10-Q 1 aytu_10q.htm FORM 10-Q aytu_10q


UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended: September 30, 2020 or
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                                to              
 
 
Commission File No. 001-38247
 
 
 
AYTU BIOSCIENCE, INC.
(www.aytubio.com)
 
 Delaware 
 47-0883144
 (State or other jurisdiction of incorporation or organization)
 (IRS Employer Identification No.)
 
373 Inverness Parkway, Suite 206
 
Englewood, Colorado 80112
 
(Address of principal executive offices, including zip code)
 
(720) 437-6580
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
AYTU
 
The NASDAQ Stock Market LLC
 
As of November 1, 2020, there were 127,928,522 shares of Common Stock outstanding.
 

 
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES FOR THE QUARTER ENDED SEPTEMBER 30, 2020
 
INDEX 
 
PART I—FINANCIAL INFORMATION
 
 
Page
 
4
6
7
8
10
26
 
 
30
 
 
30
 
 
PART II—OTHER INFORMATION
 
31
 
 
32
 
 
32
 
 
32
 
 
32
 

32
 
 
33
 
 
SIGNATURES

 

 
 
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our anticipated future clinical and regulatory events, future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Forward looking statements are generally written in the future tense and/or are preceded by words such as “may,” “will,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” or similar words, or the negatives of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, without limitation: the planned expanded commercialization of our products and the potential future commercialization of our product candidates, our anticipated future cash position; our plan to acquire additional assets; our anticipated future growth rates; anticipated sales increases; anticipated net revenue increases; amounts of certain future expenses and costs of goods sold; anticipated increases to operating expenses, research and development expenses, and selling, general, and administrative expenses; and future events under our current and potential future collaborations.
 
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Risk Factors” in Part II Item 1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.
 
This Quarterly Report on Form 10-Q includes trademarks, such as Aytu, Natesto®, Tuzistra®, ZolpiMist®, MiOXSYS®, Karbinal®, and Poly-Vi-Flor®, and the recently acquired consumer health products such as FlutiCare®, Diabasens®, Urivarx®, Sensum®, and Vesele®, as well as Beyond Human ®, a specialty marketing platform, which are protected under applicable intellectual property laws and we own or have the rights to. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names.
 
 
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
 
 September 30,
 
 
 June 30,
 
 
 
2020
 
 
2020
 
 
 
 (Unaudited)
 
 
 
 
 Assets
 Current assets
 
 
 
 
 
 
 Cash and cash equivalents
 $37,911,065 
 $48,081,715 
 Restricted cash
  251,778 
  251,592 
 Accounts receivable, net
  6,111,911 
  5,175,924 
 Inventory, net
  11,479,557 
  9,999,441 
 Prepaid expenses and other
  3,681,401 
  5,715,089 
 Other current assets
  6,017,888 
  5,742,011 
 Total current assets
  65,453,600 
  74,965,772 
 Fixed assets, net
  106,153 
  258,516 
 Right-of-use asset
  334,289 
  634,093 
 Licensed assets, net
  16,018,064 
  16,586,847 
 Patents and tradenames, net
  10,639,080 
  11,081,048 
 Product technology rights, net
  20,619,166 
  21,186,666 
 Deposits
  9,900 
  32,981 
 Goodwill
  28,090,407 
  28,090,407 
 Total long-term assets
  75,817,059 
  77,870,558 
 Total assets
 $141,270,659 
 $152,836,330 
 
See the accompanying Notes to the Consolidated Financial Statements
 
 
4
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, cont’d
 
 
 
 September 30,
 
 
 June 30,
 
 
 
2020
 
 
2020
 
 
 
 (Unaudited)
 
 
 
 
 Liabilities
 Current liabilities
 
 
 
 
 
 
 Accounts payable and other
 $5,773,768 
 $11,824,560 
 Accrued liabilities
  8,692,693 
  7,849,855 
 Accrued compensation
  1,967,035 
  3,117,177 
 Debt
  930,416 
  982,076 
 Contract liability
  232,576 
  339,336 
 Current lease liability
  97,458 
  300,426 
 Current portion of fixed payment arrangements
  2,138,514 
  2,340,166 
 Current portion of CVR liabilities
  954,800 
  839,734 
 Current portion of contingent consideration
  718,647 
  713,251 
 Total current liabilities
  21,505,907 
  28,306,581 
 Long-term contingent consideration, net of current portion
  13,058,876 
  12,874,351 
 Long-term lease liability, net of current portion
  237,497 
  725,374 
 Long-term fixed payment arrangements, net of current portion
  10,679,903 
  11,171,491 
 Long-term CVR liabilities, net of current portion
  4,714,359 
  4,731,866 
 Other long-term liabilities
  11,371 
  11,371 
 Total liabilities
  50,207,913 
  57,821,034 
 Commitments and contingencies (Note 10)
    
    
 Stockholders' equity
    
    
 Preferred Stock, par value $.0001; 50,000,000 shares authorized; shares issued and outstanding 0 and 0, respectively as of September 30, 2020 and June 30, 2020, respectively.
    
    
 Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 125,837,357 and 125,837,357 respectively as of September 30, 2020 and June 30, 2020.
  12,584 
  12,584 
 Additional paid-in capital
  215,366,272 
  215,012,891 
 Accumulated deficit
  (124,316,110)
  (120,010,179)
 Total stockholders' equity
  91,062,746 
  95,015,296 
 Total liabilities and stockholders' equity
 $141,270,659 
 $152,836,330 
 
See accompanying Notes to the Consolidated Financial Statements
 
 
5
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
 
Consolidated Statements of Operations
 (unaudited)
 
 
 
 Three Months Ended
 
 
 
 September 30,
 
 
 
2020
 
 
2019
 
 Revenues
 
 
 
 
 
 
 Product revenue, net
 $13,520,246 
 $1,439,826 
 
    
    
 Operating expenses
    
    
 Cost of sales
  3,819,156 
  375,720 
 Research and development
  182,865 
  78,020 
 Selling, general and administrative
  11,490,370 
  5,146,443 
 Amortization of intangible assets
  1,584,581 
  575,117 
Total operating expenses
  17,076,972 
  6,175,300 
Loss from operations
  (3,556,726)
  (4,735,474)
 Other (expense) income
    
    
 Other (expense), net
  (751,541)
  (195,386)
 Gain from change in fair value of contingent consideration
  2,336 
    
 Gain from warrant derivative liability
   
  1,830 
 Total other (expense) income
  (749,205)
  (193,556)
 Net loss
 $(4,305,931)
 $(4,929,030)
 Weighted average number of common shares outstanding
  121,585,939 
  15,325,921 
 Basic and diluted net loss per common share
 $(0.04)
 $(0.32)
 
See the accompanying Notes to the Consolidated Financial Statements.
 
 
6
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statement of Stockholders’ Equity
(unaudited unless indicated otherwise)
 
 
 
 Preferred Stock
 
 
 Common Stock
 
 
 Additional
 
 
 
 Total 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
paid-in capital
 
 
Accumulated Deficit
 
 
Stockholders' Equity
 
BALANCE - June 30, 2019 (audited)
  3,594,981 
 $359 
  17,538,071 
 $1,754 
 $113,475,205 
 $(106,389,500)
 $7,087,818 
Stock-based compensation
   
 $ 
   
 $ 
 $165,171 
 $ 
 $165,171 
Preferred stock converted in common stock
  (443,833)
  (44)
  443,833 
  44 
   
   
   
Net loss
   
   
   
   
   
  (4,929,030)
 $(4,929,030)
BALANCE - September 30, 2019
  3,151,148 
 $315 
  17,981,904 
 $1,798 
 $113,640,376 
 $(111,318,530)
 $2,323,959 
 
 
 
 Preferred Stock
 
 
 Common Stock
 
 
 Additional
 
 
 
 Total 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
paid-in capital
 
 
Accumulated Deficit
 
 
Stockholders' Equity
 
BALANCE - June 30, 2020 (audited)
   
 $ 
  125,837,357 
 $12,584 
 $215,012,891 
 $(120,010,179)
 $95,015,296 
Stock-based compensation
   
 $ 
   
 $ 
 $454,918 
 $ 
 $454,918 
Issuance costs
   
 $ 
   
 $ 
 $(101,537)
 $ 
 $(101,537)
Net loss
   
 $ 
   
 $ 
 $ 
 $(4,305,931)
 $(4,305,931)
BALANCE - September 30, 2020
   
 $ 
  125,837,357 
 $12,584 
 $215,366,272 
 $(124,316,110)
 $91,062,746 
 
See the accompanying Notes to the Consolidated Financial Statements
 
 
7
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
 
 
 Three Months Ended
 
 
 
 September 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Operating Activities
 
 
 
 
 
 
Net loss
 $(4,305,931)
 $(4,929,030)
Adjustments to reconcile net loss to cash used in operating activities:
    
    
Depreciation, amortization and accretion
  2,092,618 
  869,312 
Stock-based compensation expense
  454,918 
  165,171 
Loss / (gain) from change in fair value of contingent consideration
  (99,895)
   
Loss on sale of equipment
  112,110 
   
Gain on termination of lease
  (343,185)
   
Changes in allowance for bad debt
  408 
   
Loss / (gain) from change in fair value of CVR
  97,559 
   
Derivative income
    
  (1,830)
Changes in operating assets and liabilities:
    
    
(Increase) decrease in accounts receivable
  (928,895)
  35,359 
(Increase) decrease in inventory
  (1,480,116)
  59,340 
Decrease in prepaid expenses and other
  2,027,358 
  384,582 
(Increase) in other current assets
  (237,720)
  - 
(Decrease) increase in accounts payable and other
  (4,519,601)
  276,917 
Increase in accrued liabilities
  412,328 
  3,441 
(Decrease) increase in accrued compensation
  (1,150,142)
  152,911 
(Decrease) in contract liability
  (106,760)
   
(Decrease) in deferred rent
   
  (3,990)
Net cash used in operating activities
  (7,974,946)
  (2,987,817)
Investing Activities
    
    
Deposit
  2,200 
   
Contingent consideration payment
  (19,140)
  (42,103)
Note Receivable
    
  (1,000,000)
Net cash used in investing activities
  (16,940)
  (1,042,103)
Financing Activities
    
    
Issuance cost related to registered offering
  (1,632,727)
   
Payments made to borrowings
  (136,364)
   
Payments made to fixed payment arrangements
  (409,487)
   
Net cash used by financing activities
  (2,178,578)
   
Net change in cash, restricted cash and cash equivalents
  (10,170,464)
  (4,029,920)
Cash, restricted cash and cash equivalents at beginning of period
  48,333,307 
  11,294,227 
Cash, restricted cash and cash equivalents at end of period
 $38,162,843 
 $7,264,307 
 
See the accompanying Notes to the Consolidated Financial Statements.
 
