UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended: March 31, 2020
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission File No. 001-38247
 
 
AYTU BIOSCIENCE, INC.
(www.aytubio.com)
 
Delaware
 
47-0883144
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
373 Inverness Parkway, Suite 206
Englewood, Colorado 80112
(Address of principal executive offices, including zip code)
 
(720) 437-6580
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
AYTU
 
The NASDAQ Stock Market LLC
 
As of May 1, 2020, there were 120,261,423 shares of Common Stock outstanding.
 

 
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED MARCH 31, 2020
 
INDEX
 
 
 
Page
 
PART I—FINANCIAL INFORMATION
 
 
 
 
 4
 
 
 
 
 4
 
 
 
 
 5
 
 
 
 
 6
 
 
 
 
 8
 
 
 
 
10
 
 
 
40
 
 
 
49
 
 
 
49
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
49
 
 
 
49
 
 
 
53
 
 
 
53
 
 
 
53
 
 
 
53
 
 
 
53
 
 
56
 
 
2
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our anticipated future clinical and regulatory events, future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Forward looking statements are generally written in the future tense and/or are preceded by words such as “may,” “will,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” or similar words, or the negatives of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, without limitation: the planned expanded commercialization of our products and the potential future commercialization of our product candidates, our anticipated future cash position; our plan to acquire additional assets; our anticipated future growth rates; anticipated sales increases; anticipated net revenue increases; amounts of certain future expenses and costs of goods sold; anticipated increases to operating expenses, research and development expenses, and selling, general, and administrative expenses; and future events under our current and potential future collaborations. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.
 
This Quarterly Report on Form 10-Q includes trademarks, such as Aytu, Natesto®, Tuzistra® XR, ZolpiMistTTM, MiOXSYS®, AcipHex® Sprinkle™, Cefaclor for Oral Suspension, Karbinal®, Flexichamber™, Poly-Vi-Flor® and Tri-Vi-Flor™ , and the recently acquired products such as Fluticare®, Diabasens®, Urivarx®, Sensum®, and Vesele®, as well as Beyond Human®, a specialty marketing platform, which are protected under applicable intellectual property laws and we own or have the rights to. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names.  
 
 
 
3
 
 
PART I—FINANCIAL INFORMATION
 
Item 1. Consolidated Financial Statements
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 
 
 
 March 31,
 
 
 June 30,
 
 
 
2020
 
 
2019
 
 
 
 (Unaudited)
 
 
 
 
  Assets
 Current assets
 
 
 
 
 
 
 Cash and cash equivalents
 $62,264,676 
 $11,044,227 
 Restricted cash
  251,407 
  250,000 
 Accounts receivable, net
  10,203,423 
  1,740,787 
 Inventory, net
  3,854,685 
  1,440,069 
 Prepaid expenses and other
  4,830,881 
  957,781 
 Other current assets
  1,849,598 
   
 Total current assets
  83,254,670 
  15,432,864 
 
    
    
 
    
    
 Fixed assets, net
  288,415 
  203,733 
 Right-of-use asset
  675,980 
   
 Licensed assets, net
  17,155,632 
  18,861,983 
 Patents and tradenames, net
  11,724,626 
  220,611 
 Product technology rights, net
  21,754,166 
   
 Deposits
  38,981 
  2,200 
 Goodwill
  24,061,333 
   
 Total long-term assets
  75,699,133 
  19,288,527 
 Total assets
 $158,953,803 
 $34,721,391 
 
    
    
 Liabilities
 Current liabilities
    
    
 Accounts payable and other
 $6,956,091 
 $2,133,522 
 Accrued liabilities
  9,830,373 
  1,311,488 
 Accrued compensation
  2,210,288 
  849,498 
 Current lease liability
  289,238 
   
 Current contingent consideration
  947,449 
  1,078,068 
 Current portion of fixed payment arrangements
  17,395,219 
   
 Current portion of CVR liabilities
  786,564 
   
 Notes payable, net
  3,617,680 
   
 Total current liabilities
  42,032,902 
  5,372,576 
 
    
    
 Long-term contingent consideration, net of current portion
  17,806,573 
  22,247,796 
 Long-term lease liability, net of current portion
  804,393 
   
 Long-term fixed payment arrangements, net of current portion
  8,162,494 
   
 Long-term CVR liabilities, net of current portion
  4,432,254 
   
 Warrant derivative liability
  11,371 
  13,201 
 Total liabilities
  73,249,987 
  27,633,573 
 
    
    
 Commitments and contingencies (Note 12)
    
    
 
    
    
 Stockholders' equity
    
    
 Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 9,805,845 and 3,594,981, respectively as of March 31, 2020 (unaudited) and June 30, 2019.
  981 
  359 
 Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 100,610,380 and 17,538,071, respectively as of March 31, 2020 (unaudited) and June 30, 2019.
  10,061 
  1,754 
 Additional paid-in capital
  202,557,856 
  113,475,205 
 Accumulated deficit
  (116,865,082)
  (106,389,500)
 Total stockholders' equity
  85,703,816 
  7,087,818 
 
    
    
 Total liabilities and stockholders' equity
 $158,953,803 
  34,721,391 
    
See the accompanying Notes to the Consolidated Financial Statement
 
4
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
 
 
 
 Three Months Ended March 31,
 
 
 Nine Months Ended March 31,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Product revenue, net
 $8,156,173 
 $2,372,016 
 $12,771,235 
 $5,598,836 
 License revenue
    
  5,776 
    
  5,776 
 Total revenue
 $8,156,173 
 $2,377,792 
 $12,771,235 
 $5,604,612 
 
    
    
    
    
 Operating expenses
    
    
    
    
     Cost of sales
  1,998,659 
  616,853 
  2,980,425 
  1,552,950 
 Research and development
  78,502 
  108,901 
  223,197 
  413,808 
 Selling, general and administrative
  9,501,469 
  5,368,762 
  21,164,072 
  13,991,516 
 Selling, general and administrative - related party
    
  6,797 
    
  351,843 
 Amortization of intangible assets
  1,370,986 
  575,117 
  2,899,553 
  1,561,137 
 Total operating expenses
  12,949,616 
  6,676,430 
  27,267,247 
  17,871,254 
 
    
    
    
    
 Loss from operations
  (4,793,443)
  (4,298,638)
  (14,496,012)
  (12,266,642)
 
    
    
    
    
 Other (expense) income
    
    
    
    
 Other (expense), net
  (538,862)
  (194,703)
  (1,181,206)
  (398,833)
 Gain from derecognition of contingent consideration
    
    
  5,199,806 
    
 Gain from warrant derivative liability
    
  (2,521)
  1,830 
  65,468 
 Total other (expense) income
  (538,862)
  (197,224)
  4,020,430 
  (333,365)
 
    
    
    
    
 Net loss
 $(5,332,305)
 $(4,495,862)
 $(10,475,582)
 $(12,600,007)
 
    
    
    
    
 Weighted average number of common shares outstanding
  35,275,296 
  9,061,023 
  22,616,962 
  5,785,669 
 
    
    
    
    
 Basic and diluted net loss per common share
 $(0.15)
 $(0.50)
 $(0.46)
 $(2.18)
 
See the accompanying Notes to the Consolidated Financial Statements
 
 
5
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
(audited unless indicated otherwise)
 
 
 
 Preferred Stock
 
 
 Common Stock
 
 
 
 
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
Additional
paid-in capital
 
 
Accumulated Deficit
 
 
  Total Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE - June 30, 2019
  3,594,981 
 $359 
  17,538,071 
 $1,754 
 $113,475,205 
 $(106,389,500)
 $7,087,818 
 
    
    
    
    
    
    
    
Stock-based compensation (unaudited)
   
   
   
   
  165,171 
   
  165,171 
Preferred stock converted in common stock (unaudited)
  (443,833)
  (44)
  443,833 
  44 
   
