AYTU BIOSCIENCE, INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Quarterly Period Ended: March 31, 2020
or
☐
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File No. 001-38247
AYTU BIOSCIENCE, INC.
(www.aytubio.com)
|
Delaware
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47-0883144
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer Identification No.)
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373 Inverness Parkway, Suite 206
Englewood, Colorado 80112
(Address of principal executive offices, including zip
code)
(720) 437-6580
(Registrant’s telephone number, including area
code)
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes
☒
No
☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes
☒
No
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☒
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
|
|
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
☒
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common
Stock, par value $0.0001 per share
|
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AYTU
|
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The
NASDAQ Stock Market LLC
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As of
May 1, 2020, there were 120,261,423 shares of Common Stock
outstanding.
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED MARCH 31, 2020
INDEX
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Page
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PART I—FINANCIAL INFORMATION
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4
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4
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5
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6
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8
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10
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40
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49
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49
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PART II—OTHER INFORMATION
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49
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49
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53
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53
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53
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53
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53
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56
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, or the Exchange Act. All statements other
than statements of historical facts contained in this Quarterly
Report, including statements regarding our anticipated future
clinical and regulatory events, future financial position, business
strategy and plans and objectives of management for future
operations, are forward-looking statements. Forward looking
statements are generally written in the future tense and/or are
preceded by words such as “may,” “will,”
“should,” “forecast,” “could,”
“expect,” “suggest,” “believe,”
“estimate,” “continue,”
“anticipate,” “intend,” “plan,”
or similar words, or the negatives of such terms or other
variations on such terms or comparable terminology. Such
forward-looking statements include, without limitation: the planned
expanded commercialization of our products and the potential future
commercialization of our product candidates, our anticipated future
cash position; our plan to acquire additional assets; our
anticipated future growth rates;
anticipated sales increases; anticipated net
revenue increases;
amounts of
certain future expenses and costs of goods sold;
anticipated increases to operating
expenses, research and development expenses, and selling, general,
and administrative expenses;
and future events under our
current and potential future collaborations. These forward-looking
statements are subject to a number of risks, uncertainties and
assumptions, including without limitation the risks described in
“Risk Factors” in Part I, Item 1A of our most
recent Annual Report on Form 10-K, and in the reports we file with
the Securities and Exchange Commission. These risks are not
exhaustive. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and
it is not possible for our management to predict all risk factors,
nor can we assess the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any
forward-looking statements. Forward-looking statements should not
be relied upon as predictions of future events. We can provide no
assurance that the events and circumstances reflected in the
forward-looking statements will be achieved or occur and actual
results could differ materially from those projected in the
forward-looking statements. We assume no obligation to update or
supplement forward-looking statements, except as may be required
under applicable law.
This
Quarterly Report on Form 10-Q includes trademarks, such as Aytu,
Natesto
®
,
Tuzistra
®
XR,
ZolpiMistT
TM
,
MiOXSYS
®
,
AcipHex
®
Sprinkle™, Cefaclor for Oral Suspension, Karbinal®,
Flexichamber™, Poly-Vi-Flor
®
and
Tri-Vi-Flor™ , and the recently acquired products such as
Fluticare
®
,
Diabasens
®
,
Urivarx
®
,
Sensum
®
, and
Vesele
®
, as well as
Beyond Human
®
, a specialty
marketing platform, which are protected under applicable
intellectual property laws and we own or have the rights to. Solely
for convenience, our trademarks and trade names referred to in this
Quarterly Report on Form 10-Q may appear without the
®
or
TM
symbols, but such references are not
intended to indicate in any way that we will not assert, to the
fullest extent under applicable law, our rights to these trademarks
and trade names.
3
PART
I—FINANCIAL INFORMATION
Item 1.
Consolidated
F
inancial
Statements
Consolidated
B
alance Sheets
|
|
March
31,
|
June
30,
|
|
|
2020
|
2019
|
|
|
(Unaudited)
|
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Assets
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||
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Current
assets
|
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Cash and cash
equivalents
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$
62,264,676
|
$
11,044,227
|
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Restricted
cash
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251,407
|
250,000
|
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Accounts receivable,
net
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10,203,423
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1,740,787
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Inventory,
net
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3,854,685
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1,440,069
|
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Prepaid expenses and
other
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4,830,881
|
957,781
|
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Other current
assets
|
1,849,598
|
–
|
|
Total current
assets
|
83,254,670
|
15,432,864
|
|
|
|
|
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Fixed assets,
net
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288,415
|
203,733
|
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Right-of-use
asset
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675,980
|
–
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|
Licensed assets,
net
|
17,155,632
|
18,861,983
|
|
Patents and tradenames,
net
|
11,724,626
|
220,611
|
|
Product technology rights,
net
|
21,754,166
|
–
|
|
Deposits
|
38,981
|
2,200
|
|
Goodwill
|
24,061,333
|
–
|
|
Total long-term
assets
|
75,699,133
|
19,288,527
|
|
Total
assets
|
$
158,953,803
|
$
34,721,391
|
|
|
|
|
|
Liabilities
|
||
|
Current
liabilities
|
|
|
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Accounts payable and
other
|
$
6,956,091
|
$
2,133,522
|
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Accrued
liabilities
|
9,830,373
|
1,311,488
|
|
Accrued
compensation
|
2,210,288
|
849,498
|
|
Current lease
liability
|
289,238
|
–
|
|
Current contingent
consideration
|
947,449
|
1,078,068
|
|
Current portion of fixed
payment arrangements
|
17,395,219
|
–
|
|
Current portion of CVR
liabilities
|
786,564
|
–
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Notes payable,
net
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3,617,680
|
–
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Total current
liabilities
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42,032,902
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5,372,576
|
|
|
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Long-term contingent
consideration, net of current portion
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17,806,573
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22,247,796
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Long-term lease liability,
net of current portion
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804,393
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–
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Long-term fixed payment
arrangements, net of current portion
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8,162,494
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–
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Long-term CVR liabilities,
net of current portion
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4,432,254
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–
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Warrant derivative
liability
|
11,371
|
13,201
|
|
Total
liabilities
|
73,249,987
|
27,633,573
|
|
|
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Commitments
and contingencies (Note 12)
|
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Stockholders'
equity
|
|
|
|
Preferred Stock, par value
$.0001; 50,000,000 shares authorized; shares issued and outstanding
9,805,845 and 3,594,981, respectively as of March 31, 2020
(unaudited) and June 30, 2019.
|
981
|
359
|
|
Common Stock, par value
$.0001; 200,000,000 shares authorized; shares issued and
outstanding 100,610,380 and 17,538,071, respectively as of March
31, 2020 (unaudited) and June 30, 2019.
|
10,061
|
1,754
|
|
Additional paid-in
capital
|
202,557,856
|
113,475,205
|
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Accumulated
deficit
|
(116,865,082
)
|
(106,389,500
)
|
|
Total stockholders'
equity
|
85,703,816
|
7,087,818
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
$
158,953,803
|
34,721,391
|
See the
accompanying Notes to the Consolidated Financial
Statement
4
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of
O
perations
(unaudited)
|
|
Three Months
Ended March 31,
|
Nine Months
Ended March 31,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Product
revenue, net
|
$
8,156,173
|
$
2,372,016
|
$
12,771,235
|
$
5,598,836
|
|
License
revenue
|
|
5,776
|
|
5,776
|
|
Total
revenue
|
$
8,156,173
|
$
2,377,792
|
$
12,771,235
|
$
5,604,612
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
Cost
of sales
|
1,998,659
|
616,853
|
2,980,425
|
1,552,950
|
|
Research and
development
|
78,502
|
108,901
|
223,197
|
413,808
|
|
Selling,
general and administrative
|
9,501,469
|
5,368,762
|
21,164,072
|
13,991,516
|
|
Selling,
general and administrative - related party
|
|
6,797
|
|
351,843
|
|
Amortization
of intangible assets
|
1,370,986
|
575,117
|
2,899,553
|
1,561,137
|
|
Total
operating expenses
|
12,949,616
|
6,676,430
|
27,267,247
|
17,871,254
|
|
|
|
|
|
|
|
Loss from
operations
|
(4,793,443
)
|
(4,298,638
)
|
(14,496,012
)
|
(12,266,642
)
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
|
|
|
Other
(expense), net
|
(538,862
)
|
(194,703
)
|
(1,181,206
)
|
(398,833
)
|
|
Gain from
derecognition of contingent consideration
|
|
|
5,199,806
|
|
|
Gain from
warrant derivative liability
|
|
(2,521
)
|
1,830
|
65,468
|
|
Total other
(expense) income
|
(538,862
)
|
(197,224
)
|
4,020,430
|
(333,365
)
|
|
|
|
|
|
|
|
Net
loss
|
$
(5,332,305
)
|
$
(4,495,862
)
|
$
(10,475,582
)
|
$
(12,600,007
)
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
35,275,296
|
9,061,023
|
22,616,962
|
5,785,669
|
|
|
|
|
|
|
|
Basic and
diluted net loss per common share
|
$
(0.15
)
|
$
(0.50
)
|
$
(0.46
)
|
$
(2.18
)
|
See the
accompanying Notes to the Consolidated Financial
Statements
5
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statement of
S
tockholders’ Equity
(audited unless indicated otherwise)
|
|
Preferred
Stock
|
Common
Stock
|
|
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
paid-in
capital
|
Accumulated
Deficit
|
Total Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
BALANCE - June 30,
2019
|
3,594,981
|
$
359
|
17,538,071
|
$
1,754
|
$
113,475,205
|
$
(106,389,500
)
|
$
7,087,818
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
(unaudited)
|
–
|
–
|
–
|
–
|
165,171
|
–
|
165,171
|
|
Preferred stock converted in common
stock (unaudited)
|
(443,833
)
|
(44
)
|
443,833
|
44
|
–
|
–
|
–
|
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(4,929,030
)
|
(4,929,030
)
|
|
|
|
|
|
|
|
|
|
|
BALANCE - September 30, 2019
(unaudited)
|
3,151,148
|
$
315
|
17,981,904
|
$
1,798
|
$
113,640,376
|
$
(111,318,530
)
|
$
2,323,959
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
(unaudited)
|
–
|
–
|
–
|
–
|
162,264
|
–
|
162,264
|
|
Issuance of Series F preferred
stock from October 2019 private placement financing, net of
$741,650 issuance costs (unaudited)
|
10,000
|
1
|
–
|
–
|
5,249,483
|
–
|
5,249,484
|
|
Warrants issued in connection with
the private placement (unaudited)
|
–
|
–
|
–
|
–
|
4,008,866
|
–
|
4,008,866
|
|
Issuance of Series G preferred
stock due to acquisition of the Cerecor portfolio of pediatrics
therapeutics (unaudited)
|
9,805,845
|
981
|
–
|
–
|
5,558,933
|
|
5,559,914
|
|
Preferred stock converted in common
stock (unaudited)
|
(2,751,148
)
|
(275
)
|
2,751,148
|
275
|
–
|
–
|
–
|
|
|
|
|
|
|
|
|
|
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(214,247
)
|
(214,247
)
|
|
|
|
|
|
|
|
|
|
|
BALANCE - December 31, 2019
(unaudited)
|
10,215,845
|
$
1,022
|
20,733,052
|
$
2,073
|
$
128,619,922
|
$
(111,532,777
)
|
$
17,090,240
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
(unaudited)
|
–
|
–
|
1,067,912
|
107
|
263,284
|
–
|
263,391
|
|
Cashless warrant exercise
(unaudited)
|
–
|
–
|
7,915,770
|
792
|
(792
)
|
–
|
–
|
|
Issuance of Series H preferred
stock and common stock due to acquisition of Innovus
(unaudited)
|
1,997,902
|
200
|
3,809,712
|
381
|
4,405,603
|
–
|
4,406,184
|
|
Preferred stock converted in common
stock (unaudited)
|
(2,407,902
)
|
(241
)
|
12,397,902
|
1,240
|
91,881
|
–
|
92,880
|
|
Warrant exercises
(unaudited)
|
–
|
–
|
17,082,994
|
1,708
|
22,987,958
|
–
|
22,989,666
|
|
Issuance of common stock, net of
$4,523,884 in cash issuance costs
(unaudited)
|
–
|
–
|
36,365,274
|
3,637
|
33,275,119
|
–
|
33,278,756
|
|
Warrants issued in connection with
the registered offering (unaudited)
|
–
|
–
|
–
|
–
|
9,723,161
|
–
|
9,723,161
|
|
Warrants issued in connection with
the registered offering to the placement agents, non-cash
issuance costs (unaudited)
|
–
|
–
|
–
|
–
|
1,458,973
|
–
|
1,458,973
|
|
CVR payouts
(unaudited)
|
–
|
–
|
1,237,764
|
123
|
1,732,747
|
–
|
1,732,870
|
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(5,332,305
)
|
(5,332,305
)
|
|
|
|
|
|
|
|
|
|
|
BALANCE - March 31, 2020
(unaudited)
|
9,805,845
|
$
981
|
100,610,380
|
$
10,061
|
$
202,557,856
|
$
(116,865,082
)
|
$
85,703,816
|
See
the accompanying Notes to the Consolidated Financial
Statements
6
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity,
Cont’d
(audited unless indicated otherwise)
|
|
Preferred
Stock
|
Common
Stock
|
|
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
paid-in
capital
|
Accumulated
Deficit
|
Total Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
BALANCE - June 30,
2018
|
–
|
$
–
|
1,794,762
|
$
179
|
$
92,681,918
|
(79,257,592
)
|
13,424,505
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
(unaudited)
|
–
|
–
|
–
|
–
|
152,114
|
–
|
152,114
|
|
Adjustment for rounding of shares
due to stock split (unaudited)
|
–
|
–
|
6,649
|
1
|
(1
)
|
–
|
–
|
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(3,446,483
)
|
(3,446,483
)
|
|
|
|
|
|
|
|
|
|
|
BALANCE - September 30, 2018
(unaudited)
|
–
|
$
–
|
1,801,411
|
$
180
|
$
92,834,031
|
$
(82,704,075
)
|
$
10,130,136
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
(unaudited)
|
–
|
–
|
2,707,022
|
271
|
193,791
|
–
|
194,062
|
|
Common stock issued to employee
(unaudited)
|
–
|
–
|
9,000
|
1
|
11,689
|
–
|
11,690
|
|
Issuance of preferred and common
stock, net of $1,479,963 in cash issuance costs
(unaudited)
|
8,342,993
|
834
|
1,777,007
|
178
|
11,810,373
|
–
|
11,811,385
|
|
Warrants issued in connection with
the registered offering (unaudited)
|
–
|
–
|
–
|
–
|
1,827,628
|
–
|
1,827,628
|
|
Warrants issued in connection with
the registered offering to the placement agents, non-cash
issuance costs (unaudited)
|
–
|
–
|
–
|
–
|
61,024
|
–
|
61,024
|
|
Preferred stocks issued in
connection with the purchase of assets
(unaudited)
|
400,000
|
40
|
–
|
–
|
519,560
|
–
|
519,600
|
|
Preferred stocks converted into
common stock (unaudited)
|
(4,210,329
)
|
(421
)
|
4,210,329
|
421
|
–
|
–
|
–
|
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(4,657,662
)
|
(4,657,662
)
|
|
|
|
|
|
|
|
|
|
|
BALANCE - December 31, 2018
(unaudited)
|
4,532,664
|
$
453
|
10,504,769
|
$
1,051
|
$
107,258,096
|
$
(87,361,737
)
|
$
19,897,863
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
(unaudited)
|
–
|
–
|
(25,600
)
|
(2
)
|
376,668
|
–
|
376,666
|
|
Preferred stocks converted into
common stock (unaudited)
|
(2,196,999
)
|
(219
)
|
2,196,999
|
219
|
–
|
–
|
–
|
|
Warrant exercises
(unaudited)
|
–
|
–
|
172,331
|
17
|
258,495
|
–
|
258,512
|
|
Net loss
(unaudited)
|
–
|
–
|
–
|
–
|
–
|
(4,495,862
)
|
(4,495,862
)
|
|
|
|
|
|
|
|
|
|
|
BALANCE - March 31, 2019
(unaudited)
|
2,335,665
|
$
234
|
12,848,499
|
$
1,287
|
$
107,893,259
|
$
(91,857,599
)
|
$
16,037,179
|
See
the accompanying Notes to the Consolidated Financial
Statements
7
AYTU
BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of
C
ash
Flows
(unaudited)
|
|
Nine Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Operating
Activities
|
|
|
|
Net
loss
|
$
(10,475,582
)
|
$
(12,600,007
)
|
|
Adjustments to
reconcile net loss to cash used in operating
activities:
|
|
|
|
Depreciation,
amortization and accretion
|
3,780,310
|
1,974,213
|
|
Stock-based
compensation expense
|
590,826
|
722,842
|
|
Derecognition of
contingent consideration
|
(5,199,806
)
|
–
|
|
Gain on the change
in fair value of CVR payout
|
(267,130
)
|
–
|
|
Issuance of common
stock to employee
|
–
|
11,690
|
|
Derivative
income
|
(1,830
)
|
(65,468
)
|
|
Changes in
operating assets and liabilities:
|
|
|
|
(Increase) in
accounts receivable
|
(8,183,810
)
|
(797,576
)
|
|
(Increase) in
inventory
|
(345,452
)
|
(191,110
)
|
|
(Increase) in
prepaid expenses and other
|
(1,611,681
)
|
(364,831
)
|
|
(Increase) in other
current assets
|
(358,022
)
|
–
|
|
(Decrease) in
accounts payable and other
|
(4,912,245
)
|
(191,331
)
|
|
Increase in accrued
liabilities
|
6,761,319
|
758,370
|
|
Increase in accrued
compensation
|
271,560
|
250,912
|
|
(Decrease) in fixed
payment arrangements
|
(657,655
)
|
–
|
|
Increase in
interest payable
|
–
|
134,795
|
|
Net cash used in
operating activities
|
(20,609,198
)
|
(10,357,501
)
|
|
|
|
|
|
Investing
Activities
|
|
|
|
Deposit
|
–
|
2,888
|
|
Purchases of fixed
assets
|
–
|
(59,848
)
|
|
Contingent
consideration payment
|
(151,648
)
|
(408,917
)
|
|
Cash received from
acquisition
|
390,916
|
–
|
|
Purchase of
assets
|
(5,850,000
)
|
(500,000
)
|
|
Net cash used in
investing activities
|
(5,610,732
)
|
(965,877
)
|
|
|
|
|
|
Financing
Activities
|
|
|
|
Issuance of
preferred, common stock and warrants
|
58,999,666
|
15,180,000
|
|
Issuance costs
related to preferred, common stock and warrants
|
(5,280,426
)
|
(1,479,963
)
|
|
Warrant
exercises
|
22,989,666
|
258,512
|
|
Preferred stock
converted in common stock
|
92,880
|
–
|
|
Issuance of note
payable
|
640,000
|
5,000,000
|
|
Net cash provided
by financing activities
|
77,441,786
|
18,958,549
|
|
|
|
|
|
Net change in cash,
restricted cash and cash equivalents
|
51,221,856
|
7,635,171
|
|
Cash, restricted
cash and cash equivalents at beginning of period
|
11,294,227
|
7,112,527
|
|
Cash, restricted
cash and cash equivalents at end of period
|
$
62,516,083
|
$
14,747,698
|
See the
accompanying Notes to the Consolidated Financial
Statements
8
AYTU
BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, cont’d
(unaudited)
|
Supplemental
disclosures of cash and non-cash investing and financing
transactions
|
|
|
|
Cash paid for
interest
|
$
392,641
|
$
–
|
|
Fair value of
right-to-use asset and related lease liability
|
354,929
|
–
|
|
Issuance of Series
G preferred stock due to acquisition of the Cerecor portfolio of
pediatrics therapeutics
|
5,559,914
|
–
|
|
Issuance of Series
H preferred stock due to acquisition of the Innovus
|
12,805,263
|
–
|
|
Inventory payment
included in accounts payable
|
460,416
|
–
|
|
Contingent
consideration included in accounts payable
|
27,571
|
29,348
|
|
Fixed payment
arrangements included in accounts payable
|
501,766
|
–
|
|
Exchange of
convertible preferred stock into common stock
|
1,559
|
–
|
|
Return deductions
received by Cerecor
|
2,000,000
|
–
|
|
Issuance of
restricted stock
|
107
|
–
|
|
Cashless warrant
exercises
|
792
|
–
|
|
Fair value of
warrants issued to investors and underwriters
|
–
|
1,888,652
|
|
Issuance of
preferred stock related to purchase of asset
|
–
|
519,600
|
|
Contingent
consideration related to purchase of asset
|
$
–
|
$
8,833,219
|
See the
accompanying Notes to the Consolidated Financial
Statements
9
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
N
otes to Consolidated Financial
Statements
(unaudited)
1.
Nature of Business, Financial Condition, Basis
of Presentation
Nature of Business.
Aytu BioScience,
Inc. (“Aytu”, the “Company” or
“we”) was incorporated as Rosewind Corporation on
August 9, 2002 in the State of Colorado. Aytu was
re-incorporated in the state of Delaware on June 8, 2015. Aytu
is a specialty pharmaceutical company focused on global
commercialization of novel products addressing significant medical
needs such as hypogonadism (low testosterone), cough and upper
respiratory symptoms, insomnia, male infertility, various pediatric
conditions and the Company’s plans to expand
opportunistically into other therapeutic areas.
The Company
is a commercial-stage specialty pharmaceutical company focused on
commercializing novel products that address significant healthcare
needs in both prescription and consumer health categories. Through
the Company’s heritage prescription business, the Company
currently markets a portfolio of prescription products addressing
large primary care and pediatric markets. The primary care
portfolio includes (i) Natesto
®
, the only
FDA-approved nasal formulation of testosterone for men with
hypogonadism (low testosterone, or "Low T"), (ii)
ZolpiMist
™
, the only
FDA-approved oral spray prescription sleep aid, and (iii)
Tuzistra
®
XR, the only
FDA-approved 12-hour codeine-based antitussive syrup.
