Notes to Consolidated Financial Statements
(unaudited)
Note 1 – Business, Basis of Presentation, License and Supply
Agreements
Business
Aytu
BioScience, Inc. (“Aytu”, the “Company” or
“we”) was incorporated as Rosewind Corporation on
August 9, 2002 in the State of Colorado. Aytu was
re-incorporated in the state of Delaware on June 8, 2015. Aytu
is a specialty pharmaceutical company focused on global
commercialization of novel products addressing significant medical
needs such as hypogonadism
(low testosterone)
, cough and
upper respiratory symptoms, insomnia, and male infertility
and plans to expand
opportunistically into other therapeutic areas.
Basis of Presentation
The
unaudited consolidated financial statements contained in this
report represent the financial statements of Aytu and its
wholly-owned subsidiary, Aytu Women’s Health, LLC. The
unaudited consolidated financial statements should be read in
conjunction with Aytu’s Annual Report on Form 10-K for the
year ended June 30, 2018, which included all disclosures required
by generally accepted accounting principles in the United States
(“GAAP”). In the opinion of management, these unaudited
consolidated financial statements contain all adjustments necessary
to present fairly the financial position of Aytu and the results of
operations and cash flows for the interim periods presented. The
results of operations for the period ended March 31, 2019 are not
necessarily indicative of expected operating results for the full
year. The information presented throughout this report, as of and
for the periods ended March 31, 2019, and 2018, is
unaudited.
The
accompanying consolidated financial statements of the Company have
been prepared in accordance with GAAP. On August 10, 2018, Aytu
effected a reverse stock split in which each common stockholder
received one share of common stock for every 20 shares held (herein
referred to collectively as the “Reverse Stock Split”).
All share and per share amounts in this report have been adjusted
to reflect the effect of the Reverse Stock Split.
License and Supply Agreement—Natesto
In
April 2016, Aytu entered into a license and supply agreement to
acquire the exclusive U.S. rights to commercialize Natesto®
(testosterone) nasal gel from Acerus Pharmaceuticals Corporation,
or Acerus. We acquired the rights effective upon the expiration of
the former licensee’s rights, which occurred on June 30,
2016. The term of the license runs for the greater of eight years
or until the expiry of the latest to expire patent, including
claims covering Natesto or until the entry on the market of at
least one AB-rated generic product.
In
addition to the previously disclosed upfront payments made to
Acerus, we agreed to make one-time, non-refundable milestone
payments to Acerus within 45 days of the occurrence of certain
agreed upon milestones. The maximum aggregate amount payable under
such milestone payments is $37.5 million.
The
fair value of the net identifiable Natesto asset acquired was
determined to be $10.5 million, which is being amortized over eight
years. The aggregate amortization expense for each of the
three-month periods ended March 31, 2019 and 2018 was $330,000. The
aggregate amortization expense for each of the nine-month periods
ended March 31, 2019 and 2018 was $989,000.
The
contingent consideration was initially valued at $3.2 million using
a Monte Carlo simulation, as of June 30, 2016. As of June 30, 2018,
the contingent consideration was revalued at $1.8 million using the
same Monte Carlo simulation methodology, and based on current
interest rates, expected sales potential, and Aytu stock trading
variables. The contingent consideration accretion expense for each
of the three-month periods ended March 31, 2019 and 2018 was
$17,000, and $178,000, respectively. The contingent consideration
accretion expense for each of the nine-month periods ended March
31, 2019 and 2018 was $48,000, and $508,000, respectively. As of
March 31, 2019, no milestone payments have been made.
License Agreement—ZolpiMist
In June
2018, Aytu signed an exclusive license agreement for
ZolpiMist™ (zolpidem tartrate oral spray) from Magna
Pharmaceuticals, Inc., (“Magna”). This agreement allows
for Aytu’s exclusive commercialization of ZolpiMist in the
U.S. and Canada.
Aytu
made an upfront payment of $400,000 to Magna upon execution of the
agreement. In July 2018, we paid an additional $300,000, of which,
$297,000 was included in current contingent consideration at June
30, 2018.
The
ZolpiMist license agreement was valued at $3.2 million and will be
amortized over the life of the license agreement up to seven years.
The amortization expense for each of the three months ended March
31, 2019 and 2018 was $116,000 and $0, respectively. The
amortization expense for each of the nine months ended March 31,
2019 and 2018 was $348,000 and $0, respectively.
We also
agreed to make certain royalty payments to Magna which will be
calculated as a percentage of ZolpiMist net sales and are payable
within 45 days of the end of the quarter during which the
applicable net sales occur.