   
   
Net loss (unaudited)
   
   
   
   
   
  (4,929,030)
  (4,929,030)
 
    
    
    
    
    
    
    
BALANCE - September 30, 2019 (unaudited)
  3,151,148 
 $315 
  17,981,904 
 $1,798 
 $113,640,376 
 $(111,318,530)
 $2,323,959 
 
    
    
    
    
    
    
    
Stock-based compensation (unaudited)
   
   
   
   
  162,264 
   
  162,264 
Issuance of Series F preferred stock from October 2019 private placement financing, net of $741,650 issuance costs (unaudited)
  10,000 
  1 
   
   
  5,249,483 
   
  5,249,484 
Warrants issued in connection with the private placement (unaudited)
   
   
   
   
  4,008,866 
   
  4,008,866 
Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics (unaudited)
  9,805,845 
  981 
   
   
  5,558,933 
    
  5,559,914 
Preferred stock converted in common stock (unaudited)
  (2,751,148)
  (275)
  2,751,148 
  275 
   
   
   
 
    
    
    
    
    
    
    
Net loss (unaudited)
   
   
   
   
   
  (214,247)
  (214,247)
 
    
    
    
    
    
    
    
BALANCE - December 31, 2019 (unaudited)
  10,215,845 
 $1,022 
  20,733,052 
 $2,073 
 $128,619,922 
 $(111,532,777)
 $17,090,240 
 
    
    
    
    
    
    
    
Stock-based compensation (unaudited)
   
   
  1,067,912 
  107 
  263,284 
   
  263,391 
Cashless warrant exercise (unaudited)
   
   
  7,915,770 
  792 
  (792)
   
   
Issuance of Series H preferred stock and common stock due to acquisition of Innovus (unaudited)
  1,997,902 
  200 
  3,809,712 
  381 
  4,405,603 
   
  4,406,184 
Preferred stock converted in common stock (unaudited)
  (2,407,902)
  (241)
  12,397,902 
  1,240 
  91,881 
   
  92,880 
Warrant exercises (unaudited)
   
   
  17,082,994 
  1,708 
  22,987,958 
   
  22,989,666 
Issuance of common stock, net of $4,523,884 in cash issuance costs (unaudited)
   
   
  36,365,274 
  3,637 
  33,275,119 
   
  33,278,756 
Warrants issued in connection with the registered offering (unaudited)
   
   
   
   
  9,723,161 
   
  9,723,161 
Warrants issued in connection with the registered offering to the placement agents, non-cash issuance costs (unaudited)
   
   
   
   
  1,458,973 
   
  1,458,973 
CVR payouts (unaudited)
   
   
  1,237,764 
  123 
  1,732,747 
   
  1,732,870 
Net loss (unaudited)
   
   
   
   
   
  (5,332,305)
  (5,332,305)
 
    
    
    
    
    
    
    
BALANCE - March 31, 2020 (unaudited)
  9,805,845 
 $981 
  100,610,380 
 $10,061 
 $202,557,856 
 $(116,865,082)
 $85,703,816 
 
   See the accompanying Notes to the Consolidated Financial Statements
 
 
6
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity, Cont’d
(audited unless indicated otherwise)
 
 
 
 Preferred Stock
 
 
 Common Stock
 
 
 
 
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
Additional
paid-in capital
 
 
Accumulated Deficit
 
 
Total Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE - June 30, 2018
   
 $ 
  1,794,762 
 $179 
 $92,681,918 
  (79,257,592)
  13,424,505 
 
    
    
    
    
    
    
    
Stock-based compensation (unaudited)
   
   
   
   
  152,114 
   
  152,114 
Adjustment for rounding of shares due to stock split (unaudited)
   
   
  6,649 
  1 
  (1)
   
   
Net loss (unaudited)
   
   
   
   
   
  (3,446,483)
  (3,446,483)
 
    
    
    
    
    
    
    
BALANCE - September 30, 2018 (unaudited)
   
 $ 
  1,801,411 
 $180 
 $92,834,031 
 $(82,704,075)
 $10,130,136 
 
    
    
    
    
    
    
    
Stock-based compensation (unaudited)
   
   
  2,707,022 
  271 
  193,791 
   
  194,062 
Common stock issued to employee (unaudited)
   
   
  9,000 
  1 
  11,689 
   
  11,690 
Issuance of preferred and common stock, net of $1,479,963 in cash issuance costs (unaudited)
  8,342,993 
  834 
  1,777,007 
  178 
  11,810,373 
   
  11,811,385 
Warrants issued in connection with the registered offering (unaudited)
   
   
   
   
  1,827,628 
   
  1,827,628 
Warrants issued in connection with the registered offering to the placement agents, non-cash issuance costs (unaudited)
   
   
   
   
  61,024 
   
  61,024 
Preferred stocks issued in connection with the purchase of assets (unaudited)
  400,000 
  40 
   
   
  519,560 
   
  519,600 
Preferred stocks converted into common stock (unaudited)
  (4,210,329)
  (421)
  4,210,329 
  421 
   
   
   
Net loss (unaudited)
   
   
   
   
   
  (4,657,662)
  (4,657,662)
 
    
    
    
    
    
    
    
BALANCE - December 31, 2018 (unaudited)
  4,532,664 
 $453 
  10,504,769 
 $1,051 
 $107,258,096 
 $(87,361,737)
 $19,897,863 
 
    
    
    
    
    
    
    
Stock-based compensation (unaudited)
   
   
  (25,600)
  (2)
  376,668 
   
  376,666 
Preferred stocks converted into common stock (unaudited)
  (2,196,999)
  (219)
  2,196,999 
  219 
   
   
   
Warrant exercises (unaudited)
   
   
  172,331 
  17 
  258,495 
   
  258,512 
Net loss (unaudited)
   
   
   
   
   
  (4,495,862)
  (4,495,862)
 
    
    
    
    
    
    
    
BALANCE - March 31, 2019 (unaudited)
  2,335,665 
 $234 
  12,848,499 
 $1,287 
 $107,893,259 
 $(91,857,599)
 $16,037,179 
 
   See the accompanying Notes to the Consolidated Financial Statements
 
 
7
 
 
 AYTU BIOSCIENCE, INC. AND SUBSIDIARIES 
Consolidated Statements of Cash Flows
(unaudited) 
  
 
 
 Nine Months Ended March 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Operating Activities
 
 
 
 
 
 
Net loss
 $(10,475,582)
 $(12,600,007)
Adjustments to reconcile net loss to cash used in operating activities:
    
    
Depreciation, amortization and accretion
  3,780,310 
  1,974,213 
Stock-based compensation expense
  590,826 
  722,842 
Derecognition of contingent consideration
  (5,199,806)
   
Gain on the change in fair value of CVR payout
  (267,130)
   
Issuance of common stock to employee
   
  11,690 
Derivative income
  (1,830)
  (65,468)
Changes in operating assets and liabilities:
    
    
(Increase) in accounts receivable
  (8,183,810)
  (797,576)
(Increase) in inventory
  (345,452)
  (191,110)
(Increase) in prepaid expenses and other
  (1,611,681)
  (364,831)
(Increase) in other current assets
  (358,022)
   
(Decrease) in accounts payable and other
  (4,912,245)
  (191,331)
Increase in accrued liabilities
  6,761,319 
  758,370 
Increase in accrued compensation
  271,560 
  250,912 
(Decrease) in fixed payment arrangements
  (657,655)
   
Increase in interest payable
   
  134,795 
Net cash used in operating activities
  (20,609,198)
  (10,357,501)
 
    
    
Investing Activities
    
    
Deposit
   
  2,888 
Purchases of fixed assets
   
  (59,848)
Contingent consideration payment
  (151,648)
  (408,917)
Cash received from acquisition
  390,916 
   
