company believes that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired, it evaluates any necessary information prior to finalization of the fair value. During the measurement period, the Company will adjust assets if new information is obtained about facts and circumstances that existed as of the Acquisition date that, if known, would have resulted in the revised estimated values of those assets as of that date. The impact of all changes that do not qualify as measurement period adjustments are included in current period earnings.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. The aggregate amortization expense was $0.2 million and $0, for the three and nine months ended March 31, 2020 and 2019 respectively.
The following supplemental unaudited proforma financial information presents the Company’s results as if the following acquisitions had occurred on July 1, 2018:
Three Months Ended March 31, | Nine Months Ended March 31, | |||
2020 | 2019 | 2020 | 2019 | |
Unaudited (aa) (bb) | Pro forma Unaudited | Pro forma Unaudited (cc) | Pro forma Unaudited | |
| Total revenues, net | $10,331,629 | $10,575,866 | $34,276,368 | $36,916,501 |
| Net income (loss) | (5,850,703) | (8,740,850) | (18,197,902) | (17,205,490) |
| Net income / (loss) per share (dd) | $(0.17) | $(0.39) | $(0.80) | $(0.76) |
| | ● | Acquisition of the Pediatric Portfolio, |
Merger with Innovus | |
The unaudited pro forma results have been prepared based on estimates and assumptions, which management believes are reasonable, however, the results are not necessarily indicative of the consolidated results of operations had the acquisition occurred on July 1, 2019, or of future results of operations:
Three Months Ended | 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 impact of the issuance of the (i) Series G Convertible Preferred Stock and the, (ii) Series H Convertible Preferred Stock under the assumption those shares would continue to remain non-participatory during the periods reported above.
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 | ||||||||
Revenues by Product Portfolio. Net revenue disaggregated by significant product portfolio for the three and six-months ended December 31, 2020 and December 31, 2019 were as follows:
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 | ||||||||
Three Months Ended March 31, | Nine Months Ended March 31, | |||
2020 | 2019 | 2020 | 2019 | |
| U.S. | $7,273,000 | $2,024,000 | $11,582,000 | $5,025,000 |
| International | 883,000 | 348,000 | 1,189,000 | 574,000 |
| Total net revenue | $8,156,000 | $2,372,000 | $12,771,000 | $5,599,000 |
4. Product Licenses and Acquisitions
Inventories consist of raw materials 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 nine monthssix-months ended MarchDecember 31, 2020 or 2019, 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 | |
March 31, | June 30, | |
2020 | 2019 | |
| Raw materials | $363,000 | $117,000 |
| Finished goods | 3,491,000 | 1,323,000 |
$3,854,000 | $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 | As of | As of | |
Useful | March 31, | June 30, | |
Lives in years | 2020 | 2019 | |
| Manufacturing equipment | 2 - 5 | $389,000 | $83,000 |
| Leasehold improvements | 3 | 297,000 | 112,000 |
| Office equipment, furniture and other | 2 - 5 | 392,000 | 315,000 |
| Lab equipment | 3 - 5 | 90,000 | 90,000 |
| Software | 3 - 5 | 339,000 | - |
| Less accumulated depreciation and amortization | (1,219,000) | (396,000) | |
| Fixed assets, net | $288,000 | $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 $24,000$18,000 and $16,000 for each of the three-months ended MarchDecember 31, 2020 and 2019, respectively, and $56,000$51,000 and $59,000$32,000 for the nine monthssix-months ended MarchDecember 31, 2020 and 2019.2019, respectively.
6. Leases, Right-to-Use Assets and Related Liabilities
The Company holds an option to extend the lease an additional 5 years at the end of the initial term. On November 18, 2019 (“decision date”), Innovus determined it would no longer utilize the warehouse portion of the lease space, representing approximately 9,729 square feet, and as of December 31, 2019 (“cease use date”) ceased using any such space. In accordance with ASC 842,
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 | ||||||
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.
Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | |
| Remaining Office leases | $1,268,000 | $93,000 | $383,000 | $396,000 | $356,000 | $40,000 | − |
| Less: Discount Adjustment | (175,000) | ||||||
| Total lease liability | 1,093,000 | ||||||
| Lease liability - current portion | 289,000 | ||||||
| Long-term lease liability | $804,000 |
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 MarchDecember 31, 2020 and 2019 totaled $61 thousand, respectively. Amortization expense of intangible assets was $3.2 million and $31 thousand, respectively. Rent expense$1.5 million for the ninesix months ended MarchDecember 31, 2020 and 2019 totaled $126 thousand and $94 thousand,, respectively.
