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, License and
Supply Agreements
Business
Aytu BioScience, Inc. (“Aytu”, the “Company”
or “we”) was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated
in the state of Delaware on June 8, 2015. Aytu is an emerging specialty pharmaceutical company focused on
novel
products that address significant medical needs. Aytu is focused on commercializing products that address hypogonadism (low testosterone),
insomnia, and male infertility and plans to expand into other therapeutic areas.
Basis of Presentation
These unaudited consolidated financial statements represent
the financial statements of Aytu and its wholly-owned subsidiary, Aytu Women’s Health, LLC. 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, 2018,
which included all disclosures required by generally accepted accounting principles in the United States (“GAAP”).
In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly
the financial position of Aytu 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, 2018 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, 2018 and 2017
is unaudited.
The accompanying consolidated financial statements of the Company
have been prepared in accordance with GAAP. On August 10, 2018, Aytu effected a reverse stock split in which each common stockholder
received one share of common stock for every 20 shares outstanding (herein referred to collectively as the “Reverse Stock
Split”). All share and per share amounts in this report have been adjusted to reflect the effect of this Reverse Stock Split.
License and Supply Agreement—Natesto
In April 2016, Aytu entered into a license and supply agreement
to acquire the exclusive U.S. rights to distribute 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 and until the entry on the market of at least one AB-rated generic product.
In addition to the upfront payments, we agreed to make one-time,
non-refundable milestone payments to Acerus within 45 days of the occurrence of the milestones. The maximum aggregate amount payable
under such milestone payments is $37.5 million.
The fair value of the net identifiable Natesto asset acquired
was determined to be $10.5 million, which is being amortized over eight years. The amortization expense for each of the three-month
periods ended September 30, 2018 and 2017 was $330,000.
The contingent consideration was initially valued at $3.2 million
using a Monte Carlo simulation, as of June 30, 2016. As of June 30, 2018, the contingent consideration was revalued at $1.8 million
using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock
trading variables. The contingent consideration accretion expense for each of the three-month periods ended September 30, 2018
and 2017 was $15,000, and $161,000, respectively. As of September 30,2018, none of the milestones had been achieved, and therefore,
no milestone payment was made.
License Agreement—ZolpiMist
In June 2018, Aytu signed an exclusive license agreement for
ZolpiMist™ (zolpidem tartrate oral spray) from Magna Pharmaceuticals, Inc., (“Magna”). This agreement allows
for Aytu’s exclusive commercialization of ZolpiMist in the U.S. and Canada.
Aytu made an upfront payment of $400,000 to Magna upon execution
of the agreement. In July 2018, we paid an additional $300,000, of which, $297,000 was included in current contingent consideration
at June 30, 2018.
The ZolpiMist license agreement was valued at $3.2 million and
will be amortized over the life of the license agreement up to seven years. The amortization expense for each of the three months
ended September 30, 2018 and 2017 was $116,000 and $0, respectively.
We also agreed to make certain royalty payments to Magna which
will be calculated as a percentage of our ZolpiMist net sales and will be payable within 45 days of the end of the quarter during
which the applicable net sales occur.
For the quarter ended September 30, 2018, the royalty payment
will be approximately $52,000, which will reduce the balance of our contingent consideration when it is paid.
The contingent consideration, related to these royalty payments,
was valued at $2.6 million using a Monte Carlo simulation, as of June 11, 2018. The contingent consideration accretion expense
for the three months ended September 30, 2018 and 2017 was $59,000, and $0, respectively.
Liquidity Assessment
Accounting Standards Update (“ASU”) No. 2014-15,
Presentation of Financial Statements - Going Concern, requires management to evaluate the company’s ability to continue as
a going concern one year beyond the filing date of the given financial statements. This evaluation requires management to perform
two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s
ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required
to consider whether it has plans in place to alleviate that doubt. Disclosures in the notes to the financial statements are required
if management concludes that substantial doubt exists or that its plans alleviate the substantial doubt that was raised.
Prior to the date of this Report, we have financed operations
through a combination of private and public debt and equity financings, funds from the sale of our products, and occasionally through
divestures of non-strategic assets. Our financing transactions have included private placements of stock and convertible notes,
and public offerings of the Company’s equity securities. Since the formation of Aytu in June 2015, the Company has raised
approximately $65.1 million, inclusive of the $15.2 million we raised in October 2018, from the sale of its securities to investors
and the exercise of warrants by investors. Although it is difficult to predict our liquidity requirements, based upon our current
operating plan, as of the date of this Report, we believe we will have sufficient cash to meet our projected operating requirements
for fiscal 2019.
Based on management’s forecast of product revenue and
related spending plans, the Company expects its existing cash balance to last more than one year beyond the date that the financial
statements were issued. Based on this analysis, no additional disclosures are required.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB
issued ASU 2014-09, Topic 606, Revenue from Contracts with Customers. The amendments in this ASU provide a single model for use
in accounting for revenue arising from contracts with customers and supersedes 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. ASC 606 and ASC 340-40 also require the deferral of incremental
costs of obtaining contracts with customers and subsequent amortization of those costs of the period of anticipated benefit. Collectively,
we refer to this guidance as “ASC 606”.
