AYTU BIOPHARMA, INC - FORM 10-Q

Attached files

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EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - AYTU BIOPHARMA, INC	aytu_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - AYTU BIOPHARMA, INC	aytu_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - AYTU BIOPHARMA, INC	aytu_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: March 31, 2020

☐ 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 May 1, 2020, there were 120,261,423 shares of Common Stock outstanding.

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

FOR THE QUARTER ENDED MARCH 31, 2020

INDEX

		Page
	PART I—FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	4

	Consolidated Balance Sheets as of March 31, 2020 (unaudited) and June 30, 2019	4

	Consolidated Statements of Operations for the three and nine months ended March 31, 2020 (unaudited) and the three and nine months ended March 31, 2019 (unaudited)	5

	Consolidated Statement of Stockholders’ Equity for the year-to-date interim periods ended March 31, 2020 (unaudited) and March 31, 2019 (unaudited)	6

	Consolidated Statements of Cash Flows for the nine months ended March 31, 2020 (unaudited) and the nine months ended March 31, 2019 (unaudited)	8

	Notes to Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	49

	PART II—OTHER INFORMATION

Item 1.	Legal Proceeding	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	53

SIGNATURES		56

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® XR, ZolpiMistTTM, MiOXSYS®, AcipHex® Sprinkle™, Cefaclor for Oral Suspension, Karbinal®, Flexichamber™, Poly-Vi-Flor® and Tri-Vi-Flor™ , and the recently acquired products such as Fluticare®, Diabasens®, Urivarx®, Sensum®, and Vesele®, as well as Beyond Human®, a specialty marketing platform, which are protected under applicable intellectual property laws and we own or have the rights to. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names.

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	March 31,	June 30,
	2020	2019
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$62,264,676	$11,044,227
Restricted cash	251,407	250,000
Accounts receivable, net	10,203,423	1,740,787
Inventory, net	3,854,685	1,440,069
Prepaid expenses and other	4,830,881	957,781
Other current assets	1,849,598	–
Total current assets	83,254,670	15,432,864


Fixed assets, net	288,415	203,733
Right-of-use asset	675,980	–
Licensed assets, net	17,155,632	18,861,983
Patents and tradenames, net	11,724,626	220,611
Product technology rights, net	21,754,166	–
Deposits	38,981	2,200
Goodwill	24,061,333	–
Total long-term assets	75,699,133	19,288,527
Total assets	$158,953,803	$34,721,391

Liabilities
Current liabilities
Accounts payable and other	$6,956,091	$2,133,522
Accrued liabilities	9,830,373	1,311,488
Accrued compensation	2,210,288	849,498
Current lease liability	289,238	–
Current contingent consideration	947,449	1,078,068
Current portion of fixed payment arrangements	17,395,219	–
Current portion of CVR liabilities	786,564	–
Notes payable, net	3,617,680	–
Total current liabilities	42,032,902	5,372,576

Long-term contingent consideration, net of current portion	17,806,573	22,247,796
Long-term lease liability, net of current portion	804,393	–
Long-term fixed payment arrangements, net of current portion	8,162,494	–
Long-term CVR liabilities, net of current portion	4,432,254	–
Warrant derivative liability	11,371	13,201
Total liabilities	73,249,987	27,633,573

Commitments and contingencies (Note 12)

Stockholders' equity
Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 9,805,845 and 3,594,981, respectively as of March 31, 2020 (unaudited) and June 30, 2019.	981	359
Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 100,610,380 and 17,538,071, respectively as of March 31, 2020 (unaudited) and June 30, 2019.	10,061	1,754
Additional paid-in capital	202,557,856	113,475,205
Accumulated deficit	(116,865,082)	(106,389,500)
Total stockholders' equity	85,703,816	7,087,818

Total liabilities and stockholders' equity	$158,953,803	34,721,391

See the accompanying Notes to the Consolidated Financial Statement

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

	Three Months Ended March 31,		Nine Months Ended March 31,
	2020	2019	2020	2019

Revenues
Product revenue, net	$8,156,173	$2,372,016	$12,771,235	$5,598,836
License revenue		5,776		5,776
Total revenue	$8,156,173	$2,377,792	$12,771,235	$5,604,612

Operating expenses
Cost of sales	1,998,659	616,853	2,980,425	1,552,950
Research and development	78,502	108,901	223,197	413,808
Selling, general and administrative	9,501,469	5,368,762	21,164,072	13,991,516
Selling, general and administrative - related party		6,797		351,843
Amortization of intangible assets	1,370,986	575,117	2,899,553	1,561,137
Total operating expenses	12,949,616	6,676,430	27,267,247	17,871,254

Loss from operations	(4,793,443)	(4,298,638)	(14,496,012)	(12,266,642)

Other (expense) income
Other (expense), net	(538,862)	(194,703)	(1,181,206)	(398,833)
Gain from derecognition of contingent consideration			5,199,806
Gain from warrant derivative liability		(2,521)	1,830	65,468
Total other (expense) income	(538,862)	(197,224)	4,020,430	(333,365)

Net loss	$(5,332,305)	$(4,495,862)	$(10,475,582)	$(12,600,007)

Weighted average number of common shares outstanding	35,275,296	9,061,023	22,616,962	5,785,669

Basic and diluted net loss per common share	$(0.15)	$(0.50)	$(0.46)	$(2.18)