Purchase of assets
  (5,850,000)
  (500,000)
Net cash used in investing activities
  (5,610,732)
  (965,877)
 
    
    
Financing Activities
    
    
Issuance of preferred, common stock and warrants
  58,999,666 
  15,180,000 
Issuance costs related to preferred, common stock and warrants
  (5,280,426)
  (1,479,963)
Warrant exercises
  22,989,666 
  258,512 
Preferred stock converted in common stock
  92,880 
   
Issuance of note payable
  640,000 
  5,000,000 
Net cash provided by financing activities
  77,441,786 
  18,958,549 
 
    
    
Net change in cash, restricted cash and cash equivalents
  51,221,856 
  7,635,171 
Cash, restricted cash and cash equivalents at beginning of period
  11,294,227 
  7,112,527 
Cash, restricted cash and cash equivalents at end of period
 $62,516,083 
 $14,747,698 
 
See the accompanying Notes to the Consolidated Financial Statements
 
 
8
 
 
 AYTU BIOSCIENCE, INC. AND SUBSIDIARIES 
Consolidated Statements of Cash Flows, cont’d
(unaudited) 

Supplemental disclosures of cash and non-cash investing and financing transactions
 
 
 
 
 
 
Cash paid for interest
 $392,641 
 $ 
Fair value of right-to-use asset and related lease liability
  354,929 
   
Issuance of Series G preferred stock due to acquisition of the Cerecor portfolio of pediatrics therapeutics
  5,559,914 
   
Issuance of Series H preferred stock due to acquisition of the Innovus
  12,805,263 
   
Inventory payment included in accounts payable
  460,416 
   
Contingent consideration included in accounts payable
  27,571 
  29,348 
Fixed payment arrangements included in accounts payable
  501,766 
   
Exchange of convertible preferred stock into common stock
  1,559 
   
Return deductions received by Cerecor
  2,000,000 
   
Issuance of restricted stock
  107 
     
Cashless warrant exercises
  792 
     
Fair value of warrants issued to investors and underwriters
   
  1,888,652 
Issuance of preferred stock related to purchase of asset
   
  519,600 
Contingent consideration related to purchase of asset
 $ 
 $8,833,219 
 
See the accompanying Notes to the Consolidated Financial Statements
 
 
9
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements
(unaudited)
 
1. Nature of Business, Financial Condition, Basis of Presentation
 
Nature of Business. Aytu BioScience, Inc. (“Aytu”, the “Company” or “we”) was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated in the state of Delaware on June 8, 2015. Aytu is a specialty pharmaceutical company focused on global commercialization of novel products addressing significant medical needs such as hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, male infertility, various pediatric conditions and the Company’s plans to expand opportunistically into other therapeutic areas.
 
 The Company is a commercial-stage specialty pharmaceutical company focused on commercializing novel products that address significant healthcare needs in both prescription and consumer health categories. Through the Company’s heritage prescription business, the Company currently markets a portfolio of prescription products addressing large primary care and pediatric markets. The primary care portfolio includes (i) Natesto®, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra® XR, the only FDA-approved 12-hour codeine-based antitussive syrup.
 
The Company’s recently acquired prescription pediatric portfolio includes (i) AcipHex® Sprinkle, a granule formulation of rabeprazole sodium, a commonly prescribed proton pump inhibitor; (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; (iii) Karbinal® ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions; and (iv) Poly-Vi-Flor® and Tri-Vi-Flor®, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various for infants and children with fluoride deficiency.
 
On February 14, 2020, the Company acquired Innovus Pharmaceuticals  Inc. (“Innovus”), a specialty pharmaceutical company commercializing, licensing and developing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes over thirty-five consumer health products competing in large healthcare categories including diabetes, men's health, sexual wellness and respiratory health (the “Consumer Health Portfolio”). The Consumer Health Portfolio is commercialized through direct-to-consumer marketing channels utilizing Innovus’s proprietary Beyond Human® marketing and sales platform.
 
The Company recently acquired exclusive U.S. distribution rights to two COVID-19 IgG/IgM rapid tests. These coronavirus tests are solid phase immunochromatographic assays used in the rapid, qualitative and differential detection of IgG and IgM antibodies to the 2019 Novel Coronavirus in human whole blood, serum or plasma. These rapid tests have been validated in multi-center clinical trials. Most recently, the Company signed a licensing agreement with Cedars-Sinai Medical Center for worldwide rights to various potential uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in pre-clinical studies, and the Company plans to advance this technology and assess its safety and efficacy in human studies.
 
The Company’s strategy is to continue building its portfolio of revenue-generating products, leveraging its focused commercial team and expertise to build leading brands within large therapeutic markets. 
 
Financial Condition. As of March 31, 2020, the Company had approximately $62.5 million of cash, cash equivalents and restricted cash. The Company’s operations have historically consumed cash and are expected to continue to require cash, but at a declining rate.
 
Revenues for the three-months ended March 31, 2020 increased approximately 243% compared to the three-months ended March 31, 2019, and revenues increased 100% and 14% for each of the years ended June 30, 2019 and 2018, respectively. Revenue is expected to continue to increase long-term, allowing the Company to rely less on our existing cash and cash equivalents, and proceeds from financing transactions. Cash used in operations during the nine-months ended March 31, 2020 was $20.6 million compared to $10.4 million for the nine-months ended March 31, 2019. The increase is due primarily to the Company’s acquisition and integration of the Pediatric Portfolio and merger with Innovus, which consumed additional cash resources, coupled with an increase in working capital.
 
On November 1, 2019, the Company closed an asset acquisition with Cerecor, Inc. (“Cerecor”) whereby the Company acquired certain of Cerecor’s portfolio of pediatric therapeutics (the “Pediatric Portfolio”) for $4.5 million in cash, approximately 9.8 million shares of Series G Convertible Preferred Stock, the assumption of Cerecor’s financial and royalty obligations, which includes not more than $3.5 million of Medicaid rebates and products returns as they come due, and other assumed liabilities associated with the Pediatric Portfolio (see Note 2). As of March 31, 2020, the Company has paid down approximately $3.2 million of those assumed liabilities.
 
In addition, the Company assumed obligations in connection with the Pediatric Portfolio acquisition due to an investor including fixed and variable payments. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was paid. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026.
 
 
10
 
 
On February 14, 2020 the Company completed a merger with Innovus after approval by the stockholders of both companies on February 13, 2020 (the “Merger”). Upon closing the Merger, the Company merged with and into Innovus and all outstanding Innovus common stock was exchanged for approximately 3.8 million shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 million shares of Series H Convertible Preferred stock of Aytu and retired. The remaining Innovus warrants outstanding at the time of the Merger continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus will continue as a wholly owned subsidiary of the Company.
 
In addition, as part of the Merger, the Company assumed approximately $3.1 million of notes payable, $0.8 million in lease liabilities, and other assumed liabilities associated with Innovus. Of the $3.1 million of notes payable, approximately $1.8 million was converted into approximately 1.5 million shares of the Company’s common stock on April 27, 2020.
 
During the three months ended March 31, 2020, the Company completed three separate equity offerings, on March 10, 2020, March 12, 2020 and March 19, 2020 (the “March Offerings”), in which the Company issued a combination of common stock and warrants. The following summarizes the March Offerings, including total capital raised from both the issuance of common stock and subsequent warrant exercises.
 
On March 19, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 12,539,197 shares of the Company’s common stock (the “Common Stock”) at a purchase price per share of $1.595 and (ii) warrants to purchase up to 12,539,197 shares of Common Stock (the “March 19, 2020 Warrants”) at an exercise price of $1.47 per share, for aggregate gross proceeds to the Company of $20.0 million, before deducting placement agent fees and other offering expenses payable by the Company. The March 19, 2020 Warrants are exercisable immediately upon issuance and have a term of one year from the issuance date. In addition, the Company issued warrants with an exercise price of $1.9938 per share to purchase up to 815,047 shares of common stock (the “March 19, 2020 Placement Agent Warrants”) as a portion of the fees paid to the placement agent. The March 19, 2020 Placement Agent Warrants have a term of five year from the issuance date.
 