 
8
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows, cont’d
(unaudited)
 
 
 
 Three Months Ended
 
 
 
 September 30,
 
Supplemental disclosures of cash and non-cash investing and financing transactions
 
2020
 
 
2019
 
Warrants issued to underwriters
 $356,139 
 $ 
Cash paid for interest
  247,869 
  3,390 
Fair value of right-to-use asset and related lease liability
  20,438 
  412,691 
Contingent consideration included in accounts payable
   
  3,430 
Fixed payment arrangements included in accrued liabilities
  430,510 
   
Acquisition costs included in accounts payable
   
  59,014 
Exchange of convertible preferred stock into common stock
 $ 
 $44 
 
See the accompanying Notes to the Consolidated Financial Statements
 
 
9
 
 
AYTU BIOSCIENCE, INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
 
1.
Nature of Business, Financial Condition, Basis of Presentation
 
Nature of Business. Aytu BioScience, Inc. (“Aytu”, the “Company” or “we”) is a commercial-stage specialty pharmaceutical company focused on commercializing novel products that address significant healthcare needs in both prescription and consumer health categories. The Company is currently focused on its Aytu BioScience business, consisting of the Primary Care Portfolio (the “Primary Care Portfolio”) and Pediatric Care Portfolio (the “Pediatric Portfolio”), and its Aytu Consumer Health business (the “Consumer Health Portfolio”). The Aytu BioScience business is focused on prescription pharmaceutical products treating hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, male infertility, and various pediatric conditions. The Aytu Consumer Health business is focused on consumer healthcare products. The Company plans to expand into other therapeutic areas as opportunities arise. The Company 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.
  
The Primary Care Portfolio consists of (i) Natesto®, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist®, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra® XR, the only FDA-approved 12-hour codeine-based antitussive syrup.
  
The Pediatric Care Portfolio, acquired on November 1, 2019, (the “Pediatric Portfolio”), includes (i) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various for infants and children with fluoride deficiency, (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; and (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions.
  
On February 14, 2020, the Company acquired Innovus Pharmaceuticals Inc. (“Innovus”), a specialty pharmaceutical company commercializing, licensing and developing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes twenty-two consumer health products competing in large healthcare categories including diabetes, men's health, sexual wellness and respiratory health. The Consumer Health Portfolio is commercialized through direct-to- consumer marketing channels utilizing Innovus’s proprietary Beyond Human® marketing and sales platform and on eCommerce platforms.
 
The Company acquired U.S. distribution rights to a COVID-19 IgG/IgM rapid test. The coronavirus test is a solid phase immunochromatographic assay used in the rapid, qualitative and differential detection of IgG and IgM antibodies to the 2019 Novel Coronavirus in human whole blood, serum or plasma. The rapid test has been validated in multi-center clinical trials. The Company entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in pre-clinical studies, and we plan to advance this technology and assess its safety and efficacy in human studies, initially focused on Covid-19 patients.
  
The Company’s strategy is to continue building its portfolio of revenue-generating products, leveraging its commercial team’s expertise to build leading brands within large therapeutic markets.
 
Financial Condition. As of September 30, 2020, the Company had approximately $38.2 million of cash, cash equivalents and restricted cash. The Company’s operations have historically consumed cash and are expected to continue to require cash, but at a declining rate.
 
Revenues for the three-months ended September 30, 2020 were $13.5 million and increased approximately 839% compared to $1.4 million for the three-months ended September 30, 2019. Revenues increased 277% and 100% for each of the years ended June 30, 2020 and 2019, respectively. Revenue is expected to increase over time, which will allow the Company to rely less on our existing cash balance and proceeds from financing transactions. Cash used by operations during the three-months ended September 30, 2020 was $8.0 million compared to $3.0 million for the three-months ended September 30, 2019. The increase is due primarily to an increase in working capital and pay down of other liabilities.
 
 
10
 
 
As of the date of this Report, the Company expects costs for its current operations to increase modestly as the Company integrates the acquisition of the Pediatrics Portfolio and Innovus and continues to focus on revenue growth through increasing product sales. The Company’s total asset position totaling approximately $141.3 million plus the proceeds expected from ongoing product sales will be used to fund existing operations. The Company may continue to access the capital markets from time-to-time when market conditions are favorable. The timing and amount of capital that may be raised is dependent the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms favorable to the Company and its stockholders, or at all. The Company raised approximately $6.6 million, net during its fourth quarter ended June 30, 2020 from the sale of new common equity using the Company’s at-the-market facility. There were zero funds raised during the quarter ended September 30, 2020. Between September 30, 2020, and the filing date of this quarterly report on Form 10-Q, the Company raised gross proceeds of approximately $3.1 million upon the issuance of approximately 3.0 million shares of the Company’s common stock under the Company’s at-the-market offering program. As of the date of this report, the Company has adequate capital resources to complete its near-term operating objectives.
 
Since the Company has sufficient cash on-hand as of September 30, 2020 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, the Company reports that there exists no indication of substantial doubt about its ability to continue as a going concern.
 
If the Company is unable to raise adequate capital in the future when it is required, Aytu management can adjust its operating plans to reduce the magnitude of the capital need under its existing operating plan. Some of the adjustments that could be made include delays of and reductions to commercial programs, reductions in headcount, narrowing the scope of the Company’s commercial plans, or reductions to its research and development programs. Without sufficient operating capital, the Company could be required to relinquish rights to products or renegotiate to maintain such rights on less favorable terms than it would otherwise choose. This may lead to impairment or other charges, which could materially affect the Company’s balance sheet and operating results.
 
Basis of Presentation. The unaudited consolidated financial statements contained in this report represent the financial statements of Aytu and its wholly-owned subsidiaries, Aytu Women’s Health, LLC, Innovus Pharmaceuticals, Inc., and Aytu Therapeutics, LLC. The unaudited consolidated financial statements should be read in conjunction with Aytu’s Annual Report on Form 10-K for the year ended June 30, 2020, which included all disclosures required by generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Aytu and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended September 30, 2020 are not necessarily indicative of expected operating results for the full year. The information presented throughout this report, as of and for the three-month periods ended September 30, 2020, and 2019, is unaudited.
 
Interim Unaudited Condensed Consolidated Financial Statements. The accompanying condensed consolidated balance sheet as of September 30, 2020, and the condensed consolidated statements of operations, stockholders’ equity, for the three months ended, and the interim condensed consolidated statements of cash flows for the three months ended September 30, 2020 and 2019, are unaudited. The condensed consolidated balance sheet as of June 30, 2020 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial condition, its operations and cash flows for the periods presented. The historical results are not necessarily indicative of future results, and the results of operations for the three months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year or any other period.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the determination of the fair value of equity awards, the fair value of identified assets and liabilities acquired in business combinations, the useful lives of property and equipment, intangible assets, impairment of long-lived and intangible assets, including goodwill, provisions for doubtful accounts receivable, certain accrued expenses, and the discount rate used in measuring lease liabilities. These estimates and assumptions are based on the Company’s historical results and management’s future expectations. Actual results could differ from those estimates.
 
 
11
 
 
Significant Accounting Policies
 
The Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company’s unaudited condensed consolidated financial statements and related notes during the three months ended September 30, 2020.
 
Adoption of New Accounting Pronouncements
 
Fair Value Measurements (“ASU 2018-13”). 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. The Company adopted this as of July 1, 2020, the beginning of the Company’s fiscal year-ended June 30, 2021. The most relevant component of ASU 2018-13 to the Company’s financial statements relates to the need to disclose the range and weighted-average of significant unobservable inputs used in Level 3 fair value measurements. However, the Company discloses on a discrete basis all significant inputs for all Level 3 Fair Value measurements.
 
Recent Accounting Pronouncements
 
Financial Instruments – Credit Losses (“ASU 2016-13”). In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard was effective for interim and annual reporting periods beginning after December 15, 2019. However, in October 2019, the FASB approved deferral of the adoption date for smaller reporting companies for fiscal periods beginning after December 15, 2022. Accordingly, the Company’s fiscal year of adoption will be the fiscal year ended June 30, 2024. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018, but the Company did not elect to early adopt. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements, but no conclusion has been reached.
 
This Quarterly Report on Form 10-Q does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to the Company’s financial condition, results of operations, cash flows or disclosures.
 
2.
Acquisitions
 
The Pediatric Portfolio
 
On October 10, 2019, the Company entered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to acquire the Pediatric Portfolio, which closed on November 1, 2019. The Pediatric Portfolio consists of four main prescription products (i) Poly-Vi-Flor® and Tri-Vi-Flor™, (ii) Cefaclor for Oral Suspension, (iii) and Karbinal® ER. Total consideration transferred to Cerecor consisted of $4.5 million cash and approximately 9.8 million shares of Series G Convertible Preferred Stock. The Company also assumed certain of Cerecor’s financial and royalty obligations, and not more than $3.5 million of Medicaid rebates and up to $0.8 million of product returns, of which $3.5 million has been incurred. The Company also retained the majority of Cerecor’s workforce focused on sales, commercial contracts and customer relationships.
 