See the accompanying Notes to the Consolidated Financial Statements

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(audited unless indicated otherwise)

	Preferred Stock		Common Stock
	Shares	Amount	Shares	Amount	Additional paid-in capital	Accumulated Deficit	Total Stockholders' Equity

BALANCE - June 30, 2019	3,594,981	$359	17,538,071	$1,754	$113,475,205	$(106,389,500)	$7,087,818

Stock-based compensation (unaudited)	–	–	–	–	165,171	–	165,171
Preferred stock converted in common stock (unaudited)	(443,833)	(44)	443,833	44	–	–	–
Net loss (unaudited)	–	–	–	–	–	(4,929,030)	(4,929,030)

BALANCE - September 30, 2019 (unaudited)	3,151,148	$315	17,981,904	$1,798	$113,640,376	$(111,318,530)	$2,323,959

Stock-based compensation (unaudited)	–	–	–	–	162,264	–	162,264
Issuance of Series F preferred stock from October 2019 private placement financing, net of $741,650 issuance costs (unaudited)	10,000	1	–	–	5,249,483	–	5,249,484
Warrants issued in connection with the private placement (unaudited)	–	–	–	–	4,008,866	–	4,008,866
Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics (unaudited)	9,805,845	981	–	–	5,558,933		5,559,914
Preferred stock converted in common stock (unaudited)	(2,751,148)	(275)	2,751,148	275	–	–	–

Net loss (unaudited)	–	–	–	–	–	(214,247)	(214,247)

BALANCE - December 31, 2019 (unaudited)	10,215,845	$1,022	20,733,052	$2,073	$128,619,922	$(111,532,777)	$17,090,240

Stock-based compensation (unaudited)	–	–	1,067,912	107	263,284	–	263,391
Cashless warrant exercise (unaudited)	–	–	7,915,770	792	(792)	–	–
Issuance of Series H preferred stock and common stock due to acquisition of Innovus (unaudited)	1,997,902	200	3,809,712	381	4,405,603	–	4,406,184
Preferred stock converted in common stock (unaudited)	(2,407,902)	(241)	12,397,902	1,240	91,881	–	92,880
Warrant exercises (unaudited)	–	–	17,082,994	1,708	22,987,958	–	22,989,666
Issuance of common stock, net of $4,523,884 in cash issuance costs (unaudited)	–	–	36,365,274	3,637	33,275,119	–	33,278,756
Warrants issued in connection with the registered offering (unaudited)	–	–	–	–	9,723,161	–	9,723,161
Warrants issued in connection with the registered offering to the placement agents, non-cash issuance costs (unaudited)	–	–	–	–	1,458,973	–	1,458,973
CVR payouts (unaudited)	–	–	1,237,764	123	1,732,747	–	1,732,870
Net loss (unaudited)	–	–	–	–	–	(5,332,305)	(5,332,305)

BALANCE - March 31, 2020 (unaudited)	9,805,845	$981	100,610,380	$10,061	$202,557,856	$(116,865,082)	$85,703,816

See the accompanying Notes to the Consolidated Financial Statements

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity, Cont’d

(audited unless indicated otherwise)

	Preferred Stock		Common Stock
	Shares	Amount	Shares	Amount	Additional paid-in capital	Accumulated Deficit	Total Stockholders' Equity

BALANCE - June 30, 2018	–	$–	1,794,762	$179	$92,681,918	(79,257,592)	13,424,505

Stock-based compensation (unaudited)	–	–	–	–	152,114	–	152,114
Adjustment for rounding of shares due to stock split (unaudited)	–	–	6,649	1	(1)	–	–
Net loss (unaudited)	–	–	–	–	–	(3,446,483)	(3,446,483)

BALANCE - September 30, 2018 (unaudited)	–	$–	1,801,411	$180	$92,834,031	$(82,704,075)	$10,130,136

Stock-based compensation (unaudited)	–	–	2,707,022	271	193,791	–	194,062
Common stock issued to employee (unaudited)	–	–	9,000	1	11,689	–	11,690
Issuance of preferred and common stock, net of $1,479,963 in cash issuance costs (unaudited)	8,342,993	834	1,777,007	178	11,810,373	–	11,811,385
Warrants issued in connection with the registered offering (unaudited)	–	–	–	–	1,827,628	–	1,827,628
Warrants issued in connection with the registered offering to the placement agents, non-cash issuance costs (unaudited)	–	–	–	–	61,024	–	61,024
Preferred stocks issued in connection with the purchase of assets (unaudited)	400,000	40	–	–	519,560	–	519,600
Preferred stocks converted into common stock (unaudited)	(4,210,329)	(421)	4,210,329	421	–	–	–
Net loss (unaudited)	–	–	–	–	–	(4,657,662)	(4,657,662)

BALANCE - December 31, 2018 (unaudited)	4,532,664	$453	10,504,769	$1,051	$107,258,096	$(87,361,737)	$19,897,863

Stock-based compensation (unaudited)	–	–	(25,600)	(2)	376,668	–	376,666
Preferred stocks converted into common stock (unaudited)	(2,196,999)	(219)	2,196,999	219	–	–	–
Warrant exercises (unaudited)	–	–	172,331	17	258,495	–	258,512
Net loss (unaudited)	–	–	–	–	–	(4,495,862)	(4,495,862)

