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

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

 

373 Inverness Parkway, Suite 206

Englewood, Colorado 80112

(Address of principal executive offices, including zip code)

 

(720) 437-6580

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

FOR THE QUARTER ENDED MARCH 31, 2020

 

INDEX

 

		Page
	PART I—FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	4
	Consolidated Balance Sheets as of March 31, 2020 (unaudited) and June 30, 2019	4
	Consolidated Statements of Operations for the three and nine months ended March 31, 2020 (unaudited) and the three and nine months ended March 31, 2019 (unaudited)	5
	Consolidated Statement of Stockholders’ Equity for the year-to-date interim periods ended March 31, 2020 (unaudited) and March 31, 2019 (unaudited)	6
	Consolidated Statements of Cash Flows for the nine months ended March 31, 2020 (unaudited) and the nine months ended March 31, 2019 (unaudited)	8
	Notes to Consolidated Financial Statements (unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49
	PART II—OTHER INFORMATION
Item 1.	Legal Proceeding	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
SIGNATURES		56

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our anticipated future clinical and regulatory events, future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Forward looking statements are generally written in the future tense and/or are preceded by words such as “may,” “will,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” or similar words, or the negatives of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, without limitation: the planned expanded commercialization of our products and the potential future commercialization of our product candidates, our anticipated future cash position; our plan to acquire additional assets; our anticipated future growth rates; anticipated sales increases; anticipated net revenue increases; amounts of certain future expenses and costs of goods sold; anticipated increases to operating expenses, research and development expenses, and selling, general, and administrative expenses; and future events under our current and potential future collaborations. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.

 

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

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

	March 31,	June 30,
	2020	2019
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$62,264,676	$11,044,227
Restricted cash	251,407	250,000
Accounts receivable, net	10,203,423	1,740,787
Inventory, net	3,854,685	1,440,069
Prepaid expenses and other	4,830,881	957,781
Other current assets	1,849,598	–
Total current assets	83,254,670	15,432,864
Fixed assets, net	288,415	203,733
Right-of-use asset	675,980	–
Licensed assets, net	17,155,632	18,861,983
Patents and tradenames, net	11,724,626	220,611
Product technology rights, net	21,754,166	–
Deposits	38,981	2,200
Goodwill	24,061,333	–
Total long-term assets	75,699,133	19,288,527
Total assets	$158,953,803	$34,721,391
Liabilities
Current liabilities
Accounts payable and other	$6,956,091	$2,133,522
Accrued liabilities	9,830,373	1,311,488
Accrued compensation	2,210,288	849,498
Current lease liability	289,238	–
Current contingent consideration	947,449	1,078,068
Current portion of fixed payment arrangements	17,395,219	–
Current portion of CVR liabilities	786,564	–
Notes payable, net	3,617,680	–
Total current liabilities	42,032,902	5,372,576
Long-term contingent consideration, net of current portion	17,806,573	22,247,796
Long-term lease liability, net of current portion	804,393	–
Long-term fixed payment arrangements, net of current portion	8,162,494	–
Long-term CVR liabilities, net of current portion	4,432,254	–
Warrant derivative liability	11,371	13,201
Total liabilities	73,249,987	27,633,573
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 9,805,845 and 3,594,981, respectively as of March 31, 2020 (unaudited) and June 30, 2019.	981	359
Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 100,610,380 and 17,538,071, respectively as of March 31, 2020 (unaudited) and June 30, 2019.	10,061	1,754
Additional paid-in capital	202,557,856	113,475,205
Accumulated deficit	(116,865,082)	(106,389,500)
Total stockholders' equity	85,703,816	7,087,818
Total liabilities and stockholders' equity	$158,953,803	34,721,391

    