The
contingent consideration related to these royalty payments was
valued at $2.6 million using a Monte Carlo simulation, as of June
11, 2018. The contingent consideration accretion expense for the
three months ended March 31, 2019 and 2018 was $64,000, and $0,
respectively. The contingent consideration accretion expense for
the nine months ended March 31, 2019 and 2018 was $184,000, and $0,
respectively.
License, Development, Manufacturing and Supply
Agreement—Tuzistra XR
On
November 2, 2018, the Company entered into a License, Development,
Manufacturing and Supply Agreement (the “Tris License
Agreement”) with TRIS Pharma, Inc. (“TRIS”).
Pursuant to the Tris License Agreement, TRIS granted the Company an
exclusive license in the United States to commercialize Tuzistra
XR. In addition, TRIS granted the Company an exclusive license in
the United States to commercialize a complementary antitussive
referred to as “CCP-08” (together with Tuzistra XR, the
“Products”) for which marketing approval has been
sought by TRIS under a New Drug Application filed with the Food and
Drug Administration (“FDA”). As consideration for the
Products license, the Company: (i) made an upfront cash payment to
TRIS; (ii) issued shares of Series D Convertible preferred stock to
TRIS; and (iii) will pay certain royalties to TRIS throughout the
license term in accordance with the Tris License
Agreement.
The
Tris License Agreement was valued at $9.9 million and will be
amortized over the life of the Tris License Agreement up to twenty
years. The amortization expense for each of the three-month periods
ended March 31, 2019 and 2018 was $123,000 and $0, respectively.
The amortization expense for each of the nine-month periods ended
March 31, 2019 and 2018 was $205,000 and $0,
respectively.
We also
agreed to make certain quarterly royalty payments to TRIS which
will be calculated as a percentage of our Tuzistra XR net sales,
payable within 45 days of the end of the applicable
quarter.
As of
November 2, 2018, the contingent consideration, related to this
asset, was valued at $8.8 million using a Monte Carlo simulation.
The contingent consideration accretion expense for the three months
ended March 31, 2019 and 2018 was $73,000, and $0, respectively.
The contingent consideration accretion expense for the nine months
ended March 31, 2019 and 2018 was $119,000, and $0,
respectively.
Liquidity Assessment
Accounting
Standards Update (“ASU”) No. 2014-15, Presentation of
Financial Statements - Going Concern, requires management to
evaluate the company’s ability to continue as a going concern
one year beyond the filing date of the financial statements
contained herein. This evaluation requires management to perform
two steps. First, management must evaluate whether there are
conditions and events that raise substantial doubt about the
entity’s ability to continue as a going concern. Second, if
management concludes that substantial doubt is raised, management
is required to consider whether it has plans in place to alleviate
that doubt. Disclosures in the notes to the financial statements
are required if management concludes that substantial doubt exists
or that its plans alleviate the substantial doubt that was
raised.
Prior
to the date of this Report, we have financed operations through a
combination of private and public debt and equity financings,
receipts from the sale of our products, and occasionally through
divestures of non-strategic assets. Our financing transactions have
included private placements of stock and convertible notes, and
public offerings of the Company’s equity securities. Since
the formation of Aytu in June 2015, the Company has raised
approximately $70.3 million, inclusive of the $15.2 million we
raised in October 2018, from the sale of securities to investors,
the exercise of warrants by investors and the $5.0 million of debt
issued in November 2018. Although it is difficult to predict our
liquidity requirements, based upon our current operating plan, as
of the date of this Report, we believe we will have sufficient cash
to meet our projected operating requirements for the next 12
months.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Topic 606,
Revenue
from Contracts with Customers
. The amendments in this ASU provide a
single model for use in accounting for revenue arising from
contracts with customers and supersedes prior 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.
Disclosures about the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers are
also required. ASC 606 and ASC 340-40 also require the deferral of
incremental costs of obtaining contracts with customers and
subsequent amortization of those costs of the period of anticipated
benefit. Collectively, we refer to this guidance as “ASC
606.”
Effective July 1,
2018, the Company adopted Accounting Standards Codification
(“ASC”) 606,
Revenue from Contracts with
Customers
(“ASC 606”). Adoption of this ASU
was done through the modified retrospective method and did not
result in a cumulative adjustment to retained earnings or
accumulated deficit as of the adoption date. This is due to the
fact that the impact of adopting the new standard is not
significant as it relates to historical revenues, future revenues,
or accounting for incremental costs of obtaining contracts with our
customers.
We
adopted the new standard through applying the following conclusions
(resulting from a thorough analysis of all contract types): (1) The
new guidance did not materially change our existing policy and
practice for identifying contracts with customers, nor did it give
rise to changes to our existing policy and practice or create new
concern surrounding the collectability of our receivables from
customers, (2) none of our contracts with customers contain
multiple performance obligations that are not fulfilled at the same
time, (3) the new guidance did not change our existing policy and
practice regarding the recording of variable consideration, and (4)
we did not identify any customer acquisition costs that are
incremental and that are expected to be recovered at a future
time.