Effective July 1, 2018, the Company adopted Accounting
Standards Codification (“ASC”) 606,
Revenue from Contracts with Customers
(“ASC 606”), the
new standard on revenue from contracts with customers. Adoption of this ASU was done through the modified retrospective method
but did not result in a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. This is due
to the fact that the impact of adopting the new standard is not significant as it relates to historical revenues, future revenues,
or accounting for incremental costs of obtaining a contract with a customer.
We adopted the new standard through applying the
following conclusions (resulting from a thorough analysis of all contract types): (1) The new guidance did not materially change
our existing policy and practice for identifying contracts with customers, nor did it give rise to changes to our existing policy
and practice or create new concern surrounding the collectability of our receivables from customers, (2) none of our contracts
with customers contain multiple performance obligations that are not fulfilled at the same time, (3) the new guidance did not change
our existing policy and practice regarding the recording of variable consideration, and (4) we did not identify any customer acquisition
costs that are incremental and that are expected to be recovered at a future time.
As mentioned above, the modified retrospective method of transition
did not result in a cumulative adjustment as of July 1, 2018. Additionally, no other line items in the statement of operations
or the balance sheet reflect any changes due to the adoption of the new standard. Adoption of the standards related to revenue
recognition had no impact to cash from or used in operating, financing, or investing on our consolidated cash flows statement.
Recently Issued Accounting Pronouncements, Not Adopted as
of September 30, 2018
In August 2018, the FASB
issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair
Value Measurement.” The amendments in the standard apply to all entities that are required, under existing GAAP, to make
disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure
requirements in ASC 820, Fair Value Measurement. The standard is effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019.
The amendments on changes
in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair
value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most
recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively
to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted
to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures
until their effective date. The Company is currently assessing the impact that ASU 2018-13 will have on its financial statements.
In 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.
Note 2 – Revenue Recognition
We generate all of our revenues from the sale of products.
Revenue is recognized when control of theses promised products is transferred to our customers, in an amount that reflects the
consideration we expect to be entitled to in exchange for those products.
The Company determines revenue recognition through
the following five-step model:
|
(i)
|
identification of the promised goods or services in the contract;
|
|
(ii)
|
determination of whether the promised goods or services are performance obligations, including
whether they are distinct in the context of the contract;
|
|
(iii)
|
measurement of the transaction price, including the constraint on variable consideration;
|
|
(iv)
|
allocation of the transaction price to the performance obligations; and
|
|
(v)
|
recognition of revenue when, or as the Company satisfies each performance obligation.
|
Product Revenues, Net
The Company sells its products principally to a limited
number of wholesale distributors and pharmacies in the United States, which account for the largest portion of our total revenues,
and international sales are made primarily to specialty distributors, as well as hospitals, laboratories, and clinics many of which
are government owned or supported (collectively, its “Customers”). The Company’s Customers in the United States
subsequently resell the products to patients and health care providers. 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 approximately 30 days in the United States and consistent with prevailing
practice in international markets.
Revenues from product sales are recorded at the net sales price,
or “transaction price,” which includes estimates of variable consideration that result from coupons, discounts, chargebacks
and distributor fees, processing fees, as well as allowances for returns and government rebates. Provisions are established for
the estimates of variable consideration based on the amounts earned or to be claimed on the related sale. Provision balances 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. Where appropriate, the Company utilizes the expected value method to
determine the appropriate amount for estimates of variable consideration based on factors such as the Company’s historical
experience and specific known market events and trends. We constrain our estimates based on factors that could lead to a probable
reversal of revenue.
Revenues by Geographic location
The following table reflects our product revenues by geographic
location as determined by the billing address of our customers:
|
|
Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
U.S
|
|
$
|
1,273,000
|
|
|
$
|
931,000
|
|
Rest-of-the-World
|
|
|
159,000
|
|
|
|
145,000
|
|
Total net revenue
|
|
$
|
1,432,000
|
|
|
$
|
1,076,000
|
|
Note 3 - Inventories
Inventories consist of raw materials, work in process and finished
goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Aytu
periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. If unsaleable
items are observed and there are no alternate uses for the inventory, Aytu will record a write-down to net realizable value in
the period that the impairment is first recognized. There was no inventory write-down during the three months ended September 30,
2018 or September 30, 2017.
