Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Quarterly Period Ended: December 31, 2019
or
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File No. 001-38247

AYTU BIOSCIENCE, INC.
(www.aytubio.com)
Delaware
|
|
47-0883144
|
(State 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’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
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Common
Stock, par value $0.0001 per share
|
|
AYTU
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|
The
NASDAQ Stock Market LLC
|
As of
February 1, 2019, there were 23,018,052 shares of Common Stock
outstanding.
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED DECEMBER 31, 2019
INDEX
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Page
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PART I—FINANCIAL INFORMATION
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4
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4
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5
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6
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7
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8
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28
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33
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33
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PART II—OTHER INFORMATION
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34
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34
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44
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44
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44
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44
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44
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45
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2
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, Item 1A of our most recent Annual Report on Form
10-K, and in the reports we file with the Securities and Exchange
Commission. These risks are not exhaustive. Moreover, we operate in
a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for our
management to predict all risk factors, nor can we assess the
impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements. Forward-looking statements should not be relied upon as
predictions of future events. We can provide no assurance that the
events and circumstances reflected in the forward-looking
statements will be achieved or occur and actual results could
differ materially from those projected in the forward-looking
statements. We assume no obligation to update or supplement
forward-looking statements, except as may be required under
applicable law.
This
Quarterly Report on Form 10-Q includes trademarks, such as Aytu,
Natesto, Tuzistra, ZolpiMist, MiOXSYS, AcipHex®
Sprinkle™, Cefaclor for Oral Suspension, Karbinal® ER,
Flexichamber™, Poly-Vi-Flor® and Tri-Vi-Flor™
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.
3
PART
I—FINANCIAL INFORMATION
Item 1. Consolidated Financial
Statements
AYTU BIOSCIENCE, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
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December
31,
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June
30,
|
|
2019
|
2019
|
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(Unaudited)
|
|
Assets
|
|
|
Current
assets
|
|
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Cash and cash
equivalents
|
$5,259,492
|
11,044,227
|
Restricted
cash
|
251,396
|
250,000
|
Accounts
receivable, net
|
5,197,151
|
1,740,787
|
Inventory,
net
|
2,491,807
|
1,440,069
|
Prepaid
expenses and other
|
2,361,249
|
957,781
|
Note
receivable
|
1,350,000
|
–
|
Other current
assets
|
1,426,617
|
–
|
Total current
assets
|
18,337,712
|
15,432,864
|
|
|
|
Fixed assets,
net
|
122,064
|
203,733
|
Licensed
assets, net
|
17,724,416
|
18,861,983
|
Patents,
net
|
207,944
|
220,611
|
Right-of-use
asset
|
374,568
|
–
|
Product
technology rights
|
22,321,667
|
–
|
Deposits
|
2,200
|
2,200
|
Goodwill
|
15,387,064
|
–
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Total
long-term assets
|
56,139,923
|
19,288,527
|
Total
assets
|
$74,477,635
|
$34,721,391
|
|
|
|
Liabilities
|
|
|
Current
liabilities
|
|
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Accounts
payable and other
|
$9,598,567
|
$2,297,270
|
Accrued
liabilities
|
2,114,060
|
1,147,740
|
Accrued
compensation
|
786,769
|
849,498
|
Current lease
liability
|
82,755
|
–
|
Current
contingent consideration
|
705,880
|
1,078,068
|
Current
portion of fixed payment arrangements
|
2,661,456
|
–
|
Total current
liabilities
|
15,949,487
|
5,372,576
|
|
|
|
Long-term
contingent consideration
|
17,739,964
|
22,247,796
|
Long-term
lease liability
|
291,813
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–
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Long-term
fixed payment arrangements
|
23,394,761
|
–
|
Warrant
derivative liability
|
11,371
|
13,201
|
Total
liabilities
|
57,387,395
|
27,633,573
|
|
|
|
Commitments
and contingencies (Note 12)
|
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Stockholders'
equity
|
|
|
Preferred
Stock, par value $.0001; 50,000,000 shares authorized; shares
issued and outstanding 10,215,845 and 3,594,981, respectively as of
December 31, 2019 (unaudited) and June 30, 2019.
|
1,022
|
359
|
Common Stock,
par value $.0001; 100,000,000 shares authorized; shares issued and
outstanding 20,733,052 and 17,538,071, respectively as of December
31, 2019 (unaudited) and June 30, 2019.
|
2,073
|
1,754
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Additional
paid-in capital
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128,619,922
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113,475,205
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Accumulated
deficit
|
(111,532,777)
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(106,389,500)
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Total
stockholders' equity
|
16,758,367
|
7,087,818
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Total
liabilities and stockholders' equity
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$74,477,635
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$34,721,391
|
See the accompanying Notes to the
Consolidated Financial Statements
4
AYTU BIOSCIENCE, INC. AND
SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
|
Three Months Ended December 31,
|
Six Months Ended December 31,
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||
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2019
|
2018
|
2019
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2018
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Revenues
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Product
revenue, net
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$3,175,236
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$1,795,011
|
$4,615,062
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$3,226,820
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|
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Operating expenses
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Cost
of sales
|
606,046
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525,138
|
981,766
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936,097
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Research
and development
|
66,675
|
149,029
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144,695
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304,907
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Selling,
general and administrative
|
6,516,160
|
5,046,174
|
11,662,603
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8,622,754
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Selling,
general and administrative - related party
|
–
|
91,337
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–
|
345,046
|
Amortization
of intangible assets
|
953,450
|
534,063
|
1,528,567
|
986,020
|
Total
operating expenses
|
8,142,331
|
6,345,741
|
14,317,631
|
11,194,824
|
|
|
|
|
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Loss
from operations
|
(4,967,095)
|
(4,550,730)
|
(9,702,569)
|
(7,968,004)
|
|
|
|
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Other (expense) income
|
|
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Other
(expense), net
|
(446,958)
|
(127,569)
|
(642,344)
|
(204,130)
|
Gain
from derecognition of contingent consideration
liability
|
5,199,806
|
–
|
–
|
–
|
Gain
from warrant derivative liability
|
–
|
20,637
|
1,830
|
67,989
|
Total
other (expense) income
|
4,752,848
|
(106,932)
|
4,559,292
|
(136,141)
|
|
|
|
|
|
Net loss
|
$(214,247)
|
$(4,657,662)
|
$(5,143,277)
|
$(8,104,145)
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
17,538,148
|
6,477,004
|
16,425,990
|
4,183,591
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|
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Basic
and diluted net loss per common share
|
$(0.01)
|
$(0.72)
|
$(0.31)
|
$(1.94)
|
See the
accompanying Notes to the Consolidated Financial
Statements
5
AYTU BIOSCIENCE, INC. AND
SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
(unaudited unless indicated otherwise)
|
Preferred Stock
|
Common Stock
