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EX-10.1 - EXHIBIT 10.1 - AYTU BIOPHARMA, INCex_224614.htm
 
 

Table of Contents



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, 2020 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

logo_sml.jpg

 

 

 

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

 

(Registrants 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, 2021, there were 17,882,893 shares of Common Stock outstanding.

 



 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES FOR THE QUARTER ENDED DECEMBER December 31, 2020

 

 

INDEX 

 

PART IFINANCIAL INFORMATION

 

 

Page

Item 1. Consolidated Financial Statements

 

Condensed Consolidated Balance Sheets as of  December 31, 2019 (unaudited) and June 30, 2020 (audited)

4

Condensed Consolidated Statements of Operations for the three and six-months ended December 31, 2020 (unaudited) and December 31, 2019 (unaudited)

6

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

7

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2020 (unaudited) and the six months ended December 31, 2019 (unaudited)

8

Notes to Condensed Consolidated Financial Statements (unaudited)

10

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

31

 

 

Item 4. Controls and Procedures

31

 

 

PART IIOTHER INFORMATION

 

Item 1. Legal Proceedings

32

 

 

Item 1A. Risk Factors

33

 

 

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

33

 

 

Item 3. Defaults Upon Senior Securities

33

 

 

Item 4. Mine Safety Disclosures

33

 

 

Item 5. Other Information

33

 

 

Item 6. Exhibits

34

 

 

SIGNATURES

 

 

 

 

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 II 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, Karbinal®, Natesto®, Poly-Vi-Flor®, Tuzistra®, and ZolpiMist®, and the recently acquired consumer health products such as DiabaSens®, FlutiCare®, UriVarx® and Vesele®, as well as Beyond Human-®, a specialty marketing platform, which are protected under applicable intellectual property laws and we own or have the rights to. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names.

 

 

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

   

December 31,

   

June 30,

 
   

2020

   

2020

 
   

(Unaudited)

         

Assets

 

Current assets

               

Cash and cash equivalents

  $ 62,032,642     $ 48,081,715  

Restricted cash

    251,964       251,592  

Accounts receivable, net

    7,001,068       5,175,924  

Inventory, net

    6,571,254       9,999,441  

Prepaid expenses and other

    6,081,766       5,715,089  

Other current assets

    10,598,771       5,742,011  

Total current assets

    92,537,465       74,965,772  

Fixed assets, net

    89,663       258,516  

Right-of-use asset

    310,479       634,093  

Licensed assets, net

    15,449,281       16,586,847  

Patents and tradenames, net

    10,197,112       11,081,048  

Product technology rights, net

    20,051,666       21,186,666  

Deposits

    16,023       32,981  

Goodwill

    28,090,407       28,090,407  

Total long-term assets

    74,204,631       77,870,558  

Total assets

  $ 166,742,096     $ 152,836,330  

 

See the accompanying Notes to the Condensed Consolidated Financial Statements

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets, contd

 

   

December 31,

   

June 30,

 
   

2020

   

2020

 
   

(Unaudited)

         

Liabilities

 

Current liabilities

               

Accounts payable and other

  $ 7,157,208     $ 11,824,560  

Accrued liabilities

    8,877,715       7,849,855  

Accrued compensation

    2,540,353       3,117,177  

Debt

    41,318       982,076  

Contract liability

    475,680       339,336  

Current lease liability

    100,263       300,426  

Current portion of fixed payment arrangements

    1,937,476       2,340,166  

Current portion of CVR liabilities

    977,475       839,734  

Current portion of contingent consideration

    3,705,931       713,251  

Total current liabilities

    25,813,419       28,306,581  

Long-term contingent consideration, net of current portion

    12,573,916       12,874,351  

Long-term lease liability, net of current portion

    211,056       725,374  

Long-term fixed payment arrangements, net of current portion

    9,945,554       11,171,491  

Long-term CVR liabilities, net of current portion

    5,494,112       4,731,866  

Other long-term liabilities

    11,371       11,371  

Total liabilities

    54,049,428       57,821,034  

Commitments and contingencies (Note 10)

               

Stockholders' equity

               

Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 0 and 0, respectively as of December 31, 2020 and June 30, 2020, respectively.

    -       -  

Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 17,882,893 and 12,583,736, respectively as of December 31, 2020 and June 30, 2020.

    1,788       1,259  

Additional paid-in capital

    246,532,284       215,024,216  

Accumulated deficit

    (133,841,404 )     (120,010,179 )

Total stockholders' equity

    112,692,668       95,015,296  

Total liabilities and stockholders' equity

  $ 166,742,096     $ 152,836,330  

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31,

   

December 31,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues

                               

Product revenue, net

  $ 15,147,034     $ 3,175,236     $ 28,667,280     $ 4,615,062  
                                 

Operating expenses

                               

Cost of sales

    5,998,389       606,046       9,817,545       981,766  

Research and development

    286,572       66,675       469,437       144,695  

Selling, general and administrative

    12,852,614       6,516,160       24,342,983       11,662,603  

Amortization of intangible assets

    1,584,580       953,450       3,169,161       1,528,567  

Total operating expenses

    20,722,155       8,142,331       37,799,126       14,317,631  

Loss from operations

    (5,575,121 )     (4,967,095 )     (9,131,846 )     (9,702,569 )

Other (expense) income

                               

Other (expense), net

    (378,958 )     (446,958 )     (1,130,499 )     (642,344 )

Loss from change in fair value of contingent consideration

    (3,313,656 )     -       (3,311,320 )     -  

Gain from derecognition of contingent consideration

    -       5,199,806       -       5,199,806  

Gain from warrant derivative liability

    -       -       -       1,830  

Loss on debt exchange

    (257,559 )     -       (257,559 )     -  

Total other (expense) income

    (3,950,173 )     4,752,848       (4,699,378 )     4,559,292  

Net loss

  $ (9,525,294 )   $ (214,247 )   $ (13,831,224 )   $ (5,143,277 )

Weighted average number of common shares outstanding

    13,281,904       1,753,815       12,717,180       1,642,599  

Basic and diluted net loss per common share

  $ (0.72 )   $ (0.12 )   $ (1.09 )   $ (3.13 )

 

See the accompanying Notes to the Condensed Consolidated Financial Statements.

 

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

 

Condensed 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 (audited)

    3,594,981     $ 359       1,753,808     $ 176     $ 113,476,783     $ (106,389,500 )   $ 7,087,818  

Stock-based compensation

    -       -       -       -       165,171       -       165,171  

Preferred stock converted in common stock

    (443,833 )     (44 )     44,384       5       39       -       -  

Net loss

    -       -       -       -       -       (4,929,030 )     (4,929,030 )
BALANCE - September 30, 2019     3,151,148     $ 315       1,798,192     $ 181     $ 113,641,993     $ (111,318,530 )   $ 2,323,959  
                                                         
Stock-based compensation           $ -       -     $ -     $ 162,264     $ -     $ 162,264  
Issuance of Series F preferred stock from October 2019 private placement financing, net of $741,650 issuance costs     10,000       1       -       -       5,249,483       -       5,249,484  
Warrants issued in connection with the private placement      -       -       -       -       4,008,866       -       4,008,866  
Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics     9,805,845       981                       5,558,933               5,559,914  
Preferred stock converted in common stock     (2,751,148 )     (275 )     275,115       28       247       -       -  
Net loss             -       -       -       -       (214,247 )   $ (214,247 )

BALANCE - December 30, 2019

    10,215,845     $ 1,022       2,073,307     $ 209     $ 128,621,786     $ (111,532,777 )   $ 17,090,240  

 

   

Preferred Stock

   

Common Stock

   

Additional paid-in

   

Accumulated

   

Total Stockholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

capital

   

Deficit

   

Equity

 

BALANCE - June 30, 2020 (audited)

    -     $ -       12,583,736     $ 1,259     $ 215,024,216     $ (120,010,179 )   $ 95,015,296  

Stock-based compensation

    -       -       -       -       454,918       -       454,918  

Issuance costs

    -       -       -       -       (101,537 )     -       (101,537 )

Net loss

    -       -       -       -       -       (4,305,931 )     (4,305,931 )
BALANCE - September 30, 2020     -     $ -       12,583,736     $ 1,259     $ 215,377,597     $ (124,316,110 )   $ 91,062,746  
                                                         
Stock-based compensation     -     $ -       -     $ -     $ 508,059     $ -     $ 508,059  
Exchange of debt for common stock     -       -       130,081       13       1,057,546       -       1,057,559  
Issuance of common stock, net of issue costs and warrants     -       -       5,169,076       516       28,316,928       -       28,317,444  
Warrants issued in connection with common stock offering     -       -                       1,272,154               1,272,154  
      -       -                                          
Net loss      -       -       -       -       -       (9,525,294 )     (9,525,294 )

