The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
Notes to Financial Statements
(unaudited)
Note 1 - Business, Basis of Presentation and Business Combinations
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 commercial-stage specialty pharmaceutical company focused on global commercialization
of novel products in the field of urology. Aytu is currently focused on addressing significant medical needs in the areas of hypogonadism,
urological cancers, urinary tract infections, and male infertility.
Basis of Presentation
These unaudited financial statements represent the financial statements
of Aytu. These unaudited financial statements should be read in conjunction with Aytu’s Annual Report on Form 10-K for the
year ended June 30, 2016, which included all disclosures required by generally accepted accounting principles (“GAAP”).
In the opinion of management, these unaudited financial statements contain all adjustments necessary to present fairly the financial
position of Aytu for the balance sheet, the results of operations and cash flows for the interim periods presented. The results
of operations for the period ended December 31, 2016 are not necessarily indicative of expected operating results for the full
year. The information presented throughout this report as of and for the period ended December 31, 2016 is unaudited.
Through a multi-step reverse triangular merger, on April 16, 2015,
Vyrix Pharmaceuticals, Inc. (‘‘Vyrix’’) and Luoxis Diagnostics, Inc. (‘‘Luoxis’’)
merged with and into our Company (herein referred to as the Merger) and we abandoned our pre-Merger business plans to solely pursue
the specialty healthcare market, including the business of Vyrix and Luoxis. In the Merger, we acquired the RedoxSYS, MiOXSYS and
Zertane products. On June 8, 2015, we reincorporated as a domestic Delaware corporation under Delaware General Corporate Law and
changed our name from Rosewind Corporation to Aytu BioScience, Inc., and effected a reverse stock split in which each common stockholder
received one share of common stock for every 12.174 shares outstanding. On June 30, 2016, Aytu effected another reverse stock split
in which each common stockholder received one share of common stock for every 12 shares outstanding (herein referred to collectively
as the “Reverse Stock Splits”). All share and per share amounts in this report have been adjusted to reflect the effect
of these Reverse Stock Splits.
Business Combination—ProstaScint
In May 2015, Aytu entered into and closed on an asset purchase agreement
with Jazz Pharmaceuticals, Inc. (the “Seller”). Pursuant to the agreement, Aytu purchased assets related to the Seller’s
product known as ProstaScint® (capromab pendetide), including certain intellectual property and contracts, and the product
approvals, inventory and work in progress (together, the “ProstaScint Business”), and assumed certain of the Seller’s
liabilities, including those related to product approvals and the sale and marketing of ProstaScint.
The purchase price consisted of the upfront payment of $1.0 million.
Aytu also paid an additional $500,000 for the ProstaScint-related product inventory and $227,000 (which represents a portion of
certain FDA fees). Aytu also will pay 8% as contingent consideration on its net sales made after October 31, 2017, payable
up to a maximum aggregate payment of an additional $2.5 million. The contingent consideration was initially valued at $664,000.
The total fair value consideration for the purchase was $2.4 million.
The Company’s allocation of consideration transferred for
ProstaScint as of the purchase date of May 20, 2015 is as follows:
|
|
Fair Value
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
727,000
|
|
|
|
|
|
|
Intangible assets
|
|
|
1,590,000
|
|
|
|
|
|
|
Goodwill
|
|
|
74,000
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
2,391,000
|
|
Included in the intangible assets is developed technology of $790,000,
customer contracts of $720,000 and trade names of $80,000, each of which will be amortized over a ten-year period. The amortization
expense was $40,000 for each of the three months ended December 31, 2016 and 2015, respectively. The amortization expense was $80,000
for each of the six months ended December 31, 2016 and 2015, respectively.
As of December 31, 2016, the contingent consideration had increased
to $730,000 due to accretion.
Business Combination—Primsol
In October 2015, Aytu entered into and closed on an Asset Purchase
Agreement with FSC Laboratories, Inc. (the “Seller”). Pursuant to the agreement, Aytu purchased assets related to the
Seller’s product known as Primsol® (trimethoprim solution), including certain intellectual property and contracts, inventory,
work in progress and all marketing and sales assets and materials related solely to Primsol (together, the “Primsol Business”),
and assumed certain of the Seller’s liabilities, including those related to the sale and marketing of Primsol arising after
the closing.
Aytu paid $500,000 at closing for the purchase of the Primsol Business
and paid an additional $142,000, of which $102,000 went to inventory and $40,000 towards the Primsol Business, for the transfer
of the Primsol-related product inventory. We also agreed to pay an additional (a) $500,000 which was paid in April 2016, (b) $500,000
which was paid in July 2016, and (c) $250,000 which was paid in November 2016.