|
Additional paid-in
|
Accumulated
|
Total Stockholders'
|
||
|
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
Deficit
|
Equity
|
|
|
|
|
|
|
|
|
BALANCE - June
30, 2019
|
3,594,981
|
$359
|
17,538,071
|
$1,754
|
$113,475,205
|
$(106,389,500)
|
$7,087,818
|
|
|
|
|
|
|
|
|
Stock-based
compensation (unaudited)
|
–
|
–
|
–
|
–
|
165,171
|
–
|
165,171
|
Preferred
stock converted in common stock (unaudited)
|
(443,833)
|
(44)
|
443,833
|
44
|
–
|
–
|
–
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(4,929,030)
|
(4,929,030)
|
|
|
|
|
|
|
|
|
BALANCE -
September 30, 2019 (unaudited)
|
3,151,148
|
$315
|
17,981,904
|
$1,798
|
$113,640,376
|
$(111,318,530)
|
$2,323,959
|
|
|
|
|
|
|
|
|
Stock-based
compensation (unaudited)
|
–
|
–
|
–
|
–
|
162,264
|
–
|
162,264
|
Issuance of
Series F preferred stock from October 2019 private placement
financing, net of $741,650 issuance costs
(unaudited)
|
10,000
|
1
|
–
|
–
|
5,249,483
|
–
|
5,249,484
|
Warrants
issued in connection with the private placement
(unaudited)
|
–
|
–
|
–
|
–
|
4,008,866
|
–
|
4,008,866
|
Issuance of
Series G preferred stock due to acquisition of the Cerecor
portfolio of pediatrics therapeutics
(unaudited)
|
9,805,845
|
981
|
–
|
–
|
5,558,933
|
|
5,559,914
|
Preferred
stock converted in common stock (unaudited)
|
(2,751,148)
|
(275)
|
2,751,148
|
275
|
–
|
–
|
–
|
|
|
|
|
|
|
|
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(214,247)
|
(214,247)
|
|
|
|
|
|
|
|
|
BALANCE -
December 31, 2019 (unaudited)
|
10,215,845
|
$1,022
|
20,733,052
|
$2,073
|
$128,619,922
|
$(111,532,777)
|
$17,090,240
|
|
Preferred Stock
|
Common Stock
|
Additional paid-in
|
Accumulated
|
Total Stockholders'
|
||
|
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
Deficit
|
Equity
|
|
|
|
|
|
|
|
|
BALANCE - June
30, 2018
|
–
|
$–
|
1,794,762
|
$179
|
$92,681,918
|
$(79,257,592)
|
$13,424,505
|
|
|
|
|
|
|
|
|
Stock-based
compensation (unaudited)
|
–
|
–
|
–
|
–
|
152,114
|
–
|
152,114
|
Adjustment for
rounding of shares due to stock split
|
–
|
–
|
6,649
|
1
|
(1)
|
–
|
–
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(3,446,483)
|
(3,446,483)
|
|
|
|
|
|
|
|
|
BALANCE -
September 30, 2018 (unaudited)
|
–
|
$–
|
1,801,411
|
$180
|
$92,834,031
|
$(82,704,075)
|
$10,130,136
|
|
|
|
|
|
|
|
|
Stock-based
compensation (unaudited)
|
–
|
–
|
2,707,022
|
270
|
193,792
|
–
|
194,062
|
Common stock
issued to employee (unaudited)
|
–
|
–
|
9,000
|
1
|
11,689
|
–
|
11,690
|
Issuance of
preferred and common stock, net of $1,479,963 in cash issuance
costs (unaudited)
|
8,342,993
|
834
|
1,777,007
|
178
|
11,810,373
|
–
|
11,811,385
|
Warrants
issued in connection with the registered offering
(unaudited)
|
–
|
–
|
–
|
–
|
1,827,628
|
–
|
1,827,628
|
Warrants
issued in connection with the registered offering to the
placement agents, non-cash issuance costs
(unaudited)
|
–
|
–
|
–
|
–
|
61,024
|
–
|
61,024
|
Preferred
stocks issued in connection with the purchase of assets
(unaudited)
|
400,000
|
40
|
–
|
–
|
519,560
|
–
|
519,600
|
Preferred
stocks converted into common stock (unaudited)
|
(4,210,329)
|
(421)
|
4,210,329
|
421
|
–
|
–
|
–
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(4,657,662)
|
(4,657,662)
|
|
|
|
|
|
|
|
|
BALANCE -
December 31, 2018 (unaudited)
|
4,532,664
|
$453
|
10,504,769
|
$1,050
|
$107,258,097
|
$(87,361,737)
|
$19,897,863
|
See
the accompanying Notes to the Consolidated Financial
Statements
6
AYTU BIOSCIENCE, INC. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
|
Six Months Ended December 31,
|
|
|
2019
|
2018
|
|
|
|
Operating Activities
|
|
|
Net
loss
|
$(5,143,277)
|
$(8,104,145)
|
Adjustments to reconcile net loss to cash used in operating
activities:
|
|
|
Depreciation,
amortization and accretion
|
2,157,540
|
1,230,671
|
Stock-based
compensation expense
|
327,435
|
346,176
|
Derecognition
of contingent consideration
|
(5,199,806)
|
–
|
Issuance
of common stock to employee
|
–
|
11,690
|
Derivative
income
|
(1,830)
|
(67,989)
|
Changes
in operating assets and liabilities:
|
|
|
(Increase)
in accounts receivable
|
(3,456,364)
|
(903,708)
|
(Increase)
in inventory
|
(132,199)
|
(305,888)
|
(Increase)
in prepaid expenses and other
|
(171,430)
|
(504,757)
|
(Increase)
in other current assets
|
(136,694)
|
–
|
Increase
in accounts payable and other
|
2,806,973
|
252,113
|
Increase
in accrued liabilities
|
145,467
|
760,798
|
(Decrease)
Increase in accrued compensation
|
(62,729)
|
203,160
|
(Decrease)
in fixed payment arrangements
|
(216,150)
|
–
|
Increase
in interest payable
|
–
|
36,164
|
(Decrease)
in deferred rent
|
(3,990)
|
(1,450)
|
Net
cash used in operating activities
|
(9,087,054)
|
(7,047,165)
|
|
|
|
Investing Activities
|
|
|
Deposit
|
–
|
2,888
|
Purchases
of fixed assets
|
–
|
(12,954)
|
Contingent
consideration payment
|
(104,635)
|
(50,221)
|
Note
receivable
|
(1,350,000)
|
–
|
Purchase
of assets
|
(4,500,000)
|
(800,000)
|
Net
cash used in investing activities
|
(5,954,635)
|
(860,287)
|
|
|
|
Financing Activities
|
|
|
Issuance
of preferred, common stock and warrants
|
10,000,000
|
15,180,000
|
Issuance
costs related to preferred, common stock and warrants
|
(741,650)
|
(1,479,963)
|
Issuance
of debt
|
–
|
5,000,000
|
Net
cash provided by financing activities
|
9,258,350
|
18,700,037
|
|
|
|
Net
change in cash, restricted cash and cash equivalents
|
(5,783,339)
|
10,792,585
|
Cash,
restricted cash and cash equivalents at beginning of
period
|
11,294,227
|
7,112,527
|
Cash,
restricted cash and cash equivalents at end of period
|
$5,510,888
|
$17,905,112
|
|
|
|
Supplemental disclosures of cash and non-cash investing and
financing transactions
|
||
Cash
paid for interest
|
$161,890
|
$–
|
Fair
value of right-to-use asset and related lease
liability
|
374,568
|
–
|
Issuance
of Series G preferred stock due to acquisition of the Cerecor
portfolio of pediatrics therapeutics (unaudited)
|
5,559,914
|
–
|
Inventory
payment included in accounts payable
|
460,416
|
–
|
Contingent
consideration included in accounts payable
|
16,014
|
–
|
Fixed
payment arrangements included in accounts payable
|
291,666
|
–
|
Exchange
of convertible preferred stock into common stock
|
319
|
–
|
Return
deductions received by Cerecor
|
1,309,365
|
–
|
Fair
value of warrants issued to investors and underwriters
|
–
|
1,888,652
|
Issuance
of preferred stock related to purchase of asset
|
–
|
519,600
|
Contingent
consideration related to purchase of asset
|
$–
|
$8,833,219
|
See the
accompanying Notes to the Consolidated Financial
Statements
7
AYTU BIOSCIENCE, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. Nature
of Business, Financial Condition, Basis of
Presentation
Nature of Business. Aytu BioScience,
Inc. (“Aytu”, the “Company” or
“we”) was incorporated as Rosewind Corporation on
August 9, 2002 in the State of Colorado. Aytu was
re-incorporated in the state of Delaware on June 8, 2015. Aytu
is a specialty pharmaceutical company focused on global
commercialization of novel products addressing significant medical
needs such as hypogonadism (low testosterone), cough and upper
respiratory symptoms, insomnia, male infertility, various pediatric
conditions and the Company plans to expand opportunistically into
other therapeutic areas.
The
Company is currently focused on commercialization of the following
products (i) Natesto®, a testosterone replacement therapy, or
TRT, (ii) Tuzistra® XR, a codeine–based antitussive,
(iii) ZolpiMist™, a short-term insomnia treatment and (iv),
MiOXSYS®, a novel in vitro diagnostic system for male
infertility assessment. Additionally, the Company completed an
Asset Purchase Agreement (the “Purchase Agreement”)
with Cerecor, Inc (“Cerecor”) on November 1, 2019,
acquiring six products, (i) AcipHex® Sprinkle™, (ii)
Cefaclor for Oral Suspension, (iii) Karbinal® ER, (iv)
Flexichamber™, (v) Poly-Vi-Flor® and Tri-Vi-Flor™
(the “Pediatric Portfolio”) (see below and Note 2). The
Company immediately began to include the acquired Pediatric
Portfolio in its commercialization efforts.
In the
future the Company will seek to acquire additional commercial-stage
or near-market products, including existing products the Company
believes can offer distinct clinical advantages and patient
benefits over other marketed products. The management team’s
prior experience has involved identifying both clinical-stage and
commercial-stage assets that can be launched or re-launched to
increase value, with a focused commercial infrastructure
specializing in novel, niche products.
Financial Condition. As of December 31,
2019, the Company had approximately $5.5 million of cash, cash
equivalents and restricted cash. The Company’s operations
have historically consumed cash and are expected to continue to
require cash, but at a declining rate.
On
November 1, 2019, the Company closed an asset acquisition with
Cerecor, Inc. (“Cerecor”) whereby the Company acquired
certain of Cerecor’s Portfolio of Pediatric Therapeutics (the
“Pediatric Portfolio”) for $4.5 million in cash,
approximately 9.8 million shares of Series G Convertible
Preferred Stock, the assumption of Cerecor’s financial and
royalty obligations, which includes not more than $3.5 million
of Medicaid rebates and products returns as they come due, and
other assumed liabilities associated with the Pediatric Portfolio
(see Note 2).