See the accompanying Notes to the Consolidated Financial Statement

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 

	Three Months Ended March 31,		Nine Months Ended March 31,
	2020	2019	2020	2019
Revenues
Product revenue, net	$8,156,173	$2,372,016	$12,771,235	$5,598,836
License revenue		5,776		5,776
Total revenue	$8,156,173	$2,377,792	$12,771,235	$5,604,612
Operating expenses
Cost of sales	1,998,659	616,853	2,980,425	1,552,950
Research and development	78,502	108,901	223,197	413,808
Selling, general and administrative	9,501,469	5,368,762	21,164,072	13,991,516
Selling, general and administrative - related party		6,797		351,843
Amortization of intangible assets	1,370,986	575,117	2,899,553	1,561,137
Total operating expenses	12,949,616	6,676,430	27,267,247	17,871,254
Loss from operations	(4,793,443)	(4,298,638)	(14,496,012)	(12,266,642)
Other (expense) income
Other (expense), net	(538,862)	(194,703)	(1,181,206)	(398,833)
Gain from derecognition of contingent consideration			5,199,806
Gain from warrant derivative liability		(2,521)	1,830	65,468
Total other (expense) income	(538,862)	(197,224)	4,020,430	(333,365)
Net loss	$(5,332,305)	$(4,495,862)	$(10,475,582)	$(12,600,007)
Weighted average number of common shares outstanding	35,275,296	9,061,023	22,616,962	5,785,669
Basic and diluted net loss per common share	$(0.15)	$(0.50)	$(0.46)	$(2.18)

 

See the accompanying Notes to the Consolidated Financial Statements

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(audited unless indicated otherwise)

 

	Preferred Stock		Common Stock
	Shares	Amount	Shares	Amount	Additional paid-in capital	Accumulated Deficit	Total Stockholders' Equity
BALANCE - June 30, 2019	3,594,981	$359	17,538,071	$1,754	$113,475,205	$(106,389,500)	$7,087,818
Stock-based compensation (unaudited)	–	–	–	–	165,171	–	165,171
Preferred stock converted in common stock (unaudited)	(443,833)	(44)	443,833	44	–	–	–
Net loss (unaudited)	–	–	–	–	–	(4,929,030)	(4,929,030)
BALANCE - September 30, 2019 (unaudited)	3,151,148	$315	17,981,904	$1,798	$113,640,376	$(111,318,530)	$2,323,959
Stock-based compensation (unaudited)	–	–	–	–	162,264	–	162,264
Issuance of Series F preferred stock from October 2019 private placement financing, net of $741,650 issuance costs (unaudited)	10,000	1	–	–	5,249,483	–	5,249,484
Warrants issued in connection with the private placement (unaudited)	–	–	–	–	4,008,866	–	4,008,866
Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics (unaudited)	9,805,845	981	–	–	5,558,933		5,559,914
Preferred stock converted in common stock (unaudited)	(2,751,148)	(275)	2,751,148	275	–	–	–
Net loss (unaudited)	–	–	–	–	–	(214,247)	(214,247)
BALANCE - December 31, 2019 (unaudited)	10,215,845	$1,022	20,733,052	$2,073	$128,619,922	$(111,532,777)	$17,090,240
Stock-based compensation (unaudited)	–	–	1,067,912	107	263,284	–	263,391
Cashless warrant exercise (unaudited)	–	–	7,915,770	792	(792)	–	–
Issuance of Series H preferred stock and common stock due to acquisition of Innovus (unaudited)	1,997,902	200	3,809,712	381	4,405,603	–	4,406,184
Preferred stock converted in common stock (unaudited)	(2,407,902)	(241)	12,397,902	1,240	91,881	–	92,880
Warrant exercises (unaudited)	–	–	17,082,994	1,708	22,987,958	–	22,989,666
Issuance of common stock, net of $4,523,884 in cash issuance costs (unaudited)	–	–	36,365,274	3,637	33,275,119	–	33,278,756
Warrants issued in connection with the registered offering (unaudited)	–	–	–	–	9,723,161	–	9,723,161
Warrants issued in connection with the registered offering to the placement agents, non-cash issuance costs (unaudited)	–	–	–	–	1,458,973	–	1,458,973
CVR payouts (unaudited)	–	–	1,237,764	123	1,732,747	–	1,732,870
Net loss (unaudited)	–	–	–	–	–	(5,332,305)	(5,332,305)
BALANCE - March 31, 2020 (unaudited)	9,805,845	$981	100,610,380	$10,061	$202,557,856	$(116,865,082)	$85,703,816

 

   See the accompanying Notes to the Consolidated Financial Statements

 

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity, Cont’d

(audited unless indicated otherwise)

 

