This prospectus relates to the sale or other disposition
from time to time of up to 1,076,596 shares of our common stock, $0.0001 par value per share, issued and issuable to Lincoln Park
Capital Fund, LLC, the selling stockholder named in this prospectus, also referred to as Lincoln Park. We are not selling any
shares of common stock under this prospectus and will not receive any of the proceeds from the sale of shares of common stock
by the selling stockholder.
The shares of common stock being offered by the selling
stockholder have been or may be issued pursuant to the purchase agreement dated July 27, 2016 that we entered into with Lincoln
Park, which we refer to in this prospectus as the Purchase Agreement. Please refer to the section of this prospectus entitled
“The Lincoln Park Transaction” for a description of the Purchase Agreement and the section entitled “Selling
Stockholder” for additional information regarding Lincoln Park. The prices at which Lincoln Park may sell the
shares will be determined by the prevailing market price for the shares or in negotiated transactions.
The selling stockholder may sell or otherwise dispose of
the shares of common stock covered by this prospectus in a number of different ways and at varying prices. We provide more information
about how the selling stockholder may sell or otherwise dispose of their shares of common stock in the section entitled “Plan
of Distribution” on page 114. The selling shareholder will pay all brokerage fees and commissions and similar expenses.
We will pay all expenses (except brokerage fees and commissions and similar expenses) relating to the registration of the shares
with the Securities and Exchange Commission.
Our common stock is listed on
the OTCQX Market operated by OTC Markets Group, Inc. (or OTCQX) under the ticker symbol “AYTU.” On March 20, 2017,
the closing price of our common stock as reported on the OTCQX was $0.91.
Lincoln Park is an underwriter within the meaning of Section
2(a)(11) of the Securities Act of 1933, as amended.
THE OFFERING
This prospectus relates to the resale by Lincoln Park Capital
Fund, LLC, the selling stockholder identified in this prospectus, of up to 1,076,596 shares of our common stock, as follows:
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147,650 shares of common stock that we previously issued to
the selling stockholder under the Purchase Agreement; and
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928,946 shares of
common stock that we may issue after the date of this prospectus to the selling stockholder pursuant to the Purchase
Agreement.
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Common stock offered by
the selling stockholder
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1,076,596
shares
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Common stock outstanding before the offering
(1)
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13,836,607
shares
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Common
stock to be outstanding after the offering
(2)
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14
,913,203
shares
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Common
stock OTCQX Symbol
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AYTU
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(1)
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Based on the number of
shares outstanding as of March 20, 2017.
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(2)
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Assumes the issuance of all of the shares
issuable under the Purchase Agreement that are being offered by this prospectus.
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On July 27, 2016, we entered into the Purchase Agreement,
pursuant to which we could sell to Lincoln Park an aggregate of $10.5 million of our common stock, together with a Registration
Rights Agreement. Upon signing the Purchase Agreement, Lincoln Park purchased 133,690 shares of our common stock for $500,000
as the initial purchase under the Purchase Agreement. In connection with the execution of the Purchase Agreement, we issued to
Lincoln Park 52,500 shares of our common stock as a commitment fee.
Under the terms and subject to the conditions of the Purchase
Agreement, after giving effect to the initial purchase of $500,000 in July 2016, we have the right to sell to and Lincoln Park
is obligated to purchase up to an additional $10.0 million of shares, as described below, of our common stock, subject to certain
limitations, from time to time, over the 36-month period that commenced on the date that the registration statement, of which
this prospectus is a part, is declared effective by the Securities and Exchange Commission, or SEC, and a final prospectus in
connection therewith is filed, which was September 20, 2016 (the “Commencement Date”). We may direct Lincoln Park,
in our sole discretion and subject to certain conditions, to purchase up to 10,000 shares of our common stock on any business
day (such purchases, Regular Purchases), provided that at least one business day has passed since the most recent purchase, and
provided that the amount we may sell to Lincoln Park under a single Regular Purchase may increase under certain circumstances
as described in the Purchase Agreement but in no event will the amount of a single Regular Purchase exceed $500,000. The purchase
price of shares of our common stock related to the future funding will be based on the prevailing market prices of such shares
at the time of sales. In addition, we may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the
date of a Regular Purchase the closing sale price of our common stock is not below the threshold price as set forth in the Purchase
Agreement. Our sales of shares of common stock to Lincoln Park under the Purchase Agreement are limited to no more than the number
of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more
than 4.99% of the then outstanding shares of our common stock which amount may be increased to an amount not more than 9.99% of
the then outstanding shares of our common stock by written notice to us by Lincoln Park, effective 61 days after delivery of such
notice.
We may not direct Lincoln Park to purchase any shares
of our common stock during the period commencing five business days immediately prior to the filing of this
post-effective amendment to the registration statement (of which this prospectus is a part) and ending on the business day
immediately following the effective date of this post-effective amendment to the registration statement.
We have the right to terminate the Purchase Agreement at
any time, at no cost or penalty. Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement will depend
on a variety of factors to be determined by us from time to time, including, among others, market conditions, the trading price
of the common stock and determinations by us as to the appropriate sources of funding for us and our operations. Lincoln Park
has no right to require any sales by us, but is obligated to make purchases from us as it directs in accordance with the Purchase
Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or
hedging of our shares.
For a more detailed description of the Purchase Agreement,
see “The Lincoln Park Transaction.”
The net proceeds under the Purchase Agreement to us will
depend on the frequency and prices at which we sell shares of our stock to Lincoln Park. We expect that any proceeds received
by us from such sales to Lincoln Park under the Purchase Agreement will be used for general corporate purposes and working capital
requirements.
Under the Purchase Agreement, beginning on the
Commencement Date, we may sell up to an additional $10,000,000 of our common stock to Lincoln Park, after giving effect to the
initial purchase of $500,000 in July 2016. While we do not know what the purchase price for our common stock will be, and
therefore cannot be certain as to the number of shares we might issue to Lincoln Park in the future under the Purchase
Agreement, a total of 1,076,596 shares of our common stock are being offered under this prospectus, which is less than the
amount of shares issuable under the Purchase Agreement. If all of the 1,076,596 shares issuable to and offered by Lincoln
Park under this prospectus were issued and outstanding as of March 20, 2017, such shares would represent approximately 7.8%
of the total number of shares of our common stock outstanding and approximately 9.3% of the total number of outstanding
shares held by non-affiliates, in each case as of March 20, 2017; however, these percentages do not give effect to the
prohibition contained in the Purchase Agreement that prevents us from selling and issuing to Lincoln Park shares such that,
after giving effect to such sale and issuance, Lincoln Park and its affiliates would beneficially own more than 4.99% of the
then outstanding shares of our common stock. If we elect to issue and sell more than the 1,076,596 shares issuable in the future to and offered under this
prospectus to Lincoln Park, which we have the right, but not the obligation, to do, we must first register for resale under
the Securities Act any such additional shares, which could cause additional substantial dilution to our shareholders.
The number of shares ultimately offered for resale by Lincoln Park is dependent upon the number of shares we sell to Lincoln
Park under the Purchase Agreement.
After the Commencement Date, in September 2016, we
sold 40,000 shares to Lincoln Park under the agreement for $131,000, which amount reduced dollar for dollar the available
$10,000,000 total commitment to $9,869,000.
Issuances
of our common stock in this offering will not affect the rights or privileges of our existing stockholders, except that the economic
and voting interests of each of our existing stockholders will be diluted as a result of any such issuance. Although the number
of shares of common stock that our existing stockholders own will not decrease, the shares owned by our existing stockholders
will represent a smaller percentage of our total outstanding shares after any such issuance to Lincoln Park.
Use of Proceeds
The 147,650 shares currently outstanding that are being
offered for resale by the selling stockholder will be sold for the account of Lincoln Park, the selling stockholder. As a result,
all proceeds from the sales of the 147,650 shares of common stock currently outstanding and offered for resale hereby will go
to Lincoln Park and we will not receive any proceeds from the resale of those shares of common stock by Lincoln Park.
As noted above, in July 2016, we sold to Lincoln Park
$500,000 of our common stock upon the execution of the Purchase Agreement. We may receive up to a total of an additional
$10,000,000 in gross proceeds if we issue to Lincoln Park all of the additional shares issuable pursuant to the Purchase
Agreement. However, we are not registering for sale and are not offering under this prospectus all of the shares issuable
pursuant to the Purchase Agreement. As we are unable to predict the timing or amount of potential issuances of all of the
shares offered hereby, we have not allocated any proceeds of such issuances to any particular purpose. Accordingly, all such
proceeds are expected to be allocated to working capital. After the Commencement Date, in September 2016, we sold 40,000
shares to Lincoln Park under the agreement for $131,000, which amount reduced dollar for dollar the available $10,000,000. It
is possible that no further shares will be issued under the Purchase Agreement.
After the issuance of any of the shares issuable under the
Purchase Agreement, we would not receive any proceeds from the resale of those shares by Lincoln Park because those shares will
be sold for the account of Lincoln Park.
We will incur all costs associated with this registration
statement and prospectus.
Dividend Policy
We have never paid dividends on our capital stock and do
not anticipate paying any dividends for the foreseeable future. See “Dividend Policy.”
RISK FACTORS
Investing in our securities includes a high degree of risk.
Prior to making a decision about investing in our securities, you should consider carefully the specific factors discussed below,
together with all of the other information contained in this prospectus. If any of the following risks actually occurs, our business,
financial condition, results of operations and future prospects would likely be materially and adversely affected. This could cause
the market price of our common stock to decline and could cause you to lose all or part of your investment.
Risks Related to Our Financial Condition
and Capital Requirements
Our independent registered public accounting firm has
expressed substantial doubt as to our ability to continue as a going concern and may do so again in the future.
In their report accompanying our audited financial
statements, our independent registered public accounting firm expressed substantial doubt as to our ability to continue as a
going concern. A “going concern” opinion could impair our ability to finance our operations through the sale of
debt or equity securities or through bank financing. We believe our entry into the Purchase Agreement with Lincoln Park,
pursuant to which, if we meet the conditions, we can require Lincoln Park to purchase up to $10.0 million of our common
stock,
less any amount sold to Lincoln Park after the
Commencement
Date, can provide us with available capital, provided we can meet those conditions, of which there can be no assurance.
However, our ability to continue as a going concern will depend on our ability to obtain additional financing. Additional
capital may not be available on reasonable terms, or at all. If adequate financing is not available, we would be required to
terminate or significantly curtail our operations, or enter into arrangements with collaborative partners or others that may
require us to relinquish rights to certain aspects of our products or product candidates, or potential markets that we would
not otherwise relinquish. If we are unable to raise additional capital, our business would be jeopardized and we may not be
able to continue operations.
We have a limited operating history, have incurred losses,
and can give no assurance of profitability.
We are a commercial-stage healthcare company with a limited
operating history. Prior to implementing our commercial strategy in the fourth calendar quarter of 2015, we did not have a focus
on profitability. As a result, we have not generated substantial revenue to date and are not profitable, and have incurred losses
in each year since our inception. Our net loss for the years ended June 30, 2016 and 2015 was $28.2 million and $7.7 million,
respectively, and was $10.5 million for the six months ended December 31, 2016. We have not demonstrated the ability to be a profit-generating
enterprise to date, and without significant financing, there is substantial doubt about our ability to continue as a going concern.
We expect to incur substantial losses for the foreseeable future. Our ability to generate significant revenue is uncertain, and
we may never achieve profitability. We have a very limited operating history on which investors can evaluate our potential for
future success. Potential investors should evaluate us in light of the expenses, delays, uncertainties, and complications typically
encountered by early-stage healthcare businesses, many of which will be beyond our control. These risks include the following:
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uncertain market acceptance of our products and product candidates;
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U.S. regulatory approval of our products and product candidates;
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foreign regulatory approval of our products and product candidates;
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lack of sufficient capital;
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unanticipated problems, delays, and expense relating to product development and implementation;
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lack of sufficient intellectual property;
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As a result of our limited operating history, and the increasingly
competitive nature of the markets in which we compete, our historical financial data, which, prior to April 16, 2015, consists
of allocations of expenses from Ampio, is of limited value in anticipating future operating expenses. Our planned expense levels
will be based in part on our expectations concerning future operations, which is difficult to forecast accurately based on our
limited operating history and the recentness of the acquisition of our products ProstaScint, Primsol and Natesto. We may be unable
to adjust spending in a timely manner to compensate for any unexpected budgetary shortfall.
We have not received any substantial revenues from the commercialization
of our current products to date and might not receive significant revenues from the commercialization of our current products or
our product candidates in the near term. Even though ProstaScint and Primsol are each an approved drug that we are marketing, we
only acquired ProstaScint in May 2015 and Primsol in October 2015 and have limited experience on which to base the revenue we could
expect to receive from their sales. We acquired Natesto in April 2016 and launched it in July 2016 and consequently have no meaningful
experience on which to base expected revenue from Natesto. To obtain revenues from our products and product candidates, we must
succeed, either alone or with others, in a range of challenging activities, including expanding markets for our existing products
and completing clinical trials of our product candidates, obtaining positive results from those clinical trials, achieving marketing
approval for those product candidates, manufacturing, marketing and selling our existing products and those products for which
we, or our collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement
for our products from private insurance or government payors. We, and our collaborators, if any, may never succeed in these activities
and, even if we do, or one of our collaborators does, we may never generate revenues that are sufficient enough for us to achieve
profitability.
We will need to raise additional funding, which may
not be available on acceptable terms, or at all. Failure to obtain necessary capital when needed may force us to delay, limit or
terminate our product expansion and development efforts or other operations.
We are expending resources to expand the market for Natesto,
ProstaScint and Primsol, none of which might be as successful as we anticipate or at all and all of which might take longer and
be more expensive to market than we anticipate. We also are currently advancing our product candidates through clinical development.
Developing product candidates is expensive, lengthy and risky, and we expect to incur research and development expenses in connection
with our ongoing clinical development activities with the MiOXSYS System. As of December 31, 2016, our cash and cash equivalents
were $5.2 million available to fund our operations offset by an aggregate $6.4 million in accounts payable and accrued liabilities
and the Natesto payable. In November 2016, we conducted a public offering of our common stock and warrants from which we received
net cash proceeds of approximately $7.6 million. Our operating plan may change as a result of many factors currently unknown to
us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government
or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing
arrangements or a combination of these approaches. In any event, we will require additional capital to continue the expansion
of marketing efforts for Natesto, ProstaScint and Primsol and to obtain regulatory approval for, and to commercialize, our current
product candidate, the MiOXSYS System. Raising funds in the current economic environment, as well our lack of operating history,
may present additional challenges. Even if we believe we have sufficient funds for our current or future operating plans, we may
seek additional capital if market conditions are favorable or if we have specific strategic considerations. We intend to rely
on the Tender Offer and the purchase agreement (the “Purchase Agreement”) we entered into with Lincoln Park Capital
Fund, LLC in July 2016 for our capital needs, as well as the sale of the Acerus stock that we hold through a stock purchase agreement
we entered in April 2016, including further commercialization of our currently approved products. If the Tender Offer is not successful
and if we are unable to access a portion or the full amount of the Purchase Agreement and secure funds from the sale of Acerus
stock, in the absence of any other financing sources, it would have a material adverse impact on our operations.
Any additional fundraising efforts may divert our management
from their day-to-day activities, which may adversely affect our ability to expand any existing product or develop and commercialize
our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms
acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders
and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market
price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The
incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive
covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license
intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.
We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than
otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise
agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.
If we are unable to obtain funding on a timely basis, we may
be unable to expand the market for Natesto, ProstaScint or Primsol and/or be required to significantly curtail, delay or discontinue
one or more of our research or development programs or the commercialization of our current product candidate, the MiOXSYS system,
or any future product candidate or expand our operations generally or otherwise capitalize on our business opportunities, as desired,
which could materially affect our business, financial condition and results of operations.
If we do not obtain the capital necessary to fund our
operations, we will be unable to successfully expand the commercialization of Natesto, ProstaScint and Primsol and to develop,
obtain regulatory approval of, and commercialize, our current product candidate, the MiOXSYS System.
The expansion of marketing and commercialization activities
for our existing products and the development of pharmaceutical products, medical diagnostics and medical devices is capital-intensive.
We anticipate we may require additional financing to continue to fund our operations. Our future capital requirements will depend
on, and could increase significantly as a result of, many factors including:
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the costs, progress and timing of our efforts to expand the marketing of Natesto, ProstaScint and Primsol;
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progress in, and the costs of, our pre-clinical studies and clinical trials and other research and development programs;
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the costs of securing manufacturing arrangements for commercial production;
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the scope, prioritization and number of our research and development programs;
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the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we obtain;
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the costs of establishing, expanding or contracting for sales and marketing capabilities for any existing products and if we obtain regulatory clearances to market our current product candidate, the MiOXSYS system;
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the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under future collaboration agreements, if any; and
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the costs involved in filing, prosecuting, enforcing and defending patent claims and other intellectual property rights.
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If funds are not available, we may be required to delay, reduce
the scope of, or eliminate one or more of our commercialization efforts or our technologies, research or development programs.
We may not be able to access the full amounts available
under the Lincoln Park Purchase Agreement, which could prevent us from accessing the capital we need to continue our operations,
which could have an adverse effect on our business.
We intend to rely on the purchase agreement (the
“Purchase Agreement”) we entered into with Lincoln Park Capital Fund, LLC (“Lincoln Park”) in July
2016 for our near-term capital needs, including further commercialization of our currently approved products. After selling
$500,000 of common stock on the day we executed the Purchase Agreement, pursuant to the terms of the Purchase Agreement, we
may direct Lincoln Park to purchase up to $10,000,000 worth of shares of our common stock over a 36-month period beginning on
September 20, 2016 (the “Commencement Date”),
less any amount
sold to Lincoln Park after the
Commencement Date. Thereafter, on any trading day selected by us, we may sell shares
of common stock to Lincoln Park in amounts up to 10,000 shares per regular sale (Regular Purchases), which may be increased
to up to 20,000 shares depending on certain conditions as set forth in the Purchase Agreement, up to the aggregate commitment
of $10,000,000
less any amount sold to Lincoln Park after the
Commencement
Date. If the market price of our common stock is not below $7.00 per share on the purchase date, then the Regular
Purchase amount may be increased to 15,000 shares. If the market price is not below $9.00 per share on the purchase date,
then the Regular Purchase amount may be increased to 20,000 shares. Although there are no upper limits on the per share price
Lincoln Park may pay to purchase our common stock, the Company may not sell more than $500,000 in shares of common stock to
Lincoln Park per any individual Regular Purchase.
In addition to Regular Purchases, we may in our sole discretion
direct Lincoln Park on each purchase date to make “accelerated purchases” on the following business day up to the lesser
of (i) three times the number of shares purchased pursuant to such Regular Purchase or (ii) 30% of the trading volume on the accelerated
purchase date at a purchase price equal to the lesser of (i) the closing sale price on the accelerated purchase date and (ii) 95%
of the accelerated purchase date’s volume weighted average price. We cannot submit an accelerated purchase notice if the
stock price is below $3.00.
The purchase price of the shares related to the Purchase Agreement
will be based on the prevailing market prices of the Company’s shares of common stock, which shall be equal to the lesser
of the lowest sale price of the common shares during the purchase date and the average of the three lowest closing sale prices
of the common shares during the ten business days prior to the purchase date without any fixed discount.
After the Commencement Date, we sold 40,000 shares to
Lincoln Park in September 2016 for $131,000 of gross proceeds. Depending on the prevailing market price of our common stock,
we may not be able to sell shares to Lincoln Park for the remaining maximum $9,869,000 over the term of the Purchase
Agreement. We may not direct Lincoln Park to purchase any shares of our common stock during the
period commencing five business days immediately prior to the filing of this post-effective amendment to the registration
statement (of which this prospectus is a part) and ending on the business day immediately following the effective date
of this post-effective amendment to the registration statement. Our inability to access a portion or the full amount of
the Purchase Agreement, in the absence of any other financing sources, would have a material adverse impact on
our operations.
We will incur increased costs associated with, and
our management will need to devote substantial time and effort to, compliance with public company reporting and other requirements.
As a public company, we incur significant legal, accounting
and other expenses that we did not incur as private companies during the majority of fiscal 2015. In addition, the rules and regulations
of the SEC and any national securities exchange to which we may be subject in the future impose numerous requirements on public
companies, including requirements relating to our corporate governance practices, with which we will need to comply. Further, we
will continue to be required to, among other things, file annual, quarterly and current reports with respect to our business and
operating results. Based on currently available information and assumptions, we estimate that we will incur up to approximately
$0.5 million in expenses on an annual basis as a direct result of the requirements of being a publicly traded company. Our management
and other personnel will need to devote substantial time to gaining expertise regarding operations as a public company and compliance
with applicable laws and regulations, and our efforts and initiatives to comply with those requirements could be expensive.
If we fail to establish and maintain proper internal
controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Pursuant to Section 404 of the Sarbanes-Oxley Act, our management conducted
an assessment of the effectiveness of our internal control over financial reporting for the year ended June 30, 2016, and concluded
that such control was effective.
However, if in the future we were to conclude that our internal
control over financial reporting were not effective, we cannot be certain as to the timing of completion of our evaluation, testing
and remediation actions or their effect on our operations because there is presently no precedent available by which to measure
compliance adequacy. As a consequence, we may not be able to complete any necessary remediation process in time to meet our deadline
for compliance with Section 404 of the Sarbanes-Oxley Act. Also, there can be no assurance that we will not identify one or more
material weaknesses in our internal controls in connection with evaluating our compliance with Section 404 of the Sarbanes-Oxley
Act. The presence of material weaknesses could result in financial statement errors which, in turn, could require us to restate
our operating results.
If we are unable to conclude that we have effective internal
control over financial reporting or if our independent auditors are unwilling or unable to provide us, when required, with an attestation
report on the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act,
investors may lose confidence in our operating results, our stock price could decline and we may be subject to litigation or regulatory
enforcement actions. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, we may not
be able to obtain listing on a securities exchange such as the NYSE MKT.
Risks Related to Product Development,
Regulatory Approval and Commercialization
Natesto, MiOXSYS, ProstaScint and Primsol may prove
to be difficult to effectively commercialize as planned.
Various commercial, regulatory, and manufacturing factors
may impact our ability to maintain or grow revenues from sales of Natesto, MiOXSYS, ProstaScint and Primsol. Specifically, we
may encounter difficulty by virtue of:
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our inability to secure continuing prescribing of any of these products
by current or previous users of the product;
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our inability to effectively transfer and scale manufacturing as needed to maintain an adequate commercial supply of these products;
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reimbursement and medical policy changes that may adversely affect
the pricing, profitability or commercial appeal of Natesto, MiOXSYS, ProstaScint or Primsol; and
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our inability to effectively identify and align with commercial partners
outside the United States, or the inability of those selected partners to gain the required regulatory, reimbursement, and
other approvals needed to enable commercial success of MiOXSYS, ProstaScint or Primsol.
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We have limited experience selling our current products
as they have been acquired from another company or are newly approved for sale. As a result, we may be unable to successfully commercialize
our products and product candidates.
Despite our management’s extensive experience in launching
and managing commercial-stage healthcare companies, we have limited marketing, sales and distribution experience with our current
products. Our ability to achieve profitability depends on attracting and retaining customers for our current products, and building
brand loyalty for Natesto, MiOXSYS, ProstaScint and Primsol. To successfully perform sales, marketing, distribution and customer
support functions, we will face a number of risks, including:
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our ability to attract and retain skilled support team, marketing staff and sales force necessary to increase the market for our approved products and to maintain market acceptance for our product candidates;
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the ability of our sales and marketing team to identify and penetrate the potential customer base; and
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the difficulty of establishing brand recognition and loyalty for our products.
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In addition, we may seek to enlist one or more third parties
to assist with sales, distribution and customer support globally or in certain regions of the world. If we do seek to enter into
these arrangements, we may not be successful in attracting desirable sales and distribution partners, or we may not be able to
enter into these arrangements on favorable terms, or at all. If our sales and marketing efforts, or those of any third-party sales
and distribution partners, are not successful, our currently approved products may not achieve increased market acceptance and
our product candidates may not gain market acceptance, which would materially impact our business and operations.
We cannot be certain that we will be able to obtain
regulatory approval for, or successfully commercialize, any of our current or future product candidates.
We may not be able to develop our current or any future product
candidates. Our product candidates will require substantial additional clinical development, testing, and regulatory approval before
we are permitted to commence commercialization. The clinical trials of our product candidates are, and the manufacturing and marketing
of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in
the United States and in other countries where we intend to test and, if approved, market any product candidate. Before obtaining
regulatory approvals for the commercial sale of any product candidate, we must demonstrate through pre-clinical testing and clinical
trials that the product candidate is safe and effective for use in each target indication. This process can take many years and
may include post-marketing studies and surveillance, which will require the expenditure of substantial resources. Of the large
number of drugs in development in the U.S., only a small percentage successfully completes the FDA regulatory approval process
and is commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development and
clinical programs, we cannot assure you that any of our product candidates will be successfully developed or commercialized.
We are not permitted to market a product in the U.S. until we
receive approval of a New Drug Application, or an NDA, for that product from the FDA, or in any foreign countries until we receive
the requisite approval from such countries. Obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process,
and the FDA may delay, limit or deny approval of any product candidate for many reasons, including, among others:
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we may not be able to demonstrate that a product candidate is safe and effective to the satisfaction of the FDA;
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the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval;
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the FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;
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the FDA may require that we conduct additional clinical trials;
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the FDA may not approve the formulation, labeling or specifications of any product candidate;
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the clinical research organizations, or CROs, that we retain to conduct our clinical trials may take actions outside of our control that materially adversely impact our clinical trials;
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the FDA may find the data from pre-clinical studies and clinical trials insufficient to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks, such as the risk of drug abuse by patients or the public in general;
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the FDA may disagree with our interpretation of data from our pre-clinical studies and clinical trials;
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the FDA may not accept data generated at our clinical trial sites;
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if an NDA, if and when submitted, is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional pre-clinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;
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the FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval or post-approval;
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the FDA may not approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or
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the FDA may change its approval policies or adopt new regulations.
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These same risks apply to applicable foreign regulatory agencies
from which we may seek approval for any of our product candidates.
Any of these factors, many of which are beyond our control,
could jeopardize our ability to obtain regulatory approval for and successfully market any product candidate. Moreover, because
a substantial portion of our business is or may be dependent upon our product candidates, any such setback in our pursuit of initial
or additional regulatory approval would have a material adverse effect on our business and prospects.
If we fail to successfully acquire new products, we
may lose market position.
Acquiring new products is an important factor in our planned
sales growth, including products that already have been developed and found market acceptance. If we fail to identify existing
or emerging consumer markets and trends and to acquire new products, we will not develop a strong revenue source to help pay for
our development activities as well as possible acquisitions. This failure would delay implementation of our business plan, which
could have a negative adverse effect on our business and prospects.
If we do not secure collaborations with strategic partners
to test, commercialize and manufacture product candidates, we may not be able to successfully develop products and generate meaningful
revenues.
We may enter into collaborations with third parties to conduct
clinical testing, as well as to commercialize and manufacture our products and product candidates. If we are able to identify and
reach an agreement with one or more collaborators, our ability to generate revenues from these arrangements will depend on our
collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. Collaboration agreements
typically call for milestone payments that depend on successful demonstration of efficacy and safety, obtaining regulatory approvals,
and clinical trial results. Collaboration revenues are not guaranteed, even when efficacy and safety are demonstrated. The current
economic environment may result in potential collaborators electing to reduce their external spending, which may prevent us from
developing our product candidates.
Even if we succeed in securing collaborators, the collaborators
may fail to develop or effectively commercialize our products or product candidates. Collaborations involving our product candidates
pose a number of risks, including the following:
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collaborators may not have sufficient resources or may decide not to devote the necessary resources due to internal constraints such as budget limitations, lack of human resources, or a change in strategic focus;
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collaborators may believe our intellectual property is not valid or is unenforceable or the product candidate infringes on the intellectual property rights of others;
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collaborators may dispute their responsibility to conduct development and commercialization activities pursuant to the applicable collaboration, including the payment of related costs or the division of any revenues;
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collaborators may decide to pursue a competitive product developed outside of the collaboration arrangement;
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collaborators may not be able to obtain, or believe they cannot obtain, the necessary regulatory approvals;
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collaborators may delay the development or commercialization of our product candidates in favor of developing or commercializing their own or another party’s product candidate; or
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collaborators may decide to terminate or not to renew the collaboration for these or other reasons.
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As a result, collaboration agreements may not lead to development
or commercialization of our product candidates in the most efficient manner or at all. For example, our former collaborator that
licensed Zertane conducted clinical trials which we believe demonstrated efficacy in treating PE, but the collaborator undertook
a merger that we believe altered its strategic focus and thereafter terminated the collaboration agreement. The Merger also created
a potential conflict with a principal customer of the acquired company, which sells a product to treat premature ejaculation in
certain European markets.
Collaboration agreements are generally terminable without cause
on short notice. Once a collaboration agreement is signed, it may not lead to commercialization of a product candidate. We also
face competition in seeking out collaborators. If we are unable to secure collaborations that achieve the collaborator’s
objectives and meet our expectations, we may be unable to advance our products or product candidates and may not generate meaningful
revenues.
We or our strategic partners may choose not to continue
an existing product or choose not to develop a product candidate at any time during development, which would reduce or eliminate
our potential return on investment for that product.
At any time and for any reason, we or our strategic partners
may decide to discontinue the development or commercialization of a product or product candidate. If we terminate a program in
which we have invested significant resources, we will reduce the return, or not receive any return, on our investment and we will
have missed the opportunity to have allocated those resources to potentially more productive uses. If one of our strategic partners
terminates a program, we will not receive any future milestone payments or royalties relating to that program under our agreement
with that party.
Our pre-commercial product candidates are expected to
undergo clinical trials that are time-consuming and expensive, the outcomes of which are unpredictable, and for which there is
a high risk of failure. If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to
the FDA and other regulators, we or our collaborators may incur additional costs or experience delays in completing, or ultimately
be unable to complete, the development and commercialization of these product candidates.
Pre-clinical testing and clinical trials are long, expensive
and unpredictable processes that can be subject to extensive delays. We cannot guarantee that any clinical studies will be conducted
as planned or completed on schedule, if at all. It may take several years to complete the pre-clinical testing and clinical development
necessary to commercialize a drug or biologic, and delays or failure can occur at any stage. Interim results of clinical trials
do not necessarily predict final results, and success in pre-clinical testing and early clinical trials does not ensure that later
clinical trials will be successful. A number of companies in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials even after promising results in earlier trials and we cannot be certain that we will not face
similar setbacks. The design of a clinical trial can determine whether its results will support approval of a product and flaws
in the design of a clinical trial may not become apparent until the clinical trial is well advanced. An unfavorable outcome in
one or more trials would be a major set-back for that product candidate and for us. Due to our limited financial resources, an
unfavorable outcome in one or more trials may require us to delay, reduce the scope of, or eliminate one or more product development
programs, which could have a material adverse effect on our business, prospects and financial condition and on the value of our
common stock.
In connection with clinical testing and trials, we face a number
of risks, including:
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a product candidate is ineffective, inferior to existing approved medicines, unacceptably toxic, or has unacceptable side effects;
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patients may die or suffer other adverse effects for reasons that may or may not be related to the product candidate being tested;
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the results may not confirm the positive results of earlier testing or trials; and
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the results may not meet the level of statistical significance required by the FDA or other regulatory agencies to establish the safety and efficacy of the product candidate.
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If we do not successfully complete pre-clinical and clinical
development, we will be unable to market and sell products derived from our product candidates and generate revenues. Even if we
do successfully complete clinical trials, those results are not necessarily predictive of results of additional trials that may
be needed before an NDA may be submitted to the FDA. Although there are a large number of drugs and biologics in development in
the United States and other countries, only a small percentage result in the submission of an NDA to the FDA, even fewer are approved
for commercialization, and only a small number achieve widespread physician and consumer acceptance following regulatory approval.
If our clinical trials are substantially delayed or fail to prove the safety and effectiveness of our product candidates in development,
we may not receive regulatory approval of any of these product candidates and our business, prospects and financial condition will
be materially harmed.
Delays, suspensions and terminations in any clinical
trial we undertake could result in increased costs to us and delay or prevent our ability to generate revenues.
Human clinical trials are very expensive, time-consuming, and
difficult to design, implement and complete. Should we undertake the development of a pharmaceutical product candidate, we would
expect the necessary clinical trials to take up to 24 months to complete, but the completion of trials for any product candidates
may be delayed for a variety of reasons, including delays in:
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demonstrating sufficient safety and efficacy to obtain regulatory approval to commence a clinical trial;
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reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
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validating test methods to support quality testing of the drug substance and drug product;
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obtaining sufficient quantities of the drug substance or device ports;
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manufacturing sufficient quantities of a product candidate;
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obtaining approval of an IND from the FDA;
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obtaining institutional review board approval to conduct a clinical trial at a prospective clinical trial site;
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determining dosing and clinical design and making related adjustments; and
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patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical trial sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial.
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The commencement and completion of clinical trials for our product
candidates may be delayed, suspended or terminated due to a number of factors, including:
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lack of effectiveness of product candidates during clinical trials;
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adverse events, safety issues or side effects relating to the product candidates or their formulation or design;
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inability to raise additional capital in sufficient amounts to continue clinical trials or development programs, which are very expensive;
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the need to sequence clinical trials as opposed to conducting them concomitantly in order to conserve resources;
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our inability to enter into collaborations relating to the development and commercialization of our product candidates;
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failure by us or our collaborators to conduct clinical trials in accordance with regulatory requirements;
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our inability or the inability of our collaborators to manufacture or obtain from third parties materials sufficient for use in pre-clinical studies and clinical trials;
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governmental or regulatory delays and changes in regulatory requirements, policy and guidelines, including mandated changes in the scope or design of clinical trials or requests for supplemental information with respect to clinical trial results;
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failure of our collaborators to advance our product candidates through clinical development;
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delays in patient enrollment, variability in the number and types of patients available for clinical trials, and lower-than anticipated retention rates for patients in clinical trials;
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difficulty in patient monitoring and data collection due to failure of patients to maintain contact after treatment;
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a regional disturbance where we or our collaborative partners are enrolling patients in our clinical trials, such as a pandemic, terrorist activities or war, or a natural disaster; and
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varying interpretations of our data, and regulatory commitments and requirements by the FDA and similar foreign regulatory agencies.
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Many of these factors may also ultimately lead to denial of
an NDA for a product candidate. If we experience delay, suspensions or terminations in a clinical trial, the commercial prospects
for the related product candidate will be harmed, and our ability to generate product revenues will be delayed.
In addition, we may encounter delays or product candidate rejections
based on new governmental regulations, future legislative or administrative actions, or changes in FDA policy or interpretation
during the period of product development. If we obtain required regulatory approvals, such approvals may later be withdrawn. Delays
or failures in obtaining regulatory approvals may result in:
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varying interpretations of data and commitments by the FDA and similar foreign regulatory agencies; and
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diminishment of any competitive advantages that such product candidates may have or attain.
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Furthermore, if we fail to comply with applicable FDA and other
regulatory requirements at any stage during this regulatory process, we may encounter or be subject to:
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diminishment of any competitive advantages that such product candidates may have or attain;
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delays or termination in clinical trials or commercialization;
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refusal by the FDA or similar foreign regulatory agencies to review pending applications or supplements to approved applications;
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product recalls or seizures;
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suspension of manufacturing;
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withdrawals of previously approved marketing applications; and
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fines, civil penalties, and criminal prosecutions.
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The medical device regulatory clearance or approval
process is expensive, time consuming and uncertain, and the failure to obtain and maintain required clearances or approvals could
prevent us from broadly commercializing the MiOXSYS System for clinical use.
The MiOXSYS System is subject to 510(k) clearance by the FDA
prior to its marketing for commercial use in the United States, and to regulatory approvals beyond CE marking required by certain
foreign governmental entities prior to its marketing outside the United States. In addition, any changes or modifications to a
device that has received regulatory clearance or approval that could significantly affect its safety or effectiveness, or would
constitute a major change in its intended use, may require the submission of a new application for 510(k) clearance, pre-market
approval, or foreign regulatory approvals. The 510(k) clearance and pre-market approval processes, as well as the process of obtaining
foreign approvals, can be expensive, time consuming and uncertain. It generally takes from four to twelve months from submission
to obtain 510(k) clearance, and from one to three years from submission to obtain pre-market approval; however, it may take longer,
and 510(k) clearance or pre-market approval may never be obtained. We have limited experience in filing FDA applications for 510(k)
clearance and pre-market approval. In addition, we are required to continue to comply with applicable FDA and other regulatory
requirements even after obtaining clearance or approval. There can be no assurance that we will obtain or maintain any required
clearance or approval on a timely basis, or at all. Any failure to obtain or any material delay in obtaining FDA clearance or any
failure to maintain compliance with FDA regulatory requirements could harm our business, financial condition and results of operations.
The approval process for pharmaceutical and medical
device products outside the United States varies among countries and may limit our ability to develop, manufacture and sell our
products internationally. Failure to obtain marketing approval in international jurisdictions would prevent our product candidates
from being marketed abroad.
In order to market and sell our products in the European Union
and many other jurisdictions, we, and our collaborators, must obtain separate marketing approvals and comply with numerous and
varying regulatory requirements. The approval procedure varies among countries and may involve additional testing. We may conduct
clinical trials for, and seek regulatory approval to market, our product candidates in countries other than the United States.
Depending on the results of clinical trials and the process for obtaining regulatory approvals in other countries, we may decide
to first seek regulatory approvals of a product candidate in countries other than the United States, or we may simultaneously seek
regulatory approvals in the United States and other countries. If we or our collaborators seek marketing approval for a product
candidate outside the United States, we will be subject to the regulatory requirements of health authorities in each country in
which we seek approval. With respect to marketing authorizations in Europe, we will be required to submit a European Marketing
Authorization Application, or MAA, to the European Medicines Agency, or EMA, which conducts a validation and scientific approval
process in evaluating a product for safety and efficacy. The approval procedure varies among regions and countries and may involve
additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval.
Obtaining regulatory approvals from health authorities in countries
outside the United States is likely to subject us to all of the risks associated with obtaining FDA approval described above. In
addition, marketing approval by the FDA does not ensure approval by the health authorities of any other country, and approval by
foreign health authorities does not ensure marketing approval by the FDA.
Even if we, or our collaborators, obtain marketing approvals
for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we or they market our products,
which could materially impair our ability to generate revenue.
Even if we receive regulatory approval for a product candidate,
this approval may carry conditions that limit the market for the product or put the product at a competitive disadvantage relative
to alternative therapies. For instance, a regulatory approval may limit the indicated uses for which we can market a product or
the patient population that may utilize the product, or may be required to carry a warning in its labeling and on its packaging.
Products with boxed warnings are subject to more restrictive advertising regulations than products without such warnings. These
restrictions could make it more difficult to market any product candidate effectively. Accordingly, assuming we, or our collaborators,
receive marketing approval for one or more of our product candidates, we, and our collaborators expect to continue to expend time,
money and effort in all areas of regulatory compliance.
Any of our products and product candidates for which
we, or our collaborators, obtain marketing approval in the future could be subject to post-marketing restrictions or withdrawal
from the market and we, and our collaborators, may be subject to substantial penalties if we, or they, fail to comply with regulatory
requirements or if we, or they, experience unanticipated problems with our products following approval.
Any of our approved products and product candidates for which
we, or our collaborators, obtain marketing approval, as well as the manufacturing processes, post approval studies and measures,
labeling, advertising and promotional activities for such products, among other things, are or will be subject to continual requirements
of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing
information and reports, registration and listing requirements, requirements relating to manufacturing, quality control, quality
assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians
and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on
the indicated uses for which the product may be marketed or to the conditions of approval, including the FDA requirement to implement
a REMS to ensure that the benefits of a drug or biological product outweigh its risks.
The FDA may also impose requirements for costly post-marketing
studies or clinical trials and surveillance to monitor the safety or efficacy of a product. The FDA and other agencies, including
the Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they
are manufactured, marketed and distributed only for the approved indications and in accordance with the provisions of the approved
labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we, or our
collaborators, do not market any of our product candidates for which we, or they, receive marketing approval for only their approved
indications, we, or they, may be subject to warnings or enforcement action for off-label marketing. Violation of the FDCA and other
statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations
or allegations of violations of federal and state health care fraud and abuse laws and state consumer protection laws.
If we do not achieve our projected development and commercialization
goals in the timeframes we announce and expect, the commercialization of our product candidates may be delayed, and our business
will be harmed.
We sometimes estimate for planning purposes the timing of the
accomplishment of various scientific, clinical, regulatory and other product development objectives. These milestones may include
our expectations regarding the commencement or completion of scientific studies and clinical trials, the submission of regulatory
filings, or commercialization objectives. From time to time, we may publicly announce the expected timing of some of these milestones,
such as the initiation or completion of an ongoing clinical trial, the initiation of other clinical programs, receipt of marketing
approval, or a commercial launch of a product. The achievement of many of these milestones may be outside of our control. All of
such milestones are based on a variety of assumptions which may cause the timing of achievement of the milestones to vary considerably
from our estimates, including:
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our available capital resources or capital constraints we experience;
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the rate of progress, costs and results of our clinical trials and research and development activities, including the extent of scheduling conflicts with participating clinicians and collaborators, and our ability to identify and enroll patients who meet clinical trial eligibility criteria;
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our receipt of approvals from the FDA and other regulatory agencies and the timing thereof;
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other actions, decisions or rules issued by regulators;
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our ability to access sufficient, reliable and affordable supplies of compounds used in the manufacture of our product candidates;
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the efforts of our collaborators with respect to the commercialization of our products; and
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the securing of, costs related to, and timing issues associated with, product manufacturing as well as sales and marketing activities.
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If we fail to achieve announced milestones in the timeframes
we announce and expect, the commercialization of our product candidates may be delayed and our business, prospects and results
of operations may be harmed.
We rely on third parties to conduct our clinical trials
and perform data collection and analysis, which may result in costs and delays that prevent us from successfully commercializing
product candidates.
We rely, and will rely in the future, on medical institutions,
clinical investigators, contract research organizations, contract laboratories, and collaborators to perform data collection and
analysis and others to carry out our clinical trials. Our development activities or clinical trials conducted in reliance on third
parties may be delayed, suspended, or terminated if:
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the third parties do not successfully carry out their contractual duties or fail to meet regulatory obligations or expected deadlines;
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we replace a third party; or
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the quality or accuracy of the data obtained by third parties is compromised due to their failure to adhere to clinical protocols, regulatory requirements, or for other reasons.
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Third party performance failures may increase our development
costs, delay our ability to obtain regulatory approval, and delay or prevent the commercialization of our product candidates. While
we believe that there are numerous alternative sources to provide these services, in the event that we seek such alternative sources,
we may not be able to enter into replacement arrangements without incurring delays or additional costs.
Even if collaborators with which we contract in the
future successfully complete clinical trials of our product candidates, those product candidates may not be commercialized successfully
for other reasons.
Even if we contract with collaborators that successfully complete
clinical trials for one or more of our product candidates, those candidates may not be commercialized for other reasons, including:
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failure to receive regulatory clearances required to market them as drugs;
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being subject to proprietary rights held by others;
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being difficult or expensive to manufacture on a commercial scale;
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having adverse side effects that make their use less desirable; or
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failing to compete effectively with products or treatments commercialized by competitors.
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Any third-party manufacturers we engage are subject
to various governmental regulations, and we may incur significant expenses to comply with, and experience delays in, our product
commercialization as a result of these regulations.
The manufacturing processes and facilities of third-party manufacturers
we have engaged for our current approved products are, and any future third-party manufacturer will be, required to comply with
the federal Quality System Regulation, or QSR, which covers procedures and documentation of the design, testing, production, control,
quality assurance, labeling, packaging, sterilization, storage and shipping of devices. The FDA enforces the QSR through periodic
unannounced inspections of manufacturing facilities. Any inspection by the FDA could lead to additional compliance requests that
could cause delays in our product commercialization. Failure to comply with applicable FDA requirements, or later discovery of
previously unknown problems with the manufacturing processes and facilities of third-party manufacturers we engage, including the
failure to take satisfactory corrective actions in response to an adverse QSR inspection, can result in, among other things:
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administrative or judicially imposed sanctions;
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injunctions or the imposition of civil penalties;
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recall or seizure of the product in question;
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total or partial suspension of production or distribution;
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the FDA’s refusal to grant pending future clearance or pre-market approval;
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withdrawal or suspension of marketing clearances or approvals;
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refusal to permit the export of the product in question; and
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Any of these actions, in combination or alone, could prevent
us from marketing, distributing or selling our products, and would likely harm our business.
In addition, a product defect or regulatory violation could
lead to a government-mandated or voluntary recall by us. We believe the FDA would request that we initiate a voluntary recall if
a product was defective or presented a risk of injury or gross deception. Regulatory agencies in other countries have similar authority
to recall drugs or devices because of material deficiencies or defects in design or manufacture that could endanger health. Any
recall would divert our management attention and financial resources, expose us to product liability or other claims, and harm
our reputation with customers.
We face substantial competition from companies with
considerably more resources and experience than we have, which may result in others discovering, developing, receiving approval
for, or commercializing products before or more successfully than us.
We compete with companies that design, manufacture and market
already-existing and new urology products. We anticipate that we will face increased competition in the future as new companies
enter the market with new technologies and/or our competitors improve their current products. One or more of our competitors may
offer technology superior to ours and render our technology obsolete or uneconomical. Most of our current competitors, as well
as many of our potential competitors, have greater name recognition, more substantial intellectual property portfolios, longer
operating histories, significantly greater resources to invest in new technologies, more substantial experience in product marketing
and new product development, greater regulatory expertise, more extensive manufacturing capabilities and the distribution channels
to deliver products to customers. If we are not able to compete successfully, we may not generate sufficient revenue to become
profitable. Our ability to compete successfully will depend largely on our ability to:
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expand the market for our approved products, especially Natesto, ProstaScint and Primsol;
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successfully commercialize our product candidates alone or with commercial partners;
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discover and develop product candidates that are superior to other products in the market;
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obtain required regulatory approvals;
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attract and retain qualified personnel; and
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obtain patent and/or other proprietary protection for our product candidates.
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Established pharmaceutical companies devote significant financial
resources to discovering, developing or licensing novel compounds that could make our products and product candidates obsolete.
Our competitors may obtain patent protection, receive FDA approval, and commercialize medicines before us. Other companies are
or may become engaged in the discovery of compounds that may compete with the product candidates we are developing.
Natesto competes in a large, growing market. The U.S. prescription
testosterone market is comprised primarily of topically applied treatments in the form of gels, solutions, and patches. Testopel®
and Aveed®, injectable products typically implanted directly under the skin by a physician, are also FDA-approved. AndroGel
is the market-leading TRT and is marketed by AbbVie.
For the MiOXSYS System and ProstaScint, we compete with companies
that design, manufacture and market already existing and new in-vitro diagnostics and diagnostic imaging systems and radio-imaging
agents for cancer detection. Additionally, with respect to Primsol, we compete with numerous companies who produce antimicrobial
treatments for various pathogens inclusive of products containing trimethoprim as contained in Primsol. There are any number of
antibiotics available on the market that could compete with Primsol. Even though Primsol is the only FDA-approved liquid formulation
of trimethoprim, an antibiotic that is well established in current guidelines for treating UTIs, we may not be able to effectively
compete with these existing antibiotics.
We anticipate that we will face increased competition in the
future as new companies enter the market with new technologies and our competitors improve their current products. One or more
of our competitors may offer technology superior to ours and render our technology obsolete or uneconomical. Most of our current
competitors, as well as many of our potential competitors, have greater name recognition, more substantial intellectual property
portfolios, longer operating histories, significantly greater resources to invest in new technologies, more substantial experience
in new product development, greater regulatory expertise, more extensive manufacturing capabilities and the distribution channels
to deliver products to customers. If we are not able to compete successfully, we may not generate sufficient revenue to become
profitable.
Any new product we develop or commercialize that competes with
a currently-approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and/or safety in order
to address price competition and be commercially successful. If we are not able to compete effectively against our current and
future competitors, our business will not grow and our financial condition and operations will suffer.
Government restrictions on pricing and reimbursement,
as well as other healthcare payor cost-containment initiatives, may negatively impact our ability to generate revenues.
The continuing efforts of the government, insurance companies,
managed care organizations and other payors of health care costs to contain or reduce costs of health care may adversely affect
one or more of the following:
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our or our collaborators’ ability to set a price we believe is fair for our approved products;
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our ability to generate revenue from our approved products and achieve profitability; and
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the availability of capital.
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The 2010 enactments of the Patient Protection and Affordable
Care Act, or PPACA, and the Health Care and Education Reconciliation Act, or the Health Care Reconciliation Act, are expected to
significantly impact the provision of, and payment for, health care in the United States. Various provisions of these laws have
only recently taken effect or have yet to take effect, and are designed to expand Medicaid eligibility, subsidize insurance premiums,
provide incentives for businesses to provide health care benefits, prohibit denials of coverage due to pre-existing conditions,
establish health insurance exchanges, and provide additional support for medical research. Amendments to the PPACA and/or the Health
Care Reconciliation Act, as well as new legislative proposals to reform healthcare and government insurance programs, along with
the trend toward managed healthcare in the United States, could influence the purchase of medicines and medical devices and reduce
demand and prices for our products and product candidates, if approved. This could harm our or our collaborators’ ability
to market any approved products and generate revenues. As we expect to receive significant revenues from reimbursement of our Natesto,
ProstaScint and Primsol products by commercial third-party payors and government payors, cost containment measures that health
care payors and providers are instituting and the effect of further health care reform could significantly reduce potential revenues
from the sale of any of our products and product candidates approved in the future, and could cause an increase in our compliance,
manufacturing, or other operating expenses. In addition, in certain foreign markets, the pricing of prescription drugs and devices
is subject to government control and reimbursement may in some cases be unavailable. We believe that pricing pressures at the federal
and state level, as well as internationally, will continue and may increase, which may make it difficult for us to sell any approved
product at a price acceptable to us or any of our future collaborators.
In addition, in some foreign countries, the proposed pricing
for a drug or medical device must be approved before it may be lawfully marketed. The requirements governing pricing vary widely
from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal
products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products
for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct
or indirect controls on the profitability of the company placing the medicinal product on the market. A member state may require
that physicians prescribe the generic version of a drug instead of our approved branded product. There can be no assurance that
any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement
and pricing arrangements for any of our products or product candidates. Historically, pharmaceutical products launched in the European
Union do not follow price structures of the United States and generally tend to have significantly lower prices.
Our financial results will depend on the acceptance
among hospitals, third-party payors and the medical community of our products and product candidates.
Our future success depends on the acceptance by our target customers,
third-party payors and the medical community that our products and product candidates are reliable, safe and cost-effective. Many
factors may affect the market acceptance and commercial success of our products and product candidates, including:
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our ability to convince our potential customers of the advantages and economic value our products and product candidates over existing technologies and products;
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the relative convenience and ease of our products and product candidates over existing technologies and products;
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the introduction of new technologies and competing products that may make our products and product candidates less attractive for our target customers;
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our success in training medical personnel on the proper use of our products and product candidates;
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the willingness of third-party payors to reimburse our target customers that adopt our products and product candidates;
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the acceptance in the medical community of our products and product candidates;
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the extent and success of our marketing and sales efforts; and
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general economic conditions.