In
addition, the Company has assumed obligations in connection with
the Pediatric Portfolio acquisition due to an investor including
fixed and variable payments. The Company assumed fixed monthly
payments equal to $0.1 million from November 2019 through January
2021 plus $15 million due in January 2021. Monthly variable
payments due to the same investor are equal to 15% of net revenue
generated from a subset of the Product Portfolio, subject to an
aggregate monthly minimum of $0.1 million, except for January 2020,
when a one-time payment of $0.2 million is due. The variable
payment obligation continues until the earlier of: (i) aggregate
variable payments of approximately $9.5 million have been made, or
(ii) February 12, 2026.
The
Company expects to require capital beyond operating need to
complete and integrate the Pediatric Portfolio acquisition and the
merger with Innovus Pharmaceuticals, Inc. (“Innovus”),
approved by the shareholders of both companies on February 13,
2020, and expected to close February 14, 2020 (the
“Merger”) (see below). Revenues for the three-months
ended December 31, 2019 increased 77% compared to the three-months
ended December 31, 2018, and revenues increased 100% and 14% for
each of the years ended June 30, 2019 and 2018, respectively.
Revenue is expected to continue to increase long-term, allowing the
Company to rely less on our existing cash and cash equivalents, and
proceeds from financing transactions. Cash used in operations
during the six-months ended December 31, 2019 was $9.1 million
compared to $7.0 million for the six-months ended December 31,
2018, due primarily to the Company’s acquisition and
integration of the Pediatric Portfolio, which consumed additional
cash resources.
On
October 11, 2019, the Company entered into Securities Purchase
Agreements (the “Purchase Agreement”) with two
institutional investors (the “Investors”) providing for
the issuance and sale by the Company (the “October 2019
Offering”) of $10.0 million of, (i) shares of the
Company’s Series F Convertible Preferred Stock (the
“Preferred Stock”) which are convertible into shares of
common stock (the “Conversion Shares”) and (ii)
warrants (the “Warrants”) which are exercisable for
shares of common stock (the “Warrant Shares”), which
expire January 10, 2025, for a stated value of $1,000 per unit. The
closing of the October 2019 offering occurred on October 16, 2019.
The Warrants had an exercise price equal to $1.25 and contain a
cashless exercise provision. This provision was dependent on (i)
performance of the Company’s stock price between October 11,
2019 and the date of exercise of all, or a portion of the Warrants,
and (ii) subject to shareholder approval of the October 2019
Offering, which was approved January 24, 2020. On January 27, 2020,
2.0 million cashless warrants were exercised to acquire 2.0 million
shares of the Company’s common stock.
The
net proceeds that the Company received from the October 2019
Offering were approximately $9.3 million. The net proceeds
received by the Company from the October 2019 Offering will be used
for general corporate purposes, including working
capital.
8
As of
the date of this Report, the Company expects its commercial costs
for its current operation to increase modestly as the Company
integrates the acquisition of the Pediatrics Portfolio and
continues to focus on revenue growth through increasing product
sales. The Company’s total asset position totaling $74.5
million plus the proceeds expected from ongoing product sales will
be used to fund operations. The Company will access the capital
markets to fund operations when needed, and to the extent it is
required. 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 has
been successful in accessing the capital markets in the past and is
confident in its ability to access the capital markets again, if
needed. Since the Company does not have sufficient cash and cash
equivalents on-hand as of December 31, 2019 to cover potential net
cash outflows for the twelve months following the filing date of
this Quarterly Report, ASU 2014-15, Presentation of Financial
Statements—Going Concern (Subtopic 205-40) requires the
Company to report that there exists an indication of substantial
doubt about its ability to continue as a going
concern.
As
of the date of this report, the Company has inadequate capital
resources to complete its near-term operating and transaction
objectives. In anticipation of the cash outlays related to the
merger, the Pediatric Portfolio acquisition, and funding the
Company’s operations, the Company has taken the following
steps to address its post-closing cash needs, including, but
not limited to (i) engaging a placement agent to refinance the
fixed obligation, and (ii) engaging in discussions with lenders to
establish a debt facility to provide the Company with capital while
considering other funding strategies. The Company will also require
the investors that participated in the October PIPE to waive the
financing prohibition which expires in April 2020. There is no
guarantee that capital will be available on terms that the Company
considers to be favorable. However, the Company has been successful
in accessing the capital markets in the past and the Company is
confident in its ability to access the capital markets again, if
needed.
If the
Company is unable to raise adequate capital in the future when it
is required, the Company 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.
The Pending
Merger. The Company entered
into a definitive merger agreement (the “Merger
Agreement”) between the Company and Innovus on September 12,
2019. The Merger was approved by the shareholders of both companies
February 13, 2020 and is expected to close February 14,
2020.
Upon
closing, the Merger will cause for the Company to retire all of the
outstanding common stock of Innovus for an estimate of (i) up to
approximately 3.7 million in shares of the Company’s common
stock and, (ii) up to $16 million in milestone payments in the form
of contingent value rights (CVRs) may be paid to Innovus
shareholders in cash or stock over the next five years if certain
revenue and profitability milestones are achieved. Innovus
specializes in commercializing, licensing and developing safe and
effective over-the-counter consumer health products and
supplements. The Company anticipates that this transaction will
formally close on February 14, 2020, subject to shareholder
approval. The outstanding Innovus warrants with cash out rights
will receive Aytu preferred stock and such warrants will be
retired. The remaining outstanding Innovus warrants will retain the
right to be exercised for merger consideration.
Nasdaq Listing Compliance. The
Company’s common stock is listed on The Nasdaq Capital
Market. In order to maintain compliance with Nasdaq listing
standards, the Company
must, amongst other requirements, maintain a stockholders’
equity balance of at least $2.5 million pursuant to Nasdaq Listing
Rule 5550(b). In that regard, on September 30, 2019, the
Company’s stockholders’ equity totaled approximately
$2.3 million, thereby potentially resulting in a
stockholders’ equity deficiency upon the filing of the
September 30, 2019 Form 10-Q. However, subsequent to September 30,
2019, the Company completed (i) the Offering with the Investors,
raising approximately $9.3 million, net in equity financing (see
Note 1), and (ii) the “Asset Purchase Agreement” in
which the Company issued approximately 9.8 million shares of Series
G Convertible Preferred Stock worth approximately $5.6 million,
resulting in an increase in stockholders’ equity of
approximately $14.8 million in the aggregate. Accordingly, as of
the filing of this Form 10-Q for the three and six months ended
December 31, 2019, the Company’s stockholders’ equity
balance exceeds the minimum $2.5 million threshold and, therefore,
the Company believes it is currently in compliance with all
applicable Nasdaq Listing Requirements. No formal communication has
been received from the Nasdaq Capital Markets indicating anything
to the contrary.
Basis of Presentation. The unaudited
consolidated financial statements contained in this report
represent the financial statements of Aytu and its wholly-owned
subsidiaries, Aytu Women’s Health, LLC, Aytu Acquisition Sub,
LLC, and Aytu Therapeutics, LLC. The unaudited consolidated
financial statements should be read in conjunction with
Aytu’s Annual Report on Form 10-K for the year ended June 30,
2019, which included all disclosures required by generally accepted
accounting principles in the United States (“GAAP”). In
the opinion of management, these unaudited consolidated financial
statements contain all adjustments necessary to present fairly the
financial position of Aytu and the results of operations and cash
flows for the interim periods presented. The results of operations
for the period ended December 31, 2019 are not necessarily
indicative of expected operating results for the full year. The
information presented throughout this report, as of and for the
three- and six- month periods ended December 31, 2019, and 2018, is
unaudited.
9
Adoption of New Accounting Pronouncements
Leases
(“ASU 2016-02”). In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2016-02
– Topic 842 Leases.
ASU 2016-02 requires that most leases
be recognized on the financial statements, specifically the
recognition of right-to-use assets and related lease liabilities,
and enhanced disclosures about leasing arrangements. The objective
is to provide improved transparency and comparability among
organizations. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those
fiscal years. The standard requires using the modified
retrospective transition method and apply ASU 2016-02 either at (i)
latter of the earliest comparative period presented in the
financial statements or commencement date of the lease, or (ii) the
beginning of the period of adoption. The Company has elected to
apply the standard at the beginning period of adoption, July 1,
2019 which resulted in no cumulative adjustment to retained
earnings.
The
Company has elected to apply the short-term scope exception for
leases with terms of 12 months or less at the inception of the
lease and will continue to recognize rent expense on a
straight-line basis. As a result of the adoption, on July 1, 2019,
the Company recognized a lease liability of approximately $0.4
million, which represented the present value of the remaining
minimum lease payments using an estimated incremental borrowing
rate of 8%. As of December 31, 2019, the Company recognized a
right-to-use asset of approximately $0.4 million. Lease expense did
not change materially as a result of the adoption of ASU
2016-02.