The
Company’s recently acquired prescription pediatric portfolio
includes (i) AcipHex
®
Sprinkle
™
, a granule
formulation of rabeprazole sodium, a commonly prescribed proton
pump inhibitor; (ii) Cefaclor, a second-generation cephalosporin
antibiotic suspension; (iii) Karbinal
®
ER, an
extended-release carbinoxamine (antihistamine) suspension indicated
to treat numerous allergic conditions; and (iv)
Poly-Vi-Flor
®
and
Tri-Vi-Flor
®
, two
complementary prescription fluoride-based supplement product lines
containing combinations of fluoride and vitamins in various for
infants and children with fluoride deficiency.
On
February 14, 2020, the Company acquired Innovus
Pharmaceuticals Inc. (“Innovus”), a specialty
pharmaceutical company commercializing, licensing and developing
safe and effective consumer healthcare products designed to improve
health and vitality. Innovus commercializes over thirty-five
consumer health products competing in large healthcare categories
including diabetes, men's health, sexual wellness and respiratory
health (the “Consumer Health Portfolio”). The Consumer
Health Portfolio is commercialized through direct-to-consumer
marketing channels utilizing Innovus’s proprietary Beyond
Human® marketing and sales platform.
The
Company recently acquired exclusive U.S. distribution rights to two
COVID-19 IgG/IgM rapid tests. These coronavirus tests are solid
phase immunochromatographic assays used in the rapid, qualitative
and differential detection of IgG and IgM antibodies to the 2019
Novel Coronavirus in human whole blood, serum or plasma. These
rapid tests have been validated in multi-center clinical trials.
Most recently, the Company signed a licensing agreement with
Cedars-Sinai Medical Center for worldwide rights to various
potential uses of Healight, an investigational medical device
platform technology. Healight has demonstrated safety and efficacy
in pre-clinical studies, and the Company plans to advance this
technology and assess its safety and efficacy in human
studies.
The
Company’s strategy is to continue building its portfolio of
revenue-generating products, leveraging its focused commercial team
and expertise to build leading brands within large therapeutic
markets.
Financial Condition.
As of March 31,
2020, the Company had approximately $62.5 million of cash, cash
equivalents and restricted cash. The Company’s operations
have historically consumed cash and are expected to continue to
require cash, but at a declining rate.
Revenues for the
three-months ended March 31, 2020 increased approximately 243%
compared to the three-months ended March 31, 2019, and revenues
increased 100% and 14% for each of the years ended June 30, 2019
and 2018, respectively. Revenue is expected to continue to increase
long-term, allowing the Company to rely less on our existing cash
and cash equivalents, and proceeds from financing transactions.
Cash used in operations during the nine-months ended March 31, 2020
was $20.6 million compared to $10.4 million for the nine-months
ended March 31, 2019. The increase is due primarily to the
Company’s acquisition and integration of the Pediatric
Portfolio and merger with Innovus, which consumed additional cash
resources, coupled with an increase in working
capital.
On
November 1, 2019, the Company closed an asset acquisition with
Cerecor, Inc. (“Cerecor”) whereby the Company acquired
certain of Cerecor’s portfolio of pediatric therapeutics (the
“Pediatric Portfolio”) for $4.5 million in cash,
approximately 9.8 million shares of Series G Convertible
Preferred Stock, the assumption of Cerecor’s financial and
royalty obligations, which includes not more than $3.5 million
of Medicaid rebates and products returns as they come due, and
other assumed liabilities associated with the Pediatric Portfolio
(see Note 2). As of March 31, 2020, the Company has paid down
approximately $3.2 million of those assumed
liabilities.
In
addition, the Company assumed obligations in connection with the
Pediatric Portfolio acquisition due to an investor including fixed
and variable payments. The Company assumed fixed monthly payments
equal to $0.1 million from November 2019 through January 2021 plus
$15 million due in January 2021. Monthly variable payments due to
the same investor are equal to 15% of net revenue generated from a
subset of the Product Portfolio, subject to an aggregate monthly
minimum of $0.1 million, except for January 2020, when a one-time
payment of $0.2 million was paid. The variable payment obligation
continues until the earlier of: (i) aggregate variable payments of
approximately $9.5 million have been made, or (ii) February 12,
2026.
10
On
February 14, 2020 the Company completed a merger with Innovus after
approval by the stockholders of both companies on February 13, 2020
(the “Merger”). Upon closing the Merger, the Company
merged with and into Innovus and all outstanding Innovus common
stock was exchanged for approximately 3.8 million shares of the
Company’s common stock and up to $16 million of Contingent
Value Rights (“CVRs”). The outstanding Innovus warrants
with cash out rights were exchanged for approximately 2.0 million
shares of Series H Convertible Preferred stock of Aytu and retired.
The remaining Innovus warrants outstanding at the time of the
Merger continue to be outstanding, and upon exercise, retain the
right to the merger consideration offered to Innovus stockholders,
including any remaining claims represented by CVRs at the time of
exercise. Innovus will continue as a wholly owned subsidiary of the
Company.
In
addition, as part of the Merger, the Company assumed approximately
$3.1 million of notes payable, $0.8 million in lease liabilities,
and other assumed liabilities associated with Innovus. Of the $3.1
million of notes payable, approximately $1.8 million was converted
into approximately 1.5 million shares of the Company’s common
stock on April 27, 2020.
During
the three months ended March 31, 2020, the Company completed three
separate equity offerings, on March 10, 2020, March 12, 2020 and
March 19, 2020 (the “March Offerings”), in which the
Company issued a combination of common stock and warrants. The
following summarizes the March Offerings, including total capital
raised from both the issuance of common stock and subsequent
warrant exercises.
On
March 19, 2020, the Company entered into a securities purchase
agreement with certain institutional investors, pursuant to which
the Company agreed to sell and issue, in a registered direct
offering, an aggregate of (i) 12,539,197 shares of the
Company’s common stock (the “Common Stock”) at a
purchase price per share of $1.595 and (ii) warrants to purchase up
to 12,539,197 shares of Common Stock (the “March 19, 2020
Warrants”) at an exercise price of $1.47 per share, for
aggregate gross proceeds to the Company of $20.0 million, before
deducting placement agent fees and other offering expenses payable
by the Company. The March 19, 2020 Warrants are exercisable
immediately upon issuance and have a term of one year from the
issuance date. In addition, the Company issued warrants with an
exercise price of $1.9938 per share to purchase up to 815,047
shares of common stock (the “March 19, 2020 Placement Agent
Warrants”) as a portion of the fees paid to the placement
agent. The March 19, 2020 Placement Agent Warrants have a term of
five year from the issuance date.
A total
of 1.2 million March 19, 2020 Warrants have been exercised through
May 5, 2020, for total proceeds of $1.7 million, of which 0.7
million March 19, 2020 Warrants were exercised through March 31,
2020, for total proceeds of $1.1 million.
On
March 12, 2020, the Company entered into a securities purchase
agreement with certain institutional investors, pursuant to which
the Company agreed to sell and issue, in a registered direct
offering, an aggregate of (i) 16,000,000 shares of the
Company’s common stock at a purchase price per share of $1.25
and (ii) warrants to purchase up to 16,000,000 shares of Common
Stock (the “March 12, 2020 Warrants”) at an exercise
price of $1.25 per share, for aggregate gross proceeds to the
Company of $20.0 million, before deducting placement agent fees and
other offering expenses payable by the Company (the
“Registered Offering”). The March 12, 2020 Warrants are
exercisable immediately upon issuance and have a term of one year
from the issuance date. In addition, the Company issued warrants
with an exercise price of $1.5625 per share to purchase up to
1,040,000 shares of common stock (the “March 12, 2020
Placement Agent Warrants”) as a portion of the fees paid to
the placement agent. The March 12, 2020 Placement Agent Warrants
have a term of five year from the issuance date.
A total
of 13 million March 12, 2020 Warrants have been exercised through
May 5, 2020, for total proceeds of approximately $16.3 million, of
which approximately 10.5 million March 12, 2020 Warrants were
exercised through March 31, 2020, for total proceeds of $13.1
million.
On
March 10, 2020, Company entered into a securities purchase
agreement with an institutional investor, pursuant to which the
Company agreed to sell and issue, in a registered direct offering,
an aggregate of (i) 4,450,000 shares of the Company’s common
stock (the “Common Stock”) at a purchase price per
share of $1.15 and (ii) pre-funded warrants to purchase up to
3,376,087 shares of Common Stock (the “Pre-Funded
Warrants”) at an effective price of $1.15 per share ($1.1499
paid to the Company upon the closing of the offering and $0.0001 to
be paid upon exercise of such Pre-Funded Warrants), for aggregate
gross proceeds to the Company of approximately $9.0 million, before
deducting placement agent fees and other offering expenses payable
by the Company (the “Registered Offering”). The
Pre-Funded Warrants were immediately exercised upon close. In
addition, the Company issued warrants with an exercise price of
$1.4375 per share to purchase up to 508,696 shares of common stock
(the “March 10, 2020 Placement Agent Warrants”). The
March 10, 2020 Placement Agent Warrants have a term of five year
from the issuance date.
11
Since
March 10, 2020, a total of 6.0 million shares of the
Company’s October 2018 $1.50 Warrants (the “October 18
$1.50 Warrants”) were exercised, resulting in proceeds of
approximately $9.0 million.
In
total, the Company has raised net proceeds of approximately $71.5
million from the March Offerings and related warrant exercises, as
well as exercises of the October 2018 $1.50 Warrants. The net
proceeds received by the Company from the March Offerings and
related warrant exercise will be used for general corporate
purposes, including working capital.
On
October 11, 2019, the Company entered into Securities Purchase
Agreements (the “Purchase Agreement”) with two
institutional investors (the “Investors”) providing for
the issuance and sale by the Company (the “October 2019
Offering”) of $10.0 million of, (i) 10,000 shares of the
Company’s Series F Convertible Preferred Stock (the
“Preferred Stock”) which are convertible into
10,000,000 shares of common stock (the “Conversion
Shares”) for a stated value of $1,000 per unit and (ii)
10,000,000 warrants (the “October 2019 Warrants”) which
are exercisable for shares of common stock (the “Warrant
Shares”), which expire January 10, 2025,. The closing of the
October 2019 offering occurred on October 16, 2019. The Warrants
had an exercise price equal to $1.25 and contain a cashless
exercise provision. This provision was dependent on (i) performance
of the Company’s stock price between October 11, 2019 and the
date of exercise of all, or a portion of the Warrants, and (ii)
subject to shareholder approval of the October 2019 Offering, which
was approved January 24, 2020.
As
of March 31, 2020, all of the Series F Convertible Preferred Stock
were converted into 10 million shares of the Company’s common
stock, and 5.0 million of the October 2019 Warrants were exercised
using the cashless exercise provision to acquire 5.0 million shares
of the Company’s common stock. In April of 2020, the
remaining 5 million October 2019 Warrants were exercised using the
cashless exercise provision into 5.0 million shares of the
Company’s common stock.
The net proceeds that the Company received from
the October 2019 Offering were approximately $9.3 million.
The net proceeds received by the Company from the October 2019
Offerings have been used for general corporate purposes, including
working capital.
As of
the date of this Report, the Company expects its commercial costs
for its current operation to increase modestly as the Company
integrates the acquisition of the Pediatrics Portfolio and Innovus
and continues to focus on revenue growth through increasing product
sales. The Company’s total asset position totaling
approximately $168.5 million plus the proceeds expected from
ongoing product sales will be used to fund operations. The Company
may continue to access the capital markets to fund operations when
needed, and to the extent it is required. The timing and amount of
capital that may be raised is dependent on market conditions and
the terms and conditions upon which investors would require to
provide such capital. There is no guarantee that capital will be
available on terms favorable to the Company and its stockholders,
or at all. However, the Company has been successful in accessing
the capital markets in the past and is confident in its ability to
access the capital markets again, if needed. Since the Company has
sufficient cash and cash equivalents on-hand as of March 31, 2020
to cover potential net cash outflows for the twelve months
following the filing date of this Quarterly Report, ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic
205-40) the Company reports that there does not exist indication of
substantial doubt about its ability to continue as a going
concern.
As
of the date of this report, while the Company has adequate capital
resources to complete its near-term operating and transaction
objectives, there is no guarantee that such capital resources will
be sufficient until such time the Company reaches profitability.
However, the Company has been successful in accessing the capital
markets in the past, and the Company is confident in its ability to
access the capital markets again, if needed.
If the
Company is unable to raise adequate capital in the future when it
is required, the Company can adjust its operating plans to reduce
the magnitude of the capital need under its existing operating
plan. Some of the adjustments that could be made include delays of
and reductions to commercial programs, reductions in headcount,
narrowing the scope of the Company’s commercial plans, or
reductions to its research and development programs. Without
sufficient operating capital, the Company could be required to
relinquish rights to products or renegotiate to maintain such
rights on less favorable terms than it would otherwise choose. This
may lead to impairment or other charges, which could materially
affect the Company’s balance sheet and operating
results.
Nasdaq Listing Compliance.
The
Company’s common stock is listed on The Nasdaq Capital Market
(the “Nasdaq”). In order to maintain compliance with
Nasdaq listing standards
,
the Company must, amongst other requirements, maintain a
stockholders’ equity balance of at least $2.5 million
pursuant to Nasdaq Listing Rule 5550(b). In that regard, on
September 30, 2019, the Company’s stockholders’ equity
totaled approximately $2.3 million, thereby potentially resulting
in a stockholders’ equity deficiency upon the filing of the
September 30, 2019 Form 10-Q. However, subsequent to September 30,
2019, the Company completed (i) the Offering with the Investors,
raising approximately $9.3 million, net in equity financing (see
Note 1), and (ii) the “Asset Purchase Agreement” in
which the Company issued approximately 9.8 million shares of Series
G Convertible Preferred Stock worth approximately $5.6 million,
resulting in an increase in stockholders’ equity of
approximately $14.8 million in the aggregate. Accordingly, as of
the filing of this Form 10-Q for the three and nine months ended
March 31, 2020, the Company’s stockholders’ equity
balance exceeds the minimum $2.5 million threshold and, therefore,
the Company believes it is currently in compliance with all
applicable Nasdaq Listing Requirements.
12
On
March 24, 2020, the Company received a letter from the Nasdaq
notifying the Company that the Nasdaq has determined that the
Company’s stock price has traded above at least $1.00 for at
least 10 consecutive business days since the previously announced
February 19, 2020 notice, and therefore, the Company has regained
compliance with Nasdaq Listing Rule 5550(a)(2), commonly referred
to as the Bid Price Rule.
Basis of Presentation.
The unaudited
consolidated financial statements contained in this report
represent the financial statements of Aytu and its wholly-owned
subsidiaries, Aytu Women’s Health, LLC, Innovus
Pharmaceuticals, Inc., and its wholly-owned subsidiaries and Aytu
Therapeutics, LLC. The unaudited consolidated financial statements
should be read in conjunction with Aytu’s Annual Report on
Form 10-K for the year ended June 30, 2019, which included all
disclosures required by generally accepted accounting principles in
the United States (“GAAP”). In the opinion of
management, these unaudited consolidated financial statements
contain all adjustments necessary to present fairly the financial
position of Aytu and the results of operations and cash flows for
the interim periods presented. The results of operations for the
period ended March 31, 2020 are not necessarily indicative of
expected operating results for the full year. The information
presented throughout this report, as of and for the three- and
nine- month periods ended March 31, 2020, and 2019, is
unaudited.
Adoption of New Accounting Pronouncements
Leases
(“ASU 2016-02”).
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2016-02
–
Topic 842 Leases.
ASU 2016-02 requires that most leases
be recognized on the financial statements, specifically the
recognition of right-to-use assets and related lease liabilities,
and enhanced disclosures about leasing arrangements. The objective
is to provide improved transparency and comparability among
organizations. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those
fiscal years. The standard requires using the modified
retrospective transition method and apply ASU 2016-02 either at (i)
latter of the earliest comparative period presented in the
financial statements or commencement date of the lease, or (ii) the
beginning of the period of adoption. The Company has elected to
apply the standard at the beginning period of adoption, July 1,
2019 which resulted in no cumulative adjustment to retained
earnings.
The
Company has elected to apply the short-term scope exception for
leases with terms of 12 months or less at the inception of the
lease and will continue to recognize rent expense on a
straight-line basis. As a result of the adoption, on July 1, 2019,
the Company recognized a lease liability of approximately $0.4
million, which represented the present value of the remaining
minimum lease payments using an estimated incremental borrowing
rate of 8%. As of July 1, 2019, the Company recognized a
right-to-use asset of approximately $0.4 million. Lease expense did
not change materially as a result of the adoption of ASU
2016-02.
In
addition, in conjunction with the Innovus Merger, the Company
recognized a lease liability of approximately $0.8 million relating
to Innovus’ corporate offices and related warehouse as part
of the purchase price allocation (see Note 2).
Earnings
Per Share (Topic 260), Distinguishing Liabilities from Equity
(Topic 480), Derivatives and Hedging (Topic 815) (“ASU
2017-11”)
.
In July 2017, the FASB issued ASU No. 2017-11
—
Earnings Per Share (Topic
260), Distinguishing Liabilities from Equity (Topic 480),
Derivatives and Hedging (Topic 815)
. Part I to ASU 2017-11 eliminates the requirement
to consider “down round” features when determining
whether certain equity-linked financial instruments or embedded
features are indexed to an entity’s own stock. In addition,
entities will have to make new disclosures for financial
instruments with down round features and other terms that change
conversion or exercise prices. Part I to ASU 2017-11 is effective
for fiscal years beginning after December 31, 2018. The Company
adopted this standard update as a result of the issuance of the
Series F Preferred stock as a result of the October 2019 Offering.
There were no “down-round” features present in the
financial instruments issued in conjunction with the March 2020
Offerings.
Recently Accounting Pronouncements
Fair Value Measurements (“ASU 2018-03”).
In August
2018, the FASB issued ASU 2018-13, “Fair Value Measurement
(Topic 820) Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement.” The amendments in
the standard apply to all entities that are required, under
existing GAAP, to make disclosures about recurring or nonrecurring
fair value measurements. ASU 2018-13 removes, modifies, and adds
certain disclosure requirements in ASC 820, Fair Value Measurement.
The standard is effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2019.
13
The amendments on
changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3
fair value measurements, and the narrative description of
measurement uncertainty should be applied prospectively for only
the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
Early adoption is permitted upon issuance of ASU 2018-13. An entity
is permitted to early adopt any removed or modified disclosures
upon issuance of ASU 2018-13 and delay adoption of the additional
disclosures until their effective date. The Company is currently
assessing the impact that ASU 2018-13 will have on its financial
statements
, with the impact
mostly related to certain assets acquired or liabilities assumed
that comprise Level 3 inputs.
Financial
Instruments – Credit Losses (“ASU
2016-13”).
In June 2016,
the FASB issued ASU 2016-13, “Financial Instruments –
Credit Losses” to require the measurement of expected credit
losses for financial instruments held at the reporting date based
on historical experience, current conditions and reasonable
forecasts. The main objective of this ASU is to provide financial
statement users with more decision-useful information about the
expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each
reporting date. The standard was effective for interim and annual
reporting periods beginning after December 15, 2019. However, in
October 2019, the FASB approved deferral of the adoption date for
smaller reporting companies for fiscal periods beginning after
December 15, 2022. Accordingly, the Company’s fiscal year of
adoption will be the fiscal year ended June 30, 2024. Early
adoption is permitted for interim and annual reporting periods
beginning after December 15, 2018, but the Company did not elect to
early adopt. The Company is currently assessing the impact that ASU
2016-13 will have on its consolidated financial statements, but no
conclusion has been reached.
This
Quarterly Report on Form 10-Q does not discuss recent
pronouncements that are not anticipated to have an impact on or are
unrelated to its financial condition, results of operations, cash
flows or disclosures.
2. Acquisitions
The Pediatric Portfolio
On
October 10, 2019, the Company entered into the Purchase Agreement
with Cerecor, Inc. (“Cerecor”) to purchase and acquire
Cerecor’s Pediatric Portfolio, which closed on November 1,
2019. The Pediatric Portfolio consists of six prescription products
consisting of (i) AcipHex® Sprinkle™, (ii) Cefaclor for
Oral Suspension, (iii) Karbinal® ER, (iv) Flexichamber™,
(v) Poly-Vi-Flor® and Tri-Vi-Flor™. Total consideration
transferred to Cerecor consisted of $4.5 million cash and
approximately 9.8 million shares of Series G Convertible Preferred
Stock. The Company also assumed certain of Cerecor’s
financial and royalty obligations, and not more than $3.5 million
of Medicaid rebates and products returns, of which $3.2 million has
been incurred. The Company also retained the majority of
Cerecor’s workforce focused on sales, commercial contracts
and customer relationships.
In
addition, the Company assumed Cerecor obligations due to an
investor that include fixed and variable payments aggregating to
$25.6 million. The Company assumed fixed monthly payments equal to
$0.1 million from November 2019 through January 2021 plus $15
million due in January 2021. Monthly variable payments due to the
same investor are equal to 15% of net revenue generated from a
subset of the Product Portfolio, subject to an aggregate monthly
minimum of $0.1 million, except for January 2020, when a one-time
payment of $0.2 million was paid to the investor. The variable
payment obligation continues until the earlier of: (i) aggregate
variable payments of approximately $9.5 million have been made, or
(ii) February 12, 2026.
Further, certain of
the products in the Product Portfolio require royalty payments
ranging from 12% to 15% of net revenue. One of the products in the
Product Portfolio requires the Company to generate minimum annual
sales sufficient to represent annual royalties of approximately
$1.8 million, in the event the minimum sales volume is not
satisfied.