In addition, the Company assumed Cerecor obligations due to an investor that include fixed and variable payments aggregating to $25.6 million. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was paid to the investor. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026. In June 2020, the Company paid down a $15 million balloon payment originally owed on January 2021 to reduce the fixed liability.
 
Further, certain of the products in the Product Portfolio require royalty payments ranging from 12% to 15% of net revenue. One of the products in the Product Portfolio requires the Company to generate minimum annual sales sufficient to represent annual royalties of approximately $1.8 million, in the event the minimum sales volume is not satisfied.
 
 
12
 
 
While no equity was acquired by the Company, the transaction was accounted for as a business combination under the acquisition method of accounting pursuant to Topic 805. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remainder of the aggregate purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified product portfolio that is expected to provide revenue and cost synergies.
 
The following table summarized the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. These estimates are preliminary, pending final evaluation of certain assets and liabilities, and therefore, are subject to revisions that may result in adjustments to the values presented below:
 
 
 
 As of
 
 
 
November 1, 2019
 
Consideration
 
 
 
Cash and cash equivalents
 $4,500,000 
Fair value of Series G Convertible Preferred Stock
    
Total shares issued
  9,805,845 
Estimated fair value per share of Aytu common stock
 $0.567 
Estimated fair value of equity consideration transferred
  5,559,914 
Total consideration transaferred
 $10,059,914 
Recognized amounts of identifiable assets acquired and liabilities assumed
    
Inventory, net
 $459,123 
Prepaid assets
  1,743,555 
Other current assets
  2,525,886 
Intangible assets - product marketing rights
  22,700,000 
Accrued liabilities
  (300,000)
Accrued product program liabilities
  (6,683,932)
Assumed fixed payment obligations
 $(29,837,853)
Total identifiable net assets
  (9,393,221)
Goodwill
 $19,453,135 
 
The fair values of intangible assets, including product technology rights were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 9).
 
The fair value of the net identifiable asset acquired was determined to be $22.7 million, which is being amortized over ten years.
 
Innovus Merger (Consumer Health Portfolio)
 
On February 14, 2020, the Company completed the Merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon the effectiveness of the Merger, the Company merged with and into Innovus, and all outstanding Innovus common stock was exchanged for approximately 3.8 million shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 million shares of Series H Convertible Preferred stock of the Company and retired. The remaining Innovus warrants outstanding, those without ‘cash- out’ rights, at the time of the Merger, continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus is now a 100% wholly-owned subsidiary of the Company, (“Aytu Consumer Health”).
 
On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 1.2 million shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24 million revenue milestone for the calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million.
 
In addition, as part of the Merger, the Company assumed approximately $3.1 million of notes payable, $0.8 million in lease liabilities, and other assumed liabilities associated with Innovus. Of the $3.1 million of notes payable, approximately $2.2 million was converted into approximately 1.8 million shares of the Company’s common stock since February 14, 2020. Approximately $0.3 million remained outstanding as of September 30, 2020.
 
 
13
 
 
The following table summarized the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. These estimates are preliminary, pending final evaluation of certain assets and liabilities, and therefore, are subject to revisions that may result in adjustments to the values presented below:
 
 
 
 As of
 
 
 
February 14, 2020
 
Consideration
 
 
 
Fair Value of Aytu Common Stock
 
 
 
Total shares issued at close
  3,810,393 
Estimated fair value per share of Aytu common stock
 $0.756 
Estimated fair value of equity consideration transferred
 $2,880,581 
Fair value of Seris H Convertile Preferred Stock
    
Total shares issued
  1,997,736 
Estimated fair value per share of Aytu common stock
 $0.756 
Estimated fair value of equity consideration transferred
 $1,510,288 
Fair value of former Innovus warrants
 $15,315 
Fair value of Contingent Value Rights
 $7,049,079 
Forgiveness of Note Payable owed to the Company
 $1,350,000 
Total consideration transferred
 $12,805,263 
 
 
 
 As of
 
 
 
February 14, 2020
 
Total consideration transferred
 $12,805,263 
Recongnized amounts of identifiage assets acquired and liabilities assumed
    
Cash and cash equivalents
 $390,916 
Accounts receivable, net
  278,826 
Inventory, net
  1,149,625 
Prepaid expenses and other current assets
  1,692,133 
Other long-term assets
  36,781 
Right-to-use assets
  328,410 
Property, plant and equipment
  190,393 
Trademarks and patents
  11,744,000 
Accounts payable and accrued other expenses
  (7,202,309)
Other current liabilities
  (629,601)
Notes payable
  (3,056,361)
Lease liability
  (754,822)
Total identifiable assets
 $4,167,991 
Goodwill
 $8,637,272 
 
The fair values of intangible assets, including product distribution rights were determined using variations of the income approach, specifically the relief-from-royalties method. It also includes customer lists using an income approach utilizing a discounted cash flow model. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 10).
 
The fair value of the net identifiable assets acquired was determined to be $11.7 million, which is being amortized over a range between 1.5 to 10 years.
 
 
14
 
 
Unaudited Pro Forma Information
 
The following supplemental unaudited proforma financial information presents the Company’s results as if the following acquisitions had occurred on July 1, 2019:
 
Acquisition of the Pediatric Portfolio, effective November 1, 2019;
Merger with Innovus effective February 14, 2020.
 
The unaudited pro forma results have been prepared based on estimates and assumptions, which management believes are reasonable, however, the results are not necessarily indicative of the consolidated results of operations had the acquisition occurred on July 1, 2019, or of future results of operations:
 
 
 Three Months Ended   
 
Three Months Ended
 
 
   September 30, 2020 
 
September 30, 2019
 
 
 
Actual
 
 
Pro Forma
 
 
 
 (Unaudited)
 
 
 (Unaudited)
 
Total revenues, net
 $13,520,246 
 $10,606,870 
Net (loss)
  (4,305,931)
  (8,256,982)
Net (loss) per share (aa)
 $(0.04)
 $(0.29)
 
(aa) Pro forma net loss per share calculations excluded the impact of the issuance of the (i) Series G Convertible Preferred Stock and the, (ii) Series H Convertible Preferred Stock under the assumption those shares would continue to remain non-participatory during the periods reported above.
 
3.
Revenue Recognition
 
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,
 
 
 
2020
 
 
2019
 
 
 
 (unaudited)
 
 
 (unaudited)
 
U.S.
 $12,144,000 
 $1,262,000 
International
  1,376,000 
  178,000 
Total net revenue
 $13,520,000 
 $1,440,000 
 
Revenues by Product Portfolio. Net revenue disaggregated by significant product portfolio for the three months ended September 30, 2020 and September 30, 2019 were as follows:

 
 
Three Months Ended September 30
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 Primary care and devices portfolio
 $3,033,000 
 $1,440,000 
 Pediatric portfolio
  2,719,000 
  - 
 Consumer Health portfolio
  7,768,000 
  - 
 Consolidated revenue
 $13,520,000 
 $1,440,000 
 
 
15
 
 
4.
Inventories
 
Inventories consist of raw materials and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Aytu periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory, Aytu will record a write-down to net realizable value in the period that the impairment is first recognized. The Company wrote down $0.1 million and $0 inventory during the three months ended September 30, 2020 or 2019, respectively.
 
Inventory balances consist of the following:
 
 
 
As of
 
 
As of
 
 
 
September 30,
 
 
June 30,
 
 
 
2020
 
 
2020
 
Raw materials
 $542,000 
 $397,000 
Finished goods, net
  10,938,000 
  9,603,000 
 
 $11,480,000 
 $10,000,000 
 
5.
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
 
 
September 30,
 
 
June 30,
 
 
 
Useful Lives in years
 
 
2020
 
 
2020
 
Manufacturing equipment
  2 - 5 
 $112,000 
 $112,000 
Leasehold improvements
  3 
  111,000 
  229,000 
Office equipment, furniture and other
  2 - 5 
  281,000 
  312,000 
Lab equipment
  3 - 5 
  90,000 
  90,000 
Less accumulated depreciation and amortization
    
  (488,000)
  (484,000)
   Fixed assets, net
    
 $106,000 
 $259,000 
 
During the quarter ended September 30, 2020, we recognized a loss of $112,000 on sale of equipment due to termination of leases.
 
Depreciation and amortization expense totaled $33,000 and $16,000 for the three-months ended September 30, 2020 and 2019, respectively.
 
6.
Leases, Right-to-Use Assets and Related Liabilities
 
The Company previously adopted the FASB issued ASU 2016-02, “Leases (Topic 842)” as of July 1, 2019. With the adoption of ASU 2016-02, the Company recorded an operating right-of-use asset and an operating lease liability on its balance sheet associated with the lease of its corporate headquarters. The right-of-use asset represents the Company’s right to use the underlying asset for the lease term, and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations were recognized at the later of the commencement date or July 1, 2019; the date of adoption of Topic 842; based on the present value of remaining lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments. Rent expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. The lease liability is classified as current or long-term on the balance sheet.
 
 
16
 
 
As of September 30, 2020, the maturities of the Company’s operating lease liabilities were as follows:
 


 
Year Ending
June 30, 
 
2021 (remaining 9 months)
 $90,412 
2022
  123,883 
2023
  126,883 
2024
  35,883 
2025 
  2,942 
 Total lease payments
  380,003 
Less: Imputed interest
  (45,048)
 Lease liabilities
 $334,955 
 
Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended September 30, 2020 and 2019 was $66,000 and $0, respectively, and was included in net cash used in operating activities in the consolidated statements of cash flows.
 