Earnings
Per Share (Topic 260), Distinguishing Liabilities from Equity
(Topic 480), Derivatives and Hedging (Topic 815) (“ASU
2017-11”). In July 2017, the FASB issued ASU No. 2017-11
— Earnings Per Share (Topic
260), Distinguishing Liabilities from Equity (Topic 480),
Derivatives and Hedging (Topic 815). Part I to ASU 2017-11 eliminates the requirement
to consider “down round” features when determining
whether certain equity-linked financial instruments or embedded
features are indexed to an entity’s own stock. In addition,
entities will have to make new disclosures for financial
instruments with down round features and other terms that change
conversion or exercise prices. Part I to ASU 2017-11 is effective
for fiscal years beginning after December 31, 2018. The Company
adopted this standard update as a result of the issuance of the
Series F Preferred stock as a result of the October 2019
Offering.
Recently Accounting Pronouncements
Fair Value Measurements (“ASU 2018-03”).
In August
2018, the FASB issued ASU 2018-13, “Fair Value Measurement
(Topic 820) Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement.” The amendments in
the standard apply to all entities that are required, under
existing GAAP, to make disclosures about recurring or nonrecurring
fair value measurements. ASU 2018-13 removes, modifies, and adds
certain disclosure requirements in ASC 820, Fair Value Measurement.
The standard is effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2019.
The amendments on
changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3
fair value measurements, and the narrative description of
measurement uncertainty should be applied prospectively for only
the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
Early adoption is permitted upon issuance of ASU 2018-13. An entity
is permitted to early adopt any removed or modified disclosures
upon issuance of ASU 2018-13 and delay adoption of the additional
disclosures until their effective date. The Company is currently
assessing the impact that ASU 2018-13 will have on its financial
statements, with the impact
mostly related to certain assets acquired or liabilities assumed
that comprise Level 3 inputs.
Financial
Instruments – Credit Losses (“ASU
2016-13”). In June 2016,
the FASB issued ASU 2016-13, “Financial Instruments –
Credit Losses” to require the measurement of expected credit
losses for financial instruments held at the reporting date based
on historical experience, current conditions and reasonable
forecasts. The main objective of this ASU is to provide financial
statement users with more decision-useful information about the
expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each
reporting date. The standard is effective for interim and annual
reporting periods beginning after December 15, 2019. However, in
October 2019, the FASB approved deferral of the adoption date for
smaller reporting companies for fiscal periods beginning after
December 15, 2022. Accordingly, the Company’s fiscal year of
adoption will be the fiscal year ended June 30, 2024. Early
adoption is permitted for interim and annual reporting periods
beginning after December 15, 2018, but the Company did not elect to
early adopt. The Company is currently assessing the impact that ASU
2016-13 will have on its consolidated financial
statements.
10
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 its financial condition, results of operations, cash
flows or disclosures.
2. Acquisitions
On
October 10, 2019, the Company entered into the Purchase Agreement
with Cerecor, Inc. (“Cerecor”) to purchase and acquire
Cerecor’s Pediatric Portfolio, which closed on November 1,
2019. The Pediatric Portfolio consists of six prescription products
consisting of (i) AcipHex® Sprinkle™, (ii) Cefaclor for
Oral Suspension, (iii) Karbinal® ER, (iv) Flexichamber™,
(v) Poly-Vi-Flor® and Tri-Vi-Flor™. Total consideration
transferred to Cerecor consisted of $4.5 million cash and
approximately 9.8 million shares of Series G Convertible Preferred
Stock. The Company also assumed certain of Cerecor’s
financial and royalty obligations, and not more than $3.5 million
of Medicaid rebates and products returns. The Company also retained
the majority of Cerecor’s workforce focused on commercial
sales, commercial contracts and customer
relationships.
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 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 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 Product Portfolio require royalty payments
ranging from 12% to 15% of net revenue. One of the products in the
Product Portfolio requires the Company to generate minimum annual
sales sufficient to represent annual royalties of approximately
$1.8 million, in the event the minimum sales volume is not
satisfied.
While
no equity was acquired by the Company, the transaction was
accounted for as a business combination under the acquisition
method of accounting pursuant to Topic 805. Accordingly, the
tangible and identifiable intangible assets acquired and
liabilities assumed were recorded at fair value as of the date of
acquisition, with the remaining purchase price recorded as
goodwill. The goodwill recognized is attributable primarily to
strategic opportunities related to an expanded commercial footprint
and diversified pediatric product portfolio that is expected to
provide revenue and cost synergies. Transaction costs of $0.3
million were included as general and administrative expense in the
consolidated statements of operations for the three and six months
ended December 31, 2019.
The
following table summarized the preliminary fair value of assets
acquired and liabilities assumed at the date of acquisition. These
estimates are preliminary, pending final evaluation of certain
assets, and therefore, are subject to revisions that may result in
adjustments to the values presented below:
|
As of
|
|
November 1, 2019
|
Consideration
|
|
Cash
and cash equivalents
|
$4,500,000
|
Fair
value of Series G Convertible Preferred Stock
|
|
Total
shares issued
|
9,805,845
|
Estimated
fair value per share of Aytu common stock
|
$0.567
|
Estimated
fair value of equity consideration transferred
|
$5,559,914
|
|
|
Total consideration transferred
|
$10,059,914
|
|
|
Recognized amounts of identifiable assets acquired and liabilities
assumed
|
|
Inventory,
net
|
$459,123
|
Prepaid
assets
|
1,743,555
|
Other
current assets
|
2,548,187
|
Intangible
assets – product technology rights
|
22,700,000
|
Accrued
product program liabilities
|
(6,320,853)
|
Assumed
fixed payment obligations
|
(26,457,162)
|
Total identifiable net assets
|
(5,327,150)
|
|
|
Goodwill
|
$15,387,064
|
11
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).
|
As of November 1, 2019
|
|
|
Acquired
product technology rights
|
$22,700,000
|
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 $0.4 and $0, for the three and
six months ended December 31, 2019 and 2018
respectively.
Pro Forma Impact of Business Combination
The
following supplemental unaudited proforma financial information
presents the Company’s results as if the acquisition of the
Pediatric Portfolio, which was completed on November 1, 2019, had
occurred on July 1, 2018. Due to limitations on information on
revenues and expenses for certain gap periods within each fiscal
year, this unaudited proforma financial information may not fully
reflect how the acquisition would impact the Company had the
acquisition occurred at the beginning of the earliest fiscal year
presented in these financial statements.
|
Three Months Ended December 31,
|
Six Months Ended December 31,
|
||
|
2019
|
2018
|
2019
|
2018
|
|
Unaudited (aa)
|
Pro forma Unaudited
|
Pro forma Unaudited
|
Pro forma Unaudited
|
|
|
|
|
|
Total
revenues, net
|
$3,175,236
|
$8,016,356
|
$8,027,106
|
$14,207,635
|
Net
income (loss)
|
306,314
|
(2,532,910)
|
(5,997,071)
|
(3,854,640)
|
Net
income / (loss) per share (bb)
|
$0.01
|
$(0.39)
|
$(0.38)
|
$(0.92)
|
(aa)
|
Due to
a lack of financial information covering the period from October 1,
2019 through November 1, 2019, the Company was not able to provide
pro forma adjusted financial statements without making estimated
extrapolations that the Company did not believe would be useful to
users of the above pro forma information.
|
|
|
(bb)
|
Pro
forma net loss per share calculations excluded the impact of the
issuance of the Series G Convertible Preferred under the assumption
those shares would continue to remain non-participatory until the
July 1, 2020 effective registration.
|
12
3. Revenue Recognition
The
Company sells its products principally to a limited number of
wholesale distributors and pharmacies in the United States, which
account for the largest portion of our total revenue. International
sales are made primarily to specialty distributors, as well as to
hospitals, laboratories, and clinics, some of which are government
owned or supported (collectively, its “Customers”). The
Company’s Customers in the United States subsequently resell
the products to pharmacies and patients. Revenue from product sales
is recorded at the established net sales price, or
“transaction price,” which includes estimates of
variable consideration that result from coupons, discounts,
chargebacks and distributor fees, processing fees, as well as
allowances for returns and government rebates.
In
accordance with ASC 606, the Company recognizes net revenues from
product sales when the Customer obtains control of the
Company’s product, which typically occurs upon delivery to
the Customer. The Company’s payment terms are between 30 to
60 days in the United States and consistent with prevailing
practice in international markets.
Revenues
by Geographic location
The
following table reflects our product revenues by geographic
location as determined by the billing address of our
customers:
|
Three Months
Ended December 31,
|
Six Months Ended
December 31,
|
||
|
2019
|
2018
|
2019
|
2018
|
U.S.
|
$3,047,000
|
$1,730,000
|
$4,309,000
|
3,001,000
|
International
|
128,000
|
65,000
|
306,000
|
226,000
|
Total net
revenue
|
$3,175,000
|
$1,795,000
|
$4,615,000
|
3,227,000
|
4. Product Licenses and Acquisitions
The
Company licensed three of its existing product offerings from third
parties: (i) Natesto, (ii) ZolpiMist, and (iii) Tuzistra XR. Each
of these license agreements are subject to terms and conditions
specific to each agreement. The Company acquired an additional six
pharmaceutical products upon the closing of the Asset Purchase
Agreement with Cerecor. The Company recognized an intangible asset
of approximately $22.7 million relating the Product technology
rights acquired from the Pediatric Portfolio.