A total of 1.2 million March 19, 2020 Warrants have been exercised through May 5, 2020, for total proceeds of $1.7 million, of which 0.7 million March 19, 2020 Warrants were exercised through March 31, 2020, for total proceeds of $1.1 million.
 
On March 12, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 16,000,000 shares of the Company’s common stock at a purchase price per share of $1.25 and (ii) warrants to purchase up to 16,000,000 shares of Common Stock (the “March 12, 2020 Warrants”) at an exercise price of $1.25 per share, for aggregate gross proceeds to the Company of $20.0 million, before deducting placement agent fees and other offering expenses payable by the Company (the “Registered Offering”). The March 12, 2020 Warrants are exercisable immediately upon issuance and have a term of one year from the issuance date. In addition, the Company issued warrants with an exercise price of $1.5625 per share to purchase up to 1,040,000 shares of common stock (the “March 12, 2020 Placement Agent Warrants”) as a portion of the fees paid to the placement agent. The March 12, 2020 Placement Agent Warrants have a term of five year from the issuance date.
 
A total of 13 million March 12, 2020 Warrants have been exercised through May 5, 2020, for total proceeds of approximately $16.3 million, of which approximately 10.5 million March 12, 2020 Warrants were exercised through March 31, 2020, for total proceeds of $13.1 million.
 
On March 10, 2020, Company entered into a securities purchase agreement with an institutional investor, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 4,450,000 shares of the Company’s common stock (the “Common Stock”) at a purchase price per share of $1.15 and (ii) pre-funded warrants to purchase up to 3,376,087 shares of Common Stock (the “Pre-Funded Warrants”) at an effective price of $1.15 per share ($1.1499 paid to the Company upon the closing of the offering and $0.0001 to be paid upon exercise of such Pre-Funded Warrants), for aggregate gross proceeds to the Company of approximately $9.0 million, before deducting placement agent fees and other offering expenses payable by the Company (the “Registered Offering”). The Pre-Funded Warrants were immediately exercised upon close. In addition, the Company issued warrants with an exercise price of $1.4375 per share to purchase up to 508,696 shares of common stock (the “March 10, 2020 Placement Agent Warrants”). The March 10, 2020 Placement Agent Warrants have a term of five year from the issuance date.
 
 
11
 
 
Since March 10, 2020, a total of 6.0 million shares of the Company’s October 2018 $1.50 Warrants (the “October 18 $1.50 Warrants”) were exercised, resulting in proceeds of approximately $9.0 million.
 
In total, the Company has raised net proceeds of approximately $71.5 million from the March Offerings and related warrant exercises, as well as exercises of the October 2018 $1.50 Warrants. The net proceeds received by the Company from the March Offerings and related warrant exercise will be used for general corporate purposes, including working capital.
 
On October 11, 2019, the Company entered into Securities Purchase Agreements (the “Purchase Agreement”) with two institutional investors (the “Investors”) providing for the issuance and sale by the Company (the “October 2019 Offering”) of $10.0 million of, (i) 10,000 shares of the Company’s Series F Convertible Preferred Stock (the “Preferred Stock”) which are convertible into 10,000,000 shares of common stock (the “Conversion Shares”) for a stated value of $1,000 per unit and (ii) 10,000,000 warrants (the “October 2019 Warrants”) which are exercisable for shares of common stock (the “Warrant Shares”), which expire January 10, 2025,. The closing of the October 2019 offering occurred on October 16, 2019. The Warrants had an exercise price equal to $1.25 and contain a cashless exercise provision. This provision was dependent on (i) performance of the Company’s stock price between October 11, 2019 and the date of exercise of all, or a portion of the Warrants, and (ii) subject to shareholder approval of the October 2019 Offering, which was approved January 24, 2020.
 
As of March 31, 2020, all of the Series F Convertible Preferred Stock were converted into 10 million shares of the Company’s common stock, and 5.0 million of the October 2019 Warrants were exercised using the cashless exercise provision to acquire 5.0 million shares of the Company’s common stock. In April of 2020, the remaining 5 million October 2019 Warrants were exercised using the cashless exercise provision into 5.0 million shares of the Company’s common stock.
 
The net proceeds that the Company received from the October 2019 Offering were approximately $9.3 million.  The net proceeds received by the Company from the October 2019 Offerings have been used for general corporate purposes, including working capital. 
  
As of the date of this Report, the Company expects its commercial costs for its current operation to increase modestly as the Company integrates the acquisition of the Pediatrics Portfolio and Innovus and continues to focus on revenue growth through increasing product sales. The Company’s total asset position totaling approximately $168.5 million plus the proceeds expected from ongoing product sales will be used to fund operations. The Company may continue to access the capital markets to fund operations when needed, and to the extent it is required. The timing and amount of capital that may be raised is dependent on market conditions and the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms favorable to the Company and its stockholders, or at all. However, the Company has been successful in accessing the capital markets in the past and is confident in its ability to access the capital markets again, if needed. Since the Company has sufficient cash and cash equivalents on-hand as of March 31, 2020 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) the Company reports that there does not exist indication of substantial doubt about its ability to continue as a going concern.
 
As of the date of this report, while the Company has adequate capital resources to complete its near-term operating and transaction objectives, there is no guarantee that such capital resources will be sufficient until such time the Company reaches profitability. However, the Company has been successful in accessing the capital markets in the past, and the Company is confident in its ability to access the capital markets again, if needed.
 
If the Company is unable to raise adequate capital in the future when it is required, the Company can adjust its operating plans to reduce the magnitude of the capital need under its existing operating plan. Some of the adjustments that could be made include delays of and reductions to commercial programs, reductions in headcount, narrowing the scope of the Company’s commercial plans, or reductions to its research and development programs. Without sufficient operating capital, the Company could be required to relinquish rights to products or renegotiate to maintain such rights on less favorable terms than it would otherwise choose. This may lead to impairment or other charges, which could materially affect the Company’s balance sheet and operating results.
  
Nasdaq Listing Compliance. The Company’s common stock is listed on The Nasdaq Capital Market (the “Nasdaq”). In order to maintain compliance with Nasdaq listing standards, the Company must, amongst other requirements, maintain a stockholders’ equity balance of at least $2.5 million pursuant to Nasdaq Listing Rule 5550(b). In that regard, on September 30, 2019, the Company’s stockholders’ equity totaled approximately $2.3 million, thereby potentially resulting in a stockholders’ equity deficiency upon the filing of the September 30, 2019 Form 10-Q. However, subsequent to September 30, 2019, the Company completed (i) the Offering with the Investors, raising approximately $9.3 million, net in equity financing (see Note 1), and (ii) the “Asset Purchase Agreement” in which the Company issued approximately 9.8 million shares of Series G Convertible Preferred Stock worth approximately $5.6 million, resulting in an increase in stockholders’ equity of approximately $14.8 million in the aggregate. Accordingly, as of the filing of this Form 10-Q for the three and nine months ended March 31, 2020, the Company’s stockholders’ equity balance exceeds the minimum $2.5 million threshold and, therefore, the Company believes it is currently in compliance with all applicable Nasdaq Listing Requirements.
 
 
12
 
 
On March 24, 2020, the Company received a letter from the Nasdaq notifying the Company that the Nasdaq has determined that the Company’s stock price has traded above at least $1.00 for at least 10 consecutive business days since the previously announced February 19, 2020 notice, and therefore, the Company has regained compliance with Nasdaq Listing Rule 5550(a)(2), commonly referred to as the Bid Price Rule.
 