As
mentioned above, the modified retrospective method of transition
did not result in a cumulative adjustment as of July 1, 2018.
Additionally, no other line items in the statement of operations or
the balance sheet reflect any changes due to the adoption of the
new standard. Adoption of the standards related to revenue
recognition had no impact to cash from or used in operating,
financing, or investing on our consolidated cash flows
statement.
Recently Issued Accounting Pronouncements, Not Adopted as of March
31, 2019
In August 2018, the FASB issued ASU 2018-13, “Fair Value
Measurement (Topic 820) Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurement.” The
amendments in the standard apply to all entities that are required,
under existing GAAP, to make disclosures about recurring or
nonrecurring fair value measurements. ASU 2018-13 removes,
modifies, and adds certain disclosure requirements in ASC 820, Fair
Value Measurement. The standard is effective for all entities for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019.
The amendments on changes in unrealized gains and losses, the range
and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative
description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. Early adoption is permitted
upon issuance of ASU 2018-13. An entity is permitted to early adopt
any removed or modified disclosures upon issuance of ASU 2018-13
and delay adoption of the additional disclosures until their
effective date. The Company is currently assessing the impact that
ASU 2018-13 will have on its financial statements.
In June
2016, the FASB issued ASU 2016-13, “Financial Instruments
– Credit Losses” to require the measurement of expected
credit losses for financial instruments held at the reporting date
based on historical experience, current conditions and reasonable
forecasts. The main objective of this ASU is to provide financial
statement users with more decision-useful information about the
expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each
reporting date. The standard is effective for interim and annual
reporting periods beginning after December 15, 2019. Early adoption
is permitted for interim and annual reporting periods beginning
after December 15, 2018. The Company is currently assessing the
impact that ASU 2016-13 will have on its consolidated financial
statements but does not anticipate there to be a material
impact.
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. Lessees are required to use a modified
retrospective transition approach 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. In July 2018, the FASB
issued ASU 2018-10,
“Codification
Improvements to Topic 842, Leases,”
to clarify how to apply certain aspects of
the new lease standard. In July 2018, the FASB also issued ASU
2018-11,
“Leases (Topic 842):
Targeted Improvements,”
to give reporting entities another option
for transition. The additional option for transition allows an
entity to apply the new lease standard at the adoption date and
recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. In March 2019, the
FASB issued ASU 2019-01,
“Leases (Topic 842):
Codification Improvements,”
which clarified that reporting entities are exempt
from the interim period transition disclosure requirements in
paragraph 250-10-50-3 of the guidance when adopting ASC 842.The new
standards are effective for fiscal years beginning after
December 15, 2018, including interim periods within those
fiscal years. The Company is currently evaluating the impact of its
pending adoption of this standard on its financial statements. As
of March 31, 2019, the Company has future operating lease payments
of approximately $166,000 that are being evaluated. The Company is
gathering and evaluating all key lease data elements to meet the
requirements of the new guidance.
Note 2 – Revenue Recognition
We
generate revenues from the sale of products. Revenue is recognized
when control of products is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those products.
The
Company determines revenue recognition through the following
five-step model:
(i)
identification of
the promised goods or services in the contract;
(ii)
determination of
whether the promised goods or services are performance obligations,
including whether they are distinct in the context of the
contract;
(iii)
measurement of the
transaction price, including the constraint on variable
consideration;
(iv)
allocation of the
transaction price to the performance obligations; and
(v)
recognition of
revenue when, or as the Company satisfies each performance
obligation.
Product
Revenues, Net
The
Company sells its products principally to a limited number of
wholesale distributors and pharmacies in the United States, which
account for the largest portion of our total revenue. International
sales are made primarily to specialty distributors, as well as
hospitals, laboratories, and clinics, some of which are government
owned or supported (collectively, its “Customers”). The
Company’s Customers in the United States subsequently resell
the products to patients and pharmacies. In accordance with ASC
606, the Company recognizes net revenues from product sales when
the Customer obtains control of the Company’s product, which
typically occurs upon delivery to the Customer. The Company’s
payment terms are between 30 to 60 days in the United States and
consistent with prevailing practice in international
markets.
Revenue
from product sales is recorded at the net sales price, or
“transaction price,” which includes estimates of
variable consideration that result from coupons, discounts,
chargebacks and distributor fees, processing fees, as well as
allowances for returns and government rebates. Provisions are
established for the estimates of variable consideration based on
the amounts earned or to be claimed on the related sale. Provision
balances related to estimated amounts payable to direct customers
are netted against accounts receivable from such customers.