Inventory balances consist of the following:
|
|
September
30,
2018
|
|
|
June
30,
2018
|
|
Finished goods
|
|
$
|
1,033,000
|
|
|
$
|
239,000
|
|
Raw Materials
|
|
|
277,000
|
|
|
|
1,100,000
|
|
Total inventory
|
|
$
|
1,310,000
|
|
|
$
|
1,339,000
|
|
Note 4 – Fixed Assets
Fixed assets are recorded at cost and, once placed in service,
are depreciated on a straight-line basis over the estimated useful lives. Leasehold improvements are amortized over the shorter
of the estimated economic life or related lease term. Fixed assets consist of the following:
|
|
Estimated
Useful Lives
|
|
As of
September 30,
|
|
|
As of
June 30,
|
|
|
|
in years
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Manufacturing equipment
|
|
2 - 5
|
|
$
|
36,000
|
|
|
$
|
213,000
|
|
Leasehold improvements
|
|
3
|
|
|
112,000
|
|
|
|
112,000
|
|
Office equipment, furniture and other
|
|
2 - 5
|
|
|
308,000
|
|
|
|
344,000
|
|
Lab equipment
|
|
3 - 5
|
|
|
90,000
|
|
|
|
90,000
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(350,000
|
)
|
|
|
(540,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
|
$
|
196,000
|
|
|
$
|
219,000
|
|
The depreciation and amortization expense was as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
28,000
|
|
|
$
|
80,000
|
|
Note 5 – Patents
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,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
380,000
|
|
|
$
|
380,000
|
|
Less accumulated amortization
|
|
|
(140,000
|
)
|
|
|
(134,000
|
)
|
|
|
|
|
|
|
|
|
|
Patents, net
|
|
$
|
240,000
|
|
|
$
|
246,000
|
|
The amortization expense was as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
Note 6 – Fair Value Considerations
Aytu’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. The fair value of the warrant derivative
liability was valued using the lattice valuation methodology. The fair value of acquisition-related contingent consideration is
based on a monte carlo methodology using estimated discounted future cash flows and periodic assessments of the probability of
occurrence of potential future events. The valuation policies are determined by the Chief Financial Officer, and the Company’s
Board of Directors is informed of any policy change.
Authoritative guidance defines fair value as the price that
would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants
at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data
obtained from sources independent of Aytu. Unobservable inputs are inputs that reflect Aytu’s assumptions of what market
participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The hierarchy is broken down into three levels based on reliability of the inputs as follows:
Level 1:
|
Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;
|
|
|
Level 2:
|
Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and
|
|
|
Level 3:
|
Unobservable inputs that are supported by little or no market activity.
|
Aytu’s assets and liabilities which are measured at fair
value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
Aytu’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change
in circumstances caused the transfer. Aytu has consistently applied the valuation techniques discussed below in all periods presented.
The following table presents Aytu’s financial liabilities
that were accounted for at fair value on a recurring basis as of September 30, 2018 and June 30, 2018, by level within the fair
value hierarchy.
|
|
Fair Value Measurements Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
47,000
|
|
|
$
|
47,000
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,470,000
|
|
|
$
|
4,470,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
94,000
|
|
|
$
|
94,000
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,694,000
|
|
|
$
|
4,694,000
|
|
The warrant derivative liability was valued using the lattice
valuation methodology because that model embodies the relevant assumptions that address the features underlying these instruments.
The warrants related to the warrant derivative liability are not actively traded and are, therefore, classified as Level 3 liabilities.
Significant assumptions in valuing the warrant derivative liability, based on estimates of the value of Aytu common stock and various
factors regarding the warrants, were as follows as of issuance and as of September 30, 2018:
|
|
September 30,
2018
|
|
|
At issuance
|
|
Warrants:
|
|
|
|
|
|
|
Volatility
|
|
|
169.1
|
%
|
|
|
188.0
|
%
|
Equivalent term (years)
|
|
|
3.88
|
|
|
|
5.00
|
|
Exercise premium
|
|
|
5
|
%
|
|
|
20
|
%
|
Risk-free interest rate
|
|
|
2.91
|
%
|
|
|
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, 2018
|
|
$
|
94,000
|
|
Change in fair value included in earnings
|
|
|
(47,000
|
)
|
Balance as of September 30, 2018
|
|
$
|
47,000
|
|
We classify our contingent consideration liability in connection
with the acquisition of Natesto and ZolpiMist 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 methodology.
The following table sets forth a summary of changes in the contingent
consideration for the period ended September 30, 2018:
|
|
Contingent Consideration
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
4,694,000
|
|
Increase due to accretion
|
|
|
76,000
|
|
Decrease due to contractual payment
|
|
|
(300,000
|
)
|
Balance as of September 30, 2018
|
|
$
|
4,470,000
|
|
Note 7 – Commitments and Contingencies
Commitments and contingencies are described below and summarized
by the following as of September 30, 2018:
|
|
Total
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
Thereafter
|
|
Prescription database
|
|
$
|
625,000
|
|
|
$
|
625,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Natesto
|
|
|
2,500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,500,000
|
|
|
|
-
|
|
Supply order
|
|
|
188,000
|
|
|
|
188,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Office lease
|
|
|
227,000
|
|
|
|
91,000
|
|
|
|
109,000
|
|
|
|
27,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
3,540,000
|
|
|
$
|
904,000
|
|
|
$
|
109,000
|
|
|
$
|
27,000
|
|
|
$
|
-
|
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
Prescription Database
In May 2016, Aytu entered into an agreement with a vendor that
will provide Aytu with prescription information. Aytu agreed to pay approximately $1.9 million over three years for access to the
database of prescriptions written for Natesto. The payments have been broken down into quarterly payments.