License and Supply Agreement—Natesto
In
April 2016, Aytu entered into a license and supply agreement to
acquire the exclusive U.S. rights to commercialize Natesto®
(testosterone) nasal gel from Acerus Pharmaceuticals Corporation,
or Acerus. We acquired the rights effective upon the expiration of
the former licensee’s rights, which occurred on June 30,
2016. The term of the license runs for the greater of eight years
or until the expiry of the latest to expire patent, including
claims covering Natesto or until the entry on the market of at
least one AB-rated generic product.
On
July 29, 2019, the Company and Acerus agreed-to an Amended and
Restated License and Supply Agreement (the “Acerus
Amendment”), subject to certain conditions being satisfied
prior to the Acerus Amendment becoming effective and
enforceable. The Acerus Amendment eliminated the previously
disclosed revenue-based milestone payments expected to-be-made to
Acerus.The maximum aggregate milestones payable under the original
agreement was $37.5 million. Upon the effectiveness of the Acerus
Amendment on December 1, 2019, all royalty and milestone
liabilities were eliminated. Upon the effectiveness of the Acerus
Amendment, Acerus was granted the right to earn commissions on
certain filled Natesto prescriptions. Additionally, Acerus assumed
certain ongoing sales, marketing and regulatory obligations from
the Company. This Acerus
Amendment became effective December 1, 2020, resulting in a $5.2
million unrealized gain for the three and six months ended December
31, 2019, due to the elimination of the revenue-based product
milestones.
13
The
fair value of the net identifiable Natesto asset acquired was
determined to be $10.5 million, which is being amortized over eight
years. The aggregate amortization expense for each of the
three-month periods ended December 31, 2019 and 2018 was $0.3
million. The aggregate amortization
expense for each of the six-month periods ended December 31, 2019
and 2018 was $0.7 million.
The
contingent consideration, reflecting the risk-adjusted value of
Natesto milestone liability, was initially valued at $3.2 million
using a Monte Carlo simulation, as of June 30, 2016. As of June 30,
2019, the contingent consideration was revalued at $5.1 million
using the same Monte Carlo simulation methodology, and based on
current interest rates, expected sales potential, and Aytu stock
trading variables. The Company reevaluates the contingent
consideration on a quarterly basis for changes in the fair value
recognized after the acquisition date, such as measurement period
adjustments.
The
contingent consideration accretion expense for each of the
three-month periods ended December 31, 2019 and 2018 was $54,000,
and $16,000, respectively. The
contingent consideration accretion expense for each of the
six-month periods ended December 31, 2019 and 2018 was $133,000,
and $31,000, respectively. Upon the effective date of the
Acerus Amendment, the contingent consideration liability of $5.2
million was removed from the balance sheet as a result. As of
December 31, 2019, none of the milestones had been achieved, and
therefore, no milestone payment was made.
License Agreement—ZolpiMist
In June
2018, Aytu signed an exclusive license agreement for
ZolpiMist™ (zolpidem tartrate oral spray) from Magna
Pharmaceuticals, Inc., (“Magna”). This agreement allows
for Aytu’s exclusive commercialization of ZolpiMist in the
U.S. and Canada.
Aytu
made an upfront payment of $0.4 million to Magna upon execution of
the agreement. In July 2018, the Company paid an additional $0.3
million, of which, $0.3 million was included in current contingent
consideration at June 30, 2018.
The
ZolpiMist license agreement was valued at $3.2 million and will be
amortized over the life of the license agreement up to seven years.
The amortization expense for each of the three months ended
December 31, 2019 and 2018 was $116,000. The aggregate amortization expense for each of the
six-month periods ended December 31, 2019 and 2018 was
$232,000.
We also
agreed to make certain royalty payments to Magna which will be
calculated as a percentage of ZolpiMist net sales and are payable
within 45 days of the end of the quarter during which the
applicable net sales occur.
The
contingent consideration related to these royalty payments was
valued at $2.6 million using a Monte Carlo simulation, as of June
11, 2018. As of June 30, 2019, the contingent consideration was
revalued at $2.3 million using the same Monte Carlo simulation
methodology, and based on current interest rates, expected sales
potential, and Aytu stock trading variables. The Company
reevaluates the contingent consideration on a quarterly basis for
changes in the fair value recognized after the acquisition date,
such as measurement period adjustments.
The
contingent consideration accretion expense for the three months
ended December 31, 2019 and 2018 was $56,000 and $61,000,
respectively. The contingent
consideration accretion expense for each of the six-month periods
ended December 31, 2019 and 2018 was $110,000, and $120,000,
respectively. As of December 31, 2019, none of the milestones
had been achieved, and therefore, no milestone payment was
made.
License, Development, Manufacturing and Supply
Agreement—Tuzistra XR
On
November 2, 2018, the Company entered into a License, Development,
Manufacturing and Supply Agreement (the “Tris License
Agreement”) with TRIS Pharma, Inc. (“TRIS”).
Pursuant to the Tris License Agreement, TRIS granted the Company an
exclusive license in the United States to commercialize Tuzistra
XR. In addition, TRIS granted the Company an exclusive license in
the United States to commercialize a complementary antitussive
referred to as “CCP-08” (together with Tuzistra XR, the
“Products”) for which marketing approval has been
sought by TRIS under a New Drug Application filed with the Food and
Drug Administration (“FDA”). As consideration for the
Products license, the Company: (i) made an upfront cash payment to
TRIS; (ii) issued shares of Series D Convertible preferred stock to
TRIS; and (iii) will pay certain royalties to TRIS throughout the
license term in accordance with the Tris License
Agreement.
14
The
Tris License Agreement was valued at $9.9 million and will be
amortized over the life of the Tris License Agreement up to twenty
years. The amortization expense for each of the three-month periods
ended December 31, 2019 and 2018 was $123,000 and $82,000,
respectively. The aggregate
amortization expense for each of the six-month periods ended
December 31, 2019 and 2018 was $246,000 and
$82,000.
We also
agreed to make certain quarterly royalty payments to TRIS which
will be calculated as a percentage of our Tuzistra XR net sales,
payable within 45 days of the end of the applicable
quarter.
As of
November 2, 2018, the contingent consideration, related to this
asset, was valued at $8.8 million using a Monte Carlo simulation.
As of June 30, 2019, the contingent consideration was revalued at
$16.0 million using the same Monte Carlo simulation methodology,
and based on current interest rates, expected sales potential, and
Aytu stock trading variables. The Company reevaluates the
contingent consideration on a quarterly basis for changes in the
fair value recognized after the acquisition date, such as
measurement period adjustments.
The
contingent consideration accretion expense for the three months
ended December 31, 2019 and 2018 was $101,000, and $46,000,
respectively. The contingent
consideration accretion expense for each of the six-month periods
ended December 31, 2019 and 2018 was $197,000, and $46,000,
respectively. As of December 31, 2019, none of the milestones
had been achieved, and therefore, no milestone payment was
made.
Asset Purchase
Agreement—Cerecor Products
In November 2019, Aytu Therapeutics, LLC., a
wholly-owned subsidiary of Aytu, acquired the portfolio of
pediatric therapeutic commercial products from Cerecor, Inc. This
transaction expanded our product portfolio with the addition of
six pharmaceutical and other prescription products, (i)
AcipHex® Sprinkle™, (ii) Cefaclor for Oral Suspension,
(iii) Karbinal® ER, (iv) Flexichamber™, (v)
Poly-Vi-Flor® and Tri-Vi-Flor™.
Aytu paid $4.5 million in cash, issued
approximately 9.8 million shares of Series G Convertible Preferred
Stock and assume certain of Seller’s financial and royalty
obligations, and not more than $3.5 million of Medicaid rebates and
products returns.
In
addition, the Company has assumed obligations due to an investor
including fixed and variable payments. The Company assumed fixed
monthly payments equal to $0.1 million from November 2019 through
January 2021 plus $15 million due in January 2021. Monthly variable
payments due to the same investor are equal to 15% of net revenue
generated from a subset of the Product Portfolio, subject to an
aggregate monthly minimum of $0.1 million, except for January 2020,
when a one-time payment of $0.2 million is due. The variable
payment obligation continues until the earlier of: (i) aggregate
variable payments of approximately $9.5 million have been made, or
(ii) February 12, 2026.
Supply and Distribution Agreement, As Amended –
Karbinal® ER
The
Company acquired and assumed all rights and obligations pursuant to
the Supply and Distribution Agreement, as Amended, with TRIS for
the exclusive rights to commercialize Karbinal® ER in the
United States (the “TRIS Karbinal Agreement”). The TRIS
Karbinal Agreement’s initial term terminates in August of
2033, with an optional initial 20-year extension.
The
Company owes royalties on sales of Karbinal of 23.5% of net
revenues on a quarterly basis. As part of the agreement, the
Company has agreed to pay TRIS a product make-whole payment of
approximately $1.8 million per year through July 2023, totaling a
minimum of $6.6 million (see Note 12).
