AYTU BIOPHARMA, INC - Quarter Report: 2020 December (Form 10-Q)

 

 

Table of Contents

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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: December 31, 2020 or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                                to              

 

 

Commission File No. 001-38247

 

 

 

AYTU BIOSCIENCE, INC.

(www.aytubio.com)

 

Delaware	47-0883144
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

373 Inverness Parkway, Suite 206

 

Englewood, Colorado 80112

 

(Address of principal executive offices, including zip code)

 

(720) 437-6580

 

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.0001 per share		AYTU		The NASDAQ Stock Market LLC

 

As of February 1, 2021, there were 17,882,893 shares of Common Stock outstanding.

 

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

 

INDEX 

 

PART I—FINANCIAL INFORMATION

 

	Page
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of  December 31, 2019 (unaudited) and June 30, 2020 (audited)	4
Condensed Consolidated Statements of Operations for the three and six-months ended December 31, 2020 (unaudited) and December 31, 2019 (unaudited)	6
Condensed Consolidated Statement of Stockholders’ Equity for the year-to-date interim periods ended December 31, 2020 (unaudited) and December 31, 2019 (unaudited)	7
Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2020 (unaudited) and the six months ended December 31, 2019 (unaudited)	8
Notes to Condensed Consolidated Financial Statements (unaudited)	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	31
PART II—OTHER INFORMATION
Item 1. Legal Proceedings	32
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3. Defaults Upon Senior Securities	33
Item 4. Mine Safety Disclosures	33
Item 5. Other Information	33
Item 6. Exhibits	34
SIGNATURES

 

 

 

 

 

		December 31,				June 30,
		2020				2020
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	62,032,642			$	48,081,715
Restricted cash			251,964				251,592
Accounts receivable, net			7,001,068				5,175,924
Inventory, net			6,571,254				9,999,441
Prepaid expenses and other			6,081,766				5,715,089
Other current assets			10,598,771				5,742,011
Total current assets			92,537,465				74,965,772
Fixed assets, net			89,663				258,516
Right-of-use asset			310,479				634,093
Licensed assets, net			15,449,281				16,586,847
Patents and tradenames, net			10,197,112				11,081,048
Product technology rights, net			20,051,666				21,186,666
Deposits			16,023				32,981
Goodwill			28,090,407				28,090,407
Total long-term assets			74,204,631				77,870,558
Total assets		$	166,742,096			$	152,836,330

		December 31,				June 30,
		2020				2020
		(Unaudited)
Liabilities
Current liabilities
Accounts payable and other		$	7,157,208			$	11,824,560
Accrued liabilities			8,877,715				7,849,855
Accrued compensation			2,540,353				3,117,177
Debt			41,318				982,076
Contract liability			475,680				339,336
Current lease liability			100,263				300,426
Current portion of fixed payment arrangements			1,937,476				2,340,166
Current portion of CVR liabilities			977,475				839,734
Current portion of contingent consideration			3,705,931				713,251
Total current liabilities			25,813,419				28,306,581
Long-term contingent consideration, net of current portion			12,573,916				12,874,351
Long-term lease liability, net of current portion			211,056				725,374
Long-term fixed payment arrangements, net of current portion			9,945,554				11,171,491
Long-term CVR liabilities, net of current portion			5,494,112				4,731,866
Other long-term liabilities			11,371				11,371
Total liabilities			54,049,428				57,821,034
Commitments and contingencies (Note 10)
Stockholders' equity
Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 0 and 0, respectively as of December 31, 2020 and June 30, 2020, respectively.			-				-
Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 17,882,893 and 12,583,736, respectively as of December 31, 2020 and June 30, 2020.			1,788				1,259
Additional paid-in capital			246,532,284				215,024,216
Accumulated deficit			(133,841,404	)			(120,010,179	)
Total stockholders' equity			112,692,668				95,015,296
Total liabilities and stockholders' equity		$	166,742,096			$	152,836,330

 