BALANCE - December 31, 2020

    -     $ -       17,882,893     $ 1,788     $ 246,532,284     $ (133,841,404 )   $ 112,692,668  

 

See the accompanying Notes to the Condensed Consolidated Financial Statements

 

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   

Six Months Ended

 
   

December 31,

 
   

2020

   

2019

 
                 

Operating Activities

               

Net loss

  $ (13,831,224 )   $ (5,143,277 )

Adjustments to reconcile net loss to cash used in operating activities:

               

Depreciation, amortization and accretion

    4,012,909       2,157,540  

Stock-based compensation expense

    962,977       327,435  
Loss from change in fair value of contingent consideration     2,411,333          

(Gain) from derecognition of contingent consideration

    -       (5,199,806 )

Loss on sale of equipment

    112,110       -  

(Gain) on termination of lease

    (343,185 )     -  
Loss on debt exchange     257,559          

Changes in allowance for bad debt

    147,627       -  

Loss from change in fair value of CVR

    899,987       -  

Derivative income

            (1,830 )

Changes in operating assets and liabilities:

               

Increase in accounts receivable

    (1,965,271 )     (3,456,364 )

Increase in inventory

    (3,615,662 )     (132,199 )

Increase in prepaid expenses and other

    (379,337 )     (171,430 )

Decrease (increase) in other current assets

    2,295,055       (136,694 )

(Decrease) increase in accounts payable and other

    (3,136,163 )     2,806,973  

Increase in accrued liabilities

    1,711,466       145,467  

Decrease in accrued compensation

    (576,824 )     (62,729 )
Decrease in fixed payment arrangements     -       (216,150 )

Increase in contract liability

    136,344       -  

Decrease in deferred rent

    -       (3,990 )

Net cash used in operating activities

    (10,900,299 )     (9,087,054 )
                 

Investing Activities

               

Deposit

    (3,923 )     -  

Contingent consideration payment

    (42,760 )     (104,635 )
Note receivable     -       (1,350,000 )
Purchase of assets     -       (4,500,000 )

Net cash used in investing activities

    (46,683 )     (5,954,635 )
                 

Financing Activities

               
Issuance of preferred, common stock and warrants     32,249,652       10,000,000  

Issuance cost related to registered offering

    (4,292,781 )     (741,650 )

Payments made to borrowings

    (272,727 )     -  

Payments made to fixed payment arrangements

    (2,785,863 )     -  

Net cash provided by financing activities

    24,898,281       9,258,350  
                 

Net change in cash, restricted cash and cash equivalents

    13,951,299       (5,783,339 )

Cash, restricted cash and cash equivalents at beginning of period

    48,333,307       11,294,227  

Cash, restricted cash and cash equivalents at end of period

  $ 62,284,606     $ 5,510,888  

 

See the accompanying Notes to the Condensed Consolidated Financial Statements.

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows, contd

(unaudited)

 

   

Six Months Ended

 
   

December 31,

 

Supplemental disclosures of cash and non-cash investing and financing transactions

 

2020

   

2019

 

Warrants issued to underwriters

  $ 356,139     $ -  

Cash paid for interest

    306,752       3,390  

Fair value of right-to-use asset and related lease liability

    43,082       412,691  

Contingent consideration included in accounts payable

    -       3,430  
Debt exchange     1,057,559       -  

Fixed payment arrangements included in accrued liabilities

    1,050,000       -  
Inventory swap     7,043,849       -  

Acquisition costs included in accounts payable

    -       59,014  

Exchange of convertible preferred stock into common stock

  $ -     $ 44  

 

See the accompanying Notes to the Condensed Consolidated Financial Statements

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

 

 

 1. Nature of Business, Financial Condition, Basis of Presentation

 

 

Nature of Business. Aytu BioScience, Inc. (“Aytu”, the “Company” or “we”) is a commercial-stage specialty pharmaceutical company focused on commercializing novel products that address significant healthcare needs in both prescription and consumer health categories. The Company currently operates its Aytu BioScience business, consisting of the primary care product portfolio (the “Primary Care Portfolio”), the prescription pediatric portfolio (the “Pediatric Portfolio”), and its Aytu consumer healthcare products business (the “Consumer Health Portfolio”). The Aytu BioScience business is focused on commercializing prescription pharmaceutical products treating hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, male infertility, and various pediatric conditions. The Aytu Consumer Health business is focused on commercializing consumer healthcare products. The Company plans to expand into other therapeutic areas as opportunities arise. The Company was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated in the state of Delaware on June 8, 2015.

 

The Primary Care Portfolio consists of (i) Natesto, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra XR, the only FDA-approved 12-hour codeine-based antitussive syrup.

 

The Pediatric Care Portfolio, acquired on November 1, 2019, (the “Pediatric Portfolio”), includes (i) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various formulations for infants and children with fluoride deficiency, (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; and (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions.

 

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

 

On December 10, 2020, the Company and Neutron Acquisition Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Neos Therapeutics, Inc. (“Neos”). The Merger Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Neos, with Neos surviving as a wholly owned subsidiary of the Company (the “Neos Merger”). The Neos Merger is subject to the approval of both the shareholders of the Company and Neos. Based on the number of shares of the Company’s common stock anticipated to be immediately issued to Neos stockholders upon closing of the merger (which could be impacted by changes in Neos stock price leading to the exercise of options not otherwise being assumed by the Company) and the number of shares of the Company’s common stock outstanding as of December 31, 2020, it is expected that, immediately after completion of the merger, former Neos stockholders will own approximately 24% of the outstanding shares of the Company’s common stock. Existing Company stockholders are expected to own approximately 76% of the outstanding shares of the Company’s common stock. In addition, each unvested option to acquire shares of Neos common stock that is outstanding as of immediately prior to the close of the Neos Merger (the "Effective Time") with an exercise price equal to or less than $0.95 shall be assumed by the Company and converted into an option to acquire shares of the Company’s common stock on the same terms and conditions. The number of shares of Company’s common stock subject to each such assumed option shall be equal to (i) the number of shares of Neos common stock subject to the corresponding assumed option immediately prior to the close multiplied by (ii) 0.1088 (the "Exchange Ratio"), rounded down, if necessary, to the nearest whole share of the Company’s common stock, and such assumed option shall have an exercise price per share (rounded up to the nearest whole cent) equal to (A) the exercise price per share of Neos common stock otherwise purchasable pursuant to the corresponding assumed option divided by (B) the Exchange Ratio. As of February 5, 2021, the total estimated shares to be issued in connection with this merger totaled approximately 5.4 million with an estimated fair value of $44.2 million.

 

In connection with the execution of the Merger Agreement, the Company and Neos have entered into a Commitment Letter (the “Bridge Commitment Letter”) for the Company to provide financing to Neos under an unsecured convertible note, in an aggregate amount of up to $5,000,000, subject to the terms set forth therein (the "Bridge Financing"). Interest accrues on the principal amount outstanding under the note at a rate of 6.0% per annum, compounding monthly and commencing if and when such Bridge Financing is provided. If an event of default has occurred and is continuing, the interest rate then in effect will be increased by 2.0% per annum, and all overdue obligations under the note will bear interest at the interest rate in effect at such time plus the additional 2.0% per annum. The Company's rights under the note, including rights to payment, are subordinated to the rights of Neos’s existing senior lenders. The maturity date of the note is the earlier of the acceleration of the obligations evidenced thereby and November 7, 2022. In the event that Neos draws down on the note, the exchange ratio will be adjusted downward by an amount equal to 0.00011 for every $100,000 of financing funded to Neos under the note.

 

In April of 2020, the Company entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in pre-clinical studies, and we plan to advance this technology and assess its safety and efficacy in human studies, initially focused on COVID-19 patients.

 

The Company recently established a purchasing relationship with a U.S. supplier of Emergency Use Authorization (EUA) authorized antigen tests. Antigen tests rapidly detect the presence of the SARS-CoV-2 virus antigen via a nasopharyngeal swab and are used without laboratory equipment. Demand for rapid antigen tests has increased in recent months across the U.S.

 

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

 

Financial Condition. As of December 31, 2020, the Company had approximately $62.3 million of cash, cash equivalents and restricted cash. The Company’s operations have historically consumed cash and are expected to continue to require cash, but at a declining rate.

 

Revenues for the three- and six- months ended December 31, 2020were $15.1 million and $28.7 million, compared to $3.2 million and $4.6 million for the same periods ended December 31, 2019, an increase of approximately 377% and 521%,  respectively. Revenue is expected to increase over time, which will allow the Company to rely less on the Company's existing cash balance and proceeds from financing transactions. Cash used by operations during the six-months ended December 31, 2020 was $10.9 million compared to $9.1 million for the six-months ended December 31, 2019. The increase is due primarily to an increase in working capital and pay down of other liabilities.