While
no equity was acquired by the Company, the transaction was
accounted for as a business combination under the acquisition
method of accounting pursuant to Topic 805. Accordingly, the
tangible and identifiable intangible assets acquired and
liabilities assumed were recorded at fair value as of the date of
acquisition, with the remaining purchase price recorded as
goodwill. The goodwill recognized is attributable primarily to
strategic opportunities related to an expanded commercial footprint
and diversified product portfolio that is expected to provide
revenue and cost synergies. Transaction costs of $0.0 and $0.7
million were included as general and administrative expense in the
consolidated statements of operations for the three and nine months
ended March 31, 2020.
14
The
following table summarized the preliminary fair value of assets
acquired and liabilities assumed at the date of acquisition. These
estimates are preliminary, pending final evaluation of certain
assets, and therefore, are subject to revisions that may result in
adjustments to the values presented below:
|
|
As
of
|
|
|
November
1, 2019
|
|
Consideration
|
|
|
Cash
and cash equivalents
|
$
4,500,000
|
|
Fair
value of Series G Convertible Preferred Stock
|
|
|
Total
shares issued
|
9,805,845
|
|
Estimated
fair value per share of Aytu common stock
|
$
0.567
|
|
Estimated
fair value of equity consideration transferred
|
$
5,559,914
|
|
|
|
|
Total consideration transferred
|
$
10,059,914
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities
assumed
|
|
|
Inventory,
net
|
$
459,123
|
|
Prepaid
assets
|
1,743,555
|
|
Other
current assets
|
2,548,187
|
|
Intangible
assets – product technology rights
|
22,700,000
|
|
Accrued
product program liabilities
|
(6,320,853
)
|
|
Assumed
fixed payment obligations
|
(26,457,162
)
|
|
Total identifiable net assets
|
$
(5,327,150
)
|
|
|
|
|
Goodwill
|
$
15,387,064
|
The
fair values of intangible assets, including product technology
rights were determined using variations of the income approach.
Varying discount rates were also applied to the projected net cash
flows. The Company believes the assumptions are representative of
those a market participant would use in estimating fair value (see
Note 10).
|
|
As of
November 1,
2019
|
|
|
|
|
Acquired
product technology rights
|
$
22,700,000
|
The
fair value of the net identifiable asset acquired was determined to
be $22.7 million, which is being amortized over ten years. The
aggregate amortization expense was $0.6 million and $0, for the
three months ended March 31, 2020 and 2019 respectively. The
aggregate amortization expense was $0.9 million and $0, for the
nine months ended March 31, 2020 and 2019
respectively.
15
Innovus Merger
(Consumer Health Portfolio)
On February
14, 2020, the Company completed the merger with Innovus
Pharmaceuticals after approval by the stockholders of both
companies on February 13, 2020. Upon the effectiveness of the
Merger, the Company merged with and into Innovus and all
outstanding Innovus common stock was exchanged for approximately
3.8 million shares of the Company’s common stock and up to
$16 million of Contingent Value Rights (“CVRs”). The
outstanding Innovus warrants with cash out rights were exchanged
for approximately 2.0 million shares of Series H Convertible
Preferred stock of the Company and retired. The remaining Innovus
warrants outstanding at the time of the Merger continue to be
outstanding, and upon exercise, retain the right to the merger
consideration offered to Innovus stockholders, including any
remaining claims represented by CVRs at the time of exercise.
Innovus will continue as a subsidiary of the Company.
On
March 31, 2020, the Company paid out the first CVR Milestone in the
form of approximately 1.2 million shares of the Company’s
common stock to satisfy the $2.0 million obligation as a result of
Innovus achieving the $24 million revenue milestone for the
calendar year ended December 31, 2019. As a result of this, the
Company recognized a gain of approximately $0.3
million.
The
following table summarized the preliminary fair value of assets
acquired and liabilities assumed at the date of acquisition.
Goodwill recorded in connection with the acquisition represents,
among other things, future economic benefits expect to be
recognized from the Company's expansion of products and customer
base.As this was a tax-exempt transaction, goodwill is not tax
deductible in future periods. These estimates are preliminary,
pending final evaluation of certain assets acquired and liabilities
assumed, and therefore, are subject to revisions that may result in
adjustments to the values presented below. The estimates of the
fair value of the assets acquired assumed at the date of the
Acquisition are subject to adjustment during the measurement period
(up to one year from the Acquisition date). While the Company
believes that such preliminary estimates provide a reasonable basis
for estimating the fair value of assets acquired, it evaluates any
necessary information prior to finalization of the fair value.
During the measurement period, the Company will adjust assets if
new information is obtained about facts and circumstances that
existed as of the Acquisition date that, if known, would have
resulted in the revised estimated values of those assets as of that
date. The impact of all changes that do not qualify as measurement
period adjustments are included in current period
earnings.
16
|
|
As
of
|
|
|
February 14,
2020
|
|
Consideration
|
|
|
Fair
value of Aytu Common Stock
|
|
|
Total
shares issued at close
|
3,810,393
|
|
Estimated
fair value per share of Aytu common stock
|
$
0.756
|
|
Estimated
fair value of equity consideration transferred
|
$
2,880,581
|
|
|
|
|
Fair
value of Series H Convertible Preferred Stock
|
|
|
Total
shares issued
|
1,997,736
|
|
Estimated
fair value per share of Aytu common stock
|
$
0.756
|
|
Estimated
fair value of equity consideration transferred
|
$
1,510,288
|
|
|
|
|
Fair value of
former Innovus warrants
|
$
15,315
|
|
Fair value of
Contingent Value Rights
|
$
7,049,079
|
|
Forgiveness of Note
Payable owed to the Company
|
$
1,350,000
|
|
|
|
|
Total consideration transferred
|
$
12,805,263
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities
assumed
|
|
|
Cash
and cash equivalents
|
390,916
|
|
Accounts
receivables, net
|
$
278,826
|
|
Inventory,
net
|
1,149,625
|
|
Prepaid expenses
and other current assets
|
1,736,796
|
|
Other
long-term assets
|
36,781
|
|
Right-to-use
assets
|
328,410
|
|
Property,
plant and equipment
|
190,393
|
|
Trademarks
and patents
|
11,744,000
|
|
Accounts
payable and accrued other expenses
|
(6,983,969
)
|
|
Other
current liabilities
|
(446,995
)
|
|
Notes
payable
|
(3,056,361
)
|
|
Lease
liability
|
(754,822
)
|
|
Preacquisition
contingent consideration
|
(182,606
)
|
|
Total identifiable net assets
|
4,430,994
|
|
|
|
|
Goodwill
|
$
8,374,269
|
|
|
|
The
fair values of intangible assets, including product distribution
rights were determined using variations of the income approach,
specifically the relief-from-royalties method. It also includes
customer lists using an income approach utilizing a discounted cash
flow model. Varying discount rates were also applied to the
projected net cash flows. The Company believes the assumptions are
representative of those a market participant would use in
estimating fair value (see Note 10).
17
|
|
As
of
February 14,
2020
|
|
|
|
|
Acquired
product distribution rights
|
$
11,354,000
|
|
Acquired
customer lists
|
390,000
|
|
Total
intangible assets
|
$
11,744,000
|
The
fair value of the net identifiable assets acquired was determined
to be $11.7 million, which is being amortized over a range between
1.5 to 10 years. The aggregate amortization expense was $0.2
million and $0, for the three and nine months ended March 31, 2020
and 2019 respectively.
Pro Forma Impact due to Business Combinations
The
following supplemental unaudited proforma financial information
presents the Company’s results as if the following
acquisitions had occurred on July 1, 2018:
●
Acquisition of the
Pediatric Portfolio, effective November 1, 2019;
●
Merger with Innovus
effective February 14, 2020.
|
|
Three
Months Ended March 31,
|
Nine
Months Ended March 31,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
Unaudited
(aa)
(bb)
|
Pro
forma Unaudited
|
Pro
forma Unaudited
(cc)
|
Pro
forma Unaudited
|
|
|
|
|
|
|
|
Total
revenues, net
|
$
10,331,629
|
$
10,575,866
|
$
34,276,368
|
$
36,916,501
|
|
Net
income (loss)
|
(5,850,703
)
|
(8,740,850
)
|
(18,197,902
)
|
(17,205,490
)
|
|
Net
income / (loss) per share (dd)
|
$
(0.17
)
|
$
(0.39
)
|
$
(0.80
)
|
$
(0.76
)
|
|
(aa)
|
For the
three months ended March 31, 2020, Pediatric Portfolio acquisition
occurred prior to the three months ended March 31, 2020, and
accordingly, the results of the Pediatric Portfolio are fully
consolidated into the Company’s results for the three months
ended March 31, 2020.
|
|
|
|
|
(bb)
|
Due to
the absence of discrete financial information for Innovus, covering
the period from February 1, 2020 through February 13, 2020, the
Company did not include the impact of that stub-period for the pro
forma results for the three and nine months ended March 31,
2020.
|
|
|
|
|
(cc)
|
Due to
a lack of financial information covering the period from October 1,
2019 through November 1, 2019, the Company was not able to provide
pro forma adjusted financial statements for the nine months ended
March 31, 2020 without making estimated extrapolations that the
Company did not believe would be material or useful to users of the
above pro forma information.
|
|
|
|
|
(dd)
|
Pro
forma net loss per share calculations excluded the impact of the
issuance of the (i) Series G Convertible Preferred Stock and the,
(ii) Series H Convertible Preferred Stock under the assumption
those shares would continue to remain non-participatory during the
periods reported above.
|
3. Revenue Recognition
The Company sells its prescription products related products from
both the (i) Pediatric Portfolio and its (ii) Lifestyle Portfolio
(Natesto, Tuzistra and ZolpiMist) principally to a limited number
of wholesale distributors and pharmacies in the United States,
which account for the largest portion of our total prescription
products revenue. International sales are made primarily to
specialty distributors, as well as to hospitals, laboratories, and
clinics, some of which are government owned or supported
(collectively, its “Customers”). The Company’s
Customers in the United States subsequently resell the products to
pharmacies and patients. Revenue from product sales is recorded at
the established net sales price, or “transaction
price,” which includes estimates of variable consideration
that result from coupons, discounts, chargebacks and distributor
fees, processing fees, as well as allowances for returns and
government rebates. In accordance with ASC 606, the Company
recognizes net revenues from product sales when the Customer
obtains control of the Company’s product, which typically
occurs upon delivery to the Customer. The Company’s payment
terms are between 30 to 60 days in the United States and consistent
with prevailing practice in international
markets.
18
The Company generates revenues from its Consumer
Health Portfolio
rom
product sales and the licensing of the rights to market and
commercialize our products.
The
Company recognizes revenue when it satisfies a performance
obligation in a contract by transferring control over a product to
a customer when product is shipped. Taxes assessed by a
governmental authority that are both imposed on and concurrent with
a specific revenue-producing transaction, that are collected by us
from a customer, are excluded from revenue. Shipping and handling
costs associated with outbound freight after control over a product
has transferred to a customer are accounted for as a fulfillment
cost and are included in cost of product sales.
In
addition, the Company’s Consumer Health Portfolio enters into
exclusive distributor and license agreements that are within the
scope of ASC Topic 606. The license agreements normally generate
three separate components of revenue: (1) an initial nonrefundable
payment due on signing or when certain specific conditions are met;
(2) royalties that are earned on an ongoing basis as sales are made
or a pre-agreed transfer price; and (3) sales-based milestone
payments that are earned when cumulative sales reach certain
levels. Revenue from the initial nonrefundable payments or
licensing fees are recognized when all required conditions are met.
If the consideration for the initial license fee is for the right
to sell the licensed product in the respective territory with no
other required conditions to be met, such type of nonrefundable
license fee arrangement for the right to sell the licensed product
in the territory is recognized ratably over the term of the license
agreement. For arrangements with licenses that include sales-based
royalties, including sales-based milestone payments based on the
level of sales, and the license is deemed to be the predominant
item to which the royalties relate, we recognize royalty revenue
and sales-based milestones at the later of (i) when the related
sales occur, or (ii) when the performance obligation to which the
royalty has been allocated has been satisfied. The achievement of
the sales-based milestone underlying the payment to be received
predominantly relates to the licensee’s performance of future
commercial activities.
Revenues by Geographic location
The
following table reflects our product revenues by geographic
location as determined by the billing address of our
customers:
|
|
Three Months Ended
March 31,
|
Nine Months Ended
March 31,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
U.S.
|
$
7,273,000
|
$
2,024,000
|
$
11,582,000
|
$
5,025,000
|
|
International
|
883,000
|
348,000
|
1,189,000
|
574,000
|
|
Total net
revenue
|
$
8,156,000
|
$
2,372,000
|
$
12,771,000
|
$
5,599,000
|
As of
March 31, 2020, approximately 40% of outstanding trade accounts
receivables, net were comprised of a single counter-party, for
which the Company and the counter-party have an arrangement in
which initially, the counterparty was collecting the
Company’s customer payments on its behalf for certain
products acquired as part of the Pediatric Portfolio acquisition,
and upon a final transition, the Company is now collecting all
amounts relating to the Pediatric Portfolio, including on behalf of
the counter-party, for products still retained by the
counter-party.
4. Product Licenses and Acquisitions
The
Company licensed three of its existing product offerings from third
parties: (i) Natesto, (ii) ZolpiMist, and (iii) Tuzistra XR. Each
of these license agreements are subject to terms and conditions
specific to each agreement. The Company acquired an additional six
pharmaceutical products upon the closing of the Asset Purchase
Agreement with Cerecor. The Company recognized an intangible asset
of approximately $22.7 million relating the Product technology
rights acquired from the Pediatric Portfolio
and
an intangible asset of approximately $11.7 million relating the
patent rights and trademarks acquired from the Innovus
Merger.
License and Supply Agreement—Natesto
In
April 2016, Aytu entered into a license and supply agreement to
acquire the exclusive U.S. rights to commercialize Natesto®
(testosterone) nasal gel from Acerus Pharmaceuticals Corporation,
or Acerus. We acquired the rights effective upon the expiration of
the former licensee’s rights, which occurred on June 30,
2016. The term of the license runs for the greater of eight years
or until the expiry of the latest to expire patent, including
claims covering Natesto or until the entry on the market of at
least one AB-rated generic product.
On July 29, 2019,
the Company and Acerus agreed-to an Amended and Restated License
and Supply Agreement (the “Acerus Amendment”), subject
to certain conditions being satisfied prior to the Acerus Amendment
becoming effective and enforceable. The Acerus Amendment
eliminated the previously disclosed revenue-based milestone
payments expected to be made to Acerus.The maximum aggregate
milestones payable under the original agreement were $37.5 million.
Upon the effectiveness of the Acerus Amendment on December 1, 2019,
all royalty and milestone liabilities were eliminated. Upon the
effectiveness of the Acerus Amendment, Acerus was granted the right
to earn commissions on certain filled Natesto prescriptions.
Additionally, Acerus assumed certain ongoing sales, marketing and
regulatory obligations from the Company. This Acerus Amendment
became effective December 1, 2019, resulting in a $5.2 million
unrealized gain during the nine months ended March 31, 2020, due to
the elimination of the revenue-based product milestones.
Accordingly, there is no remaining value attributable to the
contingent consideration relating to the Natesto License and Supply
Agreement.
19
The
fair value of the net identifiable Natesto asset acquired was
determined to be $10.5 million, which is being amortized over eight
years. The aggregate amortization expense for each of the
three-month periods ended March 31, 2020 and 2019 was $0.3 million.
The aggregate amortization expense for
each of the nine-month periods ended March 31, 2020 and 2019 was
$1.0 million.
License Agreement—ZolpiMist
In June
2018, Aytu signed an exclusive license agreement for
ZolpiMist™ (zolpidem tartrate oral spray) from Magna
Pharmaceuticals, Inc., (“Magna”). This agreement allows
for Aytu’s exclusive commercialization of ZolpiMist in the
U.S. and Canada.
Aytu
made an upfront payment of $0.4 million to Magna upon execution of
the agreement.
The
ZolpiMist license agreement was valued at $3.2 million and is
amortized over the life of the license agreement up to seven years.
The amortization expense for each of the three months ended March
31, 2020 and 2019 was $116,000.
The
aggregate amortization expense for each of the nine-month periods
ended March 31, 2020 and 2019 was $348,000.
We also
agreed to make certain royalty payments to Magna which will be
calculated as a percentage of ZolpiMist net sales and are payable
within 45 days of the end of the quarter during which the
applicable net sales occur.
The
contingent consideration related to these royalty payments was
valued at $2.6 million using a Monte Carlo simulation, as of June
11, 2018. As of June 30, 2019, the contingent consideration was
revalued at $2.3 million using the same Monte Carlo simulation
methodology, and based on current interest rates, expected sales
potential, and Aytu stock trading variables. The Company
reevaluates the contingent consideration on a quarterly basis for
changes in the fair value recognized after the acquisition date,
such as measurement period adjustments.
The
contingent consideration accretion expense for the three months
ended March 31, 2020 and 2019 was $59,000 and $64,000,
respectively.
The contingent
consideration accretion expense for each of the nine-month periods
ended March 31, 2020 and 2019 was $169,000, and $184,000,
respectively. As of March 31, 2020, none of the milestones had
been achieved, and therefore, no milestone payment was
made.
License, Development, Manufacturing and Supply
Agreement—Tuzistra XR
On
November 2, 2018, the Company entered into a License, Development,
Manufacturing and Supply Agreement (the “Tris License
Agreement”) with TRIS Pharma, Inc. (“TRIS”).
Pursuant to the Tris License Agreement, TRIS granted the Company an
exclusive license in the United States to commercialize Tuzistra
XR. In addition, TRIS granted the Company an exclusive license in
the United States to commercialize a complementary antitussive
referred to as “CCP-08” (together with Tuzistra XR, the
“Products”) for which marketing approval has been
sought by TRIS under a New Drug Application filed with the Food and
Drug Administration (“FDA”). As consideration for the
Products license, the Company: (i) made an upfront cash payment to
TRIS; (ii) issued shares of Series D Convertible preferred stock to
TRIS; and (iii) will pay certain royalties to TRIS and another
predecessor product owner throughout the license term in accordance
with the Tris License Agreement, including certain minimum
royalties to TRIS..
20
The
Tris License Agreement was valued at $9.9 million and will be
amortized over the life of the Tris License Agreement up to twenty
years. The amortization expense for each of the three-month periods
ended March 31, 2020 and 2019 was $123,000, respectively.
The aggregate amortization expense for
each of the nine-month periods ended March 31, 2020 and 2019 was
$369,000 and $205,000.
We also
agreed to make certain quarterly royalty payments to TRIS which
will be calculated as a percentage of our Tuzistra XR net sales,
payable within 45 days of the end of the applicable
quarter.
As of
November 2, 2018, the contingent consideration, related to this
asset, was valued at $8.8 million using a Monte Carlo simulation.
As of June 30, 2019, the contingent consideration was revalued at
$16.0 million using the same Monte Carlo simulation methodology,
and based on current interest rates, expected sales potential, and
Aytu stock trading variables. The Company reevaluates the
contingent consideration on a quarterly basis for changes in the
fair value recognized after the acquisition date, such as
measurement period adjustments.
The
contingent consideration accretion expense for the three months
ended March 31, 2020 and 2019 was $125,000, and $73,000,
respectively.
The contingent
consideration accretion expense for each of the nine-month periods
ended March 31, 2020 and 2019 was $322,000, and $119,000,
respectively. As of March 31, 2020, none of the milestones had
been achieved, and therefore, no milestone payment was
made.
Asset Purchase
Agreement
—the Pediatric Portfolio
In November 2019, Aytu Therapeutics, LLC., a
wholly-owned subsidiary of Aytu, acquired the portfolio of
pediatric therapeutic commercial products from Cerecor, Inc (the
“Pediatric Portfolio”). This transaction expanded our
product portfolio with the addition of six
prescription
products, (i) AcipHex® Sprinkle™, (ii) Cefaclor for Oral
Suspension, (iii) Karbinal® ER, (iv) Flexichamber™, (v)
Poly-Vi-Flor® and Tri-Vi-Flor™.
Aytu
paid $4.5 million in cash, issued
approximately 9.8 million shares of Series G Convertible Preferred
Stock and assumed certain of Seller’s financial and royalty
obligations, and not more than $3.5 million of Medicaid rebates and
products returns.
In
addition, the Company has assumed obligations due to an investor
including fixed and variable payments. The Company assumed fixed
monthly payments equal to $0.1 million from November 2019 through
January 2021 plus $15 million due in January 2021. Monthly variable
payments due to the same investor are equal to 15% of net revenue
generated from a subset of the Product Portfolio, subject to an
aggregate monthly minimum of $0.1 million, except for January 2020,
when a one-time payment of $0.2 million was paid. The variable
payment obligation continues until the earlier of: (i) aggregate
variable payments of approximately $9.5 million have been made, or
(ii) February 12, 2026.
Supply and Distribution Agreement, As Amended –
Karbinal® ER
The
Company acquired and assumed all rights and obligations pursuant to
the Supply and Distribution Agreement, as Amended, with TRIS for
the exclusive rights to commercialize Karbinal® ER in the
United States (the “TRIS Karbinal Agreement”). The TRIS
Karbinal Agreement’s initial term terminates in August of
2033, with an optional initial 20-year extension.
The
Company owes royalties on sales of Karbinal of 23.5% of net
revenues on a quarterly basis. As part of the agreement, the
Company has agreed to pay TRIS a product make-whole payment of
approximately $1.8 million per year through July 2023, totaling a
minimum of $6.6 million (see Note 12).