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If third-party payors do not reimburse our customers
for the products we sell or if reimbursement levels are set too low for us to sell one or more of our products at a profit, our
ability to sell those products and our results of operations will be harmed.
While Natesto, ProstaScint and Primsol are already FDA-approved
and generating revenues in the U.S., they may not receive, or continue to receive, physician or hospital acceptance, or they may
not maintain adequate reimbursement from third party payors. Additionally, even if one of our product candidates is approved and
reaches the market, the product may not achieve physician or hospital acceptance, or it may not obtain adequate reimbursement from
third party payors. We expect to sell our Primsol products and possibly other product candidates to target customers substantially
all of whom receive reimbursement for the health care services they provide to their patients from third-party payors, such as
Medicare, Medicaid, other domestic and foreign government programs, private insurance plans and managed care programs. Reimbursement
decisions by particular third-party payors depend upon a number of factors, including each third-party payor’s determination
that use of a product is:
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a covered benefit under its health plan;
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appropriate and medically necessary for the specific indication;
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neither experimental nor investigational.
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Third-party payors may deny reimbursement for covered products
if they determine that a medical product was not used in accordance with cost-effective diagnosis methods, as determined by the
third-party payor, or was used for an unapproved indication. Third-party payors also may refuse to reimburse for procedures and
devices deemed to be experimental.
Obtaining coverage and reimbursement approval for a product
from each government or third-party payor is a time consuming and costly process that could require us to provide supporting scientific,
clinical and cost-effectiveness data for the use of our potential product to each government or third-party payor. We may not be
able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. In addition, eligibility for coverage
does not imply that any product will be covered and reimbursed in all cases or reimbursed at a rate that allows our potential customers
to make a profit or even cover their costs.
Third-party payors are increasingly attempting to contain health
care costs by limiting both coverage and the level of reimbursement for medical products and services. Levels of reimbursement
may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect
the demand for and reimbursement available for any product or product candidate, which in turn, could negatively impact pricing.
If our customers are not adequately reimbursed for our products, they may reduce or discontinue purchases of our products, which
would result in a significant shortfall in achieving revenue expectations and negatively impact our business, prospects and financial
condition.
Manufacturing risks and inefficiencies may adversely
affect our ability to produce our products.
As part of the acquisition of ProstaScint from Jazz
Pharmaceuticals, we terminated the relationship with the third-party manufacturer of ProstaScint. We have initiated the
process of transferring the manufacturing to Biovest International, which we believe is a qualified manufacturer and with
whom we have entered into a Master Services Agreement although this contract is currently on hold as we evaluate our
strategic options for the ProstaScint product. In the event that this manufacturing transfer does not occur or we do
not find a replacement manufacturer by the time our current inventory expires, which could adversely impact our
continued sales of ProstaScint or its disposition should we elect to do so, we may not be able to supply sufficient
quantities and on a timely basis, while maintaining product quality, acceptable manufacturing costs and complying with
regulatory requirements, such as quality system regulations. In addition, we expect to engage third parties to manufacture
components of the MiOXSYS and RedoxSYS systems. We have an agreement for supplies of Natesto with Acerus, from whom we
license Natesto, and have entered into a supply agreement for Primsol with the same manufacturer used by FSC Laboratories,
from whom we purchased Primsol. For any future product, we expect to use third-party manufacturers because we do not have our
own manufacturing capabilities. In determining the required quantities of any product and the manufacturing schedule, we must
make significant judgments and estimates based on inventory levels, current market trends and other related factors. Because
of the inherent nature of estimates and our limited experience in marketing our current products, there could be significant
differences between our estimates and the actual amounts of product we require. If we do not effectively maintain our supply
agreements for Natesto and Primsol, we will face difficulty finding replacement suppliers, which could harm sales of those
products. If we do not effectively transition sites with our manufacturing and development partners to enable to
production scale of ProstaScint, or if we do not secure collaborations with manufacturing and development partners to enable
production to scale of the MiOXSYS system, we may not be successful in selling ProstaScint or in commercializing the MiOXSYS
system in the event we receive regulatory approval of the MiOXSYS System. If we fail in similar endeavors for future
products, we may not be successful in establishing or continuing the commercialization of our products and product
candidates.
Reliance on third-party manufacturers entails risks to which
we would not be subject if we manufactured these components ourselves, including:
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reliance on third parties for regulatory compliance and quality assurance;
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possible breaches of manufacturing agreements by the third parties because of factors beyond our control;
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possible regulatory violations or manufacturing problems experienced by our suppliers; and
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possible termination or non-renewal of agreements by third parties, based on their own business priorities, at times that are costly or inconvenient for us.
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Further, if we are unable to secure the needed financing to
fund our internal operations, we may not have adequate resources required to effectively and rapidly transition our third party
manufacturing. We may not be able to meet the demand for our products if one or more of any third-party manufacturers is unable
to supply us with the necessary components that meet our specifications. It may be difficult to find alternate suppliers for any
of our products or product candidates in a timely manner and on terms acceptable to us.
Any third-party manufacturers we engage are subject
to various governmental regulations, and we may incur significant expenses to comply with, and experience delays in, our product
commercialization as a result of these regulations.
The manufacturing processes and facilities of third-party manufacturers
we engage are required to comply with the federal Quality System Regulation, or QSR, which covers procedures and documentation
of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of devices.
The FDA enforces the QSR through periodic unannounced inspections of manufacturing facilities. Any inspection by the FDA could
lead to additional compliance requests that could cause delays in our product commercialization. Failure to comply with applicable
FDA requirements, or later discovery of previously unknown problems with the manufacturing processes and facilities of third-party
manufacturers we engage, including the failure to take satisfactory corrective actions in response to an adverse QSR inspection,
can result in, among other things:
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administrative or judicially imposed sanctions;
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injunctions or the imposition of civil penalties;
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recall or seizure of the product in question;
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total or partial suspension of production or distribution;
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the FDA’s refusal to grant pending future clearance or pre-market approval;
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withdrawal or suspension of marketing clearances or approvals;
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refusal to permit the export of the product in question; and
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Any of these actions, in combination or alone, could prevent
us from marketing, distributing or selling our products, and would likely harm our business.
In addition, a product defect or regulatory violation could
lead to a government-mandated or voluntary recall by us. We believe the FDA would request that we initiate a voluntary recall if
a product was defective or presented a risk of injury or gross deception. Regulatory agencies in other countries have similar authority
to recall drugs or devices because of material deficiencies or defects in design or manufacture that could endanger health. Any
recall would divert our management attention and financial resources, expose us to product liability or other claims, and harm
our reputation with customers.
Our future growth depends, in part, on our ability to
penetrate foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.
Our future profitability will depend, in part, on our ability
to commercialize our products and product candidates in foreign markets for which we intend to primarily rely on collaboration
with third parties. If we commercialize our products or product candidates in foreign markets, we would be subject to additional
risks and uncertainties, including:
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our inability to directly control commercial activities because we are relying on third parties;
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the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;
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different medical practices and customs in foreign countries affecting acceptance in the marketplace;
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import or export licensing requirements;
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longer accounts receivable collection times;
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longer lead times for shipping;
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language barriers for technical training;
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reduced protection of intellectual property rights in some foreign countries, and related prevalence of generic alternatives to our products;
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foreign currency exchange rate fluctuations;
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our customers’ ability to obtain reimbursement for our products in foreign markets; and
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the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
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Foreign sales of our products or product candidates could also
be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions and changes
in tariffs.
We are subject to various regulations pertaining to
the marketing of our approved products.
We are subject to various federal and state laws pertaining
to healthcare fraud and abuse, including prohibitions on the offer of payment or acceptance of kickbacks or other remuneration
for the purchase of our products, including inducements to potential patients to request our products and services. Additionally,
any product promotion educational activities, support of continuing medical education programs, and other interactions with health-care
professionals must be conducted in a manner consistent with the FDA regulations and the Anti-Kickback Statute. The Anti-Kickback
Statute prohibits persons or entities from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly
or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service,
for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Violations of the
Anti-Kickback Statute can also carry potential federal False Claims Act liability. Additionally, many states have adopted laws
similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare items or services
reimbursed by any third party payer, not only the Medicare and Medicaid programs, and do not contain identical safe harbors. These
and any new regulations or requirements may be difficult and expensive for us to comply with, may adversely impact the marketing
of our existing products or delay introduction of our product candidates, which may have a material adverse effect on our business,
operating results and financial condition.
Our products and product candidates may cause undesirable
side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result
in significant negative consequences following marketing approval, if any.
Undesirable side effects caused by our product candidates could
cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or
the delay or denial of regulatory approval by the FDA or other regulatory authorities.
Further, if a product candidate receives marketing approval
and we or others identify undesirable side effects caused by the product after the approval, or if drug abuse is determined to
be a significant problem with an approved product, a number of potentially significant negative consequences could result, including:
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regulatory authorities may withdraw or limit their approval of the product;
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regulatory authorities may require the addition of labeling statements, such as a “Black Box warning” or a contraindication;
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we may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of the product;
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we may decide to remove the product from the marketplace;
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we could be sued and held liable for injury caused to individuals exposed to or taking the product; and
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our reputation may suffer.
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Any of these events could prevent us from achieving or maintaining
market acceptance of the affected product candidate and could substantially increase the costs of commercializing an affected product
or product candidates and significantly impact our ability to successfully commercialize or maintain sales of our product or product
candidates and generate revenues.
Natesto contains, and future our other product candidates
may contain, controlled substances, the manufacture, use, sale, importation, exportation, prescribing and distribution of which
are subject to regulation by the DEA.
Natesto, which is approved by the FDA, is regulated by the DEA
as a Schedule III controlled substance. Before any commercialization of any product candidate that contains a controlled substance,
the DEA will need to determine the controlled substance schedule, taking into account the recommendation of the FDA. This may be
a lengthy process that could delay our marketing of a product candidate and could potentially diminish any regulatory exclusivity
periods for which we may be eligible. Natesto is, and our other product candidates may, if approved, be regulated as “controlled
substances” as defined in the Controlled Substances Act of 1970, or CSA, and the implementing regulations of the DEA, which
establish registration, security, recordkeeping, reporting, storage, distribution, importation, exportation, inventory, quota and
other requirements administered by the DEA. These requirements are applicable to us, to our third-party manufacturers and to distributors,
prescribers and dispensers of our product candidates. The DEA regulates the handling of controlled substances through a closed
chain of distribution. This control extends to the equipment and raw materials used in their manufacture and packaging, in order
to prevent loss and diversion into illicit channels of commerce. A number of states and foreign countries also independently regulate
these drugs as controlled substances.
The DEA regulates controlled substances as Schedule I, II, III,
IV or V substances. Schedule I substances by definition have no established medicinal use, and may not be marketed or sold in the
United States. A pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present
the highest risk of abuse and Schedule V substances the lowest relative risk of abuse among such substances.
Natesto is regulated by the DEA as a Schedule III controlled
substance. Consequently, the manufacturing, shipping, storing, selling and using of the products will be subject to a high degree
of regulation. Also, distribution, prescribing and dispensing of these drugs are highly regulated.
Annual registration is required for any facility that manufactures,
distributes, dispenses, imports or exports any controlled substance. The registration is specific to the particular location, activity
and controlled substance schedule.
Because of their restrictive nature, these laws and regulations
could limit commercialization of our product candidates containing controlled substances. Failure to comply with these laws and
regulations could also result in withdrawal of our DEA registrations, disruption in manufacturing and distribution activities,
consent decrees, criminal and civil penalties and state actions, among other consequences.
If testosterone replacement therapies are found, or
are perceived, to create health risks, our ability to sell Natesto could be materially adversely affected and our business could
be harmed.
Recent publications have suggested potential health risks associated
with testosterone replacement therapy, such as increased cardiovascular disease risk, including increased risk of heart attack
or stroke, fluid retention, sleep apnea, breast tenderness or enlargement, increased red blood cells, development of clinical prostate
disease, including prostate cancer, and the suppression of sperm production. Prompted by these events, the FDA held a T-class Advisory
Committee meeting on September 17, 2014 to discuss this topic further. The FDA has also asked health care professionals and patients
to report side effects involving prescription testosterone products to the agency.
At the T-class Advisory Committee meeting held on September
17, 2014, the Advisory Committee discussed (i) the identification of the appropriate patient population for whom testosterone replacement
therapy should be indicated and (ii) the potential risk of major adverse cardiovascular events, defined as non-fatal stroke, non-fatal
myocardial infarction and cardiovascular death associated with testosterone replacement therapy.
At the meeting, the Advisory Committee voted that the FDA should
require sponsors of testosterone products to conduct a post marketing study (e.g. observational study or controlled clinical trial)
to further assess the potential cardiovascular risk.
It is possible that the FDA’s evaluation of this topic
and further studies on the effects of testosterone replacement therapies could demonstrate the risk of major adverse cardiovascular
events or other health risks or could impose requirements that impact the marketing and sale of Natesto, including:
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mandate that certain warnings or precautions be included in our product labeling;
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require that our product carry a “black box warning”; and
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limit use of Natesto to certain populations, such as men without specified conditions.
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Demonstrated testosterone replacement therapy safety risks,
as well as negative publicity about the risks of hormone replacement therapy, including testosterone replacement, could hurt sales
of and impair our ability to successfully relaunch Natesto, which could have a materially adverse impact on our business.
FDA action regarding testosterone replacement therapies
could add to the cost of producing and marketing Natesto.
The FDA is requiring post-marketing safety studies for all testosterone
replacement therapies approved in the U.S. to assess long-term cardiovascular events related to testosterone use. Depending on
the total cost and structure of the FDA’s proposed safety studies there may be a substantial cost associated with conducting
these studies. Pursuant to our license agreement with Acerus Pharmaceuticals is, Acerus is obligated to reimburse us for the entire
cost of any studies required for Natesto by the FDA. However, in the event that Acerus is not able to reimburse us for the cost
of any required safety studies, we may be forced to incur this cost, which could have a material adverse impact on our business
and results of operations.
Our approved products may not be accepted by physicians,
patients, or the medical community in general.
Even if the medical community accepts a product as safe and
efficacious for its indicated use, physicians may choose to restrict the use of the product if we or any collaborator is unable
to demonstrate that, based on experience, clinical data, side-effect profiles and other factors, our product is preferable to any
existing medicines or treatments. We cannot predict the degree of market acceptance of any of our approved products, which will
depend on a number of factors, including, but not limited to:
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the efficacy and safety of the product;
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the approved labeling for the product and any required warnings;
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the advantages and disadvantages of the product compared to alternative treatments;
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our and any collaborator’s ability to educate the medical community about the safety and effectiveness of the product;
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the reimbursement policies of government and third-party payors pertaining to the product; and
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the market price of our product relative to competing treatments.
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We may use hazardous chemicals and biological materials
in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.
Our research and development processes may involve the controlled
use of hazardous materials, including chemicals and biological materials. We cannot eliminate the risk of accidental contamination
or discharge and any resultant injury from these materials. We may be sued for any injury or contamination that results from our
use or the use by third parties of these materials, and our liability may exceed any insurance coverage and our total assets. Federal,
state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous materials and
specified waste products, as well as the discharge of pollutants into the environment and human health and safety matters. Compliance
with environmental laws and regulations may be expensive and may impair our research and development efforts. If we fail to comply
with these requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-up costs or capital
expenditures for control equipment or operational changes necessary to achieve and maintain compliance. In addition, we cannot
predict the impact on our business of new or amended environmental laws or regulations or any changes in the way existing and future
laws and regulations are interpreted and enforced.
Intellectual Property Risks Related
to Our Business
Our ability to compete may decline if we do not adequately
protect our proprietary rights or if we are barred by the patent rights of others.
Our commercial success depends on obtaining and maintaining
proprietary rights to our products and product candidates as well as successfully defending these rights against third-party challenges.
We will only be able to protect our products and product candidates from unauthorized use by third parties to the extent that valid
and enforceable patents, or effectively protected trade secrets, cover them. Our ability to obtain patent protection for our products
and product candidates is uncertain due to a number of factors, including that:
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we may not have been the first to make the inventions covered by pending patent applications or issued patents;
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we may not have been the first to file patent applications for our products and product candidates;
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others may independently develop identical, similar or alternative products, compositions or devices and uses thereof;
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our disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability;
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any or all of our pending patent applications may not result in issued patents;
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we may not seek or obtain patent protection in countries that may eventually provide us a significant business opportunity;
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any patents issued to us may not provide a basis for commercially viable products, may not provide any competitive advantages, or may be successfully challenged by third parties;
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our compositions, devices and methods may not be patentable;
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others may design around our patent claims to produce competitive products which fall outside of the scope of our patents; or
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others may identify prior art or other bases which could invalidate our patents.
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Even if we have or obtain patents covering our products and
product candidates, we may still be barred from making, using and selling them because of the patent rights of others. Others may
have filed, and in the future may file, patent applications covering products that are similar or identical to ours. There are
many issued U.S. and foreign patents relating to chemical compounds, therapeutic products, diagnostic devices, and some of these
relate to our products and product candidates. These could materially affect our ability to sell our products and develop our product
candidates. Because patent applications can take many years to issue, there may be currently pending applications unknown to us
that may later result in issued patents that our products and product candidates may infringe. These patent applications may have
priority over patent applications filed by us.
Obtaining and maintaining a patent portfolio entails significant
expense and resources. Part of the expense includes periodic maintenance fees, renewal fees, annuity fees, various other governmental
fees on patents and/or applications due in several stages over the lifetime of patents and/or applications, as well as the cost
associated with complying with numerous procedural provisions during the patent application process. We may or may not choose to
pursue or maintain protection for particular inventions. In addition, there are situations in which failure to make certain payments
or noncompliance with certain requirements in the patent process can result in abandonment or lapse of a patent or patent application,
resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we choose to forgo patent protection or
allow a patent application or patent to lapse purposefully or inadvertently, our competitive position could suffer.
Legal actions to enforce our patent rights can be expensive
and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could
also result in the invalidation of our patents or a finding that they are unenforceable. We may or may not choose to pursue litigation
or other actions against those that have infringed on our patents, or used them without authorization, due to the associated expense
and time commitment of monitoring these activities. If we fail to protect or to enforce our intellectual property rights successfully,
our competitive position could suffer, which could harm our business, prospects, financial condition and results of operations.
Pharmaceutical and medical device patents and patent
applications involve highly complex legal and factual questions, which, if determined adversely to us, could negatively impact
our patent position.
The patent positions of pharmaceutical and medical device companies
can be highly uncertain and involve complex legal and factual questions. The interpretation and breadth of claims allowed in some
patents covering pharmaceutical compositions may be uncertain and difficult to determine, and are often affected materially by
the facts and circumstances that pertain to the patented compositions and the related patent claims. The standards of the United
States Patent and Trademark Office, or USPTO, are sometimes uncertain and could change in the future. Consequently, the issuance
and scope of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. U.S.
patents and patent applications may also be subject to interference proceedings, and U.S. patents may be subject to re-examination
proceedings, post-grant review and/or inter partes review in the USPTO. Foreign patents may be subject to opposition or comparable
proceedings in the corresponding foreign patent office, which could result in either loss of the patent or denial of the patent
application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such
interference, re-examination, post-grant review, inter partes review and opposition proceedings may be costly. Accordingly, rights
under any issued patents may not provide us with sufficient protection against competitive products or processes.
In addition, changes in or different interpretations of patent
laws in the United States and foreign countries may permit others to use our discoveries or to develop and commercialize our technology
and products and product candidates without providing any compensation to us, or may limit the number of patents or claims we can
obtain. The laws of some countries do not protect intellectual property rights to the same extent as U.S. laws and those countries
may lack adequate rules and procedures for defending our intellectual property rights.
If we fail to obtain and maintain patent protection and trade
secret protection of our products and product candidates, we could lose our competitive advantage and competition we face would
increase, reducing any potential revenues and adversely affecting our ability to attain or maintain profitability.
Developments in patent law could have a negative impact
on our business.
From time to time, the United States Supreme Court, other federal
courts, the United States Congress or the USPTO may change the standards of patentability and any such changes could have a negative
impact on our business.
In addition, the Leahy-Smith America Invents Act, or the America
Invents Act, which was signed into law in 2011, includes a number of significant changes to U.S. patent law. These changes include
a transition from a “first-to-invent” system to a “first-to-file” system, changes the way issued patents
are challenged, and changes the way patent applications are disputed during the examination process. These changes may favor larger
and more established companies that have greater resources to devote to patent application filing and prosecution. The USPTO has
developed regulations and procedures to govern the full implementation of the America Invents Act, and many of the substantive
changes to patent law associated with the America Invents Act, and, in particular, the first-to-file provisions, became effective
on March 16, 2013. Substantive changes to patent law associated with the America Invents Act may affect our ability to obtain patents,
and if obtained, to enforce or defend them. Accordingly, it is not clear what, if any, impact the America Invents Act will ultimately
have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability
to enforce or defend any patents that may issue from our patent applications, all of which could have a material adverse effect
on our business.
If we are unable to protect the confidentiality of our
trade secrets, our business and competitive position would be harmed.
In addition to patent protection, because we operate in the
highly technical field of discovery and development of therapies and medical devices, we rely in part on trade secret protection
in order to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We expect to enter
into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific and commercial
collaborators, sponsored researchers, and other advisors. These agreements generally require that the other party keep confidential
and not disclose to third parties all confidential information developed by the party or made known to the party by us during the
course of the party’s relationship with us. These agreements also generally provide that inventions conceived by the party
in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may
not effectively assign intellectual property rights to us.
In addition to contractual measures, we try to protect the confidential
nature of our proprietary information using physical and technological security measures. Such measures may not, for example, in
the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection
for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade
secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to
protect our interests fully. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult,
expensive, and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing
to protect trade secrets. Trade secrets may be independently developed by others in a manner that could prevent legal recourse
by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated,
or if any such information was independently developed by a competitor, our competitive position could be harmed.
We may not be able to enforce our intellectual property
rights throughout the world.
The laws of some foreign countries do not protect intellectual
property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting
and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly
developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating
to pharmaceuticals and medical devices. This could make it difficult for us to stop the infringement of some of our patents, if
obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory
licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability
of patents against third parties, including government agencies or government contractors. In these countries, patents may provide
limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming
process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not
have the benefit of patent protection in such countries.
Proceedings to enforce our patent rights in foreign jurisdictions
could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts
to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions
by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and
the enforcement of intellectual property.
Third parties may assert ownership or commercial rights
to inventions we develop.
Third parties may in the future make claims challenging the
inventorship or ownership of our intellectual property. We have or expect to have written agreements with collaborators that provide
for the ownership of intellectual property arising from our collaborations. These agreements provide that we must negotiate certain
commercial rights with collaborators with respect to joint inventions or inventions made by our collaborators that arise from the
results of the collaboration. In some instances, there may not be adequate written provisions to address clearly the resolution
of intellectual property rights that may arise from a collaboration. If we cannot successfully negotiate sufficient ownership and
commercial rights to the inventions that result from our use of a third-party collaborator’s materials where required, or
if disputes otherwise arise with respect to the intellectual property developed with the use of a collaborator’s samples,
we may be limited in our ability to capitalize on the market potential of these inventions. In addition, we may face claims by
third parties that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to
us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership
disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial
value of such inventions. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be
precluded from using certain intellectual property, or may lose our exclusive rights in that intellectual property. Either outcome
could have an adverse impact on our business.
Third parties may assert that our employees or consultants
have wrongfully used or disclosed confidential information or misappropriated trade secrets.
We might employ individuals who were previously employed at
universities or other biopharmaceutical or medical device companies, including our competitors or potential competitors. Although
we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work
for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise
used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other
third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition
to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending
against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
A dispute concerning the infringement or misappropriation
of our proprietary rights or the proprietary rights of others could be time consuming and costly, and an unfavorable outcome could
harm our business.
There is significant litigation in the pharmaceutical and medical
device industries regarding patent and other intellectual property rights. While we are not currently subject to any pending intellectual
property litigation, and are not aware of any such threatened litigation, we may be exposed to future litigation by third parties
based on claims that our products or product candidates infringe the intellectual property rights of others. If our development
and commercialization activities are found to infringe any such patents, we may have to pay significant damages or seek licenses
to such patents. A patentee could prevent us from using the patented drugs, compositions or devices. We may need to resort to litigation
to enforce a patent issued to us, to protect our trade secrets, or to determine the scope and validity of third-party proprietary
rights. From time to time, we may hire scientific personnel or consultants formerly employed by other companies involved in one
or more areas similar to the activities conducted by us. Either we or these individuals may be subject to allegations of trade
secret misappropriation or other similar claims as a result of prior affiliations. If we become involved in litigation, it could
consume a substantial portion of our managerial and financial resources, regardless of whether we win or lose. We may not be able
to afford the costs of litigation. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims
could have a material adverse impact on our cash position and stock price. Any legal action against us or our collaborators could
lead to:
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payment of damages, potentially treble damages, if we are found to have willfully infringed a party’s patent rights;
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injunctive or other equitable relief that may effectively block our ability to further develop, commercialize, and sell products;
or
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we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms,
if at all, all of which could have a material adverse impact on our cash position and business, prospects and financial condition.
As a result, we could be prevented from commercializing our products and product candidates.
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Risks Related to Our Organization,
Structure and Operation
We intend to acquire, through asset purchases or in-licensing,
businesses or products, or form strategic alliances, in the future, and we may not realize the intended benefits of such acquisitions
or alliances.
We intend to acquire, through asset purchases or in-licensing,
additional businesses or products, form strategic alliances and/or create joint ventures with third parties that we believe will
complement or augment our existing business. If we acquire businesses or assets with promising markets or technologies, we may
not be able to realize the benefit of acquiring such businesses or assets if we are unable to successfully integrate them with
our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing
any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits
or enhancing our business. We cannot assure you that, following any such acquisition or alliance, we will achieve the expected
synergies to justify the transaction. These risks apply to our acquisition of ProstaScint in May 2015, Primsol in October 2015
and Natesto in April 2016. Depending on the success or lack thereof of any of our existing or future acquired products and product
candidates, we might seek to out-license, sell or otherwise dispose of any of those products or product candidates, which could
adversely impact our operations if the dispositions triggers a loss, accounting charge or other negative impact.
In fiscal 2016 and 2015, the great majority of our net
revenue and gross accounts receivable were due to one significant customer, the loss of which could materially and adversely affect
our results of operations.
During fiscal 2016 and fiscal 2015, one customer accounted for
86% and 83%, respectively, of our net revenue. At June 30, 2016 and 2015, this same customer accounted for 69% and 99%, respectively,
of our gross accounts receivable. Although we expect to increase revenue and not be as reliant on this one customer, at least for
fiscal 2017, and perhaps beyond, the loss of this customer could have a material adverse effect on our results of operations.
We will need to develop and expand our company, and
we may encounter difficulties in managing this development and expansion, which could disrupt our operations.
As of December 31, 2016, we had 49 full-time employees, and
in connection with being a public company, we expect to continue to increase our number of employees and the scope of our operations.
To manage our anticipated development and expansion, we must continue to implement and improve our managerial, operational and
financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Also, our management
may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount
of time to managing these development activities. Due to our limited resources, we may not be able to effectively manage the expansion
of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give
rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees.
The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects,
such as the planned expanded commercialization of our approved products and the development of our product candidates. If our management
is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability
to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial
performance and our ability to expand the market for our approved products and develop our product candidates, if approved, and
compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our company.
We depend on key personnel and attracting qualified
management personnel and our business could be harmed if we lose personnel and cannot attract new personnel.
Our success depends to a significant degree upon the technical
and management skills of our officers and key personnel. Although our executive officers Joshua Disbrow and Jarrett Disbrow have
employment agreements, the existence of an employment agreement does not guarantee the retention of the executive officer for
any period of time, and each agreement obligates us to pay the officer lump sum severance (two years’ for Messrs. Disbrow)
if we terminate him without cause, as defined in the agreement, which could hurt our liquidity. The loss of the services of any
of these individuals would likely have a material adverse effect on us. Our success also will depend upon our ability to attract
and retain additional qualified management, marketing, technical, and sales executives and personnel. We do not maintain key person
life insurance for any of our officers or key personnel. The loss of any of our key executives, or the failure to attract, integrate,
motivate, and retain additional key personnel could have a material adverse effect on our business.
We compete for such personnel against numerous companies, including
larger, more established companies with significantly greater financial resources than we possess. There can be no assurance that
we will be successful in attracting or retaining such personnel, and the failure to do so could have a material adverse effect
on our business, prospects, financial condition, and results of operations.
Product liability and other lawsuits could divert our
resources, result in substantial liabilities and reduce the commercial potential of our product candidates.
The risk that we may be sued on product liability claims is
inherent in the development and commercialization of pharmaceutical and medical device products. Side effects of, or manufacturing
defects in, products that we develop and commercialized could result in the deterioration of a patient’s condition, injury
or even death. Once a product is approved for sale and commercialized, the likelihood of product liability lawsuits increases.
Claims may be brought by individuals seeking relief for themselves or by individuals or groups seeking to represent a class. These
lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held
liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forgo further commercialization
of the affected products.
We may be subject to legal or administrative proceedings and
litigation other than product liability lawsuits which may be costly to defend and could materially harm our business, financial
condition and operations.
Although we maintain general liability, clinical trial liability
and product liability insurance, this insurance may not fully cover potential liabilities. In addition, inability to obtain or
maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product or other legal or
administrative liability claims could prevent or inhibit the commercial production and sale of any of our products and product
candidates that receive regulatory approval, which could adversely affect our business. Product liability claims could also harm
our reputation, which may adversely affect our collaborators’ ability to commercialize our products successfully.
In order to satisfy our obligations as a public company,
we may need to hire additional qualified accounting and financial personnel with appropriate public company experience in the event
that we no longer utilize the finance and administrative functions of Ampio.
As a public company, we must establish and maintain effective
disclosure and financial controls. We may need to hire additional accounting and financial personnel with appropriate public company
experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able
to hire appropriate personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment
and the indirect consequences related to the diversion of management resources from product development efforts.
Our internal computer systems, or those of our third-party
contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development
programs.
Despite the implementation of security measures, our internal
computer systems and those of our third-party contractors and consultants are vulnerable to damage from computer viruses, unauthorized
access, natural disasters, terrorism, war and telecommunication and electrical failures. While we do not believe that we have experienced
any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations,
it could result in a loss of clinical trial data for our product candidates which could result in delays in our regulatory approval
efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach
results in a loss of or damage to our data or applications or other data or applications relating to our technology or product
candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further
development of our product candidates could be delayed.
Our ability to use our net operating loss carryforwards
and certain other tax attributes may be limited.
As of June 30, 2016, we had federal net operating loss carryforwards
of approximately $24.8 million. The available net operating losses, if not utilized to offset taxable income in future periods,
will begin to expire in 2032 and will completely expire in 2035. Under the Internal Revenue Code of 1986, as amended (the “Code”)
and the regulations promulgated thereunder, including, without limitation, the consolidated income tax return regulations, various
corporate changes could limit our ability to use our net operating loss carryforwards and other tax attributes (such as research
tax credits) to offset our income. Because Ampio’s equity ownership interest in our company fell to below 80% in January
2016, we will be deconsolidated from Ampio’s consolidated federal income tax group. As a result, certain of our net operating
loss carryforwards may not be available to us and we may not be able to use them to offset our U.S. federal taxable income. As
a consequence of the deconsolidation, it is possible that certain other tax attributes and benefits resulting from U.S. federal
income tax consolidation may no longer be available to us. Our company and Ampio do not have a tax sharing agreement that could
mitigate the loss of net operating losses and other tax attributes resulting from the deconsolidation or our incurrence of liability
for the taxes of other members of the consolidated group by reason of the joint and several liability of group members. In addition
to the deconsolidation risk, an “ownership change” (generally a 50% change (by value) in equity ownership over a three-year
period) under Section 382 of the Code could limit our ability to offset, post-change, our U.S. federal taxable income. Section
382 of the Code imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with
pre-ownership change net operating loss carryforwards and certain recognized built-in losses. Either the deconsolidation or the
ownership change scenario could result in increased future tax liability to us.
Our historical financial information as a business conducted
by Ampio may not be representative of our results as an independent public company.
The historical financial information included herein does not
necessarily reflect what our financial position, operating results or cash flows would have been had we been an independent entity
during the year ended June 30, 2015. The historical costs and expenses reflected in our financial statements include amounts for
certain corporate functions historically provided by Ampio, including costs of finance and other administrative services, and income
taxes. These expense allocations were developed on the basis of what we and Ampio considered to be reasonable prices for the utilization
of services provided or the benefits received by us.
The historical financial information in our audited financial
statements may not be indicative of what our results of operations, financial position, changes in equity and cash flows would
have been had we been a separate stand-alone entity during the periods presented or will be in the future. We have not made adjustments
to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our separation
from Ampio, including changes in our employee base, changes in our tax structure, potential increased costs associated with reduced
economies of scale and increased costs associated with being a publicly traded, stand-alone company, such as compliance costs,
nor have we made offsetting adjustments to reflect the benefits of this offering, as these factors are presently difficult to quantify.
These same risks will apply to the financial information of any business we acquire when it is included in our financial statements.
Risks Related to Securities Markets
and Investment in our Securities
There is a limited trading market for our common stock,
which could make it difficult to liquidate an investment in our common stock, in a timely manner.
Our common stock is currently traded on the OTCQX. Because there
is a limited public market for our common stock, investors may not be able to liquidate their investment whenever desired. We cannot
assure that we will maintain an active trading market for our common stock and the lack of an active public trading market could
mean that investors may be exposed to increased risk. In addition, if we failed to meet the criteria set forth in SEC regulations,
various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers
and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock,
which may further affect its liquidity.
Our ability to uplist our common stock to the NYSE MKT
or NASDAQ is subject to us meeting applicable listing criteria.
We intend to apply for our common stock to be listed on the
NYSE MKT or NASDAQ, each a national securities exchange. Each exchange requires companies desiring to list their common stock to
meet certain listing criteria including total number of stockholders; minimum stock price, total value of public float, and in
some cases total shareholders’ equity and market capitalization. Our failure to meet such applicable listing criteria could
prevent us from listing our common stock on either exchange. In the event we are unable to uplist our common stock, our common
stock will continue to trade on the OTCQX market, which is generally considered less liquid and more volatile than the either exchange.
Our failure to uplist our common stock could make it more difficult for you to trade our common stock shares, could prevent our
common stock trading on a frequent and liquid basis and could result in the value of our common stock being less than it would
be if we were able to uplist.
If we apply and our common stock is accepted for uplisting
on the NYSE MKT or NASDAQ, our failure to meet the continued listing requirements of such exchange could result in a delisting
of our common stock.
If our common stock were to be uplisted on the NYSE MKT or NASDAQ,
and thereafter we fail to satisfy the continued listing requirements of such exchange, such as the corporate governance requirements
or the minimum closing bid price requirement, the exchange may take steps to delist our common stock. Such a delisting would likely
have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when
you wish to do so. In the event of a delisting, we anticipate that we would take actions to restore our compliance with applicable
exchange requirements, such as stabilize our market price, improve the liquidity of our common stock, prevent our common stock
from dropping below such exchange’s minimum bid price requirement, or prevent future non-compliance with such exchange’s
listing requirements.
If we fail to comply with the continued trading standards
of the OTCQX U.S. Premier tier, it may result in our common stock moving tiers in the OTC Markets.
Our common stock is currently quoted for trading on the OTCQX
U.S. Premier tier, and the continued quotation of our common stock on the OTCQX U.S. Premier tier is subject to our compliance
with a number of standards. These standards include the requirement of our common stock to have a minimum bid price of $1.00 per
share as of the close of business for at least one of every thirty consecutive calendar days.
Our principal stockholders and management own a significant
percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
At March 20, 2017, our executive officers, directors and
entities affiliated with certain of our directors beneficially owned approximately 21% of our outstanding shares of common stock.
Therefore, these stockholders have the ability to influence us through their ownership position. These stockholders may be able
to determine the outcome of all matters requiring stockholder approval. For example, these stockholders may be able to control
elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major
corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you
may feel are in your best interest as one of our stockholders.
The sale of shares of our common stock to Lincoln Park
under the Purchase Agreement may cause substantial dilution to our existing stockholders and could cause the price of our common
stock to decline.
We sold $500,000 of common stock to Lincoln Park in July
2016 when we executed the Purchase Agreement. We sold 40,000 shares to Lincoln Park in September 2016 for $131,000 of gross proceeds.
As a result, as of the date of this prospectus, we may sell an aggregate of $9,869,000 of additional shares over the remaining
term of the Purchase Agreement, assuming we continue to meet the conditions required for sale. However, we may not direct Lincoln
Park to purchase any shares of our common stock during the period commencing five business days immediately prior to the filing
of this post-effective amendment to the registration statement (of which this prospectus is a part) and ending on the business
day immediately following the effective date of this post-effective amendment to the registration statement.
After it has acquired shares, Lincoln Park may sell all,
some or none of those shares. Therefore, sales to Lincoln Park by us could result in substantial dilution to the interests of
other holders of our common stock. The sale of a substantial number of shares of our common stock to Lincoln Park, or the anticipation
of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at
a price that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of any sales
of our shares to Lincoln Park, and the Purchase Agreement may be terminated by us at any time at our discretion without any cost
to us.
The registration statement of which this prospectus is a
part is effective only for an aggregate of 1,076,596 shares of our common stock, which may not be sufficient to cover the resale
by Lincoln Park of additional shares of our common stock that we may sell and issue to Lincoln Park. Consequently, we may be required
to file and have declared effective additional registration statements in connection with our Purchase Agreement with Lincoln
Park. In such event, we would not be able to sell any shares to Lincoln Park unless and until such new registration statement
was filed and declared effective.
Future sales and issuances of our equity securities
or rights to purchase our equity securities, including pursuant to equity incentive plans, would result in additional dilution
of the percentage ownership of our stockholders and could cause our stock price to fall.
To the extent we raise additional capital by issuing equity
securities, including pursuant to the Purchase Agreement with Lincoln Park, our stockholders may experience substantial dilution.
We may, as we have in the past, sell common stock, convertible securities or other equity securities in one or more transactions
at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities
in more than one transaction, investors may be further diluted by subsequent sales. Such sales may also result in material dilution
to our existing stockholders, and new investors could gain rights superior to existing stockholders.
Pursuant to our 2015 Stock Plan, following stockholder approval
of an increase in the shares authorized for issuance thereunder at our annual meeting on November 15, 2016, our Board of Directors
is currently authorized to award up to a total of 2,000,000 shares of common stock or options to purchase shares of common stock
to our officers, directors, employees and non-employee consultants. As of December 31, 2016, options to purchase 746,655 shares
of common stock issued under our 2015 Stock Plan at a weighted average exercise price of $3.52 per share were outstanding. In
addition, at December 31, 2016, there were outstanding warrants to purchase an aggregate of 8,711,354 shares of our common stock
at a weighted average exercise price of $2.98, excluding the effects of the exercise of Original Warrants to purchase an aggregate
of 2,991,041 shares pursuant to the tender offer we effected in February 2017. Stockholders will experience dilution in the event
that additional shares of common stock are issued under our 2015 Stock Plan, or options issued under our 2015 Stock Plan are exercised,
or any warrants are exercised for shares of our common stock.
Our share price is volatile and may be influenced by
numerous factors, some of which are beyond our control.
The trading price of our common stock is likely to be highly
volatile, and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition
to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:
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the products or product candidates we acquire for commercialization;
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the product candidates we seek to pursue, and our ability to obtain rights to develop, commercialize and market those product
candidates;
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our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;
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actual or anticipated adverse results or delays in our clinical trials;
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our failure to expand the market for our currently approved products or commercialize our product candidates, if approved;
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unanticipated serious safety concerns related to the use of any of our product candidates;
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overall performance of the equity markets and other factors that may be unrelated to our operating performance or the operating
performance of our competitors, including changes in market valuations of similar companies;
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conditions or trends in the healthcare, biotechnology and pharmaceutical industries;
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introduction of new products offered by us or our competitors;
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announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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our ability to maintain an adequate rate of growth and manage such growth;
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issuances of debt or equity securities;
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sales of our common stock by us or our stockholders in the future, or the perception that such sales could occur;
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trading volume of our common stock;
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ineffectiveness of our internal control over financial reporting or disclosure controls and procedures;
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general political and economic conditions;
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effects of natural or man-made catastrophic events; and
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other events or factors, many of which are beyond our control.
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adverse regulatory decisions;
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additions or departures of key scientific or management personnel;
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changes in laws or regulations applicable to our product candidates, including without limitation clinical trial requirements
for approvals;
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disputes or other developments relating to patents and other proprietary rights and our ability to obtain patent protection
for our product candidates;
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our dependence on third parties, including CROs and scientific and medical advisors;
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our ability to uplist our common stock to a national securities exchange;
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failure to meet or exceed any financial guidance or expectations regarding development milestones that we may provide to the
public;
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actual or anticipated variations in quarterly operating results;
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failure to meet or exceed the estimates and projections of the investment community;
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In addition, the stock market in general, and the stocks of
small-cap healthcare, biotechnology and pharmaceutical companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors
may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of
any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could
have a dramatic and material adverse impact on the market price of our common stock.
FINRA sales practice requirements may limit a stockholder’s
ability to buy and sell our stock.
The Financial Industry Regulatory Authority, or FINRA, has adopted
rules requiring that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that
the investment is suitable for that customer. Prior to recommending speculative or low-priced securities to their non institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status,
investment objectives and other information. Under interpretations of these rules, FINRA has indicated its belief that there is
a high probability that speculative or low-priced securities will not be suitable for at least some customers. Because these FINRA
requirements are applicable to our common stock, they may make it more difficult for broker-dealers to recommend that at least
some of their customers buy our common stock, which may limit the ability of our stockholders to buy and sell our common stock
and could have an adverse effect on the market for and price of our common stock.
If securities or industry analysts do not publish research
or publish inaccurate or unfavorable research about our business, our stock price and any trading volume could decline.
Any trading market for our common stock that may develop will
depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and
industry analysts do not currently, and may never, publish research on us or our business. If no securities or industry analysts
commence coverage of our company, the trading price for our stock could be negatively affected. If securities or industry analysts
initiate coverage, and one or more of those analysts downgrade our stock or publish inaccurate or unfavorable research about our
business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, demand for our stock could decrease, which might cause our stock price and any trading volume to decline.
We have a substantial number of shares of authorized
but unissued capital stock, and if we issue additional shares of our capital stock in the future, our existing stockholders will
be diluted.
Our Certificate of Incorporation authorize the issuance
of up to 100,000,000 shares of our common stock and up to 50,000,000 shares of preferred stock with the rights, preferences and
privileges that our Board of Directors may determine from time to time. As of March 20, 2017, we had 13,836,607 shares of our
common stock issued and outstanding, which represents approximately 13.8% of our total authorized shares of common stock. In addition
to capital raising activities, which we expect to continue to pursue in order to raise the funding we will need in order to continue
our operations, other possible business and financial uses for our authorized capital stock include, without limitation, future
stock splits, acquiring other companies, businesses or products in exchange for shares of our capital stock, issuing shares of
our capital stock to partners or other collaborators in connection with strategic alliances, attracting and retaining employees
by the issuance of additional securities under our equity compensation plans, or other transactions and corporate purposes that
our Board of Directors deems are in the best interest of our company. Additionally, shares of our capital stock could be used
for anti-takeover purposes or to delay or prevent changes in control or our management. Any future issuances of shares of our
capital stock may not be made on favorable terms or at all, they may not enhance stockholder value, they may have rights, preferences
and privileges that are superior to those of our common stock, and they may have an adverse effect on our business or the trading
price of our common stock. The issuance of any additional shares of our common stock will reduce the book value per share and
may contribute to a reduction in the market price of the outstanding shares of our common stock. Additionally, any such issuance
will reduce the proportionate ownership and voting power of all of our current stockholders.
Future sales and issuances of our common stock or rights
to purchase common stock, including pursuant to our equity incentive plan or otherwise, could result in dilution of the percentage
ownership of our stockholders and could cause our stock price to fall.
We expect that we will need significant additional capital in
the future to continue our planned operations. To raise capital, we may sell common stock, convertible securities or other equity
securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible
securities or other equity securities in more than one transaction, investors in a prior transaction may be materially diluted
by subsequent sales. Additionally, any such sales may result in material dilution to our existing stockholders, and new investors
could gain rights, preferences and privileges senior to those of holders of our common stock. Further, any future sales of our
common stock by us or resales of our common stock by our existing stockholders could cause the market price of our common stock
to decline. Any future grants of options, warrants or other securities exercisable or convertible into our common stock, or the
exercise or conversion of such shares, and any sales of such shares in the market, could have an adverse effect on the market price
of our common stock.
Some provisions of our charter documents and applicable
Delaware law may discourage an acquisition of us by others, even if the acquisition may be beneficial to some of our stockholders.
Provisions in our Certificate of Incorporation and Amended and
Restated Bylaws, as well as certain provisions of Delaware law, could make it more difficult for a third-party to acquire us, even
if doing so may benefit some of our stockholders. These provisions include:
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the authorization of 50,000,000 shares of “blank check” preferred stock, the rights, preferences and privileges
of which may be established and shares of which may be issued by our Board of Directors at its discretion from time to time and
without stockholder approval;
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limiting the removal of directors by the stockholders;
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allowing for the creation of a staggered board of directors;
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eliminating the ability of stockholders to call a special meeting of stockholders; and
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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that
can be acted upon at stockholder meetings.
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These provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our
board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203
of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range
of business combinations with an interested stockholder for a period of three years following the date on which the stockholder
became an interested stockholder, unless such transactions are approved by the board of directors. This provision could have the
effect of discouraging, delaying or preventing someone from acquiring us or merging with us, whether or not it is desired by or
beneficial to our stockholders.
Any provision of our Certificate of Incorporation or Bylaws
or of Delaware law that is applicable to us that has the effect of delaying or deterring a change in control could limit the opportunity
for our stockholders to receive a premium for their shares of our common stock in the event that a potentially beneficial acquisition
is discouraged, and could also affect the price that some investors are willing to pay for our common stock.
The elimination of personal liability against our directors
and officers under Delaware law and the existence of indemnification rights held by our directors, officers and employees may result
in substantial expenses.
Our Certificate of Incorporation and our Bylaws eliminate the
personal liability of our directors and officers to us and our stockholders for damages for breach of fiduciary duty as a director
or officer to the extent permissible under Delaware law. Further, our Certificate of Incorporation and our Bylaws and individual
indemnification agreements we intend to enter with each of our directors and executive officers provide that we are obligated to
indemnify each of our directors or officers to the fullest extent authorized by the Delaware law and, subject to certain conditions,
advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition.
Those indemnification obligations could expose us to substantial expenditures to cover the cost of settlement or damage awards
against our directors or officers, which we may be unable to afford. Further, those provisions and resulting costs may discourage
us or our stockholders from bringing a lawsuit against any of our current or former directors or officers for breaches of their
fiduciary duties, even if such actions might otherwise benefit our stockholders.
We do not intend to pay cash dividends on our capital
stock in the foreseeable future.
We have never declared or paid any dividends on our common stock
and do not anticipate paying any dividends in the foreseeable future. Any future payment of cash dividends in the future would
depend on our financial condition, contractual restrictions, solvency tests imposed by applicable corporate laws, results of operations,
anticipated cash requirements and other factors and will be at the discretion of our Board of Directors. Our stockholders should
not expect that we will ever pay cash or other dividends on our outstanding capital stock.
In the event we are unable to maintain an effective
registration statement with respect to all of the shares issuable pursuant to the Purchase Agreement, we may not be able to access
the full amount available under the Purchase Agreement.
The registration statement, of which this prospectus
is a part, was declared effective by the SEC on September 19, 2016. In March 2017, we filed a post-effective amendment to the
registration statement to update it with more recent financial and other information. We may not direct Lincoln Park
to purchase any shares of our common stock during the period commencing five business days immediately
prior to the filing of this post-effective amendment to the registration statement and ending on the business day
immediately following the effective date of this post-effective amendment.
The registration statement we have filed with the SEC for the resale of shares issuable pursuant to the
Purchase Agreement with Lincoln Park, does not register all of the shares issuable pursuant to the Purchase Agreement with
Lincoln Park. In order to access the Purchase Agreement beyond the shares offered thereunder, we must have an effective
registration statement on file for any amount of shares in excess of the 1,076,596 shares registered and offered thereby. For
us to issue additional shares pursuant to the Purchase Agreement, we will have to file one or more registration statements
for those additional shares. However, we cannot assure you that we will be able to do so, or that the SEC will declare
effective any registration statement that we may file. If we do not file and maintain an effective registration statement for
the resale of additional shares issuable pursuant to the Purchase Agreement, we will be unable to access any additional funds
that may be available under the Purchase Agreement. If we were unable to access a portion or the full remaining amount
available to us under the Purchase Agreement, in the absence of any other financing sources, it would have a material adverse
impact on our operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus, including the sections entitled “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,”
contains forward-looking statements that are based on our management’s belief and assumptions and on information currently
available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable,
these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different
from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Forward-looking statements in this prospectus include, but are not limited to, statements about:
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the commercial success and market acceptance of any of our products and product candidates that are approved for marketing
in the United States or other countries;
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the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product
candidates;
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our ability to manufacture sufficient amounts of our product candidates for clinical trials and our products for commercialization
activities;
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our need for, and ability to raise, additional capital;
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the number, designs, results and timing of our clinical trials;
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the regulatory review process and any regulatory approvals that may be issued or denied by the U.S. Food and Drug Administration
or other regulatory agencies;
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our need to secure collaborators to license, manufacture, market and sell any products for which we receive regulatory approval
in the future;
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our ability to protect our intellectual property and operate our business without infringing upon the intellectual property
rights of others;
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the medical benefits, effectiveness and safety of our products and product candidates;
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the safety and efficacy of medicines or treatments introduced by competitors that are targeted to indications which our products
and product candidates have been developed to treat;
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our current or prospective collaborators’ compliance or non-compliance with their obligations under our agreements with
them; and
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other factors discussed elsewhere in this prospectus.
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In some cases, you can identify forward-looking statements by
terminology such as “may,” “will,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”
“continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You
should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other
factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual
results to differ materially from current expectations include, among other things, those listed under “Risk Factors”
and elsewhere in this prospectus. Actual events or results may vary significantly from those implied or projected by the forward-looking
statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus, and the documents
that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration
statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially
different from any future results expressed or implied by these forward-looking statements.
The forward-looking statements in this prospectus represent
our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change.
However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention
of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements
as representing our views as of any date subsequent to the date of this prospectus.
USE OF PROCEEDS
The 147,650 shares currently outstanding that are being
offered for resale by Lincoln Park, the selling stockholder, will be sold for the account of Lincoln Park. As a result, all proceeds
from the sales of the 147,650 shares of common stock currently outstanding and offered for resale hereby will go to Lincoln Park
and we will not receive any proceeds from the resale of those shares of common stock by Lincoln Park.