The Company’s allocation of consideration transferred for
Primsol as of the purchase date of October 5, 2015 is as follows:
|
|
Fair Value
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
182,000
|
|
|
|
|
|
|
Intangible assets
|
|
|
1,470,000
|
|
|
|
|
|
|
Goodwill
|
|
|
147,000
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
1,799,000
|
|
Included in tangible assets is $102,000 of inventory and $80,000
of work-in-process inventory. Included in the intangible assets is developed technology of $520,000, customer contracts of $810,000
and trade names of $140,000, each of which will be amortized over a six-year period. The amortization expense was $61,000 and $51,000
for the three months ended December 31, 2016 and 2015, respectively. The amortization expense was $122,000 and $51,000 for the
six months ended December 31, 2016 and 2015, respectively.
License and Supply Agreement—Natesto
In April 2016, Aytu entered into and closed a license and supply
agreement to acquire the exclusive U.S. rights to Natesto® (testosterone) nasal gel from Acerus Pharmaceuticals Corporation,
or Acerus, which rights we acquired effective upon the expiration of the former licensee’s rights, which occurred on June
30, 2016. The license’s term runs for the greater of eight years or until the expiry of the latest to expire patent including
claims covering Natesto and until the entry on the market of at least one AB-rated generic product.
Aytu paid Acerus an upfront fee of $2.0 million upon execution of
the agreement. In October 2016 we paid an additional $2,000,000 (the “Second Upfront”). In January 2017, Aytu paid
the final upfront payment of $4.0 million (the “Third Upfront”). Aytu also purchased, on April 28, 2016, an aggregate
of 12,245,411 shares of Acerus common stock for Cdn. $2,534,800 (approximately US $2.0 million), with a purchase price per share
equal to Cdn. $0.207 or approximately US $0.16 per share. These shares are a held for sale trading security and are valued at fair
market value. Aytu could not dispose of these shares until after August 29, 2016 and still held these shares as of December 31,
2016.
In addition to the upfront payments, we must make the following
one-time, non-refundable payments to Acerus within 45 days of the occurrence of the following event (provided that, the maximum
aggregate amount payable under such milestone payments will be $37,500,000):
|
▪
|
$2,500,000 if net sales during any four consecutive calendar quarter period equal or exceed $25,000,000 (the “First Milestone”); the First Milestone payment is required to be paid even if the threshold is not met in the event that the agreement is terminated for any reason other than material breach by Acerus, bankruptcy of either party, or termination by Acerus because it believes the amounts payable to Aytu for agreed upon trial work would no longer make the agreement economically viable for Acerus;
|
|
|
|
|
▪
|
$5,000,000 if net sales during any four consecutive calendar quarter period equal or exceed $50,000,000;
|
|
|
|
|
▪
|
$7,500,000 if net sales during any four consecutive calendar quarter period equal or exceed $75,000,000;
|
|
|
|
|
▪
|
$10,000,000 if net sales during any four consecutive calendar quarter period equal or exceed $100,000,000; and
|
|
|
|
|
▪
|
$12,500,000 if net sales during any four consecutive calendar quarter period equal or exceed $125,000,000.
|
The fair value of the net identifiable asset acquired totaled $10.5
million which will be amortized over eight years. The amortization expense for the three months ended December 31, 2016 was $330,000.
The amortization expense for the six months ended December 31, 2016 was $659,000.
As of December 31, 2016, the accretion expense was $620,000, making
the accrued payable adjusted for the present value $4.0 million.
The contingent consideration was valued at $3.2 million using a
Monte Carlo simulation, as of June 30, 2016.The contingent consideration accretion expense for the three and six months ended December
31, 2016 was $58,000 and $104,000, respectively, resulting in the contingent consideration value of $3.3 million.
Adoption of Newly Issued Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2016-18, "Statement of Cash Flows: Restricted Cash". The
amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash on the
statement of cash flows. ASU 2016-18 is effective for the fiscal year commencing after December 15, 2017. As of the quarter
ended December 31, 2016, the Company has early adopted this pronouncement, the impact of which was very minimal as the Company
just recently set aside restricted cash, which is now shown on the statements of cash flows within cash and cash equivalents.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows
- Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the presentation of certain cash receipts
and cash payments in the statement of cash flows in order to reduce diversity in existing practice. ASU 2016-15 is effective for
interim and annual periods beginning after December 15, 2017. Early adoption is permitted. During the quarter ended September 30,
2016, the Company early adopted this standard. The primary cash flow categorization that will impact the Company will be contingent
consideration payments, however, no such payments have been made to date.
Recently Issued Accounting Pronouncements, Not Adopted as of
December 31, 2016
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the
Definition of a Business.” The amendment clarifies the definition of a business, which is fundamental in the determination
of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This determination is important
given the diverging accounting models used for each type of transaction. The guidance is generally expected to result in fewer
transactions qualifying as business combinations. The amendment is effective prospectively for public business entities for annual
periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company
does not expect an immediate impact from this codification however, if Aytu seeks to purchase additional assets in the future it
could have an impact if that purchase is accounted for as a business combination or an asset purchase.
