The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying notes are an internal
part of these consolidated financial statements.
Notes to Consolidated
Financial Statements
(unaudited)
Note 1 - Business, Basis of Presentation, Business Combinations,
Divestitures, License/supply agreement and Merger
Business
Aytu BioScience, Inc. (“Aytu”, the “Company”
or “we”) was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated
in the state of Delaware on June 8, 2015. Aytu is a commercial-stage specialty life sciences company concentrating on developing
and commercializing products with an initial focus on urological diseases and conditions. Aytu is currently focused on addressing
significant medical needs in the areas of hypogonadism, urological cancers, male infertility, and sexual wellness and vitality.
Basis of Presentation
These unaudited consolidated financial statements represent
the financial statements of Aytu and its subsidiary, Aytu Women’s Health. These unaudited consolidated financial statements
should be read in conjunction with Aytu’s Annual Report on Form 10-K for the year ended June 30, 2017, which included all
disclosures required by generally accepted accounting principles (“GAAP”). In the opinion of management, these unaudited
consolidated financial statements contain all adjustments necessary to present fairly the financial position of Aytu for the balance
sheet, the results of operations and cash flows for the interim periods presented. The results of operations for the period ended
September 30, 2017 are not necessarily indicative of expected operating results for the full year. The information presented throughout
this report as of and for the period ended September 30, 2017 and 2016 is unaudited.
Through a multi-step reverse triangular merger, on April 16,
2015, Vyrix Pharmaceuticals, Inc. (’‘Vyrix’’) and Luoxis Diagnostics, Inc. (’‘Luoxis’’)
merged with and into our Company (herein referred to as the Merger) and we abandoned our pre-merger business plans to solely pursue
the specialty healthcare market, including the business of Vyrix and Luoxis. In the Merger, we acquired the RedoxSYS, MiOXSYS
and Zertane products. On June 8, 2015, we reincorporated as a domestic Delaware corporation under Delaware General Corporate Law
and changed our name from Rosewind Corporation to Aytu BioScience, Inc., and effected a reverse stock split in which each common
stockholder received one share of common stock for every 12.174 shares held. On June 30, 2016, Aytu effected another reverse stock
split in which each common stockholder received one share of common stock for every 12 shares held. On August 25, 2017, Aytu effected
a third 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 Splits”). All share and per share amounts in this report have been
adjusted to reflect the effect of these Reverse Stock Splits.
Business Combination—ProstaScint
In May 2015, Aytu entered into and closed on an asset purchase
agreement with Jazz Pharmaceuticals, Inc. (“Jazz Pharmaceuticals”). Pursuant to the agreement, Aytu purchased assets
related to the Jazz Pharmaceuticals’ product known as ProstaScint
®
(capromab pendetide), including certain
intellectual property and contracts, and the product approvals, inventory and work in progress (together, the ’‘ProstaScint
Business’’), and assumed certain of Jazz Pharmaceuticals’ liabilities, including those related to product approvals
and the sale and marketing of ProstaScint. The purchase price consisted of an upfront payment of $1.0 million. We also agreed
to pay an additional $500,000, which was paid after the transfer of the ProstaScint-related product inventory, and $227,000 which
was paid September 30, 2015 (which represents a portion of certain FDA fees). We will also pay 8% on net sales made after October
31, 2017, payable up to a maximum aggregate payment of an additional $2.5 million. The contingent consideration was initially
valued at $664,000 and was revalued as of June 30, 2017 at $54,000 using a discounted cash flow. The total fair value consideration
for the purchase was $2.4 million.
The Company’s allocation of consideration transferred
for ProstaScint as of the purchase date of May 20, 2015 is as follows:
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
727,000
|
|
|
Intangible assets
|
|
|
1,590,000
|
|
|
Goodwill
|
|
|
74,000
|
|
|
Total assets acquired
|
|
$
|
2,391,000
|
|
Included in the intangible assets is developed technology of
$790,000, customer contracts of $720,000 and trade names of $80,000, each of which will be amortized over a ten-year period. At
June 30, 2017, the ProstaScint asset was impaired based upon sales projections that we intend to only sell this product through
mid-fiscal 2019, when this product expires. The value for the intangible assets were adjusted to $54,000 for developed technology,
$7,000 for trade names and $0 for customer contracts. The amortization expense was $12,000 and $40,000 for the three months ended
September 30, 2017 and 2016, respectively.
As of September 30, 2017, the contingent consideration increased
by $6,000 due to accretion.
Business Combination—Primsol
In October 2015, Aytu entered into and closed on an Asset Purchase
Agreement with FSC Laboratories, Inc. (“FSC”). Pursuant to the agreement, Aytu purchased assets related to FSC’s
product known as Primsol® (trimethoprim solution), including certain intellectual property and contracts, inventory, work
in progress and all marketing and sales assets and materials related solely to Primsol (together, the “Primsol Business”),
and assumed certain of FSC’s liabilities, including those related to the sale and marketing of Primsol arising after the
closing.
Aytu paid $500,000 at closing for the purchase of the Primsol
Business, and paid an additional $142,000, of which $102,000 went to inventory and $40,000 towards the Primsol Business, for the
transfer of the Primsol-related product inventory. We also agreed to pay an additional (a) $500,000 which was paid on April 1,
2016, (b) $500,000 which was paid on July 1, 2016, and (c) $250,000 which was paid in November 2016 (together, the “Installment
Payments”).
The Company’s allocation on consideration transferred
for Primsol as of the purchase date of October 5, 2015 was as follows:
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
182,000
|
|
|
Intangible assets
|
|
|
1,470,000
|
|
|
Goodwill
|
|
|
147,000
|
|
|
Total assets acquired
|
|
$
|
1,799,000
|
|
Included in tangible assets was $102,000 of inventory and $80,000
of work-in-process inventory. Included in the intangible assets was developed technology of $520,000, customer contracts of $810,000
and trade names of $140,000, each of which was being amortized over a six-year period. Amortization expense of $0 and $61,000
was recognized in the three months ended September 30, 2017 and 2016, respectively.