 

 

As of the date of this Report, the Company expects costs for its current operations to increase modestly as the Company continues to integrate the acquisition of the Pediatrics Portfolio, Innovus and if approved by the Company's and Neos' shareholders, the Neos Merger, continues to focus on revenue growth through increasing product sales and additional acquisitions. The Company’s current assets totaling approximately $92.5 million as of December 31, 2020 plus the proceeds expected from ongoing product sales will be used to fund existing operations. The Company may continue to access the capital markets from time-to-time when market conditions are favorable. The timing and amount of capital that may be raised is dependent on 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. The Company raised approximately $29.6 million, net during the three months ended December 31, 2020, from the sale of approximately 0.4 million shares using the Company’s at-the-market facility and from the issuance of approximately 4.8 million shares of the Company's common stock and 0.3 million placement agent warrants on December 15, 2020. On December 10, 2020, the Company exchanged $0.8 million of debt into 0.1 million shares of the Company's common stock, eliminating the use cash to satisfy this obligation (see Note 15). Between December 31, 2020, and the filing date of this quarterly report on Form 10-Q, the Company has not issued common stock under the Company’s at-the-market offering program.  As of the date of this report, the Company has adequate capital resources to complete its near-term operating objectives. 

 

Since the Company has sufficient cash on-hand as of December 31, 2020 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, the Company reports that there exists no indication of substantial doubt about its ability to continue as a going concern.

 

If the Company is unable to raise adequate capital in the future when it is required, the Company's management can adjust its operating plans to reduce the magnitude of the capital need under its existing operating plan. Some of the adjustments that could be made include delays of and reductions to commercial programs, reductions in headcount, narrowing the scope of the Company’s commercial plans, or reductions to its research and development programs. Without sufficient operating capital, the Company could be required to relinquish rights to products or renegotiate to maintain such rights on less favorable terms than it would otherwise choose. This may lead to impairment or other charges, which could materially affect the Company’s balance sheet and operating results.

 

Basis of Presentation. The unaudited consolidated financial statements contained in this report represent the financial statements of the Company and its wholly-owned subsidiaries, Aytu Women’s Health, LLC, Innovus Pharmaceuticals, Inc., and Aytu Therapeutics, LLC. The unaudited consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2020, 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 the Company and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended December 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 six-month periods ended December 31, 2020, and 2019, is unaudited. 

 

On December 8, 2020, the Company effected a reverse stock split in which each common stockholder received one share of common stock for every 10 shares held (herein referred to collectively as the “Reverse Stock Split”). All share and per share amounts in this report have been adjusted to reflect the effect of the Reverse Stock Split.

 

Interim Unaudited Condensed Consolidated Financial Statements. The accompanying condensed consolidated balance sheet as of December 31, 2020, and the condensed consolidated statements of operations, stockholders’ equity, for the three- and six- months ended, and the interim condensed consolidated statements of cash flows for the six-months ended December 31, 2020 and 2019, are unaudited. The condensed consolidated balance sheet as of June 30, 2020 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial condition, its operations and cash flows for the periods presented. The historical results are not necessarily indicative of future results, and the results of operations for the three and six-months ended December 31, 2020 are not necessarily indicative of the results to be expected for the full year or any other period.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent consideration, contingent value rights ("CVRs"), and fixed payment obligations at the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the determination of the fair value of equity awards, the fair value of identified assets and liabilities acquired in business combinations, the useful lives of property and equipment, intangible assets, impairment of long-lived and intangible assets, including goodwill, provisions for doubtful accounts receivable, certain accrued expenses, and the discount rate used in measuring lease liabilities. These estimates and assumptions are based on the Company’s historical results and management’s future expectations. Actual results could differ from those estimates.

 

 

Significant Accounting Policies

 

The Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company’s unaudited condensed consolidated financial statements and related notes during the three months ended December 31, 2020.

 

Adoption of New Accounting Pronouncements

 

Fair Value Measurements (ASU 2018-13). 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. The Company adopted this as of July 1, 2020, the beginning of the Company’s fiscal year-ended June 30, 2021. The most relevant component of ASU 2018-13 to the Company’s financial statements relates to the need to disclose the range and weighted-average of significant unobservable inputs used in Level 3 fair value measurements. However, the Company discloses on a discrete basis all significant inputs for all Level 3 Fair Value measurements.

 

Recent Accounting Pronouncements

 

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 the Company’s financial condition, results of operations, cash flows or disclosures.

 

 

2. Acquisitions

 

The Pediatric Portfolio

 

On October 10, 2019, the Company entered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to acquire the Pediatric Portfolio, which closed on November 1, 2019. The Pediatric Portfolio consists of four main prescription products (i) Cefaclor™ for Oral Suspension, (iii) Karbinal® ER (iii) Poly-Vi-Flor®, and (iv) Tri-Vi-Flor™.

Total consideration transferred to Cerecor consisted of $4.5 million cash and approximately 980 thousand shares of Series G Convertible Preferred Stock. The Company also assumed certain of Cerecor’s financial and royalty obligations, and not more than $2.7 million of Medicaid rebates and up to $0.8 million of product returns, of which $3.5 million has been incurred. The Company also hired 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 Pediatric 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. In June 2020, the Company paid down a $15 million balloon payment originally owed in January 2021 to reduce the fixed liability.

 

Further, certain of the products in the Pediatric 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 remainder of the aggregate purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified product portfolio that is expected to provide revenue and cost synergies.

 

The following table summarized the fair value of assets acquired and liabilities assumed at the date of acquisition. 

 

   

As of

 
   

November 1, 2019

 

Consideration

       

Cash and cash equivalents

  $ 4,500,000  

Fair value of Series G Convertible Preferred Stock

       

Total shares issued

    9,805,845  

Estimated fair value per share of Aytu common stock

  $ 0.567  

Estimated fair value of equity consideration transferred

    5,559,914  

Total consideration transferred

  $ 10,059,914  

Recognized amounts of identifiable assets acquired and liabilities assumed

       

Inventory

  $ 459,123  

Prepaid assets

    1,743,555  

Other current assets

    2,525,886  

Intangible assets - product marketing rights

    22,700,000  

Accrued liabilities

    (300,000 )

Accrued product program liabilities

    (6,683,932 )

Assumed fixed payment obligations

  $ (29,837,853 )

Total identifiable net assets

    (9,393,221 )

Goodwill

  $ 19,453,135  

 

The fair values of intangible assets, including product technology rights were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 9).

 

The fair value of the net identifiable asset acquired was determined to be $22.7 million, which is being amortized over ten years.

 

Innovus Merger (Consumer Health Portfolio)

 

On February 14, 2020, the Company completed the Merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon the effectiveness of the Merger, a subsidiary of the Company merged with and into Innovus, and all outstanding Innovus common stock was exchanged for approximately 380 thousand shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 200 thousand shares of Series H Convertible Preferred stock of the Company and retired. The remaining Innovus warrants outstanding, those without ‘cash- out’ rights, at the time of the Merger, continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus is now a 100% wholly-owned subsidiary of the Company, (“Aytu Consumer Health”).

 

On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 120 thousand shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24 million revenue milestone for the calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million.

 

In addition, as part of the Merger, the Company assumed approximately $3.1 million of notes payable, $0.8 million in lease liabilities, and other assumed liabilities associated with Innovus. Of the $3.1 million of notes payable, approximately $2.2 million was converted into approximately 180 thousand shares of the Company’s common stock since February 14, 2020. Approximately $41 thousand remained outstanding as of December 31, 2020.

 

 

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

 

   

As of

 
   

February 14, 2020

 

Consideration

       

Fair Value of Aytu Common Stock

       

Total shares issued at close

    3,810,393  

Estimated fair value per share of Aytu common stock

  $ 0.756  

Estimated fair value of equity consideration transferred

  $ 2,880,581  

Fair value of Series H Convertible Preferred Stock

       

Total shares issued

    1,997,736  

Estimated fair value per share of Aytu common stock

  $ 0.756  

Estimated fair value of equity consideration transferred

  $ 1,510,288  

Fair value of former Innovus warrants

  $ 15,315  

Fair value of Contingent Value Rights

  $ 7,049,079  

Forgiveness of Note Payable owed to the Company

  $ 1,350,000  

Total consideration transferred

  $ 12,805,263  

 

   

As of

 
   

February 14, 2020

 

Total consideration transferred

  $ 12,805,263  

Recognized amounts of identified assets acquired and liabilities assumed

       

Cash and cash equivalents

  $ 390,916  

Accounts receivable

    278,826  

Inventory

    1,149,625  

Prepaid expenses and other current assets

    1,692,133  

Other long-term assets

    36,781  

Right-to-use assets

    328,410  

Property, plant and equipment

    190,393  

Trademarks and patents

    11,744,000  

Accounts payable and accrued other expenses

    (7,202,309 )

Other current liabilities

    (629,601 )

Notes payable

    (3,056,361 )

Lease liability

    (754,822 )

Total identifiable assets

  $ 4,167,991  

Goodwill

  $ 8,637,272  

 

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

 

The fair value of the net identifiable assets acquired was determined to be $11.7 million, which is being amortized over a range between 1.5 to 10 years.

