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EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - AYTU BIOPHARMA, INCaytu_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - AYTU BIOPHARMA, INCaytu_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - AYTU BIOPHARMA, INCaytu_ex311.htm
 

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
Common Stock, par value $0.0001 per share
 
AYTU
 
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
 
 
 
Page
 
PART I—FINANCIAL INFORMATION
 
 
 
 
 4
 
 
 
 
 4
 
 
 
 
 5
 
 
 
 
 6
 
 
 
 
 7
 
 
 
 
 8
 
 
 
 28
 
 
 
 33
 
 
 
 33
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
 34
 
 
 
 34
 
 
 
 44
 
 
 
 44
 
 
 
 44
 
 
 
 44
 
 
 
 44
 
 
 45
 
 
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
 
 
 
 December 31,
 
 
 June 30,
 
 
 
2019
 
 
2019
 
 
 
 (Unaudited)
 
 
 
 
Assets
 
 
 
 Current assets
 
 
 
 
 
 
 Cash and cash equivalents
 $5,259,492 
  11,044,227 
 Restricted cash
  251,396 
  250,000 
 Accounts receivable, net
  5,197,151 
  1,740,787 
 Inventory, net
  2,491,807 
  1,440,069 
 Prepaid expenses and other
  2,361,249 
  957,781 
 Note receivable
  1,350,000 
   
 Other current assets
  1,426,617 
   
 Total current assets
  18,337,712 
  15,432,864 
 
    
    
 Fixed assets, net
  122,064 
  203,733 
 Licensed assets, net
  17,724,416 
  18,861,983 
 Patents, net
  207,944 
  220,611 
 Right-of-use asset
  374,568 
   
 Product technology rights
  22,321,667 
   
 Deposits
  2,200 
  2,200 
 Goodwill
  15,387,064 
   
 Total long-term assets
  56,139,923 
  19,288,527 
 Total assets
 $74,477,635 
 $34,721,391 
 
    
    
Liabilities
 
 
 
 Current liabilities
    
    
 Accounts payable and other
 $9,598,567
 $2,297,270 
 Accrued liabilities
  2,114,060
  1,147,740 
 Accrued compensation
  786,769 
  849,498 
 Current lease liability
  82,755 
   
 Current contingent consideration
  705,880 
  1,078,068 
 Current portion of fixed payment arrangements
  2,661,456 
   
 Total current liabilities
  15,949,487
  5,372,576 
 
    
    
 Long-term contingent consideration
  17,739,964 
  22,247,796 
 Long-term lease liability
  291,813 
   
 Long-term fixed payment arrangements
  23,394,761 
  
 Warrant derivative liability
  11,371 
  13,201 
 Total liabilities
  57,387,395
  27,633,573 
 
    
    
 Commitments and contingencies (Note 12)
    
    
 
    
    
 Stockholders' equity
    
    
 Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 10,215,845 and 3,594,981, respectively as of December 31, 2019 (unaudited) and June 30, 2019.
  1,022 
  359 
 Common Stock, par value $.0001; 100,000,000 shares authorized; shares issued and outstanding 20,733,052 and 17,538,071, respectively as of December 31, 2019 (unaudited) and June 30, 2019.
  2,073 
  1,754 
 Additional paid-in capital
  128,619,922 
  113,475,205 
 Accumulated deficit
  (111,532,777)
  (106,389,500)
 Total stockholders' equity
  16,758,367 
  7,087,818 
 
    
    
 Total liabilities and stockholders' equity
 $74,477,635 
 $34,721,391 
 
See the accompanying Notes to the Consolidated Financial Statements
 
 
4
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
 
 
 
  Three Months Ended December 31,
 
 
Six Months Ended December 31,   
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Product revenue, net
 $3,175,236 
 $1,795,011 
 $4,615,062 
 $3,226,820 
 
    
    
    
    
 Operating expenses
    
    
    
    
 Cost of sales
 606,046
  525,138 
 981,766
  936,097 
 Research and development
  66,675 
  149,029 
  144,695 
  304,907 
 Selling, general and administrative
  6,516,160 
  5,046,174 
  11,662,603 
  8,622,754 
 Selling, general and administrative - related party
  
  91,337 
  
  345,046 
 Amortization of intangible assets
  953,450 
  534,063 
  1,528,567 
  986,020 
 Total operating expenses
  8,142,331
  6,345,741 
  14,317,631
  11,194,824 
 
    
    
    
    
 Loss from operations
  (4,967,095)
  (4,550,730)
  (9,702,569)
  (7,968,004)
 
    
    
    
    
 Other (expense) income
    
    
    
    
 Other (expense), net
  (446,958)
  (127,569)
  (642,344)
  (204,130)
 Gain from derecognition of contingent consideration liability
  5,199,806 
  
 
  
 Gain from warrant derivative liability
  
  20,637 
  1,830 
  67,989 
 Total other (expense) income
  4,752,848 
  (106,932)
  4,559,292 
  (136,141)
 
    
    
    
    
 Net loss
 $(214,247)
 $(4,657,662)
 $(5,143,277)
 $(8,104,145)
 
    
    
    
    
 Weighted average number of common shares outstanding
  17,538,148 
  6,477,004 
  16,425,990 
  4,183,591 
 
    
    
    
    
 Basic and diluted net loss per common share
 $(0.01)
 $(0.72)
 $(0.31)
 $(1.94)
 
See the accompanying Notes to the 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
  <