In March 2016, the FASB issued ASU 2016-09, “Compensation
–Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting”. The standard includes multiple
provisions intended to simplify various aspects of the accounting for share based payments. The amendments are expected to impact
net income, earnings per share, and the statement of cash flows. Implementation and administration may present challenges to companies
with significant share based payment activities. The amendments are effective for public entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any interim or annual period,
with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact
of this standard on its financial statements however, the Company believes that the impact will not be material.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic
842)”. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability
on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating,
with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition
approach is required for leases for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is currently
evaluating the impact of its adoption of this standard on its financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments
– Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires
that all equity investments be measured at fair value with changes in the fair value recognized through net income (other than
those accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments
in this update also require an entity to present separately in other comprehensive income the portion of the total change in the
fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure
the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in
this update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities
that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate
the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public
business entities. The amendment is effective for financial statements issued for fiscal years beginning after December 15, 2017.
Early adoption is not permitted. The Company is currently evaluating the impact of this standard on its financial statements.
In July 2015, the FASB issued ASU 2015-11, “Simplifying
the Measurement of Inventory.” ASU 2015-11 clarifies that inventory should be held at the lower of cost or net
realizable value. Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose
and transport such inventory. ASU 2015-11 will be effective for fiscal years and interim periods beginning after December 15,
2016. ASU 2015-11 is required to be applied prospectively and early adoption is permitted. The adoption of ASU 2015-11,
when required, is not expected to have a material impact on the Company’s financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation
of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern” (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate
whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related
footnote disclosures. The amendments in this ASU are effective for reporting periods ending after December 15, 2016, with
early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 will have on its financial
statements.
In May 2014, the FASB issuing ASU 2014-09, Topic 606, Revenue from
Contracts with Customers (the "New Revenue Standard"). The amendments in this ASU provide a single model for use in accounting
for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific
revenue guidance. The core principle of the new ASU is that revenue should be recognized to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods and services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers are also required. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of the
New Revenue Standard. In 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, and ASU 2016-12 to clarify, among other things,
the implementation guidance related to principal versus agent considerations, identifying performance obligations, and accounting
for licenses of intellectual property. The New Revenue Standard is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. Early application is not permitted. The amendments in this update are to be
applied on a retrospective basis, either to each prior reporting period presented or by presenting the cumulative effect of applying
the update recognized at the date of initial application.
The New Revenue Standard will be effective for the Company in fiscal
2019. The Company is evaluating the adoption methodology and the impact of this ASU on its financial statements.
Note 2 – Fixed Assets
Fixed assets are recorded at cost and, once placed in service, are
depreciated on the straight-line method over the estimated useful lives. Fixed assets consist of the following:
|
|
Estimated
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
Useful Lives in years
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Office equipment and furniture
|
|
|
3 - 5
|
|
|
$
|
240,000
|
|
|
$
|
201,000
|
|
Leasehold improvements
|
|
|
3
|
|
|
|
112,000
|
|
|
|
45,000
|
|
Lab equipment
|
|
|
3 - 5
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Manufacturing equipment
|
|
|
5
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(157,000
|
)
|
|
|
(112,000
|
)
|
Fixed assets, net
|
|
|
|
|
|
$
|
292,000
|
|
|
$
|
231,000
|
|
The depreciation expense was $26,000 and $12,000 for the three months
ended December 31, 2016 and 2015, respectively. The depreciation expense was $45,000 and $19,000 for the six months ended December
31, 2016 and 2015, respectively.
Note 3 – Patents
Costs of establishing patents, consisting of legal and filing fees
paid to third parties, are expensed as incurred. The fair value of the Zertane patents, determined by an independent, third party
appraisal to be $500,000, was being amortized over the remaining U.S. patent life since Aytu’s acquisition of approximately
11 years. As of June 30, 2016, Aytu determined that this asset had no value because the Company is directing its resources towards
its commercial-stage products, and therefore, Aytu does not have the resources to complete the necessary clinical trials and bring
Zertane to market before the patents expire. The remaining fair value of the Zertane patents were expensed as of June 30, 2016.
The cost of the ORP related patents was $380,000 when they were
acquired and are being amortized over the remaining U.S. patent life since Aytu’s acquisition of approximately 15 years.
Patents consist of the following:
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
880,000
|
|
|
$
|
880,000
|
|
Less accumulated amortization
|
|
|
(596,000
|
)
|
|
|
(583,000
|
)
|
Patents, net
|
|
$
|
284,000
|
|
|
$
|
297,000
|
|
The amortization expense was $6,000 and $18,000 for the three months
ended December 31, 2016 and 2015, respectively. The amortization expense was $13,000 and $36,000 for the six months ended December
31, 2016 and 2015, respectively.
Note 4 – Revenue Recognition
The $794,000 and $448,000 product and service revenue recognized
during the three months ended December 31, 2016 and 2015, respectively, and the $1,492,000 and $914,000 product and service revenue
recognized during the six months ended December 31, 2016 and 2015, respectively, represents sales of the Company’s Natesto,
ProstaScint, and Primsol products and the MiOXSYS Systems.