Natesto
In April 2016, the Company entered into an agreement with Acerus,
whereby Aytu is required to make milestone payments to Acerus. The first milestone payment of $2.5 million must be paid even if
the milestone is not reached.
Supply Order
In June 2018, Aytu submitted a purchase order for a commercial
supply of ZolpiMist, which is expected to arrive in fiscal 2019. (see Note 10)
Office Lease
In June 2015, Aytu entered into a 37-month operating lease for
office space in Raleigh, North Carolina. This lease had initial base rent of $3,000 a month, with total base rent over the term
of the lease of approximately $112,000. In June 2018, the Company entered into a 12-month operating lease, beginning on August
1, 2018, for a new office space in Raleigh. This lease has base rent of $1,100 a month, with total rent over the term of the lease
of approximately $13,200. In September 2015, the Company entered into a 37-month operating lease in Englewood, Colorado. This lease
had an initial base rent of $9,000 a month with a total base rent over the term of the lease of approximately $318,000. In October
2017, the Company signed an amendment to the 37-month operating lease in Englewood, Colorado, extending the lease for an additional
24 months beginning October 1, 2018. The base rent remained $9,000 a month. The Company recognizes rent expense on a straight-line
basis over the term of each 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 was as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Rent expense
|
|
$
|
32,000
|
|
|
$
|
35,000
|
|
Note 8 – Common Stock
At September 30, 2018 and June 30, 2018, Aytu had 1,801,411
and 1,794,762 common shares outstanding, respectively, and no preferred shares outstanding. The Company has 100 million shares
of common stock authorized with a par value of $0.0001 per share and 50 million shares of preferred stock authorized
with a par value of $0.0001 per share, of which 500 are designated Series A Convertible Preferred Stock, 161 are designated as
Series B Convertible Preferred Stock, and 8,342,993 are designated as Series C Convertible Preferred Stock . Included in the common
stock outstanding are 37,890 shares of restricted stock issued to executives, directors, employees and consultants.
Note 9 – Equity Instruments
Share-based Compensation Plans
On June 1, 2015, Aytu’s stockholders approved the
Aytu BioScience 2015 Stock Option and Incentive Plan (the “2015 Plan”), which, as amended in July 2017, provides for
the award of stock options, stock appreciation rights, restricted stock and other equity awards for up to an aggregate of 3.0 million
shares of common stock. The shares of common stock underlying any awards that are forfeited, canceled, reacquired by Aytu prior
to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2015
Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. As of September 30, 2018, we
have 2,961,863 shares that are available for grant 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 has been calculated using the Black-Scholes option pricing
model. In order to calculate the fair value of the options, certain assumptions are made regarding components of the model, including
the estimated fair value of the underlying common stock, the risk-free interest rate, volatility, expected dividend yield and the
expected option life. Changes to the assumptions could cause significant adjustments to valuation. Aytu estimates the expected
term of granted options based on the average of the vesting term and the contractual term of the options. The risk-free interest
rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity. There
were no issuances during the three months ended September 30, 2018, therefore, no assumptions are used for this quarter.
Stock option activity is as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life in Years
|
|
Outstanding June 30, 2018
|
|
|
1,798
|
|
|
$
|
325.97
|
|
|
|
6.95
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(11
|
)
|
|
$
|
328.00
|
|
|
|
|
|
Outstanding September 30, 2018
|
|
|
1,787
|
|
|
$
|
325.96
|
|
|
|
6.74
|
|
Exercisable at September 30, 2018
|
|
|
1,516
|
|
|
$
|
325.59
|
|
|
|
6.62
|
|
As of September 30, 2018, there was $95,000 of total
unrecognized option-based compensation expense related to non-vested stock options. The Company expects to recognize this expense
over a weighted-average period of 0.77 years.
Restricted stock activity is as follows:
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Weighted Average Remaining Contractual Life in Years
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2018
|
|
|
37,200
|
|
|
$
|
39.80
|
|
|
|
9.4
|
|
Vested
|
|
|
(850
|
)
|
|
$
|
40.40
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Unvested at September 30, 2018
|
|
|
36,350
|
|
|
$
|
39.81
|
|
|
|
9.1
|
|
As of September 30, 2018, there was $2,861,000 of total unrecognized
share-based compensation expense related to the non-vested restricted stock. The Company expects to recognize this expense over
a weighted-average period of 8.38 years. Under the 2015 Plan, there was $1,315,000 of total unrecognized share-based compensation
expense related to the non-vested restricted stock. The Company expects to recognize this expense over a weighted-average period
of 9.10 years. During the three months ended September 30, 2018, the expense related to these awards was $36,000.