Balances related to indirect customers are included in accounts
payable and accrued liabilities. Where appropriate, the Company
utilizes the expected value method to determine the appropriate
amount for estimates of variable consideration based on factors
such as the Company’s historical experience and specific
known market events and trends. We constrain our estimates by
giving consideration to factors that could otherwise lead to a
probable reversal of revenue.
Revenues
by Geographic location
The
following table reflects our product revenues by geographic
location as determined by the billing address of our
customers:
|
|
Three Months Ended
March 31,
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
U.S
|
$
2,024,000
|
$
483,000
|
$
5,025,000
|
$
2,380,000
|
|
Rest-of-the-World
|
348,000
|
124,000
|
574,000
|
355,000
|
|
Total net
revenue
|
$
2,372,000
|
$
607,000
|
$
5,599,000
|
$
2,735,000
|
License
Revenue, Net
The
license revenue of $6,000 and $0 recognized in the three and nine
months ended March 31, 2019 and 2018, respectively, represent the
payment received from the Company’s ZolpiMist sublicensing
agreement with SUDA Pharmaceuticals. In connection with the
ZolpiMist License Agreement, Aytu assumed the SUDA Pharmaceuticals
sublicensing agreement for ZolpiMist outside of the United States
and Canada. This licensing agreement calls for SUDA to lead
commercial development and sublicensing efforts for ZolpiMist in
major territories outside the United States and Canada, including
Europe, Asia, and Latin America. SUDA has already entered into
sublicensing agreements in key markets with large, multi-national
pharmaceutical companies and has agreements in place in China,
Chile, Brazil, and throughout Southeast Asia.
Note 3 - Inventories
Inventories
consist of raw materials, work in process and finished goods and
are recorded at the lower of cost or net realizable value, with
cost determined on a first-in, first-out basis. Aytu periodically
reviews the composition of its inventories to identify obsolete,
slow-moving or otherwise unsaleable items. If unsaleable items are
observed and there are no alternate uses for the inventory, Aytu
will record a write-down to net realizable value in the period that
the impairment is first recognized. We currently have a reserve of
$10,000 for slow moving inventory as of March 31, 2019 and $0 at
June 30, 2018.
Inventory
balances consist of the following:
|
|
|
|
|
Finished goods,
net
|
$
984,000
|
$
1,100,000
|
|
Raw
materials
|
546,000
|
239,000
|
|
Total
inventory
|
$
1,530,000
|
$
1,339,000
|
Note 4 – Fixed Assets
Fixed
assets are recorded at cost and, once placed in service, are
depreciated on a straight-line basis over the estimated useful
lives. Leasehold improvements are amortized over the shorter of the
estimated economic life or related lease term. Fixed assets consist
of the following:
|
|
Estimated
Useful Lives in
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
equipment
|
2 - 5
|
$
83,000
|
$
213,000
|
|
Leasehold
improvements
|
3
|
112,000
|
112,000
|
|
Office equipment,
furniture and other
|
2 - 5
|
315,000
|
344,000
|
|
Lab
equipment
|
3 - 5
|
90,000
|
90,000
|
|
Less accumulated
depreciation and amortization
|
|
(381,000
)
|
(540,000
)
|
|
|
|
|
|
|
Fixed
assets, net
|
|
$
219,000
|
$
219,000
|
Depreciation
and amortization expense was as follows:
|
|
Three
Months Ended March 31,
|
Nine
Months Ended March 31,
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
$
15,000
|
$
91,000
|
$
59,000
|
$
252,000
|
Note 5 – Patents
The
cost of the oxidation-reduction potential (“ORP”)
technology related patents for the RedoxSYS and MiOXSYS Systems was
$380,000 when they were acquired and are being amortized over the
remaining U.S. patent life of approximately 15 years as of the
date, which expires in March 2028. Patents consist of the
following:
|
|
|
|
|
|
|
|
|
Patents
|
$
380,000
|
$
380,000
|
|
Less accumulated
amortization
|
(153,000
)
|
(134,000
)
|
|
|
|
|
|
Patents,
net
|
$
227,000
|
$
246,000
|
The
amortization expense was as follows:
|
|
Three Months Ended
March 31,
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
Amortization
expense
|
$
6,000
|
$
6,000
|
$
19,000
|
$
19,000
|
Note 6 – Fair Value Considerations
Aytu’s
financial instruments include cash and cash equivalents, restricted
cash, accounts receivable, accounts payable, accrued liabilities,
debt, warrant derivative liability, and contingent consideration.