	Preferred Stock		Common Stock
	Shares	Amount	Shares	Amount	Additional paid-in capital	Accumulated Deficit	Total Stockholders' Equity
BALANCE - June 30, 2018	–	$–	1,794,762	$179	$92,681,918	(79,257,592)	13,424,505
Stock-based compensation (unaudited)	–	–	–	–	152,114	–	152,114
Adjustment for rounding of shares due to stock split (unaudited)	–	–	6,649	1	(1)	–	–
Net loss (unaudited)	–	–	–	–	–	(3,446,483)	(3,446,483)
BALANCE - September 30, 2018 (unaudited)	–	$–	1,801,411	$180	$92,834,031	$(82,704,075)	$10,130,136
Stock-based compensation (unaudited)	–	–	2,707,022	271	193,791	–	194,062
Common stock issued to employee (unaudited)	–	–	9,000	1	11,689	–	11,690
Issuance of preferred and common stock, net of $1,479,963 in cash issuance costs (unaudited)	8,342,993	834	1,777,007	178	11,810,373	–	11,811,385
Warrants issued in connection with the registered offering (unaudited)	–	–	–	–	1,827,628	–	1,827,628
Warrants issued in connection with the registered offering to the placement agents, non-cash issuance costs (unaudited)	–	–	–	–	61,024	–	61,024
Preferred stocks issued in connection with the purchase of assets (unaudited)	400,000	40	–	–	519,560	–	519,600
Preferred stocks converted into common stock (unaudited)	(4,210,329)	(421)	4,210,329	421	–	–	–
Net loss (unaudited)	–	–	–	–	–	(4,657,662)	(4,657,662)
BALANCE - December 31, 2018 (unaudited)	4,532,664	$453	10,504,769	$1,051	$107,258,096	$(87,361,737)	$19,897,863
Stock-based compensation (unaudited)	–	–	(25,600)	(2)	376,668	–	376,666
Preferred stocks converted into common stock (unaudited)	(2,196,999)	(219)	2,196,999	219	–	–	–
Warrant exercises (unaudited)	–	–	172,331	17	258,495	–	258,512
Net loss (unaudited)	–	–	–	–	–	(4,495,862)	(4,495,862)
BALANCE - March 31, 2019 (unaudited)	2,335,665	$234	12,848,499	$1,287	$107,893,259	$(91,857,599)	$16,037,179

 

   See the accompanying Notes to the Consolidated Financial Statements

 

 

 AYTU BIOSCIENCE, INC. AND SUBSIDIARIES 

Consolidated Statements of Cash Flows

(unaudited) 

  

	Nine Months Ended March 31,
	2020	2019
Operating Activities
Net loss	$(10,475,582)	$(12,600,007)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation, amortization and accretion	3,780,310	1,974,213
Stock-based compensation expense	590,826	722,842
Derecognition of contingent consideration	(5,199,806)	–
Gain on the change in fair value of CVR payout	(267,130)	–
Issuance of common stock to employee	–	11,690
Derivative income	(1,830)	(65,468)
Changes in operating assets and liabilities:
(Increase) in accounts receivable	(8,183,810)	(797,576)
(Increase) in inventory	(345,452)	(191,110)
(Increase) in prepaid expenses and other	(1,611,681)	(364,831)
(Increase) in other current assets	(358,022)	–
(Decrease) in accounts payable and other	(4,912,245)	(191,331)
Increase in accrued liabilities	6,761,319	758,370
Increase in accrued compensation	271,560	250,912
(Decrease) in fixed payment arrangements	(657,655)	–
Increase in interest payable	–	134,795
Net cash used in operating activities	(20,609,198)	(10,357,501)
Investing Activities
Deposit	–	2,888
Purchases of fixed assets	–	(59,848)
Contingent consideration payment	(151,648)	(408,917)
Cash received from acquisition	390,916	–
Purchase of assets	(5,850,000)	(500,000)
Net cash used in investing activities	(5,610,732)	(965,877)
Financing Activities
Issuance of preferred, common stock and warrants	58,999,666	15,180,000
Issuance costs related to preferred, common stock and warrants	(5,280,426)	(1,479,963)
Warrant exercises	22,989,666	258,512
Preferred stock converted in common stock	92,880	–
Issuance of note payable	640,000	5,000,000
Net cash provided by financing activities	77,441,786	18,958,549
Net change in cash, restricted cash and cash equivalents	51,221,856	7,635,171
Cash, restricted cash and cash equivalents at beginning of period	11,294,227	7,112,527
Cash, restricted cash and cash equivalents at end of period	$62,516,083	$14,747,698