Aytu previously issued 1,540 shares of restricted stock outside
the Aytu BioScience 2015 Stock Option and Inventive Plan, which vest in July 2026. The unrecognized expense related to these shares
was $1,546,000 as of September 30, 2018 and will be recognized over the 10-year vesting period, of which 7.78 years remain. During
the three months ended September 30, 2018, the expense related to these awards was $50,000.
Stock-based compensation expense related to the fair value of
stock options and restricted stock was included in the statements of operations as selling, general and administrative expenses
as set forth in the table below:
|
|
Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
66,000
|
|
|
$
|
195,000
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
86,000
|
|
|
|
72,000
|
|
Total share-based compensation expense
|
|
$
|
152,000
|
|
|
$
|
267,000
|
|
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, 2018
|
|
|
1,882,661
|
|
|
$
|
25.94
|
|
|
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2018
|
|
|
1,882,661
|
|
|
$
|
25.94
|
|
|
|
4.36
|
|
The warrants related to the August Financing issued in fiscal
2018 were valued using the lattice option pricing model. These warrants were accounted for as liability warrants (see assumptions
used in Note 6).
Note 10 – Related Party Transactions
Executive Stock Purchases
Two Aytu executive officers, Joshua Disbrow and Jarrett Disbrow,
participated in the August 2017 offering. Each officer purchased 4,167 units.
Three Aytu executive officers, Joshua Disbrow, Jarrett Disbrow
and David Green, participated in the March 2018 offering. Joshua Disbrow and Jarrett Disbrow each purchased 11,306 units. Mr. Green
purchased 3,330 units.
Co-Pay Support
In June 2018, the Company entered into a master services agreement
with TrialCard Incorporated (“TCI”), a vendor selected to support the Company sponsored co-pay program. In supporting
the program, TCI will make disbursements to qualified patients presenting valid prescriptions for Natesto and ZolpiMist on behalf
of Aytu. Disbursements will be based upon business rules determined by Aytu. The Company agreed to pay fees monthly to TCI for
account management, data analytics, implementation, and technology and to reimburse TCI for certain direct costs incurred by TCI
to support the Company’s program. Expenses are expected to be approximately $19,000 per month based on volumes and performance
of our program. During the quarter ended September 30, 2018, the fees we paid to TCI is $254,000. One of the Aytu directors, Mr.
Donofrio, is an executive officer of TCI and has no direct interest in the arrangement.
Note 11 – Subsequent Events
On October 9, 2018, we closed an underwritten public offering,
with total gross proceeds of $15.2 million which includes the full exercise of the underwriters’ over-allotment option to purchase
additional shares and warrants, before deducting underwriting discounts, commissions and other offering expenses payable by the
Company.
The securities offered by the Company consist of (i) an aggregate
of 457,007 shares of its Common Stock, (ii) an aggregate of 8,342,993 shares of its Series C Convertible Preferred Stock convertible
into an aggregate of 8,342,993 shares of Common Stock at a conversion price of $1.50 per share, and (iii) Warrants to purchase
an aggregate of 8,800,000 shares of Common Stock at an exercise price of $1.50 per share. The securities were issued at a public
offering purchase price of $1.50 per fixed combination of (a) one share of Common Stock and one Warrant or (b) one share of Series
C Preferred Stock and one Warrant. Each share of Series C Preferred Stock is convertible into one share of Common Stock. The Warrants
are exercisable upon issuance and will expire five years from the date of issuance. The conversion price of the Series C Preferred
Stock in the offering as well as the exercise price of the Warrants are fixed and do not contain any variable pricing features,
or any price based anti-dilution features.
In connection with this offering, the underwriters have
exercised their over-allotment option in full and purchased an additional 1,320,000 shares of Common Stock and 1,320,000 Warrants.
On October 17, 2018, we made a payment in the amount of $188,000
to purchase a commercial supply of ZolpiMist.
On October 24, 2018, Aytu issued 2.7 million shares of restricted
stock to executives, directors and employees pursuant to the 2015 Plan, which vest in October 2028 and have a fair value of $3.5
million.
In November, the Company’s entry into the $3 billion cough
and cold market with an exclusive license of FDA-approved Tuzistra® XR from Tris Pharma. Along with Tuzistra XR, the Company
has licensed a complementary antitussive product pending FDA approval. As part of this transaction, the Company also plans to enter
into a strategic financing with Armistice Capital, LLC for up to $5 million in the form of a three-year note, secured by the Tuzistra
revenue streams.
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, 2018, filed on September 6, 2018. 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 September 6, 2018.
Overview,
Liquidity and Capital Resources
Aytu
is an emerging specialty pharmaceutical company focused on commercializing novel products that address significant medical needs.
Aytu is focused on commercializing products that address hypogonadism (low testosterone), insomnia, and male infertility and plans
to expand into other therapeutic areas as the company continues to execute on its growth plans.
On
October 9, 2018, we closed an underwritten public offering, with total gross proceeds of $15.2 million which includes the full
exercise of the underwriters’ over-allotment option to purchase additional shares and warrants, before deducting underwriting
discounts, commissions and other offering expenses payable by the Company.