  Basis of Presentation. The unaudited consolidated financial statements contained in this report represent the financial statements of Aytu and its wholly-owned subsidiaries, Aytu Women’s Health, LLC, Innovus Pharmaceuticals, Inc., and its wholly-owned subsidiaries and Aytu Therapeutics, LLC. The unaudited consolidated financial statements should be read in conjunction with Aytu’s Annual Report on Form 10-K for the year ended June 30, 2019, which included all disclosures required by generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Aytu and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended March 31, 2020 are not necessarily indicative of expected operating results for the full year. The information presented throughout this report, as of and for the three- and nine- month periods ended March 31, 2020, and 2019, is unaudited.
  
Adoption of New Accounting Pronouncements
 
Leases (“ASU 2016-02”). In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02 – Topic 842 Leases. ASU 2016-02 requires that most leases be recognized on the financial statements, specifically the recognition of right-to-use assets and related lease liabilities, and enhanced disclosures about leasing arrangements. The objective is to provide improved transparency and comparability among organizations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard requires using the modified retrospective transition method and apply ASU 2016-02 either at (i) latter of the earliest comparative period presented in the financial statements or commencement date of the lease, or (ii) the beginning of the period of adoption. The Company has elected to apply the standard at the beginning period of adoption, July 1, 2019 which resulted in no cumulative adjustment to retained earnings.
 
The Company has elected to apply the short-term scope exception for leases with terms of 12 months or less at the inception of the lease and will continue to recognize rent expense on a straight-line basis. As a result of the adoption, on July 1, 2019, the Company recognized a lease liability of approximately $0.4 million, which represented the present value of the remaining minimum lease payments using an estimated incremental borrowing rate of 8%. As of July 1, 2019, the Company recognized a right-to-use asset of approximately $0.4 million. Lease expense did not change materially as a result of the adoption of ASU 2016-02.
 
In addition, in conjunction with the Innovus Merger, the Company recognized a lease liability of approximately $0.8 million relating to Innovus’ corporate offices and related warehouse as part of the purchase price allocation (see Note 2).
 
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) (“ASU 2017-11”). In July 2017, the FASB issued ASU No. 2017-11 — Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). Part I to ASU 2017-11 eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. In addition, entities will have to make new disclosures for financial instruments with down round features and other terms that change conversion or exercise prices. Part I to ASU 2017-11 is effective for fiscal years beginning after December 31, 2018. The Company adopted this standard update as a result of the issuance of the Series F Preferred stock as a result of the October 2019 Offering. There were no “down-round” features present in the financial instruments issued in conjunction with the March 2020 Offerings.
 
Recently Accounting Pronouncements
 
Fair Value Measurements (“ASU 2018-03”). In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in the standard apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure requirements in ASC 820, Fair Value Measurement. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
 
 
13
 
 
The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently assessing the impact that ASU 2018-13 will have on its financial statements, with the impact mostly related to certain assets acquired or liabilities assumed that comprise Level 3 inputs.
 
Financial Instruments – Credit Losses (“ASU 2016-13”). In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard was effective for interim and annual reporting periods beginning after December 15, 2019. However, in October 2019, the FASB approved deferral of the adoption date for smaller reporting companies for fiscal periods beginning after December 15, 2022. Accordingly, the Company’s fiscal year of adoption will be the fiscal year ended June 30, 2024. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018, but the Company did not elect to early adopt. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements, but no conclusion has been reached.   
  
This Quarterly Report on Form 10-Q does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
 
2. Acquisitions
 
The Pediatric Portfolio
 
On October 10, 2019, the Company entered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to purchase and acquire Cerecor’s Pediatric Portfolio, which closed on November 1, 2019. The Pediatric Portfolio consists of six prescription products consisting of (i) AcipHex® Sprinkle™, (ii) Cefaclor for Oral Suspension, (iii) Karbinal® ER, (iv) Flexichamber™, (v) Poly-Vi-Flor® and Tri-Vi-Flor™. Total consideration transferred to Cerecor consisted of $4.5 million cash and approximately 9.8 million shares of Series G Convertible Preferred Stock. The Company also assumed certain of Cerecor’s financial and royalty obligations, and not more than $3.5 million of Medicaid rebates and products returns, of which $3.2 million has been incurred. The Company also retained the majority of Cerecor’s workforce focused on sales, commercial contracts and customer relationships.
 
In addition, the Company assumed Cerecor obligations due to an investor that include fixed and variable payments aggregating to $25.6 million. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was paid to the investor. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026.
 
Further, certain of the products in the Product Portfolio require royalty payments ranging from 12% to 15% of net revenue. One of the products in the Product Portfolio requires the Company to generate minimum annual sales sufficient to represent annual royalties of approximately $1.8 million, in the event the minimum sales volume is not satisfied.
 
While no equity was acquired by the Company, the transaction was accounted for as a business combination under the acquisition method of accounting pursuant to Topic 805. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified product portfolio that is expected to provide revenue and cost synergies. Transaction costs of $0.0 and $0.7 million were included as general and administrative expense in the consolidated statements of operations for the three and nine months ended March 31, 2020.
 
 
14
 
 
The following table summarized the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. These estimates are preliminary, pending final evaluation of certain assets, and therefore, are subject to revisions that may result in adjustments to the values presented below:
 
 
 
 As of
 
 
 
November 1, 2019
 
Consideration
 
 
 
Cash and cash equivalents
 $4,500,000 
Fair value of Series G Convertible Preferred Stock
    
Total shares issued
  9,805,845 
Estimated fair value per share of Aytu common stock
 $0.567 
        Estimated fair value of equity consideration transferred
 $5,559,914 
 
    
Total consideration transferred
 $10,059,914 
 
    
Recognized amounts of identifiable assets acquired and liabilities assumed
    
Inventory, net
 $459,123 
Prepaid assets
  1,743,555 
Other current assets
  2,548,187 
Intangible assets – product technology rights
  22,700,000 
Accrued product program liabilities
  (6,320,853)
Assumed fixed payment obligations
  (26,457,162)
Total identifiable net assets
 $(5,327,150)
 
    
Goodwill
 $15,387,064 
 
The fair values of intangible assets, including product technology rights were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 10).
 
 
 
As of
November 1, 2019
 
 
 
 
 
Acquired product technology rights
 $22,700,000 
 
The fair value of the net identifiable asset acquired was determined to be $22.7 million, which is being amortized over ten years. The aggregate amortization expense was $0.6 million and $0, for the three months ended March 31, 2020 and 2019 respectively. The aggregate amortization expense was $0.9 million and $0, for the nine months ended March 31, 2020 and 2019 respectively.
 
 
15
 
 
 Innovus Merger (Consumer Health Portfolio)
 
 On February 14, 2020, the Company completed the merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon the effectiveness of the Merger, the Company merged with and into Innovus and all outstanding Innovus common stock was exchanged for approximately 3.8 million shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 million shares of Series H Convertible Preferred stock of the Company and retired. The remaining Innovus warrants outstanding at the time of the Merger continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus will continue as a subsidiary of the Company.
 
On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 1.2 million shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24 million revenue milestone for the calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million.
 
The following table summarized the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. Goodwill recorded in connection with the acquisition represents, among other things, future economic benefits expect to be recognized from the Company's expansion of products and customer base.As this was a tax-exempt transaction, goodwill is not tax deductible in future periods. These estimates are preliminary, pending final evaluation of certain assets acquired and liabilities assumed, and therefore, are subject to revisions that may result in adjustments to the values presented below. The estimates of the fair value of the assets acquired assumed at the date of the Acquisition are subject to adjustment during the measurement period (up to one year from the Acquisition date). While the Company believes that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired, it evaluates any necessary information prior to finalization of the fair value. During the measurement period, the Company will adjust assets if new information is obtained about facts and circumstances that existed as of the Acquisition date that, if known, would have resulted in the revised estimated values of those assets as of that date. The impact of all changes that do not qualify as measurement period adjustments are included in current period earnings.
 