Supply and License Agreement – Poly-Vi-Flor &
Tri-Vi-Flor
The
Company acquired and assumed all rights and obligations pursuant to
a Supply and License Agreement and various assignment and release
agreements, including a previously agreed to Settlement and License
Agreements (the “Poly-Tri Agreements”) for the
exclusive rights to commercialize Poly-Vi-Flor and Tri-Vi-Flor in
the United States.
21
The
Company owes royalties to multiple parties totaling approximately
29.0% of net revenues on a quarterly basis. There are no
milestones, make-whole payments other otherwise any contingencies
related to these agreements.
License and Assignment Agreement – AcipHex
Sprinkle
The
Company acquired and assumed all rights and obligations pursuant to
the License and Assignment Agreement with Eisai, Inc. for exclusive
rights to commercialized AcipHex Sprinkle in the United States (the
“Eisai AcipHex Agreement”).
The
Eisai AcipHex Agreement includes quarterly royalties totaling 15%
of net revenues, but offset by amounts paid for certain regulatory
costs otherwise the responsibility of Eisai Co., Ltd. In addition,
there are certain milestone provisions triggering potential
payments of between $3.0 - $5.0 million, for which the Company has
preliminarily estimated to have a value of $0.00.
License, Supply and Distribution Agreement –
Cefaclor
The
Company acquired and assumed all rights and obligations pursuant to
the License, Supply and Distribution Agreement involving multiple
counterparties to commercialize Cefaclor in the United States. (the
“Cefaclor Agreement”).
The
Cefaclor Agreement includes quarterly royalties totaling
approximately 15% of net products sales. In addition, there are
certain milestone provisions triggering potential payments of
between $0.5 - $2.5 million, for which the Company has
preliminarily estimated to have a value of $0.00.
Innovus Merger
On
February 14, 2020, the Company and Innovus Pharmaceuticals, Inc.
(“Innovus”) completed the Merger after successful
approval of the Merger by the shareholders of the Company and
Innovus at separate special meetings held on February 13, 2020.
Upon completion of the Merger, the Company obtained a combination
of 18 registered trademarks and/or patent rights including, but not
limited to the following:
Patented Products
●
Recalmax
–A dietary supplement
specially formulated to increase the benefits of Nitric Oxide and
act as a vasodilator. Supports improved cognitive
function.
●
Sensum
–
a male moisturizer cream to
increase gland sensitivity.
●
Vessele
– A dietary supplement
formulated for healthy blood flow.
●
Zestra
- Patented blend of botanical
oils and extracts, scientifically formulated to support women's
sexual satisfaction.
Trademarks
●
Diabasens –
Topical cream
forumulated to relieve cutaneous pain associated with conditions
such as Postherpetic Neuralgia and Diabetic
Neuropathy.
●
Fluticare –
24-hour nasal allergy
relief that helps fight indoor and outdoor allergens causing
congestion, sneezing and a runny nose.
●
Urivarx –
a dietary supplement to
support bladder tone and function.
●
Beyond Human Testosterone Booster -
A
daily dietary supplement that naturally increases testosterone
Levels, supporting natural stamina, endurance and
strength.
22
5. Inventories
Inventories
consist of raw materials and finished goods and are recorded at the
lower of cost or net realizable value, with cost determined on a
first-in, first-out basis. Aytu periodically reviews the
composition of its inventories to identify obsolete, slow-moving or
otherwise unsaleable items. If unsaleable items are observed and
there are no alternate uses for the inventory, Aytu will record a
write-down to net realizable value in the period that the
impairment is first recognized. There was no inventory write-down
during the three and nine months ended March 31, 2020 or 2019,
respectively.
Inventory
balances consist of the following:
|
|
As
of
|
As
of
|
|
|
March
31,
|
June
30,
|
|
|
2020
|
2019
|
|
Raw
materials
|
$
363,000
|
$
117,000
|
|
Finished
goods
|
3,491,000
|
1,323,000
|
|
|
$
3,854,000
|
$
1,440,000
|
6. Fixed Assets
Fixed
assets are recorded at cost and, once placed in service, are
depreciated on a straight-line basis over the estimated useful
lives. Leasehold improvements are amortized over the shorter of the
estimated economic life or related lease term. Fixed assets consist
of the following:
|
|
Estimated
|
As
of
|
As
of
|
|
|
Useful
|
March
31,
|
June
30,
|
|
|
Lives in
years
|
2020
|
2019
|
|
|
|
|
|
|
Manufacturing
equipment
|
2 - 5
|
$
389,000
|
$
83,000
|
|
Leasehold
improvements
|
3
|
297,000
|
112,000
|
|
Office equipment,
furniture and other
|
2 - 5
|
392,000
|
315,000
|
|
Lab
equipment
|
3 - 5
|
90,000
|
90,000
|
|
Software
|
3 - 5
|
339,000
|
-
|
|
Less accumulated
depreciation and amortization
|
|
(1,219,000
)
|
(396,000
)
|
|
|
|
|
|
|
Fixed
assets, net
|
|
$
288,000
|
$
204,000
|
Depreciation and
amortization expense totaled $24,000 for each of the three-months
ended March 31, 2020 and 2019, respectively, and $56,000 and
$59,000 for the nine months ended March 31, 2020 and
2019.
23
7. Leases, Right-to-Use Assets and Related Liabilities
In September 2015, the Company entered into a 37-month operating
lease in Englewood, Colorado. In October 2017, the Company signed
an amendment to extend the lease for an additional 24 months
beginning October 1, 2018. In April 2019, the Company extended the
lease for an additional 36 months beginning October 1, 2020. This
lease has base rent of approximately $10 thousand a month, with
total rent over the term of the lease of approximately $355
thousand.
In
June 2018, the Company entered into a 12-month operating lease,
beginning on August 1, 2018, for office space in Raleigh, North
Carolina. This lease has base rent of approximately $1 thousand a
month, with total rent over the term of the lease of approximately
$13 thousand.
In October 2017, the Company’s subsidiary,
Innovus, entered into a commercial lease agreement for 16,705
square feet of office and warehouse space in San Diego, California
that commenced on December 1, 2017 and continues until April 30,
2023. The initial monthly base rent was $21,000 with an approximate
3% increase in the base rent amount on an annual basis, as well as,
rent abatement for rent due from January 2018 through May 2018. The
Company holds an option to extend the lease an additional 5 years
at the end of the initial term. On November 18, 2019
(“decision date”), Innovus determined it would no
longer utilize the warehouse portion of the lease space,
representing approximately 9,729 square feet, and as of December
31, 2019 (“cease use date”) ceased using any such
space. In accordance with ASC 842,
Leases
, the Company assessed the asset value of the
separate lease component and amortized such asset from the decision
date through the cease use date.
As discussed within
Note 1
, the Company adopted the FASB issued ASU
2016-02,
“Leases
(Topic 842)”
as
of July 1, 2019. With the adoption of ASU 2016-02, the Company
recorded an operating right-of-use asset and an operating lease
liability on its balance sheet associated with its lease of its
corporate headquarters. The right-of-use asset represents the
Company’s right to use the underlying asset for the lease
term and the lease obligation represents the Company’s
commitment to make the lease payments arising from the lease.
Right-of-use lease assets and obligations are recognized at the
later of the commencement date or July 1, 2019; the date of
adoption of Topic 842; based on the present value of remaining
lease payments over the lease term. As the Company’s lease
does not provide an implicit rate, the Company used an estimated
incremental borrowing rate based on the information available at
the commencement date in determining the present value of the lease
payments. Rent expense is recognized on a straight-line basis over
the lease term, subject to any changes in the lease or expectations
regarding the terms. The lease liability is classified as
current or long-term on the balance sheet.
|
|
Total
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
|
Remaining
Office leases
|
$
1,268,000
|
$
93,000
|
$
383,000
|
$
396,000
|
$
356,000
|
$
40,000
|
−
|
|
Less:
Discount Adjustment
|
(175,000
)
|
|
|
|
|
|
|
|
Total
lease liability
|
1,093,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
liability - current portion
|
289,000
|
|
|
|
|
|
|
|
Long-term
lease liability
|
$
804,000
|
|
|
|
|
|
|
Rent
expense for the three months ended March 31, 2020 and 2019 totaled
$61 thousand and $31 thousand, respectively. Rent expense for the
nine months ended March 31, 2020 and 2019 totaled $126 thousand and
$94 thousand, respectively.
24
8. Patents
The
cost of the oxidation-reduction potential (“ORP”)
technology related patents for the MiOXSYS Systems was $380,000
when they were acquired and are being amortized over the remaining
U.S. patent life of approximately 15 years as of the date, which
expires in March 2028.
Patents
consist of the following:
|
|
As
of
|
As
of
|
|
|
March
31,
|
June
30,
|
|
|
2020
|
2019
|
|
|
|
|
|
Patents -
MiOXSYS
|
$
380,000
|
$
380,000
|
|
Less
accumulated amortization
|
(178,000
)
|
(159,000
)
|
|
Patents,
net
|
$
202,000
|
$
221,000
|
The
amortization expense was $6 thousand for the three months ended
March 31, 2020 and 2019, respectively, and $19 thousand for the
nine months ended March 31, 2020 and 2019
respectively.
On
February 14, 2020, upon completion of the Merger with Innovus,
the Company recognized the fair value
of the rental of the customer lists for $390,000 and will amortize
the asset over a useful life of 1.5 years.
The Company recognized the fair value of
trademarks, patents or a combination of both for 18 distinct
products that the Company markets, distributes and sells for
$11,354,000 and will amortize the asset over a useful life of 5
years.
|
|
As
of
|
As
of
|
|
|
March
31,
|
June
30,
|
|
|
2020
|
2019
|
|
|
|
|
|
Patents &
tradenames
|
$
11,354,000
|
$
-
|
|
Customers
contracts
|
390,000
|
-
|
|
Less
accumulated amortization
|
(221,000
)
|
-
|
|
Patents
& tradenames, net
|
$
11,523,000
|
$
-
|
25
9. Accrued liabilities
Accrued
liabilities consist of the following:
|
|
As
of
|
As
of
|
|
|
March
31
|
June
30,
|
|
|
2020
|
2019
|
|
Accrued
legal settlement
|
$
205,000
|
$
−
|
|
Accrued
program liabilities
|
1,299,000
|
736,000
|
|
Accrued
product-related fees
|
1,644,000
|
295,000
|
|
Credit
card liabilities
|
941,000
|
−
|
|
Contract
liability
|
180,000
|
4,000
|
|
Medicaid
liabilities
|
3,255,000
|
61,000
|
|
Return
reserve
|
1,671,000
|
98,000
|
|
Sales
taxes payable
|
172,000
|
−
|
|
Other
accrued liabilities*
|
463,000
|
117,000
|
|
Total
accrued liabilities
|
$
9,830,000
|
$
1,311,000
|
* Other
accrued liabilities consist of franchise tax, accounting fee,
interest payable, merchant services charges, none of which
individually represent greater than five percent of total current
liabilities.
10. Fair Value Considerations
The
Company’s financial instruments include cash and cash
equivalents, restricted cash, accounts receivable, accounts
payable, accrued liabilities, warrant derivative liability, and
contingent consideration. The carrying amounts of financial
instruments, including cash and cash equivalents, restricted cash,
accounts receivable, accounts payable, and accrued liabilities
approximate their fair value due to their short maturities,
including those acquired or assumed on November 1, 2019 as a result
of the acquisition of the Pediatric Portfolio. The fair value of
the warrant derivative liability was valued using the lattice
valuation methodology. The fair value of acquisition-related
contingent consideration is based on a Monte-Carlo methodology
using estimated discounted future cash flows and periodic
assessments of the probability of occurrence of potential future
events. The valuation policies are determined by management, and
the Company’s Board of Directors is informed of any policy
change.
Authoritative
guidance defines fair value as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the measurement
date. The guidance establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset
or liability developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions of what market participants
would use in pricing the asset or liability developed based on the
best information available in the circumstances. The hierarchy is
broken down into three levels based on reliability of the inputs as
follows:
|
Level 1:
|
Inputs
that reflect unadjusted quoted prices in active markets that are
accessible to Aytu for identical assets or
liabilities;
|
|
|
|
|
Level 2:
|
Inputs
that include quoted prices for similar assets and liabilities in
active or inactive markets or that are observable for the asset or
liability either directly or indirectly; and
|
|
|
|
|
Level 3:
|
Unobservable
inputs that are supported by little or no market
activity.
|
26
The
Company’s assets and liabilities which are measured at fair
value are classified in their entirety based on the lowest level of
input that is significant to their fair value measurement. The
Company’s policy is to recognize transfers in and/or out of
fair value hierarchy as of the date in which the event or change in
circumstances caused the transfer. Aytu has consistently applied
the valuation techniques discussed below in all periods
presented.
Recurring Fair Value Measurements
The
following table presents the Company’s financial liabilities
that were accounted for at fair value on a recurring basis as of
March 31, 2020 and June 30, 2019, by level within the fair value
hierarchy.
|
|
|
Fair Value
Measurements at March 31, 2020
|
||
|
|
Fair Value
at
March 31,
2020
|
Quoted Priced
in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|
Recurring:
|
|
|
|
|
|
Warrant
derivative liability
|
$
11,000
|
–
|
–
|
$
11,000
|
|
Contingent
consideration
|
18,754,000
|
–
|
–
|
18,754,000
|
|
CVR
liability
|
5,219,000
|
–
|
–
|
5,219,000
|
|
|
|
|
|
|
|
|
$
23,984,000
|
–
|
–
|
$
23,984,000
|
|
|
|
Fair Value
Measurements at June 30, 2019
|
||
|
|
Fair Value
at
June 30,
2019
|
Quoted Priced
in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|
Recurring:
|
|
|
|
|
|
Warrant
derivative liability
|
$
13,000
|
–
|
–
|
$
13,000
|
|
Contingent
consideration
|
23,326,000
|
–
|
–
|
23,326,000
|
|
CVR
liability
|
–
|
–
|
–
|
–
|
|
|
|
|
|
|
|
|
$
23,339,000
|
–
|
–
|
$
23,339,000
|
Warrant Derivative
Liability.
The warrant
derivative liability was historically valued using the lattice
valuation methodology because that model embodies the relevant
assumptions that address the features underlying these instruments.
The warrants related to the warrant derivative liability are not
actively traded and are, therefore, classified as Level 3
liabilities. As a result of the immaterial value of the balance as
of both June 30, 2019 and March 31, 2020, coupled with continued
further declines in the Company’s stock price, the Company
elected to waive on adjusting the current fair value of the
derivative warrant liability as any adjustment was deemed de
minimus.
|
|
As of March
31,
2020
|
As of June
30,
2019
|
|
Warrant
Derivative Liability
|
|
|
|
Volatility
|
163.2
%
|
163.2
%
|
|
Equivalent
term (years)
|
2.88
|
3.13
|
|
Risk-free
interest rate
|
1.71
%
|
1.71
%
|
|
Dividend
yield
|
0.00
%
|
0.00
%
|
27
Contingent
Consideration.
The Company
classifies its contingent consideration liability in connection
with the acquisition of Natesto, Tuzistra XR,
ZolpiMist and
Innovus, within Level 3 as factors used to develop the estimated
fair value are unobservable inputs that are not supported by market
activity. The Company estimates the fair value of our contingent
consideration liability based on projected payment dates, discount
rates, probabilities of payment, and projected revenues. Projected
contingent payment amounts are discounted back to the current
period using a discounted cash flow methodology.
The
Company derecognized the contingent consideration liability related
to Natesto as a result of the December 1, 2019 effectiveness of the
Acerus Amendment, which eliminated product milestone payments
underlying the contingent consideration liability. Due to the
derecognition of the Natesto contingent consideration, the Company
recognized a, non-operating gain of approximately $5.2 million
during the three and nine months ended March 31, 2020.
The
Company recognized approximately $0.2 million in contingent
consideration as a result of the February 14, 2020 Innovus Merger.
The fair value was based on a discounted value of the future
contingent payment using a 30% discount rate based on the estimates
risk that the milestones are achieved. There was no material change
in this valuation as of March 31, 2020.
Contingent value rights.
Contingent
value rights (“CVRs”) represent contingent additional
consideration of up to $16 million payable to satisfy future
performance milestones related to the Innovus Merger. Consideration
can be satisfied in up to 4.7 million shares of the Company’s
common stock, or cash either upon the option of the Company or in
the event there are insufficient shares available to satisfy such
obligations. The fair value of the contingent value rights was
based on a model in which each individual payout was deemed either
(a) more likely than not to be paid out or (b) less likely than not
to be paid out. From there, each obligation was then discounted at
a 30% discount rate to reflect the overall risk to the contingent
future payouts pursuant to the CVRs. This value is then remeasured
both for future expected payout at well as the increase fair value
due to the time value of money. On of March 31, 2020, the Company
paid out 1.2 million shares of the Company’s common stock to
satisfy the first $2 million milestone, which relates to the
Innovus achievement of $24 million in revenues during the 2019
calendar year.
Non-Recurring Fair Value Measurements
The
following table represents those asset and liabilities measured on
a non-recurring basis for the nine months ended March 31, 2020 as a
result of the (i) November 1, 2019 acquisition of the Pediatrics
Portfolio and (ii) the February 14, 2020 Innovus
Merger.
|
|
Fair Value at
Measurement Date
|
Quoted Priced
in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|
Non-recurring
|
|
|
|
|
|
Pediatric Portfolio (November 1, 2019)
|
|
|
|
|
|
Product
technology rights
|
$
22,700,000
|
–
|
–
|
22,700,000
|
|
Goodwill
|
15,687,064
|
–
|
–
|
15,687,064
|
|
Fixed payment
arrangements
|
26,457,162
|
–
|
–
|
26,457,162
|
|
|
|
|
|
|
|
Innovus Merger (February 14, 2020)
|
|
|
|
|
|
Customer
lists
|
390,000
|
–
|
–
|
390,000
|
|
Product
distribution rights (trademarks and patents)
|
11,354,000
|
–
|
–
|
11,354,000
|
|
Right-to-use
asset
|
675,980
|
|
|
675,980
|
|
Goodwill
|
8,374,269
|
–
|
–
|
8,374,269
|
|
Notes
payable
|
3,056,361
|
–
|
–
|
3,056,361
|
|
|
|
|
|
|
|
|
$
88,694,836
|
–
|
–
|
$
88,694,836
|
28
Acquisition
of the Pediatric Portfolio
Product technology
rights.
The Company recognized
the product technology right intangible asset acquired as part of
the November 1, 2019 acquisition of the Pediatric Portfolio. This
intangible asset consists of the acquired product technology rights
consisting of (i) AcipHex Sprinkle, (ii) Karbinal ER, (iii)
Cefaclor, and (iv) Poly-vi-Flor and Tri-vi-Flor. The Company
utilized a Multiple-Period Excess Earnings Method
model.
|
|
As
of
November
1,
2019 (*)
|
|
Product
technology rights
|
|
|
Re-levered
Beta
|
1.60
|
|
Market risk
premium
|
6.00
%
|
|
Small stock
risk premium
|
5.20
%
|
|
Risk-free
interest rate
|
2.00
%
|
|
Company
specific discount
|
25.00
%
|
(*)
Valuation performed as of November 1, 2019. As a non-recurring fair
value measurement, there is no remeasurement at each reporting
period unless indications exist that the fair value of the asset
has been impaired. There were no indicators as of March 31, 2020
that the fair value of the Product technology rights was
impaired.
Goodwill.
Goodwill represents the fair
value of consideration transferred and liabilities assumed in
excess of the fair value of assets acquired. Remeasurement of the
fair value of goodwill only arises upon either (i) indicators that
the fair value of goodwill has been impaired, or (ii) during the
annual impairment test performed at June 30 of each fiscal year.
There were no indicators observed or identified during and as of
the period from November 1, 2019 through March 31,
2020.
Fixed payment arrangements.
The Company
assumed obligations due to an investor including fixed and variable
payments. The Company assumed fixed monthly payments equal to $0.1
million from November 2019 through January 2021 plus $15 million
due in January 2021. Monthly variable payments due to the same
investor are equal to 15% of net revenue generated from a subset of
the Product Portfolio, subject to an aggregate monthly minimum of
$0.1 million, except for January 2020, when a one-time payment of
$0.2 million is due. The variable payment obligation continues
until the earlier of: (i) aggregate variable payments of
approximately $9.3 million have been made, or (ii) February 12,
2026. In addition, the Company assumed fixed, product minimums
royalties of approximately $1.75 million per annum through February
2023.
|
|
|
As of November
1,
2019 (≠)
|
|
|
Fixed payment
obligations
|
|
|
|
|
Discount
rate
|
|
1.8%
to 12.4%
|
|
(≠)
Valuation performed as of November 1,
2019. As a non-recurring fair value measurement, there is no
remeasurement at each reporting period unless indicates that the
circumstances that existed as of the November 1, 2019 measurement
date indicate that the carrying value is no longer indicative of
fair value.
29
Innovus Merger
Customer lists.
The Company recognized the fair value
of the rental of the customer lists that existed as of the
Valuation Date to be $364,232. The Company utilized an income
method approach through a discounted cash flow model. Through an
iterative process, the Company added the value to the tax
amortization benefits associated with the customer lists to arrive
at an overall fair value for the customer lists of
$390,000.
Trademarks and patents.
The Company recognized the fair value
of trademarks, patents or a combination of both for 18 distinct
products that the Company markets, distributes and sells. An Income
Approach known as the Relief-From-Royalty Method was utilized to
value the product distribution rights associated with each of the
18 products associated with trademarks and patents. A royalty rate
of 15% was used based on upon a range of observable royalties
between the range of 7.5% and 34.5%.
|
|
As
of
February
14,
2020
|
|
Trademarks
and patents
|
|
|
Re-levered
Beta
|
0.84
%
|
|
Market risk
premium
|
6.17
%
|
|
Small stock
risk premium
|
4.99
%
|
|
Risk-free
interest rate
|
1.89
%
|
|
Company
specific discount
|
20.00
%
|
Goodwill
. Goodwill represents the fair value of
consideration transferred and liabilities assumed in excess of the
fair value of assets acquired. Remeasurement of the fair value of
goodwill only arises upon either (i) indicators that the fair value
of goodwill has been impaired, or (ii) during the annual impairment
test performed at June 30 of each fiscal year. There were no
indicators observed or identified during and as of the period from
February 14, 2020 through March 31, 2020.
