1. Nature of Business, Financial Condition, Basis of Presentation

 

Nature of Business. Aytu BioPharma, Inc. (“Aytu”, the “Company” or “we”) is a commercial-stage specialty pharmaceutical company focused on commercializing novel therapeutics and consumer healthcare products. The Company currently operates the Aytu BioPharma business, consisting of the prescription pharmaceutical products (the “Rx Portfolio”), and Aytu consumer healthcare products business (the “Consumer Health Portfolio”). The Rx Portfolio is focused on commercializing prescription pharmaceutical products for the treatment of attention deficit hyperactivity disorder ("ADHD"), allergies, insomnia, and various pediatric conditions. The Aytu consumer health business is focused on commercializing consumer healthcare products. The Company was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado and was re-incorporated in the state of Delaware on June 8, 2015.

 

The Rx Portfolio consists of (i) Adzenys XR-ODT (amphetamine) extended-release orally disintegrating tablets, Cotempla XR-ODT (methylphenidate) extended-release orally disintegrating tablets and Adzenys-ER (amphetamine) extended-release oral suspension for the treatment of attention deficit hyperactivity disorder (ii) Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various formulations for infants and children with fluoride deficiency, (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions, (iv) ZolpiMist, the only FDA-approved oral spray prescription sleep aid, (v) Tuzistra XR, the only FDA-approved 12-hour codeine-based antitussive syrup and (vi) a generic Tussionex (hydrocodone and chlorpheniramine) (“generic Tussionex”), extended-release oral suspension for the treatment of cough and upper respiratory symptoms of a cold.

 

The Consumer Health Portfolio consists of over twenty consumer health products competing in large healthcare categories including diabetes, men's health, sexual wellness and respiratory health commercialized through direct-to-consumer marketing channels utilizing the Company's proprietary Beyond Human marketing and sales platform and on e-commerce platforms.

 

On March 31, 2021, the Company and Acerus Pharmaceuticals Corporation (“Acerus”) entered into a termination and transition agreement (the “Termination Agreement”) to terminate the License and Supply Agreement previously entered into on July 29, 2019 related to Natesto®. Pursuant to the Termination Agreement, the Company ceased all sales, marketing and promotion of Natesto, and Acerus agreed to pay the Company an aggregate amount of $7.5 million, payable in equal monthly installment payments of $250,000 for a period of 30 consecutive months. 

 

On March 19, 2021, the Company acquired Neos Therapeutics, Inc. (“Neos”), a commercial-stage pharmaceutical company developing and manufacturing central nervous system-focused products (the “Neos Merger”). Neos commercializes Adzenys XR-ODT, Cotempla XR-ODT and Adzenys-ER in the United States using Neos’ internal commercial organization. These commercial products are extended-release (“XR”) medications in patient-friendly, orally disintegrating tablet (“ODT”) or oral suspension dosage forms that utilize Neos' microparticle modified-release drug delivery technology platform. Neos received approval from the U.S. Food and Drug Administration (“FDA”) for these three products. In addition, Neos manufactures and sells a generic Tussionex.

 

In April of 2020, the Company entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in a proof-of-concept clinical study in SARS-CoV-2 patients, and the Company plans to advance this technology to further assess its safety and efficacy in additional randomized, controlled human studies, initially focused on SARS-CoV-2 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 March 31, 2021, the Company had approximately $46.8 million of cash, cash equivalents and restricted cash. The Company’s operations have historically consumed cash and are expected to continue to consume cash.

 

Revenues for the three- and nine-months ended March 31, 2021 were $13.5 million and $42.1 million, compared to $8.2 million and $12.8 million for the same periods ended March 31, 2020, an increase of approximately 65% and 230%, respectively. Revenue is expected to increase over time, which will allow the Company to rely less on the Company's existing cash balance and proceeds from financing transactions. Cash used by operations during the nine-months ended March 31, 2021 was $19.7 million compared to $20.6 million for the nine-months ended March 31, 2020. The decrease is due primarily to a decrease in working capital and pay down of other liabilities.