8. Patents
As of | As of | |
March 31, | June 30, | |
2020 | 2019 | |
| Patents - MiOXSYS | $380,000 | $380,000 |
| Less accumulated amortization | (178,000) | (159,000) |
| Patents, net | $202,000 | $221,000 |
As of | As of | |
March 31, | June 30, | |
2020 | 2019 | |
| Patents & tradenames | $11,354,000 | $- |
| Customers contracts | 390,000 | - |
| Less accumulated amortization | (221,000) | - |
| Patents & tradenames, net | $11,523,000 | $- |
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 | |
March 31 | June 30, | |
2020 | 2019 | |
| Accrued legal settlement | $205,000 | $− |
| Accrued program liabilities | 1,299,000 | 736,000 |
| Accrued product-related fees | 1,644,000 | 295,000 |
| Credit card liabilities | 941,000 | − |
| Contract liability | 180,000 | 4,000 |
| Medicaid liabilities | 3,255,000 | 61,000 |
| Return reserve | 1,671,000 | 98,000 |
| Sales taxes payable | 172,000 | − |
| Other accrued liabilities* | 463,000 | 117,000 |
| Total accrued liabilities | $9,830,000 | $1,311,000 |
* Other accrued liabilities consist of franchise tax, 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 Pediatric Portfolio. 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 MarchDecember 31, 2020 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 March 31, 2020 | ||||
Fair Value at March 31, 2020 | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |
| Recurring: | ||||
| Warrant derivative liability | $11,000 | – | – | $11,000 |
| Contingent consideration | 18,754,000 | – | – | 18,754,000 |
| CVR liability | 5,219,000 | – | – | 5,219,000 |
$23,984,000 | – | – | $23,984,000 | |
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 |
| CVR liability | – | – | – | – |
$23,339,000 | – | – | $23,339,000 | |
As of March 31, 2020 | 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 Natesto asthis Tuzistra XR, was valued at $8.8 million using a resultMonte Carlo simulation. As of the December 1, 2019 effectiveness of the Acerus Amendment, which eliminated product milestone payments underlying31,2020, the contingent consideration liability. Duewas 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 derecognitionZolpiMist 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 Natesto contingent consideration, the Company recognized a, non-operating gain of approximately $5.2 million during the threemilestones had been achieved, and nine months ended March 31, 2020.
The Company recognized approximately $0.2 million in product related contingent consideration as a result of the February 14, 2020 Innovus Merger. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimates risk that the milestones are achieved. The contingent consideration accretion expense for the three and six-months ended December 31, 2020 and 2019 was $15,000, and $28,000, respectively. There was no material change in this valuation as of MarchDecember 31, 2020.
Contingent value rights.
Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to Fair Value at Measurement Date | Quoted Priced in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |
| Non-recurring | ||||
| Pediatric Portfolio (November 1, 2019) | ||||
| Product technology rights | $22,700,000 | – | – | 22,700,000 |
| Goodwill | 15,687,064 | – | – | 15,687,064 |
| Fixed payment arrangements | 26,457,162 | – | – | 26,457,162 |
| Innovus Merger (February 14, 2020) | ||||
| Customer lists | 390,000 | – | – | 390,000 |
| Product distribution rights (trademarks and patents) | 11,354,000 | – | – | 11,354,000 |
| Right-to-use asset | 675,980 | 675,980 | ||
| Goodwill | 8,374,269 | – | – | 8,374,269 |
| Notes payable | 3,056,361 | – | – | 3,056,361 |
$88,694,836 | – | – | $88,694,836 |
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 ninethree months ended MarchDecember 31, 2020:2020:
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 | Innovus Assets | Goodwill | Liability Classified Warrants | CVR Liability | 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 | – | – | – | – | – | – | – |
| Included in earnings | (946,000) | (221,000) | – | (2,000) | 170,000 | (4,576,000) | 647,000 |
| Included in other comprehensive income | – | – | – | – | – | ||
| Purchases, issues, sales and settlements | – | ||||||
| Purchases | 22,700,000 | 11,744,000 | 24,061,000 | – | 7,049,000 | 183,000 | – |
| Issues | – | – | – | – | – | – | 26,457,000 |
| Sales | – | – | – | – | – | – | – |
| Settlements | – | – | – | – | (2,000,000) | (179,000) | (1,547,000) |
| Balance as of March 31, 2020 | $21,754,000 | $11,523,000 | $24,061,000 | $11,000 | $5,219,000 | $18,754,000 | $25,557,000 |
10. Commitments and Contingencies
Commitments and contingencies are described below and summarized by the following as of MarchDecember 31, 2020:2020:
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 | $1,762,000 | $262,000 | $767,000$ | $733,000$ | $– | $– | – |
| Pediatric portfolio fixed payments and product minimums | 28,715,000 | 998,000 | 18,471,000 | 2,950,000 | 2,950,000 | 1,346,000 | 2,000,000 |
| CVR liability | 5,219,000 | 787,000 | 1,210,000 | 2,327,000 | 895,000 | – | – |
| Inventory purchase commitment | 2,943,000 | 1,226,250 | 1,716,750 | ||||
| Product contingent liability | 183,000 | – | – | – | – | – | 183,000 |
| Product milestone payments | 3,000,000 | – | – | 3,000,000 | – | – | – |
$41,822,000 | $3,273,250 | $22,164,750 | $9,010,000 | $3,845,000 | $1,346,000 | $2,183,000 |
Prescription Database
In May 2016, the Company entered into an agreement with a vendor that will provide it with prescription database information. The Company agreed to pay approximately $1.6 million over three years for access to the database of prescriptions written for Natesto. In January 2020, the Company amended the agreement and agreed to pay additional $0.6 million to add access to the database of prescriptions written for the Pediatric Portfolio. The payments have been broken down into quarterly payments.
Pediatric Portfolio Fixed Payments and Product Milestone
The Company assumed two fixed, periodic payment obligations to an investor (the “Fixed Obligation”). Beginning November 1, 2019 through January 2021, the Company will pay monthly payments of $86,840, with a balloon payment of $15,000,000 due in January 2021. A second fixed obligation requires the Company pay a minimum of $100,000 monthly through February 2026, except for $210,767 paid in January 2020. 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 increase 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 was 20 years. The Company will pay TRIS a royalty equal to 23.5% of net sales. A third party agreed to offset the 23.5% royalty payable by 8.5%, for a net royalty equal to 15%, in fiscal year 2018 and 2019 for net sales of Karbinal.