Divestiture – Primsol
On March 31, 2017, we entered into and closed on an Asset Purchase
Agreement with Allegis Holdings, LLC (the “Purchaser”). Pursuant to the agreement, we sold to the Purchaser all of
our assets related to our product known as Primsol, including certain intellectual property and contracts, inventory, work in
process and all marketing assets and materials related solely to Primsol (together, the “Primsol Asset”). We retain
any liability associated with the Primsol Asset that occurred prior to the closing. The Purchaser paid us $1,750,000 at the closing
for the Primsol Asset. We recognized a gain of approximately $428,000 on the sale which is included in sales, general and administrative
expense on our statement of operations.
We have evaluated this transaction and concluded that it is
not significant to our business and therefore the results are included in continuing operations, as the criteria to be presented
as discontinued operations was not satisfied.
License and Supply Agreement—Natesto
In April 2016, Aytu entered into and closed a license and supply
agreement to acquire the exclusive U.S. rights to Natesto® (testosterone) nasal gel from Acerus Pharmaceuticals Corporation,
or Acerus, which rights we acquired effective upon the expiration of the former licensee’s rights, which occurred on June
30, 2016. The license’s term runs for the greater of eight years or until the expiry of the latest to expire patent including
claims covering Natesto and until the entry on the market of at least one AB-rated generic product.
Aytu paid Acerus an upfront fee of $2.0 million upon execution
of the agreement. In October 2016, we paid an additional $2.0 million, and in January 2017, Aytu paid the final upfront payment
of $4.0 million. Aytu also purchased, on April 28, 2016, an aggregate of 12,245,411 shares of Acerus common stock for Cdn. $2.5
million (approximately US $2.0 million), with a purchase price per share equal to Cdn. $0.207 or approximately US $0.16 per share.
These shares were a held for sale trading security and were valued at fair market value. Aytu could not dispose of these shares
until after August 29, 2016. During the second half of fiscal 2017, Aytu sold all of these shares. The gross proceeds from the
sales totaled $1.1 million, the cost of the sales totaled $92,000, and we recognized a loss on investment of $1.0 million. In
the quarter ended September 30, 2016, we had an unrealized gain on this investment of $728,000.
In addition to the upfront payments, we must make the following
one-time, non-refundable payments to Acerus within 45 days of the occurrence of the following events (provided that, the maximum
aggregate amount payable under such milestone payments will be $37.5 million):
|
|
●
|
$2.5 million if net sales during any four consecutive
calendar quarter period equal or exceed $25.0 million (the “First Milestone”); the First Milestone payment is
required to be paid even if the threshold is not met in the event that the agreement is terminated for any reason other than
material breach by Acerus, bankruptcy of either party, or termination by Acerus because it believes the amounts payable to
Aytu for agreed upon trial work would no longer make the agreement economically viable for Acerus;
|
|
|
|
|
|
|
●
|
$5.0 million if net sales during any four consecutive calendar quarter
period equal or exceed $50.0 million;
|
|
|
|
|
|
|
●
|
$7.5 million if net sales during any four consecutive calendar quarter
period equal or exceed $75.0 million;
|
|
|
|
|
|
|
●
|
$10.0 million if net sales during any four consecutive calendar
quarter period equal or exceed $100.0 million; and
|
|
|
|
|
|
|
●
|
$12.5 million if net sales during any four consecutive calendar
quarter period equal or exceed $125.0 million.
|
The fair value of the net identifiable asset acquired totaled
$10.5 million which is being amortized over eight years. The amortization expense for each of the three months ended September
30, 2017 and 2016 were $330,000.
The contingent consideration was valued at $3.2 million using
a Monte Carlo simulation, as of June 30, 2016. As of June 30, 2017, the contingent consideration was revalued and increased to
$5.7 million based on increased future estimated sales performance of Natesto using a Monte Carlo simulation. The contingent consideration
accretion expenses for the three months ended September 30, 2017 was $161,000, resulting in the contingent consideration value
of $5.8 million. The contingent consideration accretion expense for the three months ended September 30, 2016 was $46,000.
Merger/Subsidiary
In May 2017, Aytu Women’s Health, LLC., a wholly-owned
subsidiary of Aytu, acquired Nuelle, Inc., or Nuelle, a women’s sexual health company. This transaction expanded our product
portfolio with the addition of the Fiera
®
personal care device for women.
In the Merger, (i) each share of Nuelle common stock and each
option or warrant to purchase Nuelle stock was cancelled, and (ii) each share of Nuelle preferred stock was converted into the
right to receive shares of our common stock. We issued to the Nuelle preferred stockholders an aggregate of 125,000 shares of
our common stock.
In addition, Nuelle preferred stockholders will be entitled
to revenue earn-out payments equal to a designated percentage of net sales on tiers of net sales up to $100.0 million, with an
average rate for all tiers in the mid-single digit range and a maximum aggregate payout of $6.9 million.
Nuelle stockholders additionally will be entitled to milestone
earn-out payments of up to a potential aggregate of $24.0 million, upon the attainment by us of designated net sales thresholds
over any sequential four calendar quarter period.
The first $1.0 million of earn-out payments will be paid in
shares of our common stock and all other earn-out payments will be comprised of 60% cash and 40% shares of our common stock. The
stock portion of any earn-out will be calculated by dividing each Nuelle stockholder’s portion of the earn-out by the average
closing price of our common stock for the 10 trading days prior to the earlier of the date we deliver notice to the Nuelle stockholders
of the earn-out or any public disclosure by us of the earn-out being due and payable.
In the event that we do not make all of the required earn-out
payments to the Nuelle stockholders before May 3, 2022, and we also close a divestiture before May 3, 2022 of any of the products
acquired in the transaction, we will pay the Nuelle stockholders a combination of (i) cash in an amount equal to 10% of the value
of all cash, securities and other property paid to us in the divestiture (cash is to be 60% of the total consideration), and (ii)
shares of our common stock equal to the Nuelle stockholders’ portion of the divestiture payment divided by the average closing
price of our common stock for the 10 trading days prior to the earlier of the closing date of the divestiture or the public disclosure
of the divestiture (shares of common stock are to be 40% of the total consideration).