 

 

Unaudited Pro Forma Information

 

The following supplemental unaudited proforma financial information presents the Company’s results as if the following acquisitions had occurred on July 1, 2019:

 

 

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

 

Merger with Innovus effective February 14, 2020.

 

The unaudited pro forma results have been prepared based on estimates and assumptions, which management believes are reasonable, however, the results are not necessarily indicative of the consolidated results of operations had the acquisition occurred on July 1, 2019, or of future results of operations:

 

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31, 2020

   

December 31, 2019

   

December 31, 2020

   

December 31, 2019

 
   

Actual

   

Pro forma

   

Actual

   

Pro forma

 
   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 

Total revenues, net

  $ 15,147,034     $ 8,929,802     $ 28,667,280     $ 20,541,401  

Net (loss)

    (9,525,294 )     (2,450,247 )     (13,831,224 )     (11,255,247 )

Net (loss) per share (aa)

  $ (0.72 )   $ (1.40 )   $ (1.09 )   $ (6.85 )

 

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

 

 

3. Revenue Recognition

 

Revenues by Geographic location. The following table reflects our product revenues by geographic location as determined by the billing address of our customers:

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31,

   

December 31,

 
   

2020

   

2019

   

2020

   

2019

 
   

(unaudited)

   

(unaudited)

   

(unaudited)

   

(unaudited)

 

U.S.

  $ 13,757,000     $ 3,047,000     $ 25,901,000     $ 4,309,000  

International

    1,390,000       128,000       2,766,000       306,000  

  Total net revenue

  $ 15,147,000     $ 3,175,000     $ 28,667,000     $ 4,615,000  

 

Revenues by Product Portfolio. Net revenue disaggregated by significant product portfolio for the three and six-months ended December 31, 2020 and December 31, 2019 were as follows:

 

   

Three Months Ended December 31,

   

Six Months Ended December 31,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Primary care and devices portfolio

  $ 4,097,000     $ 1,190,000     $ 7,130,000     $ 2,630,000  

Pediatric portfolio

    3,115,000       1,985,000       5,834,000       1,985,000  

Consumer Health portfolio

    7,935,000       -       15,703,000       -  

  Total net revenue

  $ 15,147,000     $ 3,175,000     $ 28,667,000     $ 4,615,000  

 

 

 

4. 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. The Company wrote down $0.1 million and $0.2 million of inventory during the three and six-months ended December 31, 2020, respectively. There was no inventory written down for the three and six-months ended December 31, 2019, respectively.

 

Inventory balances consist of the following:

 

   

As of

   

As of

 
   

December 31,

   

June 30,

 
   

2020

   

2020

 

Raw materials

  $ 590,000     $ 397,000  

Finished goods, net

    5,981,000       9,603,000  
    $ 6,571,000     $ 10,000,000  

 

 

5. Fixed Assets

 

Fixed assets are recorded at cost and once placed in service, are depreciated on a straight-line basis over the estimated useful lives. Leasehold improvements are amortized over the shorter of the estimated economic life or related lease term. Fixed assets consist of the following:

 

         

As of

   

As of

 
   

Estimated

   

December 31,

   

June 30,

 
   

Useful Lives in years

   

2020

   

2020

 

Manufacturing equipment

  2 - 5     $ 112,000     $ 112,000  

Leasehold improvements

  3       111,000       229,000  

Office equipment, furniture and other

  2 - 5       281,000       312,000  

Lab equipment

  3 - 5       90,000       90,000  

Less accumulated depreciation and amortization

          (504,000 )     (484,000 )

Fixed assets, net

        $ 90,000     $ 259,000  

 

During the six months ended December 31, 2020, the Company recognized a loss of $0.1 million on sale of equipment due to termination of leases.

 

        Depreciation and amortization expense totaled $18,000 and $16,000 for the three-months ended December 31, 2020 and 2019, respectively, and $51,000 and $32,000 for the six-months ended December 31, 2020 and 2019, respectively.

 

 

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

 

The Company previously 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 the 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 were 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.

 

 

As of December 31, 2020, the maturities of the Company’s future minimum lease payments were as follows:

 

 

   

Operating

   

Finance

 

2021 (remaining 6 months)

  $ 37,000     $ 61,000  

2022

    18,000       124,000  

2023

    -       127,000  

2024

    -       35,000  

2025

    -       3,000  

Total lease payments

    55,000       350,000  

Less: Imputed interest

            (39,000 )

Lease liabilities

          $ 311,000  

 

Cash paid for amounts included in the measurement of finance lease liabilities for the six months ended December 31, 2020 and 2019 was $147,000 and $63,000, respectively, and was included in net cash used in operating activities in the consolidated statements of cash flows.

 

As of December 31, 2020, the weighted average remaining lease term is 2.28 years, and the weighted average discount rate used to determine operating lease liabilities was 8.0%. Rent expense for the three-months ended December 31, 2020 and 2019 totaled $90,000 and $30,000. Rent expense for the six-months ended December 31, 2020 and 2019 totaled $160,000 and $63,000, respectively.

 

On August 28, 2020, the Company’s Innovus subsidiary signed a lease termination agreement with its lessor to terminate its lease effective September 30, 2020. The original lease termination date was April 30, 2023. As part of the agreement, Innovus agreed to make a cash payment to the landlord the equivalent of two additional months’ rent aggregating to $44,306 plus $125,000 less the security deposit of $20,881. The fair value of the lease liability related to this facility lease was approximately $0.7 million as of June 30, 2020. The Company recognized a gain of approximately $343,000 during the six months ended December 31, 2020.

       

       On October 1, 2020, the Company's Innovus subsidiary entered into a short-term lease for warehouse space in Carlsbad, CA. The lease term is for one-year with an option to terminate after six months with ninety days' notice. This lease is accounted for as a short-term lease and is not included as a component of the Company's right-to-use assets and related liability.

 

 

 

 

7. Intangible Assets Amortizable

 

The Company currently holds the following intangible asset portfolios as of December 31, 2020: (i) Licensed assets, which consist of pharmaceutical product assets that were acquired prior to July 1, 2020; (ii) Product technology rights, acquired from the November 1, 2019 acquisition of the Pediatric Portfolio from Cerecor; and, as a result of the Merger with Innovus on February 14, 2020, both, (iii) the Acquired product distribution rights; consisting of patents and trade names, and the Acquired customer lists.

 

If acquired in an asset acquisition, the Company capitalized the acquisition cost of each licensed patent or tradename, which can include a combination of both upfront consideration, as well as the estimated future contingent consideration estimated at the acquisition date. If acquired in a business combination, the Company capitalizes the estimated fair value of the intangible asset or assets acquired, based primarily on a discounted cash flow model approach or relief-from-royalties model.

 

The following table provides the summary of the Company’s intangible assets as of December 31, 2020 and June 30, 2020, respectively.

 

   

December 31, 2020

 
   

Gross Carrying Amount

   

Accumulated Amortization

   

Impairment

   

Net Carrying Amount

    Weighted-Average Remaining Life (in years)  

Licensed assets

  $ 23,649,000     $ (8,200,000 )   $ -     $ 15,449,000       11.72  

Acquired product technology right

    22,700,000       (2,648,000 )     -       20,052,000       8.84  

Acquired product distribution rights

    11,354,000       (1,319,000 )     -       10,035,000       7.27  

Acquired customer lists

    390,000       (227,000 )     -       163,000       0.62  
    $ 58,093,000     $ (12,394,000 )   $ -     $ 45,699,000       9.44  

 

   

June 30, 2020

 
   

Gross Carrying Amount

   

Accumulated Amortization

   

Impairment

   

Net Carrying Amount

    Weighted-Average Remaining Life (in years)  

Licensed assets

  $ 23,649,000     $ (7,062,000 )   $ -     $ 16,587,000       11.88  

MiOXSYS Patent

    380,000       (185,000 )     (195,000 )     -       -  

Acquired product technology right

    22,700,000       (1,513,000 )     -       21,187,000       9.34  

Acquired product distribution rights

    11,354,000       (565,000 )     -       10,789,000       7.78  

Acquired customer lists

    390,000       (98,000 )     -       292,000       1.12  
    $ 58,473,000     $ (9,423,000 )   $ (195,000 )   $ 48,855,000       9.11  

 

 

The following table summarizes the estimated future amortization expense to be recognized over the next five years and periods thereafter:

 

   

Amortization

 

2021

  $ 3,157,000  

2022

    6,085,000  

2023

    6,045,000  

2024

    6,033,000  

2025

    4,480,000  

Thereafter

    19,899,000  
    $ 45,699,000  

 

Certain of the Company’s amortizable intangible assets include renewal options, extending the expected life of the asset. The renewal periods range between approximately 1 to 20 years depending on the license, patent, or other agreement. Renewals are accounted for when they are reasonably assured. Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of intangible assets was $1.6 million and $0.9 million for the three months ended December 31, 2020 and 2019, respectively. Amortization expense of intangible assets was $3.2 million and $1.5 million for the six months ended December 31, 2020 and 2019, respectively.