The 147,650 shares currently outstanding and being offered
for resale were previously issued to Lincoln Park under the Purchase Agreement. In connection with the initial purchase in July
2016, we received gross proceeds of $500,000. Following the Commencement Date, we received an additional $131,000 in gross proceeds
in September 2016. We may receive up to an additional $9,869,000 in gross proceeds if we issue to Lincoln Park all of the additional
shares issuable pursuant to the Purchase Agreement. However, we are
not registering for sale and are not offering under this prospectus all of the shares issuable pursuant to the Purchase Agreement.
As we are unable to predict the timing or amount of potential issuances of all of the shares offered hereby, we have not allocated
any proceeds of such issuances to any particular purpose. Accordingly, all such proceeds are expected to be allocated to working
capital. It is possible that no shares will be issued under the Purchase Agreement.
After the issuance of any of the shares issuable under the
Purchase Agreement, we would not receive any proceeds from the resale of those shares by Lincoln Park because those shares will
be sold for the account of Lincoln Park.
We will incur all costs associated with this registration
statement and prospectus.
MARKET FOR COMMON
STOCK
Our common stock is quoted on the OTCQX under the symbol “AYTU.”
Prior to December 14, 2015, our common stock was quoted on the OTCQB Market. The following table sets forth the range of high and
low quotations for our common stock on the OTCQX or OTCQB, for the periods shown. The quotations represent inter-dealer
prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.
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Year Ended
June 30,
2015
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High
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Low
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First Quarter
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$
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29.37
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$
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24.11
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Second Quarter
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$
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27.76
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$
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27.76
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Third Quarter
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$
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36.52
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$
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23.38
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Fourth Quarter
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$
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141.72
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$
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29.22
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Year Ending
June 30,
2016
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High
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Low
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First Quarter
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$
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57.00
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$
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55.56
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Second Quarter
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$
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57.00
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$
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36.00
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Third Quarter
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$
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44.88
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$
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6.24
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Fourth Quarter
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$
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7.61
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$
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3.24
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Year Ending
June 30,
2017
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High
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Low
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First Quarter
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$
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5.00
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$
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3.01
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Second Quarter
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$
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3.89
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$
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1.02
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Third Quarter (through March 20, 2017)
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$
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1.26
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$
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0.74
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On March 20, 2017, the closing price as reported on the
OTCQX of our common stock was $0.91. As of March 20, 2017, there were 469 holders of record of our common stock.
We intend to apply to list our common stock on the NYSE MKT
or NASDAQ under the symbol “AYTU” once we meet applicable listing standards. We believe that we will qualify, and we
intend to list our common stock and warrants on an exchange, upon achieving a per share closing price of $3.00 (NYSE MKT) or $4.00
(NASDAQ) or greater for our stock for 30 out of 60 trading days while also achieving $15 million in value of our non-affiliated
common shares among other applicable listing criteria. In case our stock price does not reach this level otherwise, we sought and
received stockholder approval in November 2016 for a reverse stock split to help us meet the stock price listing standard. However,
it is not clear when, or if, we will meet the NYSE MKT or NASDAQ listing standards.
Equity Compensation Plan Information
In June 2015, our shareholders approved the adoption of a stock
and option award plan (the “2015 Plan”), under which 833,334 shares were reserved for future issuance under restricted
stock awards, options, and other equity awards. The 2015 Plan permits grants of equity awards to employees, directors and consultants.
The following table displays equity compensation plan information as of June 30, 2016.
Plan Category
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Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options,
Warrants
and Rights
(a)
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Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants
and Rights
(b)
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Number of Securities
Remaining Available
for Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
(c)
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Equity compensation plans approved by security holders
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322,302
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$
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18.01
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511,032
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Equity compensation plans not approved by security holders
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162,746
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4.49
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—
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Total
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485,048
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$
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13.47
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511,032
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The above table excludes all grants of equity awards to employees,
directors and consultants after June 30, 2016. In connection with our private placement of approximately $4.7 million of common
stock in 2013, we were obligated to issue to the placement agent warrants to purchase 8,553 shares of our common stock. The placement
agent warrants have a term of five years from the date of issuance and an exercise price of $54.36.
In connection with our private placement of approximately
$5.2 million of convertible notes in July and August 2015, we were obligated to issue to the placement agents’ warrants
for an amount of shares equal to 8% of the number of shares of our common stock issued upon conversion of the notes and any accrued
interest. The placement agents’ 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 100% of the price per share at which equity securities were sold in our next equity
financing, and provide for cashless exercise. Those warrants were not approved by our stockholders. In connection with the conversions
of the notes in February 2016 and May 2016, which were triggered by an equity financing in January 2016 and our public offering
of common stock and warrants in May 2016, respectively, we issued warrants to the placement agents to purchase an aggregate of
22,254 shares of our common stock at an exercise price of $7.80 per share, and an aggregate of 22,564 shares of our common stock
at an exercise price of $4.80 per share. In connection with our public offering consummated May 6, 2016, we issued warrants to
purchase an aggregate of 109,375 shares of common stock at an exercise price of $6.00 to the underwriters of the public offering.
In connection with our public offering consummated November 2, 2016, we issued warrants to purchase an aggregate of 401,450 shares
of common stock at an exercise price of $1.86 to the underwriters of the public offering. In connection with the tender offer
we effected in February 2017, the exercise prices of the underwriters’ warrants issued in such public offerings were permanently
reduced to $0.75 per share.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock and
our Board of Directors presently intends to continue a policy of retaining earnings, if any, for use in our operations. The declaration
and payment of dividends in the future, of which there can be no assurance, will be determined by the Board of Directors in light
of conditions then existing, including earnings, financial condition, capital requirements and other factors. Delaware law prohibits
us from declaring dividends where, if after giving effect to the distribution of the dividend:
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we would not be able to pay our debts as they become due in the usual course of business; or
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our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights
of stockholders who have preferential rights superior to those receiving the distribution.
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Except as set forth above, there are no restrictions that currently
materially limit our ability to pay dividends or which we reasonably believe are likely to limit materially the future payment
of dividends on common stock.
Our Board of Directors has the right to authorize the issuance
of preferred stock, without further stockholder approval, the holders of which may have preferences over the holders of our common
stock as to payment of dividends.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion covers our financial condition at December
31, 2016 and our results of operations for the year ended June 30, 2016 and the three and six months ended December 31, 2016.
Overview
We are a commercial-stage specialty pharmaceutical company focused
on global commercialization of novel products in the field of urology. We are currently focused on addressing significant medical
needs in the areas of hypogonadism, urological cancers, urinary tract infections and male infertility.
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
stock holder received one share of common stock for every 12.174 shares outstanding. On June 30, 2016, we effected another 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
in this prospectus have been adjusted to reflect the effect of these two reverse stock splits (herein referred to collectively as
the Reverse Stock Splits).
In May 2015, we entered into an asset purchase agreement with
Jazz Pharmaceuticals, Inc., pursuant to which we purchased assets related to Jazz Pharmaceuticals’ 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 Jazz Pharmaceuticals’
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. We also paid an additional $500,000 within five days after transfer for the ProstaScint-related
product inventory and $227,000 was paid on September 30, 2015 (which represents a portion of certain FDA fees). We also will pay
8% on net sales made after October 31, 2017, payable up to a maximum aggregate payment of an additional $2.5 million.
In October 2015, we entered into an asset purchase agreement
with FSC Laboratories, Inc., or FSC. Pursuant to the agreement, we purchased assets related to FSC’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 FSC’s liabilities, including those related to the sale and marketing of Primsol arising after the closing. We
paid $500,000 at closing for the Primsol Business and we 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 paid $500,000 in April
2016, $500,000 in July 2016, and $250,000 in November 2016, for a total purchase price of $1,892,000.
In October 2015, we and Biovest International, Inc., or Biovest,
(whose contract manufacturing business is now known as Cell Culture Company, or C3) entered into a Master Services Agreement,
pursuant to which Biovest is to provide manufacturing services to us for our product ProstaScint. The agreement provides that
we may engage Biovest from time to time to provide services in accordance with mutually agreed upon project addendums and purchase
orders for ProstaScint. We expect to use the agreement from time to time for manufacturing services, including without limitation,
the manufacturing, processing, quality control testing, release or storage of ProstaScint. The agreement provides customary terms
and conditions, including those for performance of services by Biovest in compliance with project addendums, industry standards,
regulatory standards and all applicable laws. Biovest will be responsible for obtaining and maintaining all governmental approvals,
at our expense, during the term of the agreement. The agreement has a term of four years, provided that either party may terminate
the agreement or any project addendum under the agreement on 30 days written notice of a material breach under the agreement.
In addition, we may terminate the agreement or any project addendum under the agreement upon 180 days written notice for any reason.
This contract is currently on hold as we evaluate our strategic options for the ProstaScint product.
In April 2016, we entered into a license and supply agreement
to acquire the exclusive U.S. rights to Natesto nasal gel from Acerus Pharmaceuticals Corporation, or Acerus, which rights we
received on July 1, 2016. We paid Acerus an upfront fee of $2.0 million upon execution of the agreement. In October 2016 we paid
an additional $2.0 million and in January of 2017, we paid the final upfront payment of $4.0 million. We 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. In our third fiscal quarter of 2017, we sold
all of our shares of common stock of Acerus for gross proceeds of approximately $1.1 million. We also agreed to make various payments
based upon certain sales milestones up to an aggregate of $37.5 million based on net sales of Natesto. During the term of the
agreement, we will purchase all of our Natesto product needs from Acerus at a designated price.
In May 2016, we sold in an underwritten public offering 1,562,500
shares of our common stock, par value $0.0001 per share, and warrants to purchase up to an aggregate 1,562,500 shares of common
stock at a combined public offering price of $4.80 per share and related warrant. Each warrant is exercisable for five years from
issuance and has an exercise price equal to $6.00. In addition, we granted the underwriters a 45-day option to purchase up to
an additional 234,375 shares of common stock and/or 234,375 additional warrants. The underwriters elected a partial purchase of
their over-allotment option to purchase 170,822 warrants. The net cash proceeds from the sale of the shares and warrants was approximately
$6.6 million, after deducting underwriting discounts and commissions and estimated offering expenses.
In July 2016, Aytu issued 1.0 million shares of restricted stock
to executive officers and directors.
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”), an Illinois limited liability company. 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.
Under the terms and subject to the conditions of the
Purchase Agreement, we have the right to sell to and Lincoln Park is obligated to purchase up to an additional $10.0 million
in amounts of shares of our common stock, subject to certain limitations, from time to time, over the 36-month period
commencing on September 20, 2016, less any amount sold to Lincoln Park after September 20, 2016. As part of the registered
offering that we completed in October 2016, we agreed not to sell any shares under this agreement for a period of 90 days
from October 28, 2016.
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. Aytu expects to use the agreement from time to
time for the filling, labeling, and packaging of its ProstaScint product. As of December 31, 2016, this contract was placed on
hold.
On October 27, 2016, we priced an underwritten public offering
of 5,735,000 shares of our common stock and warrants to purchase up to an aggregate of 5,735,000 shares of our common stock at
a combined public offering price of $1.50 per share and related warrant. The gross proceeds from the offering to Aytu
was $8.6 million, before deducting the underwriting discount and estimated offering expenses payable by Aytu, but excluding the
exercise of any warrants. The Company also granted the representative of the underwriters a 45-day option to purchase up to an
additional 860,250 shares and/or 860,250 additional warrants. The shares of common stock were immediately separable from the warrants
and were issued separately. The warrants are exercisable immediately upon issuance, expire five years after the date of issuance
and have an exercise price of $1.86 per share. On November 2, 2016, we completed the public offering. In connection
with the closing, the underwriters purchased a portion of their 45-day option and purchased an additional 285,245 additional warrants
at closing. Our net cash proceeds from the offering, after deducting the placement agent fees and the offering expenses, was $7.6
million.
As of the date of this prospectus, we have
financed operations through a combination of private and public debt and equity financings. Although it is difficult to
predict our liquidity requirements, based upon our current operating plan, as of the date of this prospectus, after giving
effect to the tender offer we closed in February 2017 for our publicly traded warrants at $0.75 and the sale of the Acerus
stock, as well as the assumed ability to access the Lincoln Park Capital purchase agreement, we believe we will have adequate capital to operate and grow our business during the remainder of fiscal
2017. See “Liquidity and Capital Resources.”
We have only begun to generate revenues from the commercialization
of our product candidates in the last fiscal year. We recognized approximately $2.1 million in revenue from ProstaScint, Primsol
and RedoxSYS sales during fiscal 2016 and $794,000 and $1.5 million during the three and six months ended December 31, 2016. We
have incurred accumulated net losses since our inception, and at December 31, 2016, we had an accumulated deficit of $57.1 million.
Our net loss was $4.8 million and $10.5 million, respectively, for the three and six months ended December 31, 2016 and we used
$8.2 million in cash from operations during the six months ended December 31, 2016.
Product Update
We continue to execute our business plan and commercialize
our FDA approved products Natesto, ProstaScint, and Primsol and initiate the early stage of commercialization of MiOXSYS, our
diagnostic device that has now been CE Marked and is available outside the U.S. in countries where the CE Mark is recognized.
We continue to progress with our plan of gaining FDA clearance for MiOXSYS upon the completion of the 510k registration process
in the United States. We are evaluating our strategic options for the ProstaScint product.
NATESTO
In April 2016, we signed an exclusive licensing agreement with
Acerus Pharmaceuticals SRL for U.S. rights to Natesto (testosterone) nasal gel. Natesto is the only FDA-approved nasal formulation
of testosterone, and it is an androgen indicated for replacement therapy in males for conditions associated with a deficiency
or absence of endogenous testosterone including primary hypogonadism (congenital or acquired) or hypogonadotropic hypogonadism
(congenital or acquired). Natesto has been shown to normalize testosterone in hypogonadal men and does not have a black box warning
as other topically applied testosterone products do. By virtue of the fact that Natesto is applied through the nostrils, there
is no practical risk of testosterone transference, an issue present with all other topically-applied testosterone products in
the $2BN U.S. testosterone replacement therapy category. Acerus Pharmaceuticals previously licensed Natesto to Endo Pharmaceuticals
in the U.S. Natesto was approved by the FDA in May 2014, and, following a transition period from April 22, 2016 through June 30,
2016,we commenced U.S. commercialization of Natesto in July 2016 through our specialty sales force which promotes Natesto to U.S.
urologists and other high prescribers of testosterone replacement therapies.
PROSTASCINT
In May 2015, we acquired ProstaScint (capromab pendetide) from
Jazz Pharmaceuticals. ProstaScint is the only commercially available diagnostic imaging agent approved by the U.S. Food and Drug
Administration (“FDA”) that specifically targets Prostate Specific Membrane Antigen (PSMA). This imaging agent assists
in the identification of prostate cells to determine the cells’ location as confirmation that they are either contained
within the prostate gland or that they have spread to tissue outside of the prostate gland. ProstaScint consists of a novel murine
monoclonal antibody that, when conjugated to a linker-chelator and radiolabeled, binds distinctly to PSMA. PSMA is a glycoprotein
expressed by prostate epithelium, which is upregulated in prostate cancer. ProstaScint was approved by the FDA in October 1996
and was initially commercialized by Cytogen which was acquired by EUSA Pharma. Jazz Pharmaceuticals acquired EUSA Pharma and its
product portfolio including ProstaScint in 2012. We are evaluating our strategic options for the ProstaScint product.
PRIMSOL
In October 2015 we acquired Primsol (trimethoprim
hydrochloride) from FSC Laboratories, Inc. Primsol
is the only
FDA-approved trimethoprim-only oral solution and is a standard antimicrobial treatment for urinary tract infections.
Primsol is a sulfa-free, pleasant tasting liquid that is appropriate for patients that are sulfa allergic and
individuals that have difficulty swallowing pills.
Trimethoprim alone has been shown to be effective against common
strains of urinary tract pathogens including
Escherichia coli
,
Enterobacter species
,
Klebsiella
pneumoniae
,
Proteus mirabilis
, and
Staphylococcus saprophyticus
. Primsol was approved by the FDA in 2000
and was originally marketed by Ascent Pediatrics. FSC Laboratories acquired Primsol from Taro Pharmaceutical.
MiOXSYS
MiOXSYS is our internally developed, CE Marked clinical diagnostic
device used in the assessment of male infertility. MiOXSYS is a small, portable device that is used in conjunction with semen
analysis testing (sperm motility, concentration, and morphology) and measures oxidative stress in seminal plasma. Specifically,
MiOXSYS employs the principle and measurement of oxidation-reduction potential (ORP) to detect overall oxidative stress levels
in neat semen and seminal plasma. Oxidative stress has repeatedly been shown to be a major causal factor in idiopathic male infertility,
which accounts for 20 – 40% of male infertility cases. Semen analysis studies are routinely conducted to assess causes of
infertility, so we expect clinicians and oxidative stress researchers to readily integrate MiOXSYS into routine adjunct use when
idiopathic male infertility has been implicated. MiOXSYS received CE Marking in early 2017, and we have since initiated the build
out of a distribution network in both Europe and Asia. In parallel, we are working with leading andrology, infertility, and urology
opinion leaders around the world including the Cleveland Clinic in Cleveland, Ohio, Tulane University in New Orleans, Louisiana,
and Hamad Medical Corporation in Doha, Qatar. We anticipate initiating U.S. studies in order to gain FDA clearance as a 510k medical
device.
ACCOUNTING POLICIES
Significant Accounting Policies and Estimates
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of the financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to recoverability and useful lives of long-lived assets, stock compensation, valuation
of derivative instruments, allowances and contingencies. Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in
applying these critical accounting policies have a significant impact on the results we report in our financial statements.
Information regarding our accounting policies and estimates
can be found in the Notes to the audited and unaudited Financial Statements.
Newly Issued Accounting Pronouncements
Information regarding the recently issued accounting standards
(adopted and pending adoption as of December 31, 2016) is combined in Note 1 to the Financial Statements.
RESULTS OF OPERATIONS
Results of Operations—June 30, 2016 Compared to
June 30, 2015
Results of operations for the year ended June 30, 2016 (“fiscal
2016”) and the year ended June 30, 2015 (“fiscal 2015”) reflected losses of approximately $28.2 million
and $7.7 million, respectively.
Revenue
Product and service revenue
The total product and service revenue recognized during
2016 was $2.1 million, related to the sale of our products ProstaScint and Primsol, as well as the RedoxSYS and MiOXSYS Systems.
The product and service revenue in fiscal 2015 was $176,000 which was from the ProstaScint product and the RedoxSYS System. The
increase in product revenue of over 1000% from fiscal 2015 to 2016 is due to our acquisitions of those products, which occurred
late in fiscal 2015 and early fiscal 2016, respectively, and expanded marketing of those products.
As is customary in the pharmaceutical industry, our gross
product sales are subject to a variety of deductions in arriving at reported net product sales. Provisions for these deductions
are recorded concurrently with the recognition of gross product sales revenue and include discounts, chargebacks, distributor
fees, processing fees, as well as allowances for returns and Medicaid rebates. Provision balances relating to estimated amounts
payable to direct customers are netted against accounts receivable and balances relating to indirect customers are included in
accounts payable and accrued liabilities. The provisions recorded to reduce gross product sales and net product sales are as follows:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
Gross product and service revenue
|
|
$
|
2,657,000
|
|
|
$
|
178,000
|
|
Provisions to reduce gross product sales to net product and service sales
|
|
|
(606,000
|
)
|
|
|
(2,000
|
)
|
Net product and service revenue
|
|
$
|
2,051,000
|
|
|
$
|
176,000
|
|
|
|
|
|
|
|
|
|
|
Percentage of provisions to gross sales
|
|
|
22.8
|
%
|
|
|
1.1
|
%
|
License revenue
During fiscal 2016 and fiscal 2015, we recognized $512,000
and $86,000, respectively, in license revenue. In 2012, we received a payment of $500,000 for our license agreement of Zertane
with a Korean pharmaceutical company. This payment was deferred and was being recognized over 10 years. In 2014, we received a
payment of $250,000 for our license agreement of Zertane with a Canadian-based supplier. This payment was deferred and was being
recognized over seven years. At June 30, 2016, Aytu determined that the Zertane asset has no value as Aytu does not have the resources
to complete the necessary clinical trials and bring it to market before the patents expire. Therefore, the remaining unamortized
deferred revenue of $426,000 which was outstanding as of the date it was determined not to proceed with the clinical trials was
recognized as of June 30, 2016.
Expenses
Cost of Sales
The cost of sales of $957,000 and $88,000 recognized for
fiscal 2016 and fiscal 2015, respectively, are related to the ProstaScint and Primsol products and the RedoxSYS and MiOXSYS Systems.
We expect to see cost of sales to continue to increase in the year ending June 30, 2017 (“fiscal 2017”) as we expect
our sales to continue to grow.
Research and Development
Research and development costs consist of clinical trials
and sponsored research, manufacture transfer expense, labor, stock-based compensation, sponsored research – related party
and consultants and other. These costs relate solely to research and development without an allocation of general and administrative
expenses and are summarized as follows:
|
|
Year
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
Manufacturing tech transfer
|
|
$
|
3,304,000
|
|
|
$
|
-
|
|
Clinical trials and sponsored research
|
|
|
2,278,000
|
|
|
|
2,244,000
|
|
Labor
|
|
|
427,000
|
|
|
|
411,000
|
|
Stock-based compensation
|
|
|
89,000
|
|
|
|
517,000
|
|
Sponsored research - related party
|
|
|
192,000
|
|
|
|
204,000
|
|
Consultants and other
|
|
|
30,000
|
|
|
|
47,000
|
|
|
|
$
|
6,320,000
|
|
|
$
|
3,423,000
|
|
Comparison of Years Ended June 30, 2016 and 2015
Research and development expenses increased $2.9 million,
or 84.6%, in fiscal 2016 over fiscal 2015. This was due primarily to switching our manufacturing process for our ProstaScint product
to a new manufacturer, which is still in progress as of June 30, 2016 offset by a $428,000 reduction in stock-based compensation.
We expect that the research and development expenses will decrease in fiscal 2017 as compared to fiscal 2016 since the transfer
of the ProstaScint manufacturing is almost complete and since we should have no more clinical cost related to Zertane.
General and Administrative
General and administrative expenses consist of personnel
costs for employees in executive, business development and operational functions and director fees; stock-based compensation;
patents and intellectual property; professional fees including legal, auditing, accounting, investor relations, shareholder expense
and printing and filing of SEC reports; occupancy, travel and other including rent, governmental and regulatory compliance, insurance,
and professional subscriptions. These costs are summarized as follows:
|
|
Year
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
Labor
|
|
$
|
3,684,000
|
|
|
$
|
979,000
|
|
Stock-based compensation
|
|
|
814,000
|
|
|
|
500,000
|
|
Patent costs
|
|
|
303,000
|
|
|
|
488,000
|
|
Professional fees
|
|
|
1,630,000
|
|
|
|
1,440,000
|
|
Occupancy, travel and other
|
|
|
2,086,000
|
|
|
|
619,000
|
|
Management fee - related party
|
|
|
308,000
|
|
|
|
311,000
|
|
|
|
$
|
8,825,000
|
|
|
$
|
4,337,000
|
|
Comparison of Years Ended June 30, 2016 and 2015
General and administrative costs increased $4.5 million,
or 103.5%, in fiscal 2016 over fiscal 2015. The increase in labor costs, stock-based compensation, and occupancy, travel and other
primarily relates to increased costs related to the increase in professional staffing during fiscal 2016 as compared to fiscal
2015, bonuses earned, increased travel expense and stock options granted as well as the continuing vesting of stock option awards
granted in previous years. We expect general and administrative expenses to increase in fiscal 2017 due to the expected overall
growth of our company.
Impairment of Intangible Assets
Impairment of intangible assets was $7.5 million for fiscal
2016 related to the impairment of the Zertane in process research and development (IPRD) (see Note 2). We did not recognize any
impairment expense in fiscal 2015.
Amortization of Intangible Assets
Amortization of intangible assets was $665,000 and $45,000
for fiscal 2016 and fiscal 2015, respectively. This expense increased due to the acquisition of the ProstaScint and Primsol businesses
in late fiscal 2015 and early fiscal 2016, respectively, and the corresponding amortization of their finite-lived intangible assets.
As we continue to license and purchase additional assets as part of our business strategy we would expect this non-cash expense
to continue to grow.
Net Cash Used in Operating Activities
During fiscal 2016, our operating activities used $10.7
million in cash. The use of cash was approximately $17.5 million lower than the net loss due primarily to non-cash charges for
asset impairment, amortization of the beneficial conversion feature, stock-based compensation, depreciation, amortization and
accretion, unrecognized loss on investment, noncash interest expense, amortization of prepaid research and development related
party, an increase in accounts payable and accrued liabilities and an increase accrued compensation offset by an increase to inventory
and a decrease to deferred revenue.
During fiscal 2015, our operating activities used $6.6 million
in cash. The use of cash was approximately $1.1 million lower than the net loss due primarily to non-cash charges for stock-based
compensation, depreciation and amortization, amortization of prepaid research and development-related party, an increase in accounts
payable and an increase in contingent consideration related to the ProstaScint asset purchase. Cash used in operating activities
also included a $24,000 deferred tax benefit and a $607,000 decrease in payable to Ampio.
Net Cash Used in Investing Activities
During fiscal 2016, cash was used to acquire Natesto, Primsol,
our investment in Acerus, the purchase of fixed assets as well as the refund of a deposit for office space.
During fiscal 2015, cash was used to acquire ProstaScint
as well as deposits for office space.
Net Cash from Financing Activities
Net cash of $16.7 million provided by financing activities
during fiscal 2016 was primarily related to our registered public offering of $7.5 million of common stock and warrants offset
by issuance costs of $905,000, the issuance of convertible promissory notes which reflects gross proceeds of $5.2 million offset
by the cash portion of the debt issuance costs of $298,000, as well as the $5.0 million stock subscription payment from Ampio
and $200,000 for a sale of stock subscriptions in January 2016 as well as the issuance costs of $30,000 related to the debt conversion.
Net cash provided by financing activities in fiscal 2015
was $12.4 million which reflects a $7.4 million loan from Ampio which was later converted to stock, a $5.0 million stock subscription
payment from Ampio, $27,000 paid out to Luoxis option holders pursuant to the Merger and $20,000 paid out for liabilities pursuant
to the Merger.
Contractual Obligations and Commitments
Information regarding our Contractual Obligations and Commitments
is contained in Note 7 to the audited Financial Statements.
Results of Operations – December 31, 2016 Compared
to December 31, 2015
Results of operations for the three months ended December 31,
2016 and the three months ended December 31, 2015 reflected losses of approximately $4.8 million and $3.3 million, respectively.
These losses include in part non-cash charges related to stock-based compensation, depreciation, amortization and accretion, compensation
through issuance of stock, unrealized loss on investment, issuance of warrants to initial investors, and amortization of prepaid
research and development – related party offset by the unrealized gain on investment and warrant derivative income in the
amount of $1.6 million for the three months ended December 31, 2016 and $552,000 for the three months ended December 31, 2015,
respectively. The non-cash charges increased in the three months ended 2016 primarily due to the increase in stock-compensation
expense, the amortization of intangible assets and the unrealized loss on investment.
Results of operations for the six months ended December 31,
2016 and the six months ended December 31, 2015 reflected losses of approximately $10.5 million and $5.6 million, respectively.
These losses include in part non-cash charges related to stock-based compensation, depreciation, amortization and accretion, compensation
through issuance of stock, issuance of warrants to initial investors, and amortization of prepaid research and development –
related party offset by the unrealized gain on investment and warrant derivative income in the amount of $4.0 million for the
six months ended December 31, 2016 and $780,000 for the six months ended December 31, 2015, respectively. The non-cash charges
increased in the six months ended 2016 primarily due to the increase in stock-compensation expense, the amortization of intangible
assets, compensation through issuance of common stock and issuance of warrants.
Revenue
Product and service revenue
We recognized $794,000 and $448,000 for the three months ended
December 31, 2016 and 2015, respectively, related to the sale of our products Natesto, ProstaScint, and Primsol, as well as the
MiOXSYS System. Our revenues grew due to our acquisition of Natesto and expanded marketing of our products.
We recognized $1.5 million and $914,000 for the six months ended
December 31, 2016 and 2015, respectively, related to the sale of our products Natesto, ProstaScint, and Primsol, as well as the
MiOXSYS System. Our revenue grew due to our acquisitions of Natesto and Primsol and expanded marketing of our products.
As is customary in the pharmaceutical industry, our gross product
sales are subject to a variety of deductions in arriving at reported net product sales. Provisions for these deductions are recorded
concurrently with the recognition of gross product sales revenue and include discounts, chargebacks, distributor fees, processing
fees, as well as allowances for returns and Medicaid rebates. Provision balances relating to estimated amounts payable to direct
customers are netted against accounts receivable and balances relating to indirect customers are included in accounts payable
and accrued liabilities. The provisions recorded to reduce gross product sales and net product sales are as follows:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Gross product and service revenue
|
|
$
|
1,358,000
|
|
|
$
|
693,000
|
|
|
$
|
2,284,000
|
|
|
$
|
1,164,000
|
|
Provisions to reduce gross product
sales to net product and service sales
|
|
|
(564,000
|
)
|
|
|
(245,000
|
)
|
|
|
(792,000
|
)
|
|
|
(250,000
|
)
|
Net product and service revenue
|
|
$
|
794,000
|
|
|
$
|
448,000
|
|
|
$
|
1,492,000
|
|
|
$
|
914,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage difference in gross sales to net sales
|
|
|
58.5
|
%
|
|
|
64.6
|
%
|
|
|
65.3
|
%
|
|
|
78.5
|
%
|
License revenue
The license revenue of $0 and $21,000 recognized in the three
months ended December 31, 2016 and 2015, respectively, represents the amortization of the upfront payments received from the Company’s
license agreements. The license revenue of $0 and $43,000 recognized in the six months ended December 31, 2016 and 2015, respectively,
represents the amortization of the upfront payments received from the Company’s license agreements. In 2012, we received
a payment of $500,000 under our out-license agreement for Zertane with a Korean pharmaceutical company. This payment was deferred
and was being recognized over 10 years. In 2014, we received a payment of $250,000 under our out-license agreement for Zertane
with a Canadian-based supplier. This payment was deferred and was being recognized over seven years. At June 30, 2016, Aytu determined
that the Zertane asset has no value as Aytu does not have the resources to complete the necessary clinical trials and bring it
to market before the patents expire. Therefore, the remaining unamortized deferred revenue of $426,000 which was outstanding as
of the date it was determined not to proceed with the clinical trials was recognized as of June 30, 2016.
Expenses
Cost of Sales
The cost of sales of $551,000 and $743,000
recognized for the three and six months ended December 31, 2016, respectively, and the cost of sales of $244,000 and $281,000
recognized for the three and six months ended December 31, 2015, respectively, are related to the Natesto, ProstaScint and Primsol
products and the MiOXSYS Systems. We expect to see cost of sales decrease as a percentage of revenues in future periods as our
revenues grow and offset some of the set period cost in cost of sales.
Research and Development
Research and development costs consist of clinical trials and
sponsored research, manufacturing transfer expense, labor, stock-based compensation, sponsored research – related party
and consultants and other. These costs relate solely to research and development without an allocation of general and administrative
expenses and are summarized as follows:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Clinical trials and sponsored research
|
|
|
262,000
|
|
|
|
1,179,000
|
|
|
|
493,000
|
|
|
|
1,906,000
|
|
Labor
|
|
|
-
|
|
|
|
96,000
|
|
|
|
-
|
|
|
|
211,000
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
25,000
|
|
Sponsored research - related party
|
|
|
48,000
|
|
|
|
48,000
|
|
|
|
96,000
|
|
|
|
96,000
|
|
Consultants and other
|
|
|
1,000
|
|
|
|
13,000
|
|
|
|
2,000
|
|
|
|
22,000
|
|
|
|
$
|
311,000
|
|
|
$
|
1,356,000
|
|
|
$
|
591,000
|
|
|
$
|
2,260,000
|
|
Comparison of Three and Six Months Ended December 31, 2016
and 2015
Research and development expenses decreased $1.0 million, or
77.1%, for the three months ended December 31, 2016 compared to the three months ended December 31, 2015. Research and development
expenses decreased $1.7 million, or 73.8%, for the six months ended December 31, 2016 compared to the six months ended December
31, 2015. This was due primarily to switching our focus towards our commercial products and eliminating expenses related to Zertane.
We anticipate research and development expense will continue at approximately the same rate or slightly decrease for the remainder
of fiscal 2017 as compared to the three months ended December 31, 2016.
Selling, General and Administrative
General and administrative expenses consist of labor costs including
personnel costs for employees in executive, commercial, business development and operational functions; stock-based compensation;
patents and intellectual property; professional fees including legal, auditing, accounting, investor relations, shareholder expense
and printing and filing of SEC reports; occupancy, travel and other including rent, governmental and regulatory compliance, insurance,
and professional subscriptions; directors fees; and management fee – related party. These costs are summarized as follows:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Labor
|
|
$
|
1,775,000
|
|
|
$
|
493,000
|
|
|
$
|
4,030,000
|
|
|
$
|
1,312,000
|
|
Stock-based compensation
|
|
|
463,000
|
|
|
|
163,000
|
|
|
|
1,582,000
|
|
|
|
226,000
|
|
Patent costs
|
|
|
29,000
|
|
|
|
84,000
|
|
|
|
55,000
|
|
|
|
165,000
|
|
Professional fees
|
|
|
248,000
|
|
|
|
294,000
|
|
|
|
510,000
|
|
|
|
574,000
|
|
Occupancy, travel and other
|
|
|
1,087,000
|
|
|
|
654,000
|
|
|
|
3,090,000
|
|
|
|
974,000
|
|
Directors Fees
|
|
|
40,000
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
-
|
|
Management fee - related party
|
|
|
51,000
|
|
|
|
86,000
|
|
|
|
102,000
|
|
|
|
175,000
|
|
|
|
$
|
3,693,000
|
|
|
$
|
1,774,000
|
|
|
$
|
9,449,000
|
|
|
$
|
3,426,000
|
|
Comparison of Three and Six Months Ended December 31, 2016
and 2015
General and administrative costs increased $1.9 million, or
108.2%, for the three months ended December 31, 2016 compared to the three months ended December 31, 2015. General and administrative
costs increased $6.0 million or 175.8%, for the six months ended December 31, 2016 compared to the six months ended December 31,
2015. The increase in labor costs, stock-based compensation, and occupancy, travel and other primarily relates to increased costs
related to the increase in professional staffing due to our commercialization efforts for our Natesto, ProstaScint and Primsol
products. We expect general and administrative expenses to be approximately flat for the remainder of fiscal 2017 as compared
to the three months ended December 31, 2016.
Amortization of Intangible Assets
Amortization of intangible assets was $437,000 and $108,000
for the three months ended December 31, 2016 compared to the three months ended December 31, 2015, Amortization of intangible
assets was $874,000 and $166,000 for the six months ended December 31, 2016 compared to the six months ended December 31, 2015.
This expense increased due to the acquisition of the Natesto, and Primsol businesses in fiscal 2016, and the corresponding amortization
of their finite-lived intangible assets. We expect this expense to remain flat for the remainder of 2017.
Net Cash Used in Operating Activities
During the six months ended December 31, 2016, our operating
activities used $8.2 million in cash which was less than the net loss of $10.5 million, primarily as a result of the non-cash
depreciation, amortization and accretion and stock-based compensation offset by an increase in accounts receivable, a decrease
in accounts payable and accrued liabilities, and accrued compensation.
During the six months ended December 31, 2015, our operating
activities used $5.6 million in cash which was approximately equal to the net loss of $5.6 million primarily as a result of the
increases to non-cash stock-based compensation, depreciation, amortization and accretion and the increase in accrued compensation
offset by increases in inventory and prepaid expenses and other.
Net Cash Used in Investing Activities
During the six months ended December 31, 2016, we used cash
in investing activities of $2.8 million, $45,000 of which was used to purchase fixed assets, $750,000 of which was paid as the
second and third installments towards the Primsol asset and $2.0 million of which was paid as the second installment payment of
our Natesto licensing agreement.
During the six months ended December 31, 2015, cash of $125,000
was used to purchase fixed assets and $540,000 was used to acquire the Primsol business. We also received a security deposit back
of $2,000 during the period.
Net Cash from Financing Activities
Net cash provided by financing activities in the six months
ended December 31, 2016 of $8.2 million was primarily related to the registered offering of $8.6 million offset by the cash offering
cost of $998,000 and common stock issuance of $631,000 offset by the issuance costs of $24,000 to Lincoln Park.
Net cash provided by financing activities in the six months
ended December 31, 2015 of $9.9 million was primarily related to the issuance of convertible promissory notes which reflects gross
proceeds of $5.2 million offset by the cash portion of the debt issuance costs related to the convertible notes of $298,000, as
well as the $5.0 million stock subscription payment from Ampio.
Liquidity and Capital Resources
We are a relatively young company and we have not yet generated
substantial revenue as our primary activities are focused on commercializing our approved products, acquiring products and developing
our product candidates, and raising capital. As of December 31, 2016, we had cash and cash equivalents totaling $5.3 million available
to fund our operations offset by an aggregate of $6.4 million in accounts payable and accrued liabilities and the Natesto payables.
In January 2017 we made the final $4.0 million upfront payment for Natesto. We believe we have the ability to acquire adequate
capital to continue operations, and grow our business through the end of fiscal 2017, based on the following factors: our resources
at December 31, 2016; the successful completion of our tender offer for the exercise of our publicly traded warrants for $0.75
per share, which we expect to complete in February 2017 and which, if all warrants are exercised, would result in estimated net
proceeds of approximately $5.4 million; our ability to sell additional capital to Lincoln Park; and funds we expect to receive
from selling our investment in Acerus. We plan to raise additional capital in fiscal 2018 to fund operations. We will evaluate
the capital markets from time to time to determine when to raise additional capital in the form of equity, convertible debt or
other financing instruments, depending on market conditions relative to our need for funds at such time. We will seek to raise
additional capital at such time as we conclude that such capital is available on terms that we consider to be in the best interests
of our Company and our stockholders.
We have prepared a budget for fiscal 2017 which reflects cash
requirements from operations of approximately $3.0 million per quarter with the cash burn being higher in the first half of the
year as compared to the second half due to our projected increase in revenues during the second half of the fiscal year. Depending
on the availability of capital, we may expend additional funds for the purchase of assets and commercialization of products. Accordingly,
it will be necessary to raise additional capital and/or enter into licensing or collaboration agreements. At this time, we expect
to satisfy our future cash needs through private or public sales of our securities or debt financings. We cannot be certain that
financing will be available to us on acceptable terms, or at all. Over the last three years, including recently, volatility in
the financial markets has adversely affected the market capitalizations of many bioscience companies and generally made equity
and debt financing more difficult to obtain. This volatility, coupled with other factors, may limit our access to additional financing.
If we cannot raise adequate additional capital in the future
when we require it, we could be required to delay, reduce the scope of, or eliminate one or more of our commercialization efforts
or our research and development programs. We also may be required to relinquish greater or all rights to product candidates at
less favorable terms than we would otherwise choose. This may lead to impairment or other charges, which could materially affect
our balance sheet and operating results.
Off Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings, or
other relationships with unconsolidated entities or other persons, also known as “variable interest entities.”
BUSINESS
Overview
We are a commercial-stage specialty pharmaceutical company focused
on acquiring, developing and commercializing novel products in the field of urology. We have multiple urological products on the
market, and we seek to build a portfolio of novel therapeutics that serve large medical needs in the field of urology. We are initially
concentrating on hypogonadism, prostate cancer, urinary tract infections, and male infertility and plan to expand into other urological
indications for which there are significant medical needs.
We acquired exclusive U.S. rights to Natesto® (testosterone),
a novel formulation of testosterone delivered via a discreet, easy-to-use nasal gel, and we launched Natesto in the United States
with our direct sales force in late July 2016 and have recently ramped up our sales efforts having just completed our sales force’
first full quarter in the field. Natesto is approved by the U.S. Food and Drug Administration, or FDA, for the treatment of hypogonadism
(low testosterone) in men and is the only testosterone replacement therapy, or TRT, delivered via a nasal gel. Natesto offers multiple
advantages over currently available TRTs and competes in a $2 billion market. Importantly, as Natesto is delivered via the nasal
mucosa and not the skin, there is no risk of testosterone transference to others, a known potential side effect and black box warning
associated with all other topically applied TRTs, including the market leader AndroGel®.
We currently market ProstaScint® (capromab pendetide), the
only radioimaging agent indicated to detect the prostate specific membrane antigen, or PSMA, in the assessment and staging of prostate
cancer. ProstaScint is approved by the FDA for use in both newly diagnosed, high-risk prostate cancer patients and patients with
recurrent prostate cancer. We also market Primsol® (trimethoprim hydrochloride) — the only FDA-approved trimethoprim-only
oral solution for urinary tract infections.
We have a focused pipeline, including primarily MiOXSYS, a novel
in vitro diagnostic device that is currently CE marked (which generally enables it to be sold within the European Economic Area
(see “Business — Foreign Regulatory Approval”)) and for which we intend to initiate a final clinical
study to enable FDA clearance in the U.S.
Our MiOXSYS system is a novel, point-of-care semen analysis
system with the potential to become a standard of care in the diagnosis and management of male infertility. Male infertility is
a prevalent and underserved condition and oxidative stress is widely implicated in its pathophysiology. MiOXSYS was developed from
our core oxidation-reduction potential (a global measure of oxidative stress) research platform known as RedoxSYS®. We are
advancing MiOXSYS toward FDA clearance.
In the future we will look to acquire additional urology products,
including existing products we believe can offer distinct commercial advantages. Our management team’s prior experience has
involved identifying clinical assets that can be re-launched to increase value, with a focused commercial infrastructure specializing
in urology.
Natesto® (testosterone).
On April 22, 2016, we entered into an agreement to acquire the
exclusive U.S. rights to Natesto® (testosterone) nasal gel from Acerus Pharmaceuticals Corporation, or Acerus, which rights
we acquired on July 1, 2016. Natesto is a patented, FDA-approved testosterone replacement therapy, or TRT, and is the only nasally-administered
formulation of testosterone available in the United States. Natesto is a discreet, easy-to-administer nasal gel that may be appropriate
for men with active lifestyles as Natesto is small, portable, Transportation Security Administration, or TSA-compliant, and easy
to use. Importantly, Natesto is not applied directly to the patient’s skin as other topically applied TRTs are. Rather, it
is delivered directly into the nasal mucosa via a proprietary nasal applicator. Thus, Natesto does not carry a black box warning
related to testosterone transference to a man’s female partner or children — as other topically (primarily
gels and solutions) administered TRTs do by virtue of their delivery directly onto the skin. We launched Natesto in the U.S. in
July 2016 with our direct sales force, and we are positioning Natesto as the ideal treatment solution for men with active, busy
lifestyles who suffer from hypogonadism.
ProstaScint® (capromab pendetide).
We became a commercial stage company by virtue of our acquisition
of ProstaScint in May 2015 and are generating sales of this FDA-approved prostate cancer imaging agent. As prostate cancer is a
condition commonly diagnosed and treated by urologists, ProstaScint complements our urology-focused product portfolio and pipeline.
Prostate cancer is the most common cancer among men in the United States, with an estimated 241,000 annual cases (as of 2012).
Further, more than 2,200,000 men were alive in 2006 with some history of prostate cancer, and over 30,000 U.S. men die each year
from the disease. The effect of prostate cancer on healthcare economics is substantial, which makes the need for accurate disease
staging critical for treatment and management strategies. The U.S. market for the diagnosis and screening of prostate cancer is
expected to total $17.4 billion by 2017, a compound annual growth rate, or CAGR, of 7.5% since 2012.
Primsol® (trimethoprim solution).
On October 5, 2015, we purchased Primsol from FSC Laboratories,
Inc. Primsol is the only FDA-approved liquid formulation of trimethoprim, an antibiotic that is well established in current guidelines
for treating uncomplicated urinary tract infections, or UTIs. This differentiated product is appropriate for UTI patients that
have difficulty swallowing tablets, such as the elderly, and particularly for patients that experience adverse reactions to sulfamethoxazole
(“sulfa”). It is estimated that 150 million cases of urinary tract infections occur annually worldwide, and the annual
estimated incidence is 0.5 – 0.7/persons per year. Importantly, there are more than 1 million catheter-associated
UTIs in the U.S. alone. As many of these patients are elderly and unable to swallow pills, an oral liquid formulation represents
a convenient formulation for easier administration. The acquisition of Primsol added a second established brand to our product
portfolio. We expect to benefit from and continue to grow Primsol’s established base of prescribers, which already includes
a significant proportion of urologists despite the fact that it has not been previously marketed to these specialists. We can thus
utilize the same sales channel as ProstaScint, leading to potential commercial synergies and product growth.
MiOXSYS®
MiOXSYS is a rapid in vitro diagnostic semen analysis test used
in the quantitative measurement of static oxidation-reduction potential, or sORP, in human semen. MiOXSYS is a recently CE marked
system and is an accurate, easy to use, and fast infertility assessment tool. It is estimated that 72.4 million couples worldwide
experience infertility problems. In the United States, approximately 10% of couples are defined as infertile. Male infertility
is responsible for between 40 – 50% of all infertility cases and affects approximately 7% of all men. Male infertility
is often unexplained (idiopathic), and this idiopathic infertility is frequently associated with levels of oxidative stress in
the semen. As such, having a rapid, easy-to-use diagnostic platform to measure oxidative stress should provide a practical way
for male infertility specialists to improve semen analysis and infertility assessments without having to refer patients to outside
clinical laboratories.
Male infertility is prevalent and underserved, and oxidative
stress is widely implicated in its pathophysiology. The global male infertility market is expected to grow to over $300 million
by 2020 with a CAGR of nearly 5% from 2014 to 2020. Oxidative stress is broadly implicated in the pathophysiology of male infertility,
yet very few diagnostic tools exist to effectively measure oxidative stress levels in men. However, antioxidants are widely available
and recommended to infertile men. With the introduction of the MiOXSYS System, we believe for the first time there will be an easy
and effective diagnostic tool to assess the degree of oxidative stress, sperm motility and morphology, and potentially enable the
monitoring of patients’ responses to antioxidant therapy as a treatment regimen for infertility. The MiOXSYS System received
CE marking in Europe in January 2016 and obtained Health Canada Class II Medical Device approval in March 2016. We expect to advance
MiOXSYS into clinical trials in the United States in order to enable 510(k) clearance.
In addition to the MiOXSYS System, we are continuing to develop
the global market for the RedoxSYS System across a range of applications. Specifically, we have begun initial commercializing of
the RedoxSYS System for research use through distribution partners, primarily outside the U.S. In 2014, we received ISO 13485 certification,
demonstrating our compliance with global quality standards in medical device manufacturing.
The technology underpinning the RedoxSYS and MiOXSYS systems
was developed by Luoxis Diagnostics, Inc. in the two years immediately preceding the merger between Luoxis, Vyrix Pharmaceuticals,
Inc., and us (under our former name of Rosewind Corporation) in April 2015. Upon the consummation of the merger, the RedoxSYS System
and MiOXSYS System became our assets.
Key elements of our business strategy include:
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·
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Expand the commercialization of Natesto in the U.S. for the treatment of hypogonadism with our direct sales force. We launched Natesto in July 2016 and are targeting high-prescribing TRT prescribers with a primary emphasis on urologists and male health practitioners.
|
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·
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Expand the commercialization of FDA-approved ProstaScint for the staging of both newly diagnosed high-risk and recurrent prostate cancer patients. We have begun commercializing ProstaScint in the U.S. and in key markets around the world.
|
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·
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Expand the commercialization of FDA-approved Primsol for the treatment of uncomplicated urinary tract infections. We are re-launching Primsol to urologists in the U.S. and in key markets around the world where appropriate.
|
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·
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Establish MiOXSYS as a leading in vitro diagnostic device in the assessment of male infertility.
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·
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Acquire additional marketed products and late-stage development assets within our core urology focus that can be efficiently marketed through our growing commercial organization.
|
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·
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Develop a pipeline of urology therapeutics, with a focus on identifying novel products with sufficient clinical proof of concept that require modest internal R&D expense.
|
We plan to augment our core in-development and commercial assets
through efficient identification of complementary therapeutics, devices, and diagnostics related to urological disorders. We intend
to seek assets that are near commercial stage or already generating revenues. Further, we intend to seek to acquire products through
asset purchases, licensing, co-development, or collaborative commercial arrangements (co-promotions, co-marketing, etc.).
Our management team has extensive experience across a wide range
of business development activities and have in-licensed or acquired products from large, mid-sized, and small enterprises in the
United States and abroad. Through an assertive product and business development approach, we expect that we will build a substantial
portfolio of complementary urology products.
We previously were developing Zertane for the treatment of premature
ejaculation, or PE. However, we determined to direct our resources to our commercial-stage products. As a result, at the end of
fiscal 2016, we determined that the Zertane asset has no value as we do not plan to allocate the resources to complete the necessary
clinical trials and bring it to market before the patents expire. We intend to sell or out-license Zertane although there can be
no assurance that we will be successful in doing so or, if successful, the value, if any, we might receive for the asset.
Our Strategy
We expect to create value by implementing a focused, three-pronged
strategy. Our primary focus is on expanding the commercialization of the recently acquired Natesto in the U.S, growing our current,
revenue-generating products, and building a complementary portfolio of aligned urology assets. In just over one year since our
merger we have acquired or in-licensed three FDA-approved, marketed assets, launched a specialty urology sales force, initiated
ex-U.S. partnering discussions for our commercial products ProstaScint and Primsol, advanced our lead diagnostic asset MiOXSYS
to CE marking, engaged in asset purchase and licensing discussions for products aligned to our strategy, and launched Natesto in
the U.S. through our own sales force.
We believe the strategy of focusing on commercializing assets
prescribed by urologists makes sense for several reasons. First, urology is a large yet concentrated specialty practice area that
can be efficiently targeted. There are approximately 10,000 active urologists in the U.S., and we believe that this audience can
be efficiently reached with a relatively small, focused sales force. Additionally, 90% of urologists practice in metropolitan areas
where concentrated sales targeting can be achieved and “windshield” representative driving time between targets can
be minimized. Importantly, 81% of urologists practice in group practices, and over 60% are in practices of four or more physicians.
Further, and important in building a balanced yet focused product portfolio, sub-specialization within large urology clinics is
common whereby there is frequently individual clinical focus on specific areas within urology including prostate cancer and conditions,
infertility, sexual dysfunction, urinary incontinence, hypogonadism, etc. This enables a company to offer multiple products to
the various sub-specialties within these focused, concentrated customer targets.
Further, urologists treat a wide range of conditions and are
thus appropriate targets across a broad range of clinical assets (Natesto — hypogonadism; ProstaScint — prostate
cancer; Primsol — urinary tract infections; MiOXSYS — male infertility). Importantly, in urology,
direct physician office purchasing of drugs, devices, and diagnostics is common. Along with this, a significant proportion of urology
groups are privately-owned and often own and operate their own outpatient surgery centers and in-office laboratories. Further,
large urology group practices have substantial payer influence and can have the ability to negotiate as large groups to achieve
better reimbursement and coverage for favored treatments and procedures. Perhaps as important as these other factors, urologists
are exposed to relatively limited promotional focus by “Big Pharma” and we believe can therefore be accessed and impacted
more readily by an emerging company, such as Aytu, over time.