As of September 30, 2020, the weighted average remaining lease term is 2.42 years, and the weighted average discount rate used to determine operating lease liabilities was 8.0%. Rent expense for the three months ended September 30, 2020 and 2019 totaled $70,000 and $32,000, respectively.
 
On August 28, 2020, the Company’s Innovus subsidiary signed a lease termination agreement with its lessor to terminate its lease effective September 30, 2020. The original lease termination date was April 30, 2023. As part of the agreement, Innovus agreed to make a cash payment to the landlord the equivalent of two additional months’ rent aggregating to $44,306 plus $125,000 less the security deposit of $20,881. The fair value of the lease liability related to this facility lease was approximately $0.7 million as of June 30, 2020. The Company recognized a gain of approximately $343,000 during the three months ended September 30, 2020.
 
7.
Intangible Assets – Amortizable
 
The Company currently holds the following intangible asset portfolios as of September 30, 2020: (i) Licensed assets, which consist of pharmaceutical product assets that were acquired prior to July 1, 2020; (ii) Product technology rights, acquired from the November 1, 2019 acquisition of the Pediatric Portfolio from Cerecor; and, as a result of the Merger with Innovus on February 14, 2020, both, (iii) the Acquired product distribution rights; consisting of patents and trade names) acquired February 14, 2020.
 
If acquired in an asset acquisition, the Company capitalized the acquisition cost of each licensed patent or tradename, which can include a combination of both upfront consideration, as well as the estimated future contingent consideration estimated at the acquisition date. If acquired in a business combination, the Company capitalizes the estimated fair value of the intangible asset or assets acquired, based primarily on a discounted cash flow model approach or relief-from-royalties model.
 
The following table provides the summary of the Company’s intangible assets as of September 30, 2020 and June 30, 2020, respectively.
 
 
 
 September 30, 2020
 
 
 
 Gross Carrying Amount
 
 
 Accumulated Amortization
 
 
 Impairment
 
 
 Net Carrying Amount
 
 
 Weighted-Average Remaining Life
(in years)
 
 Licensed assets
 $23,649,000 
 $(7,631,000)
 $- 
 $16,018,000 
  11.80 
 Acquired product technology right
  22,700,000 
  (2,081,000)
  - 
  20,619,000 
  9.09 
 Acquired product distribution rights
  11,354,000 
  (943,000)
  - 
  10,411,000 
  4.37 
 Acquired customer lists
  390,000 
  (162,000)
  - 
  228,000 
  0.87 
 
 $58,093,000 
 $(10,817,000)
 $- 
 $47,276,000 
  8.93 
 
 
 
 June 30, 2020
 
 
 
 Gross Carrying Amount
 
 
 Accumulated Amortization
 
 
 Impairment
 
 
 Net Carrying Amount
 
 
 Weighted-Average Remaining Life
(in years)
 
 Licensed assets
 $23,649,000 
 $(7,062,000)
 $- 
 $16,587,000 
  11.88 
 MiOXSYS Patent
  380,000 
  (185,000)
  (195,000)
  - 
  - 
 Acquired product technology right
  22,700,000 
  (1,513,000)
  - 
  21,187,000 
  9.34 
 Acquired product distribution rights
  11,354,000 
  (565,000)
  - 
  10,789,000 
  4.62 
 Acquired customer lists
  390,000 
  (98,000)
  - 
  292,000 
  1.12 
 
 $58,473,000 
 $(9,423,000)
 $(195,000)
 $48,855,000 
  9.11 
 
 
17
 
 
The following table summarizes the estimated future amortization expense to be recognized over the next five years and periods thereafter:
 
 
 
Amortization
 
2021
 $4,735,000 
2022
  6,086,000 
2023
  6,046,000 
2024
  6,033,000 
2025
  4,479,000 
Thereafter
  19,897,000 
 
 $47,276,000 
 
Certain of the Company’s amortizable intangible assets include renewal options, extending the expected life of the asset. The renewal periods range between approximately 1 to 20 years depending on the license, patent, or other agreement. Renewals are accounted for when they are reasonably assured. Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of intangible assets was $1.6 million and $0.6 million for the three months ended September 30, 2020 and 2019, respectively.
 
8.
Accrued liabilities
 
Accrued liabilities consist of the following:
 
 
 
As of
 
 
As of
 
 
 
September 30,
 
 
June 30,
 
 
 
2020
 
 
2020
 
Accrued settlement expense
 $150,000 
 $315,000 
Accrued program liabilities
  679,000 
  959,000 
Accrued product-related fees
  3,054,000 
  2,471,000 
Credit card liabilities
  652,000 
  510,000 
Medicaid liabilities
  1,997,000 
  1,842,000 
Return reserve
  1,537,000 
  1,329,000 
Sales taxes payable
  180,000 
  175,000 
Other accrued liabilities*
  444,000 
  249,000 
Total accrued liabilities
 $8,693,000 
 $7,850,000 
 
* Other accrued liabilities consist of franchise tax, accounting fee, interest payable, merchant services charges, none of which individually represent greater than five percent of total current liabilities.
 
9.
Fair Value Considerations
 
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability, and contingent consideration. The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short maturities, including those acquired or assumed on November 1, 2019 as a result of the acquisition of the Pediatric Portfolio. The fair value of the warrant derivative liability was valued using the lattice valuation methodology. The fair value of acquisition-related contingent consideration is based on a Monte-Carlo methodology using estimated discounted future cash flows and periodic assessments of the probability of occurrence of potential future events. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.
 
 
18
 
 
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
 
Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;
 
Level 2: Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and
 
Level 3: Unobservable inputs that are supported by little or no market activity.
 
The Company’s assets and liabilities which are measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. Aytu has consistently applied the valuation techniques discussed below in all periods presented.
 
Recurring Fair Value Measurements
 
The following table presents the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of September 30, 2020 and June 30, 2020, by level within the fair value hierarchy.
 
 
 
 
 
 
 Fair Value Measurements at September 30, 2020
 
 
 
 Fair Value at September 30, 2020
 
 
 Quoted Priced in Active Markets for Identical Assets (Level 1)
 
 
 Significant Other Observable Inputs
(Level 2)
 
 
 Significant Unobservable Inputs (Level 3)
 
 Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 Contingent consideration
  13,778,000 
   
   
  13,778,000 
 CVR liability
  5,669,000 
   
   
  5,669,000 
 
 $19,447,000 
   
   
 $19,447,000 
 
 
 
 
 
 
 Fair Value Measurements at June 30, 2020
 
 
 
 Fair Value at June 30, 2020
 
 
 Quoted Priced in Active Markets for Identical Assets (Level 1)
 
 
 Significant Other Observable Inputs (Level 2)
 
 
 Significant Unobservable Inputs (Level 3)
 
 Recurring:
 
 
 
 
 
 
 
 
 
 
 
 
 Contingent consideration
  13,588,000 
   
   
  13,588,000 
 CVR liability
 $5,572,000 
   
   
 $5,572,000 
 
 $19,160,000 
   
   
 $19,160,000 
 
Contingent Consideration. The Company classifies its contingent consideration liability in connection with the acquisition of Natesto, Tuzistra XR, ZolpiMist and Innovus, within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. The Company estimates 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.
 
As of November 2, 2018, the contingent consideration, related to this Tuzistra XR, was valued at $8.8 million using a Monte Carlo simulation. As of June 30, 2020, the contingent consideration was revalued at $13.2 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $158,000, and $96,000, respectively. As of September 30, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.
 
 
19
 
 
The contingent consideration related to the ZolpiMist royalty payments was valued at $2.6 million using a Monte Carlo simulation, as of June 11, 2018. As of June 30, 2020, the contingent consideration was revalued at $0.2 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $0.1 million and $0.1 million, respectively. As of September 30, 2020, none of the milestones had been achieved, and therefore, no milestone payment was made.
 
The Company recognized approximately $0.2 million in contingent consideration as a result of the February 14, 2020 Innovus Merger. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimates risk that the milestones are achieved. The contingent consideration accretion expense for the three months ended September 30, 2020 and 2019 was $13,000, and $0, respectively. There was no material change in this valuation as of September 30, 2020.
 
Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to 4.7 million shares of the Company’s common stock, or cash either upon the option of the Company or in the event there are insufficient shares available to satisfy such obligations. The fair value of the contingent value rights was based on a model in which each individual payout was deemed either (a) more likely than not to be paid out or (b) less likely than not to be paid out. From there, each obligation was then discounted at a 30% discount rate to reflect the overall risk to the contingent future payouts pursuant to the CVRs. This value is then remeasured both for future expected payout at well as the increase fair value due to the time value of money. As of September 30, 2020, the Company has paid out 1.2 million shares of the Company’s common stock to satisfy the first $2 million milestone, which relates to the Innovus achievement of $24 million in revenues during the 2019 calendar year. The unrealized loss for the three months ended September 30, 2020 and 2019 was $97,000, and $0, respectively.
 