The carrying amounts of financial instruments, including cash and
cash equivalents, restricted cash, accounts receivable, accounts
payable, and accrued liabilities approximate their fair value due
to their short maturities. The carrying amount of debt approximates
its fair value. The fair value of the warrant derivative liability
was valued using the lattice valuation methodology. The fair value
of acquisition-related contingent consideration is based on a Monte
Carlo methodology using estimated discounted future cash flows and
periodic assessments of the probability of occurrence of potential
future events. The valuation policies are determined by the Chief
Financial Officer, and the Company’s Board of Directors is
informed of any policy change.
Authoritative
guidance defines fair value as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the measurement
date. The guidance establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset
or liability developed based on market data obtained from sources
independent of 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 liabilities that
were accounted for at fair value on a recurring basis as of March
31, 2019 and June 30, 2018, by level within the fair value
hierarchy.
|
|
Fair Value
Measurements Using
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Warrant derivative
liability
|
$
-
|
$
-
|
$
29,000
|
$
29,000
|
|
Contingent
consideration
|
$
-
|
$
-
|
$
13,443,000
|
$
13,443,000
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Warrant derivative
liability
|
$
-
|
$
-
|
$
94,000
|
$
94,000
|
|
Contingent
consideration
|
$
-
|
$
-
|
$
4,694,000
|
$
4,694,000
|
The
warrant derivative liability was valued using the lattice valuation
methodology because that model embodies the relevant assumptions
that address the features underlying these instruments. The
warrants related to the warrant derivative liability are not
actively traded and are, therefore, classified as Level 3
liabilities. 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 issuance and as of March 31, 2019:
|
|
|
|
|
Warrants:
|
|
|
|
Volatility
|
163.2
%
|
188.0
%
|
|
Equivalent
term (years)
|
3.38
|
5.00
|
|
Exercise
premium
|
5
%
|
20
%
|
|
Risk-free
interest rate
|
2.21
%
|
1.83
%
|
|
Dividend
yield
|
0.00
%
|
0.00
%
|
The
following table sets forth a reconciliation of changes in the fair
value of the derivative financial liabilities classified as Level 3
in the fair value hierarchy:
|
|
|
|
Balance as of
June 30, 2018
|
$
94,000
|
|
Change in
fair value included in earnings
|
(65,000
)
|
|
Balance as of
March 31, 2019
|
$
29,000
|
We
classify our contingent consideration liability in connection with
the acquisition and licensing of Natesto, ZolpiMist and Tuzistra XR
within Level 3 as factors used to develop the estimated fair value
are unobservable inputs that are not supported by market activity.
We estimate the fair value of our contingent consideration
liability based on projected payment dates, discount rates,
probabilities of payment, and projected revenue. Projected
contingent payment amounts are discounted back to the current
period using a discounted cash flow methodology.
The
following table sets forth a summary of changes in the contingent
consideration for the period ended March 31, 2019:
|
|
|
|
Balance as of
June 30, 2018
|
$
4,694,000
|
|
Increase
due to purchase of assets
|
8,833,000
|
|
Increase
due to accretion
|
354,000
|
|
Decrease
due to contractual payments
|
(438,000
)
|
|
Balance as of
March 31, 2019
|
$
13,443,000
|
Note 7 – Commitments and Contingencies
Commitments
and contingencies are described below and summarized by the
following as of March 31, 2019:
|
|
|
|
|
|
|
|
|
|
Prescription
database
|
$
2,029,000
|
$
474,000
|
$
509,000
|
$
534,000
|
$
512,000
|
$
-
|
$
-
|
|
Milestone
payments
|
5,500,000
|
-
|
-
|
-
|
3,000,000
|
2,500,000
|
-
|
|
Office
lease
|
521,000
|
30,000
|
109,000
|
113,000
|
118,000
|
121,000
|
30,000
|
|
|
$
8,050,000
|
$
504,000
|
$
618,000
|
$
647,000
|
$
3,630,000
|
$
2,621,000
|
$
30,000
|
Prescription Database
In May
2016, Aytu entered into an agreement with a vendor that will
provide Aytu with prescription information. Aytu agreed to pay
approximately $1.9 million over three years for access to the
database of prescriptions written for Natesto. Aggregate payments
have been broken down into quarterly payments. In December 2018,
Aytu executed an amendment to the contract that added Tuzistra XR
and extended the contract through May of 2022. The amendment added
$1.7 million to the contract value and as of March 31, 2019, Aytu
has $2.0 million of payments remaining.
Milestone Payments
In
connection with our intangible assets, Aytu has certain milestone
payments, totaling $5.5 million, that will be payable in the future
based on sales performance.