 

 

As of the date of this Report, the Company expects its costs for operations to increase as the Company integrates the Neos acquisition, invests in new product development, continues to focus on revenue growth through increasing product sales and additional acquisitions. The Company’s current assets totaling approximately $100.0 million as of March 31, 2021 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 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 the Company and its stockholders, or at all. Upon closing of the Neos merger, on March 19, 2021, the Company paid down $15.4 million of Neos' senior secured long-term debt, including accrued interest and $5.5 million of merger costs incurred by Neos. The Company did not issue any common stock under the Company's at-the-market offering program during the three months ended March 31, 2021. 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 March 31, 2021 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, the Company's management can adjust its operating plans to reduce the magnitude of the Company's 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 or delays 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 condensed consolidated financial statements contained in this report represent the financial statements of the Company and its wholly-owned subsidiaries, Innovus Pharmaceuticals, Inc., Aytu Therapeutics, LLC and Neos Therapeutics, Inc. The unaudited consolidated financial statements should be read in conjunction with the Company'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 the Company and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended March 31, 2021 are not necessarily indicative of expected operating results for the full year. The information presented throughout this report, as of March 31, 2021 and for the three and nine months ended March 31, 2021, and 2020, is unaudited. 

 

On December 8, 2020, the Company effected a reverse stock split in which each common stockholder received one share of common stock for every 10 shares held (herein referred to collectively as the “Reverse Stock Split”). All share and per share amounts in this report have been adjusted to reflect the effect of the Reverse Stock Split.

 

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 consideration, contingent value rights ("CVRs"), and fixed payment obligations 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, net realizable value of inventory, 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.

 

Reclassification

 

The Company historically presented accrued distributor fees as a reduction to accounts receivable. However, beginning this quarterly report and for the comparative periods presented, accrued distributors fees will be presented in accrued liabilities instead of accounts receivable. As of June 30, 2020, accrued distributor fees included in accounts receivable, net on the balance sheet was $457,000. This reclassification will have no impact on the Company's statements of operation and cash flows presented in this quarterly report.

 

 

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 and nine months ended March 31, 2021.

 

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 a line of prescription pediatric products, (the "Pediatric Portfolio"), which closed on November 1, 2019. At closing, the Pediatric Portfolio consisted of four main prescription products (i) Cefaclor™ for Oral Suspension, (ii) Karbinal® ER (iii) Poly-Vi-Flor®, and (iv) Tri-Vi-Flor™. Total consideration transferred to Cerecor consisted of $4.5 million cash and approximately 980,000 shares of Series G Convertible Preferred Stock. The Company also assumed certain of Cerecor’s financial and royalty obligations, and not more than $2.7 million of Medicaid rebates and up to $0.8 million of product returns, of which all $3.5 million has been incurred. The Company also hired the majority of Cerecor’s commercial workforce.

 

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 $15.0 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 Pediatric 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 $15.0 million balloon payment originally owed in January 2021 to reduce the fixed liability.

 

Further, certain of the products in the Pediatric 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 $2.1 million, in the event the minimum sales volume is not satisfied.

 

 

While no equity was acquired by the Company, the transaction was accounted for as a business combination under the acquisition method of accounting pursuant to Topic 805. Accordingly, the tangible and identifiable intangible assets acquired, and liabilities assumed were recorded at fair value as of the date of acquisition, with the 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 fair value of assets acquired and liabilities assumed at the date of acquisition. 

 

		As of
		November 1, 2019
Consideration
Cash and cash equivalents		$	4,500,000
Fair value of Series G Convertible Preferred Stock
Total shares issued			9,805,845
Estimated fair value per share of Aytu common stock		$	0.567
Estimated fair value of equity consideration transferred			5,559,914
Total consideration transferred		$	10,059,914
Recognized amounts of identifiable assets acquired and liabilities assumed
Inventory		$	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.