Supply and License Agreement – Poly-vi-Flor &
Tri-vi-Flor
The
Company acquired and assumed all rights and obligations pursuant to
a Supply and License Agreement and various assignment and release
agreements, including a previously agreed to Settlement and License
Agreements (the “Poly-Tri Agreements”) for the
exclusive rights to commercialize Poly-vi-Flor and Tri-vi-Flor in
the United States.
15
The
Company owes royalties to multiple parties totaling approximately
29.0% of net revenues on a quarterly basis. There are no
milestones, make-whole payments other otherwise any contingencies
related to these agreements.
License and Assignment Agreement – AcipHex
Sprinkle
The
Company acquired and assumed all rights and obligations pursuant to
the License and Assignment Agreement with Eisai, Inc. for exclusive
rights to commercialized AcipHex Sprinkle in the United States (the
“Eisai AcipHex Agreement”).
The
Eisai AcipHex Agreement includes quarterly royalties totaling 15%
of net revenues, but offset by amounts paid for certain regulatory
costs otherwise the responsibility of Eisai Co., Ltd. In addition,
there are certain milestone provisions triggering potential
payments of between $3.0 - $5.0 million, for which the Company has
preliminarily estimated to have a value of $0.00.
License, Supply and Distribution Agreement –
Cefaclor
The
Company acquired and assumed all rights and obligations pursuant to
the License, Supply and Distribution Agreement involving multiple
counterparties to commercialize Cefaclor in the United States. (the
“Cefaclor Agreement”).
The
Cefaclor Agreement includes quarterly royalties totaling
approximately 15% of net products sales. In addition, there are
certain milestone provisions triggering potential payments of
between $0.5 - $2.5 million, for which the Company has
preliminarily estimated to have a value of $0.00.
5. Inventories
Inventories
consist of raw materials, work in process and finished goods and
are recorded at the lower of cost or net realizable value, with
cost determined on a first-in, first-out basis. Aytu periodically
reviews the composition of its inventories to identify obsolete,
slow-moving or otherwise unsaleable items. If unsaleable items are
observed and there are no alternate uses for the inventory, Aytu
will record a write-down to net realizable value in the period that
the impairment is first recognized. There was no inventory
write-down during the three and six months ended December 31, 2019
or 2018, respectively.
Inventory
balances consist of the following:
|
As
of
|
As
of
|
|
December
31,
|
June
30,
|
|
2019
|
2019
|
Raw materials
|
$182,000
|
$117,000
|
Finished goods
|
2,310,000
|
1,323,000
|
|
$2,492,000
|
$1,440,000
|
16
6. 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:
|
Estimated Useful
Lives in
|
As
of
December
31,
|
As
of
June
30,
|
|
years
|
2019
|
2019
|
|
|
|
|
Manufacturing
equipment
|
2 - 5
|
$83,000
|
$83,000
|
Leasehold
improvements
|
3
|
112,000
|
112,000
|
Office equipment,
furniture and other
|
2 - 5
|
265,000
|
315,000
|
Lab
equipment
|
3 - 5
|
90,000
|
90,000
|
Less accumulated
depreciation and amortization
|
|
(428,000)
|
(396,000)
|
|
|
|
|
Fixed
assets, net
|
|
$122,000
|
$204,000
|
Depreciation and
amortization expense totaled $16,000 for each of the three-months
ended December 31, 2019 and 2018, respectively, and $32,000 and
$44,000 for the six months ended December 31, 2019 and
2018.
7. Leases, Right-to-Use Assets and Related Liabilities
In
September 2015, the Company entered into a 37-month operating lease
in Englewood, Colorado. This lease had an initial base rent of
approximately $9 thousand a month with a total base rent over the
term of the lease of approximately $318,000. In October 2017, the
Company signed an amendment to the 37-month operating lease in
Englewood, Colorado, extending the lease for an additional 24
months beginning October 1, 2018. The base rent remained
approximately $9 thousand per month. In April 2019, the Company
extended the lease for an additional 36 months beginning October 1,
2020.
In
June 2018, the Company entered into a 12-month operating lease,
beginning on August 1, 2018, for office space in Raleigh, North
Carolina. This lease has base rent of approximately $1 thousand a
month, with total rent over the term of the lease of approximately
$13 thousand.
As discussed within Note 1, the Company adopted the FASB issued ASU
2016-02, “Leases
(Topic 842)” as
of July 1, 2019. With the adoption of ASU 2016-02, the Company
recorded an operating right-of-use asset and an operating lease
liability on its balance sheet associated with its lease of its
corporate headquarters. The right-of-use asset represents the
Company’s right to use the underlying asset for the lease
term and the lease obligation represents the Company’s
commitment to make the lease payments arising from the lease.
Right-of-use lease assets and obligations are recognized at the
later of the commencement date or July 1, 2019; the date of
adoption of Topic 842; based on the present value of remaining
lease payments over the lease term. As the Company’s lease
does not provide an implicit rate, the Company used an estimated
incremental borrowing rate based on the information available at
the commencement date in determining the present value of the lease
payments. Rent expense is recognized on a straight-line basis over
the lease term, subject to any changes in the lease or expectations
regarding the terms. The lease liability is classified as
current or long-term on the balance sheet.
17
|
Total
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
Remaining
Office leases
|
$445,000
|
$54,000
|
$113,000
|
$117,000
|
$121,000
|
$40,000
|
−
|
Less:
Discount Adjustment
|
(70,000)
|
|
|
|
|
|
|
Total
lease liability
|
375,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
liability - current portion
|
83,000
|
|
|
|
|
|
|
Long-term
lease liability
|
$292,000
|
|
|
|
|
|
|
Rent
expense for the three months ended December 31, 2019 and 2018
totaled $30 thousand and $31 thousand, respectively. Rent expense
for the six months ended December 31, 2019 and 2018 totaled $63
thousand and $63 thousand, respectively
8. Patents
The
cost of the oxidation-reduction potential (“ORP”)
technology related patents for the MiOXSYS Systems was $380,000
when they were acquired and are being amortized over the remaining
U.S. patent life of approximately 15 years as of the date, which
expires in March 2028. Patents consist of the
following:
|
As
of
|
As
of
|
|
December
31,
|
June
30,
|
|
2019
|
2019
|
|
|
|
Patents
|
$380,000
|
$380,000
|
Less
accumulated amortization
|
(172,000)
|
(159,000)
|
Patents,
net
|
$208,000
|
$221,000
|
The
amortization expense was $7 thousand for the three months ended
December 31, 2019 and 2018, respectively, and $13 thousand for the
six months ended December 31, 2019 and 2018
respectively.
9. Accrued liabilities
Accrued
liabilities consist of the following:
|
As
of
|
As
of
|
|
December
31
|
June
30,
|
|
2019
|
2019
|
Accrued
accounting fee
|
$63,000
|
$85,000
|
Accrued
program liabilities
|
1,087,000
|
736,000
|
Accrued
product-related fees
|
601,000
|
295,000
|
Other
accrued liabilities*
|
100,000
|
32,000
|
Accrued
note payable
|
263,000
|
–
|
Total
accrued liabilities
|
$2,114,000
|
$1,148,000
|
* Other
accrued liabilities consist of franchise tax, samples and
consultants, none of which individually represent greater than five
percent of total current liabilities.
18
10. Fair Value Considerations
The
Company’s financial instruments include cash and cash
equivalents, restricted cash, accounts receivable, accounts
payable, accrued liabilities, warrant derivative liability, and
contingent consideration. The carrying amounts of financial
instruments, including cash and cash equivalents, restricted cash,
accounts receivable, accounts payable, and accrued liabilities
approximate their fair value due to their short maturities,
including those acquired or assumed on November 1, 2019 as a result
of the acquisition of the Cerecor Portfolio of Pediatrics
Therapeutics. The fair value of the warrant derivative liability
was valued using the lattice valuation methodology. The fair value
of acquisition-related contingent consideration is based on a
Monte-Carlo methodology using estimated discounted future cash
flows and periodic assessments of the probability of occurrence of
potential future events. The valuation policies are determined by
management, and the Company’s Board of Directors is informed
of any policy change.
Authoritative
guidance defines fair value as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the measurement
date. The guidance establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset
or liability developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions of what market participants
would use in pricing the asset or liability developed based on the
best information available in the circumstances. The hierarchy is
broken down into three levels based on reliability of the inputs as
follows:
Level 1:
|
Inputs
that reflect unadjusted quoted prices in active markets that are
accessible to Aytu for identical assets or
liabilities;
|
|
|
Level 2:
|
Inputs
that include quoted prices for similar assets and liabilities in
active or inactive markets or that are observable for the asset or
liability either directly or indirectly; and
|
|
|
Level 3:
|
Unobservable
inputs that are supported by little or no market
activity.
|
The
Company’s assets and liabilities which are measured at fair
value are classified in their entirety based on the lowest level of
input that is significant to their fair value measurement. The
Company’s policy is to recognize transfers in and/or out of
fair value hierarchy as of the date in which the event or change in
circumstances caused the transfer. Aytu has consistently applied
the valuation techniques discussed below in all periods
presented.