 

See the accompanying Notes to the Consolidated Financial Statements

 

 

 AYTU BIOSCIENCE, INC. AND SUBSIDIARIES 

Consolidated Statements of Cash Flows, cont’d

(unaudited) 

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

 

See the accompanying Notes to the Consolidated Financial Statements

 

AYTU BIOSCIENCE, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(unaudited)

 

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

 

Nature of Business. Aytu BioScience, Inc. (“Aytu”, the “Company” or “we”) was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated in the state of Delaware on June 8, 2015. Aytu is a specialty pharmaceutical company focused on global commercialization of novel products addressing significant medical needs such as hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, male infertility, various pediatric conditions and the Company’s plans to expand opportunistically into other therapeutic areas.

 

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

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

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

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

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

 

Financial Condition. As of March 31, 2020, the Company had approximately $62.5 million of cash, cash equivalents and restricted cash. The Company’s operations have historically consumed cash and are expected to continue to require cash, but at a declining rate.

 

Revenues for the three-months ended March 31, 2020 increased approximately 243% compared to the three-months ended March 31, 2019, and revenues increased 100% and 14% for each of the years ended June 30, 2019 and 2018, respectively. Revenue is expected to continue to increase long-term, allowing the Company to rely less on our existing cash and cash equivalents, and proceeds from financing transactions. Cash used in operations during the nine-months ended March 31, 2020 was $20.6 million compared to $10.4 million for the nine-months ended March 31, 2019. The increase is due primarily to the Company’s acquisition and integration of the Pediatric Portfolio and merger with Innovus, which consumed additional cash resources, coupled with an increase in working capital.

 

On November 1, 2019, the Company closed an asset acquisition with Cerecor, Inc. (“Cerecor”) whereby the Company acquired certain of Cerecor’s portfolio of pediatric therapeutics (the “Pediatric Portfolio”) for $4.5 million in cash, approximately 9.8 million shares of Series G Convertible Preferred Stock, the assumption of Cerecor’s financial and royalty obligations, which includes not more than $3.5 million of Medicaid rebates and products returns as they come due, and other assumed liabilities associated with the Pediatric Portfolio (see Note 2). As of March 31, 2020, the Company has paid down approximately $3.2 million of those assumed liabilities.

 

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

 

 

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

 

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

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

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

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

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

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

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

 

 

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

 

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

 

On October 11, 2019, the Company entered into Securities Purchase Agreements (the “Purchase Agreement”) with two institutional investors (the “Investors”) providing for the issuance and sale by the Company (the “October 2019 Offering”) of $10.0 million of, (i) 10,000 shares of the Company’s Series F Convertible Preferred Stock (the “Preferred Stock”) which are convertible into 10,000,000 shares of common stock (the “Conversion Shares”) for a stated value of $1,000 per unit and (ii) 10,000,000 warrants (the “October 2019 Warrants”) which are exercisable for shares of common stock (the “Warrant Shares”), which expire January 10, 2025,. The closing of the October 2019 offering occurred on October 16, 2019. The Warrants had an exercise price equal to $1.25 and contain a cashless exercise provision. This provision was dependent on (i) performance of the Company’s stock price between October 11, 2019 and the date of exercise of all, or a portion of the Warrants, and (ii) subject to shareholder approval of the October 2019 Offering, which was approved January 24, 2020.

 

As of March 31, 2020, all of the Series F Convertible Preferred Stock were converted into 10 million shares of the Company’s common stock, and 5.0 million of the October 2019 Warrants were exercised using the cashless exercise provision to acquire 5.0 million shares of the Company’s common stock. In April of 2020, the remaining 5 million October 2019 Warrants were exercised using the cashless exercise provision into 5.0 million shares of the Company’s common stock.

 

The net proceeds that the Company received from the October 2019 Offering were approximately $9.3 million.  The net proceeds received by the Company from the October 2019 Offerings have been used for general corporate purposes, including working capital. 