The
securities offered by the Company consist of (i) an aggregate of 457,007 shares of its Common Stock, (ii) an aggregate of 8,342,993
shares of its Series C Convertible Preferred Stock convertible into an aggregate of 8,342,993 shares of Common Stock at a conversion
price of $1.50 per share, and (iii) Warrants to purchase an aggregate of 8,800,000 shares of Common Stock at an exercise price
of $1.50 per share. The securities were issued at a public offering purchase price of $1.50 per fixed combination of (a) one share
of Common Stock and one Warrant or (b) one share of Series C Preferred Stock and one Warrant. Each share of Series C Preferred
Stock is convertible into one share of Common Stock. The Warrants are exercisable upon issuance and will expire five years from
the date of issuance. The conversion price of the Series C Preferred Stock in the offering as well as the exercise price of the
Warrants are fixed and do not contain any variable pricing features, or any price based anti-dilution features.
In
connection with this offering, the underwriters exercised their over-allotment option in full and purchased an additional 1,320,000
shares of Common Stock and 1,320,000 Warrants.
Prior
to the date of this Report, we have financed operations through a combination of private and public debt and equity financings,
funds from the sale of our products, and occasionally through divestures of non-strategic assets. Our financing transactions have
included private placements of stock and convertible notes, and public offerings of the Company’s equity securities. Since
the formation of Aytu in June 2015, the Company has raised approximately $65.1 million from the sale of its securities to investors
and the exercise of warrants by investors. Although it is difficult to predict our liquidity requirements, based upon our current
operating plan, as of the date of this Report, we believe we will have sufficient cash to meet our projected operating requirements
for fiscal 2019.
We
have incurred accumulated net losses since inception, and at September 30, 2018, we had an accumulated deficit of $82.7 million.
Our net loss was $3.4 million for the three months ended September 30,2018 and we used $2.7 million in cash from operations during
the three months ended September 30, 2018.
We
are a relatively young company with substantial revenue growth expectations as demonstrated by the nearly 55% quarter-over-quarter
net revenue growth for the three months ended September 30, 2018. Our primary activities are focused on commercializing our approved
product portfolio, including Natesto and ZolpiMist, building our commercial infrastructure, improving patient access, and improving
the effectiveness and reach of our sales force. As of September 30, 2018, we had cash, cash equivalents and restricted cash totaling
$4.1 million and other current assets with an aggregate balance of $2.8 million available to fund our operations, offset by an
aggregate of $2.5 million in accounts payable and accrued liabilities. In October 2018, we raised gross proceeds of $15.2 million
in a public offering.
Based
on our recent trend of increasing revenue, and management’s operating strategy and plans for accelerating revenue growth,
we believe that our sales will continue to grow. We also believe that our efforts and programs designed to eliminate couponing
and reduce discounting of Natesto will combine to increase net revenue and therefore reduce the rate of cash use. We expect to
maintain operating expenses at levels comparable to the quarter ended September 30, 2018. With these assumptions and the additional
capital we raised in October, we believe that we have sufficient cash resources to fund operations into the first half of fiscal
2020, after which time we could require additional new capital if our revenue does not continue to grow as we have projected.
If, in the judgment of management, capital becomes available on terms that we consider to be in the best interest of the Company,
we may seek to raise additional capital even if the need for additional capital is not imminent. If we cannot raise adequate additional
capital in the future if and 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 may also be required to relinquish some 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. However, we can provide no assurance that our revenues
will increase as anticipated or that additional funding will be available to us on terms acceptable to us, or at all.
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, contingencies and going concern. Management bases its estimates and judgments on historical experience and on various
other factors that the Company believes 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, 2018, filed with the SEC on September 6, 2018.
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, 2018) is combined in Note
1 to the consolidated financial statements.
RESULTS
OF OPERATIONS
Results
of Operations – Three and nine months ended September 30, 2018 compared to September 30, 2017
Results
of operations for the three months ended September 30, 2018 and the three months ended September 30, 2017 reflected losses of
approximately $3.4 million and $4.2 million, respectively. These losses include, in part, non-cash charges related to stock-based
compensation, depreciation, amortization and accretion, issuance of restricted stock, and derivative income in the amount of $662,000
for the three months ended September 30, 2018 and $621,000 for the three months ended September 30, 2017, respectively. The non-cash
charges increased in the three months ended September 30, 2018 primarily due to the issuance of restricted stock offset by warrant
derivative income.
Revenue
Product
revenue
We
recognized net revenue from product sales of $1.4 million and $1.1 million for the three months ended September 30, 2018 and 2017
respectively. Our product portfolio includes Natesto, ZolpiMist, ProstaScint, Fiera, and the MiOXSYS and RedoxSYS Systems, but
the majority of our revenue comes from Natesto sales. Revenue from Natesto increased 44% in the first quarter of fiscal 2019 compared
to the same quarter in fiscal 2018.