The license revenue of $0 and $21,000 recognized in the three months
ended December 31, 2016 and 2015, respectively, and the license revenue of $0 and $43,000 recognized in the six months ended December
31, 2016 and 2015, respectively represent the amortization of the upfront payments received from the Company’s Zertane licensing
agreements. The initial payment of $500,000 from the license agreement for Zertane with a Korean pharmaceutical company was deferred
and was being recognized over ten years. The initial payment of $250,000 from the license agreement for Zertane with a Canadian-based
supplier was deferred and was being recognized over seven years.
At the end of fiscal 2016, Aytu determined that the Zertane asset
had no value as Aytu did not have the resources to complete the necessary clinical trials and bring it to market before the patents
expire. The remaining deferred revenue of $426,000 was recognized as of June 30, 2016.
Note 5 – Fair Value Considerations
Aytu’s financial instruments include cash, cash equivalents
and restricted cash, accounts receivable, investments, accounts payable and accrued liabilities, and warrant derivative liability.
The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities
approximate their fair value due to their short maturities. The valuation policies are determined by the Chief Financial Officer
and approved by the Company’s Board of Directors.
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 Aytu. Unobservable inputs are inputs that reflect Aytu’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.
|
Aytu’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. Aytu’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.
The following table presents Aytu’s financial assets and liabilities
that were accounted for at fair value on a recurring basis as of December 31, 2016, by level within the fair value hierarchy:
|
|
Fair Value Measurements Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Acerus
|
|
$
|
1,272,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,272,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
80,000
|
|
|
$
|
80,000
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,003,000
|
|
|
$
|
4,003,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Acerus
|
|
$
|
1,041,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,041,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
276,000
|
|
|
$
|
276,000
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,869,000
|
|
|
$
|
3,869,000
|
|
The estimated fair value of the Company’s investment in Acerus,
which is classified as Level 1 (quoted price is available), was $1,272,000 as of December 31, 2016. The estimated fair value of
the Company’s marketable securities is determined using the quoted price in the active market based on the closing price
as of the balance sheet date.
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
As of December 31, 2016
|
|
Maturity in Years
|
|
Value at June 30, 2016
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Investment in Acerus
|
|
Less than 1 year
|
|
$
|
1,041,000
|
|
|
$
|
231,000
|
|
|
$
|
|
|
|
|
$
|
1,272,000
|
|
The warrant derivative liability was valued using the Black-Scholes
valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments.
The warrants related to the warrant derivative liability are not actively traded and therefore classified as Level 3. Significant
assumptions in valuing the warrant derivative liability, based on estimates of the value of Aytu common stock and various factors
regarding the warrants, were as follows as of December 31, 2016 and at issuance:
|
|
December 31, 2016
|
|
|
At Issuance
|
|
Warrants:
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
186.7
|
%
|
|
|
75.0
|
%
|
Equivalent term (years)
|
|
|
4.34
|
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
1.33
|
%
|
|
|
1.32
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The following table sets forth a reconciliation of changes in the
fair value of financial liabilities classified as Level 3 in the fair value hierarchy:
|
|
Derivative Instruments
|
|
|
|
|
|
Balance as of June 30, 2016
|
|
$
|
276,000
|
|
Warrant issuances
|
|
|
-
|
|
Change in fair value included in earnings
|
|
|
(196,000
|
)
|
Balance as of December 31, 2016
|
|
$
|
80,000
|
|
Note 6 – Commitments and Contingencies
Commitments and contingencies are described below and summarized
by the following table for the designated fiscal years ending June 30, as of December 31, 2016:
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
Prescription database
|
|
$
|
1,736,000
|
|
|
$
|
565,000
|
|
|
$
|
598,000
|
|
|
$
|
573,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Natesto
|
|
|
6,500,000
|
|
|
|
4,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,500,000
|
|
|
|
-
|
|
|
|
-
|
|
Manufacturing/commercial supply agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Service agreement
|
|
|
72,000
|
|
|
|
72,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Office lease
|
|
|
247,000
|
|
|
|
72,000
|
|
|
|
145,000
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sponsored research agreement with related party
|
|
|
41,000
|
|
|
|
41,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
8,596,000
|
|
|
$
|
4,750,000
|
|
|
$
|
743,000
|
|
|
$
|
603,000
|
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Prescription Database
In May 2016, Aytu entered
into an agreement with a company that will provide Aytu with prescription database information, whereby Aytu agreed to pay
approximately $1.9 million over three years for access to the database of prescriptions written for Natesto. The payments
have been broken down into quarterly payments, the first of which was made in November 2016 and the second payment was made
in January 2017.
Natesto
In April 2016, the Company entered into
an agreement with Acerus whereby Aytu agreed to pay $8.0 million for the exclusive U.S. rights to Natesto (see Note 1). The
first payment totaling $2.0 million was paid in April, the second installment payment was paid in October 2016. The final
payment totaling $4.0 million was paid in January of 2017. Additionally, Aytu is required to make the first milestone payment
of $2.5 million even if the milestone is not reached.
Manufacturing/Commercial Supply Agreements
In October 2015, Aytu entered into a Master Services Agreement with Biovest International, Inc. (“Biovest”).