 
16
 
  
 
 
 As of
 
 
 
February 14, 2020
 
Consideration
 
 
 
Fair value of Aytu Common Stock
 
 
 
Total shares issued at close
  3,810,393 
Estimated fair value per share of Aytu common stock
 $0.756 
Estimated fair value of equity consideration transferred
 $2,880,581 
 
    
Fair value of Series H Convertible Preferred Stock
    
Total shares issued
  1,997,736 
Estimated fair value per share of Aytu common stock
 $0.756 
        Estimated fair value of equity consideration transferred
 $1,510,288 
 
    
Fair value of former Innovus warrants
 $15,315 
Fair value of Contingent Value Rights
 $7,049,079 
Forgiveness of Note Payable owed to the Company
 $1,350,000 
 
    
Total consideration transferred
 $12,805,263 
 
    
 
Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
 
Cash and cash equivalents
  390,916 
Accounts receivables, net
 $278,826 
Inventory, net
  1,149,625 
Prepaid expenses and other current assets
  1,736,796 
Other long-term assets
  36,781 
Right-to-use assets
  328,410 
Property, plant and equipment
  190,393 
Trademarks and patents
  11,744,000 
Accounts payable and accrued other expenses
  (6,983,969)
Other current liabilities
  (446,995)
Notes payable
  (3,056,361)
Lease liability
  (754,822)
Preacquisition contingent consideration
  (182,606)
Total identifiable net assets
  4,430,994 
 
    
Goodwill
 $8,374,269 
 
    
 
The fair values of intangible assets, including product distribution rights were determined using variations of the income approach, specifically the relief-from-royalties method. It also includes customer lists using an income approach utilizing a discounted cash flow model. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 10).
 
 
17
 
 
 
 
As of
February 14, 2020
 
 
 
 
 
Acquired product distribution rights
 $11,354,000 
Acquired customer lists
  390,000 
Total intangible assets
 $11,744,000 
 
The fair value of the net identifiable assets acquired was determined to be $11.7 million, which is being amortized over a range between 1.5 to 10 years. The aggregate amortization expense was $0.2 million and $0, for the three and nine months ended March 31, 2020 and 2019 respectively.
 
Pro Forma Impact due to Business Combinations
 
The following supplemental unaudited proforma financial information presents the Company’s results as if the following acquisitions had occurred on July 1, 2018:
 
Acquisition of the Pediatric Portfolio, effective November 1, 2019;
Merger with Innovus effective February 14, 2020.
 
 
 
Three Months Ended March 31,
 
 
Nine Months Ended March 31,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
 Unaudited
(aa) (bb)
 
 
Pro forma Unaudited
 
 
Pro forma Unaudited
(cc)
 
 
Pro forma Unaudited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues, net
 $10,331,629 
 $10,575,866 
 $34,276,368 
 $36,916,501 
Net income (loss)
  (5,850,703)
  (8,740,850)
  (18,197,902)
  (17,205,490)
Net income / (loss) per share (dd)
 $(0.17)
 $(0.39)
 $(0.80)
 $(0.76)
 
 (aa)
For the three months ended March 31, 2020, Pediatric Portfolio acquisition occurred prior to the three months ended March 31, 2020, and accordingly, the results of the Pediatric Portfolio are fully consolidated into the Company’s results for the three months ended March 31, 2020.
 
 
(bb)
Due to the absence of discrete financial information for Innovus, covering the period from February 1, 2020 through February 13, 2020, the Company did not include the impact of that stub-period for the pro forma results for the three and nine months ended March 31, 2020.
 
 
(cc)
Due to a lack of financial information covering the period from October 1, 2019 through November 1, 2019, the Company was not able to provide pro forma adjusted financial statements for the nine months ended March 31, 2020 without making estimated extrapolations that the Company did not believe would be material or useful to users of the above pro forma information.
 
 
(dd)
Pro forma net loss per share calculations excluded the impact of the issuance of the (i) Series G Convertible Preferred Stock and the, (ii) Series H Convertible Preferred Stock under the assumption those shares would continue to remain non-participatory during the periods reported above.
 
3. Revenue Recognition
 
The Company sells its prescription products related products from both the (i) Pediatric Portfolio and its (ii) Lifestyle Portfolio (Natesto, Tuzistra and ZolpiMist) principally to a limited number of wholesale distributors and pharmacies in the United States, which account for the largest portion of our total prescription products revenue. International sales are made primarily to specialty distributors, as well as to 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 pharmacies and patients. Revenue from product sales is recorded at the established 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. 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.
 
 
18
 
 
The Company generates revenues from its Consumer Health Portfolio rom product sales and the licensing of the rights to market and commercialize our products. The Company recognizes revenue when it satisfies a performance obligation in a contract by transferring control over a product to a customer when product is shipped. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales.
 
In addition, the Company’s Consumer Health Portfolio enters into exclusive distributor and license agreements that are within the scope of ASC Topic 606. The license agreements normally generate three separate components of revenue: (1) an initial nonrefundable payment due on signing or when certain specific conditions are met; (2) royalties that are earned on an ongoing basis as sales are made or a pre-agreed transfer price; and (3) sales-based milestone payments that are earned when cumulative sales reach certain levels. Revenue from the initial nonrefundable payments or licensing fees are recognized when all required conditions are met. If the consideration for the initial license fee is for the right to sell the licensed product in the respective territory with no other required conditions to be met, such type of nonrefundable license fee arrangement for the right to sell the licensed product in the territory is recognized ratably over the term of the license agreement. For arrangements with licenses that include sales-based royalties, including sales-based milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. The achievement of the sales-based milestone underlying the payment to be received predominantly relates to the licensee’s performance of future commercial activities.
 
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,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
U.S.
 $7,273,000 
 $2,024,000 
 $11,582,000 
 $5,025,000 
International
  883,000 
  348,000 
  1,189,000 
  574,000 
Total net revenue
 $8,156,000 
 $2,372,000 
 $12,771,000 
 $5,599,000 
 
As of March 31, 2020, approximately 40% of outstanding trade accounts receivables, net were comprised of a single counter-party, for which the Company and the counter-party have an arrangement in which initially, the counterparty was collecting the Company’s customer payments on its behalf for certain products acquired as part of the Pediatric Portfolio acquisition, and upon a final transition, the Company is now collecting all amounts relating to the Pediatric Portfolio, including on behalf of the counter-party, for products still retained by the counter-party.
 
4. Product Licenses and Acquisitions
 
The Company licensed three of its existing product offerings from third parties: (i) Natesto, (ii) ZolpiMist, and (iii) Tuzistra XR. Each of these license agreements are subject to terms and conditions specific to each agreement. The Company acquired an additional six pharmaceutical products upon the closing of the Asset Purchase Agreement with Cerecor. The Company recognized an intangible asset of approximately $22.7 million relating the Product technology rights acquired from the Pediatric Portfolio and an intangible asset of approximately $11.7 million relating the patent rights and trademarks acquired from the Innovus Merger.
 
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.
 
On July 29, 2019, the Company and Acerus agreed-to an Amended and Restated License and Supply Agreement (the “Acerus Amendment”), subject to certain conditions being satisfied prior to the Acerus Amendment becoming effective and enforceable. The Acerus Amendment eliminated the previously disclosed revenue-based milestone payments expected to be made to Acerus.The maximum aggregate milestones payable under the original agreement were $37.5 million. Upon the effectiveness of the Acerus Amendment on December 1, 2019, all royalty and milestone liabilities were eliminated. Upon the effectiveness of the Acerus Amendment, Acerus was granted the right to earn commissions on certain filled Natesto prescriptions. Additionally, Acerus assumed certain ongoing sales, marketing and regulatory obligations from the Company. This Acerus Amendment became effective December 1, 2019, resulting in a $5.2 million unrealized gain during the nine months ended March 31, 2020, due to the elimination of the revenue-based product milestones. Accordingly, there is no remaining value attributable to the contingent consideration relating to the Natesto License and Supply Agreement. 
  