The Karbinal Agreement make-whole payment is capped at $1,750,000$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-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 CompanyCompany'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 200 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 3,345,766365,869 shares of restricted stock issued to executives, directors, employees, and consultants.
In June 2020, the Company 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 holding shares of Series C preferred stock exercised their right to convert 443,833 shares of Series C preferred stock into 443,833 shares of common stock. There are no remaining Series C preferred stock outstanding.
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 March 19, 2020 Warrants are exercisable immediately upon issuance andwarrants 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 issued warrants with an exercise price of $1.9938 per sharehas granted Wainwright a 30-day option to purchase up to 815,047an additional 625,000 shares of Common Stock at the same offering price to the public, less underwriting discounts and commissions. Wainwright exercised their over-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 purchase up 311,458 shares of common stock. The exercise price per share of the underwriter warrants is $7.50 (equal to 125% of the public offering price per share for the shares of common stock (the “March 19, 2020 Placement Agent Warrants”). The March 19, 2020 Placement Agent Warrantssold in the offering) and the underwriter warrants have a term of five years from the issuance date.date of effectiveness of the offering. The underwriter warrants will be exercisable immediately.
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 March 31,On February 13, 2020, we have 1,317,337 shares that are available for grant under 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. Aytu has computed the fair valueThere were no grants of allstock options grantedto employees during the nine monthsthree- and six-months ended MarchDecember 31, 2020 and 2019 using the following assumptions:
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 |
| Granted | 339,500 | 0.98 | 10.00 |
| Exercised | (2,500) | 0.97 | – |
| Expired | (170) | 328.00 | – |
| Outstanding March 31, 2020 | 338,437 | 2.36 | 9.62 |
| Exercisable at March 31, 2020 | 11,437 | 41.74 | 9.30 |
As of MarchDecember 31, 2020, there was $133,015$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 | 1,067,912 | 0.73 | 1.7 |
| Vested | – | – | – |
| Forfeited | (69,900) | 2.03 | – |
| Unvested at March 31, 2020 | 3,344,226 | $1.47 | 7.2 |
Under the 2015 Plan, there was $4,124,000$4.3 million of total unrecognized stock-based compensation expense related to the non-vested restricted stock as of MarchDecember 31, 2020.2020. The Company expects to recognize this expense over a weighted-average period of 7.206.3 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 March 31, | Nine Months Ended March 31, | |||
| Selling, general and administrative: | 2020 | 2019 | 2020 | 2019 |
| Stock options | $7,000 | $15,000 | $14,000 | $122,000 |
| Restricted stock | 257,000 | 362,000 | 577,000 | 601,000 |
| Total stock-based compensation expense | $264,000 | $377,000 | $591,000 | $723,000 |
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. These warrants feature 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. During the three months ended March 31, 2020, an investor exercised 5,000,000 of the warrants using the cashless exercise provision. In April 2020, another investor exercised the remaining 5,000,000 of the October 2019 warrants using the cashless exercise provision, resulting$7.50 in no remaining October 2019 warrants as of April 30, 2020.
Significant assumptions in valuing the warrants issued during the quarter are as follows:
Warrants Issued Three Months Ended | ||||
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 | 44,627,120 | 1.21 | 1.88 |
| Warrants expired | – | – | – |
Warrants exercised (*) | (29,859,990) | – | – |
| Outstanding March 31, 2020 | 30,986,038 | $2.39 | 2.31 |
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 March 31, 2020 | 240,755 | $72.00 | 2.37 |
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 MarchDecember 31, 2020 and 2019 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 | ||||||||
Nine Months Ended | |||
March 31 | |||
2020 | 2019 | ||
| Warrants to purchase common stock - liability classified | (Note 15) | 240,755 | 240,755 |
| Warrant to purchase common stock - equity classified | (Note 15) | 30,986,038 | 11,893,175 |
| Employee stock options | (Note 14) | 338,437 | 1,666 |
| Employee unvested restricted stock | (Note 14) | 3,344,226 | 2,719,312 |
| Performance-based options (*) | (Note 14) | – | 75,000 |
| Convertible preferred stock | (Note 13) | 9,805,845 | 2,335,665 |
44,715,301 | 17,265,573 | ||
15. Notes Payable
The Aytu BioScience Note.
On February 27, 2020, the Company issued a $0.8 million promissory note (the “Note”) and received consideration of approximately $0.6 million. The Note had an eight-month term with principal and interest payable16. 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 our Company and aggregated ouraggregates 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, line, 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 | ||||
Three months Ended March 31, | Nine months Ended March 31, | |||
2020 | 2019 | 2020 | 2019 | |
| Consolidated revenue: | ||||
| Aytu BioScience | $4,703,000 | $2,378,000 | $9,318,000 | $5,605,000 |
| Aytu Consumer Health | 3,453,000 | 3,453,000 | ||
| Consolidated revenue | 8,156,000 | 2,378,000 | 12,771,000 | 5,605,000 |
| Consolidated net loss: | ||||
| Aytu BioScience | (4,421,000) | (4,496,000) | (9,565,000) | (12,600,000) |
| Aytu Consumer Health | (911,000) | (911,000) | ||
| Consolidated net loss | (5,332,000) | (4,496,000) | (10,476,000) | (12,600,000) |
17. Related Party Transactions
Tris Pharma, Inc.