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 revenue and
include coupons, discounts, chargebacks, distributor fees, processing fees, as well as allowances for returns and Medicaid rebates.
Provision deductions 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 to net product sales are as follows:
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Gross product revenue
|
|
$
|
2,320,000
|
|
|
$
|
2,243,000
|
|
Provisions to reduce gross product sales to net product sales
|
|
|
(888,000
|
)
|
|
|
(1,167,000
|
)
|
Net product revenue
|
|
$
|
1,432,000
|
|
|
$
|
1,076,000
|
|
|
|
|
|
|
|
|
|
|
Percentage of gross sales to net sales
|
|
|
61.7
|
%
|
|
|
48.0
|
%
|
Expenses
Cost
of Sales
The
cost of sales of $411,000 and $287,000 recognized for the three months ended September 30, 2018 and 2017, respectively, are related
to Natesto, ZolpiMist, ProstaScint, Fiera and the MiOXSYS and RedoxSYS Systems. We expect cost of sales to increase in the future
due to and in line with growth in revenue from product sales.
Research
and Development
Research
and development costs consist of clinical trials and sponsored research which includes manufacturing development, 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Clinical trials and sponsored research
|
|
|
120,000
|
|
|
|
140,000
|
|
Consultants and other
|
|
|
36,000
|
|
|
|
1,000
|
|
|
|
$
|
156,000
|
|
|
$
|
141,000
|
|
Comparison
of Three Months Ended September 30, 2018 and 2017
Research
and development expenses increased $15,000, or 10.6%, for the three months ended September 30, 2018 compared to the three months
ended September 30, 2017. The increase was due primarily to the use of additional consultants related to the RedoxSYS and MiOXSYS
Systems. We anticipate research and development expense to increase in fiscal 2019 as we anticipate funding a study to further
support the clinical application of our MiOXSYS System, and to fund further clinical studies for Natesto to potentially support
new claims and/or to comply with FDA post-marketing study requirements.
Selling,
General and Administrative
Selling,
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 expenses including rent, governmental and regulatory compliance, insurance, and professional subscriptions; and
directors fees. These costs are summarized as follows:
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Labor
|
|
$
|
2,281,000
|
|
|
$
|
2,400,000
|
|
Stock-based compensation
|
|
|
152,000
|
|
|
|
267,000
|
|
Patent costs
|
|
|
53,000
|
|
|
|
128,000
|
|
Professional fees
|
|
|
142,000
|
|
|
|
419,000
|
|
Occupancy, travel and other
|
|
|
908,000
|
|
|
|
1,364,000
|
|
Directors Fees
|
|
|
40,000
|
|
|
|
40,000
|
|
Sales & marketing - related party
|
|
|
254,000
|
|
|
|
-
|
|
|
|
$
|
3,830,000
|
|
|
$
|
4,618,000
|
|
Comparison
of Three Months Ended September 30, 2018 and 2017
Selling,
general and administrative costs decreased $788,000, or 17.1%, for the three months ended September 30, 2018, compared to the
three months ended September 30, 2017. The primary decrease was due to professional fees and occupancy, travel and other, which
included a refund of PDUFA fees waived by the FDA in August 2018. This decrease was offset by sales & marketing-related party,
compared to fiscal 2018, due to fees paid to TrialCard Incorporation. We expect selling, general and administrative expenses to
be approximately flat for the remainder of fiscal 2019.
Amortization
of Intangible Assets
Amortization
of intangible assets was $452,000 for the three months ended September 30, 2018, and $386,000 for the three months ended September
30, 2017. This expense increased due to amortization of the related finite-lived intangible assets. We expect this expense to
remain flat for the remainder of 2019.
Net
Cash Used in Operating Activities
During
the three months ended September 30, 2018, our operating activities used $2.7 million in cash. The decline in cash use resulted
from higher revenue and lower operating expense for first quarter in fiscal 2019. Our cash use was a result of an increase in
accrued liabilities and accrued compensation expense, with the recognition of non-cash expenses such as depreciation, amortization
and accretion and stock-based compensation expense. These were offset by derivative income, an increase in accounts receivable
and prepaid expenses
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.
Net
Cash Used in Investing Activities
During
the three months ended September 30, 2018, we used $306,000 of cash for investing activities to purchase fixed and operating assets
and received a $3,000 refund of our deposit for office space.
During
the three months ended September 30, 2017, we used zero cash in investing activities.
Net
Cash from Financing Activities
Net
cash provided by financing activities in the three months ended September 30, 2018 was zero.
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.
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.”
Contractual
Obligations and Commitments
Information
regarding our Contractual Obligations and Commitments is contained in Note 7 to the Financial
Statements.
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.
There
have been no material changes to the discussion of risk factors included in our most recent Annual Report on Form 10-K.
Item 2.
|
Unregistered
Sales of Securities and Use of Proceeds.
|
None.
Item 3.
|
Defaults
Upon Senior Securities.
|
None.
Item
4.
|
Mine
Safety Disclosures.
|
Not
Applicable.