Summary of Level 3 Input Changes
 
The following table sets forth a summary of changes to those fair value measures using Level 3 inputs for the three months ended September 30, 2020:
 
 
 
 CVR Liability
 
 
 Contingent Consideration
 
 Balance as of June 30, 2020
 $5,572,000 
 $13,588,000 
 Transfers into Level 3
   
   
 Transfer out of Level 3
   
   
 Total gains, losses, amortization or accretion in period
   
   
 Included in earnings
 $97,000 
 $209,000 
 Included in other comprehensive income
   
   
 Purchases, issues, sales and settlements
   
   
 Purchases
   
   
 Issues
   
   
 Sales
   
   
 Settlements
   
 $(19,000)
 Balance as of September 30, 2020
 $5,669,000 
 $13,778,000 
 
 
20
 
 
10.
Commitments and Contingencies
 
Commitments and contingencies are described below and summarized by the following as of September 30, 2020:
 
 
 
Total
 
 
2021
 
 
2022
 
 
2023
 
 
2024
 
 
2025
 
 
Thereafter
 
Prescription database
 $1,411,000 
 $678,000 
 $733,000 
  - 
  - 
  - 
  - 
Pediatric portfolio fixed payments and product minimums
  16,911,000 
  2,736,000 
  3,300,000 
  3,300,000 
  3,300,000 
  3,300,000 
  975,000 
Inventory purchase commitment
  1,962,000 
  1,226,000 
  736,000 
  - 
  - 
  - 
  - 
CVR liability
  14,000,000 
  2,000,000 
  2,000,000 
  5,000,000 
  5,000,000 
  - 
  - 
Product contingent liability
  202,000 
  - 
  - 
  - 
  - 
  - 
  202,000 
Product milestone payments
  3,000,000 
  - 
  3,000,000 
  - 
  - 
  - 
  - 
 
    
    
    
    
    
    
    
 
 $37,486,000 
 $6,640,000 
 $9,769,000 
 $8,300,000 
 $8,300,000 
 $3,300,000 
 $1,177,000 
 
Prescription Database
 
In May 2016, the Company entered into an agreement with a vendor that will provide it with prescription database information. The Company agreed to pay approximately $1.6 million over three years for access to the database of prescriptions written for Natesto. In January 2020, the Company amended the agreement and agreed to pay additional $0.6 million to add access to the database of prescriptions written for the Pediatric Portfolio. The payments have been broken down into quarterly payments.
 
Pediatric Portfolio Fixed Payments and Product Milestone
 
The Company assumed two fixed, periodic payment obligations to an investor (the “Fixed Obligation”). Beginning November 1, 2019 through January 2021, the Company will pay monthly payments of $86,840, with a balloon payment of $15,000,000 due in January 2021. A second fixed obligation requires the Company pay a minimum of $100,000 monthly through February 2026, except for $210,767 paid in January 2020.
 
In addition, the Company acquired a Supply and Distribution Agreement with Tris Pharma, Inc. ("TRIS"), (the “Karbinal Agreement”), under which the Company is granted the exclusive right to distribute and sell the product in the United States. The initial term of the Karbinal Agreement was 20 years. The Company will pay TRIS a royalty equal to 23.5% of net sales. A third party agreed to offset the 23.5% royalty payable by 8.5%, for a net royalty equal to 15%, in fiscal year 2018 and 2019 for net sales of Karbinal.
 
The Karbinal Agreement make-whole payment is capped at $1,750,000 each year. The Karbinal Agreement also contains minimum unit sales commitments, which is based on a commercial year that spans from August 1 through July 31, of 70,000 units through 2023. The Company is required to pay TRIS a royalty make whole payment of $30 for each unit under the 70,000-unit annual minimum sales commitment through 2033. The annual payment is due in August of each year. The Karbinal Agreement also has multiple commercial milestone obligations that aggregate up to $3.0 million based on cumulative net sales, the first of which is triggered at $40.0 million of net revenues.
 
CVR Liability
 
On February 14, 2020 the Company closed on the Merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon closing the Merger, the Company merged with and into Innovus and entered into a Contingent Value Rights Agreement (the “CVR Agreement”). Each CVR entitles its holder to receive its pro rata share, payable in cash or stock, at the option of Aytu, of certain payment amounts if the targets are met. If any of the payment amounts is earned, they are to be paid by the end of the first quarter of the calendar year following the year in which they are earned. Multiple revenue milestones can be earned in one year.
 
On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 1.2 million shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24.0 million revenue milestone for calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million during the fiscal year ended June 30, 2020. No additional milestone payments have been paid as of September 30, 2020.
 
 
 
21
 
 
Product Contingent Liability
 
In February 2015, Innovus acquired Novalere, which included the rights associated with distributing FlutiCare. As part of the Merger, Innovus is obligated to make 5 additional payments of $0.5 million when certain levels of FlutiCare sales are achieved.
 
Inventory Purchase Commitment
 
In May 1, 2020, the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Hikma Pharmaceuticals USA, Inc. (“Hikma”). Pursuant to the settlement agreement, Innovus has agreed to purchase and Hikma has agreed to manufacture a minimum amount of our branded fluticasone propionate nasal spray USP, 50 mcg per spray (FlutiCare®), under Hikma’s FDA approved ANDA No. 207957 in the U.S. The commitment requires Innovus to purchase three batches of product through fiscal year 2022 each of which amount to $1.0 million.
 
Milestone Payments
 
In connection with the Company’s intangible assets, Aytu has certain milestone payments, totaling $3.0 million, payable at a future date, are not directly tied to future sales, but upon other events certain to happen. These obligations are included in the valuation of the Company’s contingent consideration (see Note 9).
 
11.
Capital Structure
 
The Company has 200 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. At September 30, 2020 and June 30, 2020, Aytu had 125,837,357 and 125,837,357 common shares outstanding, respectively, and zero preferred shares outstanding, respectively.
 
Included in the common stock outstanding are 4,230,766 shares of restricted stock issued to executives, directors, employees and consultants.
 
In June 2020, the Company completed an at-the-market offering program, which allows us to sell and issue shares of our common stock from time-to- time. The company issued 4,302,271 shares of common stock, with total gross proceeds of $6.8 million before deducting underwriting discounts, commissions and other offering expenses payable by the Company of $0.2 million through September 30, 2020. The Company did not issue any shares of common stock under the at-the-market offering program during the three months ended September 30, 2020. After September 30, 2020, the Company issued approximately 3.0 million shares of common stock, with total gross proceeds of  approximately $3.1 million between October 8, 2020 and the filing of this form 10-Q.
 
In July 2020, the Company paid $1.5 million issuance cost in cash related to the March 10, 12, and 19 offerings (the “March Offerings”), and issued 845,000 shares of warrants with an exercise price of $1.5625 and 78,000 shares of warrants with an exercise price of $1.9938 to a third party in conjunction with the March 2020 offerings. The warrants have a term of one year from the issuance date. These warrants had at issuance a fair value of approximately $356,000 and were valued using a Black-Scholes model.
 
12.
Equity Incentive Plan
 
Share-based Compensation Plans
 
On June 1, 2015, the Company’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, 2020, we have 4,837 shares that are available for grant under the 2015 Plan. On February 13, 2020, the Company’s stockholders approved an increase to 5.0 million total shares of common stock in the 2015 Plan.
 
 
22
 
 
Stock Options
 
Employee Stock Options:
 
The fair value of the options is 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. There were no grants of stock options to employees during the quarters ended September 30, 2020 and 2019, respectively, therefore, no assumptions are used for fiscal 2021.
 
Stock option activity is as follows:
 
 
 
 Number of Options
 
 
 Weighted Average Exercise Price
 
 
 Weighted Average Remaining Contractual Life in Years
 
 
 Aggregate Intrinsic Value
 
Outstanding June 30, 2020
  765,937 
 $1.85 
  9.67 
 
 
 
   Granted
  - 
  - 
    
 
 
 
   Exercised
  - 
  - 
    
 
 
 
   Forfeited/Cancelled
  - 
  - 
    
 
 
 
   Expired
  - 
  - 
    
 
 
 
Outstanding September 30, 2020
  765,937 
  1.85 
  9.44 
  70,320 
Exercisable at September 30, 2020
  8,926 
 $52.81 
  8.68 
 $1,650 
 
As of September 30, 2020, there was $601,000 unrecognized option-based compensation expense related to non-vested stock options. The Company expects to recognize this expense over a weighted-average period of 2.73 years.
 
Restricted Stock
 
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, 2020
  4,184,516 
 $1.47 
  6.4 
 Granted
    
    
    
 Vested
  (369,198)
    
    
 Forfeited
    
    
    
 Unvested at September 30, 2020
  3,815,318 
 $1.53 
  6.3 
 
Under the 2015 Plan, there was $4.7 million of total unrecognized stock-based compensation expense related to the non-vested restricted stock as of September 30, 2020. The Company expects to recognize this expense over a weighted-average period of 6.3 years. The Company previously issued 1,540 shares of restricted stock outside the Company’s 2015 Plan, which vest in July 2026. The unrecognized expense related to these shares was $1.1 million as of September 30, 2020 and is expected to be recognized over the weighted average period of 5.8 years.
 
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,
 
 Selling, general and administrative:
 
2020
 
 
2019
 
Stock options
 $72,000 
 $5,000 
Restricted stock
  383,000 
  160,000 
 Total stock-based compensation expense
 $455,000 
 $165,000 
 
 
23
 
 
13.
Warrants
 
In July 2020, the Company issued 845,000 shares of warrants with an exercise price of $1.5625 and 78,000 shares of warrants with an exercise price of $1.9938 in connect with the March Offerings. The warrants have a term of one year from the issuance date. These warrants have a fair value of $356,000.
 
Significant assumptions in valuing the warrants issued during the quarter are as follows:
 
 
 
Warrants Issued Three Months Ended September 30, 2020
 
Expected volatility
  100%
Equivalent term (years)
  1 
Risk-free rate
  - 
Dividend yield
  0.00%
 
A summary of equity-based warrants is as follows:
 
 
 
 Number of Warrants
 
 
 Weighted Average Exercise Price
 
 
 Weighted Average Remaining Contractual Life in Years
 
Outstanding June 30, 2020
  22,884,538 
 $3.06 
  2.00 
Warrants issued
  923,000 
    
    
Warrants expired
  (8,361)
    
    
Warrants exercised
  - 
    
    
Outstanding September 30, 2020
  23,799,177 
 $2.98 
  1.47 
 
14.
Net Loss per Common Share
 
Basic income (loss) per common share is calculated by dividing the net income (loss) available to the common shareholders by the weighted average number of common shares outstanding during that period. Diluted net loss per share reflects the potential of securities that could share in the net loss of the Company. For each three-month period presented, the basic and diluted loss per share were the same for 2020 and 2019, as they were not included in the calculation of the diluted net loss per share because they would have been anti-dilutive.
 