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2020				2019				2020				2019
Revenues
Product revenue, net		$	15,147,034			$	3,175,236			$	28,667,280			$	4,615,062
Operating expenses
Cost of sales			5,998,389				606,046				9,817,545				981,766
Research and development			286,572				66,675				469,437				144,695
Selling, general and administrative			12,852,614				6,516,160				24,342,983				11,662,603
Amortization of intangible assets			1,584,580				953,450				3,169,161				1,528,567
Total operating expenses			20,722,155				8,142,331				37,799,126				14,317,631
Loss from operations			(5,575,121	)			(4,967,095	)			(9,131,846	)			(9,702,569	)
Other (expense) income
Other (expense), net			(378,958	)			(446,958	)			(1,130,499	)			(642,344	)
Loss from change in fair value of contingent consideration			(3,313,656	)			-				(3,311,320	)			-
Gain from derecognition of contingent consideration			-				5,199,806				-				5,199,806
Gain from warrant derivative liability			-				-				-				1,830
Loss on debt exchange			(257,559	)			-				(257,559	)			-
Total other (expense) income			(3,950,173	)			4,752,848				(4,699,378	)			4,559,292
Net loss		$	(9,525,294	)		$	(214,247	)		$	(13,831,224	)		$	(5,143,277	)
Weighted average number of common shares outstanding			13,281,904				1,753,815				12,717,180				1,642,599
Basic and diluted net loss per common share		$	(0.72	)		$	(0.12	)		$	(1.09	)		$	(3.13	)

 

		Preferred Stock								Common Stock								Additional paid-in				Accumulated				Total Stockholders'
		Shares				Amount				Shares				Amount				capital				Deficit				Equity
BALANCE - June 30, 2019 (audited)			3,594,981			$	359				1,753,808			$	176			$	113,476,783			$	(106,389,500	)		$	7,087,818
Stock-based compensation			-				-				-				-				165,171				-				165,171
Preferred stock converted in common stock			(443,833	)			(44	)			44,384				5				39				-				-
Net loss			-				-				-				-				-				(4,929,030	)			(4,929,030	)
BALANCE - September 30, 2019			3,151,148			$	315				1,798,192			$	181			$	113,641,993			$	(111,318,530	)		$	2,323,959
Stock-based compensation						$	-				-			$	-			$	162,264			$	-			$	162,264
Issuance of Series F preferred stock from October 2019 private placement financing, net of $741,650 issuance costs			10,000				1				-				-				5,249,483				-				5,249,484
Warrants issued in connection with the private placement			-				-				-				-				4,008,866				-				4,008,866
Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics			9,805,845				981												5,558,933								5,559,914
Preferred stock converted in common stock			(2,751,148	)			(275	)			275,115				28				247				-				-
Net loss							-				-				-				-				(214,247	)		$	(214,247	)
BALANCE - December 30, 2019			10,215,845			$	1,022				2,073,307			$	209			$	128,621,786			$	(111,532,777	)		$	17,090,240

		Preferred Stock								Common Stock								Additional paid-in				Accumulated				Total Stockholders'
		Shares				Amount				Shares				Amount				capital				Deficit				Equity
BALANCE - June 30, 2020 (audited)			-			$	-				12,583,736			$	1,259			$	215,024,216			$	(120,010,179	)		$	95,015,296
Stock-based compensation			-				-				-				-				454,918				-				454,918
Issuance costs			-				-				-				-				(101,537	)			-				(101,537	)
Net loss			-				-				-				-				-				(4,305,931	)			(4,305,931	)
BALANCE - September 30, 2020			-			$	-				12,583,736			$	1,259			$	215,377,597			$	(124,316,110	)		$	91,062,746
Stock-based compensation			-			$	-				-			$	-			$	508,059			$	-			$	508,059
Exchange of debt for common stock			-				-				130,081				13				1,057,546				-				1,057,559
Issuance of common stock, net of issue costs and warrants			-				-				5,169,076				516				28,316,928				-				28,317,444
Warrants issued in connection with common stock offering			-				-												1,272,154								1,272,154
			-				-
Net loss			-				-				-				-				-				(9,525,294	)			(9,525,294	)
BALANCE - December 31, 2020			-			$	-				17,882,893			$	1,788			$	246,532,284			$	(133,841,404	)		$	112,692,668