Innovus Notes Payable.
The Innovus Notes Payable represent
twelve financial obligations assumed as part of the Innovus Merger.
These notes are comprised of ten uncollateralized obligations with
a face value of approximately $3.6 million and two notes secured by
inventory held fulfillment centers with Amazon, Inc. and a face
value of approximately $0.4 million (the “Innovus
Notes”). The Innovus Notes were revalued using the estimated
cost of capital at the valuation date for a total estimated fair
value of approximately $3.1 million.
The
ten unsecured Innovus Notes consist of ten separate loans with
implied effective interest rates ranging between 14.1% and 73.4%.
The weighted average interest rate for these notes was 39.5%, while
the weighted average interest rate for the most recent loan
(January 9, 2020) was 41.4%. All ten of the notes are unsecured,
and as of the valuation date there was significant risk associated
with their repayment. Accordingly, the Company has revalued the
notes using an effective rate of 40% and concluded that the fair
value at the February 14, 2020 Innovus Merger date was
approximately $2.7 million.
The
secured Innovus Notes due to Amazon had had maturities of less than
one year and stated rates of 17.2% and 14.7% respectively. Due to
the fact that the most recent loan had a stated rate of 14.7% and
that the weighted average rate for these two loans was 15.6%, the
Company has estimated the current value of the loans using an
effective rate of 15% and concluded that the fair value of the
secured Innovus Notes totaled approximately $0.4
million.
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 nine months ended March 31,
2020:
|
|
Product
Technology Rights
|
Innovus
Assets
|
Goodwill
|
Liability
Classified Warrants
|
CVR
Liability
|
Contingent
Consideration
|
Fixed Payment
Arrangements
|
|
Balance as of
June 30, 2019
|
–
|
–
|
–
|
$
13,000
|
–
|
$
23,326,000
|
–
|
|
Transfers
into Level 3
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
|
Transfer out
of Level 3
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
|
Total gains,
losses, amortization or accretion in period
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
|
Included in
earnings
|
(946,000
)
|
(221,000
)
|
–
|
(2,000
)
|
170,000
|
(4,576,000
)
|
647,000
|
|
Included in
other comprehensive income
|
–
|
–
|
–
|
–
|
|
–
|
|
|
Purchases,
issues, sales and settlements
|
|
–
|
|
|
|
|
|
|
Purchases
|
22,700,000
|
11,744,000
|
24,061,000
|
–
|
7,049,000
|
183,000
|
–
|
|
Issues
|
–
|
–
|
–
|
–
|
–
|
–
|
26,457,000
|
|
Sales
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
|
Settlements
|
–
|
–
|
–
|
–
|
(2,000,000
)
|
(179,000
)
|
(1,547,000
)
|
|
Balance as of
March 31, 2020
|
$
21,754,000
|
$
11,523,000
|
$
24,061,000
|
$
11,000
|
$
5,219,000
|
$
18,754,000
|
$
25,557,000
|
30
11. Note Receivable
On
September 12, 2019, the Company announced it had entered into a
definitive merger agreement with Innovus (see Note 1) to acquire
Innovus which specializes in commercializing, licensing and
developing safe and effective supplements and over-the-counter
consumer health products. As part of the negotiations with Innovus,
the Company agreed to provide a short-term, loan in the form of a
$1.0 promissory note on August 8, 2019 (the “Innovus
Note”). In addition, on October 11, 2019, the Company amended
the original promissory note, providing an additional approximately
$0.4 million of bridge financing under the same terms and
conditions as the Innovus Note. Upon the closing of the Merger,
this note receivable was used to offset a portion of the $8 million
initial closing purchase price and was deducted from the
consideration value used when determining the number of shares of
Aytu common stock to be issued upon closing of the
acquisition.
12. Commitments and Contingencies
Commitments and contingencies are described below and summarized by
the following as of March 31, 2020:
|
|
Total
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
|
Prescription
database
|
$
1,762,000
|
$
262,000
|
$
767,000$
|
$
733,000$
|
$
–
|
$
–
|
–
|
|
Pediatric
portfolio fixed payments and product minimums
|
28,715,000
|
998,000
|
18,471,000
|
2,950,000
|
2,950,000
|
1,346,000
|
2,000,000
|
|
CVR
liability
|
5,219,000
|
787,000
|
1,210,000
|
2,327,000
|
895,000
|
–
|
–
|
|
Inventory
purchase commitment
|
2,943,000
|
1,226,250
|
1,716,750
|
|
|
|
|
|
Product
contingent liability
|
183,000
|
–
|
–
|
–
|
–
|
–
|
183,000
|
|
Product
milestone payments
|
3,000,000
|
–
|
–
|
3,000,000
|
–
|
–
|
–
|
|
|
$
41,822,000
|
$
3,273,250
|
$
22,164,750
|
$
9,010,000
|
$
3,845,000
|
$
1,346,000
|
$
2,183,000
|
Prescription Database
In May
2016, the Company entered into an agreement with a vendor that will
provide it with prescription database information. The Company
agreed to pay approximately $1.6 million over three years for
access to the database of prescriptions written for Natesto. In
January 2020, the Company amended the agreement and agreed to pay
additional $0.6 million to add access to the database of
prescriptions written for the Pediatric Portfolio. The payments
have been broken down into quarterly payments.
Pediatric Portfolio Fixed Payments and Product
Milestone
The
Company assumed two fixed, periodic payment obligations to an
investor (the “Fixed Obligation”). Beginning November
1, 2019 through January 2021, the Company will pay monthly payments
of $86,840, with a balloon payment of $15,000,000 due in January
2021. A second fixed obligation requires the Company pay a minimum
of $100,000 monthly through February 2026, except for $210,767 paid
in January 2020. There is the potential for the second fixed
obligation to increase an additional $1.8 million depending on
product sales, which could trigger additional amounts to be
paid.
In
addition, the Company acquired a Supply and Distribution Agreement
with TRIS Pharma (the “Karbinal Agreement”), under
which the Company is granted the exclusive right to distribute and
sell the product in the United States. The initial term of the
Karbinal Agreement 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.
31
The
Karbinal Agreement make-whole payment is capped at $1,750,000 each
year. The Karbinal Agreement also contains minimum unit sales
commitments, which is based on a commercial year that spans from
August 1 through July 31, of 70,000 units through 2023. The Company
is required to pay TRIS a royalty make whole payment of $30 for
each unit under the 70,000-unit annual minimum sales commitment
through 2033. The annual payment is due in August of each year. The
Karbinal Agreement also has multiple commercial milestone
obligations that aggregate up to $3.0 million based on cumulative
net sales, the first of which is triggered at $40.0 million of net
revenues.
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, the
Company merged with and into
Innovus and entered into
a Contingent Value Rights Agreement (the
“CVR Agreement”). Each CVR will entitle 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 1.2 million shares of the Company’s
common stock to satisfy the $2.0 million obligation as a result of
Innovus achieving the $24.0 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.
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 when certain levels of Fluticare sales are
achieved.
Inventory Purchase Commitment
In May
1, 2020, the Company 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.
Milestone Payments
In
connection with the Company’s intangible assets, Aytu has
certain milestone payments, totaling $3.0 million, payable at a
future date, are not directly tied to future sales, but upon other
events certain to happen. These obligations are included in the
valuation of the Company’s contingent consideration (see Note
10).
13. Capital Structure
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.
At
March 31, 2020 and June 30, 2019, Aytu had 100,610,380 and
17,538,071 common shares outstanding, respectively, and 9,805,845
and 3,594,981 preferred shares outstanding,
respectively.
The
Company has 50 million shares of non-voting, non-cumulative
preferred stock authorized with a par value of $0.0001 per share,
of which, 9,805,845 are designated as Series G Convertible
preferred stock as of March 31, 2020. Liquidation rights for all
series of preferred stock are on an as-converted to common stock
basis.
Included
in the common stock outstanding are 3,345,766 shares of restricted
stock issued to executives, directors, employees and
consultants.
During the three months ended September 30, 2019,
investors holding shares of Series C preferred stock exercised
their right to convert 443,833 shares of Series C preferred stock
into 443,833 shares of common stock. There are no remaining Series
C preferred stock outstanding.
In October 2019, Armistice Capital converted
2,751,148 shares of Series E convertible preferred stock into
2,751,148 shares of common stock. There are no remaining Series E
preferred stock outstanding.
32
In October 2019, the Company issued 10,000 shares of Series F
Convertible preferred stock, with a face value of $1,000 per share,
and convertible at a conversion price of $1.00 (the “Current
Conversion Price”). The terms of the Series F Convertible
Preferred include a conversion price reset provision in the event a
future financing transaction is priced below the Current Conversion
Price. The Company has determined that concurrent with the adoption
of ASU 2017-11, this down-round provision feature reflects a
beneficial conversion feature contingent on a future financing
transaction at a price lower than the Current Conversion Price. As
the Series F Convertible Preferred stock is an equity classified
instrument, any accounting arising from a future event giving rise
to the beneficial conversion feature would have no net impact on
the Company’s financial statements, as all activity would be
recognized within Additional Paid-in-Capital and
offset.
In addition and concurrent with the Series F
Convertible preferred stock issuance, the Company issued 10,000,000
warrants, with an exercise price of $1.25 and a term of five
years.
These warrants feature a contingent cashless exercise
provision. During the three months ended December 31, 2019, the
cashless exercise contingency was satisfied, reducing the strike
price of the October 2019 Warrants to $0. During the three months
ended March 31, 2020, an investor exercised 5,000,000 of the
warrants using the cashless exercise provision. In April 2020,
another investor exercised the remaining 5,000,000 of the October
2019 warrants using the cashless exercise provision, resulting in
no remaining October 2019 warrants.
In
November 2019, in connection with the Pediatric Portfolio
acquisition, the Company issued 9,805,845 shares of Series G
Convertible Preferred stock, of which, Pediatric Portfolio
converted 9,805,845 shares of the Series G Convertible Preferred
stock into 9,805,845 shares of common stock in April of
2020.
During
the three months ended March 31, 2020, the Company entered into
three separate offerings, on March 10, 2020, March 12, 2020 and
March 19, 2020 (the “March Offerings”) in which the
Company issued a combination of common stock and warrants. The
following summarizes the March Offerings, including total capital
raised from both the issuance of common stock and subsequent
warrant exercises.
On
March 19, 2020, the Company entered into a securities purchase
agreement with certain institutional investors (the “the
March 19, 2020 Purchasers”), pursuant to which the Company
agreed to sell and issue, in a registered direct offering, an
aggregate of (i) 12,539,197 shares of the Company’s common
stock (the “Common Stock”) at a purchase price per
share of $1.595 and (ii) warrants to purchase up to 12,539,197
shares of Common Stock (the “March 19, 2020 Warrants”)
at an exercise price of $1.47 per share, for aggregate gross
proceeds to the Company of $20.0 million, before deducting
placement agent fees and other offering expenses payable by the
Company. The March 19, 2020 Warrants are exercisable immediately
upon issuance and have a term of one year from the issuance date.
In addition, the Company issued warrants with an exercise price of
$1.9938 per share to purchase up to 815,047 shares of common stock
(the “March 19, 2020 Placement Agent Warrants”). The
March 19, 2020 Placement Agent Warrants have a term of five years
from the issuance date.
A
total of 1.2 million March 19, 2020 Warrants have been exercised
through May 5, 2020, for total proceeds of $1.7 million, of which
0.7 million March 19, 2020 Warrants were exercised through March
31, 2020, for total proceeds of $1.1 million.
On
March 12, 2020, the Company entered into a securities purchase
agreement with certain institutional investors, pursuant to which
the Company agreed to sell and issue, in a registered direct
offering, an aggregate of (i) 16,000,000 shares of the
Company’s common stock at a purchase price per share of $1.25
and (ii) warrants to purchase up to 16,000,000 shares of Common
Stock (the “March 12, 2020 Warrants”) at an exercise
price of $1.25 per share, for aggregate gross proceeds to the
Company of $20.0 million, before deducting placement agent fees and
other offering expenses payable by the Company (the
“Registered Offering”). The March 12, 2020 Warrants are
exercisable immediately upon issuance and have a term of one year
from the issuance date. In addition, the Company issued warrants
with an exercise price of $1.5625 per share to purchase up to
1,040,000 shares of common stock (the “March 12, 2020
Placement Agent Warrants”). The March 12, 2020 Placement
Agent Warrants have a term of five years from the issuance
date.
A
total of 13 million March 12, 2020 Warrants have been exercised
through May 5, 2020, for total proceeds of approximately $16.3
million, of which approximately 10.5 million March 12, 2020
Warrants were exercised through March 31, 2020, for total proceeds
of $13.1 million.
On
March 10, 2020, Company entered into a securities purchase
agreement with an institutional investor, pursuant to which the
Company agreed to sell and issue, in a registered direct offering,
an aggregate of (i) 4,450,000 shares of the Company’s common
stock (the “Common Stock”) at a purchase price per
share of $1.15 and (ii) pre-funded warrants to purchase up to
3,376,087 shares of Common Stock (the “Pre-Funded
Warrants”) at an effective price of $1.15 per share ($1.1499
paid to the Company upon the closing of the offering and $0.0001 to
be paid upon exercise of such Pre-Funded Warrants), for aggregate
gross proceeds to the Company of approximately $9.0 million, before
deducting placement agent fees and other offering expenses payable
by the Company (the “Registered Offering”). The
Pre-Funded Warrants were immediately exercised upon close. In
addition, the Company issued warrants with an exercise price of
$1.4375 per share to purchase up to 508,696 shares of common stock
(the “March 10, 2020 Placement Agent Warrants”). The
March 10, 2020 Placement Agent Warrants have a term of five years
from the issuance date.
Between
March 10, 2020 and March 31, 2020, a total of 6.0 million shares of
the Company’s October 2018 $1.50 Warrants (the “October
18 $1.50 Warrants”) were exercised, resulting in proceeds of
approximately $9.0 million.
In
total, the Company has raised net proceeds of approximately $71.5
million from the March Offerings and related warrant exercises, as
well as exercises of the October 2018 Warrants. The net proceeds
received by the Company from the March Offerings and related
warrant exercise will be used for general corporate purposes,
including working capital.
33
During
the three months ended March 31, 2020, the following Convertible
Preferred Stock issuances were converted into the Company’s
common stock:
●
400,000 shares of
the Series D Convertible Preferred Stock were converted into
400,000 shares of the Company’s common stock. There are no
remaining shares of the Series D Convertible Preferred Stock
outstanding at March 31, 2020;
●
10,000 shares of
the Series F Convertible Preferred Stock issuances were converted
into 10,000,000 shares of the Company’s common stock. There
are no remaining shares of the Series F Convertible Preferred stock
outstanding at March 31, 2020;
●
1,997,902 shares of
the Company’s Series H Convertible Preferred Stock were
converted into 1,997,902 shares of the Company’s common
stock. There are no remaining shares of the Series H Convertible
Preferred stock outstanding at March 31, 2020.
14. Equity Incentive Plan
Share-based Compensation Plans
On
June 1, 2015, Aytu’s stockholders approved the Aytu
BioScience 2015 Stock Option and Incentive Plan (the “2015
Plan”), which, as amended in July 2017, provides for the
award of stock options, stock appreciation rights, restricted stock
and other equity awards for up to an aggregate of 3.0 million
shares of common stock. The shares of common stock underlying any
awards that are forfeited, canceled, reacquired by Aytu prior to
vesting, satisfied without any issuance of stock, expire or are
otherwise terminated (other than by exercise) under the 2015 Plan
will be added back to the shares of common stock available for
issuance under the 2015 Plan. As of March 31, 2020, we have
1,317,337 shares that are available for grant under the 2015
Plan.
On
December 23, 2019, the Company filed Form S-4 related to the
proposed Innovus merger, in which shareholders are asked to approve
an increase to 5.0 million total shares of common stock in the 2015
Plan. As of the date of this report, Aytu shareholders approved the
proposal to increase the total number of common shares in the 2015
Plan.
Stock Options
Employee Stock Options:
In
November 2019, the Company granted 327,000 shares of stock options
to 28 employees pursuant to the 2015 Plan, which vest over four
years. Compensation expense related to these options will be fully
recognized over the four-year vesting period.
In
January 2020, the Company granted 12,500 shares of stock options to
5 employees pursuant to the 2015 Plan, which vest immediately upon
grant. Compensation expense related to these options were fully
recognized in the three months ended March 31, 2020.
The
fair value of the options is calculated using the Black-Scholes
option pricing model. In order to calculate the fair value of the
options, certain assumptions are made regarding components of the
model, including the estimated fair value of the underlying common
stock, risk-free interest rate, volatility, expected dividend yield
and expected option life. Changes to the assumptions could cause
significant adjustments to valuation. Aytu estimates the expected
term based on the average of the vesting term and the contractual
term of the options. The risk-free interest rate is based on the
U.S. Treasury yield in effect at the time of the grant for treasury
securities of similar maturity. Aytu has computed the fair
value of all options granted during the nine months ended March 31,
2019 using the following assumptions:
|
|
As
of March 31,
2020
|
|
|
|
|
Volatility
|
100.0
%
|
|
Equivalent
term (years)
|
10.00
|
|
Risk-free
interest rate
|
1.82
%
|
|
Dividend
yield
|
0.00
%
|
34
Stock
option activity is as follows:
|
|
Number of
Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life in Years
|
|
Outstanding June
30, 2019
|
$
1,607
|
$
325.73
|
6.13
|
|
Granted
|
339,500
|
0.98
|
10.00
|
|
Exercised
|
(2,500
)
|
0.97
|
–
|
|
Expired
|
(170
)
|
328.00
|
–
|
|
Outstanding March
31, 2020
|
338,437
|
2.36
|
9.62
|
|
Exercisable at
March 31, 2020
|
11,437
|
41.74
|
9.30
|
As
of March 31, 2020, there was $133,015 unrecognized
option-based compensation expense related to non-vested stock
options.
Restricted Stock
Restricted
stock activity is as follows:
|
|
Number of
Shares
|
Weighted
Average Grant Date Fair Value
|
Weighted
Average Remaining Contractual Life in Years
|
|
|
|
|
|
|
Unvested at
June 30, 2019
|
2,346,214
|
$
1.83
|
9.1
|
|
Granted
|
1,067,912
|
0.73
|
1.7
|
|
Vested
|
–
|
–
|
–
|
|
Forfeited
|
(69,900
)
|
2.03
|
–
|
|
Unvested at
March 31, 2020
|
3,344,226
|
$
1.47
|
7.2
|
During
the quarter ended September 30, 2019, 5,150 shares of restricted
stock were exchanged with common stock, and the Company recognized
an increase in aggregate stock compensation expense of
$2,600.
During
the quarter ended December 31, 2019, 34,750 shares of restricted
stock were exchanged with common stock, and the Company recognized
an increase in aggregate stock compensation expense of
$6,200.
During
the quarter ended March 31, 2020, 30,000 shares of restricted stock
were exchanged with common stock, and the Company recognized an
increase in aggregate stock compensation expense of
$12,000.
Under
the 2015 Plan, there was $4,124,000 of total unrecognized
stock-based compensation expense related to the non-vested
restricted stock as of March 31, 2020. The Company expects to
recognize this expense over a weighted-average period of 7.20
years.
In
January 2020, the Company issued 285,000 shares of restricted stock
to directors and employees pursuant to the 2015 Plan. Of the
285,000 shares, 200,000 shares vest in November 2021 and
share-based compensation expense will be recognized over a two-year
period. 85,000 shares vest in January 2030 and share-based
compensation expense will be recognized over a ten-year
period.
In
February 2020, the Company issued 783,000 shares of restricted
stock to employees pursuant to the 2015 Plan, which vest in
February 2021. Expense will be recognized over the one-year vesting
period.
The
Company previously issued 1,540 shares of restricted stock outside
the Company’s 2015 Plan, which vest in July 2026. The
unrecognized expense related to these shares was $1,247,000 as of
March 31, 2020 and is expected to be recognized over the weighted
average period of 6.27 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 March 31,
|
Nine
Months Ended March 31,
|
||
|
Selling,
general and administrative:
|
2020
|
2019
|
2020
|
2019
|
|
Stock
options
|
$
7,000
|
$
15,000
|
$
14,000
|
$
122,000
|
|
Restricted
stock
|
257,000
|
362,000
|
577,000
|
601,000
|
|
Total
stock-based compensation expense
|
$
264,000
|
$
377,000
|
$
591,000
|
$
723,000
|
35
15. Warrants
In
connection with the October 2019 private placement financing, the
Company issued warrants (the October 2019 Warrants) to the
investors to purchase an aggregate of 10,000,000 shares of the
Company’s common stock at an exercise price of $1.25 and a
term of five years. These warrants feature a contingent cashless
exercise provision. During the three months ended December 31,
2019, the cashless exercise contingency was satisfied, reducing the
strike price of the October 2019 Warrants to $0. During the three
months ended March 31, 2020, an investor exercised 5,000,000 of the
warrants using the cashless exercise provision. In April 2020,
another investor exercised the remaining 5,000,000 of the October
2019 warrants using the cashless exercise provision, resulting in
no remaining October 2019 warrants as of April 30,
2020.