The agreement provides that Aytu may engage Biovest from time to time to provide services in accordance with mutually agreed upon
project addendums and purchase orders. Aytu expects to use the agreement from time to time for manufacturing services, including
without limitation, the manufacturing, processing, quality control testing, release or storage of its products for the ProstaScint
product. In September 2016, Aytu entered into a Commercial Supply Agreement with Grand River Aseptic Manufacturing, Inc. (“GRAM”).
The agreement provides that Aytu may engage GRAM from time to time to provide services in accordance with mutually agreed upon
work orders. As of December 31, 2016, both contracts were placed on hold as the Company evaluates its strategic options for the
ProstaScint product. If the contracts are not restarted, Aytu does not anticipate any future liability related to either contract.
Service Agreement
In July 2015, Aytu entered into an agreement with Ampio, whereby
Aytu agreed to pay Ampio a set amount per month for shared overhead, which includes costs related to the shared corporate staff
and other miscellaneous overhead expenses. This agreement was amended in November 2015, April 2016, July 2016, and again in January
2017 resulting in an amount of $12,000 per month. This agreement will be in effect until it is terminated in writing by both parties.
Office Lease
In June 2015, Aytu entered into a 37 month operating lease for a
space in Raleigh, North Carolina. This lease has initial base rent of $3,000 a month, with total base rent over the term of the
lease of approximately $112,000. In September 2015, the Company entered into a 37 month operating lease in Englewood, Colorado.
This lease has an initial base rent of $9,000 a month with a total base rent over the term of the lease of approximately $318,000.
The Company recognizes rental expense of the facilities on a straight-line basis over the term of the lease. Differences between
the straight-line net expenses on rent payments are classified as liabilities between current deferred rent and long-term deferred
rent. Rent expense for the respective periods is as follows:
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense
|
|
$
|
35,000
|
|
|
$
|
34,000
|
|
|
$
|
70,000
|
|
|
$
|
51,000
|
|
Sponsored Research Agreement with Related Party
In June 2013, Luoxis entered into a sponsored research agreement
with TRLLC, an entity controlled by Ampio’s director and Chief Scientific Officer, Dr. David Bar-Or. The agreement,
which was amended in January 2015, provides for Luoxis (now Aytu) to pay $6,000 per month to TRLLC in consideration for services
related to research and development of the Oxidation Reduction Potential platform. In March 2014, Luoxis also agreed to pay a sum
of $615,000 which is being amortized over the contractual term of 60.5 months and is divided between current and long-term on the
balance sheet; as of September 2014, this amount had been paid in full. This agreement is set to expire in March 2019 but can be
terminated earlier but not until after March 2017.
Note 7 – Convertible Promissory Notes
During July and August 2015, Aytu closed on note purchase agreements
with institutional and high net worth individual investors for the purchase and sale of convertible promissory notes (“Notes”)
with an aggregate principal amount of $5.2 million. The sale of the Notes was pursuant to a private placement. Debt issuance costs
totaled $401,000, which include the $103,000 fair value of the placement agent warrants.
The Notes were an unsecured obligation. Aytu did not have the right
to prepay the Notes prior to the maturity date. Interest accrued on the Notes in the following amounts: (i) 8% simple interest
per annum for the first six months and (ii) 12% simple interest per annum thereafter if not converted during the first nine
months. Interest accrued, was payable with the principal upon maturity, conversion or acceleration of the Notes and could have
been paid in kind or in cash, in Aytu’s sole discretion.
Placement agents for the offering sold the institutional portion
of the offering of the Notes. Aytu sold the balance of the Notes to individuals and entities with whom Aytu had an established
relationship. For Notes sold by the placement agent, Aytu paid the placement agent 8% of the gross proceeds of Notes sold by the
placement agents and was obligated to issue warrants for an amount of shares equal to 8% of the gross number of shares of the Company
stock issuable upon conversion of the Notes issued to investors introduced to the Company by the private placement agents in the
private placement, in addition to a previously paid non-refundable retainer fee of $20,000. The placement agent warrants have a
term of five years from the date of issuance of the related notes in July and August 2015, an exercise price equal to the conversion
price per share at which the Notes are converted into common stock. Change in fair value is recorded in earnings. Fair value at
the grant date was recorded as a debt discount and amortized over the term of the debt.
The warrants were recorded at fair value as long-term liabilities
on the Balance Sheet and upon conversion were moved to equity classification.
Upon Aytu’s adoption of ASU 2015-3, the issuance costs associated
with the Notes were recorded as a long–term liability and were presented in the Balance Sheet as a direct reduction of the
carrying amount of the Notes on their inception date.