The following table sets-forth securities that could be potentially dilutive, but as of the quarters ended September 30, 2020 and 2019 are anti-dilutive, and therefore excluded from the calculation of diluted earnings per share.
 
 
 
 
Three Months Ended
 
 
 
 
September 30,
 
 
 
 
2020
 
 
2019
 
Warrants to purchase common stock - liability classified
 
  240,755 
  240,755 
Warrant to purchase common stock - equity classified
 (Note 13)
  23,799,177 
  16,218,908 
Employee stock options
 (Note 12)
  765,937 
  1,556 
Employee unvested restricted stock
 (Note 12)
  3,816,858 
  2,342,604 
Convertible preferred stock
 (Note 11)
  - 
  3,151,148 
 
  28,622,727 
  21,954,971 
 
 
24
 
 
15.
Notes Payable
 
The Aytu BioScience Note. On February 27, 2020, the Company issued a $0.8 million promissory note (the “Note”) and received consideration of approximately $0.6 million. The Note had an eight-month term with principal and interest payable on November 1, 2020 and the recognition of approximately $0.2 million of debt discount related to the issuance of promissory notes. The discount is amortized over the life of the promissory notes through the fourth quarter of calendar 2020. During the three months ended September 30, 2020 and 2019, the Company recorded approximately $42,000 and $0, respectively, of related amortization.
 
The Innovus Notes. On January 9, 2020, prior to the completion of the merger, Innovus Pharmaceuticals, Inc. entered into a note agreement upon which it received gross proceeds of $0.4 million with a principal amount of $0.5 million. The note requires twelve equal monthly payments of approximately $45,000. As of September 30, 2020, the net balance of the note was $135,000.
 
16.
Segment reporting
 
The Company’s chief operating decision maker (the “CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.
 
Aytu manages our Company and aggregates our operational and financial information in accordance with two reportable segments: Aytu BioScience and Aytu Consumer Health. The Aytu BioScience segment consists of the Company’s prescription products. The Aytu Consumer Health segment contains the Company’s consumers healthcare products line, which was the result of the Innovus Merger. Select financial information for these segments is as follows:
 
 
 
 Three months Ended September 30,
 
 
 
2020
 
 
2019
 
 Consolidated revenue:
 
 
 
 
 
 
 Aytu BioScience
 $5,752,000 
 $1,440,000 
 Aytu Consumer Health
  7,768,000 
  - 
 Consolidated revenue
  13,520,000 
  1,440,000 
 
    
    
 Consolidated net loss:
    
    
 Aytu BioScience
  (2,950,000)
  (4,929,000)
 Aytu Consumer Health
  (1,356,000)
  - 
 Consolidated net loss
  (4,306,000)
  (4,929,000)
 
 
 
As of
 
 
As of
 
 
 
September 30,
 
 
June 30,
 
 
 
2020
 
 
2020
 
 Total assets:
 
 
 
 
 
 
 Aytu BioScience
 $116,499,000 
 $126,267,000 
 Aytu Consumer Health
  24,772,000 
  26,569,000 
 Total assets
 $141,271,000 
 $152,836,000 
 
17.
Related Party Transactions
   
Tris Pharma, Inc.
 
On November 2, 2018, the Company entered into a License, Development, Manufacturing and Supply Agreement (the “Tris License Agreement”). On November 1, 2019, the Company acquired the rights to Karbinal as a result of the acquisition of the Pediatric Portfolio from Cerecor, Inc. (See Notes 2 and 10). Mr. Ketan Mehta serves as a Director on the Board of Directors of the Company and is also the Chief Executive Officer of TRIS. The Company paid TRIS approximately $257,000 and $7,000 during the three months ended September 30, 2020 and 2019, respectively for a combination of royalty payments, inventory purchases and other payments as contractually required. The Company’s liabilities, including accrued royalties, contingent consideration and fixed payment obligations were $22.7 million and $16.0 million as of September 30, 2020 and 2019, respectively. In October 2020, the Company paid Tris approximately $1.6 million related to its Karbinal fixed payment obligation.
 
18.
Subsequent Events
 
See Footnotes 1 and 17 for information relating to certain events occurring between September 30, 2020, and the filing of this report Form 10-Q, impacting information disclosed above.
 
 
25
 
 
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, 2020, filed on October 6, 2020. The following discussion and analysis contain 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 October 6, 2020.
 
Overview
 
We are a commercial-stage specialty pharmaceutical company focused on commercializing novel products that address significant healthcare needs in both prescription and consumer health categories. We are currently focused on our Aytu BioScience business, consisting of the Primary Care Portfolio (the “Primary Care Portfolio”) and Pediatric Care Portfolio (the “Pediatric Portfolio”), and our Aytu Consumer Health business (the “Consumer Health Portfolio”). Our Aytu BioScience business is focused on prescription pharmaceutical products treating hypogonadism (low testosterone), cough and upper respiratory symptoms, insomnia, male infertility, and various pediatric conditions. We plan to expand into other therapeutic areas as opportunities arise. Aytu 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.
 
The Primary Care Portfolio includes (i) Natesto, the only FDA-approved nasal formulation of testosterone for men with hypogonadism (low testosterone, or "Low T"), (ii) ZolpiMist, the only FDA-approved oral spray prescription sleep aid, and (iii) Tuzistra XR, the only FDA- approved 12-hour codeine-based antitussive syrup.
 
The Pediatric Care Portfolio, acquired on November 1, 2019, (the “Pediatric Portfolio”), includes (i) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various for infants and children with fluoride deficiency, (ii) Cefaclor, a second-generation cephalosporin antibiotic suspension; and (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions.
 
On February 14, 2020 we acquired Innovus Pharmaceuticals (“Innovus”), a specialty pharmaceutical company licensing, commercializing, and developing safe and effective consumer healthcare products designed to improve health and vitality. Innovus commercializes over twenty-two consumer health products competing in large healthcare categories including diabetes, men's health, sexual wellness and respiratory health. The Innovus product portfolio is commercialized through direct-to-consumer marketing channels utilizing the Innovus’s proprietary Beyond Human® marketing and sales platform and on eCommerce platforms.
 
We recently acquired exclusive U.S. distribution rights to a COVID-19 IgG/IgM rapid test. The coronavirus test is solid phase immunochromatographic assay used in the rapid, qualitative and differential detection of IgG and IgM antibodies to the 2019 Novel Coronavirus in human whole blood, serum or plasma. The rapid test has been validated in multi-center clinical trials. Most recently we entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in pre-clinical studies, and we plan to advance this technology and assess its safety and efficacy in human studies, initially focused on COVID-19 patients.
 
Our strategy is to continue building our portfolio of revenue-generating products, leveraging our focused commercial team and expertise to build leading brands within large therapeutic markets.
 
Strategic Growth Initiatives
 
Pursuant to our strategy of identifying and acquiring complimentary assets, we have entered into two transactions that we expect to substantially increase our revenue generating capacity and provide opportunities to reduce our combined operating losses. The dual impact of the transactions on revenue and operating expenses is expected to position us to achieve positive cash flow earlier than previously expected.
 
Acquisition of Pediatric Portfolio. On October 10, 2019, we entered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to purchase and acquire Cerecor’s portfolio of prescription pediatric therapeutics (the “Pediatric Portfolio”), which closed on November 1, 2019. The Pediatric Portfolio consists of six pharmaceutical and other prescription products consisting of (i) AcipHex Sprinkle, (ii) Cefaclor for Oral Suspension, (iii) Karbinal ER, (iv) Flexichamber, (v) Poly- Vi-Flor and Tri-Vi-Flor. Total consideration transferred consisted of $4.5 million cash and approximately 9.8 million shares of Series G Convertible Preferred Stock, plus the assumption not more than $3.5 million of Medicaid rebates and products returns. In addition, we absorbed the majority of the Cerecor’s workforce focused on commercial sales, commercial contracts and customer relationships.
 
 
26
 
 
We have assumed obligations due to an investor including fixed and variable payments. We assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Product Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million is due. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026. The Company subsequently paid down the $15 million balloon payment early in June 2020, removing this obligation from our balance sheet.
 
Further, certain of the products in the Pediatric Portfolio require royalty payments ranging from 15% to 38.0% of net revenue. One of the products in the Pediatric Portfolio requires us to generate minimum annual sales sufficient to represent annual royalties of approximately $1.75 million.
 
Acquisition of Innovus Pharmaceuticals. On February 14, 2020 we closed on the merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. The acquisition of Innovus has enabled the company to expand into the consumer healthcare market with Innovus’ over-the-counter medicines and other healthcare products. We expect Innovus to continue to develop additional consumer healthcare products and expand its portfolio. This, we expect, will drive additional revenue for the consumer health subsidiary and contribute meaningfully to the company's overall revenue growth.
 
Additionally, we expect to participate in the U.S. COVID-19 serology testing market. We have purchased 1,600,000 COVID-19 IgG/gM rapid tests from Zhejiang Orient Gene Biotech Limited via our distribution agreement with L.B. Resources, Ltd. We also signed an exclusive license with Cedars-Sinai Medical Center to a medical device technology platform that is a pre-clinical prospective treatment for coronavirus for seriously ill patients in the ICU. We expect to advance this technology through development and, if proven clinically effective and able to be manufactured at scale, expect to commercialize this product in the future.
 
In the near-term, we expect to create value for shareholders by implementing a focused strategy of increasing sales of our prescription therapeutics while leveraging our commercial infrastructure. Further, we expect to increase sales of our newly acquired consumer healthcare product portfolio following the closing of our acquisition of Innovus Pharmaceuticals. Additionally, we expect to expand both our Rx and consumer health product portfolios through continuous business and product development. Finally, we expect to identify operational efficiencies identified through our recent transactions and implement expense reductions accordingly.
 