Office Lease
In June
2018, the Company entered into a 12-month operating lease,
beginning on August 1, 2018, for office space in Raleigh, North
Carolina. This lease has base rent of $1,100 a month, with total
rent over the term of the lease of approximately $13,200. In
September 2015, the Company entered into a 37-month operating lease
in Englewood, Colorado. This lease had an initial base rent of
$9,000 a month with a total base rent over the term of the lease of
approximately $318,000. In October 2017, the Company signed an
amendment to the 37-month operating lease in Englewood, Colorado,
extending the lease for an additional 24 months beginning October
1, 2018. The base rent remained $9,000 per month. In April 2019,
the Company extended the lease for an additional 36 months
beginning October1, 2020 (see Note 12). Rent expense for the
respective periods was as follows:
|
|
Three
Months Ended March 31,
|
Nine
Months Ended March 31,
|
|
|
|
|
|
|
|
Rent
expense
|
$
31,000
|
$
35,000
|
$
94,000
|
$
105,000
|
Note 8 – Debt–Related Party
On
November 29, 2018, Aytu issued a $5.0 million promissory note (the
“Note”) to Armistice Capital Master Fund Ltd.
(“Armistice”). The Note was collateralized by the
future revenue stream from the products licensed to the Company
under the Tris License Agreement between the Company and TRIS. The
Note carried an annual interest rate of 8% and had a three-year
term with principal and interest payable at maturity. The Company
had the right, in its sole discretion, to repay the Note without
penalty at any time after December 29, 2018. For the quarter ended
March 31, 2019, the Company did not exercised the early repayment
option. Subsequent to March 31, 2019, the Company exchanged the
Note for a combination of common stock, preferred stock and
warrants (see Note 12).
Interest
expense for the Note for the three months ended March 31, 2019 and
2018 was $99,000 and $0, respectively. Interest expense for the
Note for the nine months ended March 31, 2019 and 2018 was $135,000
and $0, respectively.
Note 9 – Common stock
At
March 31, 2019 and June 30, 2018, Aytu had 12,848,499 and 1,794,762
shares of common stock outstanding, respectively, and 2,335,665 and
0 shares of preferred stock outstanding, respectively. 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,
of which 500 are designated Series A Convertible preferred stock,
161 are designated as Series B Convertible preferred stock,
8,342,993 are designated as Series C Convertible preferred stock,
and 400,000 are designated as Series D Convertible preferred stock.
Included in the common stock outstanding are 2,719,312 shares of
restricted stock issued to executives, directors, employees and
consultants.
On
October 9, 2018, we completed an underwritten public offering for,
total gross proceeds of $15.2 million which includes the full
exercise of the underwriters’ over-allotment option to
purchase additional shares and warrants, before deducting
underwriting discounts, commissions and other offering expenses
payable by the Company.
The
securities offered by the Company consisted of: (i) an aggregate of
457,007 shares of its common stock; (ii) an aggregate of 8,342,993
shares of its Series C Convertible preferred stock convertible into
an aggregate of 8,342,993 shares of common stock at a conversion
price of $1.50 per share; and (iii) warrants to purchase an
aggregate of 8,800,000 shares of common stock at an exercise price
of $1.50 per share. The securities were issued at a public offering
purchase price of $1.50 per fixed unit consisting of: (a) one share
of common stock and one warrant; or (b) one share of Series C
preferred stock and one warrant. The common stock issued had a
relative fair value of $533,000 in the aggregate and a fair value
of $594,000 in the aggregate. The Series C preferred stock issued
had a relative fair value of $9.7 million in the aggregate and a
fair value of $10.8 million in the aggregate. The warrants are
exercisable upon issuance and will expire five years from the date
of issuance. The warrants have a relative fair value of $1.6
million in the aggregate, a fair value of $1.8 million in the
aggregate, and generated gross proceeds of $88,000. The conversion
price of the Series C preferred stock in the offering as well as
the exercise price of the warrants are fixed and do not contain any
variable pricing features, or any price based anti-dilution
features.
In
connection with this offering, the underwriters exercised their
over-allotment option in full, purchasing an additional 1,320,000
shares of common stock and 1,320,000 warrants. The common stock
issued had a relative fair value of $1.5 million and a fair value
of $1.7 million. The warrants have the same terms as the Warrants
sold in the registered offering. These warrants have a relative
fair value of $238,000, a fair value of $265,000, and gross
proceeds of $13,000, which was the purchase price per the
underwriting agreement.
In
October 2018, Aytu issued 9,000 shares of common stock to a former
employee.
On
November 2, 2018, the Company issued 400,000 shares of Series D
Convertible preferred stock as consideration for a purchased
asset.
In
March 2019,
warrants issued from the
October registered offering to purchase an aggregate of 172,231
shares of common stock were exercised for aggregate gross proceeds
to our Company of approximately $259,000.
As of
March 31, 2019, investors holding shares of Series C preferred
stock exercised their right to convert 6,407,328 shares of Series C
preferred stock into 6,407,328 shares of common stock. As of March
31, 2019, Aytu has 1,935,665 shares of Series C preferred stock
outstanding.