 

 

8. Accrued liabilities

 

Accrued liabilities consist of the following:

 

   

As of

   

As of

 
   

December 31,

   

June 30,

 
   

2020

   

2020

 

Accrued settlement expense

  $ 150,000     $ 315,000  

Accrued program liabilities

    1,386,000       959,000  

Accrued product-related fees

    2,332,000       2,471,000  

Credit card liabilities

    712,000       510,000  

Medicaid liabilities

    2,094,000       1,842,000  

Return reserve

    1,656,000       1,329,000  

Sales taxes payable

    175,000       175,000  

Other accrued liabilities*

    373,000       249,000  

Total accrued liabilities

  $ 8,878,000     $ 7,850,000  

 

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

 

 

9. Fair Value Considerations

 

The Company’s asset and liability classified financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability, and contingent consideration. The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The fair value of acquisition-related contingent consideration is based on Monte-Carlo models. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.

 

 

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

 

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

 

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

 

Level 3: Unobservable inputs that are supported by little or no market activity.

 

The Company’s assets and liabilities which are measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. Aytu has consistently applied the valuation techniques discussed below in all periods presented.

 

Recurring Fair Value Measurements

 

The following table presents the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of  December 31, 2020 and June 30, 2020, by level within the fair value hierarchy.

 

           

Fair Value Measurements at December 31, 2020

 
   

Fair Value at December 31, 2020

   

Quoted Priced in Active Markets for Identical Assets (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Recurring:

                               

Contingent consideration

    16,280,000                   16,280,000  

CVR liability

    6,472,000                   6,472,000  
    $ 22,752,000                 $ 22,752,000  

 

           

Fair Value Measurements at June 30, 2020

 
   

Fair Value at June 30, 2020

   

Quoted Priced in Active Markets for Identical Assets
(Level 1)

   

Significant Other Observable Inputs
(Level 2)

   

Significant Unobservable Inputs
(Level 3)

 

Recurring:

                               

Contingent consideration

    13,588,000                   13,588,000  

CVR liability

  $ 5,572,000                 $ 5,572,000  
    $ 19,160,000                 $ 19,160,000  

 

Contingent Consideration. The Company classifies its contingent consideration liability in connection with the acquisition of 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.

 

As of November 2, 2018, the contingent consideration, related to this Tuzistra XR, was valued at $8.8 million using a Monte Carlo simulation. As of December 31,2020, the contingent consideration was revalued at $15.8 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables.  As of December 31, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made. However, approximately $3.0 million is expected to be paid in November 2021, as this milestone will be satisfied.

 

 

The contingent consideration related to the ZolpiMist royalty payments was valued at $2.6 million using a Monte Carlo simulation, as of June 11, 2018. As of December 31, 2020, the contingent consideration was revalued at $0.3 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments.  As of December 31, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.

 

The Company recognized approximately $0.2 million in product related contingent consideration as a result of the February 14, 2020 Innovus Merger. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimates risk that the milestones are achieved. The contingent consideration accretion expense for the three and six-months ended December 31, 2020 and 2019 was $15,000, and $28,000, respectively. There was no material change in this valuation as of December 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 470 thousand 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 Monte Carlo model which takes into account current interest rates and expected sales potential. On March 31, 2020, the Company paid out approximately 120 thousand 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. The unrealized loss for the three and six-months ended December 31, 2020 and 2019was $0.1 million and $0.8 million, respectively. The CVR's did not exist until after December 31, 2019. 

 

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 three months ended December 31, 2020:

 

   

CVR Liability

   

Contingent Consideration

 

Balance as of June 30, 2020

  $ 5,572,000     $ 13,588,000  

Transfers into Level 3

           

Transfer out of Level 3

           

Total gains, losses, amortization or accretion in period

           

Included in earnings

  $ 900,000     $ 2,735,000  

Included in other comprehensive income

           

Purchases, issues, sales and settlements

           

Purchases

           

Issues

           

Sales

           

Settlements

        $ (43,000 )

Balance as of December 31, 2020

  $ 6,472,000     $ 16,280,000  

 

 

Significant Assumptions

 

Contingent consideration. The Company estimates the fair value of the Contingent Consideration at each reporting date using management's forecast as the baseline for developing a Monte-Carlo model. The other significant assumptions used in the Monte Carlo Simulation as of December 31, 2020, were as follows: 

 

 

   

As of December 31, 2020

Contingent Consideration

   

Credit risk assumption

 

19.10%

Sales volatility

 

45.00%

Credit spread

 

4.00%

Time steps per year

 

1

Number of iterations

 

500

 

Contingent value rights. The Company estimates the fair value of the Contingent Value Rights at each reporting date using management's forecast as the baseline for developing a Monte-Carlo model. The other significant assumptions used in the Monte Carlo Simulation as of December 31, 2020 were as follows:

 

 

   

As of December 31, 2020

Contingent Value Rights

   

Credit risk assumption

 

9.6%

Time steps per year

 

30.00

Number of iterations

 

10,000

 

 

 

10. Commitments and Contingencies

 

Commitments and contingencies are described below and summarized by the following as of December 31, 2020:

 

   

Total

   

2021

   

2022

   

2023

   

2024

   

2025

   

Thereafter

 

Prescription database

  $ 1,278,000     $ 545,000     $ 733,000       -       -       -       -  

Pediatric portfolio fixed payments and product minimums

    15,825,000       1,650,000       3,300,000       3,300,000       3,300,000       3,300,000       975,000  

Inventory purchase commitment

    1,717,000       981,000       736,000       -       -       -       -  

CVR liability

    14,000,000       2,000,000       2,000,000       5,000,000       5,000,000       -       -  

Product contingent liability

    2,500,000       -       -       -       -       -       2,500,000  

Product milestone payments

    3,000,000       -       3,000,000       -       -       -       -  
                                                         
    $ 38,320,000     $ 5,176,000     $ 9,769,000     $ 8,300,000     $ 8,300,000     $ 3,300,000     $ 3,475,000  

 

Prescription Database

 

In May 2016, the Company entered into an agreement with a vendor that will provide it with prescription database information. The Company agreed to pay approximately $1.6 million over three years for access to the database of prescriptions written for Natesto. In January 2020, the Company amended the agreement and agreed to pay additional $0.6 million to add access to the database of prescriptions written for the Pediatric Portfolio. The payments have been broken down into quarterly payments.

 

Pediatric Portfolio Fixed Payments and Product Milestone

 

The Company assumed two fixed, periodic payment obligations to an investor (the “Fixed Obligation”). Beginning November 1, 2019 through January 2021, the Company will pay monthly payments of $86,840, with a balloon payment of $15,000,000 due in January 2021. A second fixed obligation requires the Company pay a minimum of $100,000 monthly through February 2026, except for $210,767 paid in January 2020. 

 

On May 29, 2020, the Company entered into an Early Payment Agreement and Escrow Instruction (the “Early Payment Agreement”) pursuant to which the Company agreed to pay $15.0 million to the investor in early satisfaction of the Balloon Payment Obligation. The parties to the Early Payment Agreement acknowledged and agreed that the remaining fixed payments other than the Balloon Payment Obligation remain due and payable pursuant to the terms of the Agreement, and that nothing in the Early Payment Agreement alters, amends, or waives any provisions or obligations in the Waiver or the Investor agreement other than as expressly set forth therein.

 

In addition, the Company acquired a Supply and Distribution Agreement with Tris Pharma, Inc. ("TRIS"), (the “Karbinal Agreement”), under which the Company is granted the exclusive right to distribute and sell the product in the United States. The initial term of the Karbinal Agreement was 20 years. The Company will pay TRIS a royalty equal to 23.5% of net sales. A third party agreed to offset the 23.5% royalty payable by 8.5%, for a net royalty equal to 15%, in fiscal year 2018 and 2019 for net sales of Karbinal.

 

The Karbinal Agreement make-whole payment is capped at $2,100,000 each year. The Karbinal Agreement also contains minimum unit sales commitments, which is based on a commercial year that spans from August 1 through July 31, of 70,000 units through 2025. The Company is required to pay TRIS a royalty make whole payment of $30 for each unit under the 70,000-unit annual minimum sales commitment through 2025. The annual payment is due in August of each year. The Karbinal Agreement also has multiple commercial milestone obligations that aggregate up to $3.0 million based on cumulative net sales, the first of which is triggered at $40.0 million of net revenues.