In
connection with the March Offerings, the following warrants were
granted, and potentially subsequently exercised:
|
●
|
|
On
March 10, 2020, the Company granted 3,376,087 Pre-Funded Warrants
for total proceeds of $3.9 million, which were fully exercised as
of March 31, 2020. In addition, the Company issued 508,696 of
Placement Agent Warrants with an exercise price of $1.4375 to
purchase 508,696 shares of the Company's common stock, which expire
five years after the grant date. None of the Placement Agent
Warrants have been exercised as of March 31, 2020.
|
|
|
|
|
|
●
|
|
On
March 12, 2020, the Company granted 16,000,000 March 12, 2020 $1.25
Warrants to purchase 16,000,000 shares of the Company’s
common stock for an exercise price of $1.25 per share of common
stock, and expire one-year after the grant date, of which
10,450,000 were exercised as of March 31, 2020 for total proceeds
of approximately $13.1 million. In addition, the Company granted
1,040,000 of the March 12, 2020 Placement Agent Warrants with an
exercise price of $1.5625 per share of common stock to purchase
1,040,000 shares of the Company’s common stock, which expire
five years after the grant date. As of March 31, 2020, there were
no exercises of the March 19, 2020 Placement Agent
Warrants.
|
|
|
|
|
|
●
|
|
On
March 19, 2020, the Company granted 12,539,197 March 19, 2020 $1.47
Warrants to purchase 12,539,197 shares of the Company’s
common stock for an exercise price of $1.47 per share of common
stock, and expire one-year after the grant date, of which 700,000
were exercised as of March 31, 2020 for total proceeds of
approximately $1.0 million. In addition, the Company granted
815,047 of the March 12, 2020 Placement Agent Warrants with an
exercise price of $1.9938 per share of common stock to purchase
815,047 shares of the Company’s common stock, which expire
five years after the grant date. As of March 31, 2020, there were
no exercises of the March 19, 2020 Placement Agent
Warrants.
|
While
these warrants are classified as a component of equity, in order to
allocate the fair value of the March offerings between the investor
warrants and the placement agent warrants, the Company was required
to calculate the fair value of the warrants issued in March. These
warrants issued had a relative fair value of $11.2 million. All
warrants issued in March 2020 were valued using a Black-Scholes
model. In order to calculate the fair value of the warrants,
certain assumptions were made, including the selling price or fair
market value of the underlying common stock, risk-free interest
rate, volatility, expected dividend yield, and contractual life.
Changes to the assumptions could cause significant adjustments to
valuation. The Company estimated a volatility factor utilizing a
weighted average of comparable published betas of peer companies.
The risk-free interest rate is based on the U.S. Treasury yield in
effect at the time of the grant for treasury securities of similar
maturity.
36
Significant
assumptions in valuing the warrants issued during the quarter are
as follows:
|
|
Warrants
Issued Three Months Ended March 31, 2020
|
|
Expected
volatility
|
100
%
|
|
Equivalent term
(years)
|
1 - 5
|
|
Risk-free
rate
|
0.20% -
0.66
%
|
|
Dividend
yield
|
0.00
%
|
A
summary of equity-based warrants is as follows:
|
|
Number of
Warrants
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life in Years
|
|
Outstanding June
30, 2019
|
16,218,908
|
$
3.15
|
4.36
|
|
Warrants
issued
|
44,627,120
|
1.21
|
1.88
|
|
Warrants
expired
|
–
|
–
|
–
|
|
Warrants exercised
(*)
|
(29,859,990
)
|
–
|
–
|
|
Outstanding March
31, 2020
|
30,986,038
|
$
2.39
|
2.31
|
(*)
During the quarter ended March 31, 2020
, investor exercised 5.0 million of the October
2019 private placement warrants under the cashless exercise
provision.
In
April 2020, another investor exercised all remaining 5.0 million
October 2019 private placement warrants. There are no more October
2019 private placement warrants outstanding as of April 30,
2020.
During
the quarter ended March 31, 2020, warrants issued from the October
2018 registered offering and March 2020 offerings to purchase an
aggregate of 17,082,994 shares of common stock were exercised for
aggregate gross proceeds to our Company of approximately $23.0
million.
A
summary of liability warrants is as follows:
|
|
Number of
Warrants
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life in Years
|
|
Outstanding June
30, 2019
|
240,755
|
$
72.00
|
3.16
|
|
Warrants
expired
|
–
|
–
|
–
|
|
Warrants
exercised
|
–
|
–
|
–
|
|
Outstanding March
31, 2020
|
240,755
|
$
72.00
|
2.37
|
37
16. 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 Aytu. For each three- and nine-month period presented,
the basic and diluted loss per share were the same for 2019 and
2018, 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 quarters ended March 31, 2020 and 2019 are
anti-dilutive, and therefore excluded from the calculation of
diluted earnings per share.
|
|
|
Nine Months
Ended
|
|
|
|
|
March
31
|
|
|
|
|
2020
|
2019
|
|
Warrants to
purchase common stock - liability classified
|
(Note
15)
|
240,755
|
240,755
|
|
Warrant to purchase
common stock - equity classified
|
(Note
15)
|
30,986,038
|
11,893,175
|
|
Employee stock
options
|
(Note
14)
|
338,437
|
1,666
|
|
Employee unvested
restricted stock
|
(Note
14)
|
3,344,226
|
2,719,312
|
|
Performance-based
options (*)
|
(Note
14)
|
–
|
75,000
|
|
Convertible
preferred stock
|
(Note
13)
|
9,805,845
|
2,335,665
|
|
|
44,715,301
|
17,265,573
|
|
(*) During the year ended June 30, 2019, the Company issued 75,000
performance-based stock options out of the 2015 Plan to a
consultant. These options vest based on meeting certain market
criteria with an exercise price of $1.00. At June 30, 2019, the
first of three market targets were not achieved, and all 75,000
performance stock options were forfeited.
During the quarter
ended March 31, 2020, 5.0 million equity classified warrants were
cashless exercised pursuant to the terms of the October 2019
warrants
. In April 2020, the final 5.0 million of the
October 2019 warrants were exercised using the cashless exercise
provision. There are no more October 2019 warrants
remaining.
17. 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 $0.6 million. The
Note had an eight-month term with principal and interest payable at
maturity and the recognition of approximately $0.2 million of
debt discount related to the issuance of promissory notes. The
discount is amortized over the life of the promissory notes through
the fourth quarter of calendar 2020.During the three months ended
March 31, 2020, and March 31, 2019, the Company recorded
approximately $34,000 and $0, respectively, of related
amortization.
The Innovus Notes.
Upon completion of the Merger, the
Company assumed approximately $3.1 million of the twelve Innovus
Notes (see Note 1, 2 and 10). During the three months ended
March 31, 2020, and March 31, 2019, the Company recorded
approximately $0.2 million and $0, respectively, of related
amortization. All notes are due within twelve months from
March 31, 2020, with a weighted average interest rate of
approximately 42% for the ten unsecured notes and approximately 15%
for the two secured notes.
On
April 27, 2020, approximately $1.8 million of outstanding notes
were exchanged for approximately 1.5 million shares of the
Company’s common stock, leaving a remaining obligation of
approximately $2.1 million after the exchange, with a remaining
carrying value of approximately $1.4 million.
38
18. 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.
Aytu manages our Company and aggregated our operational and
financial information in accordance with two reportable segments:
Aytu BioScience and Aytu Consumer Health. The Aytu BioScience
segment consists of the Company’s prescription products. The
Aytu Consumer Health segment contains the Company’s consumers
healthcare products line, which was the result of the Innovus
Merger. Select financial information for these segments is as
follows:
|
|
Three
months Ended March 31,
|
Nine
months Ended March 31,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Consolidated
revenue:
|
|
|
|
|
|
Aytu
BioScience
|
$
4,703,000
|
$
2,378,000
|
$
9,318,000
|
$
5,605,000
|
|
Aytu Consumer
Health
|
3,453,000
|
|
3,453,000
|
|
|
Consolidated
revenue
|
8,156,000
|
2,378,000
|
12,771,000
|
5,605,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net
loss:
|
|
|
|
|
|
Aytu
BioScience
|
(4,421,000
)
|
(4,496,000
)
|
(9,565,000
)
|
(12,600,000
)
|
|
Aytu Consumer
Health
|
(911,000
)
|
|
(911,000
)
|
|
|
Consolidated
net loss
|
(5,332,000
)
|
(4,496,000
)
|
(10,476,000
)
|
(12,600,000
)
|
|
|
March 31,
|
June
20,
|
|
|
|
|
2020
|
2019
|
|
|
|
Total
assets:
|
|
|
|
|
|
Aytu
BioScience
|
$
137,825,000
|
$
34,721,000
|
|
|
|
Aytu Consumer
Health
|
21,129,000
|
|
|
|
|
Total
assets
|
$
158,954,000
|
$
34,721,000
|
|
|
19. Subsequent Events
See
Footnotes 1, 14, 15 and 16, 17, for information relating to certain
events occurring subsequent to March 31, 2020 impacting information
disclosed above. In addition, the following subsequent events were
considered:
In May
1, 2020, the Company 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
million.
On April 24, 2020,
the Company received notification it had received approximately
$2.5 million in the form of the Small Business Administration
(“SBA”) Payroll Protection Program loan. Under the
terms of the loan, the loan is due in April 2022, and bears
interest of 1% per annum.
On
April 23, 2020, the Company announced the signing of a definitive
agreement with Singapore-based Biolidics, Ltd to exclusively
distribute Biolidics’ COVID-19 IgG/IgM Rapid Test in the
United States.
On
April 20, 2020, the Company announced that it has signed an
exclusive worldwide license from Cedars-Sinai to develop and
commercialize the Healight Platform Technology
(“Healight”). This medical device technology platform,
discovered and developed by scientists at Cedars-Sinai, is being
studied as a potential first-in-class treatment for coronavirus and
other respiratory infections.
39
Item 2.
M
anagement’s
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,
2019, filed on September 26, 2019. The following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. For additional
information regarding these risks and uncertainties, please see the
risk factors included in Aytu’s Form 10-K filed with the
Securities and Exchange Commission on September 26,
2019.
Overview, Liquidity and Capital Resources
We are a
commercial-stage specialty pharmaceutical company focused on
commercializing novel products that address significant healthcare
needs in both prescription and consumer health categories. Through
our heritage prescription business, we currently market a portfolio
of prescription products addressing large primary care and
pediatric markets. The primary care portfolio includes (i) Natesto,
the only FDA-approved nasal formulation of testosterone for men
with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist,
the only FDA-approved oral spray prescription sleep aid, and (iii)
Tuzistra XR, the only FDA-approved 12-hour codeine-based
antitussive syrup.
We
recently acquired a prescription pediatric portfolio that includes
(i) AcipHex Sprinkle, a granule formulation of rabeprazole sodium,
a commonly prescribed proton pump inhibitor; (ii) Cefaclor, a
second-generation cephalosporin antibiotic suspension; (iii)
Karbinal ER, an extended-release carbinoxamine (antihistamine)
suspension indicated to treat numerous allergic conditions; and
(iv) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription
fluoride-based supplement product lines containing combinations of
fluoride and vitamins in various for infants and children with
fluoride deficiency.
On
February 14, 2020 we acquired Innovus Pharmaceuticals
(“Innovus”), a specialty pharmaceutical company
commercializing, licensing and developing safe and effective
consumer healthcare products designed to improve health and
vitality. Innovus commercializes over thirty-five consumer health
products competing in large healthcare categories including
diabetes, men's health, sexual wellness and respiratory health. The
Innovus product portfolio is commercialized through
direct-to-consumer marketing channels utilizing the Innovus’s
proprietary Beyond Human® marketing and sales
platform.
We
recently acquired exclusive U.S. distribution rights to two
COVID-19 IgG/IgM rapid tests. These coronavirus tests are solid
phase immunochromatographic assays used in the rapid, qualitative
and differential detection of IgG and IgM antibodies to the 2019
Novel Coronavirus in human whole blood, serum or plasma. These
rapid tests have been validated in multi-center clinical trials.
Most recently we signed a licensing agreement with Cedars-Sinai
Medical Center to 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.
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
Financial Condition.
As of March 31,
2020, we had approximately $62.5 million of cash, cash equivalents
and restricted cash. Our operations have historically consumed cash
and are expected to continue to require cash, but at a declining
rate.
On
November 1, 2019, we closed an asset acquisition with Cerecor,
Inc. (“Cerecor”) whereby we acquired certain of
Cerecor’s portfolio of prescription pediatric therapeutics
(the “Pediatric Portfolio”) for $4.5 million in
cash, approximately 9.8 million shares of Series G Convertible
Preferred Stock, the assumption of Cerecor’s financial and
royalty obligations, which includes not more than $3.5 million
of Medicaid rebates and products returns as they come due, and
other assumed liabilities associated with the Pediatric Portfolio
(see Note 2). As of March 31, 2020, we have paid down approximately
$3.2 million of those assumed liabilities.
40
In
addition, we have assumed obligations in connection with the
Pediatric Portfolio acquisition due to an investor including fixed
and variable payments. We assumed fixed monthly payments equal to
$0.1 million from November 2019 through January 2021 plus $15
million due in January 2021. Monthly variable payments due to the
same investor are equal to 15% of net revenue generated from a
subset of the Product Portfolio, subject to an aggregate monthly
minimum of $0.1 million, except for January 2020, when a one-time
payment of $0.2 million is due. The variable payment obligation
continues until the earlier of: (i) aggregate variable payments of
approximately $9.5 million have been made, or (ii) February 12,
2026.
On
February 14, 2020 we closed on the merger with Innovus
Pharmaceuticals after approval by the stockholders of both
companies on February 13, 2020. Upon closing the Merger, we merged
with and into Innovus and (ii) all outstanding Innovus common stock
was exchanged for approximately 3.8 million shares of our common
stock and up to $16 million in value in Contingent Value Rights
(“CVRs”). The outstanding Innovus warrants with cash
out rights were exchanged for approximately 2.0 shares of Series H
Convertible Preferred stock of Aytu and retired. The remaining
Innovus warrants outstanding at the time of the Merger continue to
be outstanding, and upon exercise, retain the right to the merger
consideration offered to Innovus stockholders, including any
remaining claims represented by CVRs at the time of exercise.
Innovus will continue as a subsidiary of us.
In
addition, as part of the merger, we assumed approximately $3.1
million of notes payable, $0.8 million in lease liabilities, and
other assumed liabilities associated with Innovus. Of the $3.1
million of notes payable, approximately $1.8 million was converted
into approximately 1.5 million shares of our common stock on April
27, 2020.
Revenues for the
three-months ended March 31, 2019 increased approximately 243%
compared to the three-months ended December 31, 2018, and revenues
increased 100% and 14% for each of the years ended June 30, 2019
and 2018, respectively. Revenue is expected to continue to increase
long-term, allowing us to rely less on our existing cash and cash
equivalents, and proceeds from financing transactions. Cash used in
operations during the nine-months ended March 31, 2019 was $20.6
million compared to $10.4 million for the nine-months ended March
31, 2019, due primarily to our acquisition and integration of the
Pediatric Portfolio and merger with Innovus, which consumed
additional cash resources, coupled with an increase in working
capital. During three months ended March 31, 2020, we entered into
three separate offerings, on March 10, 2020, March 12, 2020 and
March 19, 2020 (the “March Offerings”) in which we
issued a combination of common stock and warrants. The following
summarizes the March Offerings, including total capital raised from
both the issuance of common stock or subsequent warrant
exercises.
On
March 19, 2020, we entered into a securities purchase agreement
with certain institutional investors, pursuant to which we agreed
to sell and issue, in a registered direct offering, an aggregate of
(i) 12,539,197 shares of the our common stock (the “Common
Stock”) at a purchase price per share of $1.595 and (ii)
warrants to purchase up to 12,539,197 shares of Common Stock (the
“March 19, 2020 Warrants”) at an exercise price of
$1.47 per share, for aggregate gross proceeds of $20.0 million,
before deducting placement agent fees and other offering expenses
payable by us. The March 19, 2020 Warrants are exercisable
immediately upon issuance and have a term of one year from the
issuance date. In addition, we issued warrants with an exercise
price of $1.9938 per share to purchase up to 815,047 shares of
common stock (the “March 19, 2020 Placement Agent
Warrants”). The March 19, 2020 Placement Agent Warrants have
a term of five year from the issuance date.
A total
of 1.2 million March 19, 2020 Warrants have been exercised through
May 5, 2020, for total proceeds of $1.7 million, of which 0.7
million March 19, 2020 Warrants were exercised through March 31,
2020, for total proceeds of $1.1 million.
On
March 12, 2020, we entered into a securities purchase agreement
with certain institutional investors, pursuant to which we agreed
to sell and issue, in a registered direct offering, an aggregate of
(i) 16,000,000 shares of our common stock at a purchase price per
share of $1.25 and (ii) warrants to purchase up to 16,000,000
shares of Common Stock (the “March 12, 2020 Warrants”)
at an exercise price of $1.25 per share, for aggregate gross
proceeds of $20.0 million, before deducting placement agent fees
and other offering expenses payable by the us. The March 12, 2020
Warrants are exercisable immediately upon issuance and have a term
of one year from the issuance date. In addition, we issued warrants
with an exercise price of $1.5625 per share to purchase up to
1,040,000 shares of common stock (the “March 12, 2020
Placement Agent Warrants”). The March 12, 2020 Placement
Agent Warrants have a term of five year from the issuance
date.
41
A total
of 13 million March 12, 2020 Warrants have been exercised through
May 5, 2020, for total proceeds of approximately $16.3 million, of
which approximately 10.5 million March 12, 2020 Warrants were
exercised through March 31, 2020, for total proceeds of $13.1
million.
On
March 10, 2020, we entered into a securities purchase agreement
with an institutional investor, pursuant to which we agreed to sell
and issue, in a registered direct offering, an aggregate of (i)
4,450,000 shares of our common stock (the “Common
Stock”) at a purchase price per share of $1.15 and (ii)
pre-funded warrants to purchase up to 3,376,087 shares of Common
Stock (the “Pre-Funded Warrants”) at an effective price
of $1.15 per share ($1.1499 per Pre-Funded Warrant paid to us upon
the closing of the offering and $0.0001 paid upon exercise of such
Pre-Funded Warrants), for aggregate gross proceeds of approximately
$9.0 million, before deducting placement agent fees and other
offering expenses payable by us. The Pre-Funded Warrants were
immediately exercised upon close. In addition, we issued warrants
with an exercise price of $1.4375 per share to purchase up to
508,696 shares of common stock (the “March 10, 2020 Placement
Agent Warrants”). The March 10, 2020 Placement Agent Warrants
have a term of five year from the issuance date.
Since
March 10, 2020, a total of 6.0 million shares of the October 2018
$1.50 Warrants (the “October 18 $1.50 Warrants”) were
exercised, resulting in proceeds of approximately $9.0
million.
In
total, we have raised net proceeds of approximately $71.5 million
from the March Offerings and related warrant exercises, as well as
exercises of the October 2018 Warrants. The net proceeds we
received from the March Offerings and related warrant exercise will
be used for general corporate purposes, including working
capital.
On
October 11, 2019, we entered into Securities Purchase Agreements
(the “Purchase Agreement”) with two institutional
investors (the “Investors”) providing for our issuance
and sale (the “October 2019 Offering”) of $10.0 million
of, (i) 10,000 shares of our Series F Convertible Preferred Stock
(the “Preferred Stock”) which are convertible into
10,000,000 shares of common stock (the “Conversion
Shares”) for a stated value of $1,000 per unit and (ii)
warrants (the “October 2019 Warrants”) which are
exercisable for shares of our common stock (the “Warrant
Shares”), which expire January 10, 2025. The closing of the
October 2019 offering occurred on October 16, 2019. The Warrants
had an exercise price equal to $1.25 and contain a cashless
exercise provision. This provision was dependent on (i) performance
of our stock price between October 11, 2019 and the date of
exercise of all, or a portion of the Warrants, and (ii) subject to
shareholder approval of the October 2019 Offering, which was
approved January 24, 2020.
During
the three months ended March 31, 2020, all 10,000 of the Series F
Convertible Preferred stock was converted into 10,000,000 shares of
our Common stock and 5 million of the October 2019 Warrants were
exercised into 5.0 million shares of our Common stock using the
cashless exercise provision. In April 2020, the remaining 5 million
October 2019 Warrants were exercised into 5.0 million shares of our
Common stock using the cashless exercise provision.
The net proceeds we received from the October 2019
Offering were approximately $9.3 million. The net proceeds we
received from the October 2019 Offerings will be used for general
corporate purposes, including working
capital.
42
As of
the date of this Report, the we expect our commercial costs for our
current operations to increase modestly as we integrate the
acquisition of the Pediatric Portfolio and continue to focus on
revenue growth through increasing product sales. Our total asset
position totaling approximately $168.5 million plus the proceeds
expected from ongoing product sales will be used to fund
operations. We may continue to access the capital markets to fund
operations when needed, and to the extent it is required. The
timing and amount of capital that may be raised is dependent on
market conditions and the terms and conditions upon which investors
would require to provide such capital. There is no guarantee that
capital will be available on terms favorable to the us and our
stockholders, or at all. However, we have been successful in
accessing the capital markets in the past and are confident in our
ability to access the capital markets again, if needed. Since we
have sufficient cash and cash equivalents on-hand as of March 31,
2020 to cover potential net cash outflows for the twelve months
following the filing date of this Quarterly Report, ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic
205-40) we report that there does not exist indication of
substantial doubt about our ability to continue as a going
concern.
As
of the date of this report, while we have adequate capital
resources to complete our near-term operating and transaction
objectives, there is no guarantee that such capital resources will
be sufficient until such time the we reach profitability. However,
we have been successful in accessing the capital markets in the
past and are confident in our ability to access the capital markets
again, if needed.
If we
are unable to raise adequate capital in the future when it is
required, we can adjust our operating plans to reduce the magnitude
of the capital 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 our commercial plans, or reductions to our research and
development programs. Without sufficient operating capital, we
could be required to relinquish rights to products or renegotiate
to maintain such rights on less favorable terms than it would
otherwise choose. This may lead to impairment or other charges,
which could materially affect our balance sheet and operating
results.