Recurring Fair Value Measurements
The
following table presents the Company’s financial liabilities
that were accounted for at fair value on a recurring basis as of
December 31, 2019 and June 30, 2019, by level within the fair value
hierarchy.
|
|
Fair Value
Measurements at December 31, 2019
|
||
|
Fair Value at
December 31, 2019
|
Quoted Priced
in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Recurring:
|
|
|
|
|
Warrant derivative
liability
|
$11,000
|
–
|
–
|
$11,000
|
Contingent
consideration
|
18,446,000
|
–
|
–
|
18,446,000
|
|
$18,457,000
|
–
|
–
|
$18,457,000
|
|
|
|
|
|
19
|
|
Fair Value
Measurements at June 30, 2019
|
||
|
Fair Value
at June 30, 2019
|
Quoted
Priced in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Recurring:
|
|
|
|
|
Warrant
derivative liability
|
$13,000
|
–
|
–
|
$13,000
|
Contingent
consideration
|
23,326,000
|
–
|
–
|
23,326,000
|
|
$23,339,000
|
–
|
–
|
$23,339,000
|
Derivative
Warrant Liability. The warrant derivative liability
was historically valued using the lattice valuation methodology
because that model embodies the relevant assumptions that address
the features underlying these instruments. The warrants related to
the warrant derivative liability are not actively traded and are,
therefore, classified as Level 3 liabilities. As a result of the
immaterial value of the balance as of both June 30, 2019 and
September 30, 2019, coupled with continued further declines in the
Company’s stock price, the Company elected to waive on
adjusting the current fair value of the derivative warrant
liability as any adjustment was deemed de
minimus.
|
As
of
December
31,
2019
|
As
of
June
30,
2019
|
Warrant
Derivative Liability
|
|
|
Volatility
|
163.2%
|
163.2%
|
Equivalent
term (years)
|
2.88
|
3.13
|
Risk-free
interest rate
|
1.71%
|
1.71%
|
Dividend
yield
|
0.00%
|
0.00%
|
Contingent
Consideration. The Company
classifies its contingent consideration liability in connection
with the acquisition of Natesto, Tuzistra XR and ZolpiMist,
within Level 3 as factors used to develop the estimated fair value
are unobservable inputs that are not supported by market activity.
The Company estimates the fair value of our contingent
consideration liability based on projected payment dates, discount
rates, probabilities of payment, and projected revenues. Projected
contingent payment amounts are discounted back to the current
period using a discounted cash flow methodology.
The
Company derecognized the contingent consideration liability related
to Natesto as a result of the December 1, 2019 effectiveness of the
Acerus Amendment, which eliminated product milestone payments
underlying the contingent consideration liability. Due to the
derecognition of the Natesto contingent consideration, the Company
recognized a, non-operating gain of approximately $5.2 million
during the three and six months ended December 31,
2019.
Non-Recurring Fair Value Measurements
The
following table represents those asset and liabilities measured on
a non-recurring basis as a result
|
|
|
|
Fair Value Measurements at December 31, 2019
|
|||||
|
|
Fair Value at December 31, 2019
|
|
Quoted Priced in Active Markets for Identical Assets (Level
1)
|
|
Significant Other Observable Inputs(Level 2)
|
|
Significant Unobservable Inputs(Level 3)
|
|
Non-recurring
|
|
|
|
|
|
|
|
|
|
Product
technology rights
|
$
|
22,321,667
|
|
–
|
|
–
|
$
|
22,321,667
|
|
Goodwill
|
|
15,387,064
|
|
–
|
|
–
|
|
15,387,064
|
|
Fixed payment
arrangements
|
|
26,056,217
|
|
–
|
|
–
|
|
26,056,217
|
|
|
$
|
63,764,948
|
|
–
|
|
–
|
$
|
63,764,948
|
|
20
|
|
Fair Value
Measurements at November 1, 2019 (*)
|
||
|
Fair Value
at November 1, 2019 (*)
|
Quoted
Priced in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
|
|
|
|
|
Product technology
rights
|
$22,700,000
|
–
|
–
|
$22,700,000
|
Goodwill
|
15,387,064
|
–
|
–
|
15,387,064
|
Fixed payment
arrangements
|
26,457,162
|
–
|
–
|
26,457,162
|
|
$64,544,226
|
–
|
–
|
$64,544,226
|
Product technology
rights. The Company recognized
the product technology right intangible asset acquired as part of
the November 1, 2019 acquisition of the Pediatric Portfolio. This
intangible asset consists of the acquired product technology rights
consisting of (i) AcipHex Sprinkle, (ii) Karbinal ® ER, (iii)
Cefaclor, and (iv) Poly-vi-Flor and Tri-vi-Flor. The Company
utilized a Multiple-Period Excess Earnings Method
model.
|
As
of
November
1,
2019
(*)
|
Product
technology rights
|
|
Re-levered
Beta
|
1.60
|
Market risk
premium
|
6.00%
|
Small stock
risk premium
|
5.20%
|
Risk-free
interest rate
|
2.00%
|
Company
specific discount
|
25.00%
|
(*)
Valuation performed as of November 1, 2019. As a non-recurring fair
value measurement, there is no remeasurement at each reporting
period unless indications exist that the fair value of the asset
has been impaired. There were no indicators as of December 31, 2019
that the fair value of the Product technology rights was
impaired.
Goodwill. Goodwill represents the fair
value of consideration transferred and liabilities assumed in
excess of the fair value of assets acquired. Remeasurement of the
fair value of goodwill only arises upon either (i) indicators that
the fair value of goodwill has been impaired, or (ii) during the
annual impairment test performed at June 30 of each fiscal year.
There were no indicators observed or identified during and as of
the period from November 1, 2019 through December 31,
2019.
Fixed payment arrangements. The Company
assumed obligations due to an investor including fixed and variable
payments. The Company assumed fixed monthly payments equal to $0.1
million from November 2019 through January 2021 plus $15 million
due in January 2021. Monthly variable payments due to the same
investor are equal to 15% of net revenue generated from a subset of
the Product Portfolio, subject to an aggregate monthly minimum of
$0.1 million, except for January 2020, when a one-time payment of
$0.2 million is due. The variable payment obligation continues
until the earlier of: (i) aggregate variable payments of
approximately $9.3 million have been made, or (ii) February 12,
2026. In addition, the Company assumed fixed, product minimums
royalties of approximately $1.75 million per annum through February
2023.
21
|
|
As of November
1, 2019 (≠)
|
|
Fixed
payment obligations
|
|
|
|
Discount
rate
|
|
1.8%
to 12.4%
|
|
(≠)
Valuation performed as of November 1,
2019. As a non-recurring fair value measurement, there is no
remeasurement at each reporting period unless indicates that the
circumstances that existed as of the November 1, 2019 measurement
date indicate that the carrying value is no longer indicative of
fair value.
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 six months ended December 31,
2019:
|
Product
Technology Rights
|
Goodwill
|
Liability
Classified Warrants
|
Contingent
Consideration
|
Fixed Payment
Arrangements
|
Balance as of
June 30, 2019
|
$–
|
$–
|
$13,000
|
$23,326,000
|
$–
|
Transfers
into Level 3
|
–
|
–
|
–
|
–
|
–
|
Transfer out
of Level 3
|
–
|
–
|
–
|
–
|
–
|
Total gains,
losses, amortization or accretion in period
|
(378,000)
|
|
|
–
|
–
|
Included in
earnings
|
–
|
–
|
(2,000)
|
(4,760,000)
|
264,000
|
Included in
other comprehensive income
|
–
|
–
|
–
|
–
|
|
Purchases,
issues, sales and settlements
|
|
|
|
|
|
Purchases
|
22,700,000
|
15,387,000
|
–
|
–
|
–
|
Issues
|
–
|
–
|
–
|
–
|
26,457,000
|
Sales
|
–
|
–
|
–
|
–
|
–
|
Settlements
|
–
|
–
|
–
|
(120,000)
|
(665,000)
|
Balance as of
December 31, 2019
|
$22,322,000
|
$15,387,000
|
$11,000
|
$18,446,000
|
$26,056,000
|
11. Note Receivable
On
September 12, 2019, the Company announced it had entered into a
definitive merger agreement with Innovus (see Note 1) to acquire
Innovus which specializes in commercializing, licensing and
developing safe and effective supplements and over-the-counter
consumer health products. As part of the negotiations with Innovus,
the Company agreed to provide a short-term, loan in the form of a
$1.0 promissory note on August 8, 2019 (the “Innovus
Note”). The Innovus Note will be used to offset a portion of
the purchase price upon closing of the Innovus Merger Agreement
(see Note 1) or, in the event the Merger Agreement does not close
the Innovus Note matures on February 29, 2020, accruing interest at
10.0% per annum to be paid upon principal pay down. In the event of
default, the interest rate increases to 15.0% per annum. In
addition, on October 11, 2019, the Company amended the original
promissory note, providing an additional approximately $0.4 million
of bridge financing under the same terms and conditions as the
Innovus Note.