Pursuant to the terms of the convertible promissory note agreements,
if Aytu sold equity securities at any time while the Notes were outstanding in a financing transaction that was not a Qualified
Financing (a public offering of Aytu stock resulting in gross proceeds of at least $5.0 million (excluding indebtedness converted
in such financing) prior to the maturity date of the Notes), the holders of the convertible promissory notes had the option, but
not the obligation, to convert the outstanding principal and accrued interest as of the closing of such financings into a number
of shares of Aytu capital stock in an amount equal to 120% of the number of such shares calculated by dividing the outstanding
principal and accrued interest by the lesser of (a) the lowest cash price per share paid by purchasers of shares in such financing,
or (b) $4.63. As a result of Aytu’s sale of common stock on January 20, 2016, the Company was obligated to provide notice
to the above-referenced noteholders of such stock sales. In accordance with the convertible note terms, noteholders had the option
to convert their entire balance (inclusive of accrued but unpaid interest) into a number of shares of Aytu common stock equal to
120% of the number of shares calculated by dividing such note balance by $7.80, which was the per share purchase price paid in
the equity financing described above. On February 10, 2015, the date of the conversion, an aggregate of $4,125,000 of principal
and $143,000 of accrued interest on the Notes converted into an aggregate of 656,591 shares of Aytu’s common stock under
the original terms of the agreement.
In May 2016, Aytu completed a registered public offering which was
considered a Qualified Financing and all outstanding Notes were automatically converted on the same terms as in the offering. At
the insistence of the underwriters of the offering, all outstanding noteholders had signed lockup agreements which granted them
an extra 10% on the conversion, increasing it to 130% of shares calculated by dividing such Note balance by $4.80, which was the
per share purchase price in the registered offering. On May 6, 2016, the date of conversion, an aggregate of $1,050,000 of principal
and $78,000 of accrued interest on the Notes converted into an aggregate of 305,559 shares of Aytu’s common stock and 305,559
warrants.
In connection with the conversion of the Aytu notes, Aytu was obligated
to issue to the placement agents for the convertible note offering warrants for an amount of shares equal to 8% of the number of
shares of Aytu’s common stock for the Notes sold by the placement agents issued upon conversion of the notes. As a result
of the optional note conversion, on February 10, 2016, Aytu issued warrants to the placement agents to purchase an aggregate of
22,254 shares of common stock at an exercise price of $7.80 per share. As a result of the second Note conversion, on May 6, 2016,
Aytu issued warrants to the placement agents to purchase an aggregate of 22,564 shares of common stock at an exercise price of
$4.80 per share. These warrants are exercisable for five years from the date of issuance of the related Notes in July and August
2015. The warrants have a cashless exercise feature.
Also in connection with the conversion of the Notes, Aytu
recorded a beneficial conversion feature of $4.9 million which was recorded as a debt discount; this amount represents that
carrying amount of the Notes at the date of conversion. The beneficial conversion feature was expensed upon conversion
of the Notes to interest expense.
Note 8 – Common Stock
Capital Stock
At December 31, 2016 and June 30, 2016, Aytu had 10,845,566 and
3,741,944 common shares outstanding, respectively, and no preferred shares outstanding at either December 31, 2016 or June 30,
2016. The Company has 100 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.
In May 2016, we raised gross proceeds of approximately $7.5 million
through a public offering of 1,562,500 Units. Offering costs totaled $1.2 million resulting in net proceeds of $6.3 million. Each
Unit consisted of one share of Aytu common stock and a warrant to purchase one share of Aytu common stock. The common stock issued
had a relative fair value of $4.2 million. The warrants have an exercise price of $6.00 per share and will expire five years from
the date of issuance. These warrants have a relative fair value of $2.1 million. We also granted the underwriters a 45-day option
(the Over-Allotment Option) to purchase up an additional 234,375 shares of common stock and/or warrants. The underwriters exercised
170,822 of this over-allotment option for the warrants and paid $0.12 per over-allotment warrant resulting in proceeds of $20,000.
These warrants have the same terms as the warrants sold in the registered offering.
On June 30, 2016, Aytu effected a reverse stock split in which each
common stock holder received one share of common stock for each 12 shares. All share and per share amounts for all periods presented
in this report have been adjusted to reflect the effect of this reverse stock split.
In July 2016, we entered into a purchase agreement (the ‘‘Purchase
Agreement’’), together with a registration rights agreement (the ‘‘Registration Rights Agreement’’),
with Lincoln Park Capital Fund, LLC (‘‘Lincoln Park’’). Upon signing the Purchase Agreement, Lincoln Park
agreed to purchase 133,690 shares of our common stock for $500,000 as an initial purchase under the agreement. We also issued as
a commitment fee to Lincoln Park of 52,500 shares of common stock. In September 2016, Lincoln Park purchased an additional 40,000
shares for $131,000, the issuance costs related to these purchases totaled $24,000, resulting in net proceeds for the quarter ended
September 30, 2016 of $607,000.
In July 2016, we issued 1,000,000 shares of restricted stock as
compensation to certain executive officers and directors, which vest on July 7, 2026. This expense is included in sales, general
and administrative. For the three and six months ended December 31, 2016, the expense was $75,000 and $157,000, respectively.
In August 2016, we issued an aggregate of 142,457 shares of common
stock as bonuses for performance in 2016 to three executive officers.