 

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 (the "Innovus Merger"). Upon the effectiveness of the Innovus Merger, a subsidiary of the Company merged with and into Innovus, and all outstanding Innovus common stock was exchanged for approximately 380,000 shares of the Company’s common stock and up to $16.0 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with 'cash out' rights were exchanged for approximately 200,000 shares of Series H Convertible Preferred stock of the Company over a period of time covering February 26, 2020 through March 10, 2020. The remaining Innovus warrants outstanding, those without ‘cash out’ rights, at the time of the Innovus 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 120,000 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 during the three months ended March 31, 2020. On March 20, 2021, the Company paid the CVR holders approximately 103,000 shares of the Company’s common stock to satisfy one of two $1.0 million 2020 milestones, which relates to the Innovus achievement of $30.0 million in revenues during the 2020 calendar year. As a result of this, the Company recognized a gain of approximately $0.4 million during the three months ended March 31, 2021. The $1.0 million 2020 milestone for the Aytu Consumer Health subsidiary achieving profitability was not met.

 

In addition, as part of the Innovus 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 180,000 shares of the Company’s common stock since February 14, 2020. Approximately $41,000 remained outstanding as of March 31, 2021.

 

 

The following table summarized the 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 Series H Convertible Preferred Stock
Total shares issued			1,997,736
Estimated fair value per share of Aytu common stock		$	0.756
Estimated fair value of equity consideration transferred		$	1,510,288
Fair value of former Innovus warrants		$	15,315
Fair value of Contingent Value Rights			7,049,079
Forgiveness of Note Payable owed to the Company			1,350,000
Total consideration transferred		$	12,805,263

 

		As of
		February 14, 2020
Total consideration transferred		$	12,805,263
Recognized amounts of identified assets acquired and liabilities assumed
Cash and cash equivalents		$	390,916
Accounts receivable			278,826
Inventory			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 net 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 CVRs were valued using a Monte-Carlo model. 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 assets acquired was determined to be $11.7 million, which is being amortized over a range between 1.5 to 10 years.

 

 

Neos Merger (ADHD Portfolio)

 

On March 19, 2021, the Company completed the Neos Merger with Neos Therapeutics, Inc. after approval by the stockholders of Neos on March 18, 2021 and the approval of the consideration to be delivered by the Company in connection with the merger by the shareholders of Aytu, also on March 18, 2021. Upon the effectiveness of the Neos Merger, a subsidiary of the Company merged with and into Neos, and all outstanding Neos common stock was exchanged for approximately 5,472,000 shares of the Company’s common stock. Neos is now a 100% wholly-owned subsidiary of the Company. The Company pursued the acquisition of Neos in order to gain scale in the industry, expand its product portfolio and as an opportunity to potentially accelerate the pathway to breakeven. The Company incurred in relation to the Neos Merger (i) approximately $2.8 million of acquisition related costs, recognized as part of operating expense, and (ii) $0.1 million of issuance costs, recognized as a component of stockholders’ equity. 

 

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
		March 19, 2021
Considerations:
Fair Value of Aytu Common Stock
Total shares issued at close			5,471,804
Estimated fair value per share of Aytu common stock		$	9.73
Estimated fair value of equity consideration transferred		$	53,240,653
Cash			15,383,104
Estimated fair value of replacement equity awards			432,289
Total consideration transferred		$	69,056,046

 

		As of
		March 19, 2021
Total consideration transferred		$	69,056,046
Recognized amounts of identified assets acquired and liabilities assumed
Cash and cash equivalents		$	15,721,797
Accounts receivable			24,695,527
Inventory			10,984,055
Prepaid expenses and other current assets			2,929,457
Operating leases right-to-use assets			3,515,141
Property, plant and equipment			5,518,801
Intangible assets			56,530,000
Other long-term assets			148,931
Accounts payable and accrued expenses			(56,718,159	)
Short-term line of credit			(10,707,115	)
Long-term debt, including current portion			(17,677,954	)
Operating lease liabilities			(3,515,141	)
Other long-term liabilities			(81,523	)
Total identifiable net assets		$	31,343,817
Goodwill		$	37,712,229

 

The fair values of intangible assets were determined using variations of the cost approach, excess earnings method and the relief-from-royalties method. The fair value of Neos trade name, in-process R&D and developed product technology, which is the proprietary technology for the development of Adzenys, Cotempla and generic Tussionex, were determined using the relief from royalty method. The fair value of developed technology right, which is a proprietary modified-release drug delivery technology, was determined using multi-period excess earnings method. The fair value of RxConnect, which is a developed technology for Neos-sponsored patient support program that offers affordable and predictable copays to all commercially insured patients, was determined using cost to recreate method. The finite-lived intangible assets are being amortized over a range of between 1 to 18 years.