On November 2, 2018, the Company entered into a License, Development, Manufacturing and Supply Agreement (the “Tris License Agreement”). On November 1, 2019, the Company acquired the rights to Karbinal as a result of the acquisition of the Pediatric Portfolio from Cerecor, Inc. (See Notes 2 and 10). Mr. Ketan Mehta serves as a Director on the Board of Directors of the Company and is also the Chief Executive Officer of TRIS. The Company paid TRIS approximately $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.
March 31, | June 20, | |||
2020 | 2019 | |||
| Total assets: | ||||
| Aytu BioScience | $137,825,000 | $34,721,000 | ||
| Aytu Consumer Health | 21,129,000 | |||
| Total assets | $158,954,000 | $34,721,000 |
18. Subsequent Events
Except for below, see Footnote 1 14, 15 and 16, 17, for information relating to certain events occurring subsequent to Marchbetween December 31, 2020, and the filing of this report Form 10-Q, impacting information disclosed above. In addition, the following subsequent events were considered:
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 SettlementPennsylvania-based limited liability company focused on reproductive health.
Under the MiOXSYS Agreement, Avrio Genetics will purchase existing inventory, commercialize, and Release (the “Settlement Agreement”)market the Product under a royalty on Product net sales with Hikma Pharmaceuticals USA Inc. (“Hikma”). Pursuanta 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 settlement agreement, Innovus has agreedCompany. The Company will continue 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. 207957own the intellectual property in the U.S. The commitment requires InnovusProduct, 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 purchase three batchesincrease the commercialization of product through fiscal year 2022 eachthe Product. With Avrio’s assumption of which amount to $1 million.
Item 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 healthcare needs in both prescription and consumer health categories. ThroughWe are currently operate our heritageAytu 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. Our Consumer Health business we currently market a portfoliois focused on consumer health products. We plan to expand into other therapeutic areas as opportunities arise. Aytu was incorporated as Rosewind Corporation on August 9, 2002 in the State of prescription products addressing large primary care and pediatric markets. Colorado. Aytu was re-incorporated in the state of Delaware on June 8, 2015.
The primary care portfolio includes (i) Natesto, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra XR, the only FDA-approvedFDA- approved 12-hour codeine-based antitussive syrup.
The pediatric care portfolio, acquired a prescription pediatric portfolio thaton November 1, 2019, (the “Pediatric Portfolio”), includes (i) AcipHex Sprinkle, a granule formulation of rabeprazole sodium, a commonly prescribed proton pump inhibitor; (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions; and (iv) 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.
On February 14, 2020 we acquired Innovus Pharmaceuticals (“Innovus”), a specialty pharmaceutical company commercializing, licensing, developing and developingcommercializing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes over thirty-fivetwenty 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.
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 “Merger Agreement”) with Neos Therapeutics, Inc. (“Neos”). The 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 issued to Neos 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 common stock outstanding as of December 31, 2020, it is expected that, immediately after completion of the merger, former Neos stockholders are expected to own approximately 24% of the outstanding shares of the our common stock and existing Aytu stockholders are expected to own approximately 76% of the outstanding shares of our common stock. In addition, each unvested option to acquire shares of Neos common stock that is outstanding as of immediately prior to the close of the Neos Merger (the "Effective Time") with an exercise price equal to or less than $0.95 shall be assumed by Aytu and converted into an option to acquire shares of our common stock on the same terms and conditions. The number of shares of our common stock subject to each such assumed option shall be equal to (i) the number of shares of Neos common stock subject to the corresponding assumed option immediately prior to the Effective Time multiplied by (ii) 0.1088 (the "Exchange Ratio"), rounded down, if necessary, to the nearest whole share of our common stock, and such assumed option shall have an exercise price per share (rounded up to the nearest whole cent) equal to (A) the exercise price per share of Neos common stock otherwise purchasable pursuant to the corresponding assumed option divided by (B) the Exchange Ratio. As of February 5, 2021, the total estimated shares to be issued as consideration in connection with this merger totaled approximately 5.4 million with an estimated fair value of $44.2 million.
In connection with the execution 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 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 rights to two COVID-19 IgG/IgM rapid tests. These coronavirus testspayment, are solid phase immunochromatographic assays used in the rapid, qualitative and differential detection of IgG and IgM antibodiessubordinated to the 2019 Novel Coronavirus in human whole blood, serum or plasma. These rapid tests have been validated in multi-center clinical trials. Most recently we signedrights 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.
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 and expertise to build leading brands within large therapeutic markets
Strategic Growth Initiatives
Pursuant to our strategy of identifying and acquiring complimentary assets we have entered into two transactions thatand companies, we expect to substantially increase our revenue generating capacity and provide opportunities to reduce our combined operating losses.losses through a combination of 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 us 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 portfolio of prescription 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, (iii)(ii) Karbinal ER, (iii) Poly- Vi-Flor, and (iv) Flexichamber, (v) Poly-Vi-Flor and 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. We assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million is due.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 Pediatric Portfolio require royalty payments ranging from 15% to 38.0% of net revenue. One of the products in the Pediatric 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 with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. The acquisition of Innovus has enabled the company to expand into the consumer healthcare market with Innovus’ thirty-five-plus over-the-counter medicines and other healthcareconsumer health products. We expect Innovus to continue to develop additional consumer healthcare products and expand its product portfolio. This, we expect, will drive additional revenue for the consumer health subsidiary and contribute meaningfully to the company's overall revenue growth.