  

As of the date of this Report, the Company expects its commercial costs for its current operation to increase modestly as the Company integrates the acquisition of the Pediatrics Portfolio and Innovus and continues to focus on revenue growth through increasing product sales. The Company’s total asset position totaling approximately $168.5 million plus the proceeds expected from ongoing product sales will be used to fund operations. The Company may continue to access the capital markets to fund operations when needed, and to the extent it is required. The timing and amount of capital that may be raised is dependent on market conditions and the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms favorable to the Company and its stockholders, or at all. However, the Company has been successful in accessing the capital markets in the past and is confident in its ability to access the capital markets again, if needed. Since the Company has sufficient cash and cash equivalents on-hand as of March 31, 2020 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) the Company reports that there does not exist indication of substantial doubt about its ability to continue as a going concern.

 

As of the date of this report, while the Company has adequate capital resources to complete its near-term operating and transaction objectives, there is no guarantee that such capital resources will be sufficient until such time the Company reaches profitability. However, the Company has been successful in accessing the capital markets in the past, and the Company is confident in its ability to access the capital markets again, if needed.

 

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

  

Nasdaq Listing Compliance. The Company’s common stock is listed on The Nasdaq Capital Market (the “Nasdaq”). In order to maintain compliance with Nasdaq listing standards, the Company must, amongst other requirements, maintain a stockholders’ equity balance of at least $2.5 million pursuant to Nasdaq Listing Rule 5550(b). In that regard, on September 30, 2019, the Company’s stockholders’ equity totaled approximately $2.3 million, thereby potentially resulting in a stockholders’ equity deficiency upon the filing of the September 30, 2019 Form 10-Q. However, subsequent to September 30, 2019, the Company completed (i) the Offering with the Investors, raising approximately $9.3 million, net in equity financing (see Note 1), and (ii) the “Asset Purchase Agreement” in which the Company issued approximately 9.8 million shares of Series G Convertible Preferred Stock worth approximately $5.6 million, resulting in an increase in stockholders’ equity of approximately $14.8 million in the aggregate. Accordingly, as of the filing of this Form 10-Q for the three and nine months ended March 31, 2020, the Company’s stockholders’ equity balance exceeds the minimum $2.5 million threshold and, therefore, the Company believes it is currently in compliance with all applicable Nasdaq Listing Requirements.

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

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

  

Adoption of New Accounting Pronouncements

 

Leases (“ASU 2016-02”). In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02 – Topic 842 Leases. ASU 2016-02 requires that most leases be recognized on the financial statements, specifically the recognition of right-to-use assets and related lease liabilities, and enhanced disclosures about leasing arrangements. The objective is to provide improved transparency and comparability among organizations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard requires using the modified retrospective transition method and apply ASU 2016-02 either at (i) latter of the earliest comparative period presented in the financial statements or commencement date of the lease, or (ii) the beginning of the period of adoption. The Company has elected to apply the standard at the beginning period of adoption, July 1, 2019 which resulted in no cumulative adjustment to retained earnings.

 

The Company has elected to apply the short-term scope exception for leases with terms of 12 months or less at the inception of the lease and will continue to recognize rent expense on a straight-line basis. As a result of the adoption, on July 1, 2019, the Company recognized a lease liability of approximately $0.4 million, which represented the present value of the remaining minimum lease payments using an estimated incremental borrowing rate of 8%. As of July 1, 2019, the Company recognized a right-to-use asset of approximately $0.4 million. Lease expense did not change materially as a result of the adoption of ASU 2016-02.

 

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

 

Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) (“ASU 2017-11”). In July 2017, the FASB issued ASU No. 2017-11 — Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). Part I to ASU 2017-11 eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. In addition, entities will have to make new disclosures for financial instruments with down round features and other terms that change conversion or exercise prices. Part I to ASU 2017-11 is effective for fiscal years beginning after December 31, 2018. The Company adopted this standard update as a result of the issuance of the Series F Preferred stock as a result of the October 2019 Offering. There were no “down-round” features present in the financial instruments issued in conjunction with the March 2020 Offerings.