12. Commitments and Contingencies
Commitments
and contingencies are described below and summarized by the
following as of December 31, 2019:
|
Total
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
Prescription
database
|
$1,342,000
|
$296,000
|
$534,000
|
$512,000
|
$–
|
$–
|
$–
|
Pediatric
portfolio fixed payments and product minimums
|
29,824,000
|
2,107,000
|
18,471,000
|
2,950,000
|
2,950,000
|
1,346,000
|
2,000,000
|
Product
milestone payments
|
3,000,000
|
–
|
–
|
–
|
3,000,000
|
–
|
–
|
|
$34,166,000
|
$2,403,000
|
$19,005,000
|
$3,462,000
|
$5,950,000
|
$1,346,000
|
$2,000,000
|
22
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. 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 due
January 2020. There is the potential for the second fixed
obligation to rise an additional $1.8 million depending on product
sales, which could trigger additional amounts to be
paid.
In
addition, the Company acquired a Supply and Distribution Agreement
with TRIS Pharma (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 is 20 years. The Company will pay TRIS a royalty
equal to 23.5% of net sales. Avadel has 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
make-whole payment is capped at $1,750,000 each year. The Karbinal
Agreement also contains minimum unit sales commitments, which is
based on a commercial year that spans from August 1 through July
31, of 70,000 units through 2023. The Company is required to pay
TRIS a royalty make whole payment of $30 for each unit under the
70,000 unit annual minimum sales commitment through 2033. The
annual payment is due in August of each year. The Karbinal
Agreement also has multiple commercial milestone obligations that
aggregate up to $3.0 million based on cumulative net sales, the
first of which is triggered at $40.0 million.
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).
13. Capital Structure
At
December 31, 2019 and June 30, 2019, Aytu had 20,733,052 and
17,538,071 common shares outstanding, respectively, and 10,215,845
and 3,594,981 preferred shares outstanding, respectively. The
Company has 100 million shares of common stock authorized with
a par value of $0.0001 per share and 50 million shares of
preferred stock authorized with a par value of $0.0001 per
share.
The
Company has 50 million shares of non-voting, non-cumulative
preferred stock authorized with a par value of $0.0001 per share,
of which, 400,000 are designated as Series D Convertible preferred
stock, and 10,000 are designated as Series F Convertible preferred
stock, and 9,805,845 are designated as Series G Convertible
preferred stock as of December 31, 2019. Liquidation rights for all
series of preferred stock are on an as-converted to common stock
basis.
Included
in the common stock outstanding are 2,307,854 shares of restricted
stock issued to executives, directors, employees and
consultants.
During
the quarter 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. As of September 30, 2019, there are no remaining Series C
preferred stock outstanding.
23
In
October 2019, Armistice Capital converted 2,751,148 shares of
Series E Preferred Stock into 2,751,148 shares of common
stock.
In
October 2019, the Company issued 10,000 shares of Series F
Convertible Preferred Stock, with a face value of $1,000 per share,
and convertible at a conversion price of $1.00 (the “Current
Conversion Price”). The terms of the Series F Convertible
Preferred include a conversion price reset provision in the event a
future financing transaction is priced below the Current Conversion
Price. The Company has determined that concurrent with the adoption
of ASU 2017-11, this down-round provision feature reflects a
beneficial conversion feature contingent on a future financing
transaction at a price lower than the Current Conversion Price. As
the Series F Convertible Preferred stock is an equity classified
instrument, any accounting arising from a future event giving rise
to the beneficial conversion feature would have no net impact on
the Company’s financial statements, as all activity would be
recognized within Additional Paid-in-Capital and
offset.
In
November 2019, in connection with the Cerecor acquisition, the
Company issued 9,805,845 shares of Series G Convertible Preferred
stock.
14. Equity Incentive Plan
Share-based Compensation Plans
On
June 1, 2015, Aytu’s stockholders approved the Aytu
BioScience 2015 Stock Option and Incentive Plan (the “2015
Plan”), which, as amended in July 2017, provides for the
award of stock options, stock appreciation rights, restricted stock
and other equity awards for up to an aggregate of 3.0 million
shares of common stock. The shares of common stock underlying any
awards that are forfeited, canceled, reacquired by Aytu prior to
vesting, satisfied without any issuance of stock, expire or are
otherwise terminated (other than by exercise) under the 2015 Plan
will be added back to the shares of common stock available for
issuance under the 2015 Plan. As of December 31, 2019, we have
692,204 shares that are available for grant under the 2015
Plan.
On
December 23, 2019, the Company filed Form S-4 related to the
proposed Innovus merger, in which shareholders are asked to approve
an increase to 5.0 million total shares of common stock in the 2015
Plan. As of the date of this report, Aytu shareholders [approved]
the proposal to increase the total number of common shares in the
2015 Plan.
Stock Options
Employee Stock Options: There were no
grants of stock options to employees during the quarters ended
December 31, 2019 and 2018, respectively, therefore, no assumptions
are used for this quarter.
Stock
option activity is as follows:
|
Number of
Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life in Years
|
Outstanding June
30, 2019
|
1,607
|
$325.73
|
6.13
|
Expired
|
(125)
|
328.00
|
–
|
Outstanding
December 31, 2019
|
1,482
|
325.54
|
6.07
|
Exercisable at
December 31, 2019
|
1,482
|
$325.54
|
6.07
|
As
of December 31, 2019, there was $0 unrecognized
option-based compensation expense related to non-vested stock
options.
In
January 2020, the Company granted 12,500 shares of stock options to
5 employees pursuant to the 2015 Plan, which vest immediately upon
grant. Compensation expense related to these options will be fully
recognized in the three months ended March 31, 2020.
24
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, 2019
|
2,346,214
|
$1.83
|
9.1
|
Granted
|
–
|
–
|
–
|
Vested
|
–
|
–
|
–
|
Forfeited
|
(39,900)
|
2.57
|
–
|
Unvested at
December 31, 2019
|
2,306,314
|
$1.81
|
8.6
|
During
the quarter ended September 30, 2019, 5,150 shares of restricted
stock were exchanged with common stock, and the Company recognized
an increase in aggregate stock compensation expense of
$2,600.
During
the quarter ended December 31, 2019, 34,750 shares of restricted
stock were exchanged with common stock, and the Company recognized
an increase in aggregate stock compensation expense of
$6,200.
Under
the 2015 Plan, there was $3,573,000 of total unrecognized
stock-based compensation expense related to the non-vested
restricted stock as of December 31, 2019. The Company expects to
recognize this expense over a weighted-average period of 8.57
years.
In
January 2020, the Company issued 285,000 shares of restricted stock
to directors and employees pursuant to the 2015 Plan. Of the
285,000 shares, 200,000 shares vest in November 2021 and
share-based compensation expense will be recognized over a two-year
period. 85,000 shares vest in January 2030 and share-based
compensation expense will be recognized over a ten-year
period.
The
Company previously issued 1,540 shares of restricted stock outside
the Company’s 2015 Plan, which vest in July 2026. The
unrecognized expense related to these shares was $1,297,000 as of
December 31, 2019 and is expected to be recognized over the
weighted average period of 6.52 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:
|
2019
|
2018
|
2019
|
2018
|
Stock
options
|
$2,000
|
$41,000
|
$7,000
|
$107,000
|
Restricted
stock
|
160,000
|
153,000
|
320,000
|
239,000
|
Total
stock-based compensation expense
|
$162,000
|
$194,000
|
$327,000
|
$346,000
|
25
15. Warrants
In
connection with the October 2019 private placement financing, the
Company issued warrants (the October 2019 Warrants) to the
investors to purchase an aggregate of 10,000,000 shares of the
Company’s common stock at 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. In January 2020,
an investor exercised 2 million October 2019 Warrants using the
cashless exercise feature.
While
these warrants are classified as a component of equity, in order to
allocate the fair value of the October 2019 private placement
between the Series F Convertible Preferred Stock and the October
2019 Warrants, the Company was required to calculate the fair value
of the October 2019 Warrants. These warrants issued had a relative
fair value of $4.0 million. All warrants issued in October 2019
were valued using a Monte Carlo model. In order to calculate the
fair value of the warrants, certain assumptions were made,
including the selling price or fair market value of the underlying
common stock, risk-free interest rate, volatility, expected
dividend yield, and contractual life. Changes to the assumptions
could cause significant adjustments to valuation. The Company
estimated a volatility factor utilizing a weighted average of
comparable published betas of peer companies. 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.
Significant
assumptions in valuing the warrants issued during the quarter are
as follows:
|
As of
October
11,
2019
|
Expected
volatility
|
1.53
|
Equivalent term
(years)
|
5
|
Risk-free
rate
|
1.59%
|
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, 2019
|
16,218,908
|
$3.15
|
4.36
|
Warrants issued
(*)
|
10,000,000
|
1.25
|
5.00
|
Warrants
expired
|
–
|
–
|
–
|
Warrants
exercised
|
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