 

Inventory Purchase Commitment

 

On May 1, 2020, the Company's Innovus subsidiary entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Hikma Pharmaceuticals USA, Inc. (“Hikma”). Pursuant to the settlement agreement, Innovus has agreed to purchase and Hikma has agreed to manufacture a minimum amount of our branded fluticasone propionate nasal spray USP, 50 mcg per spray (FlutiCare®), under Hikma’s FDA approved ANDA No. 207957 in the U.S. The commitment requires Innovus to purchase three batches of product through fiscal year 2022 each of which amount to $1.0 million.

 

CVR Liability

 

On February 14, 2020, the Company closed on the Merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon closing the Merger, a subsidiary of the Company merged with and into Innovus and entered into a Contingent Value Rights Agreement (the “CVR Agreement”). Each CVR entitles its holder to receive its pro rata share, payable in cash or stock, at the option of Aytu, of certain payment amounts if the targets are met. If any of the payment amounts is earned, they are to be paid by the end of the first quarter of the calendar year following the year in which they are earned. Multiple revenue milestones can be earned in one year.

 

On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 120 thousand shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24.0 million revenue milestone for calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million during the fiscal year ended June 30, 2020. No additional milestone payments have been paid as of December 31, 2020.

 

 

Product Contingent Liability

 

In February 2015, Innovus acquired Novalere, which included the rights associated with distributing FlutiCare. As part of the Merger, Innovus is obligated to make 5 additional payments of $0.5 million each when certain levels of FlutiCare sales are achieved. The discounted value as of December 31, 2020, is approximately $0.2 million.

 

 

Product Milestone Payments

 

In connection with the Company’s intangible assets, Aytu has certain milestone payments, totaling $3.0 million, payable at a future date, are not directly tied to future sales, but upon other events certain to happen. These obligations are included in the valuation of the Company’s contingent consideration (see Note 9).

 

 

11. Capital Structure

 

The Company has 200 million shares of common stock authorized with a par value of $0.0001 per share and 50 million shares of preferred stock authorized with a par value of $0.0001 per share. On December 31, 2020 and June 30, 2020, Aytu had 17,882,893 and 12,583,736 common shares outstanding, respectively, and zero preferred shares outstanding, respectively.

 

Included in the common stock outstanding are 365,869 shares of restricted stock issued to executives, directors, employees, and consultants.

 

In June 2020, the Company initiated an at-the-market offering program, which allows the Company to sell and issue shares of our common stock from time-to-time. The company issued 430,230 shares of common stock, with total gross proceeds of $6.8 million before deducting underwriting discounts, commissions and other offering expenses payable by the Company of $0.2 million through December 31, 2020. The Company did not issue any shares of common stock under the at-the-market offering program during the three months ended September 30, 2020. During the three months ended December 31, 2020, the Company issued 352,912 shares of common stock, with total gross proceeds of approximately $3.6 million before deducting underwriting discounts, commissions, and other offering expenses payable by the Company of $0.1 million.

 

In July 2020, the Company paid $1.5 million issuance cost in cash related to the March 10, 12, and 19 offerings (the “March Offerings”) and issued 92,302 warrants to purchase 92,302 shares of the Company's common stock with an weighted-average exercise price of $15.99 to an investment bank conjunction with the March 2020 offerings. The warrants have a term of one year from the issuance date. These warrants had at issuance a fair value of approximately $356,000 and were valued using a Black-Scholes model.

 

On December 10, 2020, the Company entered into an exchange agreement to exchange the $0.8 million of debt outstanding for 130,081 shares of the Company's common stock (see Note 15).

 

    On December 10, 2020, the Company entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“Wainwright”) (as amended and restated, the “Underwriting Agreement”). Pursuant to the Underwriting Agreement, the Company agreed to sell, in an upsized firm commitment offering, 4,166,667 shares (the “Shares”) of the Company’s common stock, $0.0001 par value per share (the “Common Stock”), to Wainwright at an offering price to the public of $6.00 per share, less underwriting discounts and commissions. In addition, pursuant to the Underwriting Agreement, the Company has granted Wainwright a 30-day option to purchase up to an additional 625,000 shares of Common Stock at the same offering price to the public, less underwriting discounts and commissions. Wainwright exercised their over-allotment option in full, purchasing total common stock of 4,791,667 shares. In connection with the offering, the Company issued 311,458 underwriter warrants to purchase up 311,458 shares of common stock. The exercise price per share of the underwriter warrants is $7.50 (equal to 125% of the public offering price per share for the shares of common stock sold in the offering) and the underwriter warrants have a term of five years from the date of effectiveness of the offering. The underwriter warrants will be exercisable immediately.

 

 

 

12. Equity Incentive Plan

 

Share-based Compensation Plans

 

On June 1, 2015, the Company’s stockholders approved the Aytu BioScience 2015 Stock Option and Incentive Plan (the “2015 Plan”), which, as amended in July 2017, provides for the award of stock options, stock appreciation rights, restricted stock and other equity awards for up to an aggregate of 3.0 million shares of common stock. The shares of common stock underlying any awards that are forfeited, canceled, reacquired by Aytu prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2015 Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. On February 13, 2020, the Company’s stockholders approved an increase to 5.0 million total shares of common stock in the 2015 Plan. As of December 31, 2020, we have 4,560,864 shares that are available for grant under the 2015 Plan.

 

 

Stock Options

 

Employee Stock Options:

 

The fair value of the options is calculated using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding components of the model, including the estimated fair value of the underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to valuation. Aytu estimates the expected term based on the average of the vesting term and the contractual term of the options. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity. There were no grants of stock options to employees during the three- and six-months ended December 31, 2020 and 2019

 

Stock option activity is as follows:

 

   

Number of Options

   

Weighted Average Exercise Price

   

Weighted Average Remaining Contractual Life in Years

   

Aggregate Intrinsic Value

 
Outstanding June 30, 2020     76,614     $ 19.39       9.67     $ -  

Granted

    -       -                  

Exercised

    -       -                  

Forfeited/Cancelled

    (3,187 )     -                  

Expired

    (2 )     -                  

Outstanding December 31, 2020

    73,425       19.71       9.08       -  

Exercisable at December 31, 2020

    9,095     $ 67.62       7.81     $ -  

 

As of December 31, 2020, there was $494,000 unrecognized option-based compensation expense related to non-vested stock options. The Company expects to recognize this expense over a weighted-average period of 2.68 years.

 

Restricted Stock

 

Restricted stock activity is as follows:

 

   

Number of Shares

    Weighted Average Grant Date Fair Value    

Weighted Average Remaining Contractual Life in Years

 

Unvested at June 30, 2020

    418,454     $ 14.69       6.4  

Granted

                       

Vested

    (52,743 )                

Forfeited

                       

Unvested at December 31, 2020

    365,711     $ 15.66       6.3  

 

Under the 2015 Plan, there was $4.3 million of total unrecognized stock-based compensation expense related to the non-vested restricted stock as of December 31, 2020. The Company expects to recognize this expense over a weighted-average period of 6.3 years. The Company previously issued 158 shares of restricted stock outside the Company’s 2015 Plan, which vest in July 2026. The unrecognized expense related to these shares was $1.1 million as of December 31, 2020 and is expected to be recognized over the weighted average period of 5.5 years.

 

Stock-based compensation expense related to the fair value of stock options and restricted stock was included in the statements of operations as selling, general and administrative expenses as set forth in the table below:

 

   

Three Months Ended December 31,

   

Six Months Ended December 31,

 

Selling, general and administrative:

 

2020

   

2019

   

2020

   

2019

 

Stock options

  $ 94,000     $ 2,000     $ 166,000     $ 7,000  

Restricted stock

    414,000       160,000       797,000       320,000  

Total stock-based compensation expense

  $ 508,000     $ 162,000     $ 963,000     $ 327,000  

 

 

 

13. Warrants

 

In July 2020, the Company issued 92,302 shares of warrants with a weighted average exercise price of $15.99 in connection with the March Offerings. The warrants have a term of one year from the issuance date. These warrants have a fair value of $356,000 and are classified within stockholders' equity.

 

On December 15, 2020, the Company issued 311,458 shares of warrants with an exercise price of $7.50 in connection with the December 15, 2020 offering. These warrants have a fair value of approximately $1.3 million and are classified within stockholders' equity.

 

Significant assumptions in valuing the warrants issued during the quarter are as follows:

 

   

Warrants Issued Three Months Ended December 31, 2020

 

Expected volatility

    100 %

Equivalent term (years)

    5.0  

Risk-free rate

    37 %

Dividend yield

    0.00 %

 

A summary of equity-based warrants is as follows:

 

   

Number of Warrants

   

Weighted Average Exercise Price

   

Weighted Average Remaining Contractual Life in Years

 

Outstanding June 30, 2020

    2,288,528     $ 30.26       2.00  

Warrants issued

    403,760                  

Warrants expired

    (842 )                

Warrants exercised

    -                  

Outstanding December 31, 2020

    2,691,446     $ 26.94       1.65  

 

 

14. Net Loss per Common Share

 

Basic income (loss) per common share is calculated by dividing the net income (loss) available to the common shareholders by the weighted average number of common shares outstanding during that period. Diluted net loss per share reflects the potential of securities that could share in the net loss of the Company. For each three-month period presented, the basic and diluted loss per share were the same for 2020 and 2019, as they were not included in the calculation of the diluted net loss per share because they would have been anti-dilutive.

 

The following table sets-forth securities that could be potentially dilutive, but as of the three and six-months ended December 31, 2020 and 2019 are anti-dilutive, and therefore excluded from the calculation of diluted earnings per share.

 

     

Three Months Ended

 
     

December 31,

 
     

2020

   

2019

 

Warrants to purchase common stock - liability classified

    24,105       24,105  

Warrant to purchase common stock - equity classified

(Note 13)

    2,691,446       1,621,891  

Employee stock options

(Note 12)

    73,425       156  

Employee unvested restricted stock

(Note 12)

    365,869       234,261  

Convertible preferred stock

(Note 11)

    -       315,115  
        3,154,845       2,195,528  

 

 

 

15. Notes Payable

 

The Aytu BioScience Note. On February 27, 2020, the Company issued a $0.8 million promissory note (the “Note”) and received consideration of approximately $0.6 million. The Note had an eight-month term with principal and interest payable on November 1, 2020, and the recognition of approximately $0.2 million of debt discount related to the issuance of promissory notes. The discount was amortized over the life of the promissory notes through the fourth quarter of calendar 2020. During the three and six-months ended months ended December 31, 2020 and 2019 the Company recorded approximately $15,000 and $70,000, respectively, of related amortization. There was no amortization for the same period in 2019. On December 10, 2020, the Company agreed to exchange the Note for 130,081 shares of the Company's common stock. The Company recognized a non-cash loss of approximately $0.3 million as a result of this exchange, saving the Company $0.8 million in cash that otherwise would have been used to satisfy this obligation on December 31, 2020.

 

The Innovus Notes. On January 9, 2020, prior to the completion of the merger, Innovus Pharmaceuticals, Inc., entered into a note agreement upon which it received gross proceeds of $0.4 million with a principal amount of $0.5 million. The note requires twelve equal monthly payments of approximately $45,000. As of December 31, 2020, the net balance of the note was $41,000.

 

 

16. Segment reporting

 

The Company’s chief operating decision maker (the “CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.

 

The Company manages and aggregates its operational and financial information in accordance with two reportable segments: Aytu BioScience and Aytu Consumer Health. The Aytu BioScience segment consists of the Company’s prescription products. The Aytu Consumer Health segment contains the Company’s consumers healthcare products, which was the result of the Innovus Merger. Select financial information for these segments is as follows:

 

   

Three months Ended December 31,

   

Six Months Ended December 31,

 
   

2020

   

2019

   

2020

   

2019

 

Consolidated revenue:

                               

Aytu BioScience

  $ 7,212,000     $ 3,175,000     $ 13,000,000     $ 4,615,000  

Aytu Consumer Health

    7,935,000       -       16,000,000       -  

Consolidated revenue

    15,147,000       3,175,000       29,000,000       4,615,000  
                                 

Consolidated net loss:

                               

Aytu BioScience

    (8,267,000 )     (214,000 )     (11,218,000 )     (5,143,000 )

Aytu Consumer Health

    (1,258,000 )     -       (2,613,000 )     -  

Consolidated net loss

    (9,525,000 )     (214,000 )     (13,831,000 )     (5,143,000 )

 

   

As of

   

As of

 
   

December 31,

   

June 30,

 
   

2020

   

2020

 

Total assets:

               

Aytu BioScience

  $ 140,647,000     $ 126,267,000  

Aytu Consumer Health

    26,095,000       26,569,000  

Total assets

  $ 166,742,000     $ 152,836,000  

 

 

17. Related Party Transactions

 

Tris Pharma, Inc.

 

On November 2, 2018, the Company entered into a License, Development, Manufacturing and Supply Agreement (the “Tris License Agreement”). On November 1, 2019, the Company acquired the rights to Karbinal as a result of the acquisition of the Pediatric Portfolio from Cerecor, Inc. (See Notes 2 and 10). Mr. Ketan Mehta serves as a Director on the Board of Directors of the Company and is also the Chief Executive Officer of TRIS. The Company paid TRIS approximately $1.9 million and $0.2 million during the three months ended December 31, 2020 and 2019, respectively for a combination of royalty payments, inventory purchases and other payments as contractually required. The Company’s liabilities, including accrued royalties, contingent consideration and fixed payment obligations were $24.1 million and $24.8 million as of December 31, 2020 and 2019, respectively. In October 2020, the Company paid Tris approximately $1.6 million related to its Karbinal fixed payment obligation.

 

 

25

 

 

18. Subsequent Events

 

Except for below, see Footnote 1 for information relating to certain events occurring between December 31, 2020, and the filing of this report Form 10-Q, impacting information disclosed above.

 

MiOXSYS® Licensing Agreement

 

On January 20, 2021, the Company signed an Exclusive License Agreement (the “ MiOXSYS Agreement”) to exclusively license the intellectual property surrounding the use of the Company's rapid in vitro diagnostic test that accurately measures seminal oxidative stress, including all components of the MiOXSYS® commercial system (the “Product”). The Agreement has been entered into with Avrio Genetics, LLC (“Avrio Genetics”), a Pennsylvania-based limited liability company focused on reproductive health.

 

Under the MiOXSYS Agreement, Avrio Genetics will purchase existing inventory, commercialize, and market the Product under a royalty on Product net sales with a minimum annual payment fee structure for a term of ten (10) years, with the term continuing in perpetuity with a fixed percentage royalty rate based on Product sales payable annually to the Company. The Company will continue to own the intellectual property in the Product, with Avrio Genetics bearing all related patent maintenance and prosecution fees, commercial expenses, and regulatory fees. Further, Avrio Genetics will foster and expand all related customer, manufacturing, marketing, and distribution relationships in their effort to increase the commercialization of the Product. With Avrio’s assumption of the Product-related expenses and management of the Product programs, the Company expects to eliminate expenses associated the Product while maintain future revenue potential in the form of royalty and minimum annual payments from Avrio Genetics.

 

 

 

 

 

 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

This discussion should be read in conjunction with Aytu BioScience, Inc.s Annual Report on Form 10-K for the year ended June 30, 2020, filed on October 6, 2020. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the risk factors included in Aytus Form 10-K filed with the Securities and Exchange Commission on October 6, 2020.

 

Overview

 

We are a commercial-stage specialty pharmaceutical company focused on commercializing novel products that address significant healthcare needs in both prescription and consumer health categories. We are currently operate our Aytu BioScience business, consisting of the Primary Care Portfolio (the “Primary Care Portfolio”) and Pediatric Care Portfolio (the “Pediatric Portfolio”), and our Aytu Consumer Health business (the “Consumer Health Portfolio”). Our Aytu BioScience business is focused on prescription pharmaceutical products treating hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, male infertility, and various pediatric conditions. Our Consumer Health business is focused on consumer health products. We plan to expand into other therapeutic areas as opportunities arise. Aytu was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated in the state of Delaware on June 8, 2015.

 

The primary care portfolio includes (i) Natesto, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra XR, the only FDA- approved 12-hour codeine-based antitussive syrup.

 

The pediatric care portfolio, acquired on November 1, 2019, (the “Pediatric Portfolio”), includes (i) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various formulations for infants and children with fluoride deficiency, (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; and (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions.