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 ongoing 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, including COVID-19, 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, 2020, filed with the SEC on October 6, 2020.
 
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, 2020) are presented in Note 1 to the condensed consolidated financial statements.
 
 
27
 
 
RESULTS OF OPERATIONS
 
Results of Operations – Three months ended September 30, 2020 compared to September 30, 2019
 
 
 
 Three months Ended September 30,
 
 
 
 
 
 
 
 
 
2020
 
 
2019
 
 
Change
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 Product and service revenue, net
 $13,520,246 
 $1,439,826 
 $12,080,420 
  839%
 Operating expenses
    
    
    
    
     Cost of sales
  3,819,156 
  375,720 
  3,443,436 
  916%
 Research and development
  182,865 
  78,020 
  104,845 
  134%
 Selling, general and administrative
  11,490,370 
  5,146,443 
  6,343,927 
  123%
 Amortization of intangible assets
  1,584,581 
  575,117 
  1,009,464 
  176%
 Total operating expenses
  17,076,972 
  6,175,300 
  10,901,672 
  177%
 Loss from operations
  (3,556,726)
  (4,735,474)
  1,178,748 
  -25%
 Other (expense) income
    
    
    
    
 Other (expense), net
  (751,541)
  (195,386)
  (556,155)
  285%
 Gain from change in fair value of contingent consideration
  2,336 
  - 
  2,336 
   
 Gain from warrant derivative liability
  - 
  1,830 
  (1,830)
  -100%
 Total other (expense) income
  (749,205)
  (193,556)
  (555,649)
  287%
 Net loss
 $(4,305,931)
 $(4,929,030)
 $623,099 
  -13%
 
Product revenue. We recognized net revenue from product sales of $13.5 million and $1.4 million for the three months ended September 30, 2020 and 2019 , respectively. This increase was primarily driven by the acquisition of the Pediatric Care Portfolio on November 1, 2019 and the Merger with Innovus on February 14, 2020, contributing approximately $2.7 million and $7.8 million for the three months ended September 30, 2020, respectively.
 
Cost of sales. The cost of sales of $3.8 million and $0.4 million recognized for the three months ended September 30, 2020 and 2019, respectively, are related to Natesto, Tuzistra XR, ZolpiMist, Cefaclor, Karbinal, Poly-Vi-Flor, Tri-Vi-Flor, the MiOXSYS System and consumer health products. 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 expenses increased $0.1 million, or 134%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase was due primarily to costs associated with the Company’s Healight Platform license and initial development and clinical costs.
 
Selling, General and Administrative. Selling, general and administrative costs increased $6.3 million, or 123%, for the three months ended September 30, 2020 compared the three months ended September 30, 2019. The increase was primarily due to the Pediatric Portfolio and Consumer Health acquisitions during the year-ended June 30, 2020.
 
The increase was primarily driven by the cost of personnel and the commercial support associated with generating additional revenues from the (i) acquisition of the Pediatric Portfolio on November 1, 2019 and (ii) the Merger with Innovus on February 14, 2020. Additionally, we incurred significant expenses associated with the execution of the Merger and Pediatric Portfolio transactions.
 
 
28
 
 
Amortization of Intangible Assets. Amortization expense for the remaining intangible assets was approximately $1.6 million and $0.6 million for the for the three months ended September 30, 2020 and 2019, respectively. This expense is related to corresponding amortization of our finite-lived intangible assets. The increase of this expense is due to the Pediatric Portfolio acquisition from Cerecor and Innovus Merger that occurred in the 2020 fiscal year ended June 30, 2020.
 
Other (expense) income, net. Other (expense) income, net for the three months ended September 30, 2020 was income of approximately $0.8 million, compared to expenses of $0.2 million for the three months ended September 30, 2019. The increase was primarily due to the accretion and interest expense resulting from the assumed fixed payment obligations and other long-term liabilities that arose from the (i) November 1, 2019 acquisition of the Pediatric Portfolio from Cerecor, Inc. and (ii) the February 14, 2020 Merger with Innovus.
 
Liquidity and Capital Resources
 
As of September 30, 2020, we had approximately $38.2 million of cash, cash equivalents and restricted cash. Our operations have historically consumed cash and are expected to continue to require cash, but at a declining rate.
 
Revenues for the three-months ended September 30, 2020 were $13.5 million and increased approximately 839% compared to $1.4 million for the three-months ended September 30, 2019. Revenues increased 277% and 100% for each of the years ended June 30, 2020 and 2019, respectively. Revenue is expected to increase over time, which will allow us to rely less on our existing cash balance and proceeds from financing transactions. Cash used by operations during the three-months ended September 30, 2020 was $8.0 million compared to $3.0 million for the three-months ended September 30, 2019. The increase is due primarily to our acquisition and integration of the Pediatric Portfolio and merger with Innovus, which consumed additional cash resources, coupled with an increase in working capital and paydown of other liabilities
 
As of the date of this Report, we expect costs for our current operations to increase modestly as we integrate the acquisition of the Pediatrics Portfolio and Innovus and continue to focus on revenue growth through increasing product sales. Our total current asset position totaling approximately $141.3 million plus the proceeds expected from ongoing product sales will be used to fund existing operations. We may continue to access the capital markets from time-to-time when market conditions are favorable. The timing and amount of capital that may be raised is dependent on the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms favorable to us, or at all. We did not raise any additional capital during the three-months ended September 30, 2020. Between September 30, 2020, and the filing date of this quarterly report on Form 10-Q, we raised gross proceeds of approximately $3.1 million upon the issuance of 3.0 million shares of the Company’s common stock under the Company’s at-the-market offering program. As of the date of this report, the Company has adequate capital resources to complete its near-term operating and transaction objectives.
 
Since we have sufficient cash on-hand as of September 30, 2020 to cover potential net cash outflows for the twelve months following the filing date of this Quarterly Report, the Company reports that there does not exist no indication of substantial doubt about its ability to continue as a going concern.
 
If we are unable to raise adequate capital in the future when it is required, we can adjust our operating plans to reduce the magnitude of the capital needs under our existing operating plan. Some of the adjustments that could be made include delays of and reductions to commercial programs, reductions in headcount, narrowing the scope of the Company’s commercial plans, or reductions to its research and development programs. Without sufficient operating capital, the Company could be required to relinquish rights to products or renegotiate to maintain such rights on less favorable terms than it would otherwise choose. This may lead to impairment or other charges, which could materially affect the Company’s balance sheet and operating results.
 
The following table shows cash flows for the three months ended September 30, 2020 and 2019:
 
 
 
Three Months Ended September 30,
 
 
 
2020
 
 
2019
 
Net cash used in operating activities
 $(7,974,946)
 $(2,987,817)
Net cash used in investing activities
 $(16,940)
 $(1,042,103)
Net cash provided by financing activities
 $(2,178,578)
 $- 
 
 
29
 
 
Net Cash Used in Operating Activities
 
During the three months ended September 30, 2020, our operating activities used $8.0 million in cash, which was greater than the net loss of $4.3 million, primarily due to increases in working capital including increases in accounts receivable, inventory, prepaid and other assets. These charges were offset by depreciation, amortization and accretion and an increase in accrued liabilities and accrued compensation.
 
During the three months ended September 30, 2019, our operating activities used $3.0 million in cash, which was less than the net loss of $4.9 million, primarily as a result of the non-cash depreciation, amortization and accretion, stock-based compensation, a decrease in prepaid expenses and an increase in accrued compensation.
 
Net Cash Used in Investing Activities
 
During the three months ended September 30, 2020, we made a payment of $0.02 million in contingent consideration.
 
During the three months ended September 30, 2019, we issued a $1.0 million note receivable to Innovus prior to the Innovus Merger, and we paid $42,000 in contingent consideration.
 
Net Cash from Financing Activities
 
Net cash used by financing activities in the three months ended September 30, 2020 was $2.2 million. This was primarily related to the offering cost of $1.6 million which was paid in cash; (ii) we made payments of $0.6 million in note payables and fixed payment arrangements.
 
Net cash provided by financing activities in the three months ended September 30, 2019 was zero.
 
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 10 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 engage 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, except as described below, known to the Chief Executive Officer or the Chief Financial Officer that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
The Company’s assessment over changes in our internal controls over financial reporting excluded those processes or controls that exist at our Aytu Consumer Health reporting unit which we acquired from the February 14, 2020 Innovus Merger. Aytu Consumer Health comprises approximately 57.4% of net revenues, 31.5% of net losses, and 17.5% of the total assets.
  
 
30
 
  
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
Presmar. In connection with our acquisition from Cerecor of the Poly-Vi-Flor product rights, the Company agreed to reimburse Cerecor for change of control payments Cerecor may owe to Presmar Associates, Inc. (“Presmar”) pursuant to an Agreement to Redeem Membership Interest among TRx Pharmaceuticals, LLC, Presmar, Fremantle Corporation, and LRS International, LLC, dated May 31, 2011 (the “Presmar Agreement”). Cerecor had inherited the Presmar Agreement as part of a prior transaction. The Company did not assume the Presmar Agreement, but agreed to reimburse Cerecor for any payment it was required to make in connection with the Presmar Agreement change of control provisions. Upon closing of the Cerecor transaction, Presmar disputed the agreed upon calculation by Company and Cerecor of the amount payable under the Presmar Agreement. The Company, Cerecor, and Presmar have had ongoing discussions regarding the appropriate amount owed to Presmar under the Presmar Agreement. Recently, the parties tentatively agreed on an approach under which: (i) Cerecor will make an initial payment to Presmar in the amount of $150,000, which will be reimbursed by the Company in six (6) equal monthly installments; (ii) the Company will issue to Presmar $150,000 worth of the Company’s common stock in a private placement pursuant to applicable exemptions under the Securities Act; and (iii) each party will provide a mutual release of liability in connection with the Poly-Vi-Flor product transfer (the “Settlement”). The Settlement remains contingent on approval from the parties’ respective board of directors.
 
Hikma. On May 8, 2017, Innovus entered into a Supply Agreement with Hikma (formerly West-Ward Pharmaceuticals Corp.) for the supply of FlutiCare®, a branded fluticasone propionate nasal spray. During the second year of the Supply Agreement, Innovus received multiple shipments of FlutiCare® products containing non-compliant labelling due to defective label adhesive. Since that time Hikma and Innovus have been in negotiations regarding responsibility for the defective products and the status of the Supply Agreement. On May 1, 2020, Hikma and Innovus (now a Company subsidiary) entered into the Settlement Agreement requiring Innovus to purchase three batches of FlutiCare® through the fiscal year 2022 at a price of $1 million per batch.
 
Marin County DA. On August 24, 2018, Innovus received a letter from the Marin County District Attorney’s Office (the “Marin DA”) demanding substantiation for certain advertising claims made by Innovus related to DiabaSens®, and Apeaz®, which were sold and marketed in Marin County, California. The Marin DA is part of a larger Northern California task force comprising of district attorney offices from ten counties that agree to handle customer protection matters. Innovus responded to the Marin DA through its regulatory counsel in November 2018 and continued to exchange correspondence with the Marin DA through April 2019. In June 2019 Innovus met with the Northern California task force. In March 2020, Innovus (now a Company subsidiary) entered into a Stipulation for Entry of Final Judgement (the “Stipulation”), pursuant to which Innovus agreed to the following: (i) certain injunctive relief relating the advertising and sale of DiabaSens®, and Apeaz®; (ii) to pay a civil penalty of $150,000; (iii) to reimburse investigative costs of $11,500; and (iv) to pay restitution of $43,000. In May 2020, the Marin DA filed the judgement with the Superior Court for the County of Monterrey and the parties are waiting for the judge to approve the stipulation.
 
 
31
 
 
Pliscott. Between November 20, 2019 and December 17, 2019, four putative class action lawsuits were filed in Delaware state and federal courts in connection with: (i) Aytu’s proposal to approve, in accordance with Nasdaq Marketplace Rule 5635(d), the convertibility of the Company’s Series F convertible preferred stock and the exercisability of certain warrants, in each case, issued in a private placement offering that closed on October 16, 2019 (the “Nasdaq Rule 5635(d) Proposal”); (ii) Aytu’s proposal to approve an amendment to its Certificate of Incorporation to increase the number of its authorized shares of common stock from 100,000,000 to 120,000,000 shares of common stock (the “Authorized Share Increase Proposal”); and (iii) Aytu’s proposal to approve the adjournment of the special meeting, if necessary, to continue to solicit votes for the Nasdaq Rule 5635(d) Proposal and/or the Authorized Share Increase Proposal (“Adjournment Proposal” and, together with the Nasdaq Rule 5635(d) Proposal and the Authorized Share Increase Proposal, the “Proposal”). Three lawsuits were filed in the Court of Chancery of the State of Delaware: Carl Pliscott v. Joshua R. Disbrow, et al. , Case No. 2019-0933, filed on November 20, 2019 (the “Pliscott Action”); Adam Kirschenbaum v. Aytu Bioscience, Inc., et al. , Case No. 2019-0984, filed on December 10, 2019 (the “Kirschenbaum lawsuit”); and Michael Sebree v. Josh Disbrow, et al. , Case No. 2019-1011, filed on December 17, 2019 (the “Sebree Action”). The Kirschenbaum Action and Sebree Action were both assigned to Chancellor Andre G. Bouchard. The Pliscott Action was removed to the United States District Court for the District of Delaware on December 5, 2019, captioned as Carl Pliscott v. Joshua R. Disbrow, et al., Case No. 19-cv-02228-UNA, but was remanded to the Court of Chancery and assigned to Chancellor Andre G. Bouchard on January 14, 2020. One lawsuit was filed in the United States District Court for the District of Delaware and assigned to Chief Judge Leonard P. Stark: Adam Franchi v. Aytu Bioscience, Inc., et al., Case No. 19-cv-02204- LPS, filed on November 26, 2019 (the “Franchi Action”). The Pliscott Action, Kirschenbaum Action, and Sebree Action alleged that the members of the Aytu board breached their fiduciary duties to Aytu stockholders by failing to disclose all information material to the Proposals. The Franchi Action alleged that Aytu and the individual members of the Aytu board violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (and Rule 14a-9, promulgated thereunder) by virtue of allegedly false and misleading statements contained in the proxy statement filed by Aytu on November 21, 2019. All four lawsuits sought, among other things, declaratory relief allowing the action to be maintained as a class action, injunctive relief prohibiting any stockholder vote on the Proposals or other consummation of the Proposals, damages, attorneys’ fees and costs, and other and further relief. The Sebree Action further sought injunctive relief prohibiting consummation of the Asset Purchase Agreement, dated October 10, 2019. Aytu and the board have asserted that all claims asserted are meritless and vigorously defended against the four lawsuits. On January 30, 2020, the parties in the Pliscott Action, Kirschenbaum Action, and Sebree Action filed a stipulation voluntarily dismissing the cases as moot, with plaintiffs reserving the right to seek mootness fees. On February 5, 2020, the Chancery Court dismissed the cases while retaining jurisdiction to adjudicate anticipated mootness fee motions. No mootness fee motion has been filed to date. At this stage, it is not otherwise possible to predict the effect of lawsuits on Aytu.
 
Item 1A. Risk Factors.
 
In addition to other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report, which could materially affect our business, financial condition, cash flows, and/or future results. The risk factors in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or future results. There are no additional risk factors other than those contained in our Annual Report.
 
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.
 
 
32
 
 
Item 6. Exhibits.
 
Exhibit No.
Description
 
Registrant’s Form
 
 
Date Filed
 
 
Exhibit Number
 
Filed Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.1 
Agreement and Plan of Merger, dated as of September 12, 2019, by and among Aytu BioScience, Inc., Aytu Acquisition Sub, Inc. and Innovus Pharmaceuticals, Inc.
  8-K 
 
9/18/19
 
  2.1 
 
 
2.2 
Asset Purchase Agreement, dated October 10, 2019
  8-K 
 
10/15/19
 
  2.1 
 
 
3.1 
Certificate of Incorporation effective June 3, 2015
  8-K 
 
6/09/15
 
  3.1 
 
 
3.2 
Certificate of Amendment of Certificate of Incorporation effective June 1, 2016
  8-K 
 
6/02/16
 
  3.1 
 
 
3.3 
Certificate of Amendment of Certificate of Incorporation, effective June 30, 2016
  8-K 
 
7/01/16
 
  3.1 
 
 
3.4 
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, filed on August 11, 2017
  8-K 
 
8/16/17
 
  3.1 
 

3.5 
Certificate of Amendment of Certificate of Incorporation, effective August 25, 2017
  8-K 
 
8/29/17
 
  3.1 
 
 
3.6 
Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock filed on March 2, 2018
  S-1/A 
 
2/27/18
 
  3.6 
 
 
3.7 
Certificate of Amendment to the Restated of Certificate of Incorporation, effective August 10, 2018
  8-K 
 
8/10/18
 
  3.1 
 
 
3.8 
Amended and Restated Bylaws
  8-K 
 
6/09/15
 
  3.2 
 
 
3.9 
Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock
  10-Q 
 
2/7/19
 
  10.4 
 
 
3.10 
Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock
  8-K 
 
10/15/19
 
  3.1 
 
 
3.11 
Certificate of Designation of Preferences, Rights and Limitations of Series G Convertible Preferred Stock
  8-K 
 
11/4/19
 
  3.1 
 
 
4.1 
Form of Placement Agent Warrant issued in 2015 Convertible Note Financing
  8-K 
 
7/24/15
 
  4.2 
 
 
4.2 
Warrant Agent Agreement, dated May 6, 2016 by and between Aytu BioScience, Inc. and VStock Transfer, LLC
  8-K 
 
5/6/16
 
  4.1 
 
 
4.3 
First Amendment to May 6, 2016 Warrant Agent Agreement between Aytu BioScience, Inc. and VStock Transfer LLC
  S-1 
 
9/21/16
 
  4.5 
 
 
4.4 
Warrant Agent Agreement, dated November 2, 2016 by and between Aytu BioScience, Inc. and VStock Transfer, LLC
  8-K 
 
11/2/16
 
  4.1 
 
 
4.5 
Form of Amended and Restated Underwriters Warrant (May 2016 Financing)
  8-K 
 
3/1/17
 
  4.1 
 
 
    
    
 
    
 
 
 
4.6 
Form of Amended and Restated Underwriters Warrant (October 2016 Financing)
  8-K 
3/1/17
  4.2 
 
 
 
 
    
    
 
    
 
 
 
4.7 
Form of Common Stock Purchase Warrant issued on August 15, 2017
  8-K 
8/16/17
  4.1 
 
 
 
 
    
    
 
    
 
 
 
4.8 
Form of Common Stock Purchase Warrant for March 2018 Offering
  S-1 
2/27/18
  4.8 
 
 
 
 
    
    
 
    
 
 
 
4.9 
Form of Pre-Funded Purchase Warrant
  8-K 
3/13/20
  4.1 
 
 
 
 
    
    
 
    
 
 
 
4.10 
Form of Placement Agents Warrant
  8-K 
3/13/20
  4.2 
 
 
 
 
    
    
 
    
 
 
 
4.11 
Form of Warrant
  8-K 
3/13/20
  4.1 
 
 
 
 
    
    
 
    
 
 
 
4.12 
Form of Placement Agents Warrant
  8-K 
3/13/20
  4.2 
 
 
 
 
    
    
 
    
 
 
 
4.13 
Form of Warrant
  8-K 
3/20/20
  4.1