 

		Six Months Ended
		December 31,
		2020				2019
Operating Activities
Net loss		$	(13,831,224	)		$	(5,143,277	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation, amortization and accretion			4,012,909				2,157,540
Stock-based compensation expense			962,977				327,435
Loss from change in fair value of contingent consideration			2,411,333
(Gain) from derecognition of contingent consideration			-				(5,199,806	)
Loss on sale of equipment			112,110				-
(Gain) on termination of lease			(343,185	)			-
Loss on debt exchange			257,559
Changes in allowance for bad debt			147,627				-
Loss from change in fair value of CVR			899,987				-
Derivative income							(1,830	)
Changes in operating assets and liabilities:
Increase in accounts receivable			(1,965,271	)			(3,456,364	)
Increase in inventory			(3,615,662	)			(132,199	)
Increase in prepaid expenses and other			(379,337	)			(171,430	)
Decrease (increase) in other current assets			2,295,055				(136,694	)
(Decrease) increase in accounts payable and other			(3,136,163	)			2,806,973
Increase in accrued liabilities			1,711,466				145,467
Decrease in accrued compensation			(576,824	)			(62,729	)
Decrease in fixed payment arrangements			-				(216,150	)
Increase in contract liability			136,344				-
Decrease in deferred rent			-				(3,990	)
Net cash used in operating activities			(10,900,299	)			(9,087,054	)
Investing Activities
Deposit			(3,923	)			-
Contingent consideration payment			(42,760	)			(104,635	)
Note receivable			-				(1,350,000	)
Purchase of assets			-				(4,500,000	)
Net cash used in investing activities			(46,683	)			(5,954,635	)
Financing Activities
Issuance of preferred, common stock and warrants			32,249,652				10,000,000
Issuance cost related to registered offering			(4,292,781	)			(741,650	)
Payments made to borrowings			(272,727	)			-
Payments made to fixed payment arrangements			(2,785,863	)			-
Net cash provided by financing activities			24,898,281				9,258,350
Net change in cash, restricted cash and cash equivalents			13,951,299				(5,783,339	)
Cash, restricted cash and cash equivalents at beginning of period			48,333,307				11,294,227
Cash, restricted cash and cash equivalents at end of period		$	62,284,606			$	5,510,888

		Six Months Ended
		December 31,
Supplemental disclosures of cash and non-cash investing and financing transactions		2020				2019
Warrants issued to underwriters		$	356,139			$	-
Cash paid for interest			306,752				3,390
Fair value of right-to-use asset and related lease liability			43,082				412,691
Contingent consideration included in accounts payable			-				3,430
Debt exchange			1,057,559				-
Fixed payment arrangements included in accrued liabilities			1,050,000				-
Inventory swap			7,043,849				-
Acquisition costs included in accounts payable			-				59,014
Exchange of convertible preferred stock into common stock		$	-			$	44

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

As of the date of this Report, the Company expects costs for its current operations to increase modestly as the Company continues to integrate the acquisition of the Pediatrics Portfolio, Innovus and if approved by the Company's and Neos' shareholders, the Neos Merger, continues to focus on revenue growth through increasing product sales and additional acquisitions. The Company’s current assets totaling approximately $92.5 million as of December 31, 2020 plus the proceeds expected from ongoing product sales will be used to fund existing operations. The Company may continue to access the capital markets from time-to-time when market conditions are favorable. The timing and amount of capital that may be raised is dependent on the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms favorable to the Company and its stockholders, or at all. The Company raised approximately $29.6 million, net during the three months ended December 31, 2020, from the sale of approximately 0.4 million shares using the Company’s at-the-market facility and from the issuance of approximately 4.8 million shares of the Company's common stock and 0.3 million placement agent warrants on December 15, 2020. On December 10, 2020, the Company exchanged $0.8 million of debt into 0.1 million shares of the Company's common stock, eliminating the use cash to satisfy this obligation (see Note 15). Between December 31, 2020, and the filing date of this quarterly report on Form 10-Q, the Company has not issued common stock under the Company’s at-the-market offering program.  As of the date of this report, the Company has adequate capital resources to complete its near-term operating objectives. 