 
19
 
 
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, 2020 and 2019 was $0.3 million. The aggregate amortization expense for each of the nine-month periods ended March 31, 2020 and 2019 was $1.0 million.
 
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 $0.4 million to Magna upon execution of the agreement.
 
The ZolpiMist license agreement was valued at $3.2 million and is amortized over the life of the license agreement up to seven years. The amortization expense for each of the three months ended March 31, 2020 and 2019 was $116,000. The aggregate amortization expense for each of the nine-month periods ended March 31, 2020 and 2019 was $348,000.
 
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. As of June 30, 2019, the contingent consideration was revalued at $2.3 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments.
 
The contingent consideration accretion expense for the three months ended March 31, 2020 and 2019 was $59,000 and $64,000, respectively. The contingent consideration accretion expense for each of the nine-month periods ended March 31, 2020 and 2019 was $169,000, and $184,000, respectively. As of March 31, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.
 
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 and another predecessor product owner throughout the license term in accordance with the Tris License Agreement, including certain minimum royalties to TRIS..
 
 
20
 
 
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, 2020 and 2019 was $123,000, respectively. The aggregate amortization expense for each of the nine-month periods ended March 31, 2020 and 2019 was $369,000 and $205,000.
 
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. As of June 30, 2019, the contingent consideration was revalued at $16.0 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments.
 
The contingent consideration accretion expense for the three months ended March 31, 2020 and 2019 was $125,000, and $73,000, respectively. The contingent consideration accretion expense for each of the nine-month periods ended March 31, 2020 and 2019 was $322,000, and $119,000, respectively. As of March 31, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.
   
Asset Purchase Agreement—the Pediatric Portfolio
 
In November 2019, Aytu Therapeutics, LLC., a wholly-owned subsidiary of Aytu, acquired the portfolio of pediatric therapeutic commercial products from Cerecor, Inc (the “Pediatric Portfolio”). This transaction expanded our product portfolio with the addition of six prescription products, (i) AcipHex® Sprinkle™, (ii) Cefaclor for Oral Suspension, (iii) Karbinal® ER, (iv) Flexichamber™, (v) Poly-Vi-Flor® and Tri-Vi-Flor™.
 
Aytu paid $4.5 million in cash, issued approximately 9.8 million shares of Series G Convertible Preferred Stock and assumed certain of Seller’s financial and royalty obligations, and not more than $3.5 million of Medicaid rebates and products returns.
 
In addition, the Company has assumed obligations due to an investor including fixed and variable payments. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was paid. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026. 
 
Supply and Distribution Agreement, As Amended – Karbinal® ER
 
The Company acquired and assumed all rights and obligations pursuant to the Supply and Distribution Agreement, as Amended, with TRIS for the exclusive rights to commercialize Karbinal® ER in the United States (the “TRIS Karbinal Agreement”). The TRIS Karbinal Agreement’s initial term terminates in August of 2033, with an optional initial 20-year extension.
 
The Company owes royalties on sales of Karbinal of 23.5% of net revenues on a quarterly basis. As part of the agreement, the Company has agreed to pay TRIS a product make-whole payment of approximately $1.8 million per year through July 2023, totaling a minimum of $6.6 million (see Note 12).
 
Supply and License Agreement – Poly-Vi-Flor & Tri-Vi-Flor
 
The Company acquired and assumed all rights and obligations pursuant to a Supply and License Agreement and various assignment and release agreements, including a previously agreed to Settlement and License Agreements (the “Poly-Tri Agreements”) for the exclusive rights to commercialize Poly-Vi-Flor and Tri-Vi-Flor in the United States.
 
 
21
 
 
The Company owes royalties to multiple parties totaling approximately 29.0% of net revenues on a quarterly basis. There are no milestones, make-whole payments other otherwise any contingencies related to these agreements.
 
License and Assignment Agreement – AcipHex Sprinkle
 
The Company acquired and assumed all rights and obligations pursuant to the License and Assignment Agreement with Eisai, Inc. for exclusive rights to commercialized AcipHex Sprinkle in the United States (the “Eisai AcipHex Agreement”).
 
The Eisai AcipHex Agreement includes quarterly royalties totaling 15% of net revenues, but offset by amounts paid for certain regulatory costs otherwise the responsibility of Eisai Co., Ltd. In addition, there are certain milestone provisions triggering potential payments of between $3.0 - $5.0 million, for which the Company has preliminarily estimated to have a value of $0.00.
 
License, Supply and Distribution Agreement – Cefaclor
 
The Company acquired and assumed all rights and obligations pursuant to the License, Supply and Distribution Agreement involving multiple counterparties to commercialize Cefaclor in the United States. (the “Cefaclor Agreement”).
 
The Cefaclor Agreement includes quarterly royalties totaling approximately 15% of net products sales. In addition, there are certain milestone provisions triggering potential payments of between $0.5 - $2.5 million, for which the Company has preliminarily estimated to have a value of $0.00.
 
Innovus Merger
 
On February 14, 2020, the Company and Innovus Pharmaceuticals, Inc. (“Innovus”) completed the Merger after successful approval of the Merger by the shareholders of the Company and Innovus at separate special meetings held on February 13, 2020. Upon completion of the Merger, the Company obtained a combination of 18 registered trademarks and/or patent rights including, but not limited to the following:
 
Patented Products
Recalmax –A dietary supplement specially formulated to increase the benefits of Nitric Oxide and act as a vasodilator. Supports improved cognitive function.
Sensum a male moisturizer cream to increase gland sensitivity.
Vessele – A dietary supplement formulated for healthy blood flow.
Zestra - Patented blend of botanical oils and extracts, scientifically formulated to support women's sexual satisfaction.
 
Trademarks
Diabasens – Topical cream forumulated to relieve cutaneous pain associated with conditions such as Postherpetic Neuralgia and Diabetic Neuropathy.
Fluticare – 24-hour nasal allergy relief that helps fight indoor and outdoor allergens causing congestion, sneezing and a runny nose.
Urivarx – a dietary supplement to support bladder tone and function.
Beyond Human Testosterone Booster - A daily dietary supplement that naturally increases testosterone Levels, supporting natural stamina, endurance and strength.
 
 
22
 
 
5. Inventories
 
Inventories consist of raw materials and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Aytu periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory, Aytu will record a write-down to net realizable value in the period that the impairment is first recognized. There was no inventory write-down during the three and nine months ended March 31, 2020 or 2019, respectively.
 
Inventory balances consist of the following:
 
 
 
As of
 
 
As of
 
 
 
March 31,
 
 
June 30,
 
 
 
2020
 
 
2019
 
Raw materials
 $363,000 
 $117,000 
Finished goods
  3,491,000 
  1,323,000 
 
 $3,854,000 
 $1,440,000 
 
6. 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
 
 
As of
 
 
As of
 
 
 
Useful
 
 
March 31,
 
 
June 30,
 
 
 
Lives in years
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
Manufacturing equipment
  2 - 5 
 $389,000 
 $83,000 
Leasehold improvements
  3 
  297,000 
  112,000 
Office equipment, furniture and other
  2 - 5 
  392,000 
  315,000 
Lab equipment
  3 - 5 
  90,000 
  90,000 
Software
  3 - 5 
  339,000 
  - 
Less accumulated depreciation and amortization
    
  (1,219,000)
  (396,000)
 
    
    
    
   Fixed assets, net
    
 $288,000 
 $204,000 
 
Depreciation and amortization expense totaled $24,000 for each of the three-months ended March 31, 2020 and 2019, respectively, and $56,000 and $59,000 for the nine months ended March 31, 2020 and 2019.
 