In addition to the upfront issuance of common stock, we must
make the following one-time payments to the Nuelle stockholders within 90 days of the occurrence of the following events (provided
that, the maximum aggregate amount payable under such milestone payments will be $24.0 million):
|
|
●
|
Upon achieving the first
occurrence of Net Sales of $10.0 million over any sequential four calendar quarter period, Aytu will make a one-time payment
to the Nuelle security holders of an amount equal to $1.0 million;
|
|
|
|
|
|
|
●
|
Upon achieving
the first occurrence of Net Sales of $17.5 million over any sequential four calendar quarter period, Aytu will make a one-time
payment to the Nuelle security holders of an amount equal to $1.8 million;
|
|
|
|
|
|
|
●
|
Upon achieving
the first occurrence of Net Sales of $25.0 million over any sequential four calendar quarter period, Aytu will make a one-time
payment to the Nuelle security holders of an amount equal to $2.5 million;
|
|
|
|
|
|
|
●
|
Upon achieving the first occurrence
of Net Sales of $37.5 million over any sequential four calendar quarter period, Aytu will make a one-time payment to the Nuelle
security holders of an amount equal to $3.8 million;
|
|
|
|
|
|
|
●
|
Upon achieving the first occurrence
of Net Sales of $50.0 million over any sequential four calendar quarter period, Aytu will make a one-time payment to the Nuelle
security holders of an amount equal to $5.0 million; and
|
|
|
|
|
|
|
●
|
Upon achieving the first occurrence
of Net Sales of $100.0 million over any sequential four calendar quarter period, Aytu will make a one-time payment to the
Nuelle security holders of an amount equal to $10.0 million.
|
The Company’s allocation on consideration transferred
for Nuelle as of the purchase date May 5, 2017 is as follows:
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
2,061,000
|
|
|
Intangible assets
|
|
|
1,540,000
|
|
|
Goodwill
|
|
|
238,000
|
|
|
Total assets acquired
|
|
$
|
3,839,000
|
|
Included in the intangible assets is developed technology of
$1.3 million, customer contracts of $80,000 and trade names of $160,000, each of which will be amortized over a nine to twelve-year
period. Amortization expense of $38,000 and $0 was recognized for the three months ended September 30, 2017 and September 30,
2016, respectively.
The contingent consideration was valued at $1.9 million using
a Monte Carlo simulation, as of May 2017. The contingent consideration accretion expense for the three months ended September
30, 2017 and September 30, 2016 was $20,000, and $0 respectively.
During the quarter ended September 30, 2017, we paid the first
earn-out payment to Nuelle shareholders of $12,000 issued in Aytu common stock, which was 25% of the Aytu Women’s Health
net revenue for fiscal 2017.
Additionally, upon the closing of the merger, we assumed liabilities
of $47,000.
Recently Issued Accounting Pronouncements, Not Adopted as
of September 30, 2017
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock
Compensation (Topic 718) Scope of Modification Accounting (ASU 2017-09).” ASU 2017-09 clarifies which changes to the
terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard
is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company
is currently evaluating the impact of its adoption of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles
- Goodwill and Other (Topic 350).” The amendment simplifies the subsequent measurement of goodwill by removing the second
step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount
by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the
total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment
for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective
basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. The Company does not believe that adoption of this amendment will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business
Combinations (Topic 805) Clarifying the Definition of a Business.” The amendment clarifies the definition of a business,
which is fundamental in the determination of whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. This determination is important given the diverging accounting models used for each type of transaction. The guidance
is generally expected to result in fewer transactions qualifying as business combinations. The amendment is effective prospectively
for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods.
Early adoption is permitted. The Company does not expect an immediate impact from this codification however, if Aytu seeks to
purchase additional assets in the future it could have an impact if that purchase is accounted for as a business combination or
an asset purchase.
In 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. This
ASU is effective for private companies and emerging growth companies beginning after December 15, 2020; the ASU allows for early
adoption as of the beginning of an interim or annual reporting period 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. The new standard is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective
transition approach is required for leases for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company
is currently evaluating the impact of its adoption of this standard on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial
Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,”
which requires that all equity investments be measured at fair value with changes in the fair value recognized through net income
(other than those accounted for under the equity method of accounting or those that result in consolidation of the investee).
The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total
change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected
to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments
in this update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities
that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate
the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for
public business entities. The amendment is effective for financial statements issued for fiscal years beginning after December
15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact of this standard on its consolidated
financial statements.
In May 2014, the FASB issued ASU 2014-09, Topic 606, Revenue
from Contracts with Customers (the “New Revenue Standard”). The amendments in this ASU provide a single model for use
in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including
industry-specific revenue guidance. The core principle of the new ASU is that revenue should be recognized to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods and services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers are also required. In August 2015, the FASB issued ASU 2015-14 which deferred the
effective date of the New Revenue Standard. In 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, and ASU 2016-12 to
clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance
obligations, and accounting for licenses of intellectual property. The New Revenue Standard is effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. Early application is not permitted. The amendments
in this update are to be applied on a retrospective basis, either to each prior reporting period presented or by presenting the
cumulative effect of applying the update recognized at the date of initial application. The New Revenue Standard will be effective
for the Company in fiscal 2019. The Company is evaluating the adoption methodology and the impact of this ASU on its consolidated
financial statements.
Note 2 – Fixed Assets
Fixed assets are recorded at cost and, once placed in service,
are depreciated on the straight-line method over the estimated useful lives. Fixed assets consist of the following:
|
|
|
Estimated
Useful Lives in
|
|
|
As of
September 30,
|
|
|
As of
June 30,
|
|
|
|
|
years
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing equipment
|
|
2 - 5
|
|
|
$
|
405,000
|
|
|
$
|
405,000
|
|
|
Leasehold improvements
|
|
3
|
|
|
|
111,000
|
|
|
|
111,000
|
|
|
Office equipment, furniture and other
|
|
2 - 5
|
|
|
|
287,000
|
|
|
|
287,000
|
|
|
Lab equipment
|
|
3 - 5
|
|
|
|
90,000
|
|
|
|
90,000
|
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
(326,000
|
)
|
|
|
(246,000
|
)
|
|
Fixed assets, net
|
|
|
|
|
$
|
567,000
|
|
|
$
|
647,000
|
|
The depreciation expense was as follows:
|
|
|
Three
Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
80,000
|
|
|
$
|
19,000
|
|
Note 3 – Patents
Costs of establishing patents, consisting of legal and filing
fees paid to third parties, are expensed as incurred. The fair value of the Zertane patents, determined by an independent third-party
appraisal, was $500,000. The Zertane patents were acquired in connection with the 2011 acquisition of DMI BioSciences by Ampio,
the former parent company of Aytu, and were being amortized over the remaining U.S. patent lives of approximately 11 years, which
were to expire in March 2022. In fiscal 2016, we redirected our resources towards our commercial-stage products and the Company
determined that this asset had no further value as the Company did not have the resources to complete the necessary clinical trials
and bring it to market before the patents expired. The remaining fair value of the Zertane patents were expensed as of June 30,
2016.