 

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

 

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

 

Basis of Presentation. The unaudited consolidated financial statements contained in this report represent the financial statements of the Company and its wholly-owned subsidiaries, Aytu Women’s Health, LLC, Innovus Pharmaceuticals, Inc., and Aytu Therapeutics, LLC. The unaudited consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2020, which included all disclosures required by generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended December 31, 2020 are not necessarily indicative of expected operating results for the full year. The information presented throughout this report, as of and for the three and six-month periods ended December 31, 2020, and 2019, is unaudited. 

 

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

 

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

 

Use of Estimates

 

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

 

 

Significant Accounting Policies

 

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

 

Adoption of New Accounting Pronouncements

 

Fair Value Measurements (“ASU 2018-13”). In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in the standard apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure requirements in ASC 820, Fair Value Measurement. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

 

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted this as of July 1, 2020, the beginning of the Company’s fiscal year-ended June 30, 2021. The most relevant component of ASU 2018-13 to the Company’s financial statements relates to the need to disclose the range and weighted-average of significant unobservable inputs used in Level 3 fair value measurements. However, the Company discloses on a discrete basis all significant inputs for all Level 3 Fair Value measurements.

 

Recent Accounting Pronouncements

 

Financial Instruments – Credit Losses (“ASU 2016-13”). In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard was effective for interim and annual reporting periods beginning after December 15, 2019. However, in October 2019, the FASB approved deferral of the adoption date for smaller reporting companies for fiscal periods beginning after December 15, 2022. Accordingly, the Company’s fiscal year of adoption will be the fiscal year ended June 30, 2024. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018, but the Company did not elect to early adopt. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements, but no conclusion has been reached.

 

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

 

2. Acquisitions

 

The Pediatric Portfolio

 

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

Total consideration transferred to Cerecor consisted of $4.5 million cash and approximately 980 thousand shares of Series G Convertible Preferred Stock. The Company also assumed certain of Cerecor’s financial and royalty obligations, and not more than $2.7 million of Medicaid rebates and up to $0.8 million of product returns, of which $3.5 million has been incurred. The Company also hired the majority of Cerecor’s workforce focused on sales, commercial contracts and customer relationships.

 

 

In addition, the Company assumed Cerecor obligations due to an investor that include fixed and variable payments aggregating to $25.6 million. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Pediatric Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was paid to the investor. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026. In June 2020, the Company paid down a $15 million balloon payment originally owed in January 2021 to reduce the fixed liability.

 

Further, certain of the products in the Pediatric Portfolio require royalty payments ranging from 12% to 15% of net revenue. One of the products in the Product Portfolio requires the Company to generate minimum annual sales sufficient to represent annual royalties of approximately $1.8 million, in the event the minimum sales volume is not satisfied.

 

 

While no equity was acquired by the Company, the transaction was accounted for as a business combination under the acquisition method of accounting pursuant to Topic 805. Accordingly, the tangible and identifiable intangible assets acquired, and liabilities assumed were recorded at fair value as of the date of acquisition, with the remainder of the aggregate purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified product portfolio that is expected to provide revenue and cost synergies.

 

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

 

 

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

 

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

 

Innovus Merger (Consumer Health Portfolio)

 

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

 

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

 

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

 

 

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

 

 

 

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

 

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

 

 

Unaudited Pro Forma Information

 

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

 

●

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

●

Merger with Innovus effective February 14, 2020.