Note 10 – Equity Instruments
Share-based Compensation Plans
On
June 1, 2015, Aytu’s stockholders approved the Aytu
BioScience 2015 Stock Option and Incentive Plan (the “2015
Plan”), which, as amended in July 2017, provides for the
award of stock options, stock appreciation rights, restricted stock
and other equity awards for up to an aggregate of 3.0 million
shares of common stock. The shares of common stock underlying any
awards that are forfeited, canceled, reacquired by Aytu prior to
vesting, satisfied without any issuance of stock, expire or are
otherwise terminated (other than by exercise) under the 2015 Plan
will be added back to the shares of common stock available for
issuance under the 2015 Plan. As of March 31, 2019, we have 205,562
shares available for grant under the 2015 Plan.
Pursuant
to the 2015 Plan, 3.0 million shares of the Company’s common
stock, are reserved for issuance. The fair value of options granted
has been 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, the
risk-free interest rate, volatility, expected dividend yield and
the expected option life. Changes to the assumptions could cause
significant adjustments to valuation. Aytu estimates the expected
term of granted options based on the average of the vesting term
and the contractual term of the options. The risk-free interest
rate is based on the U.S. Treasury yield in effect at the time of
the grant for treasury securities of similar maturity. There
were no issuances during the three months ended March 31, 2019,
therefore, no assumptions are used for this quarter.
Stock
option activity is as follows:
|
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life in
Years
|
|
Outstanding June
30, 2018
|
1,798
|
$
325.97
|
6.95
|
|
Granted
|
-
|
$
-
|
|
|
Exercised
|
-
|
$
-
|
|
|
Forfeited/Cancelled
|
(132
)
|
$
328.00
|
|
|
Outstanding March
31, 2019
|
1,666
|
$
325.81
|
6.49
|
|
Exercisable at
March 31, 2019
|
1,514
|
$
325.59
|
6.43
|
As
of March 31, 2019, there was $28,000 of total
unrecognized share-based compensation expense related to non-vested
stock options. The Company expects to recognize this expense over a
weighted-average period of 0.43 years.
During
the quarter ended December 31, 2018, Aytu issued 75,000
performance-based stock options out of the 2015 Plan to a
consultant. These options vest based on meeting certain market
criteria with an exercise price of $1.00. Market options that
require specific events before they begin to vest are valued at
grant date. The fair value of the options granted has been
calculated using a Monte Carlo simulation. Significant assumptions
at issuance in valuing the options were as follows:
|
Expected
volatility
|
164%
|
|
Risk
free interest rate
|
2.99%
|
|
Expected
term (years)
|
5.0
|
|
Dividend
yield
|
0%
|
As
of March 31, 2019, there was $44,000 of total
unrecognized share-based compensation expense related to these
non-vested stock options. The Company expects to recognize this
expense over a weighted-average period of
0.63 years.
Restricted
stock issued from the 2015 Plan is as follows:
|
|
|
Weighted
Average Grant Date Fair Value
|
Weighted
Average Remaining Contractual Life in
Years
|
|
Unvested at June
30, 2018
|
37,200
|
$
39.80
|
9.4
|
|
Vested
|
(850
)
|
$
40.40
|
|
|
Granted
|
2,772,022
|
$
1.30
|
|
|
Forfeited
|
(90,600
)
|
$
-
|
|
|
Unvested at March
31, 2019
|
2,717,772
|
$
1.81
|
9.3
|
In
October 2018, Aytu issued 2,707,022 shares of restricted stock to
executives, directors, employees pursuant to the 2015 Plan, which
vest in October 2028. Expense will be recognized over the 10-year
vesting period.
In
January 2019, Aytu modified 168,288 shares of restricted stock for
accelerated vesting and recognized an increase in aggregate stock
compensation expense of $207,000. Also, in January 2019, Aytu
forfeited 57,000 shares of restricted stock.
In
February 2019, Aytu issued 65,000 shares of restricted stock to a
director pursuant to the 2015 Plan, which vest in February
2029.
In
March 2019, Aytu forfeited 33,600 shares of restricted
stock.
Under
the 2015 Plan, there was $4,288,000 of total unrecognized
share-based compensation expense related to the non-vested
restricted stock as of March 31, 2019. The Company expects to
recognize this expense over a weighted-average period of 9.32
years. During the three months ended March 31, 2019, the expense
related to these awards was $313,000. During the nine months ended
March 31, 2019, the expense related to these awards was
$452,000.