The cost of the Luoxis patents were $380,000 when they were
acquired in connection with the 2013 formation of Luoxis and are being amortized over the remaining U.S. patent lives of approximately
15 years, which expires in March 2028. Patents consist of the following:
|
|
|
As of
September 30,
|
|
|
As of
June 30,
|
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
880,000
|
|
|
$
|
880,000
|
|
|
Less accumulated amortization
|
|
|
(615,000
|
)
|
|
|
(609,000
|
)
|
|
Patents, net
|
|
$
|
265,000
|
|
|
$
|
271,000
|
|
The amortization expense was as follows:
|
|
|
Three
Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
6,000
|
|
|
$
|
7,000
|
|
Note 4 – Revenue Recognition
The $1,076,000 and $698,000 of product revenue recognized during
the three months ended September 30, 2017 and 2016, respectively, represent sales of the Company’s products, Natesto, ProstaScint,
and Primsol, and the MiOXSYS and RedoxSYS Systems, as well as products in the Fiera line.
Note 5 – Fair Value Considerations
Aytu’s financial instruments include cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and accrued liabilities, and warrant derivative liability. The carrying
amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable,
and other current assets and other liabilities approximate their fair value due to their short maturities. The fair value of acquisition-related
contingent consideration is based on estimated discounted future cash flows and assessment of the probability of occurrence of
potential future events. The valuation policies are determined by the Chief Financial Officer and approved by the Company’s
Board of Directors.
Authoritative guidance defines fair value as the price that
would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants
at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data
obtained from sources independent of Aytu. Unobservable inputs are inputs that reflect Aytu’s assumptions of what market
participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The hierarchy is broken down into three levels based on reliability of the inputs as follows:
|
Level 1:
|
Inputs that reflect unadjusted
quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;
|
|
|
|
|
Level 2:
|
Inputs that include quoted prices for similar
assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or
indirectly; and
|
|
|
|
|
Level 3:
|
Unobservable inputs that are supported by
little or no market activity.
|
Aytu’s assets and liabilities which are measured at fair
value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
Aytu’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change
in circumstances caused the transfer. Aytu has consistently applied the valuation techniques discussed below in all periods presented.
The following table presents Aytu’s financial liabilities
that were accounted for at fair value on a recurring basis as of September 30, 2017, by level within the fair value hierarchy.
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,818,000
|
|
|
$
|
3,818,000
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,823,000
|
|
|
$
|
7,823,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,648,000
|
|
|
$
|
7,648,000
|
|
The warrant derivative liability was valued using the lattice
valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments.
The warrants related to the warrant derivative liability are not actively traded and therefore classified as Level 3. Significant
assumptions in valuing the warrant derivative liability, based on estimates of the value of Aytu common stock and various factors
regarding the warrants, were as follows as of issuance and as of September 30, 2017:
|
|
|
September 30, 2017
|
|
|
At Issuance
|
|
|
Warrants:
|
|
|
|
|
|
|
|
Volatility
|
|
|
183.0
|
%
|
|
|
188.0
|
%
|
|
Equivalent term (years)
|
|
|
4.88
|
|
|
|
5.00
|
|
|
Risk-free interest rate
|
|
|
1.90
|
%
|
|
|
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:
|
|
|
Derivative
Instruments
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
|
$
|
-
|
|
|
Warrant issuances
|
|
|
4,118,000
|
|
|
Change in fair value
included in earnings
|
|
|
(300,000
|
)
|
|
Balance as of September 30, 2017
|
|
$
|
3,818,000
|
|
We classify our contingent consideration liability in connection
with the acquisition of ProstaScint, Natesto and Fiera 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 revenues. Projected contingent payment
amounts are discounted back to the current period using a discounted cash flow model. There was no change in the fair value of
the contingent consideration during the period ended September 30, 2017.
The following table sets forth a summary of changes in the contingent consideration
for the period ended September 30, 2017:
|
|
|
Contingent Consideration
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
|
$
|
7,648,000
|
|
|
Increase due to accretion
|
|
|
187,000
|
|
|
Decrease due to contractual payment
|
|
|
(12,000
|
)
|
|
Balance as of September 30, 2017
|
|
$
|
7,823,000
|
|
Note 6 – Commitments and Contingencies
Commitments and contingencies are described below and summarized
by the following table for the designated fiscal years ending June 30, as of September 30, 2017:
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
|
Prescription Database
|
|
$
|
1,220,000
|
|
|
$
|
647,000
|
|
|
$
|
573,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Natesto
|
|
|
15,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,500,000
|
|
|
|
5,000,000
|
|
|
|
-
|
|
|
|
7,500,000
|
|
|
Manufacturing/commercial supply agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Office Lease
|
|
|
138,000
|
|
|
|
108,000
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
16,358,000
|
|
|
$
|
755,000
|
|
|
$
|
603,000
|
|
|
$
|
2,500,000
|
|
|
$
|
5,000,000
|
|
|
$
|
-
|
|
|
$
|
7,500,000
|
|
Prescription Database
In May 2016, Aytu entered into an agreement with a company
that will provide Aytu with prescription database information. Aytu agreed to pay approximately $1.9 million over three years
for access to the database of prescriptions written for Natesto. The payments have been broken down into quarterly payments, the
first of which was made in November 2016, the second payment was made in January 2017, the third payment was made in April 2017,
and the fourth payment was made in August 2017.
Natesto
In April 2016, the Company entered into an agreement with Acerus
whereby Aytu agreed to pay $8.0 million for the exclusive U.S. rights to Natesto (see Note 1). The first payment totaling $2.0
million was paid in April 2016, the second installment payment was paid in October 2016. The final payment totaling $4.0 million
was paid in January 2017. Additionally, Aytu is required to make the first milestone payment of $2.5 million even if the milestone
is not reached, and anticipates making the second milestone payment of $5.0 million along with the third milestone payment of
$7.5 million.