Aytu BioScience’s Strategic Value Drivers
The primary elements of our strategy are:
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Expanding the commercialization of Natesto, ProstaScint and Primsol, our revenue-generating, FDA-approved products in the United States via a direct commercial infrastructure. Launching ProstaScint, Primsol, and MiOXSYS outside the United States via a developing distribution network.
|
Natesto is a novel, recently FDA-approved testosterone replacement
therapy, or TRT, indicated for the treatment of hypogonadism in men. Natesto is the only nasal formulation of testosterone and
is delivered via a proprietary nasal gel to enable simple, discreet use of testosterone into the nostrils. By virtue of applying
Natesto to the nasal mucosa, and not to the man’s skin, there is no risk of transference to others. As such Natesto is the
only TRT that does not have a black box warning associated with this potential for transference. Additionally, Natesto is a convenient
form of testosterone that does not require application to large areas of the man’s body (arms, shoulders, upper torso, under
arms) as required with market-leading products AndroGel and Axiron. A convenient form of TRT, applied two-to-three times in the
nostrils, may be an appropriate option for men over 45 with hypogonadism who have active lifestyles, travel frequently, and value
having a discreet way to treat their hypogonadism.
Low testosterone is a condition affecting approximately 13 million
U.S. men, with U.S. revenues estimated at $2.4 billion in 2013. The market is expected to grow to $5.0 billion by 2017, and we
believe multiple factors are in place to position Natesto favorably in gaining market share in this large, growing market. By gaining
less than a 5% share of the current U.S. market (assuming similar pricing and reimbursement), a novel TRT product could achieve
annual revenues in excess of $100.0 million.
ProstaScint has several unique selling features that we believe
will enable significant sales growth and regular use by healthcare providers diagnosing and treating prostate cancer. ProstaScint
is the only imaging agent that specifically targets prostate cancer cells and demonstrates high sensitivity, specificity, and accuracy.
In multiple clinical studies researchers have shown that when SPECT/CT scans were used in patients pre-treated with ProstaScint,
ProstaScint imaging was highly sensitive in detecting prostate cancer and significantly predictive of 10-year biochemical disease
free survival in prostate cancer patients (86.6% vs. 65.5%; p=0.0014). Additionally, the American Cancer Society specifically recognizes
ProstaScint by name in current prostate cancer diagnosis guidelines.
Prostate cancer is the second most common cancer among men in
the United States, with an estimated 241,000 annual cases (as of 2012). Further, more than 2.2 million men were alive in 2006 with
some history of prostate cancer, and over 30,000 U.S. men die each year from the disease. The effect of prostate cancer on healthcare
economics is substantial, which makes the need for accurate disease staging critical for treatment and management strategies. The
U.S. market for the diagnosis and screening of prostate cancer is expected to total $17.4 billion in 2017, a CAGR of 7.5% since
2012.
Primsol is an antimicrobial agent that is indicated to treat
uncomplicated urinary tract infections (UTIs). Primsol is the only oral solution containing trimethoprim and offers a novel solution
for UTI patients who are either allergic to sulfamethoxazole (which is commonly combined with trimethoprim) or have difficulty
swallowing pills. Because many prostate cancer patients have temporary urinary catheters placed, they are frequently diagnosed
with recurrent urinary tract infections. Primsol offers a solution to those patients and enables us to sell multiple products to
a similar base of U.S. prescribing clinicians.
United States
. We have launched a commercial
infrastructure in the U.S. in order to support increased sales and distribution of Natesto, ProstaScint and Primsol in the U.S.
We have a highly experienced sales force that is distinctly focused on impacting the prescribing of urologists, and through this
efficient sales channel we are able to increase prescribing of our unique urology assets.
Ex-U.S
. As neither ProstaScint nor Primsol
have been previously approved and marketed outside the U.S., we believe we can realize commercial opportunities through efficient
corporate partnerships in key markets around the world. Also, with MiOXSYS now CE Marked we can develop a distribution network
to launch this first-in-class in vitro diagnostic device.
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Developing a pipeline of novel urological therapeutics through assertive acquisition, licensing, or co-promotion, inclusive of both marketed and late-stage development assets.
|
In order to diversify our product portfolio and create more
value, we intend to seek to acquire complementary products or product candidates to develop and/or commercialize, including marketed
assets. Initially, the focus will be on acquiring products or product candidates for urological conditions but we will opportunistically
consider other products or product candidates based on their ability to create value and complement our focus. We plan to pursue
product acquisitions, inclusive of therapeutics, diagnostics, and devices, which we will evaluate for their strategic fit and potential
for near-term and/or accretive value to us. In a little over a year from the Company’s merger in April 2015 we began generating
revenue from the acquisition of both ProstaScint and Primsol, and we later launched Natesto in July 2016. We expect to continue
to identify and acquire additional, complementary urology assets in the future.
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Completing U.S. studies in male infertility with the MiOXSYS System to enable 510k clearance by FDA.
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With MiOXSYS now CE marked and available for sale in many markets
outside the U.S., we are positioned to initiate our clinical studies in the U.S. to enable 510k de novo clearance. We expect to
receive guidance from FDA on clinical study design and patient criteria and implement the required clinical program as soon as
possible, subject to additional funding. If approved, MiOXSYS would be the first and only semen analysis diagnostic test for the
detection of oxidative stress in infertility.
Male infertility is prevalent and underserved, and oxidative
stress is widely implicated in its pathophysiology. As such, we have bolstered our research focus in this area with the MiOXSYS
System to complement our focus on urologic conditions. The global male infertility market is expected to grow to over $300 million
by 2020 with a CAGR of nearly 5% from 2014 to 2020. Oxidative stress is broadly implicated in the pathophysiology of idiopathic
male infertility, yet very few diagnostic tools exist to effectively measure oxidative stress levels in men. However, antioxidants
are widely available and recommended to infertile men. With the introduction of the MiOXSYS System, we believe for the first time
there will be an easy and effective diagnostic tool to assess degree of oxidative stress and monitor patients’ responses
to antioxidant therapy and improve diagnosis of male infertility.
Through our extensive network of researchers developed at one
of our predecessor companies Luoxis, the RedoxSYS System has demonstrated the potential to have broad clinical applications inclusive
of male infertility in semen analysis studies. Studies have been completed at a major U.S. university and major hospital outside
the U.S. in the evaluation of male infertility. As such, we developed the MiOXSYS System as a line extension to RedoxSYS to specifically
assess oxidative stress in semen as a tool to assess male infertility. In January 2016, the MiOXSYS System received CE Marking
and is now available for sale in multiple ex-U.S. markets including Europe, the Middle East, and parts of Asia. In March 2016,
the MiOXSYS System obtained Health Canada Class II Medical Device approval. With Health Canada approval in place, the Company expects
to begin initial marketing of the product in Canada.
Our FDA-Approved Urology Products
Three of our products have received FDA approval for marketing
in the U.S.: Natesto, ProstaScint and Primsol.
Natesto for Testosterone Replacement
On April 22, 2016, we 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 on July 1, 2016. Natesto is a patented, FDA-approved testosterone replacement therapy,
or TRT, and is the only nasally-administered formulation of testosterone available in the United States. Natesto is a discreet,
easy-to-administer nasal gel that may be appropriate for men with active lifestyles as Natesto is small, portable, TSA-compliant,
and easy to use.
Importantly, Natesto is not applied directly to the patient’s
skin as other topically applied TRTs are. Rather, it is delivered directly into the nasal mucosa via a patented nasal applicator.
Thus, Natesto does not carry a black box warning related to testosterone transference to a man’s female partner or children — as
other topically (primarily gels) administered TRTs do by virtue of their delivery directly onto the skin.
Image of Natesto (testosterone) nasal gel
The unique delivery of Natesto also enables simple, discreet
use by a single three times daily application into the nose and may improve compliance over topical forms that are applied to large
sections of the arms, shoulders, and other large areas of the man’s upper torso. It also offers a more discreet method of
TRT administration compared to films/patches (Androderm & Testoderm, which is applied to the scrotum) and doesn’t involve
the pain, potential for site injection infections, and the administration inconvenience of the injectable TRTs such as Testopel
and Aveed.
A concern associated with the use of the currently marketed
testosterone gels is the unintentional transfer of testosterone to women (or children) by skin contact with the man’s application
site. In the event of a female partner receiving inadvertent testosterone exposure due to intimate contact with her male partner,
she may develop hyperandrogenism, a condition characterized by excess levels of androgens. This condition may result in women developing
acne, scalp hair loss, excessive facial or body hair, breast atrophy, and other symptoms. Natesto, as it is nasally administered,
does not present this potential complication of ‘transference’ and thus does not have a black box warning as is associated
with the topically applied testosterone supplements.
We believe Natesto offers additional distinct clinical advantages
over market-leading AndroGel, which advantages may translate into clinical adoption of Natesto over AndroGel and other topically-applied
TRT products. First, Natesto achieves C
max
, or maximum concentration of testosterone, of 1,044 ng/dL, while AndroGel
achieves a lower C
max
of 845 ng/dL. Additionally, Natesto achieves C
max
within 40 minutes, which is a rapid
onset of action for a topically applied TRT. Natesto also enables effective restoration of serum testosterone levels with a low
dose of only 5.5 mg per nasal actuation (5.5 mg per pump per nostril), while AndroGel delivers substantially more testosterone
of 20.25 mg per pump (1-3 pumps may be applied per the AndroGel prescribing information). Importantly, Natesto’s prescribing
information also indicates a relatively low incidence of rising Prostate-Specific Antigen (PSA), which is a well characterized
effect of testosterone supplementation. Natesto yields a 5.1% incidence of rising PSA in the product information, while AndroGel
yields 11.1%. While head-to-head comparative studies have not been conducted between these two products, we believe clinicians
will recognize the potential benefits offered by Natesto over other topically-applied TRTs.
Natesto is an androgen indicated for replacement therapy in
adult males for conditions associated with a deficiency or absence of endogenous testosterone including:
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Primary hypogonadism (congenital or acquired): testicular failure due to conditions such as cryptorchidism, bilateral torsion, orchitis, vanishing testis syndrome, orchiectomy, Klinefelter’s syndrome, chemotherapy, or toxic damage from alcohol or heavy metals. These men usually have low serum testosterone concentrations and gonadotropins (follicle-stimulating hormone [FSH] and luteinizing hormone [LH]) above the normal range.
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Hypogonadotropic hypogonadism (congenital or acquired): gonadotropin or luteinizing hormone-releasing hormone (LHRH) deficiency or pituitary-hypothalamic injury from tumors, trauma, or radiation. These men have low serum testosterone concentrations but have gonadotropins in the normal or low range.
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The U.S. Testosterone Replacement Therapy Market
We believe we have an opportunity to increase revenue with Natesto
in the U.S. Natesto competes in a large, growing market. The U.S. TRT market is large, with annual revenues in the U.S. in 2013
of $2 billion. At the current market size of $2 billion, a product with 5% market penetration could achieve sales in excess of
$100 million annually, assuming comparatively similar product pricing and reimbursement levels as seen with other TRTs.
The U.S. prescription testosterone market is comprised primarily
of topically applied treatments in the form of gels, solutions, and patches. Testopel® and Aveed®, injectable products
typically implanted directly under the skin by a physician, are also FDA-approved.
The actively marketed, FDA-approved TRTs include:
Brand Name
|
|
Form of Delivery
|
|
Company
|
|
Year
Approved
|
|
Black Box
Warning
|
Androderm®
|
|
Film/Patch
|
|
Allergan
|
|
1995
|
|
No
|
AndroGel®
|
|
Gel
|
|
AbbVie
|
|
2000
|
|
Yes
|
Aveed®
|
|
Injection
|
|
Endo Pharmaceuticals
|
|
2014
|
|
No
|
Axiron®
|
|
Solution
|
|
Eli Lilly & Company
|
|
2010
|
|
Yes
|
Fortesta®
|
|
Gel
|
|
Endo Pharmaceuticals
|
|
2010
|
|
Yes
|
Striant®
|
|
Extended Release Tablet
|
|
Endo Pharmaceuticals
|
|
2003
|
|
No
|
Testim®
|
|
Gel
|
|
Endo Pharmaceuticals
|
|
2002
|
|
Yes
|
Testoderm®
|
|
Film/Patch
|
|
Johnson & Johnson
|
|
1993
|
|
No
|
Testopel®
|
|
Injection
|
|
Endo Pharmaceuticals
|
|
1972
|
|
No
|
Vogelxo®
|
|
Gel
|
|
Upsher-Smith
|
|
2014
|
|
Yes
|
AndroGel®, marketed by AbbVie, is the leading TRT and had
2012 revenues of $1.15 billion. AndroGel had over half of the total TRT market across its 1.0% and 1.62% formulations of the product.
Importantly, however, AndroGel is beginning to face generic
threats with the expiration of key patents for its 1.0% formulation, and Teva Pharmaceuticals has a competitive generic product
in waiting. AbbVie has attempted to block Teva’s launch through the filing of a citizen’s petition. Products with significant
shares of the TRT market and promotional spending include Axiron, Testim, Fortesta, Androderm, and Testopel.
We believe there are multiple factors in the U.S. TRT market
that are favorable to Natesto and our company as we seek to expand commercialization of Natesto. First, the TRT market has demonstrated
5.5% growth on a quarter-over-quarter basis (quarter ended June 30, 2016 versus quarter ended June 30, 2015). With this expanding
market we expect to capture a significant number of prescriptions from both newly diagnosed patients and currently treated patients
who may be dissatisfied with current treatment. Additionally, the promotion of TRT products by major competitors including both
AbbVie (AndroGel) and Eli Lilly & Company (Axiron) has been reduced. We believe this enables us to more effectively compete
in this large, growing market. For example, direct-to-consumer advertising by these larger companies has been reduced, which should
provide a more ‘even playing field’ among newer, smaller competitive entrants like Aytu. Finally, with the advent and
increasing popularity of ‘high deductible plans’ provided by health insurers, many patients are paying more money out
of pocket for their prescriptions, and TRT out-of-pocket prices have risen. With limited true low cost generic options in the TRT
market, we expect that Natesto will be afforded a more equal footing in this competitive, growing market.
About Hypogonadism
Male hypogonadism is a condition in which the body does not
produce enough testosterone — the hormone that plays a key role in masculine growth and development during puberty — or
has an impaired ability to produce sperm or both. Men can be born with male hypogonadism, or it can develop later in life from
injury or infection.
Hypogonadism is formally defined as deficient or absent male
gonadal function that results in insufficient testosterone secretion. Hypogonadism may be caused primarily by testicular failure,
or secondarily by hypothalamic-pituitary axis dysfunction, resulting in the production or release of insufficient testosterone
to maintain testosterone-dependent functions and systems. It can also result from a combination of testicular failure and hypothalamic-pituitary
axis dysfunction.
Hypogonadism affects an estimated 13 million men in the United
States, and although it may occur in men at any age, low testosterone levels are especially common in older males. More than 60%
of men over age 65 have free testosterone levels below the normal values of men aged 30 to 35. Studies suggest that hypogonadism
in adult men is often underdiagnosed and under treated.
Low testosterone, as male hypogonadism is also known, is associated
with a number of signs and symptoms, most notably loss of libido and erectile dysfunction (ED). Other signs of low testosterone
include depressive symptoms, a decrease in cognitive abilities, irritability and lethargy or loss of energy. Deficient endogenous
testosterone also has negative effects on bone mass and is a significant risk factor for osteoporosis in men.
Progressive decrease in muscle mass and muscle strength and
testicular dysfunction, often resulting in impaired sperm production, are also associated with low testosterone levels.
A younger patient may have pure hypogonadism as a primary event,
whereas an older man may have an age-related decline in testosterone production that is a part of his ED profile. However, because
both ED and loss of libido are hallmarks of hypogonadism, for a patient who presents with ED it is recommended that he have a basic
hormone profile to determine if he has low testosterone. Treatments to normalize testosterone can not only improve libido, energy
level and the potential to have normal erections, but can also improve the response to sildenafil, if that is deemed appropriate
treatment.
Natesto Clinical Studies Demonstrating Safety and Efficacy
Natesto has been shown to be safe and effective in men with
hypogonadism. It was approved by the FDA in May 2014. In its pivotal clinical trial, Natesto was evaluated for efficacy in a 90-day,
open-label, multicenter study of 306 hypogonadal men. Eligible patients were 18 years of age and older (mean age 54 years) and
had morning serum total testosterone concentrations less than 300 ng/dL. Patients were Caucasian (89%), African-American (6%),
Asian (5%), or of other ethnicities (less than 1%).
Patients were instructed to self-administer Natesto (11 mg of
testosterone) intranasally either two or three times daily. The primary endpoint was the percentage of patients with an average
serum total testosterone concentration (C
avg
) within the normal range (300 to 1050 ng/dL) on Day 90.
The secondary endpoint was the percentage of patients with a
maximum total testosterone concentration (C
max
) above three predetermined limits: greater than 1500 ng/dL, between 1800
and 2500 ng/dL, and greater than 2500 ng/dL. A total of 78 hypogonadal men received Natesto (11 mg of testosterone) three times
daily (33 mg of testosterone daily). Of these, a total of 73 hypogonadal men were included in the statistical evaluation of efficacy
(total testosterone pharmacokinetics) on Day 90 based on the intent-to-treat (ITT) population with last observation carried forward
(LOCF). Ninety percent of these 73 patients had a C
avg
within the normal range (300 to 1050 ng/dL) on Day 90. The percentages
of patients with C
avg
below the normal range (less than 300 ng/dL) and above the normal range (greater than 1050 ng/dL)
on Day 90 were 10% and 0%, respectively.
The table below (Table 3 from the Natesto Prescribing Information)
summarizes the mean (SD) serum total testosterone concentrations on Day 90 in 69 patients who had a full pharmacokinetic sampling
profile and were treated with Natesto (11 mg of testosterone) three times daily for 90 days.
Table 3: Mean (SD) Serum Total Testosterone
Concentrations on Day 90 Following
Administration of Natesto (11 mg of testosterone) Three Times Daily
|
|
Natesto
|
|
|
(11 mg of testosterone) Three Times Daily (N=69)
|
|
|
C
avg
(ng/dL)
|
|
421 (116)
|
|
|
C
max
(ng/dL)
|
|
1044 (378)
|
|
|
C
min
(ng/dL)
|
|
215 (74)
|
In the same clinical trial studying the safety and efficacy
of Natesto, which was conducted at 39 U.S. outpatient sites, it was shown that 70% of the per protocol patients in the twice-daily
‘titration arm’ (n=141) achieved normal testosterone levels. Ninety-one percent of the per protocol patients in the
thrice-daily group (n=77) achieved normal testosterone levels, demonstrating that the majority of men in both treatment groups
achieved normalization of testosterone levels while taking Natesto. The efficacy of both B.I.D. (twice daily) and T.I.D. (three
times daily) dosing of Natesto is demonstrated in the graphs below:
Natesto Product Features and Patient Benefits
We believe Natesto has a unique opportunity to gain market share
in the more than $2.4 billion U.S. market given the product’s novel features and patient benefits including:
|
·
|
Ease of administration; Appropriate for men with busy, active lives;
|
|
·
|
Established efficacy in pivotal FDA trials with a unique, low dose of testosterone; Effective in improving serum testosterone levels while using a proven, lower dose of testosterone;
|
|
·
|
Discreet product presentation and ease of transport (TSA compliant); Important for men who travel frequently and desire a simple, portable solution that travels easily with them;
|
|
·
|
No risk of secondary exposure to testosterone due to dermal transference, an important consideration when thinking about a
hypogonadal man’s partner’s or child’s safety; and
|
|
·
|
Safety, with a lower incidence of rising PSA levels than the market leading product AndroGel; Natesto demonstrates a 5.5% rate
of rising PSA levels in clinical trials, while AndroGel demonstrated a rising PSA rate of over 11% in clinical trials. This is
an important consideration as physicians concerned with understanding and tracking prostate cancer risk frequently monitor PSA
levels in men over 50 years of age.
|
Natesto has proven efficacy and a product profile well suited
for men suffering from hypogonadism who have active, busy lifestyles who want a simple, discreet TRT option. We believe Natesto
can play an important role in the treatment of hypogonadism, a condition affecting approximately 13 million U.S. men.
Natesto Market Opportunity
Two recent developments have presented a unique opportunity
for Natesto that we believe will enable us to effectively compete and be well positioned in the more than $2.4 billion TRT market.
As previously indicated, AndroGel’s patent expired in 2015 and, unless a citizen’s petition filed by AbbVie to delay
a Teva Pharmaceuticals generic is successful long-term, we expect a generic entrant to begin eroding AbbVie’s market share.
As a result, we expect there to be diminished promotional support in the form of fewer physician details and lower overall promotional
spending by AbbVie. In conjunction with the market leader’s diminished intellectual property position and potential diminished
promotional spending, the TRT market has received increased scrutiny from the FDA.
On January 31, 2014 and subsequently on March 3, 2015, the FDA
issued Safety Announcements relating to the possible increased risk of non-fatal heart attacks and strokes in patients taking testosterone.
While the FDA has not concluded that the FDA-approved testosterone treatment increases the risk of stroke, heart attack, or death,
this recent safety consideration has caused patient advocates and consumer groups to ask for increased scrutiny on the direct to
consumer advertising associated with the leading testosterone replacement products, most notably AndroGel and Axiron. As a result,
we expect decreased advertising spending in the TRT category to enable newer, less established products like Natesto to more effectively
infiltrate the market through on-label, physician-directed promotion with a direct selling effort. While the potential safety concerns
may cause a decrease in physician prescribing, we expect that physicians will continue to prescribe TRTs for patients for whom
TRT treatment is appropriate.
Leading urology groups including the American Urological Association,
or AUA, have strongly commented in favor of continued prescribing of TRTs for appropriate patients, and the safety data precipitating
the FDA’s comments have been called into question. Importantly, the FDA has not called for discontinuation of TRTs. Rather,
patients were encouraged to speak with their health care professional and not stop taking TRTs.
In the FDA’s initial statement about the potential cardiovascular
risks associated with TRT treatment, the agency commented:
“Patients should not stop taking their prescribed testosterone
products without first discussing their questions or concerns with their health care professionals. ... The prescribing information
in the drug labels of FDA-approved testosterone products should be followed.”
Importantly, following the FDA’s statement, the AUA issued
a strong response reiterating the clinical importance of low testosterone and maintaining their support for the appropriate use
of testosterone replacement therapy:
“Men with hypogonadism may also experience reduced muscle
mass and strength and increased body fat. Hypogonadism may also contribute to reduced bone mineral density and anemia. Testosterone
therapy is appropriate treatment for patients with clinically significant hypogonadism, including those with idiopathic clinical
hypogonadism that may or may not be age-related, after full discussion of potential adverse effects.”
Additional publications publicly refuted the validity of the
data that precipitated the FDA’s safety concern in a subsequent statement following the 2014 annual meeting of the AUA:
“During the last several months there has been a firestorm
of negative media attention regarding testosterone deficiency and its treatment, precipitated by a study reporting an increased
rate of nonfatal myocardial infarction (MI) associated with testosterone prescriptions. This public judgment of T therapy demands
a response. As researchers and clinicians with extensive experience with T deficiency and its treatment, we disagree that the recent
study published in PLOS (Public Library of Science) One presents any credible evidence that T prescriptions increase health risks,
and we find baseless the general assertion that testosterone is prescribed to men “who are simply reluctant to accept the
fact that they are getting older.” We object to comments questioning whether T deficiency is real, regardless of whether
it is called hypogonadism or “low T” as used in advertisements.” (Note: The PLOS is an open access online publication
venue, and while peer reviewed it is not a published medical journal.)
AbbVie’s sales of AndroGel dropped 5% in the first half
of 2014, following the FDA’s initial Safety Announcement and the subsequent reaction of the AUA and others. In the face of
significant new competitive entrants (Aveed, Vogelxo) at that time and the FDA’s expressed safety concerns, this represents
a relatively insignificant sales decline. We believe this decline speaks to a real, present need in hypogonadism and a substantial
opportunity for newly marketed products like Natesto. Natesto has proven safety, a recent FDA approval that speaks to the product’s
efficacy, and unique product features and patient benefits we believe will set Natesto apart from the topically administered competitive
products in the more than $2.4 billion U.S. TRT market.
ProstaScint for the Detection of Prostate Cancer
On May 20, 2015, we acquired ProstaScint® from Jazz Pharmaceuticals.
ProstaScint Kit, or capromab pendetide, is a radio-labeled monoclonal antibody, which is a biologic product that targets a specific
antigen. ProstaScint targets prostate specific membrane antigen, or PSMA, a protein uniquely expressed by prostate tissue. A radioactive
substance called Indium (In 111) is attached to the proprietary, mouse-derived antibody. The radiolabeled antibody is infused into
the patient and is taken up by prostate cancer cells which can be detected and visualized with a special nuclear medicine scan
(single-photon emission tomography, or SPECT). ProstaScint has been shown to be clinically effective in determining the course
of treatment for a patient who has had a prostatectomy and/or has suspected metastasis (spread of the cancer cells beyond the prostate).
Further, ProstaScint has demonstrated efficacy in patients classified as high risk or with recurrent prostate cancer. ProstaScint
has been approved by the FDA and Health Canada, and significant clinical data exist demonstrating the significant predictive value
in prostate cancer staging.
Prostate Cancer Market
According to the American Cancer Society prostate cancer is
the most common cancer among men in the United States, with an estimated 241,000 annual cases (as of 2012). Further, more than
2.2 million men were alive in 2006 with some history of prostate cancer, and over 30,000 U.S. men die each year from the disease.
The effect of prostate cancer on healthcare economics is substantial, which makes the need for accurate disease staging critical
for treatment and management strategies. The U.S. market for the diagnosis and screening of prostate cancer is expected to total
$17.4 billion in 2017, a CAGR of 7.5% since 2012. Importantly, ProstaScint is the only FDA-approved radiopharmaceutical (for use
in radioimmunoscintigraphy) specifically indicated for prostate cancer screening and is specifically highlighted in the American
Cancer Society practice guidelines for prostate cancer screening and staging.
Prostate cancer is classified into four stages based on severity:
Stages 1 through 4. Stage 3 is considered “high risk” and Stage 4 is when cancer has become metastatic. Radioimmunoscintigraphy
has been established as a diagnostic to stage cancer malignancy and one of the most widespread clinical uses has been for the detection
of prostate cancer.
ProstaScint Clinical Data
Multiple clinical studies have been conducted in the United
States and published in peer-reviewed publications that consistently demonstrate substantial clinical efficacy of ProstaScint in
staging prostate cancer patients and specifically identify whether the cancer is confined to the prostate or has metastasized to
other parts of the body. Through more accurate clinical staging and identification of metastatic prostate cancer, clinicians are
able to better direct therapeutic interventions and improve outcomes. A brief summary of key clinical findings for ProstaScint
from select studies are summarized below.
Principal
Investigator(s)/
Primary Authors
|
|
Publication
|
|
Patient Population
|
|
Conclusion/Results
|
Ellis RJ et al.
|
|
Int. J. Radiation Oncology Biol. Phy. (2010)
|
|
Patients presenting for primary radiotherapy having a clinical diagnosis of localized primary prostate cancer; Patients evaluated for tumor stage using conventional staging and SPECT/CT (N=239)
|
|
SPECT/CT imaging with ProstaScint pre-treatment was significantly predictive of 10-year biochemical disease-free survival (86.6% vs. 65.5%; p=0.0014)
|
|
|
|
|
|
|
|
Haseman MK et al.
|
|
Urology (2007)
|
|
Men with prostate cancer who underwent imaging with ProstaScint pretreatment; Patients were divided according to the presence or absence of central abdominal uptake (CAU) (N=341)
|
|
SPECT/CT imaging with ProstaScint pretreatment effectively predicted death rates among patients with central abdominal uptake (CAU), and demonstrated that prostate cancer-specific death rates were 10 times higher in patients identified with ProstaScint as having central abdominal uptake (p=0.005).
|
|
|
|
|
|
|
|
Ellis RJ et al.
|
|
Brachytherapy (2005)
|
|
Men with prostate cancer of all risk categories who underwent imaging with ProstaScint pretreatment; patients were divided into low, intermediate, and high risk and underwent brachytherapy (N=239)
|
|
SPECT/CT imaging with ProstaScint pretreatment effectively predicted biochemical disease recurrence regardless of the patient’s risk category; 7-year outcomes data from brachytherapy patients with treatment based on the ProstaScint scan showed a significant difference in biochemical disease-free survival.
|
Radiation oncology experts have published numerous papers expressing
the potential for expanded use of ProstaScint in prostate cancer imaging due to advances in imaging technologies since the product’s
initial approval. Since the early 2000s, significantly greater image resolution has been enabled due to the advent of dual head
cameras (and improved imaging in general) along with the use of co-registered images where radiologists now combine the images
of SPECT and computerized tomography, or CT, or magnetic resonance imaging, or MRI. Because of these factors, we believe there
is significant commercial opportunity for ProstaScint.
ProstaScint Product Information
ProstaScint is provided as a two-vial kit which contains all
of the non-radioactive ingredients necessary to produce a single unit dose for administration by intravenous injection. The ProstaScint
vial contains 0.5 mg of capromab pendetide in 1 mL of sodium phosphate buffered saline solution adjusted to pH 6; a sterile, pyrogen-free,
clear, colorless solution that may contain some translucent particles. The vial of sodium acetate buffer contains 82 mg of sodium
acetate in 2 mL of water for injection adjusted to pH 5 – 7 with glacial acetic acid; it is a sterile, pyrogen-free,
clear, and colorless solution. Neither solution contains a preservative.
Each kit also includes one sterile 0.22 μm Millex® GV
filter, prescribing information, and two identification labels. The hospital is responsible for addition of Indium (In 111). ProstaScint
may also be helpful in conjunction with other scans (CT or MRI) for higher risk patients, by detecting lymph nodes in the abdomen
that are involved with prostate cancer cells, but may still appear falsely normal on CT or MRI scans.
The procedure to administer ProstaScint is as follows: the patient
is given an intravenous, or IV, infusion of the monoclonal antibody, and 30 minutes later, a scan is performed. A second scan is
done between 96 and 120 hours (4 – 5 days) after the infusion. The first scan (on the day of the infusion) takes
approximately 1 hour, while the second scan takes approximately 2.5 hours.
ProstaScint Uses
ProstaScint is indicated as a diagnostic imaging agent in newly-diagnosed
patients with biopsy-proven prostate cancer, thought to be clinically-localized after standard diagnostic evaluation (e.g. chest
x-ray, bone scan, CT scan, or MRI), who are at high-risk for pelvic lymph node metastases. It is not indicated in patients who
are not at high risk.
ProstaScint is also indicated as a diagnostic imaging agent
in post-prostatectomy patients with a rising PSA and a negative or equivocal standard metastatic evaluation in whom there is a
high clinical suspicion of occult metastatic disease. The imaging performance of Indium (In 111) ProstaScint following radiation
therapy has not been studied.
The information provided by Indium (In 111) ProstaScint imaging
should be considered in conjunction with other diagnostic information. Scans that are positive for metastatic disease should be
confirmed histologically in patients who are otherwise candidates for surgery or radiation therapy unless medically contraindicated.
Scans that are negative for metastatic disease should not be used in lieu of histological confirmation. ProstaScint is not indicated
as a screening tool for carcinoma of the prostate nor for re-administration for the purpose of assessment of response to treatment.
ProstaScint was initially marketed by Cytogen Corporation, which
was acquired by EUSA Pharma. Jazz Pharmaceuticals acquired EUSA in June 2012 but significantly reduced promotion of ProstaScint
due to a lack of strategic focus. Despite limited commercialization efforts, peak annual unit sales of ProstaScint of 8,216 kits
were achieved. At current pricing, this unit sales volume would equate to approximately $14.6 million in annual revenue.
Primsol for the Treatment of Urinary Tract Infections
In October 2015 we acquired Primsol (trimethoprim hydrochloride
oral solution) from FSC Laboratories, Inc. Primsol is the only FDA-approved trimethoprim-only oral solution for urinary tract infections
and is standard therapy for such infections. Primsol is a sulfa-free, pleasant tasting, dye-free liquid that is appropriate for
patients that are sulfa allergic and individuals that have difficulty swallowing pills. Primsol has demonstrated efficacy in eradicating
key pathogens implicated in urinary tract infections including
E. coli
and has demonstrated similar efficacy to trimethoprim-sulfamethoxazole
combination agents. Primsol addresses a significant issue as many patients experience an allergic reaction to sulfamethoxazole.
As the only oral solution containing only trimethoprim, Primsol offers distinct advantages over sulfa-containing antibacterial
agents. Primsol was approved by the FDA in 2000 and was originally marketed by Ascent Pediatrics. FSC Laboratories acquired Primsol
from Taro Pharmaceutical.
On April 4, 2016, we entered into a co-promotion agreement for
Primsol oral solution with Allegis Pharmaceuticals. Under the agreement, the third party will exclusively promote Primsol to pediatricians
across the U.S. We retain all other rights in the U.S. and around the world and will continue to market the product in urologic
indications. This co-promotion enables us to focus exclusively on the urology channel while monetizing Primsol by virtue of a relationship
with a company focused on selling to a non-core non-urology audience than can drive prescription growth of Primsol.
About Primsol
Primsol is a solution of the synthetic antibacterial
trimethoprim in water prepared with the aid of hydrochloric acid. Each 5 mL for oral administration contains trimethoprim
hydrochloride equivalent to 50 mg trimethoprim and the inactive ingredients bubble gum flavor, fructose, glycerin,
methylparaben, monoammonium glycyrrhizinate, povidone, propylparaben, propylene glycol, saccharin sodium, sodium benzoate,
sorbitol, water and hydrochloric acid and/or sodium hydroxide to adjust pH to a range of 3.0 – 5.0. Primsol
is indicated for the treatment of initial episodes of uncomplicated urinary tract infections in adults due to susceptible
strains of the following organisms:
Escherichia coli, Proteus mirabilis, Klebsiella pneumoniae, Enterobacter
species
and coagulase-negative Staphylococcus species, including
S. saprophyticus
.
For the treatment of uncomplicated urinary tract infections
the usual oral adult dosage of Primsol is 100 mg (10 mL) every 12 hours or 200 mg (20 mL) every 24 hours, each for 10 days.
Urinary tract infections, or UTIs are among the most common
diagnoses in the U.S., where the prevalence is estimated at 8.1 million physician office visits. Additionally, one fourth of women
will have recurrent UTIs requiring the repeated use of oral antibiotics. Current UTI treatment recommendations include the use
of trimethoprim-containing products given the compound’s longstanding, established efficacy profile in effectively eradicating
the key pathogens implicated in UTIs. Primsol has demonstrated efficacy in the eradication of the key pathogens implicated in urinary
tract infections as demonstrated by a series of quantitative methods and clinical studies.
Quantitative methods are used to determine antimicrobial minimum
inhibitory concentrations, or MICs, to eradicate pathogens implicated in urinary tract infections. These MICs provide estimates
of the susceptibility of bacteria to antimicrobial compounds. The MICs should be determined using a standardized procedure. Standardized
procedures are based on a dilution method (broth or agar) or equivalent with standardized inoculum concentrations and standardized
concentrations of trimethoprim powder.
The MIC values should be interpreted according to the following
criteria:
For testing aerobic microorganisms isolated from urinary tract
infections:
MIC (mcg/mL) Interpretation
|
≤ 8
|
Susceptible (S)
|
|
|
|
|
≥ 16
|
Resistant (R)
|
A report of “Susceptible” indicates that the pathogen
is likely to be inhibited if the antimicrobial compound in the blood reaches the concentrations usually achievable. A report of
“Intermediate” indicates that the result should be considered equivocal, and, if the microorganism is not fully susceptible
to alternative, clinically feasible drugs, the test should be repeated. This category implies possible clinical applicability in
body sites where the drug is physiologically concentrated or in situations where high dosage of drug can be used. This category
also provides a buffer zone which prevents small uncontrolled technical factors from causing major discrepancies in interpretation.
A report of “Resistant” indicates that the pathogen is not likely to be inhibited if the antimicrobial compound in
the blood reaches the concentrations usually achievable; and other therapy should be selected.
Standardized susceptibility test procedures require the use
of laboratory control microorganisms to control the technical aspects of the laboratory procedures. Standard trimethoprim powder
as contained in Primsol provides the following MIC values against E. coli demonstrating significant susceptibility of this primary
causal organism in urinary tract infections:
|
Microorganism MIC
|
(mcg/mL)
|
|
|
|
|
Escherichia coli
|
0.5 – 2
|
Trimethoprim has been shown to be active against the following
microbial strains as indicated below and demonstrated through in vitro and clinical studies.
Aerobic gram-positive microorganisms
|
·
|
Staphylococcus species (coagulase-negative strains, including
S. saprophyticus)
|
|
·
|
Streptococcus pneumoniae
(penicillin-susceptible strains)
|
Aerobic gram-negative microorganisms
|
·
|
Haemophilus influenza (excluding beta-lactamase negative, ampicillin resistant strains)
|
Primsol has demonstrated efficacy in the treatment of uncomplicated
urinary tract infections without the potential side effects and allergic reactions sometimes attributed to sulfa-containing trimethoprim
formulations. Importantly, and despite the fact that FSC Laboratories did not historically promote Primsol to urologists, 26% of
Primsol prescriptions over the six-year period of September 2009 through August 2015 were written by urologists. This, we believe,
underscores the unmet market opportunity for Primsol in presenting this treatment option more assertively to urologists. As our
sales team will already be accessing urologists through their promotion of ProstaScint, Primsol can be positioned as a first-line
treatment option for urologists treating uncomplicated UTIs. With two FDA-approved products directed at urologists, we are able
to efficiently drive awareness and increase through a focused field effort. ProstaScint and Primsol are commercially complementary
and enable us to utilize our field sales force’s synergies to affect prescription growth on both products while directing
promotional efforts to our urology customers.
Primsol was previously marketed by FSC Laboratories. Due to
FSC’s strategic refocusing and new product acquisitions to which sales efforts were diverted, Primsol had only limited commercial
emphasis in the three to four years preceding our acquisition of the product. Despite FSC’s limited commercial focus, annual
unit sales of 7,842 units were achieved. At current pricing, this would result in annual revenues of approximately $5.3 million.
MiOXSYS In Vitro Diagnostic System for Male Infertility
Male infertility is a significant medical condition that urologists
and infertility specialists treat frequently in the office setting or specialized fertility centers around the world. Of all sexually
active couples, 8% to 12% are infertile and male infertility is the sole cause or contributing factor up to 50% of the time. The
global male infertility market is large and growing. The market for male infertility diagnosis and treatments is expected to grow
to more than $300 million globally by 2020, with a CAGR of nearly 5% from 2014 to 2020. Despite the prevalence of male infertility,
difficulties remain in effectively diagnosing root causes. Oxidative stress assessment is considered a standard practice in complex
andrology laboratories around the world, but due to various factors oxidative stress testing is not routinely employed in clinicians’
offices or standard laboratory settings.
Seminal oxidative stress has been well established throughout
the peer-reviewed literature to play a substantial role in unexplained male infertility, and researchers and clinicians actively
consider oxidative stress when conducting laboratory infertility assessment. While oxidative stress is well established as a leading
contributing factor to male infertility, a significant proportion of male infertility remains unexplained in part because of the
lack of standardized tests available to clinicians and researchers to assess oxidative stress in semen and plasma. This lack of
standardization has resulted in poor implementation of semen and plasma analysis around the world. Further, current testing platforms
are cost-prohibitive for small office settings or local medical laboratories and require extensive training and on-site expertise.
Additionally, antioxidant supplementation is frequently recommended to patients by clinicians without an effective method of measuring
treatment success. As such, we believe introducing the MiOXSYS System to assess oxidative stress levels in semen and seminal fluid
represents a significant commercial opportunity and novel way for clinicians to assess male factor infertility and assess therapeutic
responses of patients in a simple, reliable, and cost-effective way.
The MiOXSYS System was CE marked in January 2016, and we expect
to initiate early commercialization efforts outside the U.S. by the middle of fiscal 2017.
An attractive aspect of the reproductive health market relates
to reimbursement as infertility treatments and the associated diagnostic tests are generally paid directly by patients. The current
infertility treatments could cost in excess of $10,000 per treatment cycle, so the addition of a moderately priced oxidative stress
test would consume nominal relative costs while providing specific, actionable information needed to improve the oxidative status
of infertile patients. The current infertility treatments include antioxidant supplements and lifestyle modifications that lower
oxidative stress (e.g., smoking cessation, exercise, dietary changes, etc.), so the measurements reported by the MiOXSYS System
could effectively guide treatment in the infertile patients.
The global male infertility market is expected to grow to more
than $300 million by 2020. With a substantial base of conditions for which the MiOXSYS System may present utility, we believe there
is significant revenue potential from this first-in-class system.
As part of our strategy to develop future clinical applications
of the RedoxSYS System (the MiOXSYS System’s predecessor product for plasma and whole blood detection), we have conducted
initial studies in male reproductive health. Male infertility is a significant medical condition in which oxidative stress is well
known to play a substantial role. As such, we believe developing a clinical application to assess oxidative stress levels with
the uniquely designed and programmed MiOXSYS System for semen analysis represents a significant commercial opportunity. Oxidative
stress is well established as a leading contributing factor to male infertility. Further, a significant proportion of male infertility
remains unexplained in part because of the lack of standardized tests available to clinicians and researchers to assess oxidative
stress in semen and seminal plasma. This lack of standardization has resulted in poor implementation of semen and plasma analysis
around the world. Further, currently available tests are cumbersome, time consuming to perform, and costly.
We conducted initial proof-of-concept clinical studies in male
infertility with a leading research center in the United States, which demonstrated that oxidation-reduction potential effectively
measures oxidative stress levels in semen and seminal plasma — and that these levels strongly correlate with established
markers of infertility. Semen analysis studies are routinely conducted to assess causes of infertility, so we expect clinicians
and oxidative stress researchers to readily integrate the MiOXSYS System into routine use upon the completion of more extensive
studies and regulatory clearance for this use. Additional studies are now in the late planning stages that will evaluate the MiOXSYS
System’s performance in the detection of oxidative stress levels and correlations with key semen parameters in both healthy
and infertile males. The MiOXSYS System must receive 510(k) de novo clearance from the FDA before we can market it for clinical
use in the United States. We expect to begin envolling patients in a single clinical study prior to year-end with 501(k) de novo
clearance expected in late 2017. Of the $300 million male infertility market projected for 2020, the North American, Middle Eastern,
and Asia Pacific markets dominate due to prevalence, awareness of treatment, and availability of treatment resources. Thus, it
is important that we have already established distribution relationships and direct access to major oxidative stress researchers
in many of these important markets.
Following our initial proof of concept studies with a leading
center in the United States with the MiOXSYS system, we conducted our CE mark-enabling study with over 300 infertile patients.
The two key studies conducted with these leading centers are presented below.
United States-Based Proof-of-Concept Clinical Study
Fifty-one (51) male patients were seen in a national clinic
for suspected infertility. In addition to standard semen analyses (WHO 5
th
Edition, 2010), samples were measured for
oxidative stress using the MiOXSYS System. Raw sORP values were normed to sperm concentration (mv/10
6
sperm/mL) and
compared across six semen parameters that are associated with fertility: ejaculate volume, concentration, total sperm number, total
motility, progressive motility, and normal morphology. Higher sORP values are associated with a higher state of oxidative stress.
Patients with abnormally low ejaculate volume had similar sORP
values as those with a normal volume. Those with an abnormally low sperm concentration or overall total number, have significantly
higher sORP values than those in the normal range. Abnormally few motile sperm or few sperm with a progressive motility were also
associated with significantly higher sORP values than those in the normal range. Lastly, semen samples that had fewer normal sperm
had slightly, but not significantly, higher sORP values. Thus, most abnormal semen parameters appear to be associated with higher
measures of oxidative stress.
When samples that achieve all six parameters associated with
fertile semen are compared to samples that fail one or more of the parameters, the samples that meet the parameters have significantly
lower sORP values than those that fail one or more. A cutoff value of 1.635 mv/10
6
sperm/mL separated those that met
fertility standards from those that did not. In the current study, 85.7% of samples that met standards fell below this cutoff value,
whereas 71.8% of those that failed one or more parameters had sORP values above this cutoff. The probability that a semen sample
with a measured sORP value higher than the cutoff is abnormal in at least one of the semen parameters, is 96.5%. Lastly, the more
parameters that a semen sample falls within the abnormal range, the higher the sORP values, thus those that are abnormal on five
or six parameters have higher sORP values than those that are abnormal on one or two.
Data derived from patients of the national clinic confirms the
results obtained in an international fertility clinic. Overall, semen that falls into the abnormal range for concentration, total
number, motility, and morphology have higher levels of oxidative stress as indicated by higher sORP values. These values are uniquely
obtained using the MiOXSYS System for semen analysis.
In April 2016, we observed encouraging data from two prospective
studies of the MiOXSYS System that demonstrated its clinical utility as a tool for measuring ORP to assess the degree of oxidative
stress levels in human semen.
The first study measured sORP in the semen samples of infertile
men that correlated well with the sperm concentration, motility, and morphology. The second study further suggests that sORP is
an easy to determine one-step indicator of increased oxidative stress in semen samples of infertile men especially with leukocytospermia.
The results are currently being validated in a larger cohort of infertile men.
International Pivotal Clinical Study
Three-hundred sixty-six (366) male partners from couples seeking
fertility advisement in an international clinic were recruited. In addition to standard semen analyses (WHO 5
th
Edition,
2010), samples were measured for oxidative stress using the MiOXSYS System. Raw sORP values were normed to sperm concentration
(mv/10
6
sperm/mL) and compared across six semen parameters that are associated with fertility: ejaculate volume, concentration,
total sperm number, total motility, progressive motility, and normal morphology. Higher sORP values are associated with a higher
state of oxidative stress.
Patients with abnormally low ejaculate volume had similar sORP
values as those with a normal volume. Those with an abnormally low sperm concentration or overall total number, have significantly
higher sORP values than those in the normal range. Abnormally few motile sperm or few sperm with a progressive motility were also
associated with significantly higher sORP values than those in the normal range. Lastly, semen samples that had fewer normal sperm
had significantly higher sORP values than those that fell into the range of normal morphology. Thus, most abnormal semen parameters
appear to be associated with higher measures of oxidative stress.
When samples that achieve all six parameters associated with
fertile semen are compared to samples that fail one or more of the parameters, the samples that meet the parameters have significantly
lower sORP values than those that fail one or more. A cutoff value of 1.635 mv/10
6
sperm/mL separated those that met
fertility standards from those that did not. In the current study, 91.43% of samples that met fertility standards fell below this
cutoff value whereas 59.5% of those that failed one or more had sORP values above this cutoff. The probability that a semen sample
with a measured sORP value higher than the cutoff is abnormal in at least one of the semen parameters, is 98.6%. Lastly, the more
parameters that a semen samples falls within the abnormal range, the higher the sORP values, thus those that are abnormal on five
or six parameters have higher sORP values than those that are abnormal on one or two.
Data derived from patients at this international clinic confirms
the results obtained in United States fertility clinic. Overall, semen that falls into the abnormal range for concentration, total
number, motility, and morphology have higher levels of oxidative stress as indicated by higher sORP values. These values are obtained
uniquely using the MiOXSYS System for semen analysis.
Proof of concept clinical studies have been conducted at the
Cleveland Clinic’s Department of Urology, and two posters were presented at the 2015 American Society for Reproductive Medicine
in November 2015. These abstracts are presented below.
Establishing the Oxidation-Reduction Potential in Semen
and Seminal Plasma
A. Agarwal,
1
S. S. Du Plessis,
1,2
R.
Sharma,
1
L. Samanta,
1,3
A. Harlev,
1,4
G. Ahmad,
1,5
S. Gupta,
1
E. S.
Sabanegh
6
; 1. Center For Reproductive Medicine, Cleveland Clinic, Cleveland, OH, 2. Medical Physiology, Stellenbosch
University, Tygerberg, South Africa, 3. Redox Biology Laboratory, School of Life Sciences, Ravenshaw University, Orissa, India,
4. Soroka Medical Center, Ben-Gurion University, Beer Sheva, Israel, 5. Physiology and Cell Biology, University of Health Sciences,
Lahore, Pakistan, 6. Department of Urology, Cleveland Clinic, Cleveland, OH
Abstract:
Objective:
Oxidation-reduction potential (ORP)
is a novel measure of oxidative stress or redox imbalance in biological samples. Static ORP (sORP) provides an integrated measure
of the balance between total oxidants and reductants in a biological system, whereas capacity ORP (cORP) equates to the amount
of antioxidant reserves. sORP has been shown to correlate well with illness and injury severity that accompanies the state of oxidative
stress; cORP correlates with the ability to respond to illness or injury. Our objectives were to evaluate whether 1) ORP can be
measured in semen and seminal plasma samples and 2) ORP levels correlate with sperm motility.
Design:
Prospective study measuring ORP in
both semen and seminal plasma.
Materials and Methods:
Semen samples (n=18)
from normal control subjects were divided into two fractions and the seminal plasma was isolated from one fraction (300 x g, 7min).
Sperm count and motility were assessed manually. sORP (mV/106 sperm) and cORP (μC/106 sperm) were measured in both fractions
(RedoxSYS®, Aytu BioScience). Values are reported as Mean ± SEM. Spearman correlation and Receiver Operating Characteristic
curves (ROC) were used for statistical analysis.
Results:
sORP and cORP levels in semen correlated
significantly with the levels in seminal plasma. A significant negative correlation existed between sperm motility and sORP in
both semen (r=-0.609; p=0.004) and seminal plasma (r=-0.690; p=0.002). Furthermore, a sORP cutoff of 4.73mV/106 sperm in semen
(sensitivity = 100%, specificity = 89.5%, AUC=0.947) and 4.65mV/106 sperm in seminal plasma (sensitivity = 100%, specificity =
93.8%, AUC = 0.969) was highly predictive of abnormal sperm motility.
Conclusions:
RedoxSYS® accurately measured
sORP and cORP in both semen and seminal plasma samples. Based on high sensitivity as assessed by ROC analysis, sORP levels can
be used to screen infertile men with oxidative stress. These results are being validated in a larger cohort of infertile men.
Effect of Time on Oxidation-Reduction Potential in Semen
and Seminal Plasma
R. Sharma,
1
S. S. Du Plessis,
1,2
A.