BALANCE - March 31, 2019 (unaudited)	2,335,665	$234	12,848,499	$1,287	$107,893,259	$(91,857,599)	$16,037,179

See the accompanying Notes to the Consolidated Financial Statements

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended March 31,
	2020	2019

Operating Activities
Net loss	$(10,475,582)	$(12,600,007)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation, amortization and accretion	3,780,310	1,974,213
Stock-based compensation expense	590,826	722,842
Derecognition of contingent consideration	(5,199,806)	–
Gain on the change in fair value of CVR payout	(267,130)	–
Issuance of common stock to employee	–	11,690
Derivative income	(1,830)	(65,468)
Changes in operating assets and liabilities:
(Increase) in accounts receivable	(8,183,810)	(797,576)
(Increase) in inventory	(345,452)	(191,110)
(Increase) in prepaid expenses and other	(1,611,681)	(364,831)
(Increase) in other current assets	(358,022)	–
(Decrease) in accounts payable and other	(4,912,245)	(191,331)
Increase in accrued liabilities	6,761,319	758,370
Increase in accrued compensation	271,560	250,912
(Decrease) in fixed payment arrangements	(657,655)	–
Increase in interest payable	–	134,795
Net cash used in operating activities	(20,609,198)	(10,357,501)

Investing Activities
Deposit	–	2,888
Purchases of fixed assets	–	(59,848)
Contingent consideration payment	(151,648)	(408,917)
Cash received from acquisition	390,916	–
Purchase of assets	(5,850,000)	(500,000)
Net cash used in investing activities	(5,610,732)	(965,877)

Financing Activities
Issuance of preferred, common stock and warrants	58,999,666	15,180,000
Issuance costs related to preferred, common stock and warrants	(5,280,426)	(1,479,963)
Warrant exercises	22,989,666	258,512
Preferred stock converted in common stock	92,880	–
Issuance of note payable	640,000	5,000,000
Net cash provided by financing activities	77,441,786	18,958,549

Net change in cash, restricted cash and cash equivalents	51,221,856	7,635,171
Cash, restricted cash and cash equivalents at beginning of period	11,294,227	7,112,527
Cash, restricted cash and cash equivalents at end of period	$62,516,083	$14,747,698

See the accompanying Notes to the Consolidated Financial Statements

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, cont’d

(unaudited)

Supplemental disclosures of cash and non-cash investing and financing transactions
Cash paid for interest	$392,641	$–
Fair value of right-to-use asset and related lease liability	354,929	–
Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics	5,559,914	–
Issuance of Series H preferred stock due to acquisition of the Innovus	12,805,263	–
Inventory payment included in accounts payable	460,416	–
Contingent consideration included in accounts payable	27,571	29,348
Fixed payment arrangements included in accounts payable	501,766	–
Exchange of convertible preferred stock into common stock	1,559	–
Return deductions received by Cerecor	2,000,000	–
Issuance of restricted stock	107	–
Cashless warrant exercises	792	–
Fair value of warrants issued to investors and underwriters	–	1,888,652
Issuance of preferred stock related to purchase of asset	–	519,600
Contingent consideration related to purchase of asset	$–	$8,833,219

See the accompanying Notes to the Consolidated Financial Statements

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’s plans to expand opportunistically into other therapeutic areas.

The Company is a commercial-stage specialty pharmaceutical company focused on commercializing novel products that address significant healthcare needs in both prescription and consumer health categories. Through the Company’s heritage prescription business, the Company currently markets a portfolio of prescription products addressing large primary care and pediatric markets. The primary care portfolio includes (i) Natesto®, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist™, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra® XR, the only FDA-approved 12-hour codeine-based antitussive syrup.

The Company’s recently acquired prescription pediatric portfolio includes (i) AcipHex® Sprinkle™, a granule formulation of rabeprazole sodium, a commonly prescribed proton pump inhibitor; (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; (iii) Karbinal® ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions; and (iv) Poly-Vi-Flor® and Tri-Vi-Flor®, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various for infants and children with fluoride deficiency.

On February 14, 2020, the Company acquired Innovus Pharmaceuticals Inc. (“Innovus”), a specialty pharmaceutical company commercializing, licensing and developing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes over thirty-five consumer health products competing in large healthcare categories including diabetes, men's health, sexual wellness and respiratory health (the “Consumer Health Portfolio”). The Consumer Health Portfolio is commercialized through direct-to-consumer marketing channels utilizing Innovus’s proprietary Beyond Human® marketing and sales platform.

The Company recently acquired exclusive U.S. distribution rights to two COVID-19 IgG/IgM rapid tests. These coronavirus tests are solid phase immunochromatographic assays used in the rapid, qualitative and differential detection of IgG and IgM antibodies to the 2019 Novel Coronavirus in human whole blood, serum or plasma. These rapid tests have been validated in multi-center clinical trials. Most recently, the Company signed a licensing agreement with Cedars-Sinai Medical Center for worldwide rights to various potential uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in pre-clinical studies, and the Company plans to advance this technology and assess its safety and efficacy in human studies.

The Company’s strategy is to continue building its portfolio of revenue-generating products, leveraging its focused commercial team and expertise to build leading brands within large therapeutic markets.

Financial Condition. As of March 31, 2020, the Company had approximately $62.5 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.