Additionally, through the two recently announced transactions to acquire distribution rights to two COVID-19 IgG/gM rapid tests, we expect to continue to participate in the U.S. serologyCOVID-19 testing market. We have purchased 1,600,000 COVID-19 IgG/IgM rapid antibody tests from one manufacturer (ZhejiangZhejiang Orient Gene Biotech Limited via our distribution agreement with L.B. Resources, Limited) and committed to purchase another 1,250,100 rapid tests from another manufacturer (Biolidics, Limited).Ltd. We also signed an exclusive license with Cedars-Sinai Medical Center for rights to a medical device technology platform that is a pre-clinical prospective treatment for coronavirusCOVID-19 for seriously ill patients in the ICU. We expect to advance this technology through development and, if proven clinically effective and able to be manufactured at scale, expect to commercialize this product in the future.
In the near-term, we expect to create value for shareholders by implementing a focused strategy of increasing sales of our prescription therapeutics while leveraging our commercial infrastructure. Further, we expect to increase sales of our newly acquired consumer healthcare product portfolio following the closing of our acquisition of Innovus Pharmaceuticals.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 MarchDecember 31, 2020)2020) are presented in Note 1 to the condensed consolidated financial statements.
RESULTS OF OPERATIONS
Results of Operations –Three and Nine months ended MarchSix Months Ended December 31, 2020 compared to Marchthe Three and Six Months Ended December 31, 2019
Three Months Ended March 31, | ||||
2020 | 2019 | Change | % | |
| Revenues | ||||
| Product revenue, net | $8,156,173 | $2,372,016 | $5,784,157 | 244% |
| License revenue | - | 5,776 | (5,776) | -100% |
| Total net revenue | 8,156,173 | 2,377,792 | 5,778,381 | 243% |
| Operating expenses | ||||
| Cost of sales | 1,998,659 | 616,853 | 1,381,806 | 224% |
| Research and development | 78,502 | 108,901 | (30,399) | -27.9% |
| Selling, general and administrative | 9,501,469 | 5,368,762 | 4,132,707 | 77.0% |
| Selling, general and administrative - related party | - | 6,797 | (6,797) | -100% |
| Amortization of intangible assets | 1,370,986 | 575,117 | 795,869 | 138% |
| Total operating expenses | 12,949,616 | 6,676,430 | 6,273,186 | 94% |
| Loss from operations | (4,793,443) | (4,298,638) | (494,805) | 12% |
| Other (expense) income | ||||
| Other (expense), net | (538,862) | (194,703) | (344,159) | 177% |
| Gain from derecognition of contingent consideration | - | - | - | 100% |
| Gain from warrant derivative liability | - | (2,521) | 2,521 | -100% |
| Total other (expense) income | (538,862) | (197,224) | (341,638) | 173% |
| Net loss | $(5,332,305) | $(4,495,862) | $(836,443) | 19% |
Nine Months Ended March 31, | ||||
2020 | 2019 | Change | % | |
| Revenues | ||||
| Product revenue, net | $12,771,235 | $5,598,836 | $7,172,399 | 128% |
| License revenue | - | 5,776 | (5,776) | -100% |
| Total net revenue | 12,771,235 | 5,604,612 | 7,166,623 | 128% |
| Operating expenses | ||||
| Cost of sales | 2,980,425 | 1,552,950 | 1,427,475 | 92% |
| Research and development | 223,197 | 413,808 | (190,611) | -46.1% |
| Selling, general and administrative | 21,164,072 | 13,991,516 | 7,172,556 | 51.3% |
| Selling, general and administrative - related party | - | 351,843 | (351,843) | -100% |
| Amortization of intangible assets | 2,899,553 | 1,561,137 | 1,338,416 | 86% |
| Total operating expenses | 27,267,247 | 17,871,254 | 9,395,993 | 53% |
| Loss from operations | (14,496,012) | (12,266,642) | (2,229,370) | 18% |
| Other (expense) income | ||||
| Other (expense), net | (1,181,206) | (398,833) | (782,373) | 196% |
| Gain from derecognition of contingent consideration | 5,199,806 | - | 5,199,806 | 100% |
| Gain from warrant derivative liability | 1,830 | 65,468 | (63,638) | -97% |
| Total other (expense) income | 4,020,430 | (333,365) | 4,353,795 | -1306% |
| Net loss | $(10,475,582) | $(12,600,007) | $2,124,425 | -17% |
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 expensesSelling, General and Administrative.
Selling, general and administrative costs increasedAmortization of Intangible Assets. Amortization expense for the remaining intangible assets was approximately $1.4$1.6 million and $0.6$1.0 million for the for the three months ended MarchDecember 31, 2020 and 2019, respectively. Amortization ofexpense for the remaining intangible assets was $2.9approximately $3.2 million and $1.6$1.5 million, respectively, for the ninesix months ended MarchDecember 31, 2020 and 2019, respectively.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 acquisition and Innovus Merger closedthat occurred in this quarter.