Agarwal,
1
A. Harlev,
1,3
L. Samanta,
1,4
G. Ahmad,
1,5
S. Gupta,
1
E. S.
Sabanegh
6
; 1. Center For Reproductive Medicine, Cleveland Clinic, Cleveland, OH, 2. Medical Physiology, Stellenbosch
University, Tygerberg, South Africa, 3. Soroka Medical Center, Ben-Gurion University, Beer Sheva, Israel, 4. Redox Biology Laboratory,
School of Life Science, Ravenshaw University, Orissa, India, 5. Physiology and Cell Biology, University of Health Sciences, Lahore,
Pakistan, 6. Department of Urology, Cleveland Clinic, Cleveland, OH
Abstract:
Objective:
Oxidation-reduction potential (ORP)
is a novel measure of oxidative stress or redox imbalance in biological fluids. Reactive oxygen species (ROS) are highly reactive
and have a very short half-life. ROS levels in the seminal ejaculate should be measured within an hour after collection to prevent
a reduction in ROS levels over time. The traditional methods of measuring seminal ROS are time sensitive and time consuming, making
it difficult to use them for diagnostic purposes. It would be highly advantageous to employ a method that is independent of semen
age and provides results in real time. The objective was to assess the effect of time on static ORP (sORP), which provides a snapshot
of current redox balance, and capacity ORP (cORP) which is indicative of the amount of antioxidant reserves available.
Design:
Prospective study measuring ORP in
semen and seminal plasma samples at time 0 and 120 minutes. Materials and Methods: The sORP and cORP of both semen (n=18) and seminal
plasma (n=15) samples from normal control subjects were measured after liquefaction (time 0) and after 120 minutes of incubation
at room temperature (RedoxSYS®, Aytu BioScience). Values are mean ± SEM. Spearman correlation was used for statistical
analysis.
Results:
A significant correlation was seen
between sORP at time 0 and 120 minutes in semen and seminal plasma. Similar correlations were found for cORP values at both time
intervals.
Conclusions:
ORP values are not affected by
the age of semen or seminal plasma for up to 120 minutes, making it easier to employ this new technology for diagnostic use.
RedoxSYS System for Research Use
We completed the development of the RedoxSYS System (MiOXSYS’
predecessor product) during the two years preceding the Merger. In 2014, we received ISO 13485 certification, demonstrating our
compliance with global quality standards in medical device manufacturing. This enabled the launch of the RedoxSYS System into the
research market around the world. We also received a CE marking in Europe in January 2016 and Health Canada clearance in March
2016 to begin the market development of the RedoxSYS System as a clinical diagnostic in Europe, Canada, and elsewhere around the
world where CE marking is recognized. We launched sales efforts into the research market in late 2014 and since that time have
placed the RedoxSYS System at a number of prominent research centers in the United States, Europe, and Israel. We expect to leverage
these research relationships and build numerous applications in areas where researchers are studying oxidative stress. Currently,
there are no available research platforms that measure oxidation-reduction potential in biologic fluids (i.e., blood, plasma, serum,
semen, seminal fluid, cerebrospinal fluid, tissue, and cells). While oxidative stress is commonly studied in research settings
around the world (both academia and industry), the current assessment methods are incomplete, time consuming, and often impractical
for assessing oxidative stress completely. To position the RedoxSYS System effectively in the research market, we have placed key
personnel in the United States, Europe, and Asia to develop direct research business relationships as well as distribution networks.
Through these proof of concept studies and clinical exploratory studies, we identified the application of oxidation-reduction potential
in male infertility assessment. As such, MiOXSYS was developed specifically for assessing semen and seminal plasma ORP levels.
While we expect additional clinical applications to be developed through these applications, our near-term focus is on completing
the development of MiOXSYS for use in semen analysis for male infertility assessment.
Background on the MiOXSYS System
MiOXSYS is a novel, portable device that measures oxidation-reduction
potential, or ORP, a global measure of oxidative stress. MiOXSYS is the first and only system that measures ORP in biologic specimens
to provide a complete measure of redox balance, which is broadly implicated across a wide range of both acute and chronic conditions.
Potential Role of ORP in Diagnosing Male Infertility
Oxidation-reduction potential is defined in the published literature
as follows:
“ORP in a biological system is an integrated measure of
the balance between total oxidants and reductants. In plasma, many constituents contribute to the ORP. Reactive oxygen species
(ROS), such as the superoxide ion, hydroxyl radical, hydrogen peroxide, nitric oxide, peroxynitrite, transition metal ions, and
hypochlorous acid, contribute to the oxidative potential. Plasma reductants include thiols, vitamin C, tocopherol, β-carotene,
lycopene, uric acid, bilirubin, and flavonoids. Enzymes such as superoxide dismutase, or SOD, catalase, and glutathione peroxidase,
are involved in the conversion of ROS into less reactive species. ORP monitoring of plasma represents a single measurement that
integrates the overall quantitative balance among the oxidants and reductants of the system.”
Given that ORP represents a single, global measure of oxidative
stress in a biological system, we believe the potential for ORP to serve as a standardized marker in semen analysis and other aspects
of infertility assessment is significant. A major limitation of oxidative stress assays relates to the fact that there is poor
standardization in testing. As many factors contribute to oxidative stress (e.g., free radical proliferation, antioxidant depletion,
DNA damage, etc.), it is important to have an integrated measure that combines all known and unknown oxidants and reductants in
the respective system into one measurement. We believe ORP is an integrated measure of oxidative stress that can be easily and
quickly measured with the MiOXSYS System.
In the context of infertility, having an integrated value representing
all relevant biologic constituents contributing to oxidative stress will enable simple, robust analysis in a two to three-minute
test. There are various techniques in use to assess semen in cases of male infertility. The most commonly implemented techniques
involve DNA fragmentation, oxidative stress analysis, microscopic examination, sperm penetration assays, sperm agglutination, computer
assisted semen analysis, and others. The currently available oxidative stress analysis tools are widely considered expensive and
cumbersome to use in routine clinical practice. In both developed countries as well as in the developing world, expensive analysis
tools and recurring reagent expenses make routine testing nearly impossible to implement with regularity.
The MiOXSYS System Overview
The MiOXSYS System is comprised of two distinct, patented components
that enable a system capable of measuring the ORP and antioxidant capacity of a biological fluid: an analyzer and sensor strips.
In mechanical terms, ORP is defined as the potential between a working electrode, and a reference electrode at equilibrium. The
RedoxSYS System has been specifically studied in human whole blood, serum, semen, seminal plasma, blood plasma, and other biological
fluids.
The MiOXSYS System measures two distinct elements to determine
a patient’s oxidation reduction potential:
|
·
|
Static ORP — the standard potential between a working electrode and a reference electrode with no driving current
(or extremely small current). This is proportional to the balance of redox agents and is what is classically defined as ORP. Low
ORP values mean that the biological sample is in the normal range of oxidative stress. Higher than normal ORP values means that
the biological sample is in a higher oxidation state.
|
|
·
|
Capacity — the measure of antioxidant reserve available in the body’s system. High capacity values mean
that the biological sample has levels of antioxidant reserves. Lower than normal capacity values means that the biological sample
has below normal antioxidant reserves.
|
The MiOXSYS Analyzer
The MiOXSYS analyzer is a portable, lightweight desktop platform
that may be used in a clinical or research laboratory or near a patient care area. The analyzer is a small device that accepts
an inserted sensor that has collected a small specimen as obtained by traditional specimen collection procedures. The analyzer
is battery powered and equipped with a custom 5 lead strip connector. The reader consists of a Galvanostat analog circuit with
greater than 1012 MHz input impedance.
The analyzer contains a 10 MHz external crystal (internal 4X
PLL for 40 MHz operation), and a programming/serial header is externally accessible. The device has internal power/heart-beat indicator
LED, primary storage of 128Mbit (16Mbyte) SPI Flash (3.3V) (Bulk data storage), and secondary storage of 2Mbit (256Kbyte) SPI FRAM
(3.3V) (Hi-Speed Storage).
The MiOXSYS analyzer contains a user-friendly interface that
is flexibly designed to accommodate multiple endpoints depending upon the specific clinical condition being considered. The interface
is LCD, 16x2, with a white backlight, variable delay auto-off time-out. Two status LED indicators are visible through front panel
mounted lenses. Further, the reader contains three DPDT push-button switches (Left, Center, Right), power on button(s) for battery
mode operation, switch usage switch, audible alerts, strip detection, and test completion signals.
Further, the MiOXSYS analyzer enables data transfer, has USB
serial communication, and is configured for data download to a connected PC.
The MiOXSYS analyzer’s power management consists of an
external 5VDC power jack with input capacitance and filtering, a boost converter supplied by external 5VDC power or internal Li-Ion
battery, and provides main 5VDC digital board supply. The reader functions with or without the battery connected. The battery lasts
in excess of 24 hours with continuous operation to enable prolonged use outside of a laboratory setting.
Image of the MiOXSYS Analyzer
The MiOXSYS Sensor Strips
The MiOXSYS sensor strips, via standard biological specimen
collection techniques, receive 20 – 40 microliters of a specimen from which the ORP clinical analysis is performed.
The ORP sensor strips are small, disposable, and biocompatible and consist of a ceramic substrate and a five-lead configuration.
Significant intellectual property surrounds the design, construct, and electrochemical algorithms associated with the sensors.
Image of the MiOXSYS Sensor Strips
Regulatory Pathway
We achieved ISO 13485: 2003 in late 2013 following the successful
development of a compliant medical device quality system. Following the issuance of our ISO certification, we obtained CE marking
for the RedoxSYS System, which has enabled initial market development in Europe and markets that accept a CE marking. In December
2015, we achieved CE marking for MiOXSYS following technical validation and clinical study completion in male infertility. In March
2016, we obtained Health Canada Class II Medical approvals for MiOXSYS. In the United States, we intend to pursue 510k de novo
clearance with the FDA for the MiOXSYS System. We have recent, ongoing correspondence with the FDA and have confirmed that MiOXSYS
is appropriate for the 510k de novo pathway, and we are pursuing regulatory clearance through this pathway.
United States Commercial Strategy
If the clinical studies to measure oxidative stress in male
infertility are successful, we expect to pursue that intended use for the MiOXSYS System via the FDA 510k de novo pathway. If cleared
for the infertility intended use, we intend to seek to commercialize the MiOXSYS System as a new tool for the assessment of oxidative
stress in infertility in men. We envision pursuing a direct sales effort to high priority urology/andrology laboratories, infertility
clinics and reference centers across the United States. We have identified the primary, influential centers in the United States
and believe our commercial deployment will be efficient through a focused sales and marketing effort. We intend to seek to sell
the MiOXSYS System into individual centers and laboratories but will focus our revenue model on the repeat ordering of the disposable,
single use MiOXSYS sensor strips. We expect to realize a favorable gross margin on the basis of estimated low cost of goods sold
on both components of the system. We envision an average selling price for the disposable sensors of approximately $25 – $40.
We envision selling the MiOXSYS analyzers for $2,500 – $5,500 but will also pursue an instrument rental agreement
model with minimum disposable sensor purchase requirements.
We also intend to leverage our urology commercialization efforts
with other products with a focus on urology centers, infertility clinics, and reproductive health laboratories around the United
States.
We believe a focused sales force at the onset of commercialization
will enable effective representation of our products and penetration of the reproductive health market. Our sales efforts into
the research markets will be enabled initially through a full-time business development professional who will focus on collaborative
research and research sales to major oxidative stress centers in the United States. We expect to pursue identical pricing in the
research market and the clinical diagnostics markets.
ROW Commercial Strategy
We intend to undertake a similar strategy outside the United
States for the RedoxSYS and MiOXSYS systems while complementing our efforts in infertility and research with adjunct applications
in critical care conditions because the fertility market outside the U.S. is 10 times larger than that in the U.S. To efficiently
execute across our strategy, we intend to utilize a network of established distributors in the target markets in Europe and Asia.
We have already engaged with distributors in multiple countries, while many other potential distributors are in advanced stages
of discussions with us. We anticipate slightly reduced pricing outside the U.S. for the disposable sensors given the anticipated
lower pricing observed ex-US for diagnostic and research products.
Our Business Development Strategy — Identifying
& Acquiring Complementary Urology Assets
A key growth and value driver for our Company is the ongoing
identification and acquisition of novel urology products for commercialization. We seek to identify unique products with urologic
indications that may be non-strategic, undervalued or under-resourced by the company that currently markets the product. We believe
that we can continue to acquire strategically aligned products at an appropriate valuation and grow those products via our focused
sales and marketing efforts. We will also consider acquiring novel, late-stage development products that represent unique commercial
opportunities and can be efficiently developed.
We are actively identifying unique product assets to acquire
based on specific attributes including but not limited to: therapeutic area/indication; growth potential; intellectual property
position (patents, regulatory, manufacturing or development technicalities, etc.), valuation, strategic fit, commercial orientation
and other factors. Indications of interest include products to treat conditions such as urinary incontinence, sexual dysfunction,
hypogonadism, prostate and other urological cancers, urinary tract infections, and other urological conditions.
Past Product Candidate — Zertane for the
Treatment of Premature Ejaculation
Zertane, is a specifically formulated orally disintegrating
tablet, or ODT, of tramadol hydrochloride patented for the on-demand treatment of premature ejaculation, or PE. We had been developing
Zertane utilizing a regulatory pathway pursuant to Section 505(b)(2) of the FDCA, as the active ingredient is already well characterized
for the treatment of pain, and we were relying on the FDA’s finding of safety of tramadol hydrochloride to support its use
in a new indication, PE, at a lower dose. The FDA accepted the IND for Zertane in late 2015.
While we had partnerships in place to market Zertane in
South Korea and Brazil in the event of regulatory approval in those countries, and had entered into an agreement with Endo Ventures
Limited, which recently acquired Paladin Labs Inc., or Paladin, a leading Canadian specialty pharmaceutical company, to provide
exclusive rights to market, sell and distribute Zertane in Canada, the Republic of South Africa, certain countries in Sub-Saharan
Africa, Colombia and Latin America, we decided to cease the development of Zertane as of June 30, 2016 because we are directing
our resources towards our commercial-stage products and do not plan to complete the necessary clinical trials and bring Zertane
to market ourselves prior to the expiration of the patent covering the product. We intend to attempt to sell or out-license Zertane
to one or more third parties to develop independently. We can provide no assurance that we will be able to out-license or sell
Zertane or as to the value, if any, we might receive for Zertane in the event we were to out-license or sell it.
Government Regulation
While we do not have any pharmaceutical product candidates that
we are actively developing as of the date of this prospectus, we may in the future acquire such products. Currently, we are developing
two medical device candidates, the RedoxSYS and MiOXSYS Systems, for which regulatory approval must be received before we can market
them. Regulatory approval processes for our current and any future product candidates are discussed below.
Approval Process for Pharmaceutical Products
FDA Approval Process for
Pharmaceutical Products
In the United States, pharmaceutical products are subject to
extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act, or the FDC Act, and other federal and state statutes
and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval,
labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical
products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial
sanctions, such as FDA refusal to approve pending NDAs, warning letters, product recalls, product seizures, total or partial suspension
of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.
Pharmaceutical product development in the United States typically
involves the performance of satisfactory nonclinical, also referred to as pre-clinical, laboratory and animal studies under the
FDA’s Good Laboratory Practice, or GLP, regulation, the development and demonstration of manufacturing processes, which conform
to FDA mandated current good manufacturing requirements, or cGMP, including a quality system regulating manufacturing, the submission
and acceptance of an IND application, which must become effective before human clinical trials may begin in the United States,
obtaining the approval of Institutional Review Boards, or IRBs, at each site where we plan to conduct a clinical trial to protect
the welfare and rights of human subjects in clinical trials, adequate and well-controlled clinical trials to establish the safety
and effectiveness of the drug for each indication for which FDA approval is sought, and the submission to the FDA for review and
approval of an NDA. Satisfaction of FDA requirements typically takes many years and the actual time required may vary substantially
based upon the type, complexity, and novelty of the product or disease.
Pre-clinical tests generally include laboratory evaluation of
a product candidate, its chemistry, formulation, stability and toxicity, as well as certain animal studies to assess its potential
safety and efficacy. Results of these pre-clinical tests, together with chemistry, manufacturing controls and analytical data and
the clinical trial protocol, which details the objectives of the trial, the parameters to be used in monitoring safety, and the
effectiveness criteria to be evaluated, along with other requirements must be submitted to the FDA as part of an IND, which must
become effective before human clinical trials can begin. The entire clinical trial and its protocol must be in compliance with
what are referred to as good clinical practice, or GCP, requirements. The term, GCP, is used to refer to various FDA laws and regulations,
as well as international scientific standards intended to protect the rights, health and safety of patients, define the roles of
clinical trial sponsors and assure the integrity of clinical trial data.
An IND automatically becomes effective 30 days after receipt
by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the intended conduct of the trials
and imposes what is referred to as a clinical hold. Pre-clinical studies generally take several years to complete, and there is
no guarantee that an IND based on those studies will become effective, allowing clinical testing to begin. In addition to FDA review
of an IND, each medical site that desires to participate in a proposed clinical trial must have the protocol reviewed and approved
by an independent IRB or Ethics Committee, or EC. The IRB considers, among other things, ethical factors, and the selection and
safety of human subjects. Clinical trials must be conducted in accordance with the FDA’s GCP requirements. The FDA and/or
IRB may order the temporary, or permanent, discontinuation of a clinical trial or that a specific clinical trial site be halted
at any time, or impose other sanctions for failure to comply with requirements under the appropriate entity jurisdiction.
Clinical trials to support NDAs for marketing approval are typically
conducted in three sequential phases, but the phases may overlap. In Phase 1 clinical trials, a product candidate is typically
introduced either into healthy human subjects or patients with the medical condition for which the new drug is intended to be used.
The main purpose of the trial is to assess a product candidate’s
safety and the ability of the human body to tolerate the product candidate. Phase 1 clinical trials generally include less than
50 subjects or patients. During Phase 2 trials, a product candidate is studied in an exploratory trial or trials in a limited number
of patients with the disease or medical condition for which it is intended to be used in order to: (i) further identify any possible
adverse side effects and safety risks, (ii) assess the preliminary or potential efficacy of the product candidate for specific
target diseases or medical conditions, and (iii) assess dosage tolerance and determine the optimal dose for Phase 3 trials. Phase
3 trials are generally undertaken to demonstrate clinical efficacy and to further test for safety in an expanded patient population
with the goal of evaluating the overall risk-benefit relationship of the product candidate. Phase 3 trials are generally designed
to reach a specific goal or endpoint, the achievement of which is intended to demonstrate the candidate product’s clinical
efficacy and adequate information for labeling of the approved drug.
There are three main types of NDAs, which are covered by Section
505 of the FDC Act: (1) an application that contains full reports of investigations of safety and efficacy (Section 505(b)(1));
(2) an application that contains full reports of investigations of safety and effectiveness but where at least some of the information
required for approval comes from studies not conducted by or for the applicant and for which the application has not obtained a
right of reference (Section 505(b)(2)); and (3) an application that contains information to show that the proposed product is identical
in active ingredient, dosage form, strength, route of administration, labeling, quality, performance characteristics, and intended
use, among other things, to a previously approved product (Section 505(j)). Section 505(b)(2) expressly permits the FDA to rely,
for approval of an NDA, on data not developed by the applicant. In the pre-IND briefing meeting with Ampio and in June 2012, the
FDA agreed that our NDA may be submitted under Section 505(b)(2). As such, we intend to rely on studies published in the scientific
literature and reference FDA-approved NDAs for tramadol-containing products (NDAs 21-693, 20-281 and 21-692) to support the safety
and efficacy demonstrated in our clinical program.
After completion of the required clinical testing, an NDA is
prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the U.S. The
NDA must include the results of all pre-clinical, clinical, and other testing and a compilation of data relating to the product’s
pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA is substantial. Under federal law,
the submission of most NDAs is additionally subject to a substantial application user fee, currently exceeding $2.3 million and
the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment user fees, currently
approximately $0.1 million per product and $0.6 million per establishment. These fees are typically increased annually.
The FDA has 60 days from its receipt of an NDA to
determine whether the application will be accepted for filing based on the FDA’s threshold determination that it is
sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth
review. The FDA has agreed to certain performance goals in the review of NDAs. Most such applications for standard review
drug products are reviewed within ten months; most applications for priority review drugs are reviewed in six months.
Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment
where no adequate therapy exists. The review process for both standard and priority review may be extended by the FDA for
three additional months to consider certain late-submitted information, or information intended to clarify information
already provided in the submission. The FDA may also refer applications for novel drug products, or drug products which
present difficult questions of safety or efficacy, to an advisory committee — typically a panel that includes
clinicians and other experts — for review, evaluation, and a recommendation as to whether the application
should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such
recommendations. Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance
with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. The FDA will
not approve the product unless compliance with cGMP is satisfactory and the NDA contains data that provide substantial
evidence that the drug is safe and effective in the indication studied.
After the FDA evaluates the NDA and the manufacturing facilities,
it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies
in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application.
If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue
an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information
included. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
As a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the
benefits of the drug outweigh the potential risks.
REMS can include medication guides, communication plans for
healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training
or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of
patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug. Moreover,
product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy.
Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified
following initial marketing.
The Hatch-Waxman Act
In seeking approval for a drug through an NDA, applicants are
required to list with the FDA each patent whose claims cover the applicant’s product. Upon approval of a drug, each of the
patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence
Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential competitors
in support of approval of an abbreviated new drug application, or ANDA. An ANDA provides for marketing of a drug product that has
the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence
testing to be therapeutically equivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants
are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or effectiveness of their
drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and
can often be substituted by pharmacists under prescriptions written for the original listed drug.
The ANDA applicant is required to certify to the FDA concerning
any patents listed for the approved product in the FDA’s Orange Book that: 1) the required patent information has not been
filed; 2) the listed patent has expired; 3) the listed patent has not expired, but will expire on a particular date and approval
is sought after patent expiration; or 4) the listed patent is invalid or will not be infringed by the new product. A certification
that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid, is
called a Paragraph IV certification. If the applicant does not challenge the listed patents, the ANDA application will not be approved
until all the listed patents claiming the referenced product have expired.
If the ANDA applicant has provided a Paragraph IV certification
to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has
been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to
the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph
IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent,
settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA applicant.
The ANDA application also will not be approved until any non-patent
exclusivity listed in the Orange Book for the referenced product has expired. Federal law provides a period of five years following
approval of a drug containing no previously approved active ingredients during which ANDAs for generic versions of those drugs
cannot be submitted, unless the submission contains a Paragraph IV challenge to a listed patent — in which case
the submission may be made four years following the original product approval. Federal law provides for a period of three years
of exclusivity during which FDA cannot grant effective approval of an ANDA based on the approval of a listed drug that contains
previously approved active ingredients but is approved in a new dosage form, route of administration or combination, or for a new
use; the approval of which was required to be supported by new clinical trials conducted by, or for, the applicant.
Post-Approval Regulation
Even if a product candidate receives regulatory approval, the
approval is typically limited to specific clinical indications. Further, even after regulatory approval is obtained, subsequent
discovery of previously unknown problems with a product may result in restrictions on its use or even complete withdrawal of the
product from the market. Any FDA-approved products manufactured or distributed by us are subject to continuing regulation by the
FDA, including record-keeping requirements and reporting of adverse events or experiences. Further, drug manufacturers and their
subcontractors are required to register their establishments with the FDA and state agencies, and are subject to periodic inspections
by the FDA and state agencies for compliance with cGMP, which impose rigorous procedural and documentation requirements upon us
and our contract manufacturers. We cannot be certain that we or our present or future contract manufacturers or suppliers will
be able to comply with cGMP regulations and other FDA regulatory requirements. Failure to comply with these requirements may result
in, among other things, total or partial suspension of production activities, failure of the FDA to grant approval for marketing,
and withdrawal, suspension, or revocation of marketing approvals.
If the FDA approves one or more of our product candidates, we
and the contract manufacturers we use for manufacture of clinical supplies and commercial supplies must provide certain updated
safety and efficacy information. Product changes, as well as certain changes in the manufacturing process or facilities where the
manufacturing occurs or other post-approval changes may necessitate additional FDA review and approval. The labeling, advertising,
promotion, marketing and distribution of a drug or biologic product or medical devices, also must be in compliance with FDA and
Federal Trade Commission, or FTC, requirements which include, among others, standards and regulations for direct-to-consumer advertising,
off-label promotion, industry sponsored scientific and educational activities, and promotional activities involving the Internet.
The FDA and FTC have very broad enforcement authority, and failure to abide by these regulations can result in penalties, including
the issuance of a warning letter directing us to correct deviations from regulatory standards and enforcement actions that can
include seizures, fines, injunctions and criminal prosecution.
Approval Process for Medical Devices
In the United States, the FDCA, FDA regulations and other federal
and state statutes and regulations govern, among other things, medical device design and development, preclinical and clinical
testing, premarket clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotion,
sales and distribution, export and import, and post-market surveillance. The FDA regulates the design, manufacturing, servicing,
sale and distribution of medical devices, including molecular diagnostic test kits and instrumentation systems. Failure to comply
with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal
to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production
or distribution, injunctions, fines, civil penalties and criminal prosecution.
Unless an exemption applies, each medical device we wish to
distribute commercially in the United States will require marketing authorization from the FDA prior to distribution. The two primary
types of FDA marketing authorization applicable to a device are premarket notification, also called 510(k) clearance, and premarket
approval, also called PMA approval. The type of marketing authorization is generally linked to the classification of the device.
The FDA classifies medical devices into one of three classes (Class I, II or III) based on the degree of risk the FDA determines
to be associated with a device and the level of regulatory control deemed necessary to ensure the device’s safety and effectiveness.
Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are deemed
to pose the least risk and are subject only to general controls applicable to all devices, such as requirements for device labeling,
premarket notification and adherence to the FDA’s current Good Manufacturing Practices, or cGMP, known as the Quality System
Regulations, or QSR. Class II devices are intermediate risk devices that are subject to general controls and may also be subject
to special controls such as performance standards, product-specific guidance documents, special labeling requirements, patient
registries or post-market surveillance. Class III devices are those for which insufficient information exists to assure safety
and effectiveness solely through general or special controls and include life sustaining, life-supporting or implantable devices,
devices of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of
illness or injury.
Most Class I devices and some Class II devices are exempted
by regulation from the 510(k) clearance requirement and can be marketed without prior authorization from the FDA. Some Class I
devices that have not been so exempted and Class II devices are eligible for marketing through the 510(k) clearance pathway. By
contrast, devices placed in Class III require PMA approval prior to commercial marketing. The PMA approval process is more stringent,
time-consuming and expensive than the 510(k) clearance process, however, the 510(k) clearance process has also become increasingly
stringent and expensive. The FDA has provided initial guidance to us that the RedoxSYS and MiOXSYS Systems are appropriate for
the 510(k) clearance process, likely through the de novo pathway.
510(k) Clearance. To obtain 510(k) clearance for a medical device,
an applicant must submit a premarket notification to the FDA demonstrating that the device is “substantially equivalent”
to a device legally marketed in the United States that is not subject to PMA approval, commonly known as the “predicate device.”
A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (i)
the same technological characteristics or (ii) different technological characteristics and the information submitted demonstrates
that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness.
A showing of substantial equivalence sometimes, but not always, requires clinical data. Generally, the 510(k) clearance process
can exceed 90 days and may extend to a year or more.
After a device has received 510(k) clearance for a specific
intended use, any change or modification that significantly affects its safety or effectiveness, such as a significant change in
the design, materials, method of manufacture or intended use, may require a new 510(k) clearance or PMA approval and payment of
an FDA user fee. The determination as to whether or not a modification could significantly affect the device’s safety or
effectiveness is initially left to the manufacturer using available FDA guidance; however, the FDA may review this determination
to evaluate the regulatory status of the modified product at any time and may require the manufacturer to cease marketing and recall
the modified device until 510(k) clearance or PMA approval is obtained. The manufacturer may also be subject to significant regulatory
fines or penalties.
Before we can submit a medical device for 510(k) clearance,
we may have to perform a series of generally short studies over a period of months, including method comparison, reproducibility,
interference and stability studies to ensure that users can perform the test successfully. Some of these studies may take place
in clinical environments, but are not usually considered clinical trials. For PMA submissions, we would generally be required to
conduct a longer clinical trial over a period of years that supports the clinical utility of the device and how the device will
be used.
Although clinical investigations of most devices are subject
to the investigational device exemption, or IDE, requirements, clinical investigations of diagnostic tests, including our products
and products under development, are generally exempt from the IDE requirements. Thus, clinical investigations by intended users
for intended uses of our products generally do not require the FDA’s prior approval but may require approval of an Institutional
Review Board, or IRB, and written informed consent by the patient, provided the clinical evaluation testing is non-invasive, does
not require an invasive sampling procedure that presents a significant risk, does not intentionally introduce energy into the subject
and is not used as a diagnostic procedure without confirmation by another medically established test or procedure. In addition,
our products must be labeled per FDA regulations “for research use only-RUO” or “for investigational use only-IUO,”
and distribution controls must be established to assure that our products distributed for research, method comparisons or clinical
evaluation studies are used only for those purposes.
Regulation after FDA Clearance
or Approval
Any devices we manufacture or distribute pursuant to clearance
or approval by the FDA are subject to pervasive and continuing regulation by the FDA and certain state agencies. We are required
to adhere to applicable regulations setting forth detailed cGMP requirements, as set forth in the QSR, which include, among other
things, testing, control and documentation requirements. Noncompliance with these standards can result in, among other things,
fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, refusal of the
government to grant 510(k) clearance or PMA approval of devices, withdrawal of marketing approvals and criminal prosecutions, fines
and imprisonment. Our contract manufacturers’ facilities operate under the FDA’s cGMP requirements.
Foreign Regulatory Approval
Outside of the United States, our ability to market our product
candidates will be contingent also upon our receiving marketing authorizations from the appropriate foreign regulatory authorities,
whether or not FDA approval has been obtained. The foreign regulatory approval process in most industrialized countries generally
encompasses risks similar to those we will encounter in the FDA approval process. The requirements governing conduct of clinical
trials and marketing authorizations, and the time required to obtain requisite approvals, may vary widely from country to country
and differ from those required for FDA approval.
In the European Union, we are required under the European Medical
Device Directive (Council Directive 93/42/EEC) to affix the CE mark to certain of our products in order to sell the products in
member countries of the European Union. The CE mark is an international symbol that represents adherence to certain essential principles
of safety and effectiveness mandated in the European Medical Device Directive, which are referred to as the “essential requirements”.
Once affixed, the CE mark enables a product to be sold within the European Economic Area, or EEA, which is composed of the 28 member
states of the EU plus Norway, Iceland and Liechtenstein as well as other countries that accept the CE mark.
To demonstrate compliance with the essential requirements, we
must undergo a conformity assessment procedure which varies according to the type of medical device and its classification. Except
for low risk medical devices (Class I with no measuring function and which are not sterile) where the manufacturer can issue an
EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the
Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a member
state of the EEA to conduct conformity assessments, or a notified body. Depending on the relevant conformity assessment procedure,
the notified body would typically audit and examine the technical file and the quality system for the manufacture, design and final
inspection of our devices. The notified body issues a CE certificate of Conformity following successful completion of a conformity
assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements.
This certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related
EC Declaration of Conformity.
If we modify our devices, we may need to apply for permission
to affix the CE mark to the modified product. Additionally, we may need to apply for a CE mark for any new products that we may
develop in the future. Certain products regulated as medical devices according to EC-Directives are subject to vigilance requirements
for reporting of adverse events.
We will be subject to additional regulations in other countries
in which we market, sell and import our products, including Canada. We or our distributors must receive all necessary approvals
or clearance prior to marketing and/or importing our products in those markets.
The International Standards Organization, or ISO, promulgates
internationally recognized standards, including those for the requirements of quality systems. To support ISO certifications, surveillance
audits are conducted by a notified body yearly and recertification audits every three years that assess continued compliance with
the relevant ISO standards.
Other Regulatory Matters
Manufacturing, sales, promotion and other activities following
product approval are also subject to regulation by numerous regulatory authorities in addition to the FDA, including, in the United
States, the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, the Drug
Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety &Health
Administration, the Environmental Protection Agency and state and local governments. In the United States, sales, marketing and
scientific/educational programs must also comply with state and federal fraud and abuse laws. Pricing and rebate programs must
comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements
in the Health Care Reform Law, as amended by the Health Care and Education Affordability Reconciliation Act, or ACA. If products
are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and
requirements apply. The handling of any controlled substances must comply with the U.S. Controlled Substances Act and Controlled
Substances Import and Export Act. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention
Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer
protection and unfair competition laws.
The distribution of pharmaceutical products is subject to additional
requirements and regulations, including extensive recordkeeping, licensing, storage and security requirements intended to prevent
the unauthorized sale of pharmaceutical products.
The failure to comply with regulatory requirements subjects
firms to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements
can result in criminal prosecution, fines, imprisonment or other penalties, injunctions, recall or seizure of products, total or
partial suspension of production, denial or withdrawal of product approvals, or refusal to allow a firm to enter into supply contracts,
including government contracts. In addition, even if a firm complies with FDA and other requirements, new information regarding
the safety or effectiveness of a product could lead the FDA to modify or withdraw product approval. Prohibitions or restrictions
on sales or withdrawal of future products marketed by us could materially affect our business in an adverse way.
Changes in regulations, statutes or the interpretation of existing
regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements; (ii)
additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping
requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.
United States Patent Term Restoration and Marketing
Exclusivity
Depending upon the timing, duration and other specific aspects
of the FDA approval of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension under the
Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman
Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development
and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total
of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the
effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval
of that application. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension
must be submitted prior to the expiration of the patent. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews
and approves the application for any patent term extension or restoration. In the future, if any of our NDA’s are approved,
we intend to apply for restoration of patent term for one of our currently owned or licensed patents to add patent life beyond
the current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of
the relevant NDA.
Market exclusivity provisions under the FDCA can also delay
the submission or the approval of certain marketing applications. The FDCA provides a five-year period of non-patent marketing
exclusivity within the United States to the first applicant to obtain approval of an NDA for a new chemical entity, or NCE. A drug
is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is
the molecule or ion responsible for the action of the drug substance. Recently, the FDA stated that it may change its interpretation
of 5-year NCE exclusivity determinations to apply to each drug substance in a fixed-combination drug product, not for the drug
product as a whole. If this change is implemented, for example, a fixed-combination drug product that contains a drug substance
with a single, new active moiety would be eligible for 5 year NCE exclusivity, even if the fixed-combination also contains a drug
substance with a previously approved active moiety. During the exclusivity period, the FDA may not accept for review an abbreviated
new drug application, or ANDA, or a Section 505(b)(2) NDA submitted by another company for another drug based on the same active
moiety, regardless of whether the drug is intended for the same indication as the original innovator drug or for another indication,
where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application
may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents
listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, or supplement
to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the
applicant are deemed by the FDA to be essential to the approval of the application, for example new indications, dosages or strengths
of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval on the basis
of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for
the original indication or condition of use. Five-year and three-year exclusivity will not delay the submission or approval of
a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the
pre-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness. Orphan
drug exclusivity, as described above, may offer a seven-year period of marketing exclusivity, except in certain circumstances.
Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted,
adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other
exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance with
an FDA-issued “Written Request” for such a trial.
Reimbursement
Natesto is covered by many commercial insurance providers and
pharmacy benefit management companies and is largely dependent upon reimbursement for continued use in the U.S. market. However,
Natesto is covered under a Rebate Agreement between us and Centers for Medicare and Medicaid Services. This, in turn, enables states
to offer public payer coverage of Natesto through their separate Medicare and public assistance programs. Additionally, privately
managed Medicare Part D plans may choose to cover Natesto prescriptions through their plans’ pharmacy benefits. ProstaScint
is dependent upon reimbursement for continued use in the U.S. market, and ProstaScint does have a reimbursement code as assigned
by the American Medical Association. ProstaScint is currently reimbursed by Medicare, Medicaid, and various private health plans.
However, reimbursement is not universally available throughout the United States for ProstaScint. Primsol is also dependent upon
reimbursement for continued use in the U.S. market, and Primsol is covered under a Rebate Agreement between us and Centers for
Medicare and Medicaid Services. This, in turn, enables states to offer public payer coverage of Primsol through their separate
Medicaid and public assistance programs. Primsol is also covered by many private payers who offer coverage benefits to patients
for branded, prescription antibiotic treatments. We do not anticipate that the sales of our product candidate, the MiOXSYS System,
if approved for sale in the U.S., will be heavily dependent upon reimbursement by third-party payors. Traditionally, sales of pharmaceutical
products that are not “life style” indications depend, in part, on the extent to which products will be covered by
third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. These third-party
payors are increasingly reducing reimbursements for medical products and services.
Lack of third-party reimbursement for our product candidate
or a decision by a third-party payor to not cover our product candidates could reduce physician usage of the product candidate
and have a material adverse effect on our sales, results of operations and financial condition.
In addition, in some foreign countries, the proposed pricing
for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country
to country. For example, the European Union provides options for its member states to restrict the range of medicinal products
for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human
use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect
controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country
that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing
arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the
United States and generally tend to be significantly lower.
DEA Regulation
Natesto, already approved by the FDA, is a “controlled
substance” as defined in the Controlled Substances Act of 1970, or CSA, because it contains testosterone. As a result, the
U.S. Drug Enforcement Agencies, or DEA, regulate Natesto and have listed it as a Schedule III substance.
Annual registration is required for any facility that manufactures,
distributes, dispenses, imports or exports any controlled substance. The registration is specific to the particular location, activity
and controlled substance schedule. For example, separate registrations are needed for import and manufacturing, and each registration
will specify which schedules of controlled substances are authorized. Similarly, separate registrations are also required for separate
facilities.
The DEA typically inspects a facility to review its security
measures prior to issuing a registration and on a periodic basis. Reports must also be made for thefts or losses of any controlled
substance, and to obtain authorization to destroy any controlled substance. In addition, special permits and notification requirements
apply to imports and exports of narcotic drugs.
The DEA establishes annually an aggregate quota for how much
of a controlled substance may be produced in total in the United States based on the DEA’s estimate of the quantity needed
to meet legitimate scientific and medicinal needs. The DEA may adjust aggregate production quotas and individual production and
procurement quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make such
adjustments. Our or our manufacturers’ quotas of an active ingredient may not be sufficient to meet commercial demand or
complete clinical trials. Any delay, limitation or refusal by the DEA in establishing our or our manufacturers’ quota for
controlled substances could delay or stop our clinical trials or product launches, which could have a material adverse effect on
our business, financial position and results of operations.
To enforce these requirements, the DEA conducts periodic inspections
of registered establishments that handle controlled substances. Failure to maintain compliance with applicable requirements, particularly
as manifested in loss or diversion, can result in administrative, civil or criminal enforcement action that could have a material
adverse effect on our business, results of operations and financial condition. The DEA may seek civil penalties, refuse to renew
necessary registrations, or initiate administrative proceedings to revoke those registrations. In some circumstances, violations
could result in criminal proceedings.
Individual states also independently regulate controlled substances.
We and our manufacturers will be subject to state regulation on distribution of these products, including, for example, state requirements
for licensures or registration.
Intellectual Property
Aytu has an exclusive license from Acerus Pharmaceuticals Corporation
for the United States to intellectual property related to a nasal gel drug product containing testosterone to treat hypogonadism
in males, including the FDA approved product Natesto®, as well as an authorized generic version and OTC versions thereof. The
license includes sublicense rights to intellectual property owned by Mattern Pharmaceuticals and exclusively licensed to Acerus
by Mattern Pharmaceuticals. The sublicensed intellectual property includes four Orange Book listed patents directed at nasal gel
formulations containing testosterone or methods of testosterone replacement therapy by nasal administration of the same. It further
includes a pending application, and two patents that are not listed in the Orange Book directed at a method of making a testosterone
formulation and a method for reducing physical or chemical interactions between a nasal testosterone formulation and a plastic
container.
The Acerus license also grants rights to intellectual property
owned by Acerus which includes twelve nonprovisional patent applications, some of which may be abandoned. These patent applications
include at least three pending applications directed to testosterone titration methods, intranasal testosterone bio-adhesive gel
formulations, and controlled release testosterone formulations.
We have an extensive range of intellectual property for Primsol,
MiOXSYS, and RedoxSYS. We have patent protection in the United States and several other large markets worldwide. Specifically,
we have numerous patents issued and pending for the RedoxSYS/MiOXSYS systems and their use in the U.S., Europe, Canada, Israel,
Japan, and China. Further, we have patent protection in the United States and several other large markets worldwide for the use
of tramadol hydrochloride to treat PE.
We have restructured our patent portfolio related to RedoxSYS/MiOXSYS
to focus on the United States and core foreign jurisdictions which include Europe, Canada, Israel, Japan and China. In other foreign
jurisdictions, patents and pending applications will be allowed to lapse through non-payment of annuities for issued patents and
non-response to outstanding actions for pending applications. The portfolio to be supported in the United States and core foreign
jurisdictions consists of 17 issued patents and 20 pending applications.
The portfolio primarily consists of four families filed in the
United States and in core foreign jurisdictions. The first family includes six issued patents and five pending applications with
claims directed to the measurement of the ORP of a patient sample to evaluate various conditions. The standard 20-year expiration
for patents in this family is in 2028. The second family includes two pending United States applications, two issued United States
patents and four pending applications in core foreign jurisdictions with claims directed to the measurement of the ORP capacity
of a patient sample to evaluate various conditions. The standard 20-year expiration for patents in this family is in 2033. The
third family includes seven issued patents and four pending applications with claims directed to devices and methods for the measurement
of ORP and ORP capacity. The standard 20-year expiration for patents in this family is in 2032. The fourth family includes one
pending United States application, one issued United States patent, and five pending applications in core foreign jurisdictions
with claims directed to multiple layer gel test strip measurement devices and methods of making for use in measuring ORP and ORP
capacity. The standard 20-year expiration for patents in this family is in 2033.
Primsol is protected by a formulation patent and its regulatory
designation. By virtue of the fact that Primsol was approved as an NDA and the extremely large backlog of Abbreviated New Drug
Applications at the FDA (two to three year review time currently), we do not expect generic competition for Primsol in the next
three to four years. There are currently no generic competitors filed with the FDA under Paragraph IV, which is required of potential
generic competitors seeking to genericize an on-patent NDA.
ProstaScint is protected by significant trade secrets and manufacturing
know-how related to the production of the product and linkage of the base monoclonal antibody and imaging component. The antibody
in the ProstaScint product is produced by a proprietary cell line.
We also maintain trade secrets and proprietary know-how that
we seek to protect through confidentiality and nondisclosure agreements. These agreements may not provide meaningful protection
or adequate remedies in the event of unauthorized use or disclosure of confidential and proprietary information. If we do not adequately
protect our trade secrets and proprietary know-how, our competitive position and business prospects could be materially harmed.
We expect to seek United States and foreign patent protection
for drug and diagnostic products we discover, as well as therapeutic and diagnostic products and processes. We expect also to seek
patent protection or rely upon trade secret rights to protect certain other technologies which may be used to discover and characterize
drugs and diagnostic products and processes, and which may be used to develop novel therapeutic and diagnostic products and processes.
The patent positions of companies such as ours involve complex
legal and factual questions and, therefore, their enforceability cannot be predicted with any certainty. Our issued and licensed
patents, and those that may be issued to us in the future, may be challenged, invalidated or circumvented, and the rights granted
under the patents or licenses may not provide us with meaningful protection or competitive advantages. Our competitors may independently
develop similar technologies or duplicate any technology developed by us, which could offset any advantages we might otherwise
realize from our intellectual property. Furthermore, even if our product candidates receive regulatory approval, the time required
for development, testing, and regulatory review could mean that protection afforded us by our patents may only remain in effect
for a short period after commercialization. The expiration of patents or license rights we hold could adversely affect our ability
to successfully commercialize our pharmaceutical drugs or diagnostics, thus harming our operating results and financial position.
We will be able to protect our proprietary intellectual property
rights from unauthorized use by third parties primarily to the extent that such rights are covered by valid and enforceable patents
or are effectively maintained as trade secrets. If we must litigate to protect our intellectual property from infringement, we
may incur substantial costs and our officers may be forced to devote significant time to litigation-related matters. The laws of
certain foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Our
pending patent applications, or those we may file or license from third parties in the future, may not result in patents being
issued. Until a patent is issued, the claims covered by an application for patent may be narrowed or removed entirely, thus depriving
us of adequate protection. As a result, we may face unanticipated competition, or conclude that without patent rights the risk
of bringing product candidates to market exceeds the returns we are likely to obtain. We are generally aware of the scientific
research being conducted in the areas in which we focus our research and development efforts, but patent applications filed by
others are maintained in secrecy for at least 18 months and, in some cases in the United States, until the patent is issued. The
publication of discoveries in scientific literature often occurs substantially later than the date on which the underlying discoveries
were made. As a result, it is possible that patent applications for products similar to our drug or diagnostic products and product
candidates may have already been filed by others without our knowledge.
The biotechnology and pharmaceutical industries are characterized
by extensive litigation regarding patents and other intellectual property rights, and it is possible that our development of products
and product candidates could be challenged by other pharmaceutical or biotechnology companies. If we become involved in litigation
concerning the enforceability, scope and validity of the proprietary rights of others, we may incur significant litigation or licensing
expenses, be prevented from further developing or commercializing a product or product candidate, be required to seek licenses
that may not be available from third parties on commercially acceptable terms, if at all, or subject us to compensatory or punitive
damage awards. Any of these consequences could materially harm our business.
Competition
The healthcare industry is highly competitive and subject to
significant and rapid technological change as researchers learn more about diseases and develop new technologies and treatments.
Significant competitive factors in our industry include product efficacy and safety; quality and breadth of an organization’s
technology; skill of an organization’s employees and its ability to recruit and retain key employees; timing and scope of
regulatory approvals; government reimbursement rates for, and the average selling price of, products; the availability of raw materials
and qualified manufacturing capacity; manufacturing costs; intellectual property and patent rights and their protection; and sales
and marketing capabilities. Market acceptance of our current products and product candidates will depend on a number of factors,
including: (i) potential advantages over existing or alternative therapies or tests, (ii) the actual or perceived safety of similar
classes of products, (iii) the effectiveness of sales, marketing, and distribution capabilities, and (iv) the scope of any approval
provided by the FDA or foreign regulatory authorities.
We are a very small biopharmaceutical company compared to other
companies that we are competing against. Our current and potential competitors include large pharmaceutical and biotechnology companies,
and specialty pharmaceutical and generic drug companies. Many of our current and potential competitors have substantially greater
financial, technical and human resources than we do and significantly more experience in the marketing, commercialization, discovery,
development and regulatory approvals of products, which could place us at a significant competitive disadvantage or deny us marketing
exclusivity rights. Specifically, our competitors will most likely have larger sales teams and have more capital resources to support
their products then we do.
Accordingly, our competitors may be more successful than we
may be in achieving widespread market acceptance and obtaining FDA approval for product candidates. We anticipate that we will
face intense and increasing competition as new products enter the market, as advanced technologies become available and as generic
forms of currently branded products become available. Finally, the development of new treatment methods for the diseases we are
targeting could render our products non-competitive or obsolete.
We cannot assure you that any of our products that we acquire
or successfully develop will be clinically superior or scientifically preferable to products developed or introduced by our competitors.
Our current approved products compete in highly competitive
fields whereby there are numerous options available to clinicians including generics. These generic treatment options are frequently
less expensive and more widely available.
Natesto
Natesto competes in a large, growing market. The U.S. TRT market
is large, with annual revenues in the U.S. in 2015 of $2 billion. Even at the current market size of approximately $2 billion,
a product with 5% market penetration could achieve sales of approximately $100 million annually, assuming comparatively similar
product pricing and reimbursement levels as seen with other TRTs.
The U.S. prescription testosterone market is comprised primarily
of topically applied treatments in the form of gels, solutions, and patches. Testopel® and Aveed®, injectable products
typically implanted directly under the skin by a physician, are also FDA-approved. AndroGel is the market-leading TRT and is marketed
by AbbVie.
ProstaScint
Currently, there are several FDA approved imaging techniques
for cancer in general, however there is only one SPECT-specific agent targeting prostate cancer — ProstaScint.
The other imaging methods are F18-fluorodeoxyglucose (F18-FDG), C11-Acetate, and C11-Choline. The primary advantage of these methods
is that they all use PET imaging, a technique with better resolution than SPECT. The use of PET is also a disadvantage, however,
since it uses radiolabels with short half-lives necessitating the need for a local or on-site cyclotron to generate the labels.
The half-life of fluorine-18 (F18) and of carbon-11 (C11) are approximately 110 and 20 minutes, respectively. The radiolabel used
by ProstaScint is Indium-11, with a half-life of about 2 – 3 days. This longer time period allows the radiolabel
to be made remotely and shipped to the imaging facility; however, it does use SPECT as the imaging modality.
As indicated, ProstaScint is the only radio-imaging marker that
is specific for prostate specific membrane antigen (PMSA). ProstaScint is based on radiolabeling the antibody against PSMA, a protein
express by prostate cells. This specificity for prostate cells is what allows ProstaScint to detect the metastases of prostate
cancer regardless of location. The mechanism of labeling for F18-FDG, C11-Acetate, and C11-Choline is the intracellular accumulation
of these markers in cancer cells, due to the fact that cancer cells typically have a higher cellular metabolism than non-cancerous
cells. Thus, these markers can accumulate in any type of cancer cell with a high metabolism. Unfortunately for these technologies,
prostate cancer cells tend to have a lower cellular metabolism resulting in higher false positives attributed to hyperplasia and
prostatitis.
In a meta-analysis of 21 studies evaluating accuracy, sensitivity,
specificity, positive/negative predictive values, ProstaScint using combined SPECT/CT imaging was comparable to PET/CT imaging
based on F18-FDG and C11-Choline.
Primsol
There are any number of antibiotics available on the market
that could compete with Primsol. However, Primsol is the only FDA-approved liquid formulation of trimethoprim, an antibiotic that
is well established in current guidelines for treating UTIs. Further, Primsol is the only trimethoprim oral solution on the U.S.
market that does not contain sulfamethoxazole, or sulfa. Therefore, Primsol is appropriate for UTI patients that have difficulty
swallowing tablets, such as the elderly, and particularly for patients that experience adverse reactions to sulfa.
MiOXSYS/RedoxSYS
With respect to MiOXSYS competitive offerings, there are other
oxidative stress diagnostic tests available throughout the world, although none are approved in the United States for clinical
use. Diagnostic systems that are marketed for clinical use outside the United States include the FRAS 4 system (H&D srl), FREE
Carpe Diem (Diacron International), and the FORM and FORMPlus systems (Callegari srl). These systems are used in both research
and clinical settings but do not generate significant sales in the clinical setting. If approved in the United States for clinical
use, these systems could present competition to the MiOXSYS System. However, their testing parameters differ significantly from
MiOXSYS and would need to demonstrate clinical superiority to MiOXSYS in order to substantially detract from MiOXSYS prescribing
and sales. Additionally, to our knowledge these systems have not demonstrated clinical feasibility in human semen or seminal plasma.
Research and Development
Our strategy is to minimize our research and development activities.
When we do conduct research and development, we intend to utilize consultants with domain experience for research, development
and regulatory guidance.
Our MiOXSYS System has been developed in conjunction with numerous
medical device and diagnostic development consultants. Further, we have relationships with regulatory consultants who are actively
assisting in the development of our regulatory strategy with the FDA. To complement our internal clinical research efforts with
the MiOXSYS System, we have engaged with numerous universities around the world to identify and develop research and clinical applications
for the MiOXSYS System. Through these engagements we have access to data and analyses that enable us to develop new uses for the
MiOXSYS and RedoxSYS systems. Additionally, we have formal research agreements in place with two prominent U.S.-based universities
and one prominent European university for which we are paying a research fee.