 

The fair value of the identifiable intangible assets acquired were as follows:

 

 

 

 

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.
	●	Merger with Neos, effective March 19, 2021.

 

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								Nine Months Ended
		March 31, 2021				March 31, 2020				March 31, 2021				March 31, 2020
		Actual				Pro forma				Actual				Pro forma
		(Unaudited) (dd)				(Unaudited) (aa) (bb)				(Unaudited) (dd)				(Unaudited) (cc)
Total revenues, net		$	22,250,543			$	24,824,477			$	74,582,036			$	83,141,373
Net (loss)		$	(32,674,710	)		$	(13,800,554	)		$	(55,711,884	)		$	(31,686,745	)
Net (loss) per share (ee)		$	(1.41	)		$	(3.91	)		$	(2.71	)		$	(14.01	)

 

(aa) For the three months ended March 31, 2020, the Pediatric Portfolio acquisition occurred prior to the three months ended March 31, 2020, and accordingly, the results of the Pediatric Portfolio are fully consolidated into the Company’s results for the three months ended March 31, 2020.

 

(bb) Due to the absence of discrete financial information for Innovus covering the period from January 1, 2020 through February 13, 2020, the Company did not include the impact of that stub-period for the pro forma results for the three and nine months ended March 31, 2020.

 

(cc) Due to a lack of financial information covering the period from October 1, 2019 through November 1, 2019, the Company was not able to provide pro forma adjusted financial statements for the nine months ended March 31, 2020 without making estimated extrapolations that the Company did not believe would be material or useful to users of the above pro forma information.

 

(dd) Neos contributed approximately $0.9 million to net revenue and approximately $3.9 million to net loss for the period covering March 20, 2021 through March 31, 2021.

 

(ee) 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

 

Contract Balances. Contract assets primarily relate to the Company’s right to consideration in exchange for products transferred to a customer in which that right to consideration is dependent upon the customer selling these products. As of March 31, 2021, contract assets of $42,000 was included in other current assets in the consolidated balance sheet. There was no contract asset as of June 30, 2020. Contract liabilities primarily relate to advances or deposits received from the Company's customers before revenue is recognized. As of March 31, 2021 and June 30, 2020, contract liabilities of $0.2 million and $0.3 million, respectively, were included in accrued liabilities in the consolidated balance sheet.

 

Revenues by Geographic location. The following table reflects the Company's product revenues by geographic location as determined by the billing address of customers:

 

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2021				2020				2021				2020
U.S.		$	12,344,000			$	7,273,000			$	38,245,000			$	11,582,000
International			1,138,000				883,000				3,905,000				1,189,000
Total net revenue		$	13,482,000			$	8,156,000			$	42,150,000			$	12,771,000

 

Revenues by Product Portfolio. Net revenue disaggregated by significant product portfolio for the three and nine months ended March 31, 2021 and March 31, 2020 were as follows:

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2021				2020				2021				2020
Primary care and devices portfolio		$	1,209,000			$	870,000			$	8,339,000			$	3,500,000
Pediatric portfolio			3,918,000				3,833,000				9,752,000				5,818,000
Consumer Health portfolio			8,355,000				3,453,000				24,059,000				3,453,000
Consolidated revenue		$	13,482,000			$	8,156,000			$	42,150,000			$	12,771,000

 

 

 

4. Inventories

 

Inventories consist of raw materials, work in process and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Aytu periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. In the event that such items are identified 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 $7.0 million and $7.2 million of inventory during the three and nine months ended March 31, 2021, respectively, primarily as a result of changing market conditions for the Company's COVID-19 test kits. There was no inventory written down for the three and nine-months ended March 31, 2020, respectively.