 

Recently Accounting Pronouncements

 

Fair Value Measurements (“ASU 2018-03”). In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in the standard apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure requirements in ASC 820, Fair Value Measurement. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

 

 

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently assessing the impact that ASU 2018-13 will have on its financial statements, with the impact mostly related to certain assets acquired or liabilities assumed that comprise Level 3 inputs.

 

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

  

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

 

2. Acquisitions

 

The Pediatric Portfolio

 

On October 10, 2019, the Company entered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to purchase and acquire Cerecor’s Pediatric Portfolio, which closed on November 1, 2019. The Pediatric Portfolio consists of six prescription products consisting of (i) AcipHex® Sprinkle™, (ii) Cefaclor for Oral Suspension, (iii) Karbinal® ER, (iv) Flexichamber™, (v) Poly-Vi-Flor® and Tri-Vi-Flor™. Total consideration transferred to Cerecor consisted of $4.5 million cash and approximately 9.8 million shares of Series G Convertible Preferred Stock. The Company also assumed certain of Cerecor’s financial and royalty obligations, and not more than $3.5 million of Medicaid rebates and products returns, of which $3.2 million has been incurred. The Company also retained the majority of Cerecor’s workforce focused on sales, commercial contracts and customer relationships.

 

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

 

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

 

While no equity was acquired by the Company, the transaction was accounted for as a business combination under the acquisition method of accounting pursuant to Topic 805. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified product portfolio that is expected to provide revenue and cost synergies. Transaction costs of $0.0 and $0.7 million were included as general and administrative expense in the consolidated statements of operations for the three and nine months ended March 31, 2020.

 

 

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

 

	As of
	November 1, 2019
Consideration
Cash and cash equivalents	$4,500,000
Fair value of Series G Convertible Preferred Stock
Total shares issued	9,805,845
Estimated fair value per share of Aytu common stock	$0.567
Estimated fair value of equity consideration transferred	$5,559,914
Total consideration transferred	$10,059,914
Recognized amounts of identifiable assets acquired and liabilities assumed
Inventory, net	$459,123
Prepaid assets	1,743,555
Other current assets	2,548,187
Intangible assets – product technology rights	22,700,000
Accrued product program liabilities	(6,320,853)
Assumed fixed payment obligations	(26,457,162)
Total identifiable net assets	$(5,327,150)
Goodwill	$15,387,064

 

The fair values of intangible assets, including product technology rights were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 10).

 

	As of November 1, 2019
Acquired product technology rights	$22,700,000

 

The fair value of the net identifiable asset acquired was determined to be $22.7 million, which is being amortized over ten years. The aggregate amortization expense was $0.6 million and $0, for the three months ended March 31, 2020 and 2019 respectively. The aggregate amortization expense was $0.9 million and $0, for the nine months ended March 31, 2020 and 2019 respectively.

 

 

 Innovus Merger (Consumer Health Portfolio)

 

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

 

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

 

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

 

  

	As of
	February 14, 2020
Consideration
Fair value of Aytu Common Stock
Total shares issued at close	3,810,393
Estimated fair value per share of Aytu common stock	$0.756
Estimated fair value of equity consideration transferred	$2,880,581
Fair value of Series H Convertible Preferred Stock
Total shares issued	1,997,736
Estimated fair value per share of Aytu common stock	$0.756
Estimated fair value of equity consideration transferred	$1,510,288
Fair value of former Innovus warrants	$15,315
Fair value of Contingent Value Rights	$7,049,079
Forgiveness of Note Payable owed to the Company	$1,350,000
Total consideration transferred	$12,805,263

 

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	390,916
Accounts receivables, net	$278,826
Inventory, net	1,149,625
Prepaid expenses and other current assets	1,736,796
Other long-term assets	36,781
Right-to-use assets	328,410
Property, plant and equipment	190,393
Trademarks and patents	11,744,000
Accounts payable and accrued other expenses	(6,983,969)
Other current liabilities	(446,995)
Notes payable	(3,056,361)
Lease liability	(754,822)
Preacquisition contingent consideration	(182,606)
Total identifiable net assets	4,430,994
Goodwill	$8,374,269

 

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

 

 

	As of February 14, 2020
Acquired product distribution rights	$11,354,000
Acquired customer lists	390,000
Total intangible assets	$11,744,000

 

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