Manufacturing/Commercial Supply Agreements
In October 2015, Aytu entered into a Master Services Agreement
with Biovest International, Inc. (“Biovest”). The agreement provides that Aytu may engage Biovest from time to time
to provide services in accordance with mutually agreed upon project addendums and purchase orders. Aytu expects to use the agreement
from time to time for manufacturing services, including without limitation, the manufacturing, processing, quality control testing,
release or storage of its products for the ProstaScint product. In September 2016, Aytu entered into a Commercial Supply Agreement
with Grand River Aseptic Manufacturing, Inc. (“GRAM”). The agreement provides that Aytu may engage GRAM from time
to time to provide services in accordance with mutually agreed upon work orders. As of September, 30, 2017, both contracts were
still on hold as the Company evaluates its strategic options for the ProstaScint product. If the contracts are not restarted,
Aytu does not anticipate any future liability related to either contract.
Office Lease
In June 2015, Aytu entered into a 37-month operating lease
for a space in Raleigh, North Carolina. This lease has initial base rent of $3,000 a month, with total base rent over the term
of the lease of approximately $112,000. In September 2015, the Company entered into a 37-month operating lease in Englewood, Colorado.
This lease has an initial base rent of $9,000 a month with a total base rent over the term of the lease of approximately $318,000.
The Company recognizes rental expense of the facilities on a straight-line basis over the term of the lease. Differences between
the straight-line net expenses on rent payments are classified as liabilities between current deferred rent and long-term deferred
rent. Rent expense for the respective periods is as follows:
|
|
|
Three Months Ended
September
30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
Note 7 – Common Stock
Capital Stock / Restricted Stock
At September 30, 2017 and June 30, 2017, Aytu had 4,224,840
and 824,831 common shares outstanding, respectively, and 2,250 and 0 preferred shares outstanding, respectively. The Company has
100.0 million shares of common stock authorized with a par value of $0.0001 per share and 50.0 million shares of
preferred stock authorized with a par value of $0.0001 per share, of which 10,000 were designated Series A Convertible Preferred
Stock. Included in the common stock outstanding are 243,000 shares of restricted stock issued to employees and directors.
On August 11, 2017, we entered into a Securities Purchase Agreement
with various investors pursuant to which we agreed to sell Class A and Class B equity units for gross proceeds of approximately
$11.8 million. Class A units consist of one (1) share of common stock and a warrant to purchase one and one-half (1.5) shares
of common stock and were sold at a negotiated price of $3.00 per unit. Class B units consist of one (1) share of our newly created
Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and warrants to purchase one and one-half (1.5)
shares of common stock for each share of common stock into which the Series A Preferred Stock is convertible and were sold at
a negotiated price of $1,000.00 per unit to those purchasers who, together with their affiliates and certain related parties,
would beneficially own more than 9.99% of our outstanding common stock following the offering. These Series A Preferred stock
converts into common shares at $3.00 per common share, which when fully exercised will increase the common shares outstanding
by 750,000 shares. The offering closed on August 15, 2017.
In the offering, we issued an aggregate of 3,196,665 shares
of our common stock, 2,250 shares of Series A Preferred Stock and warrants to purchase up to an aggregate of 6,314,671 shares
of our common stock, which included 394,669 warrants issued to the underwriters as compensation for the transaction.
We incurred certain expenses related to this transaction to
attorneys and underwriters inclusive of a 9% cash fee and warrants to purchase 10% of the aggregate number of shares issued in
the transaction.
In connection with the closing of the financing, we terminated
the Purchase Agreement, dated as of July 27, 2016, by and between us and Lincoln Park Capital Fund, LLC. The termination was effective
on August 16, 2017.
In September 2017, Aytu issued 200,000 shares of restricted
stock to employees, which vest in September 2027. This expense is included in sales, general and administrative. For the three
months ended September 30, 2017, the expense was $2,000. The fair value of the restricted stock was $404,000. The unrecognized
expense of $402,000 will be recognized over the next ten years.
Aytu also has 43,000 shares of restricted stock outstanding and unvested which
were not issued out of the 2015 Stock Option and Inventive Plan. These shares vest in July 2026 and the unrecognized expense of
$2,435,000 will be recognized over the next ten years. During the quarter ended September 30, 2017, the expense related to these
awards was $70,000.
In September 2017, Aytu issued 3,018 shares of common stocks
as the earn-out payment to Nuelle Shareholders for fiscal 2017. (See Note 1).
Note 8 – Equity Instruments
Options
On June 1, 2015, Aytu’s stockholders approved the
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.
Pursuant to the 2015 Stock Plan, 3.0 million shares of the
Company’s common stock, are reserved for issuance. The fair value of options granted was calculated using the Black-Scholes
option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding components of
the model, including the estimated fair value of the underlying common stock, risk-free interest rate, volatility, expected dividend
yield and expected option life. Changes to the assumptions could cause significant adjustments to valuation. Aytu estimates the
expected term based on the average of the vesting term and the contractual term of the options. The risk-free interest rate is
based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity.
Stock option activity is as follows:
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life in Years
|
|
|
Outstanding June 30, 2017
|
|
|
38,263
|
|
|
$
|
16.31
|
|
|
|
8.40
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(139
|
)
|
|
$
|
16.40
|
|
|
|
|
|
|
Outstanding September 30, 2017
|
|
|
38,124
|
|
|
$
|
16.31
|
|
|
|
8.13
|
|
|
Exercisable at September 30, 2017
|
|
|
23,385
|
|
|
$
|
16.40
|
|
|
|
7.85
|
|
|
Available for grant at
September 30, 2017
|
|
|
2,761,876
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense related to the fair value
of stock options was included in the statements of operations as research and development expenses and selling, general and administrative
expenses as set forth in the table below. Aytu determined the fair value as of the date of grant using the Black-Scholes option
pricing model and expenses the fair value ratably over the vesting period
.
The following table summarizes stock-based compensation expense for the stock option issuances for the three months ended
September 30, 2017 and 2016:
|
|
|
Three Months Ended
September
30,
|
|
|
Selling, general and administrative:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
195,000
|
|
|
$
|
1,044,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
72,000
|
|
|
|
75,000
|
|
|
Total share-based compensation
expense
|
|
$
|
267,000
|
|
|
$
|
1,119,000
|
|
As of September 30, 2017, there
was $571,000 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 1.60 years.