 

Inventory balances consist of the following:

 

		As of				As of
		March 31,				June 30,
		2021				2020
Raw materials		$	2,583,000			$	397,000
Work in process			3,181,000				−
Finished goods			10,812,000				9,603,000
Inventory		$	16,576,000			$	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:

 

					As of				As of
		Estimated			March 31,				June 30,
		Useful Lives in years			2021				2020
Manufacturing equipment		2 - 7			$	3,072,000			$	112,000
Leasehold improvements		3				1,259,000				229,000
Office equipment, furniture and other		2 - 7				966,000				312,000
Lab equipment		3 - 7				646,000				90,000
Assets under construction						186,000				−
Less accumulated depreciation and amortization						(571,000	)			(484,000	)
Fixed assets, net					$	5,558,000			$	259,000

 

During the nine months ended March 31, 2021, the Company recognized a loss of $0.1 million on sale of equipment due to termination of leases. There was no such loss during the three months ended March 31, 2021.

 

        Depreciation and amortization expense totaled $68,000 and $24,000 for the three-months ended March 31, 2021 and 2020, respectively, and $119,000 and $56,000 for the nine-months ended March 31, 2021 and 2020, 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 ("ROU") and an operating lease liability on its balance sheet associated with the leases of the corporate headquarters. The finance leases are related to the Company's Neos subsidiary equipment leases. The operating lease ROU 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. The operating lease ROU 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 operating lease liabilities are classified as current or long-term operating lease liabilities on the balance sheet.

 

Upon the closing of the Neos Merger on March 19, 2021, pursuant to the guidance under ASC 805, Neos recognized operating lease ROU asset and lease liability of $3.5 million, which represented the present value of the remaining lease payments as of the acquisition date, for its office space and manufacturing facilities at Grand Prairie, Texas. As the lease agreement does not provide an implicit rate, Neos used its borrowing rate of 6.7% to determine the present value of future lease payments. Furthermore, as of the acquisition date, no assets or liabilities of the operating leases that have a remaining lease term of less than twelve months were recognized. The finance leases are related to Neos equipment finance leases with fixed contract terms and an implicit interest rate of approximately 5.9%. The finance lease assets are included in fixed assets and the lease liabilities are included in current and long-term debt on the balance sheet.

 

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 nine months ended March 31, 2021.

       

       On October 1, 2020, the Company's Innovus subsidiary entered into a short-term lease for warehouse space in Carlsbad, CA. The lease term is for one-year with an option to terminate after six months with ninety days' notice. This lease is accounted for as a short-term lease and is not included as a component of the Company's right-to-use assets and related liability.

 

The components of lease expenses are as follows:

 

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2021				2020				2021				2020			Statement of Operations Classification
Lease cost:
Operating lease cost		$	69,000			$	27,000			$	128,000			$	72,000		Operating expenses
Short-term lease cost			7,000				−				7,000				−		Operating expenses
Finance lease cost:
Amortization of leased assets			19,000				−				19,000				−		Cost of sales
Interest on lease liabilities			1,000				−				1,000				−		Other (expense), net
Total net lease cost		$	96,000			$	27,000			$	155,000			$	72,000

 

 

 

Supplemental balance sheet information related to leases is as follows:

 

		March 31, 2021				June 30, 2020			Balance Sheet Classification
Assets:
Operating lease assets		$	3,782,000			$	634,000		Operating lease right-of-use asset
Finance lease assets			347,000				−		Fixed assets, net
Total leased assets		$	4,129,000			$	634,000
Liabilities:
Current:
Operating leases		$	911,000			$	300,000		Current portion of operating lease liabilities
Finance leases			100,000				−		Current portion of debt
Long-term
Operating leases			2,872,000				725,000		Long-term operating lease liabilities, net of current portion
Finance leases			207,000				-		Long-term debt, net of current portion
Total lease liabilities		$	4,090,000			$	1,025,000

 

Remaining lease term and discount rate used are as follows:

 