Revenues for the three-months ended March 31, 2020 increased approximately 243% compared to the three-months ended March 31, 2019, 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 nine-months ended March 31, 2020 was $20.6 million compared to $10.4 million for the nine-months ended March 31, 2019. The increase is due primarily to the Company’s acquisition and integration of the Pediatric Portfolio and merger with Innovus, which consumed additional cash resources, coupled with an increase in working capital.

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). As of March 31, 2020, the Company has paid down approximately $3.2 million of those assumed liabilities.

In addition, the Company 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 was paid. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026.

On February 14, 2020 the Company completed a merger with Innovus after approval by the stockholders of both companies on February 13, 2020 (the “Merger”). Upon closing the Merger, the Company merged with and into Innovus and all outstanding Innovus common stock was exchanged for approximately 3.8 million shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 million shares of Series H Convertible Preferred stock of Aytu and retired. The remaining Innovus warrants outstanding at the time of the Merger continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus will continue as a wholly owned subsidiary of the Company.

In addition, as part of the Merger, the Company assumed approximately $3.1 million of notes payable, $0.8 million in lease liabilities, and other assumed liabilities associated with Innovus. Of the $3.1 million of notes payable, approximately $1.8 million was converted into approximately 1.5 million shares of the Company’s common stock on April 27, 2020.

During the three months ended March 31, 2020, the Company completed three separate equity offerings, on March 10, 2020, March 12, 2020 and March 19, 2020 (the “March Offerings”), in which the Company issued a combination of common stock and warrants. The following summarizes the March Offerings, including total capital raised from both the issuance of common stock and subsequent warrant exercises.

On March 19, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 12,539,197 shares of the Company’s common stock (the “Common Stock”) at a purchase price per share of $1.595 and (ii) warrants to purchase up to 12,539,197 shares of Common Stock (the “March 19, 2020 Warrants”) at an exercise price of $1.47 per share, for aggregate gross proceeds to the Company of $20.0 million, before deducting placement agent fees and other offering expenses payable by the Company. The March 19, 2020 Warrants are exercisable immediately upon issuance and have a term of one year from the issuance date. In addition, the Company issued warrants with an exercise price of $1.9938 per share to purchase up to 815,047 shares of common stock (the “March 19, 2020 Placement Agent Warrants”) as a portion of the fees paid to the placement agent. The March 19, 2020 Placement Agent Warrants have a term of five year from the issuance date.

A total of 1.2 million March 19, 2020 Warrants have been exercised through May 5, 2020, for total proceeds of $1.7 million, of which 0.7 million March 19, 2020 Warrants were exercised through March 31, 2020, for total proceeds of $1.1 million.

On March 12, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 16,000,000 shares of the Company’s common stock at a purchase price per share of $1.25 and (ii) warrants to purchase up to 16,000,000 shares of Common Stock (the “March 12, 2020 Warrants”) at an exercise price of $1.25 per share, for aggregate gross proceeds to the Company of $20.0 million, before deducting placement agent fees and other offering expenses payable by the Company (the “Registered Offering”). The March 12, 2020 Warrants are exercisable immediately upon issuance and have a term of one year from the issuance date. In addition, the Company issued warrants with an exercise price of $1.5625 per share to purchase up to 1,040,000 shares of common stock (the “March 12, 2020 Placement Agent Warrants”) as a portion of the fees paid to the placement agent. The March 12, 2020 Placement Agent Warrants have a term of five year from the issuance date.

A total of 13 million March 12, 2020 Warrants have been exercised through May 5, 2020, for total proceeds of approximately $16.3 million, of which approximately 10.5 million March 12, 2020 Warrants were exercised through March 31, 2020, for total proceeds of $13.1 million.

On March 10, 2020, Company entered into a securities purchase agreement with an institutional investor, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 4,450,000 shares of the Company’s common stock (the “Common Stock”) at a purchase price per share of $1.15 and (ii) pre-funded warrants to purchase up to 3,376,087 shares of Common Stock (the “Pre-Funded Warrants”) at an effective price of $1.15 per share ($1.1499 paid to the Company upon the closing of the offering and $0.0001 to be paid upon exercise of such Pre-Funded Warrants), for aggregate gross proceeds to the Company of approximately $9.0 million, before deducting placement agent fees and other offering expenses payable by the Company (the “Registered Offering”). The Pre-Funded Warrants were immediately exercised upon close. In addition, the Company issued warrants with an exercise price of $1.4375 per share to purchase up to 508,696 shares of common stock (the “March 10, 2020 Placement Agent Warrants”). The March 10, 2020 Placement Agent Warrants have a term of five year from the issuance date.

Since March 10, 2020, a total of 6.0 million shares of the Company’s October 2018 $1.50 Warrants (the “October 18 $1.50 Warrants”) were exercised, resulting in proceeds of approximately $9.0 million.

In total, the Company has raised net proceeds of approximately $71.5 million from the March Offerings and related warrant exercises, as well as exercises of the October 2018 $1.50 Warrants. The net proceeds received by the Company from the March Offerings and related warrant exercise will be used for general corporate purposes, including working capital.

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) 10,000 shares of the Company’s Series F Convertible Preferred Stock (the “Preferred Stock”) which are convertible into 10,000,000 shares of common stock (the “Conversion Shares”) for a stated value of $1,000 per unit and (ii) 10,000,000 warrants (the “October 2019 Warrants”) which are exercisable for shares of common stock (the “Warrant Shares”), which expire January 10, 2025,. 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.