Warrants
A summary of all warrants is as follows:
|
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life in Years
|
|
|
Outstanding June 30, 2017
|
|
|
286,049
|
|
|
$
|
50.29
|
|
|
|
4.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued to investors in connection
with the private offering
|
|
|
5,920,002
|
|
|
$
|
3.60
|
|
|
|
|
|
|
Warrants issued to underwritters
for the private offering
|
|
|
394,669
|
|
|
$
|
3.60
|
|
|
|
|
|
|
Outstanding September 30, 2017
|
|
|
6,600,720
|
|
|
$
|
5.62
|
|
|
|
4.86
|
|
In connection
with our August 2017 private offering,
we issued to investors and underwriters warrants to purchase an aggregate of 6,314,671
shares of common stock
at an exercise price of $3.60 with a term of five years from
August 25, 2017. These warrants are accounted for under derivative liability treatment.
(see Note 5).
All warrants issued in fiscal 2018 were valued using the lattice
option pricing model. In order to calculate the fair value of the warrants, certain assumptions were made regarding components
of the model, including the selling price or fair market value of the underlying common stock, risk-free interest rate, volatility,
expected dividend yield, and contractual life. Changes to the assumptions could cause significant adjustments to valuation. The
Company estimated a volatility factor utilizing a weighted average of comparable published volatilities of peer companies. The
risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar
maturity.
Significant assumptions in valuing the warrants issued during
the September 30, 2017 quarter are included in Note 5.
Note 9 – Related Party Transactions
Executive Stock Purchases
When Aytu completed the August 2017 offering, our executive
officers Joshua Disbrow and Jarrett Disbrow participated in this offering, purchasing 83,333, units each.
Services Agreement
In July 2015, Aytu entered into an agreement with Ampio, whereby
Aytu agreed to pay Ampio a set amount per month for shared overhead, which includes costs related to the shared corporate staff
and other miscellaneous overhead expenses. This agreement as amended in November 2015, April 2016, July 2016, and again in January
2017 required a monthly payment of $12,000. This agreement was terminated in June 2017.
Sponsored Research Agreement
In June 2013, Luoxis entered into a sponsored research agreement
with TRLLC, an entity controlled by Ampio’s director and Chief Scientific Officer, Dr. Bar-Or. The agreement was amended
in January 2015 and provided for Luoxis (now Aytu) to pay $6,000 per month to TRLLC in consideration for services related to research
and development of the Oxidation Reduction Potential platform. In March 2014, Luoxis also agreed to pay a sum of $615,000 which
was being amortized over the contractual term of 60.5 months and was divided between current and long-term on the balance sheet;
as of September 2014, this amount had been paid in full. This agreement was terminated in March 2017.
Note 10 – Segment Information
Aytu manages our Company and aggregates our operational and
financial information in accordance with two reportable segments: Aytu and Aytu Women’s Health. The Aytu segment consists
of our core male urology products. The Aytu Women’s Health segment contains our women’s health products. Select financial
information for these segments is as follows:
|
|
|
Three
months ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Consolidated Revenue:
|
|
|
|
|
|
|
|
|
|
Aytu
|
|
$
|
972,000
|
|
|
$
|
698,000
|
|
|
Aytu
Women’s Health
|
|
|
104,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
revenue
|
|
$
|
1,076,000
|
|
|
$
|
698,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss:
|
|
|
|
|
|
|
|
|
|
Aytu
|
|
$
|
(3,725,000
|
)
|
|
$
|
(5,724,000
|
)
|
|
Aytu
Women’s Health
|
|
|
(520,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
net loss
|
|
$
|
(4,245,000
|
)
|
|
$
|
(5,724,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
assets:
|
|
|
|
|
|
|
|
|
|
Aytu
|
|
$
|
18,115,000
|
|
|
$
|
14,999,000
|
|
|
Aytu
Women’s Health
|
|
|
3,131,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated assets
|
|
$
|
21,246,000
|
|
|
$
|
14,999,000
|
|
Note 11 – Subsequent Events
October 20, 2017, the Company was approved for listing and
began trading on The NASDAQ Capital Market under the company’s current ticker symbol, AYTU.
On October 24, 2017, Aytu entered into a 24-month extension
of our operating lease for the Englewood, Colorado office space. The base rent will remain at $9,000 per month.
On October 25, 350 of our preferred shares outstanding converted
into 116,666 shares of our common stock.
On October 25, Aytu issued 61,000 shares to Nuelle shareholders
as a prepayment for the fiscal 2018 earn-out payment that will be due to them.
On November 7, 2017, Aytu issued 495,000 restricted shares
to executives, directors and consultants.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
This discussion should be read in conjunction with Aytu
BioScience, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2017, filed on August 31, 2017. The following
discussion and analysis contains forward-looking statements that involve risks and uncertainties. Actual results could differ
materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties,
please see the risk factors included in Aytu’s Form 10-K filed with the Securities and Exchange Commission on August 31,
2017.
Overview/recent events
We are a commercial-stage specialty life science company concentrating
on developing and commercializing products with an initial focus on urological diseases and conditions. We are currently focused
on addressing significant medical needs in the areas of hypogonadism, male infertility, urological cancers and female personal
care.
On August 11, 2017, we entered into a Securities Purchase Agreement
with various investors pursuant to which we agreed to sell Class A and Class B equity units for gross proceeds of approximately
$11.8 million. Class A units consist of one (1) share of common stock and a warrant to purchase one and one-half (1.5) shares
of common stock and were sold at a negotiated price of $3.00 per unit. Class B units consist of one (1) share of our newly created
Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and warrants to purchase one and one-half (1.5)
shares of common stock for each share of common stock into which the Series A Preferred Stock is convertible and were sold at
a negotiated price of $1,000 per unit to those purchasers who, together with their affiliates and certain related parties, would
beneficially own more than 9.99% of our outstanding common stock following the offering. The offering closed on August 15, 2017.