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 of the Pediatric Portfolio from Cerecor, Inc. and (ii) the February 14, 2020, Merger with Innovus.
Loss from change in fair value of contingent consideration.
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 | ||||
March 31, | ||
2020 | 2019 | |
| Net cash used in operating activities | $(20,609,198) | $(10,357,501) |
| Net cash used in investing activities | (5,610,732) | (965,877) |
| Net cash provided by financing activities | $77,441,786 | $18,958,549 |
Net Cash Used in Operating Activities
During the nine monthssix-months ended MarchDecember 31, 2020, our operating activities used $20.6$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 $10.5$5.1 million, primarily as a result of derecognition of contingent consideration and an increase in accounts receivable, decrease in accounts payable and other offset by the non-cash depreciation, amortization and accretion, stock-based compensation charges to earnings, coupled with an increase in accrued liabilities and accrued compensation.
Net Cash Used in Investing Activities
During the nine monthssix-months ended MarchDecember 31, 2020, we usedmade 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 for the Innovus Merger.million. We also used $4.5 million for the Cerecor acquisition and we paid $0.2 million$105,000 in contingent consideration offset by cash of $0.4 million received from Innovus Merger.
Net Cash from Financing Activities
Net cash provided by financing activities in the nine monthssix-months ended MarchDecember 31, 20192020, was $77.4$24.9 million. This was primarily related to the (i)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; (ii) $49 million raised in the March 2020 Offerings, offset by offering costs of approximately $4.5 million, and (iii) $23.0 million raised as the result of warrant exercises in March 2020.
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
Item 3. QuantitativeQuantitative and Qualitative Disclosures About Market Risk.
We are not currently exposed to material market risk arising from financial instruments, changes in interest rates or commodity prices, or fluctuations in foreign currencies. We have not identified a need to hedge against any of the foregoing risks and therefore currently engagesengage in no hedging activities.
Item 4. ControlsControls 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
OTHER INFORMATION
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.Marin County DA
. On August 24, 2018, Innovus received a letter from the Marin County District Attorney’s Office (the “Marin DA”) demanding substantiation for certain advertising claims made by Innovus related to DiabaSens®, and Apeaz®, which were sold and marketed in Marin County, California. The Marin DA is part of a larger Northern California task force comprising of district attorney offices from ten counties that agree to handle customer protection matters. Innovus responded to the Marin DA through its regulatory counsel in November 2018 and continued to exchange correspondence with the Marin DA through April 2019. In June 2019, Innovus met with the Northern California task force. In March 2020, Innovus (now a Company subsidiary) entered into a Stipulation for Entry of Final Judgement (the “Stipulation”), pursuant to which Innovus agreed to the following: (i) certain injunctive relief relating the advertising and sale of DiabaSens®, and Apeaz®; (ii) to pay a civil penalty of $150,000; (iii) to reimburse investigative costs of $11,500; and (iv) to pay restitution of $43,000. In May 2020, the Marin DA filed the judgement with the Superior Court for the County of Monterrey and the parties are waiting for the judge to approve the stipulation.Pliscott. Between November 20, 2019 and December 17, 2019, four putative class action lawsuits were filed in Delaware state and federal courts in connection with: (i) Aytu’s proposal to approve, in accordance with Nasdaq Marketplace Rule 5635(d), the convertibility of the Company’s Series F convertible preferred stock and the exercisability of certain warrants, in each case, issued in a private placement offering that closed on October 16, 2019 (the “Nasdaq Rule 5635(d) Proposal”); (ii) Aytu’s proposal to approve an amendment to its Certificate of Incorporation to increase the number of its authorized shares of common stock from 100,000,000 to 120,000,000 shares of common stock (the “Authorized Share Increase Proposal”); and (iii) Aytu’s proposal to approve the adjournment of the special meeting, if necessary, to continue to solicit votes for the Nasdaq Rule 5635(d) Proposal and/or the Authorized Share Increase Proposal (“Adjournment Proposal” and, together with the Nasdaq Rule 5635(d) Proposal and the Authorized Share Increase Proposal, the “Proposal”). Three lawsuits were filed in the Court of Chancery of the State of Delaware: Carl Pliscott v. Joshua R. Disbrow, et al., Case No. 2019-0933, filed on November 20, 2019 (the “Pliscott Action”); Adam Kirschenbaum v. Aytu Bioscience, Inc., et al., Case No. 2019-0984, filed on December 10, 2019 (the “Kirschenbaum lawsuit”); and Michael Sebree v. Josh Disbrow, et al., Case No. 2019-1011, filed on December 17, 2019 (the “Sebree Action”). The Kirschenbaum Action and Sebree Action were both assigned to Chancellor Andre G. Bouchard. The Pliscott Action was removed to the United States District Court for the District of Delaware on December 5, 2019, captioned as Carl Pliscott v. Joshua R. Disbrow, et al., Case No. 19-cv-02228-UNA,, but was remanded to the Court of Chancery and assigned to Chancellor Andre G. Bouchard on January 14, 2020.2020. 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,19-cv-02204- LPS, filed on November 26, 2019 (the “Franchi Action”). The Pliscott Action, Kirschenbaum Action, and Sebree Action allegealleged 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 allegesalleged 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 seek,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 seekssought injunctive relief prohibiting consummation of the Asset Purchase Agreement, dated October 10, 2019. Aytu and the board believehave asserted that all claims asserted are meritless and have vigorously defended against the four lawsuits. On January 30, 2020, the parties in the Pliscott Action, Kirschenbaum Action, and Sebree Action filed a stipulation voluntarily dismissing the cases as moot, with plaintiffs reserving the right to seek mootness fees. On February 5, 2020, the Chancery Court dismissed the cases while retaining jurisdiction to adjudicate anticipated mootness fee motions. No mootness fee motion has been filed to date. At this stage, it is not otherwise possible to predict the effect of lawsuits on Aytu.