In November 2016, we raised gross proceeds of approximately $8.6 million through a public offering of
5,735,000 Units. Offering costs totaled $998,000 resulting in net cash proceeds of $7.6 million. We also issued underwriter warrants
in connection with the offering with a fair value of $293,000, resulting in net proceeds of $7.3 million. Each Unit consisted of
one share of Aytu common stock and a warrant to purchase one share of Aytu common stock. The common stock issued had a relative
fair value of $3.7 million and a fair value of $4.4 million. The investor warrants have an exercise price of $1.86 per share and
will expire five years from the date of issuance. These investor warrants have a relative fair value of $3.5 million and a fair
value of $4.2 million. We also granted the underwriters a 45-day option (the Over-Allotment Option) to purchase up an additional
860,250 shares of common stock and/or warrants. The underwriters purchased 285,245 of this Over-Allotment Option for the warrants
and paid $0.01 per over-allotment warrant. These warrants have the same terms as the warrants sold in the registered offering.
These warrants have a relative fair value of $173,000, a fair value of $208,000, and proceeds of $3,000, which was the purchase
price per the underwriting agreement.
Note 9 – Equity Instruments
Stock Option Repricing
In July 2016, our Board of Directors approved a common stock option
repricing program whereby previously granted and unexercised options held by our then current employees, consultants and directors
with exercise prices above $6.00 per share were repriced on a one-for-one basis to $3.23 per share which represented the per share
fair value of our common stock as of the date of the repricing. There was no other modification to the vesting schedule of the
previously issued options. As a result, 316,051 unexercised options originally granted to purchase common stock at prices ranging
from $6.72 to $18.12 per share were repriced under this program.
We treated the repricing as a modification of the original awards
and calculated additional compensation costs for the difference between the fair value of the modified award and the fair value
of the original award on the modification date. The repricing resulted in incremental stock-based compensation expense of $318,000.
Expense related to vested shares was expensed on the repricing date and expense related to unvested shares is being amortized over
the remaining vesting period of such stock options.
Options
On June 1, 2015, Aytu’s stockholders approved the 2015
Stock Option and Incentive Plan (the “2015 Plan”), which provides for the award of stock options, stock appreciation
rights, restricted stock and other equity awards for up to an aggregate of 2,000,000 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.
Pursuant to the 2015 Stock Plan, 2,000,000 shares of its common
stock, are reserved for issuance. The fair value of options granted was 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. The assumptions used for the six months ended
December 31, 2016 are as follows:
Expected volatility
|
|
|
182% - 185%
|
|
Risk free interest rate
|
|
|
0.97 % - 1.14%
|
|
Expected term (years)
|
|
|
5.0 - 6.5
|
|
Dividend yield
|
|
|
0%
|
|
Stock option activity is as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Life in Years
|
|
Outstanding June 30, 2016
|
|
|
322,302
|
|
|
$
|
18.01
|
|
|
|
9.33
|
|
Granted
|
|
|
441,999
|
|
|
$
|
3.23
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(17,646
|
)
|
|
$
|
4.99
|
|
|
|
|
|
Outstanding December 31, 2016
|
|
|
746,655
|
|
|
$
|
3.52
|
|
|
|
9.21
|
|
Exercisable at December 31, 2016
|
|
|
323,755
|
|
|
$
|
3.40
|
|
|
|
9.10
|
|
Available for grant at December 31, 2016
|
|
|
1,253,345
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense related
to the fair value of stock options was included in the statements of operations as research and development expenses and selling,
general and administrative expenses as set forth in the table below. Aytu determined the fair value as of the date of grant using
the Black-Scholes option pricing model and expenses the fair value ratably over the vesting period. The following table summarizes
stock-based compensation expense for the three and six months ended December 31, 2016 and three and six months ended December 31,
2015:
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
-
|
|
|
$
|
20,000
|
|
|
$
|
-
|
|
|
$
|
25,000
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
381,000
|
|
|
$
|
163,000
|
|
|
|
1,425,000
|
|
|
|
226,000
|
|
|
|
$
|
381,000
|
|
|
$
|
183,000
|
|
|
$
|
1,425,000
|
|
|
$
|
251,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized expense at December 31, 2016
|
|
$
|
1,435,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining years to vest
|
|
|
2.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
A summary of all warrants is as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life in Years
|
|
Outstanding June 30, 2016
|
|
|
2,201,627
|
|
|
$
|
6.19
|
|
|
|
4.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of settlement warrants to initial investors
|
|
|
88,032
|
|
|
$
|
4.00
|
|
|
|
|
|
Warrants issued to investors in connection with the registered offering
|
|
|
6,020,245
|
|
|
$
|
1.86
|
|
|
|
|
|
Warrants issued to placement agents for the registered offering
|
|
|
401,450
|
|
|
$
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2016
|
|
|
8,711,354
|
|
|
$
|
2.98
|
|
|
|
4.51
|
|
Included in the warrant balance at June 30, 2016 are warrants to
purchase common stock of 109,375 issued to the underwriters of our May registered offering. These warrants are currently accounted
for under liability accounting and are fair valued at each reporting period (see Note 5). At December 31, 2016, these warrants
had a fair value of $80,000.