In the offering, we issued an aggregate of 3,196,665 shares
of our common stock, 2,250 shares of Series A Preferred Stock and warrants to purchase up to an aggregate of 6,314,671 shares
of our common stock, which included 394,669 warrants issued to the underwriters as compensation for the transaction.
As of the date of this Report, we have financed operations
through a combination of private and public debt and equity financings including net proceeds from the private placements of stock
and convertible notes. 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 into the first
half of fiscal 2019, at which point we anticipate nearing or reaching cash-flow breakeven. See “Liquidity and Capital Resources.”
We have only begun to generate material revenues from the commercialization
of our product candidates in the last fiscal year. We recognized approximately $1.1 million in revenue from Natesto, ProstaScint,
MiOXSYS and Fiera sales during the three months ended September 30, 2017. We have incurred accumulated net losses since our inception,
and at September 30, 2017, we had an accumulated deficit of $73.3 million. Our net loss was $4.2 million for the three months
ended September 30, 2017 and we used $4.2 million in cash from operations during the three months ended September 30, 2017.
ACCOUNTING POLICIES
Significant Accounting Policies and Estimates
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated
financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including those related to recoverability and useful lives of long-lived
assets, stock compensation, valuation of derivative instruments, allowances and contingencies. Management bases its estimates
and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods,
estimates, and judgments used by us in applying these critical accounting policies have a significant impact on the results we
report in our consolidated financial statements. Our significant accounting policies and estimates are included in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2017, filed with the SEC on August 31, 2017.
Information regarding our accounting policies and estimates
can be found in the Notes to the consolidated Financial Statements.
Newly Issued Accounting Pronouncements
Information regarding the recently issued accounting standards
(adopted and pending adoption as of September 30, 2017) is combined in Note 1 to the consolidated financial statements.
RESULTS OF OPERATIONS
Results of Operations – September 30, 2017 Compared
to September 30, 2016
Results of operations for the three months ended September
30, 2017 and the three months ended September 30, 2016 reflected losses of approximately $4.2 million and $5.7 million, respectively.
These losses include, in part, non-cash charges related to stock-based compensation, depreciation, amortization and accretion,
in the amount of $621,000 for the three months ended September 30, 2017 and $2.4 million for the three months ended September
30, 2016, respectively. The non-cash charges decreased in the three months ended 2017 primarily due to the decrease in stock-compensation
expense, the amortization of intangible assets, derivative expense, compensation through issuance of common stock and issuance
of warrants.
Revenue
Product revenue
We recognized $1,076,000 and $698,000 for the three months
ended September 30, 2017 and 2016, respectively, related to the sale of our products Natesto, ProstaScint, Primsol, and Fiera
as well as the MiOXSYS and RedoxSYS Systems. Our revenues grew from the launch of our Natesto product, which has increased 193%
compared to the same quarter in 2016 and due to our acquisitions and ensuing sales of the Fiera products, which occurred late
in fiscal 2017 and expanded marketing of our commercial products.
As is customary in the pharmaceutical industry, our gross product
sales are subject to a variety of deductions in arriving at reported net product sales. Provisions for these deductions are recorded
concurrently with the recognition of gross product sales revenue and include discounts, chargebacks, distributor fees, processing
fees, as well as allowances for returns and Medicaid rebates. Provision balances relating to estimated amounts payable to direct
customers are netted against accounts receivable and balances relating to indirect customers are included in accounts payable
and accrued liabilities. The provisions recorded to reduce gross product sales and net product sales are as follows:
|
|
|
Three
Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Gross product
|
|
$
|
2,243,000
|
|
|
$
|
925,000
|
|
|
Provisions to reduce
gross product sales to net product sales
|
|
|
(1,167,000
|
)
|
|
|
(227,000
|
)
|
|
Net product revenue
|
|
$
|
1,076,000
|
|
|
$
|
698,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of gross sales to net sales
|
|
|
48.0
|
%
|
|
|
75.5
|
%
|
Expenses
Cost of Sales
The cost of sales of $287,000 and $192,000 recognized for the
three months ended September 30, 2017 and 2016, respectively, are related to the Natesto, ProstaScint, and Primsol products and
the MiOXSYS and RedoxSYS Systems, as well as products in the Fiera line. We expect to see cost of sales continue to increase in
the fiscal year 2018 as we expect our sales of our current products to continue to grow.
Research and Development
Research and development costs consist of clinical trials and
sponsored research, manufacturing transfer expense, sponsored research – related party and consultants and other. These
costs relate solely to research and development without an allocation of general and administrative expenses and are summarized
as follows:
|
|
|
Three
Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Manufacturing tech transfer
|
|
$
|
-
|
|
|
$
|
75,000
|
|
|
Clinical trials and sponsored research
|
|
|
140,000
|
|
|
|
156,000
|
|
|
Sponsored research - related party
|
|
|
-
|
|
|
|
48,000
|
|
|
Consultants and other
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
$
|
141,000
|
|
|
$
|
280,000
|
|
Comparison of Three Ended September 30, 2017 and 2016
Research and development expenses decreased $139,000, or 49.6%,
for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. This was due primarily to
switching our focus towards our commercial products. We anticipate research and development expense will decrease in fiscal 2018
as compared to fiscal 2017 due to that fact that we will continue to focus on our existing products.
Selling, General and Administrative
General and administrative expenses consist of labor costs,
including personnel costs for employees in executive, commercial, business development and operational functions; stock-based
compensation; patents and intellectual property; professional fees including legal, auditing, accounting, investor relations,
shareholder expense and printing and filing of SEC reports; occupancy, travel and other including rent, governmental and regulatory
compliance, insurance, and professional subscriptions; directors fees; and management fee – related party. These costs are
summarized as follows:
|
|
|
Three
Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Labor
|
|
$
|
2,400,000
|
|
|
$
|
2,255,000
|
|
|
Stock-based compensation
|
|
|
267,000
|
|
|
|
1,119,000
|
|
|
Patent costs
|
|
|
128,000
|
|
|
|
26,000
|
|
|
Professional fees
|
|
|
419,000
|
|
|
|
262,000
|
|
|
Occupancy, travel and other
|
|
|
1,364,000
|
|
|
|
2,003,000
|
|
|
Directors Fees
|
|
|
40,000
|
|
|
|
40,000
|
|
|
Management fee - related
party
|
|
|
-
|
|
|
|
51,000
|
|
|
|
|
$
|
4,618,000
|
|
|
$
|
5,756,000
|
|
Comparison of Three Months Ended September 30, 2017 and
2016
General and administrative costs decreased $1,138,000, or 19.8%,
for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. The primary decrease was
in stock-based compensation, and occupancy, travel and other which was related to decreased costs from the stock options that
were vested and immediately exercisable in July 2016, as well as the initial sales training for our Natesto product which occurred
in July 2016. We expect general and administrative expenses to be approximately flat for the remainder of fiscal 2018 as compared
to the three months ended September 30, 2017.