Aytu
previously issued 1,540 shares of restricted stock outside the Aytu
2015 Plan, which vest in July 2026. The unrecognized expense
related to these shares was $1,447,000 as of March 31, 2019 and
will be recognized over the 10-year vesting period, of which 7.28
years remain. During the three months ended March 31, 2019, the
expense related to these awards was $49,000. During the nine months
ended March 31, 2019, the expense related to these awards was
$149,000.
Stock-based
compensation expense related to the fair value of stock options and
restricted stock was included in the statements of operations as
selling, general and administrative expenses as set forth in the
table below:
|
|
Three Months
Ended March 31,
|
Nine Months
Ended March 31,
|
|
|
|
|
|
|
|
Selling,
general and administrative:
|
|
|
|
|
|
Stock
options
|
$
15,000
|
$
12,000
|
$
122,000
|
$
288,000
|
|
|
|
|
|
|
|
Restricted
stock
|
362,000
|
55,000
|
601,000
|
159,000
|
|
Total
share-based compensation expense
|
$
377,000
|
$
67,000
|
$
723,000
|
$
447,000
|
Warrants
A
summary of all warrants is as follows:
|
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life in
Years
|
|
Outstanding June
30, 2018
|
1,882,661
|
$
25.94
|
4.61
|
|
|
|
|
|
|
Warrants issued in
connection with the October 2018 offering
|
10,120,000
|
$
1.50
|
|
|
Warrants issued to
underwriters in connection with the October 2018
offering
|
303,600
|
$
1.50
|
|
|
Warrants
exercised
|
(172,331
)
|
$
1.50
|
|
|
Outstanding March
31, 2019
|
12,133,930
|
$
5.29
|
4.42
|
In
connection with our October 2018 registered offering, we issued
warrants to investors and underwriters to purchase an aggregate of
10,423,600 shares of the Company’s common stock at an
exercise price of $1.50 and a term of five years. These warrants
are accounted for under equity treatment. These warrants had a
relative fair value of $1.8 million and a fair value of $2.0
million.
In
March 2019,
warrants issued from the
October registered offering to purchase an aggregate of 172,331
shares of common stock were exercised for aggregate gross proceeds
to our Company of approximately $259,000.
Note 11 – Related Party Transactions
Armistice
In
February 2019, the Company waived its right to disallow Armistice
from holding more than 4.99% of Aytu common stock and agreed to
allow Armistice to hold up to 40% of the outstanding shares of our
common stock. Also, in February 2019, Armistice converted 1.9
million shares of Series C preferred stock into Aytu common stock,
resulting in Armistice holding more than 10% of the Company’s
common stock. The Company also had a promissory note to Armistice
with a face value of $5.0 million (see Note 8), which was
subsequently exchanged for a combination of common stock, preferred
stock and warrants (see Note 12). Therefore, Armistice is now
considered an affiliate of the Company.
Co-Pay Support
In June
2018, the Company entered into a master services agreement with
TrialCard Incorporated (“TCI”), a vendor selected to
support the Company sponsored co-pay program. In supporting the
program, Aytu will prefund certain amounts from which TCI will make
disbursements to qualified patients presenting valid prescriptions
for Natesto, Tuzistra XR and ZolpiMist on behalf of Aytu.
Disbursements will be based upon business rules determined by Aytu.
The Company agreed to pay fees monthly to TCI for account
management, data analytics, implementation, and technology and to
reimburse TCI for certain direct costs incurred by TCI to support
the Company’s program. One of the Aytu directors, Mr.
Donofrio, was an executive officer of TCI but has no direct
interest in the arrangement. As of February 2019, Mr. Donofrio
is no longer employed by TCI.
Note 12 – Subsequent Events
During
April 2019, 691,832 of Aytu Series C Preferred shares outstanding
converted into 691,832 shares of our common stock.
On
April 4, 2019, Aytu entered into a 36-month extension of our
operating lease for the Englewood, Colorado office space. The base
rent will be at $10,000 per month.
On
April 18, 2019, pursuant to the exchange agreement between Aytu and
Armistice, which was approved by the stockholders of the Company on
April 12, 2019, Aytu exchanged the Armistice Note into: (1)
3,120,064 shares of common stock of the Company, (2) 2,751,148
shares of Series E Convertible preferred stock of the Company, and
(3) a Common Stock Purchase Warrant exercisable for 4,403,409
shares of common stock of the Company.
On May
1, 2019, Aytu entered into an Independent Contractor Services
Agreement (the “Agreement”) with Averaden, LLC (the
“Contractor”). Under the terms of the Agreement, the
Contractor agreed to perform certain consulting services with
respect to corporate business development activities for the
Company. In return, the Company has agreed to pay the Contractor
$8,400 per month, which amount shall not exceed $110,000 in
aggregate. The Agreement will terminate on May 15, 2020. Gary
Cantrell, a member of the Board of Directors of the Company, is a
Principal of the Contractor.