Manufacturing
Our business strategy is to use cGMP compliant contract manufacturers
for the manufacture of clinical supplies as well as for commercial supplies if required by our commercialization plans, and to
transfer manufacturing responsibility to our collaboration partners when possible.
Natesto
On April 22, 2016, we entered into a license and supply agreement
with Acerus pursuant to which we will pay Acerus a supply price per unit of the greater of (i) a fixed percentage of Acerus’
cost of goods sold for Natesto, not to exceed a fixed ceiling price and (ii) a low double digit percentage of the net selling price
for the first year of the agreement, that increases in each of the second and third years and remains constant after that.
ProstaScint
We have acquired a two-year supply of
ProstaScint through our asset purchase agreement with Jazz Pharmaceuticals, which we project to last through calendar 2017,
and which, if necessary, we believe we could extend to the fall of 2018. Further, we have begun the process of transferring
the manufacturing of ProstaScint to a new contract manufacturer as discussed below.
On October 8, 2015, we and Biovest International, Inc., or Biovest,
entered into a Master Services Agreement, pursuant to which Biovest is to provide manufacturing services to us for ProstaScint.
The agreement provides that we may engage Biovest from time to time to provide services in accordance with mutually agreed upon
project addendums and purchase orders for ProstaScint. We expect to use the agreement from time to time for manufacturing services,
including without limitation, the manufacturing, processing, quality control testing, release or storage of ProstaScint. The agreement
provides customary terms and conditions, including those for performance of services by Biovest in compliance with project addendums,
industry standards, regulatory standards and all applicable laws. Biovest will be responsible for obtaining and maintaining all
governmental approvals, at our expense, during the term of the agreement. The agreement has a term of four years, provided that
either party may terminate the agreement or any project addendum under the agreement on 30 days written notice of a material breach
under the agreement.
In addition, we may terminate the agreement or any project addendum
under the agreement upon 180 days written notice for any reason. In conjunction with entering into the agreement, we submitted
a work order to Biovest to provide us with active pharmaceutical ingredient for ProstaScint over a four-year period at a total
cost of $5.3 million, of which we paid $1.0 million upon submission of the work order and $500,000 in each of January and April
2016. In June 2016, we paid $300,000 and in July of 2016, we paid another $500,000 towards this project.
This contract is currently on hold as we evaluate our strategic
options for the ProstaScint product.
Primsol
We have entered into a supply agreement for Primsol with the
same manufacturer used by FSC Laboratories, from whom we purchased Primsol. Pursuant to the agreement, we can order supply as needed
at a fixed price for the first two years of the agreement through September 30, 2017; thereafter we will negotiate the price but
do not expect the supply price to increase by more than 25%.
MiOXSYS/RedoxSYS
We have completed the technical development of the RedoxSYS
System by engaging contract development and manufacturing companies in the United States. We secured supply and quality agreements
with manufacturers for both the RedoxSYS and MiOXSYS instruments as well as the RedoxSYS and MiOXSYS sensor strips. Both manufacturers
hold long-standing ISO 13485:2003 certifications and are established medical device manufacturers. Both manufacturers have high
volume manufacturing capacity such that production volumes can be easily scaled. Both manufacturers have been audited by our quality
engineers and are fully compliant.
Employees
As of December 31, 2016, we had 49 full-time employees and utilized
the services of a number of consultants on a temporary basis. Overall, we have not experienced any work stoppage and do not anticipate
any work stoppage in the foreseeable future. None of our employees is subject to a collective bargaining agreement. Management
believes that relations with our employees are good.
Properties
In August 2015, Aytu entered into a 37 month non-cancellable
operating lease for new office space effective September 1, 2015. The new lease has initial base rent of $8,500 per month beginning
in October 2015, with the total base rent over the term of the lease of approximately $318,000 which includes rent abatements.
We have also opened a 1,333 square foot office in Raleigh, North Carolina for which the lease runs until July 31, 2018. We believe
our current office space is sufficient to meet our current needs.
We recognize rental expense of the facility 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.
Legal Proceedings
We are currently not party to any material legal or administrative
proceedings and are not aware of any material pending or threatened legal or administrative proceedings in which we will become
involved.
Available Information
Our principal executive offices are located at 373 Inverness
Parkway, Suite 206, Englewood, Colorado 80112 USA, and our phone number is (720) 437-6580.
We maintain a website on the internet at
http://aytubio.com
.
We make available free of charge through our website, by way of a hyperlink to a third-party site that includes filings we make
with the SEC website (
www.sec.gov)
, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports electronically filed or furnished pursuant to Section 15(d) of the Exchange Act. The information
on our website is not, and shall not be deemed to be, a part of this prospectus or incorporated into any other filings we make
with the SEC. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington D.C., 20549. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.
Code of Ethics
We have adopted a written code of ethics that applies to our
officers, directors and employees, including our principal executive officer and principal accounting officer. We intend to disclose
any amendments to, or waivers from, our code of ethics that are required to be publicly disclosed pursuant to rules of the SEC
by filing such amendment or waiver with the SEC. This code of ethics and business conduct can be found in the corporate governance
section of our website,
http://aytubio.com
.
MANAGEMENT
The following table sets forth the names and ages of all
of our directors and executive officers as of December 31, 2016. Our Board of Directors is currently comprised of five members,
who are elected annually to serve for one year or until their successor is duly elected and qualified, or until their earlier
resignation or removal. Executive officers serve at the discretion of the Board of Directors and are appointed by the Board of
Directors.
Name
|
|
Age
|
|
Position
|
Joshua R. Disbrow
|
|
41
|
|
Chairman & Chief Executive Officer
|
|
|
|
|
|
Jarrett T. Disbrow
|
|
41
|
|
Chief Operating Officer
|
|
|
|
|
|
Gregory A. Gould
|
|
50
|
|
Chief Financial Officer, Secretary, and Treasurer
|
|
|
|
|
|
Michael Macaluso
|
|
64
|
|
Director
|
|
|
|
|
|
Carl C. Dockery
|
|
53
|
|
Director
|
|
|
|
|
|
John A. Donofrio, Jr.
|
|
49
|
|
Director
|
|
|
|
|
|
Gary V. Cantrell
|
|
61
|
|
Director
|
The following is a biographical summary of the experience of
our executive officers and directors during the past five years, and an indication of directorships held by the director in other
companies subject to the reporting requirements under the federal securities law.
Joshua R. Disbrow — Chairman
and Chief Executive Officer
Joshua R. Disbrow has been employed by us since April 16, 2015.
Prior to the closing of the Merger, Mr. Disbrow was the Chief Executive Officer of Luoxis since January 2013. Mr. Disbrow was also
the Chief Operating Officer of Ampio since December 2012. Prior to joining Ampio, he served as the Vice President of Commercial
Operations at Arbor Pharmaceuticals, a specialty pharmaceutical company, from May 2007 through October 2012. He joined Arbor as
that company’s second full-time employee. Mr. Disbrow led the company’s commercial efforts from inception to the company’s
acquisition in 2010 and growth to over $127 million in net sales in 2011. By the time Mr. Disbrow departed Arbor in late 2012,
he had led the growth of the commercial organization to comprise over 150 people in sales, marketing sales training, managed care,
national accounts, and other commercial functions. Mr. Disbrow has spent over 17 years in the pharmaceutical, diagnostic and medical
device industries and has held positions of increasing responsibility in sales, marketing, sales management, commercial operations
and commercial strategy. Prior to joining Arbor, Mr. Disbrow served as Regional Sales Manager with Cyberonics, Inc., a medical
device company focused on neuromodulation therapies from June 2005 through April 2007. Prior to joining Cyberonics he was the Director
of Marketing at LipoScience, an in vitro diagnostics company. Mr. Disbrow holds an MBA from Wake Forest University and BS in Management
from North Carolina State University. Mr. Disbrow’s experience in executive management and marketing within the pharmaceutical
industry, monetizing company opportunities, and corporate finance led to the conclusion that he should serve as a director of our
Company in light of our business and structure.
Jarrett T. Disbrow — Chief
Operating Officer
Jarrett Disbrow has been employed by us since April 16, 2015.
Prior to the closing of the Merger, Mr. Disbrow was the Chief Executive Officer of Vyrix from November 2013. Mr. Disbrow joined
Vyrix from Eurus Pharma LLC, or Eurus Pharma, where he held the position of general manager from 2011 to 2013. Prior to joining
Eurus Pharma, Mr. Disbrow was the founder, president and chief executive officer of Arbor Pharmaceuticals, Inc., or Arbor Pharmaceuticals
from 2006 to 2010. Following Arbor Pharmaceuticals’ acquisition in 2010, Mr. Disbrow remained with the company as vice president
of commercial development. Prior to founding Arbor Pharmaceuticals in 2006, he was head of marketing for Accentia Biopharmaceuticals,
Inc. from 2002 to 2006. Mr. Disbrow began his career with GlaxoWellcome, Inc. (now GlaxoSmithKline plc) from 1997 to 2001, where
he held positions of increasing responsibility in sales and later marketing. Mr. Disbrow received a BS in business management from
North Carolina State University in Raleigh, NC. Mr. Disbrow served on our Board of Directors from April 2015 to July 2016.
Gregory A. Gould — Chief
Financial Officer, Secretary, and Treasurer
Gregory A. Gould has been our Chief Financial Officer since
April 16, 2015. Mr. Gould is also the Chief Financial Officer of Ampio where he has been employed since June 2014. Prior to joining
Ampio, he provided financial and operational consulting services to the biotech industry through his consulting company, Gould
LLC from April 2012 until June 2014. Mr. Gould was Chief Financial Officer, Treasurer and Secretary of SeraCare from November 2006
until the company was sold to Linden Capital Partners in April 2012. During the period from July 2011 until April 2012 Mr. Gould
also served as the Interim President and Chief Executive Officer of SeraCare Life Sciences. Mr. Gould has held several other executive
positions at publicly traded life sciences companies including the Chief Financial Officer role at Atrix Laboratories, Inc., an
emerging specialty pharmaceutical company focused on advanced drug delivery. During Mr. Gould’s tenure at Atrix he was instrumental
in the negotiation and sale of the company to QLT, Inc. for over $855 million. He also played a critical role in the management
of several licensing agreements including the global licensing agreement with Sanofi-Synthelabo of the Eligard® products. Mr.
Gould was the Chief Financial Officer at Colorado MedTech, Inc., a publicly traded medical device design and manufacturing company
where he negotiated the transaction to sell the company to KRG Capital Partners. Mr. Gould began his career as an auditor with
Arthur Andersen, LLP. He currently serves on the board of directors of CytoDyn, Inc., a publicly traded drug development company
pursuing anti-viral agents for the treatment of HIV. Mr. Gould graduated from the University of Colorado with a BS in Business
Administration and is a Certified Public Accountant.
Michael Macaluso — Director
Michael Macaluso has been a member of our Board of Directors
since April 2015. Mr. Macaluso is also the Chairman and Chief Executive Officer of Ampio. Mr. Macaluso has been a member of Ampio
Pharmaceuticals’ Board of Directors since March 2010 and Ampio’s Chief Executive Officer since January 2012. Mr. Macaluso
served in the roles of president and Chief Executive Officer of Isolagen, Inc. (AMEX: ILE) from June 2001 until September 2004.
Mr. Macaluso also served on the board of directors of Isolagen from June 2001 until April 2005. From October 1998 until June 2001,
Mr. Macaluso was the owner of Page International Communications, a manufacturing business. Mr. Macaluso was a founder and principal
of International Printing and Publishing, a position Mr. Macaluso held from 1989 until 1997, when he sold that business to a private
equity firm. Mr. Macaluso’s experience in executive management and marketing within the pharmaceutical industry, monetizing
company opportunities, and corporate finance led to the conclusion that he should serve as a director of our company in light of
our business and structure.
Carl C. Dockery — Director
Carl Dockery joined our Board as an independent director in
April 2016. Mr. Dockery is a financial executive with 30 years of experience as an executive in the insurance and reinsurance industry
and more recently in 2006 as the founder and president of a registered investment advisory firm, Alpha Advisors, LLC. Mr. Dockery’s
career as an insurance executive began in 1988 as an officer and director of two related and closely held insurance companies,
including serving as secretary of Crossroads Insurance Co. Ltd. of Bermuda and as vice president of Gulf Insurance Co. Ltd. of
Grand Cayman. Familiar with the London reinsurance market, in the 1990s, Mr. Dockery worked at Lloyd’s and the London Underwriting
Centre brokering various types of reinsurance placements. Mr. Dockery serves as a director of CytoDyn Inc. (OTCQB: “CYDY”),
a biotechnology company. Mr. Dockery graduated from Southeastern University with a Bachelor of Arts in Humanities. Mr. Dockery’s
financial expertise and experience, as well as his experience as a director of a publicly traded biopharmaceutical company, led
to the conclusion that he should serve as a director of our company in light of our business and structure.
John A. Donofrio, Jr. — Director
John Donofrio joined our Board as an independent director in
July 2016. He is a Senior Finance Executive with 24 years of experience in the pharmaceutical industry across a broad range of
areas, including consolidated financial reporting, international accounting and internal controls, financial systems development
and implementation, cost accounting, inventory management, supply chain, transfer pricing, budget and forecast planning, integration
of mergers and acquisitions and business development. He has served as the Chief Financial Officer and Head of North American Business
Development for Merz North America, or Merz, since August 2013. Merz is a specialty healthcare company that develops and commercializes
innovative treatment solutions in aesthetics, dermatology and neurosciences in the U.S. and Canada. At Merz, Mr. Donofrio is accountable
for financial performance, cost management, business development and strategic business planning and analysis for the finance organization
in North America. Prior to joining Merz, Mr. Donofrio served as Vice President, Stiefel Global Finance, U.S. Specialty Business
and Puerto Rico for Stiefel, a GlaxoSmithKline plc company from July 2009 to July 2013. In that role, Mr. Donofrio was responsible
for the financial strategy, management reporting, and overall control framework for the Global Dermatology Business Unit. He was
also the Senior Finance Partner accountable for the U.S. Specialty Business Units of GlaxoSmithKline plc. Mr. Donofrio served as
a director of Vyrix Pharmaceuticals from February 2014 to April 2015. Mr. Donofrio holds a degree in Accounting from North Carolina
State University. Mr. Donofrio’s financial expertise and experience in the pharmaceutical industry, led to the conclusion
that he should serve as a director of our company in light of our business and structure.
Gary V. Cantrell — Director
Gary Cantrell joined our Board as an independent director in
July 2016. He has 30 years of experience in the life sciences industry ranging from clinical experience as a respiratory therapist
to his current exclusive consulting role with Mayne Pharma (ASX: MYX) as Business Development Executive focused on acquiring branded
prescription assets for Mayne’s U.S. Specialty Brands Division. Mr. Cantrell served as CEO of Yasoo Health Inc., a global
specialty nutritional company from 2007 through June 2015, highlighted by the sale of its majority asset AquADEKs to Actavis in
March 2016. Previously, he was President of The Catevo Group, a U.S.-based healthcare consulting firm. Prior to that, he was Executive
Vice President, Sales and Marketing for TEAMM Pharmaceuticals, an Accentia Biopharmaceuticals company, where he led all commercial
activities for a public specialty pharmaceutical business. His previous 22 years were at GlaxoSmithKline plc where he held progressively
senior management positions in sales, marketing and business development. Mr. Cantrell is a graduate of Wichita State University
and serves as an advisor to several emerging life science companies. He served as a director for Yasoo Health Inc., Yasoo Health
Limited and Flexible Stenting Solutions, Inc., a leading developer of next generation peripheral arterial, venous, neurovascular
and biliary stents, which was sold to Cordis, while a Division of Johnson & Johnson in March 2013. Mr. Cantrell served as a
director of Vyrix Pharmaceuticals from February 2014 to April 2015. Mr. Cantrell’s experience in consulting and executive
management within the pharmaceutical industry led to the conclusion that he should serve as a director of our company in light
of our business and structure.
Family Relationships
Jarrett T. Disbrow, our Chief Operating Officer, is the brother
of Joshua R. Disbrow, our Chairman and Chief Executive Officer. There are no other family relationships among or between any of
our current or former executive officers and directors.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has been involved
in any legal proceeding in the past 10 years that would require disclosure under Item 401(f) of Regulation S-K promulgated under
the Securities Act.
Board Committees
Our Board has established an Audit Committee, Compensation Committee
and Nominating and Governance Committee. Our Audit Committee consists of Mr. Donofrio (Chair), Mr. Cantrell and Mr. Dockery. Our
Compensation Committee consists of Mr. Cantrell (Chair), Mr. Dockery and Mr. Donofrio. Our Nominating and Governance Committee
consists of Mr. Dockery (Chair), Mr. Cantrell and Mr. Donofrio. The independence of our directors is discussed below under the
caption “Director Independence.”
Each of the above-referenced committees operates pursuant to
a formal written charter. The charters for these committees, which have been adopted by our Board, contain a detailed description
of the respective committee’s duties and responsibilities and are available on our website at
http://aytubio.com
under
the “Investor Relations — Corporate Governance” tab.
Our Board has determined Mr. Donofrio qualifies as an audit
committee financial expert, as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.
Stockholder Proposals
Our bylaws establish procedures for stockholder nominations
for elections of directors and bringing business before any annual meeting or special meeting of stockholders. A stockholder entitled
to vote in the election of directors may nominate one or more persons for election as directors at a meeting only if written notice
of such stockholder’s intent to make such nomination or nominations has been delivered to our Corporate Secretary at our
principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary of the prior year’s
annual meeting. In the event that the date of the annual meeting is more than 30 days before or more than 60 days after the anniversary
date of the prior year’s annual meeting, the stockholder notice must be given not more than 120 days nor less than the later
of 90 days prior to the date of the annual meeting or, if it is later, the 10
th
day following the date on which the
date of the annual meeting is first publicly announced or disclosed by us. These notice deadlines are the same as those required
by the SEC’s Rule 14a-8.
Pursuant to the bylaws, a stockholder’s notice must set
forth among other things: (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director
all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors
in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended, or the Exchange Act, and the rules and regulations thereunder; and (b) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons
for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made.
There have been no changes to these nominating procedures since
the adoption of the bylaws.
Executive Compensation
In accordance with Item 402 of Regulation S-K promulgated by
the SEC, we are required to disclose certain information regarding the makeup of and compensation for our company’s directors
and named executive officers. On April 16, 2015, we acquired Luoxis and Vyrix in the Merger. Because for certain periods some of
our named executive officers were, prior to the Merger on April 16, 2015, employed by Luoxis and Vyrix, we are providing past compensation
information concerning such executive officers with respect to Luoxis and Vyrix.
In establishing executive compensation, our Board is guided
by the following goals:
|
·
|
compensation should consist of a combination of cash and equity awards that are designed to fairly pay the executive officers
and directors for work required for a company of our size and scope;
|
|
·
|
compensation should align the executive officers’ and directors’ interests with the long-term interests of stockholders;
and
|
|
·
|
compensation should assist with attracting and retaining qualified executive officers and directors.
|
Compensation of Directors
Our current compensation package for non-employee directors,
effective July 1, 2017, consists of: an annual cash retainer of $25,000 for each director, $10,000 for each committee chair and
$5,000 for each other committee member; a one-time grant of 65,000 restricted shares of stock upon appointment to the board; and
an annual stock option grant of 15,000 shares thereafter. In April 2016, we prorated for the last quarter of fiscal 2016 the annual
cash retainer (amounting to $6,250) and also made the annual grant of 100,000 stock options to our then two non-employee directors.
Prior to April 1, 2016, we paid no cash compensation and made no annual stock option grants. We also reimburse directors for expenses
incurred in connection with their service as director.
The following table provides information regarding all compensation
paid to non-employee directors of Aytu during the fiscal year ended June 30, 2016.
Name
|
|
Fees Earned
or Paid in
Cash
|
|
|
Stock Option
Awards
(1)
|
|
|
All Other
Compensation
|
|
|
Total
|
|
Michael Macaluso
(2)
|
|
$
|
6,250
|
|
|
$
|
34,169
|
|
|
$
|
—
|
|
|
$
|
40,419
|
|
Carl C. Dockery
(2)
|
|
$
|
6,250
|
|
|
$
|
34,169
|
|
|
$
|
—
|
|
|
$
|
40,419
|
|
Gary V. Cantrell
(2)(3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
John A. Donofrio Jr
(2)(3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(1)
|
This column reflects the aggregate grant date fair value computed
in accordance with Financial Accounting Standards Board, or FASB, issued Accounting Standards
Update, or ASC, Topic 718. On March 16, 2017, the Board reset the exercise price of these
options to $0.82; the incremental fair value for these options will be recognized in
fiscal year 2017.
|
|
(2)
|
As of June 30, 2016, the number of shares underlying options held by each non-employee director was as follows: 18,750 shares
for Mr. Macaluso; 8,334 shares for Mr. Dockery; none for Mr. Cantrell; and none for Mr. Donofrio.
|
|
(3)
|
Gary V. Cantrell and John A. Donofrio Jr. were each appointed a director in July 2016 and therefore received no compensation
or equity awards from Aytu in the fiscal year ended June 30, 2016.
|
Executive Officer Compensation
The following table sets forth all cash compensation earned,
as well as certain other compensation paid or accrued for the years ended June 30, 2016 and 2015 to each of the following named
executive officers.
Name and Principal Position
(a)
|
|
Year
(b)
|
|
Salary
($)
(c)
|
|
|
Bonus
($)
(d)
|
|
|
Stock
Award
($)
(e)
|
|
|
Option
Award
($)
(1)
(f)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
(g)
|
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
(h)
|
|
|
All
Other
Compensation
($)
(i)
|
|
|
Total
($)
(j)
|
|
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua R. Disbrow
(2)
|
|
2016
|
|
|
250,000
|
|
|
|
312,500
|
|
|
|
—
|
|
|
|
559,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,121,500
|
|
Chief Executive Officer since
December 2012
|
|
2015
|
|
|
246,000
|
|
|
|
202,500
|
|
|
|
—
|
|
|
|
198,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,045
|
(3)
|
|
|
653,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jarrett T. Disbrow
(4)
|
|
2016
|
|
|
250,000
|
|
|
|
287,500
|
|
|
|
—
|
|
|
|
559,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,096,500
|
|
Chief Operating Officer
|
|
2015
|
|
|
218,000
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
223,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory A. Gould
(5)
|
|
2016
|
|
|
—
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
Chief Financial Officer since
June 2014
|
|
2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan H. McGrael
(6)
|
|
2016
|
|
|
140,417
|
|
|
|
237,737
|
|
|
|
—
|
|
|
|
186,337
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,233
|
(7)
|
|
|
577,724
|
|
VP of Commercial Operations
|
|
2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Option awards are reported at fair value at the date of grant. See Note 10 to our audited annual financial statements and Note
9 to our unaudited interim financial statements. Pre-Merger option awards made in August 2014 to Joshua R. Disbrow and Gregory
A. Gould were cancelled in April 2015 and the expenses were reversed.
|
|
(2)
|
Joshua R. Disbrow received a salary increase to $250,000 effective April 16, 2015 when he was appointed Chief Executive Officer
of Aytu.
|
|
(3)
|
This was a cash payout of in-the-money options issued to Mr. Disbrow by Luoxis, which options were cashed out in the Merger.
|
|
(4)
|
Jarrett T. Disbrow received a salary increase to $250,000 effective April 16, 2015 when he was appointed Chief Operating Officer
of Aytu.
|
|
(5)
|
Mr. Gould was appointed to Chief Financial Officer, Secretary and Treasurer effective April 16, 2015. His compensation expense
is part of the shared service agreement with Ampio, except for his bonus, which was paid directly by us to Mr. Gould.
|
|
(6)
|
Mr. McGrael was hired on September 16, 2015 and his annual
salary was increased on May 15, 2016 from $175,000 to $190,000. Mr. McGrael left our
employment on March 13, 2017.
|
|
(7)
|
Represents reimbursed relocation expenses.
|
Our executive officers are reimbursed by us for any out-of-pocket
expenses incurred in connection with activities conducted on our behalf. Executives are reimbursed for business expenses directly
related to Aytu business activities, such as travel, primarily for business development as we grow and expand our product lines.
On average, each executive incurs between $1,000 to $3,000 of out-of-pocket business expenses each month. The executive management
team meets weekly and determines which activities they will work on based upon what we determine will be the most beneficial to
our company and our shareholders. No interest is paid on amounts reimbursed to the executives.
Grants of Plan-Based Awards
The following table sets forth certain information regarding
grants of plan-based awards to the Named Executive Officers during the year ended June 30, 2016:
Name
|
|
Grant Date
|
|
All
Other
Option
Awards:
Number
of
Securities
Underlying
Options
(#)
|
|
|
Exercise
Price of
Option
Awards
($/Share)
(3)
|
|
|
Grant
Date
Fair
Value of
Option
Awards
($)
(1)
|
|
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua R Disbrow
|
|
11/11/2015
|
|
|
50,000
|
|
|
$
|
18.12
|
|
|
$
|
559,000
|
|
Jarrett T Disborw
|
|
11/11/2015
|
|
|
50,000
|
|
|
$
|
18.12
|
|
|
$
|
559,000
|
|
Gregory A Gould
|
|
11/11/2015
|
|
|
20,834
|
|
|
$
|
18.12
|
|
|
$
|
—
|
(2)
|
Jonathan H McGrael
(4)
|
|
11/11/2015
|
|
|
16,667
|
|
|
$
|
18.12
|
|
|
$
|
186,337
|
|
|
(1)
|
The amounts reported in this column represent the aggregate grant date fair value computed in accordance with FASB ASC 718,
excluding the effect of any estimated forfeitures and may not correspond to the actual value that will be realized by the named
executive officer.
|
|
(2)
|
The fair value of this award was recognized by Ampio Pharmaceuticals as at the date of grant, Ampio was the parent company
and in accordance with GAAP, since Mr. Gould is still an Ampio employee, it was appropriate for Ampio to recognize the expense.
|
|
(3)
|
On July 7, 2016, the Board reset the option exercise price
on these options from $18.12 to $3.23, and on March 16, 2017, reset the price to $0.82.
|
|
(4)
|
Mr. McGrael
left our employment on March 13, 2017.
|
Outstanding Equity Awards at Fiscal Year-End 2016
The following table contains certain information concerning
unexercised options for the Named Executive Officers as of June 30, 2016.
|
|
Option Awards
|
Name
(a)
|
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
(b)
|
|
|
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
(c)
|
|
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
|
|
|
Option
Exercise
Price
($)
(e)
(1)
|
|
|
Option
Expiration
Date
(f)
|
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua R. Disbrow
|
|
|
—
|
|
|
|
50,000
|
|
|
|
—
|
|
|
$
|
18.12
|
|
|
11/11/2025
|
Jarrett T. Disbrow
|
|
|
—
|
|
|
|
50,000
|
|
|
|
—
|
|
|
$
|
18.12
|
|
|
11/11/2025
|
Gregory A. Gould
|
|
|
20,834
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
18.12
|
|
|
11/11/2025
|
Jonathan H. McGrael
|
|
|
—
|
|
|
|
16,667
|
|
|
|
—
|
|
|
$
|
18.12
|
|
|
11/11/2025
|
|
(1)
|
On July 7, 2016, the Board reset the option exercise price
of these options from $18.12 to $3.23 and reset the price again on March 16, 2017 to
$0.82.
|
Employment Agreements
We entered into an employment agreement with Joshua Disbrow
in connection with his employment as our Chief Executive Officer. The agreement is for a term of 24 months beginning on April 16,
2015, subject to termination by us with or without Cause or as a result of officer’s disability, or by the officer with or
without Good Reason (as discussed below). Mr. Disbrow is entitled to receive $250,000 in annual salary, plus a discretionary performance
bonus with a target of 125% of his base salary. Mr. Disbrow is also eligible to participate in the benefit plans maintained by
us from time to time, subject to the terms and conditions of such plans.
We entered into an employment agreement with Jarrett Disbrow,
our Chief Operating Officer, in connection with his employment with us. The agreement is for a term of 24 months beginning on April
16, 2015, subject to termination by us with or without Cause or as a result of the officer’s disability, or by the officer
with or without Good Reason (as discussed below). Mr. Disbrow is entitled to receive $250,000 in annual salary, plus a discretionary
performance bonus with a target of 125% of his base salary. Mr. Disbrow is also eligible to participate in the benefit plans maintained
by us from time to time, subject to the terms and conditions of such plans.
In September 2015, we entered into an employment
agreement with Jonathan McGrael, our Vice President of Sales, in connection with his employment with us. On May 15, 2016, we
amended Mr. McGrael’s contract to increase his salary and to name him our Vice President of Commercial Operations. Mr.
McGrael left our employment on March 13, 2017. The agreement was at will, subject to termination by us with or without Cause
or as a result of the officer’s disability, or by the officer with or without Good Reason (as discussed below). Mr.
McGrael was entitled to receive $190,000 in annual salary, plus a discretionary performance bonus with a target of 43% of his
base salary. Mr. McGrael could also receive up to $20,000 for relocation reimbursement. Mr. McGrael was also eligible to
participate in the benefit plans maintained by us from time to time, subject to the terms and conditions of such
plans. As a result of Mr. McGrael’s departure, he will receive payment equal to six months of salary and
an allowance for relocation-related expenses, as well as the vesting in full of his unvested options to purchase an aggregate of
40,000 shares of our common stock and his 140,000 restricted shares.
Payments Provided Upon Termination for Good Reason or
Without Cause
Pursuant to the employment agreements, in the event Joshua Disbrow’s
or Jarrett Disbrow’s employment is terminated without Cause by us or either officer terminates his employment with Good Reason,
we will be obligated to pay him any accrued compensation and a lump sum payment equal to two times his base salary in effect at
the date of termination, as well as continued participation in the health and welfare plans for up to two years. All vested stock
options shall remain exercisable from the date of termination until the expiration date of the applicable award. So long as a Change
in Control is not in effect, then all options which are unvested at the date of termination Without Cause or for Good Reason shall
be accelerated as of the date of termination such that the number of option shares equal to 1/24
th
the number of option
shares multiplied by the number of full months of such officer’s employment shall be deemed vested and immediately exercisable
by the officer. Any unvested options over and above the foregoing shall be cancelled and of no further force or effect, and shall
not be exercisable by such officer.
“Good Reason” with respect to the agreements with
Joshua Disbrow and Jarrett Disbrow, means, without the officer’s written consent, there is:
|
·
|
a material reduction in the officer’s overall responsibilities or authority, or scope of duties (it being understood
that the occurrence of a Change in Control shall not, by itself, necessarily constitute a reduction in the officer’s responsibilities
or authority);
|
|
·
|
a material reduction of the level of the officer’s compensation (excluding any bonuses) (except where there is a general
reduction applicable to the management team generally, provided, however, that in no case may the base salary be reduced below
certain specified amounts); or
|
|
·
|
a material change in the principal geographic location at which the officer must perform his services.
|
“Cause” with respect to the agreements with Joshua
Disbrow and Jarrett Disbrow, means:
|
·
|
conviction of, or entry of a plea of guilty to, or entry of a plea of nolo contendere with respect to, any crime, other than
a traffic violation which is a misdemeanor;
|
|
·
|
willful malfeasance or willful misconduct by the officer in connection with his employment;
|
|
·
|
gross negligence in performing any of his duties;
|
|
·
|
willful and deliberate violation of any of our policies;
|
|
·
|
unintended but material breach of any written policy applicable to all employees adopted by us which is not cured to the reasonable
satisfaction of the board;
|
|
·
|
unauthorized use or disclosure of any proprietary information or trade secrets of us or any other party as to which the officer
owes an obligation of nondisclosure as a result of the officer’s relationship with us;
|
|
·
|
willful and deliberate breach of his obligations under the employment agreement; or
|
|
·
|
any other material breach by officer of any of his obligations which is not cured to the reasonable satisfaction of the board.
|
In the case of Mr. McGrael’s termination without Cause
or with Good Reason, we were obligated to pay him any accrued compensation and continue his salary for six months. In addition,
all unvested options would receive accelerated vesting in full.
“Good Reason” with respect to the agreement with
Mr. McGrael, means, without the officer’s written consent, there is:
|
·
|
a material reduction in the officer’s overall responsibilities or authority, or scope of duties;
|
|
·
|
a material reduction of the level of the officer’s compensation (excluding any bonuses) (except where there is a general
reduction applicable to the management team generally, provided, however, that in no case may the base salary be reduced below
certain specified amounts); or
|
|
·
|
the Company’s material breach of the employment agreement.
|
“Cause” with respect to the agreement with Mr. McGrael
means:
|
·
|
conviction of, or entry of a plea of guilty to, or entry of a plea of nolo contendere with respect to, a felony or misdemeanor
involving moral turpitude;
|
|
·
|
willful malfeasance or willful misconduct by the officer in connection with his employment;
|
|
·
|
gross negligence in performing any of his duties;
|
|
·
|
material failure to comply with our workplace rules, policies or procedures which is not cured within fifteen days of written
notice;
|
|
·
|
material breach of our Proprietary Information and Inventions Agreement;
|
|
·
|
material breach of the employment agreement which is not cured within fifteen days of written notice;
|
|
·
|
unauthorized use or disclosure of any proprietary information or trade secrets of us or any other party as to which the officer
owes an obligation of nondisclosure as a result of the officer’s relationship with us; or
|
|
·
|
willful failure or refusal to perform his material duties under the employment agreement or failure to follow any specific
lawful instructions of the Chief Executive Officer or his designee which is not cured within fifteen days of written notice.
|
The severance benefits described above are contingent on each
officer executing a general release of claims.
Payments Provided Upon a Change in Control
Pursuant to the employment agreements for Joshua Disbrow and
Jarrett Disbrow, in the event of a Change in Control of us, all stock options, restricted stock and other stock-based grants granted
or may be granted in the future by us to the officers will immediately vest and become exercisable.
“Change in Control” means: the occurrence of any
of the following events:
|
·
|
the acquisition by any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act)
(the “Acquiring Person”), other than us, or any of our Subsidiaries, of beneficial ownership (within the meaning of
Rule 13d-3- promulgated under the Exchange Act) of 50% or more of the combined voting power or economic interests of the then outstanding
voting securities of us entitled to vote generally in the election of directors (excluding any issuance of securities by us in
a transaction or series of transactions made principally for bona fide equity financing purposes); or
|
|
·
|
the acquisition of us by another entity by means of any transaction or series of related transactions to which we are party
(including, without limitation, any stock acquisition, reorganization, merger or consolidation but excluding any issuance of securities
by us in a transaction or series of transactions made principally for bona fide equity financing purposes) other than a transaction
or series of related transactions in which the holders of the voting securities of us outstanding immediately prior to such transaction
or series of related transactions retain, immediately after such transaction or series of related transactions, as a result of
shares in us held by such holders prior to such transaction or series of related transactions, at least a majority of the total
voting power represented by the outstanding voting securities of us or such other surviving or resulting entity (or if we or such
other surviving or resulting entity is a wholly-owned subsidiary immediately following such acquisition, its parent); or
|
|
·
|
the sale or other disposition of all or substantially all of the assets of us in one transaction or series of related transactions.
|
Our only obligation to Joshua Disbrow and Jarrett Disbrow had
a Change in Control occurred as of June 30, 2016, would be the acceleration of the vesting of all options held by them at that
date. On June 30, 2016, the closing price of our common stock was below the exercise price for all of the options held by Joshua
Disbrow and Jarrett Disbrow and therefore there would have been no economic benefit to them upon the acceleration of vesting of
those options.
TRANSACTIONS WITH RELATED PERSONS
Related Party Transactions
We describe below all transactions and series of similar transactions,
other than compensation arrangements, during the last three fiscal years, to which we were a party or will be a party, in which:
|
·
|
the amounts involved exceeded or will exceed $120,000; and
|
|
·
|
any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family
of the foregoing persons, had or will have a direct or indirect material interest.
|
Merger
On April 16, 2015, pursuant to the Merger Agreement entered
into among Rosewind, Luoxis, Vyrix and two subsidiaries of Rosewind created solely for the purposes of the Merger, and which did
not survive the Merger, the Merger occurred in two stages.
In the first stage, each of Vyrix and Luoxis merged with one
of Rosewind’s merger subsidiaries. Vyrix and Luoxis survived these mergers. The outstanding shares of stock of Vyrix and
the outstanding shares of stock of Luoxis were converted into the right to receive shares of our common stock. The Vyrix stock
and the Luoxis stock were each converted at an exchange factor. The exchange factor for each of them was determined upon the basis
of a relative value opinion obtained by Ampio, the parent company of Vyrix and Luoxis. The outstanding shares of Rosewind’s
merger subsidiary that merged with Vyrix were converted into shares of Vyrix as the surviving corporation. The outstanding shares
of Rosewind’s merger subsidiary that merged with Luoxis were converted into shares of Luoxis as the surviving corporation.
After completion of the first stage, Vyrix and Luoxis became subsidiaries of Rosewind.
In the second stage, which occurred on the same day as the first
stage, each of Vyrix and Luoxis merged with Rosewind with Rosewind surviving. The first and second stage mergers are referred to
collectively as the “Merger.”
Concurrently with the Merger:
|
·
|
Ampio purchased 396,816 shares of our common stock for (i) issuance to Rosewind of a promissory note of Ampio in the principal
amount of $10,000,000, maturing on the first anniversary of the Merger; (ii) cancellation of indebtedness of Luoxis to Ampio in
the amount of $8,000,000; and (iii) cancellation of indebtedness of Vyrix to Ampio in the amount of $4,000,000.
|
Rosewind
On March 3, 2015, Rosewind accepted a cash investment from two
irrevocable trusts for estate planning of which Joshua Disbrow and Jarrett Disbrow are beneficiaries. None of such persons have
or share investment control over our shares held by such trusts. None of such persons, nor members of their respective immediate
families, are trustees of such trusts. None of such persons have or share power to revoke such trusts. Accordingly, under Rule
16a-8(b) and related rules, none of such persons has beneficial ownership over our shares purchased and held by such trusts.
Luoxis and Vyrix
Ampio Loan Agreements
In November 2013, Vyrix entered into a loan agreement with Ampio.
Pursuant to the loan agreement, Ampio agreed to lend Vyrix up to an aggregate amount of $3,000,000 through cash advances of up
to $500,000 each. Unpaid principal amounts under the loan agreement bear simple interest at the “Applicable Federal Rate”
for long-term obligations prescribed under Section 1274(d) of the Internal Revenue Code of 1986, as amended (or any successor provision
with similar applicability). The initial term of this loan agreement is for one year, subject to automatic extension of successive
one-year terms. Vyrix may repay any outstanding balance at any time without penalty. Ampio has an option of converting any balance
outstanding under the loan agreement into shares of Vyrix common stock at the fair market value per share of Vyrix common stock,
as determined by the Ampio board of directors, as of such conversion date. On April 16, 2015, in connection with the closing of
the Merger, Ampio released Vyrix from its then outstanding obligation of $4,000,000 under the loan agreement as consideration of
its share purchase, and the loan agreement was terminated.
In March 2014, Luoxis entered into a loan agreement with Ampio.
Pursuant to the loan agreement, Ampio agreed to lend Luoxis $3,000,000. Unpaid principal amounts under the loan agreement bear
simple interest at the “Applicable Federal Rate” for long-term obligations prescribed under Section 1274(d) of the
Internal Revenue Code of 1986, as amended (or any successor provision with similar applicability). The initial term of this loan
agreement is for one year, subject to automatic extension of successive one-year terms. Luoxis may repay any outstanding balance
at any time without penalty. Ampio has an option of converting any balance outstanding under the loan agreement into shares of
Luoxis common stock at the fair market value per share of Luoxis common stock, as determined by the Ampio board of directors, as
of such conversion date. On April 16, 2015, in connection with the closing of the Merger, Ampio released Luoxis from its then outstanding
obligation of $8,000,000 under the loan agreement as consideration of its share purchase, and the loan agreement was terminated.
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 $10,000,000, maturing on the first
anniversary of the Merger, (ii) cancellation of indebtedness of Luoxis to Ampio in the amount of $8,000,000; and (iii) cancellation
of indebtedness of Vyrix to Ampio in the amount of $4,000,000.
Services Agreements
In January 2013, Luoxis entered into a services agreement with
Ampio whereby Ampio provides corporate overhead services and a shared facility with Luoxis in exchange for $15,000 per month. The
amount can be modified in writing upon the consent of both parties. The agreement may be terminated at any time by either party.
In January 2014, Vyrix entered into a services agreement with Ampio whereby Ampio provides corporate overhead services to Vyrix
in exchange for $7,000 per month. The amount can be modified in writing upon the consent of both parties. The agreement may be
terminated at any time by either party. Both agreements were assigned to us upon the closing of the Merger.
In July 2015, the prior service agreements were canceled
and Aytu entered into agreements with Ampio whereby Aytu agreed to pay Ampio $30,000 per month for shared overhead which includes
costs related to the shared facility, corporate staff, and other miscellaneous overhead expenses. This agreement will be in effect
until it is terminated in writing by both parties. This agreement was amended in April 2016, which reduced the monthly amount
to $18,000, was amended again in July 2016, which reduced the monthly amount to approximately $17,000 per month and was amended
again in January 2017 to reduce the monthly amount to approximately $12,000 per month.
Sponsored Research Agreement
In June 2013, Luoxis entered into a sponsored research agreement
with TRLLC, an entity controlled by Ampio’s director and Chief Scientific Officer, Dr. Bar-Or. The agreement, which was
amended in September 2013 and provides for Luoxis to pay $6,000 per month to TRLLC in consideration for services related to research
and development of Luoxis’ RedoxSYS System. 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; this amount has been
paid in full. This agreement was set to expire March 2019 and could not be terminated prior to March 2017. Pursuant to the agreement’s
terms, we gave notice that we would terminate the agreement on March 31, 2017. We will recognize the remainder of the unamortized
expense in the quarter ending March 31, 2017.
Review, Approval or Ratification of Transactions with Related
Persons
Effective upon its adoption in July 2016, pursuant to the Audit
Committee Charter, the Audit Committee is responsible for reviewing and approving all related party transactions as defined under
Item 404 of Regulation S-K, after reviewing each such transaction for potential conflicts of interests and other improprieties.
Our policies and procedures for review and approval of transactions with related persons are in writing in our Code of Conduct
and Ethics available on our website at
http://aytubio.com
under the “Investor Relations — Corporate
Governance” tab.
Prior to the adoption of the Audit Committee Charter, and due
to the small size of our company, we did not have a formal written policy regarding the review of related party transactions, and
relied on our Board of Directors to review, approve or ratify such transactions and identify and prevent conflicts of interest.
Our Board of Directors reviewed any such transaction in light of the particular affiliation and interest of any involved director,
officer or other employee or stockholder and, if applicable, any such person’s affiliates or immediate family members.
Director Independence
Our common stock is not listed on any exchange. Consequently,
no exchange rules regarding director independence are applicable to us. Audit Committee members must satisfy the independence criteria
set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, for listed companies. In order to be considered
to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or
her capacity as a member of the audit committee, the board of directors or any other board committee: (1) accept, directly or indirectly,
any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated
person of the listed company or any of its subsidiaries.
Three of our five directors, namely Messrs. Dockery, Donofrio
and Cantrell, are independent under the definition of the NYSE. The other two directors are not independent under either definition
due to (i) being an executive officer of our Company, in the case of Josh Disbrow, and (ii) the payments we make to Ampio under
the services agreement with Aytu, in the case of Mr. Macaluso.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information with respect
to the beneficial ownership of our common stock as of March 20, 2017 for:
|
·
|
each beneficial owner of more than 5% of our outstanding common stock;
|
|
·
|
each of our director and named executive officers; and
|
|
·
|
all of our directors and executive officers as a group.
|
Beneficial ownership is determined in accordance with the
rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting
power or investment power with respect to those securities and include common stock that can be acquired within 60 days of March
20, 2017. The percentage ownership information shown in the table is based upon 13,836,607 shares of common stock outstanding
as of March 20, 2017.
Except as otherwise indicated, all of the shares reflected in
the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares
beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial
ownership for any other purpose.
In computing the number of shares of common stock beneficially
owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options
and warrants held by that person that are immediately exercisable or exercisable within 60 days of March 20, 2017. We did not
deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial
ownership representing less than 1% is denoted with an asterisk (*). The information in the table below is based on information
known to us or ascertained by us from public filings made by the stockholders. Except as otherwise indicated in the table below,
addresses of the director, executive officers and named beneficial owners are in care of Aytu BioScience, Inc., 373 Inverness
Parkway, Suite 206, Englewood, Colorado 80112.
Name of Beneficial Owner
|
|
Number
of
Shares
Beneficially
Owned
|
|
|
Percentage
of
Shares
Beneficially
Owned
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
Alpha Venture Capital Partners, L.P.
(1)
|
|
|
837,300
|
|
|
|
6.9
|
%
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
Joshua R. Disbrow
(2)
|
|
|
675,785
|
|
|
|
4.9
|
%
|
Jarrett T. Disbrow
(3)
|
|
|
617,672
|
|
|
|
4.5
|
%
|
Gregory A. Gould
(4)
|
|
|
361,065
|
|
|
|
3.6
|
%
|
Michael Macaluso
(5)
|
|
|
130,406
|
|
|
|
*
|
%
|
Carl C. Dockery
(6)
|
|
|
915,634
|
|
|
|
6.6
|
%
|
John Donofrio
(7)
|
|
|
76,250
|
|
|
|
*
|
%
|
Gary Cantrell
(8)
|
|
|
146,666
|
|
|
|
1.1
|
%
|
All directors and executive officers as a group (seven persons)
|
|
|
2,923,478
|
|
|
|
21.1
|
%
|
|
*
|
Represents beneficial ownership of less than 1%.
|
|
(1)
|
Carl C. Dockery is the President of the general partner of Alpha Venture Capital Partners, L.P. and therefore may be deemed
to beneficially own the shares beneficially owned by Alpha Venture Capital Partners, L.P. The address of Alpha Venture Capital
Partners, L.P. is 2026 Crystal Wood Drive, Lakeland, Florida 33801. For securities beneficially owned by Alpha Venture Capital
Partners, L.P., see footnote 7 below.
|
|
(2)
|
Consists of (i) 252,694 shares, (ii) 190,000 restricted shares, (iii) 216,424 shares issuable upon the exercise of warrants
and (iv) 16,667 shares issuable upon the exercise of vested options. Does not include 46,548 shares held by an irrevocable trust
for estate planning in which Mr. Disbrow is a beneficiary. Mr. Disbrow does not have or share investment control over the shares
held by the trust, Mr. Disbrow is not the trustee of the trust (nor is any member of Mr. Disbrow’s immediate family) and
Mr. Disbrow does not have or share the power to revoke the trust. As such, under Rule 16a-8(b) and related rules, Mr. Disbrow does
not have beneficial ownership over the shares purchased and held by the trust.
|
|
(3)
|
Consists of (i) 248,505 shares, (ii) 165,000 restricted shares, (iii) 187,500 shares issuable upon the exercise of warrants
and (iv) 16,667 shares issuable upon the exercise of vested options. Does not include 46,548 shares held by an irrevocable trust
for estate planning in which Mr. Disbrow is a beneficiary. Mr. Disbrow does not have or share investment control over the shares
held by the trust, Mr. Disbrow is not the trustee of the trust (nor is any member of Mr. Disbrow’s immediate family) and
Mr. Disbrow does not have or share the power to revoke the trust. As such, under Rule 16a-8(b) and related rules, Mr. Disbrow does
not have beneficial ownership over the shares purchased and held by the trust.
|
|
(4)
|
Consists of (i) 108,565 shares, (ii) 165,000 restricted shares,(iii) 66,666 shares issuable upon the exercise of warrants and
(iv) 20,834 shares issuable upon exercise of vested options.
|
|
(5)
|
Consists of (i) 29,780 shares, (ii) 65,000 restricted shares,
and (iii) 35,626 shares issuable upon exercise of vested options.
|
|
(6)
|
Consists of (i) 65,000 restricted shares, (ii) 13,334 shares
issuable upon exercise of vested options, and (iii) 837,300 shares held by Alpha Venture
Capital Partners, L.P. Mr. Dockery is the President of the general partner of Alpha Venture
Capital Partners, L.P. and therefore may be deemed to beneficially own the shares beneficially
owned by Alpha Venture Capital Partners, L.P.
|
|
(7)
|
Consists of (i) 65,000 restricted shares, and (ii) 11,250 shares
issuable upon exercise of vested options.
|
|
(8)
|
Consists of (i) 70,416 shares, (ii) 65,000 restricted shares,
and (iii) 11,250 shares issuable upon exercise of vested options.
|
THE LINCOLN PARK TRANSACTION
General
On July 27, 2016, we entered into the Purchase
Agreement and the Registration Rights Agreement with Lincoln Park. Pursuant to the terms of the Purchase
Agreement, Lincoln Park has agreed to purchase from us up to $10.5 million in the aggregate of our common stock (subject to
certain limitations) from time to time over a 36-month period beginning on September 20, 2016 (the
“Commencement Date”). Pursuant to the terms of the Registration Rights Agreement, we have filed with the SEC the
registration statement that includes this prospectus to register for resale under the Securities Act the shares that have
been or may be issued to Lincoln Park under the Purchase Agreement. Thereafter and upon satisfaction of the other conditions
set forth in the Purchase Agreement, we may, from time to time and at our sole discretion, direct Lincoln Park to purchase
shares of our common stock in amounts up to 10,000 shares on any single business day so long as at least one business day has
passed since the most recent purchase. We can also increase the amount of our common stock to be purchased under
certain circumstances to up to 20,000 shares but not exceeding $500,000 per purchase plus an additional
“accelerated amount” under certain circumstances. The purchase price per share is based on the market
price of our common stock immediately preceding the time of sale as computed under the Purchase Agreement without any
fixed discount. Lincoln Park may not assign or transfer its rights and obligations under the Purchase
Agreement.
We sold $500,000 of common stock to Lincoln Park in July
2016 when we executed the Purchase Agreement. After the Commencement Date, we sold 40,000 shares to Lincoln Park in September
2016 for $131,000 of gross proceeds. As a result, as of the date of this prospectus, we may sell an aggregate of $9,869,000 of
additional shares over the remaining term of the Purchase Agreement, assuming we continue to meet the conditions required for
sale. However, we may not direct Lincoln Park to purchase any shares of our common stock during the period commencing five business
days immediately prior to the filing of this post-effective amendment to the registration statement (of which this prospectus
is a part) and ending on the business day immediately following the effective date of this post-effective amendment to the registration
statement.
The registration statement of which this prospectus is a
part is effective only for an aggregate of 1,076,596 shares of our common stock, which may not be sufficient to cover the resale
by Lincoln Park of additional shares of our common stock that we may sell and issue to Lincoln Park. Consequently, we may be required
to file and have declared effective additional registration statements in connection with our Purchase Agreement with Lincoln
Park. In such event, we would not be able to sell any shares to Lincoln Park unless and until such new registration statement
was filed and declared effective.