Item 1A. RiskRisk 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 COVID-19
Because the Exchange Ratio is fixed and the market price of Aytu common stock may fluctuate, Neos stockholders cannot be certain of the precise value of the stock consideration they may receive in the merger.
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 stock consideration will depend on FDA policiesthe market price of Aytu common stock at the time the transaction is completed. Time will elapse from the date of the Merger Agreement, when the Exchange Ratio was established, until each of the date of this joint proxy statement/prospectus, the date on which Neos stockholders vote to approve the Merger Agreement at the Neos special meeting, the date the Aytu stockholders approve the merger consideration, including the Common Stock Issuance, at the Aytu special meeting and guidance provisions that have changed very recently,the date on which Neos stockholders entitled to receive shares of Aytu common stock under the Merger Agreement actually receive such shares. The market value of Aytu common stock may fluctuate during these periods as a result of a variety of factors, including, among others, general market and may continue to change,economic conditions, changes in Aytu’s businesses, operations and relate directlyprospects and regulatory considerations, federal, state and local legislation, governmental regulation and legal developments in the businesses in which Aytu operates, any potential stockholder litigation related to the 2019 coronavirus health crisis. If we misinterpret this guidance or the guidance changes unexpectedly and/or materially, potential salesmerger, market assessments of the COVID-19 tests wouldlikelihood that the transaction will be impacted.
The market price of shares of Aytu common stock after the merger will continue to fluctuate and may be marketed under an Emergency Use Authorization. If our interpretationaffected by factors different from those that are currently affecting or historically have affected the market price of shares of Neos common stock or Aytu common stock.
Upon completion of the newlymerger, holders of shares of Neos 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 Neos 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 Neos and Aytu business are not realized, or if the transaction costs relating to the merger are greater than 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 Neos stockholders may decide not to hold the shares of Aytu common stock they receive as a result of the merger. Other Neos 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. In addition, in the future Aytu may issue additional securities to raise capital. Aytu may also acquire interests in other companies by issuing Aytu common stock to finance the acquisition, in whole or in part. Aytu may also issue securities convertible into Aytu common stock. Moreover, general fluctuations in stock markets could have a material adverse effect on the market for, or liquidity of, the Aytu common stock, regardless of Aytu’s actual operating performance.
The businesses of Aytu differ from those of Neos 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 Neos and Aytu as stand-alone public companies, as well as the market price of shares of Neos common stock and Aytu common stock prior to completion of the merger.
Current Aytu and Neos stockholders will have a reduced ownership and voting interest in Aytu after the merger.
Upon the completion of the merger, each Neos stockholder who receives shares of Aytu common stock will become 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 number 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 stockholder owns in favor of the issuance of shares of Aytu common stock in connection with the merger, 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 guidance is incorrect or specifics aroundreaffirmed opinion prior to the guidance change,consummation of the salesmerger. 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 test could be materially impacted.
Failure to consummate the merger could negatively impact respective future stock prices, operations and damage to our reputation.
If the market’s confidence that we can provide reliable, high-quality COVID-19 diagnostic tests. We believe that customers in our target markets are likely to be particularly sensitive to product defects and errors. Our reputation andmerger is not consummated for any reason, the public imageongoing businesses of our licensed COVID-19 diagnostic testsAytu and/or Neos may be impaired if they fail to perform as expected or are perceived as difficult to use. Despite quality control testing, defects or errors could occur with the tests.
● | 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 COVID-19 IgG/IgM rapid rests have experience manufacturing diagnostic tests, theremerger 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 they can manufacture the COVID-19 diagnostic tests at a scale that is adequate for our current and future commercial needs. We may face significant or unforeseen difficulties in securing adequate supply of the COVID-19 diagnostic tests, relating to the manufacturing of the tests. These risks include but are not limited to:
In addition, if the ownermerger does not close, Neos may be required to effectuate a reverse stock split of its common stock to increase the underlying intellectual property failsper-share market price of Neos common stock to adequately maintain such intellectual property.
The merger may disrupt the attention of Aytu’s management or Neos’ management from ongoing business operations.
Each of Aytu and scientific standardsNeos has expended, and our reliance on a third party does not relieve us of our regulatory responsibilities. If we or Cedars-Sinai Medical Center failexpects to comply with applicable requirements, the FDA may requirecontinue to perform additional clinical tests.
Aytu and Neos stockholders will not be entitled to appraisal or otherwise performsdissenters’ rights in the merger.
Appraisal rights are statutory rights that, if applicable under law, enable stockholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a substandard manner,judicial proceeding instead of receiving the consideration 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 terminates its engagementdissenters’ rights in connection with us, the timelines for the Healight technology developmentAytu share issuance proposal.
Aytu and Neos may be extend, delayed, suspended, or terminated.