 
23
 
 
7. Leases, Right-to-Use Assets and Related Liabilities
 
In September 2015, the Company entered into a 37-month operating lease in Englewood, Colorado. In October 2017, the Company signed an amendment to extend the lease for an additional 24 months beginning October 1, 2018. In April 2019, the Company extended the lease for an additional 36 months beginning October 1, 2020. This lease has base rent of approximately $10 thousand a month, with total rent over the term of the lease of approximately $355 thousand.
 
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 approximately $1 thousand a month, with total rent over the term of the lease of approximately $13 thousand.
 
In October 2017, the Company’s subsidiary, Innovus, entered into a commercial lease agreement for 16,705 square feet of office and warehouse space in San Diego, California that commenced on December 1, 2017 and continues until April 30, 2023. The initial monthly base rent was $21,000 with an approximate 3% increase in the base rent amount on an annual basis, as well as, rent abatement for rent due from January 2018 through May 2018. The Company holds an option to extend the lease an additional 5 years at the end of the initial term. On November 18, 2019 (“decision date”), Innovus determined it would no longer utilize the warehouse portion of the lease space, representing approximately 9,729 square feet, and as of December 31, 2019 (“cease use date”) ceased using any such space. In accordance with ASC 842, Leases, the Company assessed the asset value of the separate lease component and amortized such asset from the decision date through the cease use date.
 
As discussed within Note 1, the Company adopted the FASB issued ASU 2016-02, “Leases (Topic 842)” as of July 1, 2019. With the adoption of ASU 2016-02, the Company recorded an operating right-of-use asset and an operating lease liability on its balance sheet associated with its lease of its corporate headquarters. The right-of-use asset represents the Company’s right to use the underlying asset for the lease term and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations are recognized at the later of the commencement date or July 1, 2019; the date of adoption of Topic 842; based on the present value of remaining lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments. Rent expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. The lease liability is classified as current or long-term on the balance sheet.
 
 
 
Total
 
 
2020
 
 
2021
 
 
2022
 
 
2023
 
 
2024
 
 
Thereafter
 
Remaining Office leases
 $1,268,000 
 $93,000 
 $383,000 
 $396,000 
 $356,000 
 $40,000 
   
Less: Discount Adjustment
  (175,000)
    
    
    
    
    
    
Total lease liability
  1,093,000 
    
    
    
    
    
    
 
    
    
    
    
    
    
    
Lease liability - current portion
  289,000 
    
    
    
    
    
    
Long-term lease liability
 $804,000 
    
    
    
    
    
    
 
Rent expense for the three months ended March 31, 2020 and 2019 totaled $61 thousand and $31 thousand, respectively. Rent expense for the nine months ended March 31, 2020 and 2019 totaled $126 thousand and $94 thousand, respectively.
 
 
24
 
 
8. Patents
 
The cost of the oxidation-reduction potential (“ORP”) technology related patents for the 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:
 
 
 
As of
 
 
As of
 
 
 
March 31,
 
 
June 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 Patents - MiOXSYS
 $380,000 
 $380,000 
 Less accumulated amortization
  (178,000)
  (159,000)
    Patents, net
 $202,000 
 $221,000 
 
The amortization expense was $6 thousand for the three months ended March 31, 2020 and 2019, respectively, and $19 thousand for the nine months ended March 31, 2020 and 2019 respectively.
 
On February 14, 2020, upon completion of the Merger with Innovus, the Company recognized the fair value of the rental of the customer lists for $390,000 and will amortize the asset over a useful life of 1.5 years.
 
 The Company recognized the fair value of trademarks, patents or a combination of both for 18 distinct products that the Company markets, distributes and sells for $11,354,000 and will amortize the asset over a useful life of 5 years.
 
 
 
As of
 
 
As of
 
 
 
March 31,
 
 
June 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 Patents & tradenames
 $11,354,000 
 $- 
 Customers contracts
  390,000 
  - 
 Less accumulated amortization
  (221,000)
  - 
   Patents & tradenames, net
 $11,523,000 
 $- 
 
 
25
 
 
9. Accrued liabilities
 
Accrued liabilities consist of the following:
 
 
 
As of
 
 
As of
 
 
 
March 31
 
 
June 30,
 
 
 
2020
 
 
2019
 
Accrued legal settlement
 $205,000 
 $ 
Accrued program liabilities
  1,299,000 
  736,000 
Accrued product-related fees
  1,644,000 
  295,000 
Credit card liabilities
  941,000 
   
Contract liability
  180,000 
  4,000 
Medicaid liabilities
  3,255,000 
  61,000 
Return reserve
  1,671,000 
  98,000 
Sales taxes payable
  172,000 
   
Other accrued liabilities*
  463,000 
  117,000 
Total accrued liabilities
 $9,830,000 
 $1,311,000 
 
* Other accrued liabilities consist of franchise tax, accounting fee, interest payable, merchant services charges, none of which individually represent greater than five percent of total current liabilities. 
 
10. Fair Value Considerations
 
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability, and contingent consideration. The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short maturities, including those acquired or assumed on November 1, 2019 as a result of the acquisition of the Pediatric Portfolio. 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 management, and the Company’s Board of Directors is informed of any policy change.
 
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
 
Level 1:
 Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;
 
 
Level 2:
 Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and
 
 
Level 3:
 Unobservable inputs that are supported by little or no market activity.
 
 
26
 
 
The Company’s assets and liabilities which are measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. Aytu has consistently applied the valuation techniques discussed below in all periods presented.
 
Recurring Fair Value Measurements
 
The following table presents the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of March 31, 2020 and June 30, 2019, by level within the fair value hierarchy.
 
 
 
 
 
 
 Fair Value Measurements at March 31, 2020
 
 
 
 Fair Value at
March 31, 2020
 
 
 Quoted Priced in Active Markets for Identical Assets (Level 1)
 
 
 Significant Other Observable Inputs
(Level 2)
 
 
 Significant Unobservable Inputs
(Level 3)
 
 Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 Warrant derivative liability
 $11,000 
   
   
 $11,000 
 Contingent consideration
  18,754,000 
   
   
  18,754,000 
 CVR liability
  5,219,000 
   
   
  5,219,000 
 
    
    
    
    
 
 $23,984,000 
   
   
 $23,984,000 
 
 
 
 
 
 
 Fair Value Measurements at June 30, 2019
 
 
 
 Fair Value at
June 30, 2019
 
 
 Quoted Priced in Active Markets for Identical Assets (Level 1)
 
 
 Significant Other Observable Inputs
(Level 2)
 
 
 Significant Unobservable Inputs
(Level 3)
 
 Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 Warrant derivative liability
 $13,000 
   
   
 $13,000 
 Contingent consideration
  23,326,000 
   
   
  23,326,000 
 CVR liability
   
   
   
   
 
    
    
    
    
 
 $23,339,000 
   
   
 $23,339,000 
 
 Warrant Derivative Liability. The warrant derivative liability was historically 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. As a result of the immaterial value of the balance as of both June 30, 2019 and March 31, 2020, coupled with continued further declines in the Company’s stock price, the Company elected to waive on adjusting the current fair value of the derivative warrant liability as any adjustment was deemed de minimus.
 
 
 
As of March 31,
2020
 
 
As of June 30,
2019
 
 Warrant Derivative Liability
 
 
 
 
 
 
 Volatility
  163.2%
  163.2%
 Equivalent term (years)
  2.88 
  3.13 
 Risk-free interest rate
  1.71%
  1.71%
 Dividend yield
  0.00%