Purchase of Shares Under the Purchase Agreement
Under the Purchase Agreement, on any business day selected
by us, we may direct Lincoln Park to purchase up to 10,000 shares of our common stock on any such business day so long as one
business day has passed since the last purchase. On any day that the closing sale price of our common stock is not
below (a) $7.00, the purchase amount may be increased, at our sole discretion, to up to 15,000 shares of our common stock per
purchase, and (b) $9.00, the purchase amount may be increased, at our sole discretion, to up to 20,000 shares of our common stock
per purchase, provided in each instance that the amount cannot exceed $500,000 (a “Regular Purchase”). Lincoln Park
will not be required to purchase any shares of our common stock if such sale would result in Lincoln Park’s beneficial ownership
exceeding 4.99% of the then outstanding shares of our common stock, which amount may be increased to an amount not more than 9.99%
of the then outstanding shares of common stock by written notice to us by Lincoln Park, effective 61 days after delivery of such
notice. The purchase price per share for each such Regular Purchase will be equal to the lower of:
|
·
|
the
lowest sale price for our common stock on the purchase date of such shares; or
|
|
·
|
the
arithmetic average of the three lowest closing sale prices for our common stock during
the 10 consecutive business days ending on the business day immediately preceding the
purchase date of such shares.
|
In addition to Regular Purchases described above, we may
also direct Lincoln Park, on any business day on which we have properly submitted a Regular Purchase notice and the closing price
of our common stock is not below $3.00 per share, to purchase an additional amount of our common stock (an “Accelerated
Purchase”), not to exceed the lesser of:
|
·
|
30%
of the aggregate shares of our common stock traded during normal trading hours on the
purchase date; and
|
|
·
|
three
times the number of purchase shares purchased pursuant to the corresponding Regular Purchase.
|
The purchase price per share for each such Accelerated Purchase
will be equal to the lower of:
|
·
|
95%
of the volume weighted average price during (i) the entire trading day on the purchase
date, if the volume of shares of our common stock traded on the purchase date has not
exceeded a volume maximum calculated in accordance with the Purchase Agreement, or (ii)
the portion of the trading day of the purchase date (calculated starting at the beginning
of normal trading hours) until such time at which the volume of shares of our common
stock traded has exceeded such volume maximum; or
|
|
·
|
the
closing sale price of our common stock on the purchase date.
|
In the case of both Regular Purchases and Accelerated Purchases,
the purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split,
reverse stock split or other similar transaction occurring during the business days used to compute the purchase price.
Other than as set forth above, there are no trading volume
requirements or restrictions under the Purchase Agreement, and we will control the timing and amount of any sales of our common
stock to Lincoln Park.
After the Commencement Date, in September 2016, we
sold 40,000 shares to Lincoln Park under the agreement for $131,000, which amount reduced dollar for dollar the available
$10,000,000 such that the amount remaining available is $9,869,000 as of the date of this prospectus.
We may not direct Lincoln Park to purchase any shares
of our common stock during the period commencing five business days immediately prior to
the filing of this post-effective amendment to the registration statement (of which this prospectus is a part) and ending on
the business day immediately following the effective date of this post-effective amendment to the registration
statement.
Events of Default
Events of default under the Purchase Agreement include the
following:
|
·
|
the
effectiveness of the registration statement of which this prospectus forms a part, or
any future registration statement relating to the resale of shares issuable pursuant
to the Purchase Agreement, lapses for any reason (including, without limitation, the
issuance of a stop order), or any required prospectus supplement and accompanying prospectus
are unavailable for the resale by Lincoln Park of our common stock offered hereby, and
such lapse or unavailability continues for a period of 10 consecutive business days or
for more than an aggregate of 30 business days in any 365-day period;
|
|
·
|
suspension
by our principal market of our common stock from trading for a period of one business
day;
|
|
·
|
the
de-listing of our common stock from the OTC markets, provided our common stock is not
immediately thereafter trading on the New York Stock Exchange, the NYSE MKT, the NYSE
Arca, The NASDAQ Capital Market, The NASDAQ Global Market, The NASDAQ Global Select Market,
or the OTC Bulletin Board (or nationally recognized successor thereto);
|
|
·
|
the
transfer agent’s failure for three business days to issue to Lincoln Park shares
of our common stock which Lincoln Park is entitled to receive under the Purchase Agreement;
|
|
·
|
our
breach of any representation, warranty, covenant, or other term or condition contained
in the Purchase Agreement or any related agreement which has or which could have a material
adverse effect on us subject to a cure period of five business days;
|
|
·
|
any
voluntary or involuntary participation or threatened participation in insolvency or bankruptcy
proceedings by or against us; or
|
|
·
|
if
at any time we are not eligible to transfer our common stock electronically or a material
adverse change in our business, financial condition, operations or prospects has occurred.
|
Lincoln Park does not have the right to terminate the Purchase
Agreement upon any of the events of default set forth above. During an event of default, all of which are outside of Lincoln Park’s
control, we cannot initiate any Regular Purchases or Accelerated Purchases under the Purchase Agreement.
Our Termination
Rights
We have the unconditional right, at any time, for any reason
and without any payment or liability to us, to give notice to Lincoln Park to terminate the Purchase Agreement. In
the event of bankruptcy proceedings by or against us, the Purchase Agreement will automatically terminate without action of any
party.
No Short-Selling or Hedging by Lincoln Park
Lincoln Park has agreed that neither it nor any of its affiliates
shall engage in any direct or indirect short-selling or hedging of our common stock during any time prior to the termination of
the Purchase Agreement.
No Variable Rate Transactions
We agreed with Lincoln
Park that we will not enter into any “variable rate” transactions with any third party from the date of the Purchase
Agreement until the expiration of the six-month period following the date of the Purchase Agreement. Additionally, we agreed with
Lincoln Park that we will not effect any issuance of shares of our common stock in any “continuous offering” in which
we enter into any agreement, including, but not limited to, an equity line of credit or at-the-market offering, whereby we may
sell securities at a future determined price until the expiration of the 36-month period following the date of the Purchase Agreement.
A “variable rate” transaction means any of the following transactions by us:
|
·
|
if
we sell any debt or equity securities that are convertible into, exchangeable or exercisable
for, or include the right to receive additional shares of our common stock, either
|
|
o
|
at a price that is based upon or varies with the trading
prices of our common stock at any time after the initial issuance of such debt or equity
securities (including pursuant to a cashless exercise provision),
|
|
o
|
with a price that is subject to being reset at some future
date after the initial issuance of such debt or equity security or upon the occurrence
of specified or contingent events directly or indirectly related to our business or the
market for our common stock;
|
|
·
|
if
we issue any debt or equity securities either:
|
|
o
|
at a price that is subject to being reset at some future
date after the initial issuance of such debt or equity security or upon the occurrence
of specified or contingent events directly or indirectly related to our business or the
market for our common stock, or
|
|
o
|
that is subject to or contains any put, call, redemption,
buy-back, price-reset or other similar provision or mechanism (including, without limitation,
a “Black-Scholes” put or call right) that requires us to issue additional
debt or equity securities or payment cash; or
|
|
·
|
if
we issue common stock in an “equity line of credit”, “at-the-market
offering” or other continuous offering or similar offering whereby we may sell
common stock or common stock equivalents at a future determined price;
|
The prohibition on “variable rate” transactions
and “continuous offerings” does not apply to, and we are not restricted from entering into, the following transactions
(“exempt issuances”):
|
·
|
if
we issue shares of common stock or options to our employees, officers, directors or vendors
pursuant to any stock or option plan duly adopted by our board of directors;
|
|
·
|
if
we issue securities upon the exercise or conversion of any securities that are outstanding
on the date of the Purchase Agreement; or
|
|
·
|
if
we issue securities pursuant to acquisitions or strategic transactions approved by our
board of directors, provided that any such issuance is to an operating company or an
asset in a business synergistic with our business, and shall not include a transaction
primarily for the purpose of raising capital or to an entity whose primary business is
investing in securities.
|
Effect of Performance of the Purchase Agreement on Our
Stockholders
All shares of common stock registered in this
offering are expected to be freely tradable. It is anticipated that shares registered in this offering will be
sold over a period of up to 36 months beginning on September 20, 2016. The sale by Lincoln Park of a significant
amount of shares registered in this offering at any given time could cause the market price of our common stock to decline
and to be highly volatile. Lincoln Park may ultimately purchase all, some or none of the shares of common stock
not yet issued but registered in this offering. If we sell these shares to Lincoln Park, Lincoln Park may sell
all, some or none of such shares. Therefore, sales to Lincoln Park by us under the Purchase Agreement may result
in substantial dilution to the interests of other holders of our common stock. In addition, if we sell a
substantial number of shares to Lincoln Park under the Purchase Agreement, or if investors expect that we will do so, the
actual sales of shares or the mere existence of our arrangement with Lincoln Park may make it more difficult for us to sell
equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect
such sales. However, we have the right to control the timing and amount of any sales of our shares to Lincoln Park
and the Purchase Agreement may be terminated by us at any time at our discretion without any cost to us.
In July 2016, we issued to Lincoln Park $500,000 of shares
of our common stock up the execution of the Purchase Agreement. Pursuant to the terms of the Purchase Agreement, we have the right,
but not the obligation, to direct Lincoln Park to purchase up to an additional $10,000,000 of our common stock, less any amount
sold after the Commencement Date. After the Commencement Date, we sold 40,000 shares to Lincoln Park in September 2016 for
$131,000 of gross proceeds. As a result, as of the date of this prospectus, we may sell an aggregate of $9,869,000 of additional
shares over the remaining term of the Purchase Agreement, assuming we continue to meet the conditions required for sale. We have
registered only a portion of the shares issuable under the Purchase Agreement and, therefore, we may seek to issue and sell to
Lincoln Park under the Purchase Agreement more shares of our common stock than are offered under this prospectus. If
we choose to do so, we must first register for resale under the Securities Act any such additional shares, which could cause additional
substantial dilution to our stockholders. The number of shares ultimately offered for resale by Lincoln Park under
this prospectus is dependent upon the number of shares we direct Lincoln Park to purchase under the Purchase Agreement.
We may not direct Lincoln Park to purchase any shares
of our common stock during the period commencing five business days immediately prior to the filing of this
post-effective amendment to the registration statement (of which this prospectus is a part) and ending on the business day
immediately following the effective date of this post-effective amendment to the registration statement.
The following table sets forth the amount of proceeds we
would receive from Lincoln Park from the sale of shares at varying purchase prices:
Assumed Average
Purchase Price Per
Share
(1)
|
|
|
Number of Registered
Shares to be Issued if Full
Purchase
(2)(3)
(4)
|
|
|
Percentage of Outstanding
Shares After Giving Effect
to the Issuance to Lincoln
Park
(4)
|
|
|
Additional Proceeds from
the Sale of Registered
Shares to Lincoln Park
Under the Purchase
Agreement
|
|
$
|
8.00
|
|
|
|
1,076,596
|
|
|
|
7.22
|
%
|
|
$
|
8,612,768
|
|
$
|
6.00
|
|
|
|
1,076,596
|
|
|
|
7.22
|
%
|
|
$
|
6,459,576
|
|
$
|
4.00
|
|
|
|
1,076,596
|
|
|
|
7.22
|
%
|
|
$
|
4,306,384
|
|
$
|
2.00
|
|
|
|
1,076,596
|
|
|
|
7.22
|
%
|
|
$
|
2,153,192
|
|
$
|
1.00
|
|
|
|
1,076,596
|
|
|
|
7.22
|
%
|
|
$
|
1,070,596
|
|
$
|
0.50
|
|
|
|
1,076,596
|
|
|
|
7.22
|
%
|
|
$
|
538,298
|
|
|
(1)
|
The closing price of our common stock on
March 20, 2017 was $0.91. On July 27, 2016, in connection with the execution of the
Purchase Agreement, we sold $500,000 shares of our common stock to Lincoln Park, with
a per share purchase price of approximately $3.74. In September 2016, we sold $131,000
shares of our common stock to Lincoln Park, with a per share purchase price of approximately
$3.27.
|
|
(2)
|
Although the Purchase Agreement provides that we may sell up to $10,500,000
of our common stock to Lincoln Park, we only registered 1,155,136 shares under the
registration statement of which this prospectus is a part, which is not all of the shares issuable to Lincoln
Park under the Purchase Agreement. Of the registered shares, an aggregate of 78,540 shares have been resold. As a
result, we have
included in
this column
only those
shares that we have registered for this offering and remain available for sale.
|
|
(3)
|
The number of registered shares to be issued excludes
the 52,500 commitment shares previously issued and registered hereunder because no proceeds
will be attributable to such shares.
|
|
(4)
|
The denominator is based on 13,836,607 shares
outstanding as of March 20, 2017, which includes the 226,190 shares already issued to
Lincoln Park, and is adjusted to include the number of shares set forth in the adjacent
column which we would have sold to Lincoln Park at the applicable assumed average purchase
price per share. The numerator is based on the number of shares issuable under the Purchase
Agreement at the corresponding assumed purchase price set forth in the adjacent column.
The number of shares in such column does not include shares that may be issued to Lincoln
Park under the Purchase Agreement which are not registered in this offering. The table
does not give effect to the current prohibition contained in the Purchase Agreement that prevents
us from selling and issuing to Lincoln Park shares such that, after giving effect to
such sale and issuance, Lincoln Park and its affiliates would beneficially own more than
4.99% of the then outstanding shares of our common stock.
|
SELLING STOCKHOLDER
The following table set forth certain information regarding
Lincoln Park, the selling stockholder, and the shares of common stock beneficially owned by it, which information is available
to us as of March 20, 2017. Lincoln Park may offer the shares under this prospectus from time to time and may elect to sell
some, all or none of the shares set forth under this prospectus. However, for the purposes of the table below, we have assumed
that, after completion of the offering, none of the shares covered by this prospectus will be held by Lincoln Park. In addition,
Lincoln Park may have sold, transferred or otherwise disposed of all or a portion of its shares of common stock since the date
on which it provided information for this table. We have not made independent inquiries about such transfers or dispositions.
See the section entitled “Plan of Distribution” beginning on page 114.
Beneficial ownership is determined
in accordance with Rule 13d-3(d) promulgated by the SEC under the Securities Exchange Act of 1934, or the Exchange Act. The percentage
of shares beneficially owned prior to the offering is based on 13,836,607 shares of our common stock outstanding as of March 20, 2017.
Selling Stockholder
|
|
Number
of
Shares
Beneficially
Owned
Before
this Offering
|
|
|
Percentage
of
Outstanding
Shares
Beneficially
Owned
Before this
Offering
|
|
|
Shares
to be
Sold in this
Offering
Assuming
the
Company
issues the
Maximum
Number of
Shares
under the
Purchase
Agreement
|
|
|
Percentage
of
Outstanding Shares
Beneficially Owned
After
this Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lincoln
Park Capital Fund, LLC
(1)
|
|
|
434,400
|
(2)
|
|
|
3.08
|
%
(3)
|
|
|
1,076,596
|
(4)
|
|
|
*
|
|
* Less than 1%.
|
(1)
|
Josh
Scheinfeld and Jonathan Cope, the Managing Members of Lincoln Park Capital, LLC, are deemed to be beneficial owners of all of
the shares of common stock owned by Lincoln Park Capital Fund, LLC. Messrs. Cope and Scheinfeld have shared voting and investment
power over the shares being offered under the prospectus filed with the SEC in connection with the transactions contemplated under
the Purchase Agreement. Lincoln Park Capital, LLC is not a licensed broker dealer or an affiliate of a licensed broker dealer.
|
|
(2)
|
Represents (i)
107,650 shares of our common stock issued to Lincoln Park on July 27, 2016, all of which
shares are covered by the registration statement that includes this prospectus, (ii) warrants to acquire 286,750 shares
of common stock previously acquired by Lincoln Park and not included in this registration
statement and (iii) 40,000 shares of common stock we sold to Lincoln Park in September 2016. See the description under the
heading
“The
Lincoln Park
Transaction”
for
more
information
about
the
Purchase Agreement.
|
|
(3)
|
Based on
13,836,607
shares of our common stock outstanding as of March 20, 2017, plus the assumed exercise of warrants held by Lincoln Park
to purchase 286,750 shares of our common stock, but excluding any other shares issuable under the Purchase Agreement.
Although we may
at
our discretion elect to
issue to Lincoln Park up to an aggregate amount of $10,000,000 of our common stock under the Purchase Agreement, excluding
the shares previously issued to Lincoln Park in July and September 2016, such shares are
not included in determining the percentage of shares beneficially owned before this offering.
|
|
(4)
|
Assumes
issuance of the maximum 1,076,596 shares being registered hereby, which includes (i) 928,946 shares issuable under the Purchase
Agreement, and (ii) an aggregate of 147,650 shares previously issued in July 2016.
|
PLAN OF DISTRIBUTION
An aggregate of up to 1,076,596 shares of our common stock
may be offered by this prospectus by Lincoln Park pursuant to the Purchase Agreement. The common stock may be sold or distributed
from time to time by Lincoln Park directly to one or more purchasers or through brokers, dealers, or underwriters who may act
solely as agents at market prices prevailing at the time of sale, at prices related to the prevailing market prices, at negotiated
prices, or at fixed prices, which may be changed. The sale of the common stock offered by this prospectus could be affected in
one or more of the following methods:
|
·
|
ordinary
brokers’ transactions;
|
|
·
|
transactions
involving cross or block trades;
|
|
·
|
through
brokers, dealers, or underwriters who may act solely as agents;
|
|
·
|
“at
the market” into an existing market for the common stock;
|
|
·
|
in
other ways not involving market makers or established business markets, including direct
sales to purchasers or sales effected through agents;
|
|
·
|
in
privately negotiated transactions; or
|
|
·
|
any
combination of the foregoing.
|
In order to comply with the securities laws of certain states,
if applicable, the shares may be sold only through registered or licensed brokers or dealers. In addition, in certain states,
the shares may not be sold unless they have been registered or qualified for sale in the state or an exemption from the state’s
registration or qualification requirement is available and complied with.
Lincoln Park is an “underwriter” within the
meaning of Section 2(a)(11) of the Securities Act.
Lincoln Park has informed us that it intends to use an unaffiliated
broker-dealer to effectuate all sales, if any, of the common stock that it may purchase from us pursuant to the Purchase Agreement.
Such sales will be made at prices and at terms then prevailing or at prices related to the then current market price. Each such
unaffiliated broker-dealer will be an underwriter within the meaning of Section 2(a)(11) of the Securities Act. Lincoln Park has
informed us that each such broker-dealer will receive commissions from Lincoln Park that will not exceed customary brokerage commissions.
In compliance with the guidelines of the Financial Industry Regulatory Authority, Inc., or FINRA, the maximum consideration or
discount to be received by any FINRA member or independent broker dealer may not exceed 8% of the aggregate amount of the securities
offered pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in
the distribution of the shares as agents may receive compensation in the form of commissions, discounts, or concessions from Lincoln
Park and/or purchasers of the common stock for whom the broker-dealers may act as agent. The compensation paid to a particular
broker-dealer may be less than or in excess of customary commissions. Neither we nor Lincoln Park can presently estimate the amount
of compensation that any agent will receive. We know of no existing arrangements between Lincoln Park or any other stockholder,
broker, dealer, underwriter or agent relating to the sale or distribution of the shares offered by this prospectus. At the time
a particular offer of shares is made, a prospectus supplement, if required, will be distributed that will set forth the names
of any agents, underwriters or dealers and any compensation from Lincoln Park, and any other required information.
We will pay the expenses incident to the registration, offering,
and sale of the shares to Lincoln Park. We have agreed to indemnify and certain other persons against certain liabilities
in connection with the offering of shares of common stock offered hereby, including liabilities arising under the Securities Act
or, if such indemnity is unavailable, to contribute amounts required to be paid in respect of such liabilities. has agreed
to indemnify us against liabilities under the Securities Act that may arise from certain written information furnished to us by
specifically for use in this prospectus or, if such indemnity is unavailable, to contribute amounts required to be paid in respect
of such liabilities.
Lincoln Park has represented to us that at no time prior
to the Purchase Agreement has it or its agents, representatives or affiliates engaged in or effected, in any manner whatsoever,
directly or indirectly, any short sale (as such term is defined in Rule 200 of Regulation SHO of the Exchange Act) of our common
stock or any hedging transaction, which establishes a net short position with respect to our common stock. Lincoln Park
agreed that during the term of the Purchase Agreement, it, its agents, representatives or affiliates will not enter into or effect,
directly or indirectly, any of the foregoing transactions.
We have advised Lincoln Park that it is required to comply
with Regulation M promulgated under the Exchange Act. With certain exceptions, Regulation M precludes Lincoln Park, any affiliated
purchasers, and any broker-dealer or other person who participates in the distribution from bidding for or purchasing, or attempting
to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection
with the distribution of that security. All of the foregoing may affect the marketability of the securities offered by this prospectus.
This offering will terminate on the date that all shares
offered by this prospectus have been sold by Lincoln Park.
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 100.0 million shares of common
stock, $0.0001 par value per share, and 50.0 million shares of preferred stock, $0.0001 par value per share.
As of December 31, 2016, a total of 10,845,566 shares of
our common stock were issued and outstanding and no shares of our preferred stock were issued and outstanding. As a result of
the completion of the tender offer in February 2017, we issued an aggregate of 2,991,041 shares of common stock upon the exercise
of warrants tendered, which increased our outstanding shares to 13,836,607.
At our annual meeting of shareholders on November 15, 2016,
we sought and received approval for an amendment to our Certificate of Incorporation to effect a reverse stock split at a ratio
of any whole number between 1-for-2 and 1-for-4, as determined by our board of directors, at any time before November 15, 2017,
if and as determined by our board of directors.
Common Stock
The holders of common stock are entitled to one vote per share.
Our Certificate of Incorporation does not expressly prohibit cumulative voting. The holders of our common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of Directors out of legally available funds. Upon liquidation,
dissolution or winding-up, the holders of our common stock are entitled to share ratably in all assets that are legally available
for distribution. The holders of our common stock have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock, which may be
designated solely by action of the Board of Directors and issued in the future.
Preferred Stock
Our Certificate of Incorporation provides our Board of Directors
with the authority, without any vote of the holders of common stock, to divide the preferred stock into series and to fix and determine
the rights and preferences of the shares of any series of preferred stock established to the full extent permitted by the laws
of the State of Delaware and the Certificate of Incorporation.
Warrants
As of December 31, 2016, we had outstanding warrants to purchase
an aggregate of 8,711,354 shares of our common stock, consisting of:
|
·
|
Warrants to purchase 8,553 shares that were originally issued by Luoxis in 2013 and, in connection with the Merger, were converted
into warrants to purchase shares of our common stock at a purchase price of $54.36 per share. These warrants expire on May 30,
2018.
|
|
·
|
Warrants to purchase 22,254 shares of our common stock
that were issued in February 2016 to the placement agents in our private placement of
convertible notes that we conducted in July and August 2015. These placement agents’
warrants have a term of five years from the date of issuance of the related notes in
July and August 2015, have an exercise price of $0.75 (reduced from $7.80 in March 2017),
and provide for cashless exercise.
|
|
·
|
Warrants to purchase 22,564 shares of our common stock
that were issued in May 2016 to the placement agents in our private placement of convertible
notes that we conducted in July and August 2015. These placement agents’ warrants
have a term of five years from the date of issuance of the related notes in July and
August 2015, have an exercise price of $0.75 (reduced from $4.80 in March 2017), and
provide for cashless exercise.
|
|
·
|
May 2016 Warrants to purchase 1,733,322 shares of our common stock that were
issued (including pursuant to an underwriters’ over-allotment option) in the
public offering of common stock and warrants we completed on May 6, 2016. These
warrants are exercisable for five years from issuance and have an exercise price
equal to $6.00; provided that such exercise price was temporarily reduced to $0.75
per share through February 27, 2017, pursuant to the tender offer. After giving
effect to the tender offer that we closed in February 2017, warrants to purchase
an aggregate of 544,012 shares remain outstanding. See “Prospectus
Summary – Recent
Developments.”
|
|
·
|
Warrants to purchase 109,375 shares of common stock issued to the
underwriters of our public offering completed on May 6, 2016. These warrants are
exercisable beginning May 2, 2017 until May 2, 2021 and were originally issued with
an exercise price equal to $6.00 (after giving effect to our 1-for-12 reverse stock split) which was reduced to $0.75 per
share in connection with the tender offer. See “Prospectus Summary – Recent Developments.”
|
|
·
|
Warrants to purchase 88,032 shares of common stock issued in a settlement to the certain shareholders. These warrants expire
on July 7, 2021 and have an exercise price equal to $4.00.
|
|
·
|
October 2016 Warrants to purchase 6,020,245 shares of our common stock that
were issued (including pursuant to an underwriters’ over-allotment option) in
the public offering of common stock and warrants we completed on November 2, 2016.
These warrants are exercisable for five years from issuance and have an exercise
price equal to $1.86; provided that such exercise price was temporarily reduced to
$0.75 per share through February 27, 2017 pursuant to the tender offer. After giving
effect to the tender offer that we closed in February 2017,
warrants to purchase an aggregate of 4,218,514 shares remain outstanding. See “Prospectus Summary – Recent
Developments.”
|
|
·
|
Warrants to purchase 401,450 shares of common stock issued to the
underwriters of our public offering completed on November 2, 2016. These warrants
are exercisable beginning October 27, 2017 until October 27, 2021 and have an
exercise price equal to $1.86 which was reduced to $0.75 per share in connection with the tender offer. See
“Prospectus Summary – Recent
Developments.”
|
Options
Prior to the closing of the Merger, each of Vyrix and Luoxis
had an option plan and had made equity grants thereunder. On April 16, 2015, upon the closing of the Merger, an aggregate of $27,476
was paid to holders of in-the-money options and all equity compensation plans of Vyrix and Luoxis were terminated and all the awards
granted thereunder were cancelled.
On June 1, 2015, our stockholders approved the 2015 Stock Option
and Incentive Plan, which provides for the award of stock options, stock appreciation rights, restricted stock and other equity
awards for up to an aggregate of 833,334 shares of common stock. The shares of common stock underlying any awards that are forfeited,
canceled, reacquired by us 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.
At our annual meeting of shareholders on November 15, 2016,
we sought and received approval for amendments to our 2015 Stock Option and Incentive Plan to (i) increase the number of authorized
shares of common stock reserved for issuance thereunder from 833,334 shares to 2,000,000 shares, (ii) increase the number of shares
that may be issued as incentive stock options from 833,334 shares to 2,000,000 shares, and (iii) increase the maximum number of
shares of common stock (A) underlying stock options or stock appreciation rights that may be granted to any one individual during
any calendar year period, and (B) granted to any one individual that is intended to qualify as “performance-based compensation”
under Section 162(m) of the Internal Revenue Code of 1986, as amended, for any performance cycle, in each case from 166,667 shares
to 1,000,000 shares.
As of December 31, 2016, we had outstanding options
to purchase an aggregate of 746,655 shares of our common stock at a weighted average exercise price of $3.52 per share.
Of these, an aggregate of 323,755 are exercisable. The remainder have vesting requirements with an aggregate of 86,110
vesting one third on each of November 11, 2017 and 2018, an aggregate of 31,249 vesting one quarter on each of November 11,
2017, 2018 and 2019, an aggregate of 3,125 vesting one quarter on each of August 7, 2017, 2018 and 2019, an aggregate of
29,584 vesting one quarter on March 31, 2017 and June 30, 2017, and an aggregate of 272,832 vesting one third on each of July
7, 2017, 2018 and 2019. On March 16, 2017, we reduced the exercise price of outstanding options issued to directors,
employees and consultants to purchase an aggregate of 737,279 shares of our common stock from a weighted average exercise
price of $3.53 to $0.82 to incentivize the
holders of these options.
The 2015 Plan is administered by our Board or a committee designated
by the Board (as applicable, the Administrator). The Administrator has full power to select, from among the individuals eligible
for awards, the individuals to whom awards will be granted, to make any combination of awards to participants, and to determine
the specific terms and conditions of each award, subject to the provisions of the 2015 Plan. The Administrator may delegate to
our Chief Executive Officer the authority to grant stock options and other awards to employees who are not subject to the reporting
and other provisions of Section 16 of the Exchange Act and not subject to Section 162(m) of the Code, subject to certain limitations
and guidelines.
Persons eligible to participate in the 2015 Plan are full or
part-time officers, employees, non-employee directors, directors and other key persons (including consultants and prospective officers)
of our company and its subsidiaries as selected from time to time by the Administrator in its discretion. Approximately 30 individuals
are currently eligible to participate in the 2015 Plan, which includes officers, employees who are not officers, non-employee director,
former employees and other individuals who are primarily consultants.
The 2015 Plan provides that upon the effectiveness of a “sale
event” as defined in the 2015 Plan, except as otherwise provided by the Administrator in the award agreement, all stock options,
stock appreciation rights and other awards will be assumed or continued by the successor entity and adjusted accordingly to take
into account the impact of the transaction. To the extent, however, that the parties to such sale event do not agree that all stock
options, stock appreciation rights or any other awards shall be assumed or continued, then such stock options and stock appreciation
rights shall become fully exercisable and the restrictions and conditions on all such other awards with time-based conditions will
automatically be deemed waived. Awards with conditions and restrictions relating to the attainment of performance goals may become
vested and non-forfeitable in connection with a sale event in the Administrator’s discretion. In addition, in the case of
a sale event in which our stockholders will receive cash consideration, we may make or provide for a cash payment to participants
holding options and stock appreciation rights equal to the difference between the per share cash consideration and the exercise
price of the options or stock appreciation rights in exchange for the cancellation thereto.
Quotation on the OTCQX U.S. Premier Market
Our common stock is quoted on the OTCQX U.S. Premier Market
under the symbol “AYTU”. We intend to apply to list our common stock on the NYSE MKT or NASDAQ under the symbol “AYTU”
once we meet applicable listing standards. We believe that we will qualify, and we intend to list our common stock and warrants
on an exchange, upon achieving a per share closing price of $3.00 (NYSE MKT) or $4.00 (NASDAQ) or greater for our stock and a market
value of our non-affiliated float in excess of $15 million, among other applicable listing criteria. In case our stock price does
not reach this level otherwise, we sought and received stockholder approval in November 2016 for a reverse stock split to help
us meet the stock price listing standard. However, it is not clear when, or if, we will meet the NYSE MKT or NASDAQ listing standards.
Transfer Agent
The transfer agent of our common stock is VStock Transfer. Their
address is 18 Lafayette Place, Woodmere, NY 11598.
Director Duties
Under Delaware law, every member of the Company’s Board
of Director owes fiduciary duties, including the duty of care and the duty of loyalty, to a corporation and its stockholders. The
duty of care requires directors to act in good faith and make rational decisions based on adequate information, just as any other
prudent person would, given similar circumstances. As with most, if not all, companies, and as permitted by Delaware law, our certificate
of incorporation eliminates a director’s personal liability for breaches of the duty of care to the fullest extent permitted
by law. The duty of loyalty concerns the relationship between a director’s interests and those of the corporation and its
stockholders. The law imposes the duty of loyalty to ensure that directors, acting in good faith, serve the interests of the corporation
and all its stockholders before the directors’ own interests or those of a specific stockholder or class of stockholders.
A corporation may not eliminate a director’s personal liability for a breach of the duty of loyalty, though it may provide
indemnification against such claims, which we do under our bylaws and indemnification agreements.
Delaware Anti-Takeover Law and Provisions of Our Certificate
of Incorporation and Bylaws
Delaware Anti-Takeover Law.
We are subject
to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging
in a “business combination” with an “interested stockholder” for a period of three years after the date
of the transaction in which the person became an interested stockholder, unless:
|
·
|
prior to the date of the transaction, the board of directors of the corporation approved either the business combination or
the transaction which resulted in the stockholder becoming an interested stockholder;
|
|
·
|
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding specified
shares; or
|
|
·
|
at or subsequent to the date of the transaction, the business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of
the outstanding voting stock which is not owned by the interested stockholder.
|
Section 203 defines a “business combination” to
include:
|
·
|
any merger or consolidation involving the corporation and the interested stockholder;
|
|
·
|
any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the corporation
to or with the interested stockholder;
|
|
·
|
subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
|
|
·
|
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share
of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
|
|
·
|
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
|
In general, Section 203 defines an “interested stockholder”
as any person that is:
|
·
|
the owner of 15% or more of the outstanding voting stock of the corporation;
|
|
·
|
an affiliate or associate of the corporation who was the owner of 15% or more of the outstanding voting stock of the corporation
at any time within three years immediately prior to the relevant date; or
|
|
·
|
the affiliates and associates of the above.
|
Under specific circumstances, Section 203 makes it more difficult
for an “interested stockholder” to effect various business combinations with a corporation for a three-year period,
although the stockholders may, by adopting an amendment to the corporation’s certificate of incorporation or bylaws, elect
not to be governed by this section, effective 12 months after adoption.
Our certificate of incorporation and bylaws do not exclude us
from the restrictions of Section 203. We anticipate that the provisions of Section 203 might encourage companies interested in
acquiring us to negotiate in advance with our board of directors since the stockholder approval requirement would be avoided if
a majority of the directors then in office approve either the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder.
Certificate of Incorporation and Bylaw.
Provisions
of our certificate of incorporation and bylaws may delay or discourage transactions involving an actual or potential change of
control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares,
or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely
affect the price of our common stock. Among other things, these provisions include:
|
·
|
the authorization of 50,000,000 shares of “blank check” preferred stock, the rights, preferences and privileges
of which may be established and shares of which may be issued by our Board of Directors at its discretion from time to time and
without stockholder approval;
|
|
·
|
limiting the removal of directors by the stockholders;
|
|
·
|
allowing for the creation of a staggered board of directors;
|
|
·
|
eliminating the ability of stockholders to call a special meeting of stockholders; and
|
|
·
|
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that
can be acted upon at stockholder meetings.
|
LEGAL MATTERS
The validity of the shares of common stock being offered
by this prospectus will be passed upon for us by Wyrick Robbins Yates & Ponton, LLP, Raleigh, North Carolina.
EXPERTS
The financial statements of Aytu BioScience, Inc. at June 30,
2016 and 2015, and for each of the two years in the period ended June 30, 2016, included in this prospectus have been audited by
EKS&H LLLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus, which constitutes a part of the registration
statement on Form S-1 that we have filed with the SEC under the Securities Act, does not contain all of the information in the
registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus,
you should refer to the registration statement and the exhibits filed as part of that document. Statements contained in this prospectus
as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer
you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is
qualified in all respects by this reference.
We are subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, and file annual, quarterly and current reports, proxy statements and other information with the
SEC. You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at
http://www.sec.gov
.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITY
Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions,
the registrant has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
INDEX TO THE FINANCIAL STATEMENTS
AYTU BIOSCIENCE, INC.
Unaudited Interim Financial Statements
Audited Annual Financial Statements
PART I—FINANCIAL INFORMATION
|
Item 1.
|
Financial Statements
|
AYTU BIOSCIENCE, INC.
Balance Sheets
(unaudited)
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,230,394
|
|
|
$
|
8,054,190
|
|
Restricted cash
|
|
|
75,062
|
|
|
|
-
|
|
Accounts receivable, net
|
|
|
582,393
|
|
|
|
162,427
|
|
Inventory, net
|
|
|
438,966
|
|
|
|
524,707
|
|
Prepaid expenses and other
|
|
|
436,573
|
|
|
|
215,558
|
|
Prepaid research and development - related party (Note 10)
|
|
|
121,983
|
|
|
|
121,983
|
|
Investment in Acerus
|
|
|
1,272,298
|
|
|
|
1,041,362
|
|
Total current assets
|
|
|
8,157,669
|
|
|
|
10,120,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
292,169
|
|
|
|
231,430
|
|
Developed technology, net
|
|
|
1,076,903
|
|
|
|
1,159,736
|
|
Customer contracts, net
|
|
|
1,249,875
|
|
|
|
1,353,375
|
|
Trade names, net
|
|
|
178,806
|
|
|
|
194,472
|
|
Natesto asset, net
|
|
|
9,890,435
|
|
|
|
10,549,797
|
|
Goodwill
|
|
|
221,000
|
|
|
|
221,000
|
|
Patents, net
|
|
|
283,944
|
|
|
|
296,611
|
|
Long-term portion of prepaid research and development - related party (Note 10)
|
|
|
152,479
|
|
|
|
213,471
|
|
Deposits
|
|
|
2,888
|
|
|
|
2,888
|
|
Total long-term assets
|
|
|
13,348,499
|
|
|
|
14,222,780
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,506,168
|
|
|
$
|
24,343,007
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
2,445,849
|
|
|
$
|
3,519,711
|
|
Natesto payable
|
|
|
4,000,000
|
|
|
|
5,379,675
|
|
Accrued compensation
|
|
|
519,498
|
|
|
|
1,200,930
|
|
Deferred rent
|
|
|
6,187
|
|
|
|
4,109
|
|
Total current liabilities
|
|
|
6,971,534
|
|
|
|
10,104,425
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
4,003,229
|
|
|
|
3,869,122
|
|
Deferred rent
|
|
|
4,787
|
|
|
|
8,215
|
|
Warrant derivative liability
|
|
|
79,844
|
|
|
|
275,992
|
|
Total liabilities
|
|
|
11,059,394
|
|
|
|
14,257,754
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred Stock, par value $.0001; 50,000,000 shares authorized; none issued
|
|
|
-
|
|
|
|
-
|
|
Common Stock, par value $.0001; 100,000,000 shares authorized; shares issued
|
|
|
|
|
|
|
|
|
and outstanding 10,845,566 (unaudited) and 3,741,944, respectively as of
|
|
|
|
|
|
|
|
|
December 31, 2016 and June 30, 2016
|
|
|
1,085
|
|
|
|
374
|
|
Additional paid-in capital
|
|
|
67,548,690
|
|
|
|
56,646,304
|
|
Accumulated deficit
|
|
|
(57,103,001
|
)
|
|
|
(46,561,425
|
)
|
Total stockholders' equity
|
|
|
10,446,774
|
|
|
|
10,085,253
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
21,506,168
|
|
|
$
|
24,343,007
|
|
The accompanying notes are an integral part
of these financial statements.
AYTU BIOSCIENCE, INC.
Statements of Operations
(unaudited)
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and service revenue
|
|
$
|
794,172
|
|
|
$
|
447,786
|
|
|
$
|
1,492,152
|
|
|
$
|
913,742
|
|
License revenue
|
|
|
-
|
|
|
|
21,428
|
|
|
|
-
|
|
|
|
42,857
|
|
Total revenue
|
|
|
794,172
|
|
|
|
469,214
|
|
|
|
1,492,152
|
|
|
|
956,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
551,293
|
|
|
|
244,100
|
|
|
|
743,217
|
|
|
|
281,425
|
|
Research and development
|
|
|
263,457
|
|
|
|
1,308,460
|
|
|
|
495,479
|
|
|
|
2,164,334
|
|
Research and development - related party (Note 10)
|
|
|
47,998
|
|
|
|
47,998
|
|
|
|
95,996
|
|
|
|
95,996
|
|
Sales, general and administrative
|
|
|
3,642,332
|
|
|
|
1,687,724
|
|
|
|
9,347,082
|
|
|
|
3,250,903
|
|
Sales, general and administrative - related party (Note 10)
|
|
|
50,772
|
|
|
|
86,443
|
|
|
|
101,544
|
|
|
|
175,068
|
|
Amortization of finite-lived intangible assets
|
|
|
437,014
|
|
|
|
108,489
|
|
|
|
874,029
|
|
|
|
165,936
|
|
Total operating expenses
|
|
|
4,992,866
|
|
|
|
3,483,214
|
|
|
|
11,657,347
|
|
|
|
6,133,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,198,694
|
)
|
|
|
(3,014,000
|
)
|
|
|
(10,165,195
|
)
|
|
|
(5,177,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(388,085
|
)
|
|
|
(240,214
|
)
|
|
|
(803,465
|
)
|
|
|
(353,467
|
)
|
Derivative income (expense)
|
|
|
266,757
|
|
|
|
(78,166
|
)
|
|
|
196,148
|
|
|
|
(78,038
|
)
|
Unrealized (loss) gain on investment
|
|
|
(497,164
|
)
|
|
|
-
|
|
|
|
230,936
|
|
|
|
-
|
|
Total other (expense) income
|
|
|
(618,492
|
)
|
|
|
(318,380
|
)
|
|
|
(376,381
|
)
|
|
|
(431,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,817,186
|
)
|
|
$
|
(3,332,380
|
)
|
|
$
|
(10,541,576
|
)
|
|
$
|
(5,608,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Aytu common shares outstanding
|
|
|
7,850,790
|
|
|
|
1,188,308
|
|
|
|
5,910,910
|
|
|
|
1,188,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted Aytu net loss per common share
|
|
$
|
(0.61
|
)
|
|
$
|
(2.80
|
)
|
|
$
|
(1.78
|
)
|
|
$
|
(4.72
|
)
|
The accompanying notes are an integral part
of these financial statements.
AYTU BIOSCIENCE, INC.
Statement of Stockholders’
Equity
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2016
|
|
|
3,741,944
|
|
|
$
|
374
|
|
|
$
|
56,646,304
|
|
|
$
|
(46,561,425
|
)
|
|
$
|
10,085,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lincoln Park Capital stock issuance, net of $24,247 in issuance costs (unaudited)
|
|
|
226,190
|
|
|
|
23
|
|
|
|
607,211
|
|
|
|
-
|
|
|
|
607,234
|
|
Issuance of restricted stock (unaudited)
|
|
|
1,000,000
|
|
|
|
100
|
|
|
|
156,714
|
|
|
|
-
|
|
|
|
156,814
|
|
Common stock issued to executives (unaudited)
|
|
|
142,457
|
|
|
|
14
|
|
|
|
509,982
|
|
|
|
-
|
|
|
|
509,996
|
|
Issuance of warrants to initial investors (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
596,434
|
|
|
|
-
|
|
|
|
596,434
|
|
Issuance of common stock, net of $997,865 in cash issuance costs (unaudited)
|
|
|
5,734,975
|
|
|
|
574
|
|
|
|
3,671,007
|
|
|
|
|
|
|
|
3,671,581
|
|
Warrants issued in connection with equity financing (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,470,646
|
|
|
|
-
|
|
|
|
3,470,646
|
|
Warrants issued in connection with equity financing to the placement agents for the over-allotment option (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
172,629
|
|
|
|
-
|
|
|
|
172,629
|
|
Warrants issued in connection with equity financing to the placement agents, non-cash issuance costs (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
292,630
|
|
|
|
-
|
|
|
|
292,630
|
|
Stock-based compensation (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,425,133
|
|
|
|
-
|
|
|
|
1,425,133
|
|
Net loss (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,541,576
|
)
|
|
|
(10,541,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016 (unaudited)
|
|
|
10,845,566
|
|
|
$
|
1,085
|
|
|
$
|
67,548,690
|
|
|
$
|
(57,103,001
|
)
|
|
$
|
10,446,774
|
|
The accompanying notes are an integral part
of these financial statements.
AYTU BIOSCIENCE, INC.
Statements of Cash Flows
(unaudited)
|
|
Six Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,541,576
|
)
|
|
$
|
(5,608,568
|
)
|
Stock-based compensation expense
|
|
|
1,425,133
|
|
|
|
250,887
|
|
Depreciation, amortization and accretion
|
|
|
1,722,965
|
|
|
|
242,427
|
|
Issuance of restricted stocks
|
|
|
156,814
|
|
|
|
-
|
|
Amortization of debt issuance costs
|
|
|
-
|
|
|
|
147,805
|
|
Derivative (income) expense
|
|
|
(196,148
|
)
|
|
|
78,038
|
|
Amortization of prepaid research and development - related party (Note 10)
|
|
|
60,992
|
|
|
|
60,991
|
|
Common stock issued to executives
|
|
|
509,996
|
|
|
|
-
|
|
Issuance of warrants to initial investors
|
|
|
596,434
|
|
|
|
-
|
|
Unrealized (gain) on investment
|
|
|
(230,936
|
)
|
|
|
-
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(419,966
|
)
|
|
|
(131,408
|
)
|
Decrease (increase) in inventory
|
|
|
85,741
|
|
|
|
(613,673
|
)
|
(Increase) in prepaid expenses and other
|
|
|
(221,015
|
)
|
|
|
(370,656
|
)
|
(Decrease) in accounts payable and accrued liabilities
|
|
|
(434,231
|
)
|
|
|
(126,781
|
)
|
Increase in related party payable
|
|
|
-
|
|
|
|
38,451
|
|
(Decrease) increase in accrued compensation
|
|
|
(681,432
|
)
|
|
|
296,081
|
|
Increase in interest payable
|
|
|
-
|
|
|
|
161,988
|
|
(Decrease) increase in deferred rent
|
|
|
(1,350
|
)
|
|
|
10,245
|
|
(Decrease) in deferred revenue
|
|
|
-
|
|
|
|
(42,857
|
)
|
Net cash used in operating activities
|
|
|
(8,168,579
|
)
|
|
|
(5,607,030
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
-
|
|
|
|
1,998
|
|
Purchases of fixed assets
|
|
|
(44,876
|
)
|
|
|
(125,161
|
)
|
Installment payment for Natesto asset
|
|
|
(2,000,000
|
)
|
|
|
-
|
|
Installment payments for Primsol asset
|
|
|
(750,000
|
)
|
|
|
(540,000
|
)
|
Net cash used in investing activities
|
|
|
(2,794,876
|
)
|
|
|
(663,163
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Ampio stock subscription payment
|
|
|
-
|
|
|
|
5,000,000
|
|
Proceeds from convertible promissory notes, net
|
|
|
-
|
|
|
|
5,175,000
|
|
Debt issuance costs (Note 7)
|
|
|
-
|
|
|
|
(298,322
|
)
|
Issuance of common stock to Lincoln Park Capital
|
|
|
631,481
|
|
|
|
-
|
|
Costs related to sale of common stock
|
|
|
(24,247
|
)
|
|
|
-
|
|
Registered offering of common stock and warrants
|
|
|
8,602,500
|
|
|
|
-
|
|
Registered offering costs
|
|
|
(997,865
|
)
|
|
|
-
|
|
Over-allotment warrants purchased by placement agents
|
|
|
2,852
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
8,214,721
|
|
|
|
9,876,678
|
|
|
|
|
|
|
|
|
|
|
Net change in cash, cash equivalents and restricted cash
|
|
|
(2,748,734
|
)
|
|
|
3,606,485
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
|
8,054,190
|
|
|
|
7,353,061
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
5,305,456
|
|
|
$
|
10,959,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability related to the issuance of the convertible promissory notes
|
|
$
|
-
|
|
|
$
|
102,931
|
|
Primsol business purchase included in primsol payable, $1,250,000 less future accretion of $173,000
|
|
$
|
-
|
|
|
$
|
1,077,000
|
|
Fixed asset purchases included in accounts payable
|
|
$
|
61,241
|
|
|
$
|
7,708
|
|
Warrants issued in connection with the equity financing to the placement agents
|
|
$
|
292,630
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these financial statements.
AYTU BIOSCIENCE, INC.
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.
INDEX TO THE FINANCIAL STATEMENTS
AYTU BIOSCIENCE, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aytu Bioscience, Inc.
Englewood, Colorado
We have audited the accompanying balance
sheets of Aytu BioScience, Inc. (the “Company”) as of June 30, 2016 and 2015, and the related statements of operations,
stockholders’ equity, and cash flows for each of the periods then ended. The Company’s management is responsible for
these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of Aytu BioScience, Inc. as of June 30, 2016
and 2015, and the results of its operations and its cash flows for each of the periods then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the
Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ EKS&H LLLP
September 1, 2016
Denver, Colorado
AYTU BIOSCIENCE, INC.
Balance Sheets
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,054,190
|
|
|
$
|
7,353,061
|
|
Accounts receivable, net
|
|
|
162,427
|
|
|
|
157,058
|
|
Inventory, net
|
|
|
524,707
|
|
|
|
39,442
|
|
Prepaid expenses and other
|
|
|
215,558
|
|
|
|
370,888
|
|
Prepaid research and development - related party (Note 11)
|
|
|
121,983
|
|
|
|
121,983
|
|
Investment in Acerus
|
|
|
1,041,362
|
|
|
|
-
|
|
Total current assets
|
|
|
10,120,227
|
|
|
|
8,042,432
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
231,430
|
|
|
|
29,706
|
|
Developed technology, net
|
|
|
1,159,736
|
|
|
|
780,125
|
|
Customer contracts, net
|
|
|
1,353,375
|
|
|
|
711,000
|
|
Trade names, net
|
|
|
194,472
|
|
|
|
79,000
|
|
Natesto asset
|
|
|
10,549,797
|
|
|
|
-
|
|
Goodwill
|
|
|
221,000
|
|
|
|
74,000
|
|
In-process research and development
|
|
|
-
|
|
|
|
7,500,000
|
|
Patents, net
|
|
|
296,611
|
|
|
|
628,776
|
|
Long-term portion of prepaid research and development - related party (Note 11)
|
|
|
213,471
|
|
|
|
335,454
|
|
Deposits
|
|
|
2,888
|
|
|
|
4,886
|
|
|
|
|
14,222,780
|
|
|
|
10,142,947
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
24,343,007
|
|
|
$
|
18,185,379
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
3,519,711
|
|
|
$
|
1,195,368
|
|
Natesto payable
|
|
|
5,379,675
|
|
|
|
-
|
|
Accrued compensation
|
|
|
1,200,930
|
|
|
|
196,503
|
|
Deferred revenue
|
|
|
-
|
|
|
|
85,714
|
|
Deferred rent
|
|
|
4,109
|
|
|
|
-
|
|
Total current liabilities
|
|
|
10,104,425
|
|
|
|
1,477,585
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
3,869,122
|
|
|
|
664,000
|
|
Long-term deferred revenue
|
|
|
-
|
|
|
|
425,893
|
|
Deferred rent
|
|
|
8,215
|
|
|
|
1,449
|
|
Warrant derivative liability
|
|
|
275,992
|
|
|
|
-
|
|
Total liabilities
|
|
|
14,257,754
|
|
|
|
2,568,927
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred Stock, par value $.0001; 50,000,000 shares authorized; none issued
|
|
|
-
|
|
|
|
-
|
|
Common Stock, par value $.0001; 100,000,000 shares authorized; shares issued and outstanding 3,741,944 in 2016 and 1,188,307 in 2015
|
|
|
374
|
|
|
|
119
|
|
Additional paid-in capital
|
|
|
56,646,304
|
|
|
|
38,997,674
|
|
Ampio stock subscription
|
|
|
-
|
|
|
|
(5,000,000
|
)
|
Accumulated deficit
|
|
|
(46,561,425
|
)
|
|
|
(18,381,341
|
)
|
Total stockholders' equity
|
|
|
10,085,253
|
|
|
|
15,616,452
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
24,343,007
|
|
|
$
|
18,185,379
|
|
The accompanying notes are an integral part
of these financial statements.
AYTU BIOSCIENCE, INC.