Nasdaq Listing Compliance.
Our common
stock is listed on The Nasdaq Capital Market (the
“Nasdaq”). In order to maintain compliance with Nasdaq
listing standards
,
we must,
amongst other requirements, maintain a stockholders’ equity
balance of at least $2.5 million pursuant to Nasdaq Listing Rule
5550(b). In that regard, on September 30, 2019, our
stockholders’ equity totaled approximately $2.3 million,
thereby potentially resulting in a stockholders’ equity
deficiency upon the filing of the September 30, 2019 Form 10-Q.
However, subsequent to September 30, 2019, we completed (i) the
Offering with the Investors, raising approximately $9.3 million,
net in equity financing (see Note 1), and (ii) the “Asset
Purchase Agreement” in which we issued approximately 9.8
million shares of Series G Convertible Preferred Stock worth
approximately $5.6 million, resulting in an increase in
stockholders’ equity of approximately $14.8 million in the
aggregate. Accordingly, as of the filing of this Form 10-Q for the
three and nine months ended March 31, 2020, our stockholders’
equity balance exceeds the minimum $2.5 million threshold and,
therefore, we believe we are currently in compliance with all
applicable Nasdaq Listing Requirements.
On
March 24, 2020, we received a letter from the Nasdaq notifying us
that the Nasdaq has determined that the our stock price has traded
above at least $1.00 for at least 10 consecutive business days
since the previously announced February 19, 2020 notice, and
therefore, we have regained compliance with Nasdaq Listing Rule
5550(a)(2), commonly referred to as the Bid Price
Rule.
Strategic Growth Initiatives
Pursuant to our
strategy of identifying and acquiring complimentary assets, we have
entered into two transactions that we expect to substantially
increase our revenue generating capacity and provide opportunities
to reduce our combined operating losses. The dual impact of the
transactions on revenue and operating expenses is expected to
position us to achieve positive cash flow earlier than previously
expected.
Acquisition of Pediatric Portfolio.
On
October 10, 2019, we entered into the Purchase Agreement with
Cerecor, Inc. (“Cerecor”) to purchase and acquire
Cerecor’s portfolio of prescription pediatric therapeutics
(the “Pediatric Portfolio”), which closed on November
1, 2019. The Pediatric Portfolio consists of six pharmaceutical and
other prescription products consisting of (i) AcipHex Sprinkle,
(ii) Cefaclor for Oral Suspension, (iii) Karbinal ER, (iv)
Flexichamber, (v) Poly-Vi-Flor and Tri-Vi-Flor. Total consideration
transferred 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 absorbed the majority of the
Cerecor’s workforce focused on commercial sales, commercial
contracts and customer relationships.
43
We have
assumed obligations due to an investor including fixed and variable
payments. We assumed fixed monthly payments equal to $0.1 million
from November 2019 through January 2021 plus $15 million due in
January 2021. Monthly variable payments due to the same investor
are equal to 15% of net revenue generated from a subset of the
Product Portfolio, subject to an aggregate monthly minimum of $0.1
million, except for January 2020, when a one-time payment of $0.2
million is due. The variable payment obligation continues until the
earlier of: (i) aggregate variable payments of approximately $9.5
million have been made, or (ii) February 12, 2026.
Further, certain of
the products in the Pediatric Portfolio require royalty payments
ranging from 15% to 38.0% of net revenue. One of the products in
the Pediatric Portfolio requires us to generate minimum annual
sales sufficient to represent annual royalties of approximately
$1.75 million.
Acquisition of Innovus
Pharmaceuticals.
On February 14, 2020 we closed on
the merger with Innovus Pharmaceuticals after approval by the
stockholders of both companies on February 13, 2020
.
The acquisition of Innovus has
enabled the company to expand into the consumer healthcare market
with Innovus’ thirty-five-plus over-the-counter medicines and
other healthcare products. We expect Innovus to continue to develop
additional consumer healthcare products and expand its portfolio.
This, we expect, will drive additional revenue for the consumer
health subsidiary and contribute meaningfully to the company's
overall revenue growth.
Additionally,
through the two recently announced transactions to acquire
distribution rights to two COVID-19 IgG/gM rapid tests, we expect
to participate in the U.S. serology testing market. We have
purchased 1,600,000 rapid tests from one manufacturer (Zhejiang
Orient Gene Biotech Limited via our distribution agreement with
L.B. Resources, Limited) and committed to purchase another
1,250,100 rapid tests from another manufacturer (Biolidics,
Limited). We also signed an exclusive license with Cedars-Sinai
Medical Center to a medical device technology platform that is a
pre-clinical prospective treatment for coronavirus for seriously
ill patients in the ICU. We expect to advance this technology
through development and, if proven clinically effective and able to
be manufactured at scale, expect to commercialize this product in
the future.
In the
near-term, we expect to create value for shareholders by
implementing a focused strategy of increasing sales of our
prescription therapeutics while leveraging our commercial
infrastructure. Further, we expect to increase sales of our newly
acquired consumer healthcare product portfolio following the
closing of our acquisition of Innovus Pharmaceuticals.
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.
44
ACCOUNTING POLICIES
Significant Accounting Policies and Estimates
Our
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America. The preparation of the consolidated financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements, and the reported
amounts of expenses during the reporting period. On an on-going
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, contingencies and going concern. Management bases its
estimates and judgments on historical experience and on various
other factors, including COVID-19, that the Company believes to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions. The methods, estimates, and judgments
used by us in applying these critical accounting policies have a
significant impact on the results we report in our consolidated
financial statements. Our significant accounting policies and
estimates are included in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2019, filed with the SEC on September
26, 2019.
Information
regarding our accounting policies and estimates can be found in the
Notes to the consolidated Financial Statements.
Newly Issued Accounting Pronouncements
Information
regarding the recently issued accounting standards (adopted and
pending adoption as of March 31, 2020) are presented in Note 1 to
the consolidated financial statements.
45
RESULTS OF OPERATIONS
Results of Operations – Three and Nine months ended March 31,
2020 compared to March 31, 2019
|
|
Three
Months Ended March 31,
|
|
||
|
|
2020
|
2019
|
Change
|
%
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Product
revenue, net
|
$
8,156,173
|
$
2,372,016
|
$
5,784,157
|
244
%
|
|
License
revenue
|
-
|
5,776
|
(5,776
)
|
-100
%
|
|
Total net
revenue
|
8,156,173
|
2,377,792
|
5,778,381
|
243
%
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
Cost
of sales
|
1,998,659
|
616,853
|
1,381,806
|
224
%
|
|
Research and
development
|
78,502
|
108,901
|
(30,399
)
|
-27.9
%
|
|
Selling,
general and administrative
|
9,501,469
|
5,368,762
|
4,132,707
|
77.0
%
|
|
Selling,
general and administrative - related party
|
-
|
6,797
|
(6,797
)
|
-100
%
|
|
Amortization
of intangible assets
|
1,370,986
|
575,117
|
795,869
|
138
%
|
|
Total
operating expenses
|
12,949,616
|
6,676,430
|
6,273,186
|
94
%
|
|
|
|
|
|
|
|
Loss from
operations
|
(4,793,443
)
|
(4,298,638
)
|
(494,805
)
|
12
%
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
|
|
|
Other
(expense), net
|
(538,862
)
|
(194,703
)
|
(344,159
)
|
177
%
|
|
Gain from
derecognition of contingent consideration
|
-
|
-
|
-
|
100
%
|
|
Gain from
warrant derivative liability
|
-
|
(2,521
)
|
2,521
|
-100
%
|
|
Total other
(expense) income
|
(538,862
)
|
(197,224
)
|
(341,638
)
|
173
%
|
|
|
|
|
|
|
|
Net
loss
|
$
(5,332,305
)
|
$
(4,495,862
)
|
$
(836,443
)
|
19
%
|
|
|
Nine
Months Ended March 31,
|
|
||
|
|
2020
|
2019
|
Change
|
%
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Product
revenue, net
|
$
12,771,235
|
$
5,598,836
|
$
7,172,399
|
128
%
|
|
License
revenue
|
-
|
5,776
|
(5,776
)
|
-100
%
|
|
Total net
revenue
|
12,771,235
|
5,604,612
|
7,166,623
|
128
%
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
Cost
of sales
|
2,980,425
|
1,552,950
|
1,427,475
|
92
%
|
|
Research and
development
|
223,197
|
413,808
|
(190,611
)
|
-46.1
%
|
|
Selling,
general and administrative
|
21,164,072
|
13,991,516
|
7,172,556
|
51.3
%
|
|
Selling,
general and administrative - related party
|
-
|
351,843
|
(351,843
)
|
-100
%
|
|
Amortization
of intangible assets
|
2,899,553
|
1,561,137
|
1,338,416
|
86
%
|
|
Total
operating expenses
|
27,267,247
|
17,871,254
|
9,395,993
|
53
%
|
|
|
|
|
|
|
|
Loss from
operations
|
(14,496,012
)
|
(12,266,642
)
|
(2,229,370
)
|
18
%
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
|
|
|
Other
(expense), net
|
(1,181,206
)
|
(398,833
)
|
(782,373
)
|
196
%
|
|
Gain from
derecognition of contingent consideration
|
5,199,806
|
-
|
5,199,806
|
100
%
|
|
Gain from
warrant derivative liability
|
1,830
|
65,468
|
(63,638
)
|
-97
%
|
|
Total other
(expense) income
|
4,020,430
|
(333,365
)
|
4,353,795
|
-1306
%
|
|
|
|
|
|
|
|
Net
loss
|
$
(10,475,582
)
|
$
(12,600,007
)
|
$
2,124,425
|
-17
%
|
46
Product revenue.
We recognized net revenue from product sales of
$8.2 million and $2.4 million for the three months ended March 31,
2020 and 2019 respectively. We recognized net revenue from product
sales of $12.8 million and $5.6 million for the nine months ended
March 31, 2020 and 2019 respectively. This increase was primarily
driven by the acquisition of the Portfolio of Pediatric
Therapeutics on November 1, 2019 and the Merger with Innovus on
February 14, 2020.
Our product portfolio includes Natesto, Tuzistra
XR, ZolpiMist, and the MiOXSYS Systems. In November 2019, we
acquired the portfolio of pediatric therapeutic commercial products
from Cerecor, Inc. This transaction expanded our product portfolio
with the addition of six pharmaceutical and other prescription
products, AcipHex Sprinkle, Cefaclor, Karbinal, Flexichamber,
Poly-Vi-Flor and Tri-Vi-Flor.
On February 14, 2020, the
Company acquired Innovus Pharmaceuticals.
Innovus commercializes over
thirty-five consumer health products competing in large healthcare
categories including diabetes, men's health, sexual wellness and
respiratory health.
Cost of sales
. The cost of sales of
$2.0 million and $0.6 million recognized for the three months ended
March 31, 2020 and 2019, respectively, and $3.0 million and $1.6
million recognized for the nine months ended March 31, 2020 and
2019, respectively, are related to Natesto, Tuzistra XR, ZolpiMist,
AcipHex Sprinkl, Cefaclor, Karbinal,
Flexichamber, Poly-Vi-Flor, Tri-Vi-Flor
, the MiOXSYS System
and consumer health products. We expect cost of sales to increase
in the future due to and in line with growth in revenue from
product sales.
Research and Development.
Research and
development expenses decreased $0.03 million, or 27.9%, for the
three months ended March 31, 2020 compared to the three months
ended March 31, 2019.
Research and
development expenses decreased $0.2 million, or 46.1%, for the nine
months ended March 31, 2020 compared to the nine months ended March
31, 2019.
The
decrease was due primarily to
a
decrease in research and development costs associated with the
MiOXSYS System
. We anticipate research and development
expense to increase in fiscal 2020 as we anticipate funding a study
to further support the clinical application of our MiOXSYS
System.
Selling, General and Administrative.
Selling, general and administrative
costs increased $4.1 million, or 77%, for the three months ended
March 31, 2020 compared the three months ended March 31,
2019. Selling, general and administrative costs increased $7.2
million, or 51.3%, for the nine months ended March 31, 2020,
compared to the nine months ended March 31,
2019.
The
primary increase was due to sales and marketing expenses related to
Cerecor acquisition and Innovus Merger, labor, occupancy, travel,
expanding our commercial team, and stock-based
compensation.
Selling, General and
Administrative – Related Party.
Selling, general and administrative costs –
related party comprise the cost of a services provided by TrialCard
Inc. (“TrialCard”), of which one of our Directors, Mr.
Donofrio, was an employee during the quarter ended March 31, 2019.
Mr. Donofrio is no longer an employee of
TrialCard.
Amortization of Intangible Assets.
Amortization expense for the remaining intangible assets was
approximately $1.4 million and $0.6 million for the for the three
months ended March 31, 2020 and 2019, respectively.
Amortization of intangible assets was $2.9 million
and $1.6 million for the nine months ended March 31, 2020 and 2019,
respectively.
This expense is related to corresponding
amortization of our finite-lived intangible assets. The increase of
this expense is due to the Cerecor acquisition and Innovus Merger
closed in this quarter.
Derecognition of contingent
consideration.
Gain of approximately $5.2 million from the
derecognition of the estimated contingent consideration liability
related to sales of Natesto with terms covered pursuant to the
Amended and Restated License and Supply Agreement (the
“Acerus Amendment”).
47
Liquidity and Capital Resources
|
|
March
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Net cash used
in operating activities
|
$
(20,609,198
)
|
$
(10,357,501
)
|
|
Net cash used
in investing activities
|
(5,610,732
)
|
(965,877
)
|
|
Net cash
provided by financing activities
|
$
77,441,786
|
$
18,958,549
|
Net Cash Used in Operating Activities
During
the nine months ended March 31, 2020, our operating activities used
$20.6 million in cash, which was greater than the net loss of $10.5
million, primarily as a result of derecognition of contingent
consideration and an increase in accounts receivable, decrease in
accounts payable and other offset by the non-cash depreciation,
amortization and accretion, stock-based compensation charges to
earnings, coupled with an increase in accrued liabilities and
accrued compensation.
During
the nine months ended March 31, 2019, our operating activities used
$10.4 million in cash, which was less than the reported net loss of
$12.6 million. Our cash use was lower than our reported net loss
due to an increase in accrued liabilities, accrued compensation
expense and interest payable, along with the recognition of
non-cash expenses such as depreciation, amortization and accretion,
stock-based compensation, and restricted stock. These were offset
by derivative income, an increase in accounts receivable, inventory
and prepaid expenses and other.
Net Cash Used in Investing Activities
During
the nine months ended March 31, 2020, we used $1.4 million for the
Innovus Merger. We also used $4.5 million for the Cerecor
acquisition and we paid $0.2 million in contingent consideration
offset by cash of $0.4 million received from Innovus
Merger.
During
the nine months ended March 31, 2019, we used $560,000 of cash for
investing activities to purchase fixed and operating assets, paid
$409,000 in contingent consideration, and received a $3,000 refund
of our deposit for office space.
Net Cash from Financing Activities
Net
cash provided by financing activities in the nine months ended
March 31, 2019 was $77.4 million.
This
was primarily related to the (i) October 2019 Offering for gross
proceeds of $10.0 million, offset by the offering cost of $0.7
million which was paid in cash; (ii) $49 million raised in the
March 2020 Offerings, offset by offering costs of approximately
$4.5 million, and (iii) $23.0 million raised as the result of
warrant exercises in March 2020.
Net
cash provided by financing activities in the nine months ended
March 31, 2019 was $19.0 million. This was primarily related to the
October 2018 public offering of $15.2 million, offset by the
offering cost of $1.5 million which was paid in cash. In addition,
we received proceeds of $5 million from the Note. We also received
proceeds of $0.3 million from warrant exercises.
Off Balance Sheet Arrangements
We do
not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also
known as “variable interest entities.”
Contractual Obligations and Commitments
Information
regarding our Contractual Obligations and Commitments is contained
in Note 12 to the Financial
Statements.
48
Item 3.
Q
uantitative and
Qualitative Disclosures About Market Risk.
We
are not currently exposed to material market risk arising from
financial instruments, changes in interest rates or commodity
prices, or fluctuations in foreign currencies. We have not
identified a need to hedge against any of the foregoing risks and
therefore currently engages in no hedging activities.
Item 4.
C
ontrols and
Procedures.
As
of the end of the period covered by this Quarterly Report on Form
10-Q, an evaluation was carried out by our management, with the
participation of the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange
Act. Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be
disclosed in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and are
operating in an effective manner.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal controls over financial reporting
that occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II.
O
THER
INFORMATION
Item 1.
L
egal Proceedings.
Presmar
. In connection with our
acquisition from Cerecor of the Poly-Vi-Flor product rights, the
Company agreed to reimburse Cerecor for change of control payments
Cerecor may owe to Presmar Associates, Inc. (“Presmar”)
pursuant to an Agreement to Redeem Membership Interest among TRx
Pharmaceuticals, LLC, Presmar, Fremantle Corporation, and LRS
International, LLC, dated May 31, 2011 (the “Presmar
Agreement”). Cerecor had inherited the Presmar Agreement as
part of a prior transaction. The Company did not assume the Presmar
Agreement, but agreed to reimburse Cerecor for any payment it was
required to make in connection with the Presmar Agreement change of
control provisions. Upon closing of the Cerecor transaction,
Presmar disputed the agreed upon calculation by Company and Cerecor
of the amount payable under the Presmar Agreement. The Company,
Cerecor, and Presmar have had ongoing discussions regarding the
appropriate amount owed to Presmar under the Presmar Agreement.
Recently, the parties tentatively agreed on an approach under
which: (i) Cerecor will make an initial payment to Presmar in the
amount of $150,000, which will be reimbursed by the Company in six
(6) equal monthly installments; (ii) the Company will issue to
Presmar $150,000 worth of the Company’s common stock in a
private placement pursuant to applicable exemptions under the
Securities Act; and (iii) each party will provide a mutual release
of liability in connection with the Poly-Vi-Flor product transfer
(the “Settlement”). The Settlement remains contingent
on approval from the parties respective board of
directors.
Hikma
. On May 8, 2017, Innovus entered
into a Supply Agreement with Hikma (formerly West-Ward
Pharmaceuticals Corp.) for the supply of FlutiCare®, a branded
fluticasone propionate nasal spray. During the second year of the
Supply Agreement, Innovus received multiple shipments of
FlutiCare® products containing non-compliant labelling due to
defective label adhesive. Since that time Hikma and Innovus have
been in negotiations regarding responsibility for the defective
products and the status of the Supply Agreement. On May 1, 2020,
Hikma and Innovus (now a Company subsidiary) entered into the
Settlement Agreement requiring Innovus to purchase three batches of
FlutiCare® through the fiscal year 2022 at a price of $1
million per batch.
Marin County DA
. On August 24, 2018,
Innovus received a letter from the Marin County District
Attorney’s Office (the “Marin DA”) demanding
substantiation for certain advertising claims made by Innovus
related to DiabaSens®, and Apeaz®, which were sold and
marketed in Marin County, California. The Marin DA is part of a
larger Northern California task force comprising of district
attorney offices from ten counties that agree to handle customer
protection matters. Innovus responded to the Marin DA through its
regulatory counsel in November 2018 and continued to exchange
correspondence with the Marin DA through April 2019. In June 2019
Innovus met with the Northern California task force. In March 2020,
Innovus (now a Company subsidiary) entered into a Stipulation for
Entry of Final Judgement (the “Stipulation”), pursuant
to which Innovus agreed to the following: (i) certain injunctive
relief relating the advertising and sale of DiabaSens®, and
Apeaz®; (ii) to pay a civil penalty of $150,000; (iii) to
reimburse investigative costs of $11,500; and (iv) to pay
restitution of $43,000. In May 2020, the Marin DA filed the
judgement with the Superior Court for the County of Monterrey and
the parties are waiting for the judge to approve the
stipulation.
Pliscott.
Between November 20, 2019 and
December 17, 2019, four putative class action lawsuits were filed
in Delaware state and federal courts in connection with: (i)
Aytu’s proposal to approve, in accordance with Nasdaq
Marketplace Rule 5635(d), the convertibility of the Company’s
Series F convertible preferred stock and the exercisability of
certain warrants, in each case, issued in a private placement
offering that closed on October 16, 2019 (the “Nasdaq Rule
5635(d) Proposal”); (ii) Aytu’s proposal to approve an
amendment to its Certificate of Incorporation to increase the
number of its authorized shares of common stock from 100,000,000 to
120,000,000 shares of common stock (the “Authorized Share
Increase Proposal”); and (iii) Aytu’s proposal to
approve the adjournment of the special meeting, if necessary, to
continue to solicit votes for the Nasdaq Rule 5635(d) Proposal
and/or the Authorized Share Increase Proposal (“Adjournment
Proposal” and, together with the Nasdaq Rule 5635(d) Proposal
and the Authorized Share Increase Proposal, the
“Proposal”). Three lawsuits were filed in the Court of
Chancery of the State of Delaware:
Carl Pliscott v. Joshua R. Disbrow, et
al.
, Case No. 2019-0933, filed on November 20, 2019 (the
“Pliscott Action”);
Adam Kirschenbaum v. Aytu Bioscience, Inc., et
al.
, Case No. 2019-0984, filed on December 10, 2019 (the
“Kirschenbaum lawsuit”); and
Michael Sebree v. Josh Disbrow, et al.
,
Case No. 2019-1011, filed on December 17, 2019 (the “Sebree
Action”). The Kirschenbaum Action and Sebree Action were both
assigned to Chancellor Andre G. Bouchard. The Pliscott Action was
removed to the United States District Court for the District of
Delaware on December 5, 2019, captioned as
Carl Pliscott v. Joshua R. Disbrow, et
al.