 

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

 

On December 10, 2020, Aytu and Neutron Acquisition Sub, Inc., our wholly owned subsidiary (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Neos Therapeutics, Inc. (“Neos”). The Merger Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Neos, with Neos surviving as a wholly owned subsidiary of Aytu (the “Neos Merger”). The Neos Merger is subject to the approval of both the shareholders of Aytu and Neos. Based on the number of shares of our common stock anticipated to be immediately issued to Neos stockholders upon closing of the merger (which could be impacted by changes in Neos stock price leading to exercise of options not otherwise being assumed by Aytu or by additional issuances of Neos common stock that we may consent to) and the number of shares of our common stock outstanding as of December 31, 2020, it is expected that, immediately after completion of the merger, former Neos stockholders are expected to own approximately 24% of the outstanding shares of the our common stock and existing Aytu stockholders are expected to own approximately 76% of the outstanding shares of our common stock. In addition, each unvested option to acquire shares of Neos common stock that is outstanding as of immediately prior to the close of the Neos Merger  (the "Effective Time") with an exercise price equal to or less than $0.95 shall be assumed by Aytu and converted into an option to acquire shares of our common stock on the same terms and conditions. The number of shares of our common stock subject to each such assumed option shall be equal to (i) the number of shares of Neos common stock subject to the corresponding assumed option immediately prior to the Effective Time multiplied by (ii) 0.1088 (the "Exchange Ratio"), rounded down, if necessary, to the nearest whole share of our common stock, and such assumed option shall have an exercise price per share (rounded up to the nearest whole cent) equal to (A) the exercise price per share of Neos common stock otherwise purchasable pursuant to the corresponding assumed option divided by (B) the Exchange Ratio. As of February 5, 2021, the total estimated shares to be issued as consideration in connection with this merger totaled approximately 5.4 million with an estimated fair value of $44.2 million. 

 

In connection with the execution of the Merger Agreement, Aytu and Neos have entered into a Commitment Letter (the “Bridge Commitment Letter”) for us to provide financing to Neos under an unsecured convertible note, in an aggregate amount of up to $5,000,000, subject to the terms set forth therein (the "Bridge Financing"). Interest accrues on the principal amount outstanding under the note at a rate of 6.0% per annum, compounding monthly and commencing if and when such Bridge Financing is provided. If an event of default has occurred and is continuing, the interest rate then in effect will be increased by 2.0% per annum, and all overdue obligations under the note will bear interest at the interest rate in effect at such time plus the additional 2.0% per annum. Our rights under the note, including rights to payment, are subordinated to the rights of Neos’s existing senior lenders. The maturity date of the note is the earlier of the acceleration of the obligations evidenced thereby and November 7, 2022. In the event that Neos draws down on the note, the exchange ratio will be adjusted downward by an amount equal to 0.00011 for every $100,000 of financing funded to Neos under the note.

 

In April of 2020, the Company entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in pre-clinical studies, and we plan to advance this technology and assess its safety and efficacy in human studies, initially focused on COVID-19 patients.

 

We recently established a purchasing relationship with a U.S. supplier of Emergency Use Authorization (EUA) authorized antigen tests. Antigen tests rapidly detect the presence of the SARS-CoV-2 virus antigen via a nasopharyngeal swab and are used without laboratory equipment. Demand for rapid antigen tests has increased in recent months across the U.S.

Our strategy is to continue building our portfolio of revenue-generating products, leveraging our focused commercial team and expertise to build leading brands within large therapeutic markets.

 

Strategic Growth Initiatives

 

Pursuant to our strategy of identifying and acquiring complimentary assets and companies, we expect to substantially increase our revenue generating capacity and provide opportunities to reduce our combined operating losses through a combination of our recent acquisitions during the twelve months ended June 30, 2020, coupled with the December 10, 2020 announcement of our planto merge with Neos. The combined impact of these transactions on revenue and operating expenses is expected to position us to achieve positive cash flow earlier than previously expected.

 

 Strategic Rx Acquisitions. On December 10, 2020, we entered in a Merger Agreement with Neos Therapeutics, Inc. The merger is subject the approval by shareholders of both Aytu and Neos. The merger can accelerate our path to profitability, with estimated annualized cost synergies of up to approximately $15M beginning FY 2022. Neos’ established, multi-brand ADHD portfolio, will enhance our footprint in pediatrics and expanding our presence in adjacent specialty care segments. Opportunity to leverage and further enhance Neos RxConnect, a best-in-class patient support program, for our product portfolio of best-in-class prescription therapeutics, and potentially, our consumer health products.

 

On November 1 2019, we acquired the Cerecor, Inc.'s ("Cerecor") portfolio of prescription pediatric therapeutics (the “Pediatric Portfolio”). The Pediatric Portfolio consists of four pharmaceutical and other prescription products consisting of (i) Cefaclor for Oral Suspension, (ii) Karbinal ER, (iii) Poly- Vi-Flor, and (iv) Tri-Vi-Flor. . Total consideration transferred consisted of $4.5 million cash and approximately 9.8 million shares of Series G Convertible Preferred Stock, plus the assumption not more than $3.5 million of Medicaid rebates and products returns. In addition, we hired the majority of the Cerecor’s workforce focused on commercial sales, commercial contracts, and customer relationships.

 

 

 

We have assumed obligations due to an investor including fixed and variable payments. We assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was due and paid. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026. The Company subsequently paid down the $15 million balloon payment early in June 2020, removing this obligation from our balance sheet.

 

Further, certain of the products in the Pediatric Portfolio require royalty payments ranging from 15% to 38.0% of net revenue. One of the products in the Pediatric Portfolio requires us to generate minimum annual sales sufficient to represent annual royalties of approximately $1.75 million.

 

Consumer Health Acquisitions. On February 14, 2020, we closed on the merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. The acquisition of Innovus has enabled the company to expand into the consumer healthcare market with Innovus’ over-the-counter medicines and other consumer health products. We expect Innovus to continue to develop additional consumer healthcare products and expand its product portfolio. This, we expect, will drive additional revenue for the consumer health subsidiary and contribute meaningfully to the company's overall revenue growth.

 

Additionally, we expect to continue to participate in the U.S. COVID-19 testing market. We have purchased 1,600,000 COVID-19 IgG/IgM rapid antibody tests from Zhejiang Orient Gene Biotech Limited via our distribution agreement with L.B. Resources, Ltd. We also signed an exclusive license with Cedars-Sinai Medical Center for rights to a medical device technology platform that is a prospective treatment for COVID-19 for seriously ill patients in the ICU. We expect to advance this technology through development and, if proven clinically effective and able to be manufactured at scale, expect to commercialize this product in the future.

 

In the near-term, we expect to create value for shareholders by implementing a focused strategy of increasing sales of our prescription therapeutics while leveraging our commercial infrastructure. Further, we expect to increase sales of our consumer healthcare product portfolio. Additionally, we expect to expand both our Rx and consumer health product portfolios through continuous business and product development. Finally, we expect to identify operational efficiencies identified through our recent transactions and implement expense reductions accordingly.

 

ACCOUNTING POLICIES

 

Significant Accounting Policies and Estimates

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to recoverability and useful lives of long-lived assets, stock compensation, valuation of derivative instruments, allowances, contingent consideration, contingent value rights ("CVR"), fixed payment arrangements and going concern. Management bases its estimates and judgments on historical experience and on various other factors, including COVID-19, that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these critical accounting policies have a significant impact on the results we report in our consolidated financial statements. Our significant accounting policies and estimates are included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on October 6, 2020.

 

Information regarding our accounting policies and estimates can be found in the Notes to the consolidated Financial Statements.

 

Newly Issued Accounting Pronouncements

 

Information regarding the recently issued accounting standards (adopted and pending adoption as of December 31, 2020) are presented in Note 1 to the condensed consolidated financial statements.

 

 

RESULTS OF OPERATIONS

 

Results of Operations Three and Six Months Ended December 31, 2020 compared to the Three and Six Months Ended December 31, 2019

 

  

   

Three months Ended December 31,

                 
   

2020

   

2019

   

Change

    %  
                                 

Revenues

                               

Product and service revenue, net

  $ 15,147,034     $ 3,175,236     $ 11,971,798       377 %

Operating expenses

                               

Cost of sales

    5,998,389       606,046       5,392,343       890 %

Research and development

    286,572       66,675       219,897       330 %

Selling, general and administrative

    12,852,614       6,516,160       6,336,454       97 %

Amortization of intangible assets

    1,584,581       953,450       631,131       66 %

Total operating expenses

    20,722,156       8,142,331       12,579,825       154 %

Loss from operations

    (5,575,122 )     (4,967,095 )     (608,027 )     12 %

Other (expense) income

                               

Other (expense), net

    (378,958 )     (446,958 )     68,000       -15 %

Loss from change in fair value of contingent consideration

    (3,313,656 )     -       (3,313,656 )      
Gain from derecognition of contingent consideration     -       5,199,806       (5,199,806 )     -100 %
Loss on debt exchange     (257,559 )     -       (257,559 )      
Total other (expense) income     (3,950,173 )     4,752,848       (8,703,021 )     -183 %
Net loss   $ (9,525,295 )   $ (214,247 )   $ (9,311,048 )     4346 %
                                 
                                 
                                 
                                 
    Six Months Ended December 31,                  
    2020     2019     Change       %
                                 
Revenues                                
Product and service revenue, net   $ 28,667,280     $ 4,615,062     $ 24,052,218       521 %
Operating expenses                                
Cost of sales     9,817,545       981,766       8,835,779       900 %
Research and development     469,437       144,695       324,742       224 %
Selling, general and administrative     24,342,983