During the six months ended December 31, 2016, Aytu issued warrants to purchase 88,032 shares of common
stock to initial investors of the Company at an exercise price of $4.00 and a term of five years from July 2016. These warrants
generated a non-cash expense of $7,000 and $596,000 for the three and six month periods ended December 31, 2016, respectively,
which is included in sales, general and administrative expense. These warrants are accounted for under equity treatment.
In connection with our November 2016 public offering, we issued
warrants to purchase an aggregate of 401,450 shares of common stock at an exercise price of $1.86 and a term of five years to the
underwriters of the public offering. These warrants are accounted for under equity treatment.
Also in connection with our November 2016 public offering, we issued
to investors warrants to purchase an aggregate of 6,020,245 shares of common stock, which includes the over-allotment warrants,
at an exercise price of $1.86 with a term of five years. These warrants are accounted for under equity treatment (see Note 9).
The warrants issued in connection with our November registered offering
are all registered and tradable on the OTCQX under the ticker symbol “AYTUZ”.
All warrants were valued using the Black-Scholes option pricing model. In order to calculate the fair
value of the warrants, certain assumptions were made regarding components of the model, including the selling price of the underlying
common stock, risk-free interest rate, volatility, expected dividend yield, and expected life. Changes to the assumptions could
cause significant adjustments to valuation. The Company estimated a volatility factor utilizing a weighted average of comparable
published volatilities of peer companies. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time
of the grant for treasury securities of similar maturity. During the three months ended December 31, 2016, Aytu sold 5,735,000 units (each unit consisting of one share of common stock and one warrant with an exercise price of $1.86) which was
sold at $1.50 per unit. The $1.50 was used as the selling price underlying the units to calculate the value attributable to the
common stock and warrants. This resulted in a fair value of $0.77 for the common stock and $0.73 for the warrant. We used the value
of $0.73 per in the valuation of all warrants issued in the December 31, 2016 quarter.
Significant assumptions in valuing the warrants issued during the
December 31, 2016 quarter were as follows:
Expected volatility
|
|
|
186.7% - 229.8%
|
|
Risk free interest rate
|
|
|
1.02% - 1.33%
|
|
Contractual term (years)
|
|
|
4.68 - 5.0
|
|
Dividend yield
|
|
|
0%
|
|
Note 10 – Related Party Transactions
Executive/Director Stock Purchases
When Aytu completed the November registered offering, our executive
officers Joshua Disbrow, Jarrett Disbrow and Gregory Gould and our director, Gary Cantrell, participated in this offering, purchasing
166,666, 166,666, 66,666 and 33,333 units respectively.
Ampio Loan Agreements
On April 16, 2015, Ampio received 396,816 shares of common
stock of Aytu for (i) issuance to Aytu of a promissory note from Ampio in the principal amount of $10.0 million, maturing
on the first anniversary of the Merger, and (ii) cancellation of indebtedness of $12.0 million to Ampio. The $10.0 million
was paid to Aytu, with $5.0 million paid in June of 2015 and $5.0 million paid in December of 2015.
Services Agreement
The Company has a service agreement with Ampio which is described
in Note 6.
Sponsored Research Agreement
The Company has a service agreement with TRLLC which is described
in Note 6.
Note 11 – Subsequent Events
On January 27, 2017, the Company commenced a tender offer to the beneficial holders of certain series
of warrants, offering them the opportunity to exercise such warrants at a temporarily reduced cash exercise price of $0.75 per
share of common stock. The tender offer is being made pursuant to the Offer to Amend and Exercise Warrants to Purchase Common Stock,
as filed with the Securities and Exchange Commission on January 27, 2017, which has been mailed to the beneficial holders of the
applicable series of warrants. The warrants subject to the tender offer are (i) outstanding warrants to purchase 1,733,322 shares
of common stock, issued in the May 2016 public financing, with an exercise price of $6.00 per share, and (ii) outstanding warrants
to purchase 6,020,245 shares of common stock, issued in the November 2016 public financing, with an exercise price of $1.86 per
share. In the tender offer, the exercise prices of such warrants will be temporarily reduced to $0.75 per share, for the period
from January 27, 2017 through the expiration time of 11:59 P.M. (Eastern Time) on February 27, 2017, subject to extension at the
Company’s sole discretion.
In addition, the solicitation
agents retained by the Company in the foregoing tender offer collectively own (together with certain affiliates) an aggregate of
510,825 warrants to purchase shares of the Company’s common stock, which warrants were previously issued as underwriters’
compensation in connection with the Company’s public offerings consummated on May 6, 2016 and November 2, 2016. The Company
has agreed with the solicitation agents to reduce the exercise price of these underwriters’ warrants, which are currently
exercisable at exercise prices of $6.00 and $1.86, to $0.75 for the remaining exercise period of the warrants. These underwriters’
warrants were not included in the tender offer described above
.
Subsequent to December 31, 2016, Aytu has sold approximately
one third of its investment in Acerus generating nearly $400,000 in net proceeds.