Item 5.
|
Other
Information.
|
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 to the Company
an exclusive license in the United States related to Tuzistra XR. In addition, TRIS has agreed to an exclusive license in the
United States related to 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 FDA. As consideration for the
license granted, the Company made an upfront cash payment to TRIS and also issued to TRIS shares of Series D Convertible Preferred
Stock. Additionally, the Company will pay TRIS certain royalty fees through the term for Tuzistra XR and CCP-08. The Agreement
may be terminated by either the Company or TRIS on the occurrence of a material breach of the Agreement and will terminate according
to its terms upon expiration of the final royalty payment made to TRIS.
As
consideration to TRIS for entering into the Tris License Agreement, the Company issued to TRIS 400,000 shares of Series D Convertible
Preferred Stock (“Series D Preferred Stock”) in a private placement under Section 4(a)(2) of the Securities Act of
1933, as amended (the “Securities Act”). The preferences and rights of the Series D Preferred Stock are as set forth
in a Certificate of Designation (the “Certificate of Designation”) attached as Exhibit 4.1. The material terms of
the Series D Preferred Stock are disclosed below.
Conversion.
Each share of Series D Preferred Stock is convertible at any time at the holder’s option into one share of common stock,
which conversion ratio is subject to adjustment for stock splits, stock dividends, distributions, subdivisions and combinations.
Notwithstanding the foregoing, the Certificate of Designation provides that the Company shall not effect any conversion of the
Series D Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder
of Series C Preferred Stock (together with such holder’s affiliates, and any persons acting as a group together with such
holder or any of such holder’s affiliates) would beneficially own a number of shares of the common stock of the Company
(“Common Stock”) in excess of 4.99% (or, at the election of the purchaser prior to the date of issuance, 9.99%) of
the shares of Common Stock then outstanding after giving effect to such exercise.
Fundamental
Transaction. In the event the Company consummates a merger or consolidation with or into another person or other reorganization
event in which the Common Stock is converted or exchanged for securities, cash or other property, or the Company sells, leases,
licenses, assigns, transfers, conveys or otherwise disposes of all or substantially all of the Company’s assets or the Company
or another person acquires 50% or more of the Company’s outstanding shares of Common Stock, then following such event, the
holders of the Series D Preferred Stock will be entitled to receive upon conversion of such Series D Preferred Stock the same
kind and amount of securities, cash or property which the holders would have received had they converted their Series D Preferred
Stock immediately prior to such fundamental transaction. Any successor to the Company or surviving entity shall assume the obligations
under the Series D Preferred Stock.
Liquidation
Preference. In the event of a liquidation, the holders of Series D Preferred Stock will be entitled to participate on an as-converted-to-common-stock
basis with holders of Common Stock in any distribution of assets of the Company to the holders of Common Stock.
Voting
Rights. With certain exceptions, as described in the Certificate of Designation, the Series D Preferred Stock has no voting rights.
However, as long as any shares of Series D Preferred Stock remain outstanding, the Certificate of Designation provides that the
Company shall not, without the affirmative vote of holders of a majority of the then-outstanding shares of Series D Preferred
Stock: (a) alter or change adversely the powers, preferences or rights given to the Series D Preferred Stock or alter or amend
the Series D Certificate of Designation, (b) amend the Company’s certificate of incorporation or other charter documents
in any manner that adversely affects any rights of the holders of Series D Preferred Stock, (c) increase the number of authorized
shares of Series D Preferred Stock or (d) effect a stock split or reverse stock split of the Series D Preferred Stock or any like
event.
Dividends.
The Certificate of Designation provides, among other things, that the Company shall not pay any dividends on shares of Common
Stock (other than dividends in the form of Common Stock) unless and until such time as the Company pays dividends on each share
of Series D Preferred Stock on an as-converted basis. Other than as set forth in the previous sentence, the Certificate of Designation
provides that no other dividends shall be paid on shares of Series D Preferred Stock and that the Company shall pay no dividends
(other than dividends in the form of Common Stock) on shares of Common Stock unless the Company simultaneously complies with the
previous sentence.
Repurchase
Restrictions. The Certificate of Designation does not provide for any restriction on the repurchase of Series D Preferred Stock
by the Company while there is any arrearage in the payment of dividends on the Series D Preferred Stock. There will be no sinking
fund provisions applicable to the Series D Preferred Stock.
Redemption.
The Company will not be obligated to redeem or repurchase any shares of Series D Preferred Stock. Shares of Series D Preferred
Stock will not otherwise be entitled to any redemption rights or mandatory sinking fund or analogous fund provisions.
Exchange
Listing. The Series D Preferred Stock is not listed on any securities exchange or other trading system.
*
|
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
(principal executive officer)
|
|
|
Date:
November 7, 2018
|
|
|
|
|
By:
|
/s/ David
A. Green
|
|
|
David
A. Green
|
|
|
Chief
Financial Officer
(principal financial and accounting officer)
|
|
|
Date:
November 7, 2018
|