 

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

 

 

 

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

 

3. Revenue Recognition

 

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

 

 

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

 

 

 

 

4. Inventories

 

Inventories consist of raw materials and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Aytu periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory, Aytu will record a write-down to net realizable value in the period that the impairment is first recognized. The Company wrote down $0.1 million and $0.2 million of inventory during the three and six-months ended December 31, 2020, respectively. There was no inventory written down for the three and six-months ended December 31, 2019, respectively.

 

Inventory balances consist of the following:

 

 

 

5. Fixed Assets

 

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

 

 

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

 

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

 

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

 

The Company previously adopted the FASB issued ASU 2016-02, “Leases (Topic 842)” as of July 1, 2019. With the adoption of ASU 2016-02, the Company recorded an operating right-of-use asset and an operating lease liability on its balance sheet associated with the lease of its corporate headquarters. The right-of-use asset represents the Company’s right to use the underlying asset for the lease term, and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations were recognized at the later of the commencement date or July 1, 2019; the date of adoption of Topic 842; based on the present value of remaining lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments. Rent expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. The lease liability is classified as current or long-term on the balance sheet.

 

 

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

 

 

 

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

 

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

 

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

       

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

 

 

 

7. Intangible Assets – Amortizable

 

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

 

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

 

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

 

 

 

 

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

 

 

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

 

8. Accrued liabilities

 

Accrued liabilities consist of the following:

 

 

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

 

9. Fair Value Considerations

 

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

 

 

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

 

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

 

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

 

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

 

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

 

Recurring Fair Value Measurements

 

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

 

 

 

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

 

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

 

 

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

 

The Company recognized approximately $0.2 million in product related contingent consideration as a result of the February 14, 2020 Innovus Merger. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimates risk that the milestones are achieved. The contingent consideration accretion expense for the three and six-months ended December 31, 2020 and 2019 was $15,000, and $28,000, respectively. There was no material change in this valuation as of December 31, 2020.

 

Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to 470 thousand shares of the Company’s common stock, or cash either upon the option of the Company or in the event there are insufficient shares available to satisfy such obligations. The fair value of the contingent value rights was based on a Monte Carlo model which takes into account current interest rates and expected sales potential. On March 31, 2020, the Company paid out approximately 120 thousand shares of the Company’s common stock to satisfy the first $2 million milestone, which relates to the Innovus achievement of $24 million in revenues during the 2019 calendar year. The unrealized loss for the three and six-months ended December 31, 2020 and 2019was $0.1 million and $0.8 million, respectively. The CVR's did not exist until after December 31, 2019. 

 

Summary of Level 3 Input Changes

 

The following table sets forth a summary of changes to those fair value measures using Level 3 inputs for the three months ended December 31, 2020:

 

 

 

Significant Assumptions

 

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

 

 

 

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

 

 

 

 

 

10. Commitments and Contingencies

 

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

 

 

Prescription Database

 

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

 

Pediatric Portfolio Fixed Payments and Product Milestone

 

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

 

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

 

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

 

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

 

Inventory Purchase Commitment

 

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

 

CVR Liability

 

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

 

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

 

 

Product Contingent Liability

 

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

 

 

Product Milestone Payments

 

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

 

11. Capital Structure

 

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

 

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

 

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

 

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

 

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

 

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

 

 

12. Equity Incentive Plan

 

Share-based Compensation Plans

 

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

 

 

Stock Options

 

Employee Stock Options:

 

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

 

Stock option activity is as follows:

 

 

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

 

Restricted Stock

 

Restricted stock activity is as follows:

 

 

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

 

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

 

 

 

 

13. Warrants

 

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

 

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

 

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

 

 

A summary of equity-based warrants is as follows:

 

 

 

14. Net Loss per Common Share

 

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

 

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

 

 

 

 

15. Notes Payable

 

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

 

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

 

16. Segment reporting

 

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

 

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

 

 

 

 

17. Related Party Transactions

 

Tris Pharma, Inc.

 

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

 

 

 

 

18. Subsequent Events

 

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

 

MiOXSYS^® Licensing Agreement

 

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

 

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