As of March 31, 2020, all of the Series F Convertible Preferred Stock were converted into 10 million shares of the Company’s common stock, and 5.0 million of the October 2019 Warrants were exercised using the cashless exercise provision to acquire 5.0 million shares of the Company’s common stock. In April of 2020, the remaining 5 million October 2019 Warrants were exercised using the cashless exercise provision into 5.0 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 Offerings have been used for general corporate purposes, including working capital.

As of the date of this Report, the Company expects its commercial costs for its current operation to increase modestly as the Company integrates the acquisition of the Pediatrics Portfolio and Innovus and continues to focus on revenue growth through increasing product sales. The Company’s total asset position totaling approximately $168.5 million plus the proceeds expected from ongoing product sales will be used to fund operations. The Company may continue to 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 has sufficient cash and cash equivalents on-hand as of March 31, 2020 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) the Company reports that there does not exist indication of substantial doubt about its ability to continue as a going concern.

As of the date of this report, while the Company has adequate capital resources to complete its near-term operating and transaction objectives, there is no guarantee that such capital resources will be sufficient until such time the Company reaches profitability. 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.

Nasdaq Listing Compliance. The Company’s common stock is listed on The Nasdaq Capital Market (the “Nasdaq”). 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 nine months ended March 31, 2020, 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.

On March 24, 2020, the Company received a letter from the Nasdaq notifying the Company that the Nasdaq has determined that the Company’s stock price has traded above at least $1.00 for at least 10 consecutive business days since the previously announced February 19, 2020 notice, and therefore, the Company has regained compliance with Nasdaq Listing Rule 5550(a)(2), commonly referred to as the Bid Price Rule.

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, Innovus Pharmaceuticals, Inc., and its wholly-owned subsidiaries 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 March 31, 2020 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 nine- month periods ended March 31, 2020, and 2019, is unaudited.

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 July 1, 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.

In addition, in conjunction with the Innovus Merger, the Company recognized a lease liability of approximately $0.8 million relating to Innovus’ corporate offices and related warehouse as part of the purchase price allocation (see Note 2).

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. There were no “down-round” features present in the financial instruments issued in conjunction with the March 2020 Offerings.

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 was 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, but no conclusion has been reached.

This Quarterly Report on Form 10-Q does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

2. Acquisitions

The Pediatric Portfolio

On October 10, 2019, the Company entered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to purchase and acquire Cerecor’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, of which $3.2 million has been incurred. The Company also retained the majority of Cerecor’s workforce focused on 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 was paid to the investor. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026.

Further, certain of the products in the 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 product portfolio that is expected to provide revenue and cost synergies. Transaction costs of $0.0 and $0.7 million were included as general and administrative expense in the consolidated statements of operations for the three and nine months ended March 31, 2020.

The following table summarized the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. These estimates are preliminary, pending final evaluation of certain assets, and therefore, are subject to revisions that may result in adjustments to the values presented below:

	As of
	November 1, 2019
Consideration
Cash and cash equivalents	$4,500,000
Fair value of Series G Convertible Preferred Stock
Total shares issued	9,805,845
Estimated fair value per share of Aytu common stock	$0.567
Estimated fair value of equity consideration transferred	$5,559,914

Total consideration transferred	$10,059,914

Recognized amounts of identifiable assets acquired and liabilities assumed
Inventory, 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

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 $0.6 million and $0, for the three months ended March 31, 2020 and 2019 respectively. The aggregate amortization expense was $0.9 million and $0, for the nine months ended March 31, 2020 and 2019 respectively.

Innovus Merger (Consumer Health Portfolio)

On February 14, 2020, the Company completed the merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon the effectiveness of the Merger, the Company merged with and into Innovus and all outstanding Innovus common stock was exchanged for approximately 3.8 million shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 million shares of Series H Convertible Preferred stock of the Company and retired. The remaining Innovus warrants outstanding at the time of the Merger continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus will continue as a subsidiary of the Company.

On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 1.2 million shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24 million revenue milestone for the calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million.

The following table summarized the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. Goodwill recorded in connection with the acquisition represents, among other things, future economic benefits expect to be recognized from the Company's expansion of products and customer base.As this was a tax-exempt transaction, goodwill is not tax deductible in future periods. These estimates are preliminary, pending final evaluation of certain assets acquired and liabilities assumed, and therefore, are subject to revisions that may result in adjustments to the values presented below. The estimates of the fair value of the assets acquired assumed at the date of the Acquisition are subject to adjustment during the measurement period (up to one year from the Acquisition date). While the Company believes that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired, it evaluates any necessary information prior to finalization of the fair value. During the measurement period, the Company will adjust assets if new information is obtained about facts and circumstances that existed as of the Acquisition date that, if known, would have resulted in the revised estimated values of those assets as of that date. The impact of all changes that do not qualify as measurement period adjustments are included in current period earnings.

	As of
	February 14, 2020
Consideration
Fair value of Aytu Common Stock
Total shares issued at close	3,810,393
Estimated fair value per share of Aytu common stock	$0.756
Estimated fair value of equity consideration transferred	$2,880,581

Fair value of Series H Convertible Preferred Stock
Total shares issued	1,997,736
Estimated fair value per share of Aytu common stock	$0.756
Estimated fair value of equity consideration transferred	$1,510,288

Fair value of former Innovus warrants	$15,315
Fair value of Contingent Value Rights	$7,049,079
Forgiveness of Note Payable owed to the Company	$1,350,000

Total consideration transferred	$12,805,263

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	390,916
Accounts receivables, net	$278,826
Inventory, net	1,149,625
Prepaid expenses and other current assets	1,736,796
Other long-term assets	36,781
Right-to-use assets	328,410
Property, plant and equipment	190,393
Trademarks and patents	11,744,000
Accounts payable and accrued other expenses	(6,983,969)
Other current liabilities	(446,995)
Notes payable	(3,056,361)
Lease liability	(754,822)
Preacquisition contingent consideration	(182,606)
Total identifiable net assets	4,430,994

Goodwill	$8,374,269

The fair values of intangible assets, including product distribution rights were determined using variations of the income approach, specifically the relief-from-royalties method. It also includes customer lists using an income approach utilizing a discounted cash flow model. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 10).

	As of February 14, 2020

Acquired product distribution rights	$11,354,000
Acquired customer lists	390,000
Total intangible assets	$11,744,000

The fair value of the net identifiable assets acquired was determined to be $11.7 million, which is being amortized over a range between 1.5 to 10 years. The aggregate amortization expense was $0.2 million and $0, for the three and nine months ended March 31, 2020 and 2019 respectively.

Pro Forma Impact due to Business Combinations

The following supplemental unaudited proforma financial information presents the Company’s results as if the following acquisitions had occurred on July 1, 2018:

●

Acquisition of the Pediatric Portfolio, effective November 1, 2019;

●

Merger with Innovus effective February 14, 2020.

	Three Months Ended March 31,		Nine Months Ended March 31,
	2020	2019	2020	2019
	Unaudited (aa) (bb)	Pro forma Unaudited	Pro forma Unaudited (cc)	Pro forma Unaudited

Total revenues, net	$10,331,629	$10,575,866	$34,276,368	$36,916,501
Net income (loss)	(5,850,703)	(8,740,850)	(18,197,902)	(17,205,490)
Net income / (loss) per share (dd)	$(0.17)	$(0.39)	$(0.80)	$(0.76)

(aa)	For the three months ended March 31, 2020, Pediatric Portfolio acquisition occurred prior to the three months ended March 31, 2020, and accordingly, the results of the Pediatric Portfolio are fully consolidated into the Company’s results for the three months ended March 31, 2020.

(bb)	Due to the absence of discrete financial information for Innovus, covering the period from February 1, 2020 through February 13, 2020, the Company did not include the impact of that stub-period for the pro forma results for the three and nine months ended March 31, 2020.

(cc)	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 for the nine months ended March 31, 2020 without making estimated extrapolations that the Company did not believe would be material or useful to users of the above pro forma information.

(dd)	Pro forma net loss per share calculations excluded the impact of the issuance of the (i) Series G Convertible Preferred Stock and the, (ii) Series H Convertible Preferred Stock under the assumption those shares would continue to remain non-participatory during the periods reported above.

3. Revenue Recognition

The Company sells its prescription products related products from both the (i) Pediatric Portfolio and its (ii) Lifestyle Portfolio (Natesto, Tuzistra and ZolpiMist) principally to a limited number of wholesale distributors and pharmacies in the United States, which account for the largest portion of our total prescription products 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.

The Company generates revenues from its Consumer Health Portfolio rom product sales and the licensing of the rights to market and commercialize our products. The Company recognizes revenue when it satisfies a performance obligation in a contract by transferring control over a product to a customer when product is shipped. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales.

In addition, the Company’s Consumer Health Portfolio enters into exclusive distributor and license agreements that are within the scope of ASC Topic 606. The license agreements normally generate three separate components of revenue: (1) an initial nonrefundable payment due on signing or when certain specific conditions are met; (2) royalties that are earned on an ongoing basis as sales are made or a pre-agreed transfer price; and (3) sales-based milestone payments that are earned when cumulative sales reach certain levels. Revenue from the initial nonrefundable payments or licensing fees are recognized when all required conditions are met. If the consideration for the initial license fee is for the right to sell the licensed product in the respective territory with no other required conditions to be met, such type of nonrefundable license fee arrangement for the right to sell the licensed product in the territory is recognized ratably over the term of the license agreement. For arrangements with licenses that include sales-based royalties, including sales-based milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. The achievement of the sales-based milestone underlying the payment to be received predominantly relates to the licensee’s performance of future commercial activities.

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 March 31,		Nine Months Ended March 31,
	2020	2019	2020	2019
U.S.	$7,273,000	$2,024,000	$11,582,000	$5,025,000
International	883,000	348,000	1,189,000	574,000
Total net revenue	$8,156,000	$2,372,000	$12,771,000	$5,599,000

As of March 31, 2020, approximately 40% of outstanding trade accounts receivables, net were comprised of a single counter-party, for which the Company and the counter-party have an arrangement in which initially, the counterparty was collecting the Company’s customer payments on its behalf for certain products acquired as part of the Pediatric Portfolio acquisition, and upon a final transition, the Company is now collecting all amounts relating to the Pediatric Portfolio, including on behalf of the counter-party, for products still retained by the counter-party.

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 and an intangible asset of approximately $11.7 million relating the patent rights and trademarks acquired from the Innovus Merger.

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 were $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, 2019, resulting in a $5.2 million unrealized gain during the nine months ended March 31, 2020, due to the elimination of the revenue-based product milestones. Accordingly, there is no remaining value attributable to the contingent consideration relating to the Natesto License and Supply Agreement.

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 March 31, 2020 and 2019 was $0.3 million. The aggregate amortization expense for each of the nine-month periods ended March 31, 2020 and 2019 was $1.0 million.

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.

The ZolpiMist license agreement was valued at $3.2 million and is amortized over the life of the license agreement up to seven years. The amortization expense for each of the three months ended March 31, 2020 and 2019 was $116,000. The aggregate amortization expense for each of the nine-month periods ended March 31, 2020 and 2019 was $348,000.

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 March 31, 2020 and 2019 was $59,000 and $64,000, respectively. The contingent consideration accretion expense for each of the nine-month periods ended March 31, 2020 and 2019 was $169,000, and $184,000, respectively. As of March 31, 2020, 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 and another predecessor product owner throughout the license term in accordance with the Tris License Agreement, including certain minimum royalties to TRIS..

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 March 31, 2020 and 2019 was $123,000, respectively. The aggregate amortization expense for each of the nine-month periods ended March 31, 2020 and 2019 was $369,000 and $205,000.

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 March 31, 2020 and 2019 was $125,000, and $73,000, respectively. The contingent consideration accretion expense for each of the nine-month periods ended March 31, 2020 and 2019 was $322,000, and $119,000, respectively. As of March 31, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.

Asset Purchase Agreement—the Pediatric Portfolio

In November 2019, Aytu Therapeutics, LLC., a wholly-owned subsidiary of Aytu, acquired the portfolio of pediatric therapeutic commercial products from Cerecor, Inc (the “Pediatric Portfolio”). This transaction expanded our product portfolio with the addition of six 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 assumed 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 was paid. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026.

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.

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.

Innovus Merger

On February 14, 2020, the Company and Innovus Pharmaceuticals, Inc. (“Innovus”) completed the Merger after successful approval of the Merger by the shareholders of the Company and Innovus at separate special meetings held on February 13, 2020. Upon completion of the Merger, the Company obtained a combination of 18 registered trademarks and/or patent rights including, but not limited to the following:

Patented Products

●

Recalmax –A dietary supplement specially formulated to increase the benefits of Nitric Oxide and act as a vasodilator. Supports improved cognitive function.

●

Sensum – a male moisturizer cream to increase gland sensitivity.

●

Vessele – A dietary supplement formulated for healthy blood flow.

●

Zestra - Patented blend of botanical oils and extracts, scientifically formulated to support women's sexual satisfaction.

Trademarks

●

Diabasens – Topical cream forumulated to relieve cutaneous pain associated with conditions such as Postherpetic Neuralgia and Diabetic Neuropathy.

●

Fluticare – 24-hour nasal allergy relief that helps fight indoor and outdoor allergens causing congestion, sneezing and a runny nose.

●

Urivarx – a dietary supplement to support bladder tone and function.

●

Beyond Human Testosterone Booster - A daily dietary supplement that naturally increases testosterone Levels, supporting natural stamina, endurance and strength.

5. Inventories

Inventories consist of raw materials and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Aytu periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory, Aytu will record a write-down to net realizable value in the period that the impairment is first recognized. There was no inventory write-down during the three and nine months ended March 31, 2020 or 2019, respectively.

Inventory balances consist of the following:

	As of	As of
	March 31,	June 30,
	2020	2019
Raw materials	$363,000	$117,000
Finished goods	3,491,000	1,323,000
	$3,854,000	$1,440,000

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	As of	As of
	Useful	March 31,	June 30,
	Lives in years	2020	2019

Manufacturing equipment	2 - 5	$389,000	$83,000
Leasehold improvements	3	297,000	112,000
Office equipment, furniture and other	2 - 5	392,000	315,000
Lab equipment	3 - 5	90,000	90,000
Software	3 - 5	339,000	-
Less accumulated depreciation and amortization		(1,219,000)	(396,000)

Fixed assets, net		$288,000	$204,000

Depreciation and amortization expense totaled $24,000 for each of the three-months ended March 31, 2020 and 2019, respectively, and $56,000 and $59,000 for the nine months ended March 31, 2020 and 2019.

7. Leases, Right-to-Use Assets and Related Liabilities

In September 2015, the Company entered into a 37-month operating lease in Englewood, Colorado. In October 2017, the Company signed an amendment to extend the lease for an additional 24 months beginning October 1, 2018. In April 2019, the Company extended the lease for an additional 36 months beginning October 1, 2020. This lease has base rent of approximately $10 thousand a month, with total rent over the term of the lease of approximately $355 thousand.

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.

In October 2017, the Company’s subsidiary, Innovus, entered into a commercial lease agreement for 16,705 square feet of office and warehouse space in San Diego, California that commenced on December 1, 2017 and continues until April 30, 2023. The initial monthly base rent was $21,000 with an approximate 3% increase in the base rent amount on an annual basis, as well as, rent abatement for rent due from January 2018 through May 2018. The Company holds an option to extend the lease an additional 5 years at the end of the initial term. On November 18, 2019 (“decision date”), Innovus determined it would no longer utilize the warehouse portion of the lease space, representing approximately 9,729 square feet, and as of December 31, 2019 (“cease use date”) ceased using any such space. In accordance with ASC 842, Leases, the Company assessed the asset value of the separate lease component and amortized such asset from the decision date through the cease use date.

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.

	Total	2020	2021	2022	2023	2024	Thereafter
Remaining Office leases	$1,268,000	$93,000	$383,000	$396,000	$356,000	$40,000	−
Less: Discount Adjustment	(175,000)
Total lease liability	1,093,000

Lease liability - current portion	289,000
Long-term lease liability	$804,000

Rent expense for the three months ended March 31, 2020 and 2019 totaled $61 thousand and $31 thousand, respectively. Rent expense for the nine months ended March 31, 2020 and 2019 totaled $126 thousand and $94 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
	March 31,	June 30,
	2020	2019

Patents - MiOXSYS	$380,000	$380,000
Less accumulated amortization	(178,000)	(159,000)
Patents, net	$202,000	$221,000

The amortization expense was $6 thousand for the three months ended March 31, 2020 and 2019, respectively, and $19 thousand for the nine months ended March 31, 2020 and 2019 respectively.

On February 14, 2020, upon completion of the Merger with Innovus, the Company recognized the fair value of the rental of the customer lists for $390,000 and will amortize the asset over a useful life of 1.5 years.

The Company recognized the fair value of trademarks, patents or a combination of both for 18 distinct products that the Company markets, distributes and sells for $11,354,000 and will amortize the asset over a useful life of 5 years.

	As of	As of
	March 31,	June 30,
	2020	2019

Patents & tradenames	$11,354,000	$-
Customers contracts	390,000	-
Less accumulated amortization	(221,000)	-
Patents & tradenames, net	$11,523,000	$-

9. Accrued liabilities

Accrued liabilities consist of the following:

	As of	As of
	March 31	June 30,
	2020	2019
Accrued legal settlement	$205,000	$−
Accrued program liabilities	1,299,000	736,000
Accrued product-related fees	1,644,000	295,000
Credit card liabilities	941,000	−
Contract liability	180,000	4,000
Medicaid liabilities	3,255,000	61,000
Return reserve	1,671,000	98,000
Sales taxes payable	172,000	−
Other accrued liabilities*	463,000	117,000
Total accrued liabilities	$9,830,000	$1,311,000

* Other accrued liabilities consist of franchise tax, accounting fee, interest payable, merchant services charges, none of which individually represent greater than five percent of total current liabilities.

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 Pediatric Portfolio. The fair value of the warrant derivative liability was valued using the lattice valuation methodology. The fair value of acquisition-related contingent consideration is based on a Monte-Carlo methodology using estimated discounted future cash flows and periodic assessments of the probability of occurrence of potential future events. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:

Level 1:	Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;

Level 2:	Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and

Level 3:	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 March 31, 2020 and June 30, 2019, by level within the fair value hierarchy.

		Fair Value Measurements at March 31, 2020
	Fair Value at March 31, 2020	Quoted Priced in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Recurring:
Warrant derivative liability	$11,000	–	–	$11,000
Contingent consideration	18,754,000	–	–	18,754,000
CVR liability	5,219,000	–	–	5,219,000

	$23,984,000	–	–	$23,984,000

		Fair Value Measurements at June 30, 2019
	Fair Value at June 30, 2019	Quoted Priced in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Recurring:
Warrant derivative liability	$13,000	–	–	$13,000
Contingent consideration	23,326,000	–	–	23,326,000
CVR liability	–	–	–	–

	$23,339,000	–	–	$23,339,000

Warrant Derivative 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 March 31, 2020, 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 March 31, 2020	As of June 30, 2019
Warrant Derivative Liability
Volatility	163.2%	163.2%
Equivalent term (years)	2.88	3.13
Risk-free interest rate	1.71%	1.71%
Dividend yield	0.00%	0.00%

Contingent Consideration. The Company classifies its contingent consideration liability in connection with the acquisition of Natesto, Tuzistra XR, ZolpiMist and Innovus, within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. The Company estimates the fair value of our contingent consideration liability based on projected payment dates, discount rates, probabilities of payment, and projected revenues. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow methodology.

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 nine months ended March 31, 2020.

The Company recognized approximately $0.2 million in contingent consideration as a result of the February 14, 2020 Innovus Merger. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimates risk that the milestones are achieved. There was no material change in this valuation as of March 31, 2020.

Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to 4.7 million shares of the Company’s common stock, or cash either upon the option of the Company or in the event there are insufficient shares available to satisfy such obligations. The fair value of the contingent value rights was based on a model in which each individual payout was deemed either (a) more likely than not to be paid out or (b) less likely than not to be paid out. From there, each obligation was then discounted at a 30% discount rate to reflect the overall risk to the contingent future payouts pursuant to the CVRs. This value is then remeasured both for future expected payout at well as the increase fair value due to the time value of money. On of March 31, 2020, the Company paid out 1.2 million shares of the Company’s common stock to satisfy the first $2 million milestone, which relates to the Innovus achievement of $24 million in revenues during the 2019 calendar year.

Non-Recurring Fair Value Measurements

The following table represents those asset and liabilities measured on a non-recurring basis for the nine months ended March 31, 2020 as a result of the (i) November 1, 2019 acquisition of the Pediatrics Portfolio and (ii) the February 14, 2020 Innovus Merger.

AYTU BIOPHARMA, INC - FORM 10-Q - May 14, 2020

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