, Case No. 19-cv-02228-UNA
, but was remanded to the Court of
Chancery and assigned to Chancellor Andre G. Bouchard on January
14, 2020
. One lawsuit was filed in the United States
District Court for the District of Delaware and assigned to Chief
Judge Leonard P. Stark:
Adam
Franchi v. Aytu Bioscience, Inc., et al.
, Case No.
19-cv-02204-LPS, filed on November 26, 2019 (the “Franchi
Action”). The Pliscott Action, Kirschenbaum Action, and
Sebree Action allege that the members of the Aytu board breached
their fiduciary duties to Aytu stockholders by failing to disclose
all information material to the Proposals. The Franchi Action
alleges that Aytu and the individual members of the Aytu board
violated Sections 14(a) and 20(a) of the Securities Exchange Act of
1934 (and Rule 14a-9, promulgated thereunder) by virtue of
allegedly false and misleading statements contained in the proxy
statement filed by Aytu on November 21, 2019. All four lawsuits
seek, among other things, declaratory relief allowing the action to
be maintained as a class action, injunctive relief prohibiting any
stockholder vote on the Proposals or other consummation of the
Proposals, damages, attorneys’ fees and costs, and other and
further relief. The Sebree Action further seeks injunctive relief
prohibiting consummation of the Asset Purchase Agreement, dated
October 10, 2019. Aytu and the board believe that all claims
asserted are meritless and have vigorously defended against the
four lawsuits. On January 30, 2020, the parties in the Pliscott
Action, Kirschenbaum Action, and Sebree Action filed a stipulation
voluntarily dismissing the cases as moot, with plaintiffs reserving
the right to seek mootness fees. On February 5, 2020, the Chancery
Court dismissed the cases while retaining jurisdiction to
adjudicate anticipated mootness fee motions. No mootness fee motion
has been filed to date. At this stage, it is not otherwise possible
to predict the effect of lawsuits on
Aytu.
Item 1A.
R
isk
Factors.
In addition to other information set forth in this report, you
should carefully consider the risk factors discussed in Part I,
Item 1A. “Risk Factors” in our Annual Report, which
could materially affect our business, financial condition, cash
flows, and/or future results. The risk factors in our Annual
Report are not the only risks facing our Company. Additional risks
and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our
business, financial condition, and/or future results. There have
been no material changes to the risk factors contained in our
Annual Report, except as outlined below.
section
entitled “Special Note Regarding Forward-Looking
Statements.”
Risks Related to COVID-19
We are relying on FDA policies and guidance provisions that have
changed very recently, and may continue to change, and relate
directly to the 2019 coronavirus health crisis. If we misinterpret
this guidance or the guidance changes unexpectedly and/or
materially, potential sales of the COVID-19 tests would be
impacted.
The
U.S. Food and Drug Administration (FDA) issued non-binding guidance
for manufacturers relating to the pathway to enable FDA approval
for devices related to testing for COVID-19 under an Emergency Use
Authorization (EUA). Following the issuance of the initial
published guidance, on March 16, 2020, revised guidance specific to
COVID-19 ‘antibody tests’ was issued. Newer guidance
was published on May 4, 2020 further describing the requirements
for serology tests to continue to be marketed under an Emergency
Use Authorization. If our interpretation of the newly revised
guidance is incorrect or specifics around the guidance change, the
sales of the COVID-19 test could be materially
impacted.
49
If our recently licensed COVID-19 IgG/IgM rapid tests do not
perform as expected or the reliability of the technology is
questioned, we could experience delayed or reduced market
acceptance of the tests, increased costs and damage to our
reputation.
Our
success depends on the market’s confidence that we can
provide reliable, high-quality COVID-19 diagnostic tests. We
believe that customers in our target markets are likely to be
particularly sensitive to product defects and errors. Our
reputation and the public image of our licensed COVID-19 diagnostic
tests may be impaired if they fail to perform as expected or are
perceived as difficult to use. Despite quality control testing,
defects or errors could occur with the tests.
In the
future, if our licensed COVID-19 diagnostic tests experience a
material defect or error, this could result in loss or delay of
revenues, delayed market acceptance, damaged reputation, diversion
of development resources, legal claims, increased insurance costs
or increased service and warranty costs, any of which could harm
our business. Such defects or errors could also prompt us to amend
certain warning labels or narrow the scope of the use of our
diagnostic tests, either of which could hinder our success in the
market. Even after any underlying concerns or problems are
resolved, any widespread concerns regarding our technology or any
manufacturing defects or performance errors in the test could
result in lost revenue, delayed market acceptance, damaged
reputation, increased service and warranty costs and claims against
us.
If we become subject to claims relating to improper handling,
storage or disposal of hazardous materials, we could incur
significant cost and time to comply.
Our
research and development processes involve the controlled storage,
use and disposal of hazardous materials, including biological
hazardous materials. We are subject to foreign, federal, state and
local regulations governing the use, manufacture, storage, handling
and disposal of materials and waste products. We may incur
significant costs complying with both existing and future
environmental laws and regulations. In particular, we are subject
to regulation by the Occupational Safety and Health Administration,
or OSHA, and the Environmental Protection Agency, or EPA, and to
regulation under the Toxic Substances Control Act and the Resource
Conservation and Recovery Act in the United States. OSHA or the EPA
may adopt additional regulations in the future that may affect our
research and development programs. The risk of accidental
contamination or injury from hazardous materials cannot be
eliminated completely. In the event of an accident, we could be
held liable for any damages that result, and any liability could
exceed the limits or fall outside the coverage of our
workers’ compensation insurance. We may not be able to
maintain insurance on acceptable terms, if at all.
Our licensed COVID-19 tests have not been manufactured on a
high-volume scale and could be subject to unforeseen scale-up
risks.
While
the manufacturers of the COVID-19 IgG/IgM rapid rests have
experience manufacturing diagnostic tests, there can be no
assurance that they can manufacture the COVID-19 diagnostic tests
at a scale that is adequate for our current and future commercial
needs. We may face significant or unforeseen difficulties in
securing adequate supply of the COVID-19 diagnostic tests, relating
to the manufacturing of the tests. These risks include but are not
limited to:
●
Technical issues
relating to manufacturing components of the COVID-19 diagnostic
tests on a high-volume commercial scale at reasonable cost, and in
a reasonable time frame;
●
difficulty meeting
demand or timing requirements for orders due to excessive costs or
lack of capacity for part or all of an operation or
process;
●
changes in
government regulations or in quality or other requirements that
lead to additional manufacturing costs or an inability to supply
product in a timely manner, if at all; and
●
increases in raw
material or component supply cost or an inability to obtain
supplies of certain critical supplies needed to complete our
manufacturing processes.
These
and other difficulties may only become apparent when scaling up to
the manufacturing process of the COVID-19 diagnostic tests to a
more substantive commercial scale. In the event the tests cannot be
manufactured in sufficient commercial quantities or manufacturing
is delayed, our future prospects could be significantly impacted
and our financial prospects could be materially
harmed.
50
Our suppliers may experience development or manufacturing problems
or delays that could limit the growth of our revenue or increase
our losses.
We may
encounter unforeseen situations in the manufacturing of the
COVID-19 diagnostic tests that could result in delays or shortfalls
in our production. Suppliers may also face similar delays or
shortfalls. In addition, suppliers’ production processes may
have to change to accommodate any significant future expansion of
manufacturing capacity, which may increase suppliers’
manufacturing costs, delay production of diagnostic tests, reduce
our product gross margin and adversely impact our business. If we
are unable to keep up with demand for the COVID-19 diagnostic test
by successfully securing supply and shipping our diagnostic tests
in a timely manner, our revenue could be impaired, market
acceptance for the test could be adversely affected and our
customers might instead purchase our competitors’ diagnostic
tests.
We have relied and expect to continue to rely on third parties to
conduct studies of the COVID-19 diagnostic tests that will be
required by the FDA or other regulatory authorities and those third
parties may not perform satisfactorily.
Although we intend
to sell the COVID-19 IgG/IgM rapid tests by virtue of recent FDA
guidance allowing for reduced product clinical and analytical
studies, we have relied on third parties, such as independent
testing laboratories and hospitals, to conduct such studies. Our
reliance on these third parties will reduce our control over these
activities. These third-party contractors may not complete
activities on schedule or conduct studies in accordance with
regulatory requirements or our study design. We cannot control
whether they devote sufficient time, skill and resources to our
studies. Our reliance on third parties that we do not control will
not relieve us of any applicable requirement to prepare, and ensure
compliance with, various procedures required under good clinical
practices. If these third parties do not successfully carry out
their contractual duties or regulatory obligations or meet expected
deadlines, if the third parties need to be replaced or if the
quality or accuracy of the data they obtain is compromised due to
their failure to adhere to our clinical protocols or regulatory
requirements or for other reasons, our studies may be extended,
delayed, suspended or terminated, and we may not be able to obtain
regulatory approval for additional diagnostic tests.
If the manufacturer’s delivery of the COVID-19 tests and the
required clinical data is delayed, then our ability to obtain
necessary regulatory approvals and/or authorizations to the
distribute the COVID-19 tests will be impaired, which will
adversely affect our business plans.
While
the FDA has provided a path forward to begin selling the COVID-19
tests on an expedited basis, we are still required to provide the
FDA with data concerning the validation of the tests and to satisfy
certain labeling conditions. If the manufacturers are delayed in
delivering to us the COVID-19 tests and related validation data, we
will, in turn, be delayed in obtaining FDA authorization or
approval required before we can begin selling the COVID-19 tests.
Any such delays will adversely affect our business
plans.
We rely on third parties to manufacture the COVID-19 tests for us
and if such third party refuses or is unable to supply us with the
COVID-19 test, our business will be materially harmed.
We rely
on third parties to manufacture the COVID-19 diagnostic tests,
which manufacturers licenses their rights from the owners of the
intellectual property underlying the COVID-19 tests. If any issues
arise with respect to the manufacturers’ ability to
manufacture and deliver to us the COVID-19 tests, our business
could be materially harmed.
While
we have obtained an exclusive distribution agreement for the right
to commercialize one of the COVID-19 test in the United States,
Canada and Mexico, the manufacturer has no obligation to supply us
with a minimum amount of, or any, COVID-19 tests. The manufacturer
may choose not to supply us with a sufficient quantity of such
tests in order to supply such tests to other distributors, or for
any reason. In addition, the manufacturer may be unable to provide
us with an adequate supply of COVID-19 tests for various reasons,
including, among others, if it becomes insolvent, if a United
States regulatory authority or other governments block the import
or sale of the COVID-19 tests, if it fails to maintain its rights
to manufacture the COVID-19 test, or if the owner of the underlying
intellectual property fails to adequately maintain such
intellectual property.
51
If there is little or no demand for the COVID-19 tests our business
could be materially harmed.
While
we have received a number of inquiries regarding the COVID-19 tests
and expect to receive orders upon our receipt of a supply of
COVID-19 tests, there is no guarantee that such inquiries will
result in customer orders. If no orders for COVID-19 tests are
made, our business will be materially harmed.
We must rely on a third party to develop and commercialize the
Healight Technology.
We
must rely on Cedars-Sinai Medical Center to conduct testing and
clinical trials of the Healight technology. As a result, we are
expected to remain dependent on a third party to conduct ongoing
trials and the timing and completion of these trials will be
partially controlled by such third party and may result in delays
to the Healight development program. Nevertheless, we are
responsible for ensuring that each of the trials is conducted in
accordance with the applicable protocol and legal, regulatory, and
scientific standards and our reliance on a third party does not
relieve us of our regulatory responsibilities. If we or
Cedars-Sinai Medical Center fail to comply with applicable
requirements, the FDA may require to perform additional clinical
tests.
There
is no guarantee that Cedars-Sinai Medical Center will devote
adequate time and resources to the Healight development activities
or perform as contractually required. Furthermore, Cedars-Sinai
Medical Center may also have relationships with other entities,
some of which may be our competitors. If Cedars-Sinai Medical
Center fails to meet expected deadlines, adhere to our clinical
protocols, meet regulatory requirements, or otherwise performs in a
substandard manner, or terminates its engagement with us, the
timelines for the Healight technology development may be extend,
delayed, suspended, or terminated.
The development of Healight faces uncertainties related to
testing.
The
development of Healight is based on scientific hypotheses and
experimental approaches that may not lead to desired results. It is
possible that the timeframe for obtaining proof of principle and
other results may be considerably longer than originally
anticipated, or may not be possible given time, resource,
financial, strategic, and collaborator constraints. Success in one
stage of testing is not necessarily an indication that the Healight
program will succeed in later stages of testing and development.
The discovery of unexpected side effects, inability to increase
scale of manufacture, market attractiveness, regulatory hurdles,
competition, as well as other factors may make the Healight
technology unattractive of unsuitable for human use.
Our business may be adversely affected by the effects of the
COVID-19 pandemic.
In
December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a
disease referred to as COVID-19, was reported to have surfaced in
Wuhan, China. It has since spread to multiple other countries; and,
in March 2020, the World Health Organization declared the COVID-19
outbreak a pandemic. This pandemic has adversely affected or has
the potential to adversely affect, among other things, the economic
and financial markets and labor resources of the countries in which
we operate, our manufacturing and supply chain operations, research
and development efforts, commercial operations and sales force,
administrative personnel, third-party service providers, business
partners and customers, and the demand for some of our marketed
products.
The
COVID-19 pandemic has resulted in travel and other restrictions to
reduce the spread of the disease, including governmental orders
across the globe, which, among other things, direct individuals to
shelter at their places of residence, direct businesses and
governmental agencies to cease non-essential operations at physical
locations, prohibit certain non-essential gatherings, maintain
social distancing, and order cessation of non-essential travel. As
a result of these recent developments, we have implemented
work-from-home policies for a significant part of our employees.
The effects of shelter-in-place and social distancing orders,
government-imposed quarantines, and work-from-home policies may
negatively impact productivity, disrupt our business, and delay our
business timelines, the magnitude of which will depend, in part, on
the length and severity of the restrictions and other limitations
on our ability to conduct our business in the ordinary course. Such
restrictions and limitations may also negatively impact our access
to regulatory authorities (which may be affected, among other
things, by travel restrictions and may be delayed in responding to
inquiries, reviewing filings, and conducting inspections). The
COVID-19 pandemic may also result in the loss of some of our key
personnel, either temporarily or permanently. In addition, our
sales and marketing efforts may be impacted by postponement of
face-to-face meetings and restrictions on access by non-essential
personnel to hospitals or clinics, all of which could slow adoption
and implementation of our marketed products, resulting in lower net
product sales. For example, while the impact of shelter-in-place
and social distancing orders, physicians' office closures, and
delays in the treatment of patients following the COVID-19 pandemic
on our net product sales of our products for the three months ended
March 31, 2020 was limited, overall demand was lower in April 2020
compared to the same period of 2019. In addition to other potential
impacts of the COVID-19 pandemic on net product sales, we expect to
see continued adverse impact on new patient starts for all products
while these measures remain in place. See Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations" for a discussion of
our net product sales. Demand for some or all of our marketed
products may continue to be reduced while the shelter-in-place or
social distancing orders are in effect and, as a result, some of
our inventory may become obsolete and may need to be written off,
impacting our operating results. These and similar, and perhaps
more severe, disruptions in our operations may materially adversely
impact our business, operating results, and financial
condition.
Quarantines,
shelter-in-place, social distancing, and similar government orders
(or the perception that such orders, shutdowns, or other
restrictions on the conduct of business operations could occur)
related to COVID-19 or other infectious diseases are impacting
personnel at our research and manufacturing facilities, our
suppliers, and other third parties on which we rely, and may impact
the availability or cost of materials produced by or purchased from
such parties, which could result in a disruption in our supply
chain.
In
addition, infections and deaths related to COVID-19 may disrupt the
United States' healthcare and healthcare regulatory systems. Such
disruptions could divert healthcare resources away from, or
materially delay, FDA review and potential approval of our marketed
products. It is unknown how long these disruptions could continue.
Further, while we are focused on therapies to address the COVID-19
pandemic, our other product candidates may need to be
de-prioritized. Any elongation or de-prioritization of our other
products could materially affect our business.
52
While the potential economic impact brought
by, and the duration of, the COVID-19 pandemic may be difficult to
assess or predict, it is currently resulting in significant
disruption of global financial markets. This disruption, if
sustained or recurrent, could make it more difficult for us to
access capital if needed. In addition, a recession or market
correction resulting from the spread of COVID-19 could materially
affect our business and the value of our common stock. The global
COVID-19 pandemic continues to rapidly evolve. The ultimate impact
of this pandemic is highly uncertain and subject to change. We do
not yet know the full extent of potential delays or impacts on our
business, healthcare systems, or the global economy as a whole.
These effects could have a material impact on our operations. To
the extent the COVID-19 pandemic adversely affects our business,
prospects, operating results, or financial condition, it may also
have the effect
Risks Related to our Bylaws
Our Amended and Restated Bylaws provides that the Court of Chancery
of the State of Delaware is the exclusive forum for certain
litigation that may be initiated by our stockholders, including
claims under the Securities Act, which could limit our
stockholders’ ability to obtain a favorable judicial forum
for disputes with us or our directors, officers or
employees.
Our
Amended and Restated Bylaws provides that the Court of Chancery of
the State of Delaware shall, to the fullest extent permitted by
law, be the sole and exclusive forum for (i) any derivative action
or proceeding brought on our behalf, (ii) any action asserting a
claim for breach of a fiduciary duty owed by any of our directors,
officers, employees or agents to us or our stockholders, (iii) any
action asserting a claim arising pursuant to any provision of the
Delaware General Corporation Law, our certificate of incorporation
or our bylaws or (iv) any action asserting a claim governed by the
internal affairs doctrine. The choice of forum provision may limit
a stockholder’s ability to bring a claim in a judicial forum
that it finds favorable for disputes with us or our directors,
officers, employees or agents, which may discourage such lawsuits
against us and our directors, officers, employees and agents.
Stockholders who do bring a claim in the Court of Chancery could
face additional litigation costs in pursuing any such claim,
particularly if they do not reside in or near the State of
Delaware. The Court of Chancery may also reach different judgments
or results than would other courts, including courts where a
stockholder considering an action may be located or would otherwise
choose to bring the action, and such judgments or results may be
more favorable to us than to our stockholders. Alternatively, if a
court were to find the choice of forum provision contained in our
certificate of incorporation to be inapplicable or unenforceable in
an action, we may incur additional costs associated with resolving
such action in other jurisdictions, which could adversely affect
our business and financial condition. Notwithstanding the
foregoing, the exclusive provision shall not preclude or contract
the scope of exclusive federal or concurrent jurisdiction for
actions brought under the Exchange Act, or the Securities Act of
1933, as amended, or the Securities Act, or the respective rules
and regulations promulgated thereunder.
Item 2.
U
nregistered Sales of
Securities and Use of Proceeds.
None.
Item 3.
D
efaults Upon Senior
Securities.
None.
Item 4.
M
ine Safety
Disclosures.
Not
Applicable.
Item 5.
O
ther
Information.
53
Item 6.
E
xhibits.
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
|
First
Amendment to Merger Purchase Agreement, dated January 9, 2020
(Incorporated by reference to Exhibit 10.1 of the
Registrant’s Current Report on Form 8-K filed on January 15,
2020)
|
|
|
|
|
|
|
|
Form of Pre-Funded Purchase Warrant (Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on March 13, 2020) | |
|
|
|
|
|
|
Form of Placement Agent’s Warrant (Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on March 13, 2020) | |
|
|
|
|
|
|
Form of Warrant (Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on March 13, 2020) | |
|
|
|
|
|
|
Form of Placement Agent’s Warrant (Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on March 13, 2020) | |
|
|
|
|
|
|
Form of Warrant (Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on March 20, 2020) | |
|
|
|
|
|
|
Form of
Placement Agent’s Warrant (Incorporated by reference to
Exhibit 4.2 of the Registrant’s Current Report on Form 8-K
filed on March 20, 2020)
|
|
|
|
|
|
|
|
Form of Warrant Exchange Agreement, dated February 14, 2020 | |
|
|
|
|
|
|
Form of Securities Purchase Agreement, dated March 10, 2020 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on March 13, 2020) | |
|
|
|
|
|
|
Form of
Securities Purchase Agreement, dated March 12, 2020 (Incorporated
by reference to Exhibit 10.1 of the Registrant’s Current
Report on Form 8-K filed on March 13, 2020)
|
|
|
|
|
|
|
|
Form of
Securities Purchase Agreement, dated March 19, 2020 (Incorporated
by reference to Exhibit 10.1 of the Registrant’s Current
Report on Form 8-K filed on March 20, 2020)
|
|
|
|
|
|
|
|
Certificate
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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Certificate
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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Certificate
of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*.
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101
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XBRL
(eXtensible Business Reporting Language). The following materials
from Aytu BioScience, Inc.’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2020 formatted in XBRL: (i) the
Consolidated Balance Sheet, (ii) the Consolidated Statement of
Operations, (iii) the Consolidated Statement of Stockholders’
Equity (Deficit), (iv) the Consolidated Statement of Cash Flows,
and (v) the Consolidated Notes to the Financial
Statements.
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*
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The
certification attached as Exhibit 32.1 accompanying this
Quarterly Report on Form 10-Q pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, shall not be deemed “filed”
by the Registrant for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
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54
S
IGNATURES
Pursuant to the
requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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AYTU
BIOSCIENCE, INC.
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By:
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/s/ Joshua
R. Disbrow
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Joshua R. Disbrow
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Chief Executive Officer (principal executive officer)
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Date: May 15, 2020
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By:
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/s/ David
A. Green
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David A. Green
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Chief Financial Officer (principal financial and accounting
officer)
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Date: May 15, 2020
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55
TABLE OF CONTENTS
Part I Financial InformationItem 1. Consolidated Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits