UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 14, 2020
AYTU
BIOSCIENCE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 001-38247 | 47-0883144 | ||
|
(State or other jurisdiction
of incorporation) |
(Commission File Number) |
(IRS Employer
Identification No.) |
373 Inverness Parkway, Suite 206
Englewood, CO 80112
(Address of principal executive offices, including Zip Code)
Registrant’s telephone number, including area code: (720) 437-6580
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☒ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| 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 |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Item 1.01 Entry into a Material Definitive Agreement
In connection with the completion of the merger as set forth in Item 2.01 of this Current Report on Form 8-K, on February 14, 2020 we entered into warrant exchange agreements with certain Innovus warrant holders that had Innovus warrants that contained a right to receive a cash payment (the “Cash Warrants”) in connection with the merger. In exchange for the Cash Warrants, we offered the holders of the Cash Warrants shares of the Series H convertible preferred stock (“Series H Preferred Stock”) of the Company (the “Warrant Exchange”). The holders of the Cash Warrants agreed to exchange their Cash Warrants for the Series H Preferred Stock. The total number of shares of Series H Preferred Stock we issued in connection with the Warrant Exchange was 1,997,736 shares of Series H Preferred Stock.
The Series H Preferred Stock was be issued and sold without registration under the Securities Act of 1933 (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.
Terms of Series H Preferred Stock
Conversion. Each share of Series H Preferred Stock, will be initially convertible under certain circumstances into shares of common stock at the conversion price.
Fundamental Transaction. In the event we consummate a merger or consolidation with or into another person or other reorganization event in which our common stock is converted or exchanged for securities, cash or other property, or we sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of our assets or we or another person acquires 50% or more of our outstanding shares of common stock, then following such event, the holders of the Series H Preferred Stock will be entitled to receive upon conversion of such Series H Preferred Stock the same kind and amount of securities, cash or property which the holders would have received had they converted their Series H Preferred Stock immediately prior to such fundamental transaction. Any successor to Aytu or surviving entity shall assume the obligations under the Series H Preferred Stock.
Liquidation Preference. In the event of a liquidation, the holders of Series H Preferred Stock will be entitled to participate on an as-converted-to-common-stock basis with holders of our common stock in any distribution of our assets to the holders of the common stock.
Voting Rights. With certain exceptions, as described in the certificate of designation, the Series H Preferred Stock will have no voting rights. However, as long as any shares of Series H Preferred Stock remain outstanding, the certificate of designation provides that we shall not, without the affirmative vote of holders of a majority of the then-outstanding shares of Series H Preferred Stock: (a) alter or change adversely the powers, preferences or rights given to the Series H Preferred Stock or alter or amend the certificate of designation, (b) amend our certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders, (c) increase the number of authorized shares of Series H Preferred Stock or (d) enter into any agreement with respect to any of the foregoing.
Dividends. The certificate of designation provides, among other things, that we shall not pay any dividends on shares of common stock (other than dividends in the form of our common stock) unless and until such time as we pay dividends on each share of Series H Preferred Stock on an as-converted basis. Other than as set forth in the previous sentence, the certificate of designation provides that no other dividends shall be paid on shares of Series H Preferred Stock and that we shall pay no dividends (other than dividends in the form of our common stock) on shares of common stock unless we simultaneously comply with the previous sentence.
Exchange Listing. The Series H Preferred Stock is not listed on any securities exchange or other trading system.
Item 2.01 Completion of Acquisition of Disposition of Assets
On February 14, 2020, Aytu BioScience, Inc. (“Company”) and Innovus Pharmaceuticals, Inc. (“Innovus” or “Innovus Pharma, Inc.”) completed the Agreement and Plan of Merger dated September 12, 2019 (the “Merger”) after successful approval of the Merger by the shareholders of the Company and Innovus at separate special meetings held on February 13, 2020. Upon closing the Merger,(i) Aytu Acquisition Sub, Inc. (“Aytu Sub”), a wholly-owned subsidiary of the Company, merged with and into Innovus and (ii) all outstanding Innovus common stock was exchanged for approximately 3.8 million shares of the Company’s common stock (Ticker: AYTU), and up to $16 million in value in Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 shares of preferred stock of Aytu and retired. The remaining Innovus warrants outstanding at the time of the Merger will continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus will continue as a subsidiary of the Company.
The Company determined that this acquisition constitutes a business pursuant to Article 11 of Regulation S-X, and therefore is required pursuant to Rule 8-04 of Regulation S-X to provide within 71 days after the Acquisition close, historical, audited financial statements for a period consisting of the most recent fiscal year ended December 31, 2018 and the nine months ended September 30, 2019. In addition, pursuant to Article 11 of Regulation S-X, the Company is required to provide pro forma financial statements for the year-ended June 30, 2019 and three months ended September 30, 2019. The exhibits to this Form 8-K satisfies these requirements.
Item 3.02 Unregistered Sales of Equity Securities.
The response to this item is included in Item 1.01 of this Current Report on Form 8-K , and is incorporated herein in its entirety.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of businesses acquired
The (i) audited consolidated financial statements for Innovus Pharmaceuticals, Inc. as of and for the year-ended and December 31, 2018 and December 31, 2017 and (ii) unaudited consolidated financial statements as of and for the nine months ended September 30, 2019 are filed as Exhibit 99.1 and Exhibit 99.2, respectively, to this Current Report on Form 8-K/A.
(d) The following exhibit is being filed herewith:
* Incorporated by reference
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| AYTU BIOSCIENCE, INC. | ||
| Date: February 14, 2020 | By: | /s/ Joshua R. Disbrow |
| Joshua R. Disbrow | ||
| Chief Executive Officer | ||
2
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in the Form 8-K, constituting a part of this Current Report, of our report dated April 1, 2019, relating to the consolidated financial statements of Innovus Pharmaceuticals, Inc., as of December 31, 2018 and 2017, which is incorporated by reference in the Form 8-K.
/s/ Hall & Company Certified Public Accountants & Consultants, Inc.
Irvine, CA
February 14, 2020
Exhibit 99.3
CERTAIN UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the merger.
The unaudited pro forma condensed combined balance sheets at September 30, 2019 and the unaudited pro forma condensed combined statements of operations for the fiscal year ended June 30, 2019 and three months ended September 30, 2019 (the “Pro Forma Financials”) have been derived from the following sources:
Aytu BioScience, Inc.
| ● | Unaudited consolidated balance sheet and statement of operations as of and for the three months ended September 30, 2019; and |
| ● | Audited consolidated statement of operations for the year ended June 30, 2019. |
Pediatric Product Portfolio of Cerecor, Inc. (a/k/a “Cerecor Transaction”)
| ● | Audited abbreviated statement of net assets acquired and liabilities assumed of the Pediatric Product Portfolio of Cerecor, Inc. as of September 30, 2019; and |
| ● | Unaudited abbreviated statements of net revenues and direct expenses for the acquired Pediatric Product Portfolio of Cerecor, Inc. for the three months ended September 30, 2019 and year ended June 30, 2019. |
Innovus Pharmaceuticals, Inc.
| ● | Unaudited condensed combined balance sheet and statement of operations as of and for the three months ended September 30, 2019; and |
| ● | Unaudited condensed combined statement of operations for the year ended June 30, 2019. |
| ● | Unaudited condensed combined statement of operations for the nine months ended September 30, 2019. | |
| ● | Unaudited condensed combined statement of operations for the six months ended June 30, 2019. | |
| ● | Audited consolidated statements of net revenues and direct expenses for the Innovus for the year ended December 31, 2018 | |
| ● | Unaudited condensed combined statements of operations for Innovus for the six months ended June 30, 2018 |
The preliminary unaudited pro forma condensed combined statements of operations for the three months ended September 30, 2019 and year ended June 30, 2019 give effect to these transactions as if they had occurred as of July 1, 2018. The preliminary unaudited pro forma condensed combined balance sheet as of September 30, 2019 give effect to these transactions as if they had occurred on September 30, 2019.
Unaudited Pro Forma Condensed Combined Balance Sheet (In thousands)
|
As
of September 30, 2019
(In thousands, except share amounts) |
||||||||||||||||||||||||||||||||
|
Aytu
BioScience, Inc. |
Cerecor
Transaction |
Pro
Forma
Adj. (Cerecor) |
Combined
Aytu BioScience & Cerecor Transaction |
Innovus
Pharma, Inc. |
Pro
Forma
Adj. (Innovus) |
Pro Forma
Combined |
||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Current assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 7,014 | – | $ | (4,500 | ) | (a) | $ | 2,514 | $ | 955 | $ | (500 | ) | (i) | $ | 2,969 | |||||||||||||||
| Restricted cash | 250 | – | – | 250 | – | – | 250 | |||||||||||||||||||||||||
| Other current assets | 4,718 | 1,788 | 2,962 | (b) | 9,648 | 3,398 | (1,000 | ) | (j) | 11,866 | ||||||||||||||||||||||
| Total current assets | 11,982 | 1,788 | (1,538 | ) | 12,232 | 4,353 | (1,500 | ) | 15,085 | |||||||||||||||||||||||
| Intangible asset, net | 18,293 | 23,834 | (1,134 | ) | (c) | 40,993 | 3,378 | – | 44,371 | |||||||||||||||||||||||
| Goodwill | – | – | 15,388 | (d) | 15,388 | 953 |
21,489 |
(k) | 37,830 | |||||||||||||||||||||||
| Other non-current assets | 749 | – | – | 749 | 830 | – | 1,579 | |||||||||||||||||||||||||
| Total long-term assets | 19,042 | 23,834 | 14,254 | 57,130 | 5,161 | 21,489 |
83,780 |
|||||||||||||||||||||||||
| Total assets | $ | 31,024 | $ | 25,622 | $ | 12,716 | $ | 69,362 | $ | 9,514 | $ | 19,989 | $ | 98,865 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 3,863 | 6,373 | (52 | ) | (b) | 10,184 | $ | 4,080 | – | $ | 14,264 | ||||||||||||||||||||
| Accrued compensation | 1,002 | – | – | 1,002 | 1,341 | – | 2,343 | |||||||||||||||||||||||||
| Notes, loans payable, current portion of fixed payment obligations | – | 1,050 | 1,840 | (e) | 2,890 | 3,315 | (1,000 | ) | (l) | 5,205 | ||||||||||||||||||||||
| Current contingent consideration | 1,237 | 1,237 | (1,237 | ) | (c) | 1,237 | – | 2,000 | (m) | 3,237 | ||||||||||||||||||||||
| Total current liabilities | 6,102 | 8,660 | 551 | 15,313 | 8,736 | 1,000 | 25,049 | |||||||||||||||||||||||||
| Long-term contingent consideration | 22,272 | 6,236 | (6,236 | ) | (f) | 22,272 | 1,248 | – | 23,520 | |||||||||||||||||||||||
| Long-term fixed payment obligations | – | 14,255 | (14,255 | ) | (e) | – | – | – | – | |||||||||||||||||||||||
| Other long-term liabilities | 326 | – | 23,567 | (e) | 23,893 | 1,526 | – | 25,419 | ||||||||||||||||||||||||
| Total liabilities | 28,700 | 29,151 | 3,627 | 61,478 | 11,510 | 1,000 | 73,988 | |||||||||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||||||||||||||
| Total stockholders’ equity | 2,324 | (3,529 | ) | 9,089 | 7,884 | (1,996 | ) | 18,989 | 24,877 | |||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 31,024 | $ | 25,622 | $ | 12,716 | $ | 69,362 | $ | 9,514 | $ | 19,989 | $ | 98,865 | ||||||||||||||||||
See accompanying Notes to the Pro Forma Condensed Combined Financial Statements
2
Unaudited Pro Forma Condensed Combined Statement of Operations
Three Months Ended September 30, 2019
(In thousands, except per share data)
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||
| Aytu BioScience, Inc. | Cerecor Transaction | Pro Forma Adjustments | Combined Aytu BioScience & Cerecor Transaction | Innovus Pharma, Inc. | Pro Forma Adjustments | Pro Forma Combined | |||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||
| Product revenue, net | $ | 1,440 | 3,412 | – | $ | 4,852 | $ | 5,648 | $ | - | $ | 10,500 | |||||||||||||||||||
| Service revenue, net | – | – | – | - | 107 | - | 107 | ||||||||||||||||||||||||
| Total product revenue | 1,440 | 3,412 | – | 4,852 | 5,755 | - | 10,607 | ||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||
| Cost of sales | 376 | 1,303 | – | 1,679 | 2,215 | – | 3,894 | ||||||||||||||||||||||||
| Research and development | 78 | – | – | 78 | 86 | – | 164 | ||||||||||||||||||||||||
| Selling, general and administrative | 5,146 | 2,458 | – | 7,604 | 5,152 | (400 | ) | (n) | 12,356 | ||||||||||||||||||||||
| Amortization of intangible assets | 575 | 703 | (135 | ) | (g) | 1,143 | – |
– |
1,143 | ||||||||||||||||||||||
| Total operating expenses | 6,175 | 4,464 | (135 | ) | 10,504 | 7,453 | (400 | ) | 17,557 | ||||||||||||||||||||||
| Loss from operations | (4,735 | ) | (1,052 | ) | (135 | ) | (5,652 | ) | (1,698 | ) | 400 | (6,950 | ) | ||||||||||||||||||
| Other (expense) income | |||||||||||||||||||||||||||||||
| Other (expense), net | (195 | ) | – | (394 | ) | (g) | (589 | ) | (538 | ) | – | (1,127 | ) | ||||||||||||||||||
| Gain from warrant derivative liability | 2 | – | – | 2 | – | – | 2 | ||||||||||||||||||||||||
| Total other (expense) income | (193 | ) | – | (394 | ) | (587 | ) | (538 | ) | – | (1,125 | ) | |||||||||||||||||||
| Net loss | $ | (4,928 | ) | (1,052 | ) | (529 | ) | $ | (6,239 | ) | $ | (2,236 | ) | $ | 400 | $ | (8,075 | ) | |||||||||||||
| Weighted average number of common shares outstanding | 15,325,921 | – | – | 15,325,921 | 2,759,771 | 1,051,344 | (o) | 19,136,382 | |||||||||||||||||||||||
| Basic and diluted net loss per common share | $ | (0.32 | ) | $ | (0.41 | ) | $ | (0.81 | ) | $ | (0.42 | ) | |||||||||||||||||||
See accompanying Notes to the Pro Forma Condensed Combined Financial Statements
3
Unaudited Pro Forma Condensed COMBINED Statement of Operations
Year Ended June 30, 2019
(in thousands, except per share data)
| Year Ended June 30, 2019 | ||||||||||||||||||||||||||||||
| Aytu BioScience, Inc. | Cerecor Transaction | Pro Forma Adjustments | Combined Aytu BioScience & Cerecor Transaction | Innovus Pharma, Inc. | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||
| Product revenue, net | $ | 7,315 | 12,434 | – | $ | 19,749 | $ | 23,150 | – | $ | 42,899 | |||||||||||||||||||
| Cooperative marketing revenue, net | – | – | - | 519 | – | 519 | ||||||||||||||||||||||||
| Service revenue, net | 6 | – | – | 6 | 675 | – | 681 | |||||||||||||||||||||||
| Total product revenue | 7,321 | 12,434 | – | 19,755 | 24,344 | – | 44,099 | |||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||
| Cost of sales | 2,202 | 4,899 | – | 7,101 | 6,256 | – | 13,357 | |||||||||||||||||||||||
| Research and development | 589 | – | – | 589 | 274 | – | 863 | |||||||||||||||||||||||
| Selling, general and administrative | 18,888 | 10,034 | – | 28,922 | 23,362 | (2,000 | ) | (n) | 50,284 | |||||||||||||||||||||
| Selling, general and administrative - related party | 352 | – | 352 | – | – | 352 | ||||||||||||||||||||||||
| Amortization of intangible assets | 2,136 | 3,126 | (856 | ) | (g) | 4,406 | – | – | 4,406 | |||||||||||||||||||||
| Impairment of intangible assets | – | 1,449 | (1,449 | ) | (h) | – | – | – | – | |||||||||||||||||||||
| Total operating expenses | 24,167 | 19,508 | (2,305 | ) | 41,370 | 29,892 | (2,000 | ) | 69,262 | |||||||||||||||||||||
| Loss from operations | (16,846 | ) | (7,074 | ) | 2,305 | (21,615 | ) | (5,548 | ) | 2,000 | (25,163 | ) | ||||||||||||||||||
| Other (expense) income | ||||||||||||||||||||||||||||||
| Other (expense), net | (536 | ) | – | (1,482 | ) | (2,018 | ) | (1,838 | ) | – | (3,856 | ) | ||||||||||||||||||
| (Loss) / gain from change in fair value of contingent consideration | (9,831 | ) | (494 | ) | – | (10,325 | ) | 191 | – | (10,134 | ) | |||||||||||||||||||
| (Loss) on extinguishment of debt | – | – | – | – | (1,163 | ) | – | (1,163 | ) | |||||||||||||||||||||
| Gain from warrant derivative liability | 81 | – | – | 81 | – | – | 81 | |||||||||||||||||||||||
| Total other (expense) income | (10,286 | ) | (494 | ) | (1,482 | ) | $ | (12,262 | ) | (2,810 | ) | – | (13,590 | ) | ||||||||||||||||
| Net loss | $ | (27,132 | ) | $ | (7,568 | ) | $ | 823 | $ | (33,877 | ) | $ | (8,358 | ) | $ | 2,000 | $ | (40,235 | ) | |||||||||||
| Weighted average number of common shares outstanding | 7,794,489 | – | – | 7,794,489 | 2,700,000 | 1,110,461 | (o) | 11,604,950 | ||||||||||||||||||||||
| Basic and diluted net loss per common share | $ | (3.48 | ) | $ | (4.35 | ) | $ | (3.10 | ) | $ | (3.43 | ) | ||||||||||||||||||
See accompanying Notes to the Pro Forma Condensed Combined Financial Statements
4
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(In thousands, except per share information)
Note 1. Basis of Presentation
The historical consolidated financial statements of Aytu BioScience, Inc. (the “Company”) have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (i) directly attributable to the business combination, (ii) factually supportable and (iii) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combinations.
While Aytu will account for the business combinations under the acquisition method of accounting in accordance with ASC Topic 805 Business Combinations (“Topic 805”), Aytu has not completed the estimation of the fair value of assets acquired or liabilities assumed (the “Cerecor Transaction”) and the merger with Innovus (the “Innovus Merger”) subject to shareholder approval. Accordingly, the preliminary pro forma condensed combined balance sheet as presented currently has not been fully adjusted in accordance with Topic 805. Any adjustments reflect information currently available to Aytu today, such as certain loans between Aytu and Innovus, estimates of certain fixed minimum future payments or the estimated modifications to goodwill, which exclude the current estimated and expected adjustments upon applying purchase accounting in accordance with Topic 805.
The combined preliminary pro forma condensed combined financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of both the (i) Cerecor Transaction and the (ii) Innovus Merger as a result of restructuring activities and other planned cost savings initiatives following the completion and integration of the business combinations.
Pediatric Portfolio Date Compilation for Pro Forma Financial Information
As the Pediatrics Product Portfolio of Cerecor, Inc. (the “Pediatric Portfolio”) reported on a December 31 year end, in preparing the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended June 30, 2019, the Company updated the annual income statement of the Pediatric Portfolio to reflect a twelve-month period ended June 30, 2019.
These were obtained by taking the (i) audited abbreviated statements of net revenues and direct expenses for the acquired Pediatric Portfolio for the nine months ended September 30, 2019, less the net revenues and direct expenses for Pediatric Portfolio for the three month period ended September 30, 2019, and adding these amounts to the (ii) audited abbreviated statements of net revenues and direct expenses for the acquired Pediatric Portfolio for the year ended December 31, 2018, less the net revenues and direct expenses for the acquired Pediatric Portfolio for the abbreviated period prior to July 1, 2018.
Innovus Financial Data Compilation for Pro Forma Financial Information
As Innovus reported on a December 31 year end, in preparing the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended June 30, 2019, the Company updated the annual income statement of the Innovus to reflect a twelve-month period ended June 30, 2019.
These were obtained by taking the (i) unaudited condensed combined statement of operations for Innovus for the six months ended June 30, 2019, and adding these amounts to the (ii) audited consolidated statements of net revenues and direct expenses for the Innovus for the year ended December 31, 2018, less the unaudited condensed combined statements of operations for Innovus for the six months ended June 30, 2018.
5
Note 2. Financing Transactions
Cerecor Transaction
On November 1, 2019, the Company completed the Cerecor Transaction, acquiring a portfolio of pediatric products from Cerecor, Inc. for (i) $4.5 million in cash and (ii) $12.5 million in Series G Preferred Stock.
Innovus Merger
On September 12, 2019, the Company entered into an Agreement and Plan of Merger with Innovus Pharmaceuticals, Inc. (“Innovus) (the “Innovus Merger”). On February 13, 2020, the shareholders of both companies approved the Innovus Merger, which formally closed on February 14, 2020. The Merger consideration constituted (i) approximately 3.8 million shares of Aytu common stock at close, (ii) up to $16 million of contingent value rights (“CVRs”) with the potential settlement from the issuance of up to a maximum of 4.0 million shares of Aytu common stock underlying the CVRs or cash at the option of the Company, and an estimated 2.3 million shares underlying the issuance of the Series H convertible preferred stock or other underlying stock warrants contemplated by the transaction.).
Note 3. Estimated Purchase Price Consideration
Generally accepted accounting principles in the United States (“GAAP”) requires that Company’s assess whether the Company’s common stock, even if traded on a nationally listed exchange, is indicative of fair value. After careful analysis, due relatively thin daily trading volumes, the Company determined that the best indicator of fair value is the most recent offering price. The fair value of the Company’s common stock is determined based upon the estimated transaction price as a result of the Company’s most recently completed private placement offering on October 11, 2019, which was valued at $0.567 per share.
6
Cerecor Transaction
The following table provides the value of consideration transferred upon the November 1, 2019 closing of the Cerecor transaction:
| Estimated Consideration at Close | ||||
| Closing Shares Estimated Value | ||||
| Total shares of Aytu Series G Preferred Stock issued on November 1, 2019 | 9,805,845 | |||
| Estimated fair value per share of Aytu Series G Preferred Stock (see Note 3) | $ | 0.567 | ||
| Estimated value of Aytu Series G Preferred Stock issued at November 1, 2019 | $ | 5,559,914 | ||
| Cash Consideration | ||||
| Total cash consideration transferred at November 1, 2019 | 4,500,000 | |||
| Estimated Value of Consideration Transferred | $ | 10,059,914 | ||
Innovus Merger
The preliminary estimated purchase price is estimated as if the transaction had closed on February 14, 2020 and includes estimates as to the final total number of shares of Aytu common stock expected to either be issued at close, or registered to satisfy future potential issuances post-close. Accordingly, the amounts presented in the table below are likely to change upon the closing of the merger.
| Estimated Consideration at Close | ||||
| Closing Shares Estimated Value | ||||
| Estimated shares to be issued at Close | 3,810,463 | |||
| Estimated fair value of Aytu common stock (see Note 3) | $ | 0.567 | ||
| Estimated value of Aytu common stock issued at close | $ | 2,160,533 | ||
| Value of CVRs (Assuming 100% Milestone Achievement) (f) | ||||
| Minimum CVR Value (Assuming 100% Milestone Achievement) | $ | 16,000,000 | ||
| Other Shares of Aytu Common Stock Related to the Merger (҂) | ||||
| Estimated potential number of shares of Aytu Common stock | 2,266,619 | |||
| Estimated fair value of Aytu common stock | $ | 0.567 | ||
| Estimated value of other shares issued at close related to the merger | $ | 1,285,173 | ||
| Estimated Value of Consideration Transferred | $ | 19,445,706 | ||
(f) – Assumes 100% achievement for all Contingent Value Rights (“CVRs”) pursuant to the Contingent Value Rights Agreement (Exhibit B to the “Agreement and Plan of Merger” dated September 12, 2019). There is no guarantee that such CVRs will be achieved.
(҂) – Such estimate is subject to change due to the multiple variables involved in ultimately calculating the number of shares to be issued, including (a) the Company’s stock price; (b) the fair value of CVRs and their impact on valuations which determine certain shares to be issued to satisfy certain outstanding warrants, and (c) other inputs to certain warrant valuations that will not be determined until the date the Innovus Merger closes.
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Note 4. Preliminary purchase price allocation
Cerecor Transaction. The following table provides the initial estimated purchase price allocation as of November 1, 2019 closing date. The Company has obtained and completed the initial third-party valuation of the assets acquired and liabilities assumed from the Cerecor Transaction. However, all amounts are subject to a twelve-month measurement period from the November 1, 2019 close date to October 31, 2020 as new information arises, resulting in potential adjustments to amounts reflected below.
| Purchase Price Allocation |
Estimated Purchase Price Allocation
(in thousands) |
|||
| Estimated consideration to be transferred | 10,060 | |||
| Total Assets Acquired | ||||
| Cash and cash equivalents | – | |||
| Other current assets | 4,750 | |||
| Intangible assets | 22,700 | |||
| Other non-current assets | – | |||
| Total identifiable assets | 27,450 | |||
| Total liabilities assumed | ||||
| Accrued liabilities | 6,320 | |||
| Current portion of fixed payment obligations | 2,890 | |||
| Other long-term liabilities | 23,567 | |||
| Total identifiable liabilities | 32,778 | |||
| Total pro forma goodwill | 15,388 | |||
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Innovus Merger. The Innovus Merger was approved by the shareholders of both the Company and Innovus on February 13, 2020, prior to the furnishing of this Form 8-K. Accordingly, the Company has not yet started the process of identifying and valuing the assets acquired and liabilities assumed. However, the Company has included those net assets as reported by Innovus on its September 30, 2019 Form 10-Q, furnished November 14, 2019, the most recent balance sheet that Innovus furnished with the Securities and Exchange Commission.
| Purchase Price Allocation |
Estimated Purchase Price Allocation
(in thousands) |
Notes | ||||
| Estimated consideration to be transferred | 19,446 | (1) | ||||
| Total Assets Acquired | ||||||
| Cash and cash equivalents | 955 | |||||
| Other current assets | 3,398 | |||||
| Intangible assets | 3,378 | |||||
| Other non-current assets | 1,783 | |||||
| Total identifiable assets | 9,514 | |||||
| Total liabilities assumed | ||||||
| Accounts payable and accrued liabilities | 4,080 | |||||
| Accrued compensation | 1,341 | |||||
| Notes payable | 2,315 | |||||
| Long-term contingent consideration | 3,248 | |||||
| Other long-term liabilities | 1,526 | |||||
| Total identifiable liabilities | 12,510 | |||||
| Total pro forma goodwill | 22,442 | |||||
| (1) | The estimated consideration transferred is an estimate both regarding the ultimate fair value of the Company’s common stock at the time of close, as well as the total number of shares of the Company’s common stock either issued at close or underlying other securities transferred at the time of close. |
Note 5. Pro Forma Adjustments
The preliminary pro forma adjustments are based on the Company’s estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed consolidated combined financial information:
Cerecor Transaction
| (a) | Represents the $4.5 million of cash consideration transferred as part of the Cerecor Transaction purchase price. |
| (b) | Represents adjustments to reflect fair value of acquired net assets including: (i) inventory and prepaid expenses, as well as estimated amounts relating to certain future product returns related to products sold prior to November 1, 2019. that Cerecor, Inc. agreed-to reimburse the Company; and (ii) adjustment to reflect the fair value of certain operating liabilities assumed by the Company as part of the Cerecor Transaction. Such amounts include estimates by the Company and are subject to potential future adjustments over the twelve-month measurement period. |
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| (c) | Represents the adjustment to the fair value of identifiable intangible assets acquired by the Company at November 1, 2019. The fair value of the acquired intangible assets comprised of product technology rights is estimated at approximately $22.7 million, and subject to change if new information or analysis during the twelve month measurement period through October 31, 2020 arises. |
| (d) | Represents the preliminary estimated goodwill, which represents the excess purchase price over the fair value of the Cerecor transaction (see Note 4). As noted previously, the valuation of the assets acquired and liabilities assumed is subject to adjustment during the twelve month measurement period. |
| (e) | Represents adjustments to reflect the fair value of the current and long-term portions of the assumed fixed payment obligations related to certain product royalties or deferred payment obligations from a previous corporate acquisition involving the acquired Pediatric Portfolio. | |
| (f) | Represents the reduction in the fair value of contingent consideration obligations to $0.00 based on upon the Company’s assessment as to the probability that such milestones will be achieved. In addition, the Company reclassified the nature of the fixed payment obligations, eliminating the debt line item. | |
| (g) | Represents adjustments to reflect the impact on amortization and accretion expense resulting from the estimated fair values of amortizable intangible assets acquired and assumed fixed payments obligations at November 1, 2019. | |
| (h) | Impairment charges as reported by Cerecor, Inc. in the historical, audited abbreviated financial statements as filed in Exhibit 99.1 to this Current Report on Form 8-K/A are not specific to the identified assets acquired, and therefore the circumstances under which such impairment charges were recognized are not reflective of the Cerecor Transaction on a pro forma basis. |
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Innovus Merger
| (i) | Represents approximately $100,000 in cash consideration paid to certain key members of Innovus executive team and approximately $400,000 in severance to be paid to a parting executive of Innovus. |
| (j) | Represents the elimination of the $1.0 million note between Aytu and Innovus that the parties agreed to in August 2019 |
| (k) | Represents the preliminary estimated goodwill, which represents the excess purchase price over the fair value of the pending Innovus merger (see Note 4). |
| (l) | Represents the elimination of the $1.0 million note between Aytu and Innovus that was entered into in August 2019. |
| (m) | Represents the potential cash outflows related to the potential satisfaction of Contingent Value Rights relating to revenue targets established in the Agreement and Plan of Merger with Innovus Pharmaceuticals, Inc. on September 12, 2019. | |
| (n) | Represents the estimated expected cost savings and efficiencies to be realized within the first fiscal year post-close, due to the elimination or reduction in salaries or headcount, and elimination of various public company related activities such as accounting, legal or investor relations. |
| (o) | Represents the pro forma weighted average shares outstanding at the end of both the three months ended June 30, 2019 and three months ended September 30, 2019, excluding any future or potential transactions or offerings. |
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