Amortization of Intangible Assets
Amortization of intangible assets was $386,000 and $437,000
for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. This expense decreased due
to the impairment of the ProstaScint assets in fiscal 2017, and the corresponding amortization of its finite-lived intangible
assets. We expect this expense to remain flat for the remainder of 2018.
Net Cash Used in Operating Activities
During the three months ended September 30, 2017, our operating
activities used $4.2 million in cash, which was approximately the same as the net loss of $4.2 million, primarily as a result
of the non-cash depreciation, amortization and accretion, derivative income and stock-based compensation offset by a decrease
in accounts payable and an increase in accounts receivable.
During the three months ended September 30, 2016, our operating
activities used $5.3 million in cash, which was less than the net loss of $5.7 million primarily as a result of the non-cash depreciation,
amortization and accretion, and stock-based compensation offset by the unrealized gain on investment, accounts payable, accrued
liabilities, and accrued compensation.
Net Cash Used in Investing Activities
During the three months ended September 30, 2017, we used zero
cash in investing activities.
During the three months ended September 30, 2016, we used cash
in investing activities of $505,000, $5,000 of which was used to purchase fixed assets, and $500,000 of which was paid as the
second installment towards the Primsol asset.
Net Cash from Financing Activities
Net cash provided by financing activities in the three months ended September
30, 2017 of $10.4 million was primarily related to the private offering of $11.8 million, offset by the cash offering cost of
$1.4 million.
Net cash provided by financing activities in the three months
ended September 30, 2016 of $607,000 was primarily related to the common stock issuance of $631,000 offset by the issuance costs
of $24,000 to Lincoln Park.
Liquidity and Capital Resources
We are a relatively young company with substantial revenue
growth goals, demonstrated by the nearly 55% revenue growth year over year for the three months ended September 30, 2017. Our
primary activities are focused on commercializing our approved products, acquiring products and developing our product candidates,
and raising capital. As of September 30, 2017, we had cash and cash equivalents totaling $7.1 million available to fund our operations
offset by an aggregate of $2.6 million in accounts payable and accrued liabilities.
With the additional capital that we raised in August 2017 of
$11.8 million, we believe we have sufficient resources to fund our operations through fiscal 2018 and into the middle of fiscal
2019. We believe, if our sales continue to grow while being able to maintain research and development and selling, general and
administrative costs, that will continue to decrease our net losses and cash burn during the remainder of fiscal 2018. With these
assumptions, we believe that we have sufficient cash on hand to reach cash-flow breakeven and potentially profitability. If necessary,
in the future we will evaluate the capital markets from time to time to determine when to raise additional capital in the form
of equity, convertible debt or other financing instruments, depending on market conditions relative to our need for funds at such
time. We will seek to raise additional capital at such time as we conclude that such capital is available on terms that we consider
to be in the best interests of our Company and our stockholders. Over the last three years, including recently, volatility in
the financial markets has adversely affected the market capitalizations of many bioscience companies and generally made equity
and debt financing more difficult to obtain. This volatility, coupled with other factors, may limit our access to additional financing.
At this time, we expect to satisfy our future cash needs through
private or public sales of our securities or debt financings. We cannot be certain that financing will be available to us on acceptable
terms, or at all. Over the last three years, including recently, volatility in the financial markets has adversely affected the
market capitalizations of many bioscience companies and generally made equity and debt financing more difficult to obtain. This
volatility, coupled with other factors, may limit our access to additional financing.
If we cannot raise adequate additional capital in the future
when we require it, we could be required to delay, reduce the scope of, or eliminate one or more of our commercialization efforts
or our research and development programs. We also may be required to relinquish greater or all rights to product candidates at
less favorable terms than we would otherwise choose. This may lead to impairment or other charges, which could materially affect
our balance sheet and operating results.
Off Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings,
or other relationships with unconsolidated entities or other persons, also known as “variable interest entities.”
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About
Market Risk.
|
We are not currently exposed to material market risk arising
from financial instruments, changes in interest rates or commodity prices, or fluctuations in foreign currencies. We have not
identified a need to hedge against any of the foregoing risks and therefore currently engages in no hedging activities.
|
|
Item 4.
|
Controls and Procedures.
|
As of the end of the period covered by this Quarterly Report
on Form 10-Q, an evaluation was carried out by our management, with the participation of the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on such evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and are operating in an effective manner.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial
reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART
II. OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings.
|
We
are currently not a party to any material pending legal proceedings, whether routine or non-routine.
Except
as set forth below, there have been no material changes to the discussion of risk factors included in our most recent Annual Report
on Form 10-K, as amended.
|
|
Item 2.
|
Unregistered
Sales of Securities and Use of Proceeds.
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None.
|
|
Item
4.
|
Mine
Safety Disclosures.
|
None.
|
|
Item 5.
|
Other
Information.
|
On
November 7, 2017, the Company’s Compensation Committee approved an increase in the Base Salary of Joshua R. Disbrow, the
Company’s Chief Executive Officer, to $330,000 effective as of November 1, 2017. The approval effectively amends the Employment
Agreement between the Company and Mr. Disbrow to provide for a new base salary of $330,000.
|
*
|
The
certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the
Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
|
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
|
|
AYTU
BIOSCIENCE, INC.
|
|
|
|
|
|
|
By:
|
/s/ Joshua
R. Disbrow
|
|
|
|
Joshua
R. Disbrow
|
|
|
|
Chief
Executive Officer
|
|
|
|
Date:
November 9, 2017
|
|
|
|
|
|
|
By:
|
/s/ Gregory
A. Gould
|
|
|
|
Gregory
A. Gould
|
|
|
|
Chief
Financial Officer
|
|
|
|
Date:
November 9, 2017
|
25