Statements of Operations
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Product and service revenue
|
|
$
|
2,050,838
|
|
|
$
|
176,068
|
|
License revenue
|
|
|
511,607
|
|
|
|
85,714
|
|
Total revenue
|
|
|
2,562,445
|
|
|
|
261,782
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
957,076
|
|
|
|
88,109
|
|
Research and development
|
|
|
6,127,772
|
|
|
|
3,219,361
|
|
Research and development - related party (Note 11)
|
|
|
191,991
|
|
|
|
203,992
|
|
Sales, general and administrative
|
|
|
8,517,592
|
|
|
|
3,980,974
|
|
Sales, general and administrative - related party (Note 11)
|
|
|
307,704
|
|
|
|
311,004
|
|
Impairment of intangible assets
|
|
|
7,500,000
|
|
|
|
-
|
|
Amortization of intangible assets
|
|
|
664,707
|
|
|
|
90,662
|
|
Total operating expenses
|
|
|
24,266,842
|
|
|
|
7,894,102
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(21,704,397
|
)
|
|
|
(7,632,320
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense)
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(5,491,486
|
)
|
|
|
(114,994
|
)
|
Unrealized loss on investment
|
|
|
(971,629
|
)
|
|
|
-
|
|
Derivative (expense)
|
|
|
(12,572
|
)
|
|
|
-
|
|
Total other (expense)
|
|
|
(6,475,687
|
)
|
|
|
(114,994
|
)
|
|
|
|
|
|
|
|
|
|
Net loss, before income tax
|
|
|
(28,180,084
|
)
|
|
|
(7,747,314
|
)
|
Deferred income tax benefit
|
|
|
-
|
|
|
|
23,910
|
|
Net loss
|
|
$
|
(28,180,084
|
)
|
|
$
|
(7,723,404
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of Aytu common shares outstanding
|
|
|
1,741,137
|
|
|
|
767,326
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted Aytu net loss per common share
|
|
$
|
(16.18
|
)
|
|
$
|
(10.07
|
)
|
The accompanying notes are an integral part of these financial statements.
AYTU BIOSCIENCE, INC.
Statements of Stockholders’ Equity
|
|
Common Stock
|
|
|
Additional
paid-in
|
|
|
Ampio Stock
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Subscription
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2014
|
|
|
658,452
|
|
|
$
|
66
|
|
|
$
|
16,027,278
|
|
|
$
|
-
|
|
|
$
|
(10,657,937
|
)
|
|
$
|
5,369,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ampio stock subscription payment
|
|
|
180,371
|
|
|
|
18
|
|
|
|
9,999,982
|
|
|
|
(10,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Issurance of common stock
to Ampio in exchange for Aytu debt
|
|
|
216,445
|
|
|
|
22
|
|
|
|
11,999,978
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000,000
|
|
Ampio stock subscription payment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,000,000
|
|
|
|
-
|
|
|
|
5,000,000
|
|
Liabilities paid pursuant to the merger
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,013
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,013
|
)
|
Luoxis options paid-out pursuant to the merger
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,476
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,476
|
)
|
Reverse merger
|
|
|
133,039
|
|
|
|
13
|
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,017,938
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,017,938
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,723,404
|
)
|
|
|
(7,723,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2015
|
|
|
1,188,307
|
|
|
|
119
|
|
|
|
38,997,674
|
|
|
|
(5,000,000
|
)
|
|
|
(18,381,341
|
)
|
|
|
15,616,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ampio stock subscription
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,000,000
|
|
|
|
-
|
|
|
|
5,000,000
|
|
Stock subscription
|
|
|
25,641
|
|
|
|
3
|
|
|
|
199,997
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
Conversion of convertible promissory notes and interest to common
stock, net of $29,754 conversion costs
|
|
|
962,150
|
|
|
|
96
|
|
|
|
10,090,753
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,090,849
|
|
Issuance of warrants related to the convertible promissory notes
|
|
|
-
|
|
|
|
-
|
|
|
|
136,828
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136,828
|
|
Issuance of common stock, net of $1,202,231 in issuance costs
|
|
|
1,562,500
|
|
|
|
156
|
|
|
|
4,237,718
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,237,874
|
|
Warrants issued in connection with equity financing
|
|
|
-
|
|
|
|
-
|
|
|
|
2,059,895
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,059,895
|
|
Warrants issued in connection with equity financing to the placement
agents for the over-allotment option
|
|
|
-
|
|
|
|
-
|
|
|
|
20,493
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,493
|
|
Adjustment for rounding of shares due to stock split
|
|
|
3,346
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
902,946
|
|
|
|
-
|
|
|
|
-
|
|
|
|
902,946
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,180,084
|
)
|
|
|
(28,180,084
|
)
|
Balance - June 30, 2016
|
|
|
3,741,944
|
|
|
$
|
374
|
|
|
$
|
56,646,304
|
|
|
$
|
-
|
|
|
$
|
(46,561,425
|
)
|
|
$
|
10,085,253
|
|
The accompanying notes are an integral part
of these financial statements.
AYTU BIOSCIENCE, INC.
Statements of Cash Flows
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,180,084
|
)
|
|
$
|
(7,723,404
|
)
|
Stock-based compensation expense
|
|
|
902,946
|
|
|
|
1,017,938
|
|
Depreciation, amortization and accretion
|
|
|
874,789
|
|
|
|
118,202
|
|
Asset impairment
|
|
|
7,500,000
|
|
|
|
-
|
|
Amortization of debt issuance costs
|
|
|
182,759
|
|
|
|
-
|
|
Amortization of beneficial conversion feature
|
|
|
4,943,073
|
|
|
|
-
|
|
Noncash interest expense
|
|
|
221,024
|
|
|
|
-
|
|
Derivative expense
|
|
|
12,572
|
|
|
|
-
|
|
Amortization of prepaid research and development - related party (Note 11)
|
|
|
121,983
|
|
|
|
121,984
|
|
Unrecognized loss on investment
|
|
|
971,629
|
|
|
|
-
|
|
Deferred taxes
|
|
|
-
|
|
|
|
(23,910
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(5,369
|
)
|
|
|
(157,058
|
)
|
(Increase) in inventory
|
|
|
(485,265
|
)
|
|
|
(39,442
|
)
|
Decrease in prepaid expenses and other
|
|
|
155,330
|
|
|
|
150,434
|
|
(Increase) in prepaid research and development - related party (Note 11)
|
|
|
-
|
|
|
|
(150,000
|
)
|
Increase in accounts payable and accrued liabilities
|
|
|
1,623,469
|
|
|
|
547,314
|
|
Increase in accrued compensation
|
|
|
1,004,427
|
|
|
|
196,503
|
|
(Decrease) in payable to Ampio
|
|
|
-
|
|
|
|
(607,061
|
)
|
Increase in deferred rent
|
|
|
10,875
|
|
|
|
-
|
|
(Decrease) in deferred revenue
|
|
|
(511,607
|
)
|
|
|
(85,714
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(10,657,449
|
)
|
|
|
(6,634,214
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,998
|
|
|
|
(4,886
|
)
|
Purchases of fixed assets
|
|
|
(252,932
|
)
|
|
|
-
|
|
Purchase of ProstaScint Business
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
Purchase of Primsol asset
|
|
|
(1,040,000
|
)
|
|
|
|
|
Purchase of Natesto license
|
|
|
(2,000,000
|
)
|
|
|
|
|
Investment in Acerus
|
|
|
(2,012,991
|
)
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,303,925
|
)
|
|
|
(1,004,886
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from convertible note from Ampio converted to stock
|
|
|
-
|
|
|
|
7,400,000
|
|
Proceeds from convertible promissory notes, net (Note 8)
|
|
|
5,175,000
|
|
|
|
-
|
|
Debt issuance costs (Note 8)
|
|
|
(298,322
|
)
|
|
|
-
|
|
Costs related to the conversion of the convertible promissory notes to equity
|
|
|
(29,754
|
)
|
|
|
-
|
|
Ampio stock subscription payment
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Luoxis option payout pursuant to the merger
|
|
|
-
|
|
|
|
(27,476
|
)
|
Liabilities paid out pursuant to the merger
|
|
|
-
|
|
|
|
(20,013
|
)
|
Sale of stock subscription
|
|
|
200,000
|
|
|
|
-
|
|
Proceeds from issuance of equity financing
|
|
|
7,520,493
|
|
|
|
-
|
|
Issuance costs related to equity financing
|
|
|
(904,914
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
16,662,503
|
|
|
|
12,352,511
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
701,129
|
|
|
|
4,713,411
|
|
Cash and cash equivalents at beginning of period
|
|
|
7,353,061
|
|
|
|
2,639,650
|
|
Cash and cash equivalents at end of period
|
|
$
|
8,054,190
|
|
|
$
|
7,353,061
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Ampio stock subscription
|
|
$
|
-
|
|
|
$
|
5,000,000
|
|
Ampio unpaid debt converted to stock, received prior to 2015
|
|
$
|
-
|
|
|
$
|
4,600,000
|
|
Contingent consideration related to the ProstaScint purchase
|
|
$
|
-
|
|
|
$
|
664,000
|
|
Warrant derivative liability related to the issuance of the convertible promissory notes (Note 8)
|
|
$
|
102,931
|
|
|
$
|
-
|
|
Primsol asset purchase included in primsol payable, $1,250,000 less future accretion of $173,000
|
|
$
|
1,077,000
|
|
|
$
|
-
|
|
Conversion of convertible promissory notes and interest of $221,000 to common stock
|
|
$
|
5,396,024
|
|
|
$
|
-
|
|
Natesto asset purchase included in Natesto payable, $6,000,000 less future accretion of $620,325
|
|
$
|
5,379,675
|
|
|
$
|
-
|
|
Warrant derivative liability related to the issuance of the registered offering placement agent warrants (Note 8)
|
|
$
|
297,317
|
|
|
$
|
-
|
|
Reclassification of liability based warrants to equity presentation related to the convertible promissory notes
|
|
$
|
136,828
|
|
|
$
|
-
|
|
Beneficial conversion feature related to convertible promissory notes
|
|
$
|
4,943,073
|
|
|
$
|
-
|
|
Debt issuance costs related to notes that converted to equity
|
|
$
|
(218,494
|
)
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these financial statements.
AYTU BIOSCIENCE, INC
Notes to the Financial Statements
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 healthcare company concentrating on developing
and commercializing products with an initial focus on urological diseases and conditions. Aytu is currently focused on addressing
significant medical needs in the areas of urological cancers, hypogonadism, urinary tract infections, male infertility, and sexual
dysfunction.
Basis of Presentation
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. (“Jazz Pharmaceuticals”). Pursuant to the
agreement, Aytu purchased assets related to the Jazz Pharmaceuticals’ 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 Jazz Pharmaceuticals’ liabilities, including
those related to product approvals and the sale and marketing of ProstaScint. The purchase price consists of the upfront payment
of $1.0 million. We also agreed to pay an additional $500,000 which was paid after transfer for the ProstaScint-related product
inventory and $227,000 which was paid September 30, 2015 (which represents a portion of certain FDA fees). We also will pay 8%
on 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 and was revalued as of June 30, 2016 at $699,000 using a discounted cash
flow. The total fair value consideration for the purchase was $2.4 million.
The Company’s allocation on consideration transferred for
ProstaScint as of the purchase date May 20, 2015 is as follows:
|
|
Estimated
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. Amortization
expense of $159,000 was recognized in fiscal 2016. Future amortization from the year ended June 30, 2016 is as follows:
2017
|
|
$
|
159,000
|
|
2018
|
|
|
159,000
|
|
2019
|
|
|
159,000
|
|
2020
|
|
|
159,000
|
|
2021
|
|
|
159,000
|
|
Thereafter
|
|
|
616,000
|
|
|
|
$
|
1,411,000
|
|
Business Combination—Primsol
In October 2015, Aytu entered into and closed on an Asset Purchase
Agreement with FSC Laboratories, Inc. (“FSC”). Pursuant to the agreement, Aytu purchased assets related to FSC’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 FSC’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 on April 1, 2016, (b)
$500,000 which was paid on July 1, 2016, and (c) $250,000 payable no later than September 30, 2016 (together, the “Installment
Payments”).
The Company’s allocation on 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. Amortization expense of $174,000 was recognized
in fiscal 2016.
As of June 30, 2016, the accrued payable adjusted for the present
value was $701,000.
Future amortization from the year ended June 30, 2016 is as follows:
2017
|
|
$
|
245,000
|
|
2018
|
|
|
245,000
|
|
2019
|
|
|
245,000
|
|
2020
|
|
|
245,000
|
|
2021
|
|
|
245,000
|
|
Thereafter
|
|
|
72,000
|
|
|
|
$
|
1,297,000
|
|
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 will acquire effective upon the expiration of the current licensee’s rights, which occurred on
June 30, 2016. The licensee’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. On September 5, 2016 we will pay an additional $2,000,000 (the “Second Upfront”). On January 1, 2017,
we will pay an additional $4,000,000 (the “Third Upfront”). We 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. Aytu could not dispose of these shares until after August 29, 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 contingent consideration was valued at $3.2 million using a
Monte Carlo simulation. The fair values of the net identifiable asset acquired totaled $10.5 million which will be amortized over
eight years.
As of June 30, 2016, the accrued payable adjusted for the present
value was $5.4 million and the contingent consideration held a value of $3.2 million.
Note 2 – Summary of Significant Accounting Policies
Cash and Cash Equivalents
Aytu considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of money market fund investments. Aytu’s
investment policy is to preserve principal and maintain liquidity. The Company periodically monitors its positions with, and the
credit quality of the financial institutions with which it invests. Periodically, throughout the year, Aytu has maintained balances
in excess of federally insured limits.
Revenue Recognition
License Agreements and Royalties
Payments received upon signing of license agreements are for the
right to use the license and are deferred and amortized over the lesser of the license term or patent life of the licensed drug.
Milestone payments relate to obtaining regulatory approval, cumulative sales targets, and other projected milestones and are recognized
at the time the milestones are achieved. Royalties will be recognized as revenue when earned.
Product & Service Sales
Aytu recognizes revenue from product and service sales when there
is persuasive evidence that an arrangement exists, delivery has occurred or service has been rendered, the price is fixed or determinable
and collectability is reasonably assured.
Estimated Sales Returns and Allowances
Aytu records estimated reductions in revenue for potential returns
of products by customers. As a result, management must make estimates of potential future product returns and other allowances
related to current period product revenue. In making such estimates, management analyzes historical returns, current economic trends
and changes in customer demand and acceptance of our products. If management were to make different judgments or utilize different
estimates, material differences in the amount of the Company’s reported revenue could result.
Accounts Receivable
Accounts receivable are recorded at
their net realized value. Aytu evaluates collectability of accounts receivable on a quarterly basis and records a valuation allowance
accordingly. As of June 30, 2016 we had an allowance for doubtful accounts of $41,000, and as of June 30, 2015, no allowance for
doubtful accounts had been recorded. The Company had one customer whose revenue individually represented 10% or more of the Company’s
total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts
receivable, as follows:
For the year ended June 30, 2016, one
customer accounted for 86% of net revenue. For the year ended June 30, 2015, one customer accounted for 83% of gross revenue.
At June 30, 2016,
one
customer accounted for 69% of gross accounts receivable. At June 30, 2015, one customer accounted for 99% of gross
accounts receivable.
Inventories
Inventories are recorded at the lower of cost or market, with cost
determined on a first-in, first-out basis. Aytu periodically reviews the composition of its inventories in order to identify obsolete,
slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory,
Aytu will record a write-down to net realizable value in the period that the impairment is first recognized.
Trading Securities
Trading securities are
carried at fair value with unrealized gains and losses recorded in earnings.
Fixed Assets
Fixed assets are recorded at cost. After being placed in service,
the fixed assets are depreciated using the straight-line method over estimated useful lives. Fixed assets consist of the following:
|
|
Estimated
|
|
|
June 30,
|
|
|
|
Useful Lives in years
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Office equipment and furniture
|
|
|
3 - 5
|
|
|
$
|
201,000
|
|
|
$
|
-
|
|
Lab equipment
|
|
|
3 - 5
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Leasehold improvements
|
|
|
3
|
|
|
|
45,000
|
|
|
|
-
|
|
Manufacturing equipment
|
|
|
5
|
|
|
|
7,000
|
|
|
|
-
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(112,000
|
)
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
|
|
|
$
|
231,000
|
|
|
$
|
30,000
|
|
As of June 30, 2016, Aytu had $24,000 included in Office
equipment and furniture for a new phone system and the new enterprise resource system, neither of which had been placed in
service nor were being depreciated.
Aytu recorded the following depreciation expense in the respective
periods:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
51,000
|
|
|
$
|
27,000
|
|
In-Process Research and Development
In-process research and development (“IPRD”) relates
to the Company’s Zertane product and clinical trial data acquired in connection with the 2011 acquisition of DMI BioSciences,
Inc. (“DMI BioSciences”) by Ampio, the former parent company of Aytu. The $7,500,000 recorded was based on an independent,
third party appraisal of the fair value of the assets acquired. IPRD was considered an indefinite-lived intangible asset and its
fair value was assessed annually and written down if impaired. At the time the Zertane product obtained regulatory approval and
commercial production began, IPRD would have been reclassified to an intangible that will be amortized over its estimated useful
life. However, as of June 30, 2016, because we are directing our resources towards our commercial-stage products, the Company determined
that this asset has no value as the Company does not have the resources to complete the necessary clinical trials and bring it
to market before the patents expire. The IPRD was expensed and is included in impairment of intangible assets in the accompanying
statements of operations. The Company will try to market the Zertane asset to other pharmaceutical companies during fiscal year
2017 but there is no guarantee that the Company will be able to monetize this asset.
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, was $500,000. The Zertane patents were acquired in connection with the 2011 acquisition of DMI BioSciences and were
being amortized over the remaining U.S. patent lives of approximately 11 years, which expires in March 2022. For the fiscal year
ended June 30, 2016, because we are directing our resources towards our commercial-stage products, the Company determined that
this asset had no value as the Company does not have the resources to complete the necessary clinical trials and bring it to market
before the patents expire. The remaining fair value of the Zertane patents have been expensed as of June 30, 2016.
The cost of the Luoxis patents were $380,000 when they were acquired
in connection with the 2013 formation of Luoxis and is being amortized over the remaining U.S. patent lives of approximately 15
years, which expires in March 2028. Patents consist of the following:
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
880,000
|
|
|
$
|
880,000
|
|
Less accumulated amortization
|
|
|
(583,000
|
)
|
|
|
(251,000
|
)
|
|
|
|
|
|
|
|
|
|
Patents, net
|
|
$
|
297,000
|
|
|
$
|
629,000
|
|
Aytu recorded the following amortization expense in the respective
periods:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
332,000
|
|
|
$
|
71,000
|
|
Future amortization from the year ended June 30, 2016 is as follows:
2017
|
|
$
|
25,000
|
|
2018
|
|
|
25,000
|
|
2019
|
|
|
25,000
|
|
2020
|
|
|
25,000
|
|
2021
|
|
|
25,000
|
|
Thereafter
|
|
|
172,000
|
|
|
|
$
|
297,000
|
|
Business Combinations
The Company accounts for its business acquisitions under the acquisition
method of accounting as indicated in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) 805, “Business Combinations”, which requires the acquiring entity in a business combination
to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquired business;
and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and
liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree,
based on the fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures
goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified
net assets acquired.
Goodwill
The ProstaScint and Primsol purchase price allocation was based
upon an analysis of the fair value of the assets and liabilities acquired. The final purchase price may be adjusted up to one year
from the date of the acquisition. Identifying the fair value of the tangible and intangible assets and liabilities acquired required
the use of estimates by management, and were based upon currently available data, as noted below.
The Company allocated the excess of purchase price over the identifiable
intangible and net tangible assets to goodwill. Such goodwill is not deductible for tax purposes and represents the value placed
on entering new markets and expanding market share.
The Company tests its goodwill for impairment annually, or whenever
events or changes in circumstances indicate an impairment may have occurred, by comparing the carrying value to its implied fair
value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. If the Company determines that
an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating
expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill, the Company
must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets.
Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to
the recorded balances. The goodwill was recorded as part of the acquisition of ProstaScint that occurred on May 20, 2015 and
Primsol that occurred on October 5, 2015. There was no impairment of goodwill for the year ended June 30, 2016.
Use of Estimates
The preparation of financial statements in accordance with Generally
Accepted Accounting Principles in the United States of America (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject
to such estimates and assumptions include valuation allowances, stock-based compensation, warrant valuation, purchase price allocation,
valuation of contingent consideration, sales returns and allowances, useful lives of fixed assets and assumptions in evaluating
impairment of definite and indefinite lived assets. Actual results could differ from these estimates.
Income Taxes
Aytu has been included in the consolidated tax returns of Ampio,
the former parent company of Aytu, for tax years ended on or before December 31, 2015. As of January 2016, due to the decrease
in Ampio’s ownership percentage of Aytu stock, Aytu will begin to file tax returns separate from Ampio. For all consolidated
tax return periods, Aytu’s taxes are computed and reported on a “separate return” basis for these financial statements.
Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
The amount of income taxes and related income tax positions taken
are subject to audits by federal and state tax authorities. The Company has adopted accounting guidance for uncertain tax positions
which provides that in order to recognize an uncertain tax position, the taxpayer must be more likely than not of sustaining the
position, and the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized upon
settlement with the taxing authority. The Company believes that it has no material uncertain tax positions. The Company’s
policy is to record a liability for the difference between the benefits that are both recognized and measured pursuant to FASB
ASC 740-10, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“ASC
740-10”) and tax position taken or expected to be taken on the tax return. Then, to the extent that the assessment of such
tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports
tax-related interest and penalties as a component of income tax expense. During the periods reported, management of the Company
has concluded that no significant tax position requires recognition under ASC 740-10.
Stock-Based Compensation
Aytu accounts for share based payments by recognizing compensation
expense based upon the estimated fair value of the awards on the date of grant. The Company determines the estimated grant fair
value using the Black-Scholes option pricing model and recognizes compensation costs ratably over the period of service using the
graded method.
Research and Development
Research and development costs are expensed as incurred with expenses
recorded in the respective period.
Income (Loss) Per Common Share
Basic income (loss) per common share is calculated by dividing
the net income (loss) available to the common shareholders by the weighted average number of common shares outstanding during that
period.
Diluted net loss per share reflects the potential of securities that could share
in the net loss of Aytu. Basic and diluted loss per share was the same in 2016 and 2015. Although there were common stock equivalents
of 2,523,929, and 8,553 shares outstanding at June 30, 2016 and 2015, respectively, consisting of stock options and warrants; they
were not included in the calculation of the diluted net loss per share because they would have been anti-dilutive.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and other current assets and other liabilities approximate their fair value
due to their short maturities. The fair value of acquisition-related contingent consideration is based on estimated discounted
future cash flows and assessment of the probability of occurrence of potential future events. The fair values of marketable securities
is based on quoted market prices, if available, or estimated discounted future cash flows.
Derivative Liability
Aytu accounts for financial instruments (convertible debt with
embedded derivative features – conversion options and conversion provisions) and related warrants by recording the fair value
of each instrument in its entirety and recording the fair value of the warrant derivative liability. The fair value of the financial
instruments and related warrants was calculated using a Monte Carlo based valuation model. We recorded a derivative expense at
the inception of the instrument reflecting the difference between the fair value and cash received. Changes in the fair value in
subsequent periods will be recorded as unrealized gain or loss on fair value of debt instruments for the financial instruments
and to derivative income or expense for the warrants.
The fair value of the
warrants issued to the placement agents in connection with the registered offering were valued using the Black-Scholes valuation
methodology. Changes in the fair value in subsequent periods were recorded to derivative income or expense.
Impairment of Long-Lived Assets
Long-lived assets with finite lives are tested
for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to
the related estimated undiscounted future cash flows expected to be derived from the asset. If the expected cash flows are less
than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair
value, based on the related estimated discounted future cash flows.
Indefinite-lived intangible assets, including
acquired IPR&D, are tested for impairment annually or more frequently if events or changes in circumstances between annual
tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based solely
on a comparison of the fair value of the asset to its carrying value, without consideration of any recoverability test.
Based on the Company’s evaluation as of June 30, 2016, an
impairment existed for IPRD as we do not anticipate any future cash flows from this asset (see In-Process Research and Development).
As of June 30, 2015, there had been no impairment for long-lived assets.
Adoption of Newly Issued Accounting Pronouncements
In September 2015, the FASB issued Accounting Standards Update (“ASU”)
2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which
requires that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting
period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s
financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result
of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments
also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount
recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment
to the estimated amounts had been recognized as of the acquisition date. The amendment is effective for financial statements issued
for fiscal years beginning after December 15, 2015 and early adoption is permitted. As of March 31, 2016, the Company has early
adopted this standard, there was no material impact on our financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” to simplify the presentation of debt
issuance costs. The amendments in the update require that debt issuance costs related to a recognized debt liability be presented
in the balance sheet as a direct reduction of the carrying amount of the debt. Recognition and measurement of debt issuance costs
were not affected by this amendment. In August 2015, FASB issued ASU 2015-15, “Presentation and Subsequent Measurement
of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement
at June 18, 2015 EITF Meeting” which clarified that the SEC would not object to an entity deferring and presenting
debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit
arrangement. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015. During
the quarter ended September 30, 2015, the Company early adopted this standard and recorded debt issuance costs as a debt discount.
There was no impact on the Company’s financial statements related to this adoption as the Company did not have any debt issuance
costs prior to adoption.
In November 2015, the FASB issued ASU No. 2015-17 regarding ASC
Topic 470 "Income Taxes: Balance Sheet Classification of Deferred Taxes." The amendments in ASU 2015-17 eliminate the
requirement to bifurcate deferred taxes between current and non-current on the balance sheet and require that deferred tax liabilities
and assets be classified as noncurrent on the balance sheet. The amendments for ASU-2015-17 can be applied retrospectively or prospectively
and early adoption is permitted. Aytu early adopted ASU 2015-17 and there was no material impact on its financial statements.
Recently Issued Accounting Pronouncements, Not Adopted as of
June 30, 2016
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 significantly
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 lessees 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
is not expected to have a material impact on the Company’s financial position or results of operations.
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 3 – Going Concern
As reflected in the accompanying financial
statements, the Company has a net loss of $28.2 million and net cash used in operations of $10.7 million for the year ended June
30, 2016, and stockholders’ equity of $10.1 million and an accumulated deficit of $46.6 million at June 30, 2016. In
addition, the Company is in the early stage of commercialization and has not yet generated any profits. These factors raise substantial
doubt about the Company’s ability to continue as a going concern.
The Company expects that its current cash
resources as well as expected lack of operating cash flows will not be sufficient to sustain operations for a period greater than
one year. The ability of the Company to continue its operations is dependent on management's plans, which include continuing to
raise equity-based financing. There is no assurance that the Company will be successful in accomplishing this objective.
The accompanying financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets
or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 4 – License Agreement/Revenue Recognition
During 2011, Ampio entered into a license, development and commercialization
agreement with a major Korean pharmaceutical company which was assigned to Vyrix when it was formed in 2013. The agreement grants
the pharmaceutical company exclusive rights to market Zertane in South Korea for the treatment of premature ejaculation (“PE”)
and for a combination drug to be developed, utilizing Zertane and an erectile dysfunction drug. Upon signing of the agreement,
Ampio received a $500,000 upfront payment, the net proceeds of which were $418,000 after withholding of Korean tax. The upfront
payment was deferred and was being recognized as license revenue over a ten-year period. Milestone payments of $3.2 million could
have been earned and recognized contingent upon achievement of regulatory approvals and cumulative net sales targets, which could
have taken several years. In addition, Aytu could have earned a royalty based on 25% of net sales, as defined, if the royalty exceeded
the transfer price of the Zertane product. No royalties have been earned to date.
In April 2014, Vyrix entered into a Distribution and License Agreement
(the “Paladin Agreement”) with Endo Ventures Limited, which acquired Paladin Labs Inc. (“Paladin”), whereby
Paladin has exclusive rights to market, sell and distribute Zertane in Canada, the Republic of South Africa, certain countries
in Sub Saharan Africa, Colombia and Latin America. The Paladin Agreement expires on a country by country basis upon the later of
15 years after the first commercial sale of the product in that country or expiration of market exclusivity for Zertane in that
country. Paladin paid $250,000 to Vyrix upon signing the Paladin Agreement and is obligated to make milestone payments aggregating
up to $3,025,000 based upon achieving Canadian and South African product regulatory approval and achieving specific sales goals.
The upfront payment was deferred and was being recognized as license revenue over a seven-year period. In addition, the Paladin
Agreement provides that Paladin pay royalties based on sales volume.
At the end of fiscal 2016, Aytu determined that the Zertane asset
has no value as Aytu does 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 and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, convertible promissory notes and warrant derivative liability. The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their
fair value due to their short maturities. The fair value of the convertible notes was approximately the face value of the notes
(see Note 8 for more information). 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 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 liabilities
that were accounted for at fair value on a recurring basis as of June 30, 2016, by level within the fair value hierarchy:
|
|
Fair Value Measurements Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Acerus
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
664,000
|
|
|
$
|
664,000
|
|
The estimated fair value of the Company’s investment, which
is classified as Level 1 (quoted price is available), was $1,041,000 as of June 30, 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.
|
|
|
|
Initial
|
|
|
Unrealized
|
|
|
|
|
As of June 30, 2016
|
|
Maturity in Years
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Investment in Acerus
|
|
Less than 1 year
|
|
$
|
2,013,000
|
|
|
$
|
0
|
|
|
$
|
(972,000
|
)
|
|
$
|
1,041,000
|
|
The warrant derivative liability for the warrants was valued using
the Black-Scholes valuation methodology because that model embodies all of the relevant assumptions that address the features underlying
these instruments. Significant assumptions in valuing the warrant derivative liability were based on estimates of the value of
Aytu common stock, the exercise price of $6.00, the term of 5 years, volatility of 75% and a risk free interest rate of 1.32% at
issuance. At June 30, 2016, these warrants were re-valued with an adjusted term of 4.84 years, volatility of 75% and a risk free
interest rate of 0.986%.
The following table sets forth a reconciliation of changes in the
fair value of financial liabilities classified as Level 3 in the fair valued hierarchy:
|
|
Derivative Instruments
|
|
|
|
|
|
Balance as of June 30, 2015
|
|
$
|
-
|
|
Warrant issuances
|
|
|
400,000
|
|
Reclassification of warrant liability to equity upon note conversion
|
|
|
(137,000
|
)
|
Change in fair value included in earnings
|
|
|
13,000
|
|
Balance as of June 30, 2016
|
|
$
|
276,000
|
|
Note 6 – Income Taxes
As previously discussed in Note 2 – Summary of Significant
Accounting Policies, the Company has been included in the consolidated tax returns of Ampio for tax years ended on or before December
31, 2015. Beginning in January 2016, Aytu will file tax returns separate from Ampio. For all consolidated tax return periods, the
Company's taxes have been computed and reported on a “separate return” basis. Ampio and Aytu do not have a tax sharing
agreement. Accordingly, certain tax attributes, e.g., net operating loss carryforwards, reflected in these financial statements,
may or may not be available to Aytu. In January 2016, Ampio’s ownership fell below 80% so that Aytu will no longer be included
in the Ampio consolidated income tax return. The deconsolidation resulted in approximately $4.5 million of the net operating loss
carryforwards originating prior to the incorporation of Vyrix and Luoxis to no longer be available to Aytu. Upon deconsolidation,
the deferred income tax asset and related valuation allowance for these pre-incorporation net operating losses have been removed.
Income tax benefit resulting from applying statutory rates in jurisdictions
in which Aytu is taxed (Federal and State of Colorado) differs from the income tax provision (benefit) in the Aytu’s financial
statements. The following table reflects the reconciliation for the respective periods:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit at statutory rate
|
|
$
|
(9,581,229
|
)
|
|
|
(34.00
|
)%
|
|
$
|
(2,634,087
|
)
|
|
|
(34.00
|
)%
|
State income taxes, net of federal benefit
|
|
|
(853,203
|
)
|
|
|
(3.03
|
)%
|
|
|
(216,183
|
)
|
|
|
(2.79
|
)%
|
Stock based compensation
|
|
|
7,156
|
|
|
|
0.03
|
%
|
|
|
426,725
|
|
|
|
5.51
|
%
|
Interest on convertible debt
|
|
|
75,148
|
|
|
|
0.27
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Change in valuation allowance
|
|
|
8,672,155
|
|
|
|
30.77
|
%
|
|
|
2,397,527
|
|
|
|
30.95
|
%
|
Reduction of net operating losses upon deconsolidation
|
|
|
1,674,110
|
|
|
|
5.94
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Other
|
|
|
5,863
|
|
|
|
0.02
|
%
|
|
|
2,108
|
|
|
|
0.03
|
%
|
Net income tax provision (benefit)
|
|
$
|
-
|
|
|
|
0.00
|
%
|
|
$
|
(23,910
|
)
|
|
|
(0.30
|
)%
|
Deferred income taxes arise from temporary differences in the recognition
of certain items for income tax and financial reporting purposes. The approximate tax effects of significant temporary differences
which comprise the deferred tax assets and liabilities are as follows for the respective periods:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
-
|
|
|
$
|
190,000
|
|
Deferred rent
|
|
|
5,000
|
|
|
|
-
|
|
Accrued expenses
|
|
|
445,000
|
|
|
|
73,000
|
|
Net operating loss carry forward
|
|
|
9,202,000
|
|
|
|
6,337,000
|
|
Intangibles
|
|
|
606,000
|
|
|
|
453,000
|
|
Share-based coompensation
|
|
|
327,000
|
|
|
|
-
|
|
Acquired in-process research and development
|
|
|
-
|
|
|
|
(2,779,000
|
)
|
Unrealized loss on investment
|
|
|
360,000
|
|
|
|
-
|
|
Warrant liability
|
|
|
153,000
|
|
|
|
-
|
|
Inventory
|
|
|
192,000
|
|
|
|
-
|
|
Allowance for doubtful accounts
|
|
|
15,000
|
|
|
|
-
|
|
Total deferred income tax assets (liabilities)
|
|
|
11,305,000
|
|
|
|
4,274,000
|
|
Less: Valuation allowance
|
|
|
(11,305,000
|
)
|
|
|
(4,274,000
|
)
|
Total deferred income tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
Aytu has recorded income tax benefits in its statements of operations
since inception, stemming from its operating losses, and is expected to incur operating losses for the foreseeable future. During
the year ended June 30, 2015, the net deferred tax liability was reduced to zero based upon the operating losses, thus Aytu established
a valuation allowance offsetting any future net deferred tax asset. As such, Aytu would no longer record income tax benefits in
its results of operations after the year ended June 30, 2015 because management is currently unable to conclude that it is more
likely than not that a benefit will be realized.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income, carry back opportunities and tax planning strategies in making the assessment. The Company believes it is more likely than
not it will realize the benefits of these deductible differences, net of the valuation allowance provided.
The Company has federal net operating loss carryforwards of approximately
$24.8 million and $17.1 million as of June 30, 2016 and June 30, 2015, respectively that, subject to limitation, may be available
in future tax years to offset taxable income. The available net operating losses, if not utilized to offset taxable income in
future periods, will begin to expire in 2032 through 2035. Net operating loss carryforwards are subject to examination in the
year they are utilized regardless of whether the tax year in which they are generated has been closed by statute. The amount subject
to disallowance is limited to the NOL utilized. Accordingly, the Company may be subject to examination for prior NOLs generated
as such NOLs are utilized. Under the provisions of the Internal Revenue Code, substantial changes in the Company’s ownership
may result in limitations on the amount of NOL carryforwards that can be utilized in future years.
As of June 30, 2016 and 2015, the Company has no liability
for gross unrecognized tax benefits or related interest and penalties.
Aytu has made its best estimates of certain income tax amounts included
in the financial statements. Application of the Company’s accounting policies and estimates, however, involves the exercise
of judgment and use of assumptions as to future uncertainties and, as a result, could differ from these estimates. In arriving
at its estimates, factors the Company considers include how accurate the estimates or assumptions have been in the past, how much
the estimates or assumptions have changed and how reasonably likely such changes may have a material impact. Aytu has been historically
included in the Ampio consolidated tax return. Under the general statute of limitations, the Company would not be subject to federal
or Colorado income tax examinations for years prior to 2012 and 2011, respectively. However, given the net operating losses generated
since inception, all tax years since inception are subject to examination.
Note 7 – Commitments and Contingencies
Commitments and contingencies are described below and summarized
by the following table as of June 30, 2016:
|
|
Total
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
Prescription Database
|
|
$
|
1,902,000
|
|
|
$
|
731,000
|
|
|
$
|
598,000
|
|
|
$
|
573,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Natesto
|
|
|
8,500,000
|
|
|
|
6,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,500,000
|
|
|
|
-
|
|
|
|
-
|
|
Manufacturing agreement
|
|
|
3,000,000
|
|
|
|
2,000,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Service agreement
|
|
|
204,000
|
|
|
|
204,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Primsol
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Office Lease
|
|
|
317,000
|
|
|
|
142,000
|
|
|
|
145,000
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sponsored research agreement with related party
|
|
|
70,000
|
|
|
|
70,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
14,743,000
|
|
|
$
|
9,897,000
|
|
|
$
|
1,243,000
|
|
|
$
|
1,103,000
|
|
|
$
|
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 $1,902,000
over three years for access to the database of prescriptions written for Natesto.
Natesto
In April 2016, the Company entered into an agreement with Acerus
whereby Aytu agreed to pay $8,000,000 for the exclusive U.S. rights to Natesto of which $6,000,000 is payable in fiscal year 2017.
Additionally, Aytu is required to make the first milestone payment even if the milestone is not reached.
Manufacturing Agreement
On October 8, 2015, Aytu and Biovest International, Inc., or Biovest,
entered into a Master Services Agreement, pursuant to which Biovest is to provide manufacturing services to us for ProstaScint.
In conjunction with entering into the agreement, we submitted a work order to Biovest to provide us with active pharmaceutical
ingredient for ProstaScint over a four-year period at a total cost of $5.0 million, of which we paid $1.0 million upon submission
of the work order and $500,000 in each of January and April 2016. We will pay an additional $2,000,000 in fiscal 2017, and $500,000
in both fiscal 2018 and 2019.
Service Agreement
In July 2015, Aytu entered into agreements with Ampio whereby Aytu
agreed to pay Ampio $30,000 per month for shared overhead which includes costs related to the shared facility, corporate staff,
and other miscellaneous overhead expenses. These agreements will be in effect until they are terminated in writing by both parties.
This agreement was amended in April 2016, which reduced the monthly amount to $18,000. This agreement was amended again in July
2016, which reduced the monthly amount to approximately $17,000 per month. For the years ended June 30, 2016 and 2015, the Company
paid approximately $310,000 for this service agreement.
Primsol
In October 2015, Aytu entered into an asset purchase agreement with
FSC Laboratories, Inc., or FSC. Pursuant to the agreement, we purchased assets related to FSC’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 FSC’s liabilities, including those related to the sale and marketing of Primsol arising after the closing. We
paid $500,000 at closing for the Primsol Business and we 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 paid $500,000 on April 1, 2016
and $500,000 on July 1, 2016 and must pay $250,000 no later than September 30, 2016 (together, the ‘‘Installment Payments’’),
for a total purchase price of $1,892,000. This amount is included in accounts payable and accrued liabilities on the balance sheet.
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 August 2015, the Company entered into a 37 month operating lease in Englewood, Colorado effective
September 1, 2015. 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 which includes rent abatements. 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:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Rent expense
|
|
$
|
120,000
|
|
|
$
|
51,000
|
|
Sponsored Research Agreement with Related Party
Aytu entered into a Sponsored Research Agreement with Trauma Research
LLC (“TRLLC”), a related party, in June 2013. Under the terms of the Sponsored Research Agreement, TRLLC agreed to
work collaboratively in advancing the RedoxSYS System diagnostic platform through research and development efforts. The Sponsored
Research Agreement may be terminated without cause by either party on 30 days’ notice.
Note 8 – Convertible Promissory Notes
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 offerings sold the institutional portion
of the offering of the Notes. Aytu sold the balance of the Notes to individuals and entities with whom Aytu has 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 is obligated to issue warrants for an amount of shares to be 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
had 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 (see Note 5).
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, for a period of ten business
days (which was extended to 15 business days by the Company, or February 10, 2016) following receipt of the notice, 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 forced to convert into the same arrangement
that was given 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 according to the terms of the agreement.
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 our 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 our 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 9 – Common Stock
Capital Stock
At June 30, 2016 and 2015, Aytu had 100 million and 300 million
shares, respectively, 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, the Aytu shareholders voted to reduce the authorized common
stock outstanding from 300 million to 100 million shares.
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 consists 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. These warrants have the same terms as the warrants offered in the registered
offering. These warrants have a relative fair value of $20,000, which was the purchase price per the underwriting agreement.
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.
Note 10 – Equity Instruments
Options
Prior to the Merger, Aytu had two approved stock option plans (Luoxis
2013 Stock Option Plan and Vyrix 2013 Stock Option Plan), pursuant to which Aytu had reserved a total of 143,236 shares of common
stock, both of which were terminated on April 16, 2015 upon the closing of the Merger.
The Luoxis options that were in the money and all outstanding Vyrix
options issued under the 2013 Option Plans were accelerated and cancelled in connection with the Merger. Option holders received
a cash payment per option share equal to the difference between the consideration payable per share of common stock pursuant to
the Merger and the exercise price of the option, if the consideration paid to holders of common stock was less than the exercise
price of such options, no amount was paid to the option holder in connection with the cancellation. The cash payment during the
period ended June 30, 2015 was $27,000. The Company recognized compensation of $422,000 and $189,000 related to the Luoxis and
Vyrix options that had accelerated vesting as of the Merger date.
The Luoxis options that were not paid out were terminated pursuant
to the terms of the 2013 Luoxis Option Plan. The Company treated these options as pre-vesting forfeitures and $433,000 of previously
recognized compensation was reversed.
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 833,334 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, 833,334 shares of its common stock, were reserved for issuance. The fair value of the options 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 are as follows:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
75
|
%
|
|
|
-
|
|
Risk free interest rate
|
|
|
1.16% - 1.90
|
%
|
|
|
-
|
|
Expected term (years)
|
|
|
3.75 - 6.25
|
|
|
|
-
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
-
|
|
Forfeiture rate
|
|
|
0
|
%
|
|
|
-
|
|
Stock option activity is as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Life in Years
|
|
Outstanding June 30, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Granted
|
|
|
326,469
|
|
|
$
|
18.01
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(4,167
|
)
|
|
$
|
18.12
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
|
322,302
|
|
|
$
|
18.01
|
|
|
|
9.33
|
|
Exercisable at June 30, 2016
|
|
|
139,798
|
|
|
$
|
16.76
|
|
|
|
9.42
|
|
Available for grant at June 30, 2016
|
|
|
511,032
|
|
|
|
|
|
|
|
|
|
The following table details the options outstanding at June 30,
2016 by range of exercise prices:
Range of Exercise Prices
|
|
|
Number of
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life of
Options
Outstanding
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
6.72
|
|
|
|
16,668
|
|
|
$
|
6.72
|
|
|
|
9.79
|
|
|
|
16,668
|
|
|
$
|
6.72
|
|
$
|
18.12
|
|
|
|
301,467
|
|
|
$
|
18.12
|
|
|
|
9.37
|
|
|
|
123,130
|
|
|
$
|
18.12
|
|
$
|
55.56
|
|
|
|
4,167
|
|
|
$
|
55.56
|
|
|
|
4.11
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
322,302
|
|
|
$
|
18.01
|
|
|
|
9.33
|
|
|
|
139,798
|
|
|
$
|
16.76
|
|
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 sales,
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 years ended June 30 2016 and 2015:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Research and development expenses
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
89,000
|
|
|
$
|
519,000
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
814,000
|
|
|
|
499,000
|
|
|
|
$
|
903,000
|
|
|
$
|
1,018,000
|
|
|
|
|
|
|
|
|
|
|
Unrecognized expense at June 30, 2016
|
|
$
|
1,267,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining years to vest
|
|
|
2.66
|
|
|
|
|
|
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, 2014
|
|
|
8,553
|
|
|
$
|
54.36
|
|
|
|
3.92
|
|
Granted in fiscal 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired in fiscal 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding June 30, 2015
|
|
|
8,553
|
|
|
$
|
54.36
|
|
|
|
2.92
|
|
Warrants issued to placement agents for convertible promissory notes
|
|
|
22,254
|
|
|
$
|
7.80
|
|
|
|
|
|
Warrants issued to investors in connection with the registered offering
|
|
|
1,733,322
|
|
|
$
|
6.00
|
|
|
|
|
|
Warrants issued to placement agents for convertible promissory notes
|
|
|
22,564
|
|
|
$
|
4.80
|
|
|
|
|
|
Warrants issued to placement agents for the registered offering
|
|
|
109,375
|
|
|
$
|
6.00
|
|
|
|
|
|
Warrants issued to convertible note holders who converted May 5, 2016
|
|
|
305,559
|
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
|
2,201,627
|
|
|
$
|
6.19
|
|
|
|
4.71
|
|
In connection with our private placement of approximately $5.2 million
of convertible notes in July and August 2015, the Company was obligated to issue to the placement agents’ warrants for an
amount of shares equal to 8% of the number of shares of our common stock issued upon conversion of the notes and any accrued interest.
The placement agents 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 100% of the price per share at which equity securities were sold in our next equity financing,
and provide for cashless exercise.
In connection with the conversions of the notes in February 2016
and May 2016, which were triggered by an equity financing in January 2016 and our public offering of common stock and warrants
in May 2016, respectively, we issued warrants to the placement agents to purchase an aggregate of 22,254 shares of our common
stock at an exercise price of $7.80 per share, and an aggregate of 22,564 shares of our common stock at an exercise price of $4.80
per share. These warrants have a fair value of $87,000 and $50,000, respectively. As discussed in Note 5, these amount were reclassified
from liability accounting to equity upon the second conversion of the convertible notes in May 2016.
Also in connection with the conversion of the notes in May 2016,
the noteholders that converted also received 305,559 warrants (see Note 8). These warrants have a term of five years with an exercise
price of $6.00 per share. These warrants are accounted for under equity treatment and have a fair value of $480,000.
In connection with our May 2016 public offering, we issued warrants
to purchase an aggregate of 109,375 shares of common stock at an exercise price of $6.00 and a term of five years to the underwriters
of the public offering. These warrants are accounted for under liability accounting and are fair valued at each reporting period
(see Note 5). At June 30, 2016, these warrants had a fair value of $276,000.
Also in connection with our May 2016 public offering, we issued
to investors warrants to purchase an aggregate of 1,733,322 shares of common stock, which includes the over-allotment warrants,
at an exercise price of $6.00 with a term of five years. These warrants are accounted for under equity treatment (see Note 9).
The warrants issued in connection with our registered offering are
all registered and tradable on the OTCQX under the ticker symbol “AYTUW”.
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 closing 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.
The assumptions are as follows:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
75
|
%
|
|
|
-
|
|
Risk free interest rate
|
|
|
1.07 - 1.76
|
%
|
|
|
-
|
|
Contractual term (years)
|
|
|
4.2 - 5.0
|
|
|
|
-
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
-
|
|
Note 11 – Related Party Transactions
Ampio Loan Agreements
In November 2013, Vyrix entered into a loan agreement with Ampio.
Pursuant to the loan agreement, Ampio agreed to lend Vyrix up to an aggregate amount of $3,000,000 through cash advances of up
to $500,000 each. Unpaid principal amounts under the loan agreement bear simple interest at the “Applicable Federal Rate”
for long-term obligations prescribed under Section 1274(d) of the Internal Revenue Code of 1986, as amended (or any successor
provision with similar applicability). The initial term of this loan agreement is for one year, subject to automatic extension
of successive one-year terms. Vyrix may repay any outstanding balance at any time without penalty. Ampio has an option of converting
any balance outstanding under the loan agreement into shares of Vyrix common stock at the fair market value per share of Vyrix
common stock, as determined by the Ampio board of directors, as of such conversion date. As of June 30, 2014, the amount advanced
was $1,600,000 with interest rates from 3.11%-3.32%. On April 16, 2015, in connection with the closing of the Merger, Ampio
released Vyrix from its then outstanding obligation of $4,000,000 under the loan agreement as consideration of its share purchase,
and the loan agreement was terminated.
In March 2014, Luoxis entered into a loan agreement with Ampio.
Pursuant to the loan agreement, Ampio agreed to lend Luoxis $3,000,000. Unpaid principal amounts under the loan agreement bear
simple interest at the “Applicable Federal Rate” for long-term obligations prescribed under Section 1274(d) of
the Internal Revenue Code of 1986, as amended (or any successor provision with similar applicability). The initial term of this
loan agreement is for one year, subject to automatic extension of successive one-year terms. Luoxis may repay any outstanding balance
at any time without penalty. Ampio has an option of converting any balance outstanding under the loan agreement into shares of
Luoxis common stock at the fair market value per share of Luoxis common stock, as determined by the Ampio board of directors, as
of such conversion date. As of June 30, 2014, the amount advanced was $3,000,000 with interest rates from 3.11%—3.32%.
On April 16, 2015, in connection with the closing of the Merger, Ampio released Luoxis from its then outstanding obligation
of $8,000,000 under the loan agreement as consideration of its share purchase, and the loan agreement was terminated.
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 $10,000,000, maturing on
the first anniversary of the Merger, (ii) cancellation of indebtedness of Luoxis to Ampio in the amount of $8,000,000; and
(iii) cancellation of indebtedness of Vyrix to Ampio in the amount of $4,000,000.
Services Agreement
The Company has service agreements with Ampio which are described
in Note 7.
Sponsored Research Agreement
In June 2013, Luoxis entered into a sponsored research agreement
with TRLLC, an entity controlled by Ampio’s director and Chief Scientific Officer, Dr. Bar-Or. The agreement, which
was amended in January 2015 and 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 12 – Employee Benefit Plan
Aytu has a 401(k) plan that allows participants to contribute a
portion of their salary, subject to eligibility requirements and annual IRS limits. As of June 30, 2016, Aytu does not match employee
contributions. Starting in fiscal 2017, the Company will match 50% of the first 6% contributed to the plan by employees.
Note 13 – Subsequent Events
In July 2016, Aytu cancelled and re-issued certain outstanding stock
option agreements as well as issued an additional 441,999 stock options to executives, employees, directors and consultants. Aytu
also issued 1.0 million shares of restricted stock to executive officers and directors.
On July 27, 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”), an Illinois limited liability company. 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.
Under the terms and subject to the conditions of the Purchase Agreement,
we have the right to sell to and Lincoln Park is obligated to purchase up to an additional $10.0 million in amounts of shares of
our common stock (“Common Stock”), subject to certain limitations, from time to time, over the 36-month period commencing
on the date that a registration statement, which we agreed to file with the Securities and Exchange Commission (the “SEC”)
pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith
is filed.
In connection with the Purchase Agreement, we issued as a commitment
fee to Lincoln Park 52,500 shares of Common Stock. Joseph Gunnar & Co., LLC (“Joseph Gunnar”) and Fordham Financial
Management, Inc. (“Fordham”) acted as Financial Advisor on our behalf. Upon the execution of the Purchase Agreement,
we paid $50,000 to Joseph Gunnar and $50,000 to Fordham. Upon the earlier of six months from the execution of the Purchase Agreement
or upon the effectiveness of the resale registration statement to be filed pursuant to the Registration Rights Agreement, we will
pay an additional $50,000 to Joseph Gunnar and $50,000 to Fordham.
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