Aytu’s success after the World Health Organization declared the COVID-19 outbreak a pandemic. This pandemic has adversely affected or has the potential to adversely affect, among other things, the economic and financial markets and labor resources of the countries in which we operate, our manufacturing and supply chain operations, research and development efforts, commercial operations and sales force, administrative personnel, third-party service providers, business partners and customers, and the demand for some of our marketed products.
Furthermore, if key employees of Aytu or Neos 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 Neos 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 Neos to complete the merger are subject to satisfaction or waiver of a number of conditions including (1) the approval of the merger proposal by a majority of the holders of the outstanding shares of Neos common stock, (2) approval of the issuance of Aytu common stock by a majority of the votes cast by Aytu stockholders on the matter, (3) that the conditions to the Debt Facility Letters have been satisfied as of the time of closing, and that the lenders do not dispute the satisfaction thereof, (4) accuracy of each party’s representations and warranties, subject to certain materiality standards set forth in the Merger Agreement, (5) the absence of a material adverse effect of either party and (6) compliance in all material respects with each party’s obligations under the Merger 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 its 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 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. 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 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 Neos’ respective business, financial position and results of operation. 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, Inc. (“Cerecor”) in 2019 (the “Cerecor Transaction”). Currently, with regard to the merger, Aytu and Neos 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 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 Neos within the anticipated time frame, or at all, the anticipated cost savings and other limitations on our abilitybenefits of the merger may not be realized fully or may take longer to conduct our business inrealize than expected, the ordinary course. Such restrictionscombined businesses may not perform as expected and limitations may also negatively impact our access to regulatory authorities (whichthe value of the shares of Aytu common stock may be affected, among other things, by travel restrictionsadversely affected.
Aytu and mayNeos have operated and, until completion of the merger will continue to operate, independently, and there can be delayed in responding to inquiries, reviewing filings, and conducting inspections). The COVID-19 pandemic may alsono assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of somekey Aytu or Neos employees, the disruption of our key personnel, either temporarilycompany’s or permanently. 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 Neos 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, our salesat times, the attention of certain members of each company’s management and marketing effortseach company’s resources may be impacted by postponement of face-to-face meetings and restrictionsfocused on access by non-essential personnel to hospitals or clinics, all of which could slow adoption and implementation of our marketed products, resulting in lower net product sales. For example, while the impact of shelter-in-place and social distancing orders, physicians' office closures, and delays in the treatment of patients following the COVID-19 pandemic on our net product sales of our products for the three months ended March 31, 2020 was limited, overall demand was lower in April 2020 compared to the same period of 2019. In addition to other potential impactscompletion of the COVID-19 pandemic on net product sales, we expect to see continued adverse impact on new patient starts for all products while these measures remain in place. See Part I, Item 2. "Management's Discussionmerger and Analysisthe integration of Financial Conditionthe businesses of the two companies and Results of Operations - Results of Operations" for a discussion of our net product sales. Demand for some or all of our marketed products may continue to be reduced while the shelter-in-place or social distancing orders are in effect and, as a result, some of our inventory may become obsolete and may need to be written off, impacting our operating results. These and similar, and perhaps more severe, disruptions in our operations may materially adversely impact our business, operating results, and financial condition.
The Merger Agreement contains provisions that make it more difficult for usAytu and Neos to access capital if needed. In addition,pursue alternatives to the merger and may discourage other companies from trying to acquire Neos for greater consideration than what Aytu has agreed to pay.
The Merger Agreement contains provisions that make it more difficult for Neos to sell its business to a recessionparty other than Aytu, or market correction resulting fromfor 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 spreadother party the recommendation of COVID-19 could materially affect our businessits board of directors in favor of the merger proposal, in the case of Neos, or the approval of the 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 approval of the merger proposal by Neos stockholders, in the case of Neos, or the approval of the merger 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 Neos 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 $2,000,000 termination fee.
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 Neos 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 our common stock. 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 global COVID-19 pandemic continues to rapidly evolve. The ultimate impactindebtedness of this pandemicthe combined company following completion of the merger will be greater than Aytu’s indebtedness on a stand-alone 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 credit ratings could adversely affect Aytu’s and/or the combined company’s respective businesses, cash flows, financial condition and operating results.
As of January 26, 2021, the current outstanding indebtedness of Neos is highly uncertain and$38.3 million, which is subject to change. We dochange between January 29, 2021 and the closing. As a result of the merger, Aytu will assume the outstanding indebtedness of Neos at the closing. 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 Neos 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 yet knowbe able to service all of the full extent of potential delays or impacts on our business, healthcare systems, or the global economy as a whole. These effectscombined 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 impactadverse effect on ourthe 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 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 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 Neos 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 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 Neos. The testing, manufacturing and marketing of these product candidates would require regulatory approvals, including approval from the FDA and similar bodies in other countries. To the extent the COVID-19 pandemiccombined company seeks to develop product candidates, the future growth of the combined company would be negatively affected if Aytu, Neos 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 affects ourimpacted 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 prospects, operating results,will be significantly larger than the current size of either Aytu’s or financial condition, it may also haveNeos’ 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 effect
Item 2. UnregisteredUnregistered Sales of Securities and Use of Proceeds.
None.
Item 3. DefaultsDefaults Upon Senior Securities.
None.
Item 4. MineMine Safety Disclosures.
Not Applicable.
| 10.3 | License Agreement with Avrio Genetics, LLC, dated January 20, 2020* | X | |||||||||
| 31.1 | Certificate of the | ||||||||||
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. |