		March 31, 2021				June 30, 2020
Weighted-Average Remaining Lease Term (years)
Operating lease assets			3.67				3.33
Finance lease assets			2.96				−
Weighted-Average Discount Rate
Operating lease assets			6.62	%			8.09	%
Finance lease assets			6.40	%			−

 

Supplemental cash flow information related to lease is as follows:

 

		Nine Months Ended
		March 31,
		2021				2020
Cash flow classification of lease payments:
Operating cash flows from operating leases		$	128,000			$	72,000
Operating cash flows from finance leases		$	1,000			$	-

 

 

As of March 31, 2021, the maturities of the Company’s future minimum lease payments were as follows:

 

		Operating				Finance
2021 (remaining 3 months)		$	281,000			$	29,000
2022			1,154,000				117,000
2023			1,182,000				105,000
2024			1,117,000				88,000
2025			557,000				−
Total lease payments			4,291,000				339,000
Less: Imputed interest			(508,000	)			(32,000	)
Lease liabilities		$	3,783,000			$	307,000

 

 

 

 

7. Intangible Assets

 

The Company currently holds the following intangible asset portfolios as of March 31, 2021: (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, as a result of the Innovus Merger on February 14, 2020 and as a result of the Neos Merger on March 19, 2021, (iii) Proprietary modified-release drug delivery technology right as a result of the Neos Merger, (iv) Acquired product distribution rights and commercial technology consisting of RxConnect and trade names as a result of the Neos Merger, and patents, trade names and the acquired customer lists from the Innovus Merger, (v) Acquired in-process R&D related to NT0502 product candidate for sialorrhea from the Neos Merger.

 

On March 31, 2021, the Company and Acerus Pharmaceuticals Corporation (“Acerus”) entered into a termination and transition agreement (the “Termination Agreement”) to terminate the License and Supply Agreement previously entered into on July 29, 2019. Pursuant to the Termination Agreement, the Company ceased all sales, marketing and promotions of Natesto, and Acerus agreed to pay the Company an aggregate amount of $7.5 million, payable in equal monthly installment payments for a period of 30 consecutive months. The Company determined that none of the $7.5 million future cash payments can be recognized as of March 31, 2021, and therefore the remaining $4.3 million carrying value of the licensed intangible asset related to Natesto was impaired, and there is no remaining value as of March 31, 2021. 

 

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 as further described in Note 2.

 

The following table provides the summary of the Company’s intangible assets as of March 31, 2021 and June 30, 2020, respectively.

 

		March 31, 2021
		Gross Carrying Amount				Accumulated Amortization				Impairment				Net Carrying Amount				Weighted-Average Remaining Life (in years)
Licensed assets		$	23,649,000			$	(8,768,000	)		$	(4,286,000	)		$	10,595,000				15.15
Acquired product technology right			45,400,000				(3,259,000	)			−				42,141,000				13.37
Acquired technology right			30,200,000				(57,000	)			−				30,143,000				16.97
Acquired product distribution rights			11,354,000				(1,697,000	)			−				9,657,000				7.03
Acquired in-process R&D			2,600,000				-				−				2,600,000				Indefinite-lived
Acquired commercial technology			630,000				(20,000	)			−				610,000				1.97
Acquired trade name			400,000				(6,000	)			−				394,000				0.97
Acquired customer lists			390,000				(293,000	)			−				97,000				0.37
Total		$	114,623,000			$	(14,100,000	)		$	(4,286,000	)		$	96,237,000				13.56

 

		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				7.78
Acquired customer lists			390,000				(98,000	)			−				292,000				1.12
Total		$	58,473,000			$	(9,423,000	)		$	(195,000	)		$	48,855,000				9.11

 

 

The following table summarizes the estimated future amortization expense to be recognized over the next five years and periods thereafter:

 

		Amortization
2021 (remaining 3 months)		$	2,234,500
2022			8,529,000
2023			7,981,000
2024			7,825,000
2025			7,591,000
Thereafter			59,476,500
Total future amortization expense		$	93,637,000

 

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 $1.7 million and $1.4 million for the three months ended March 31, 2021 and 2020, respectively. Amortization expense of intangible assets was $4.9 million and $2.9 million for the nine months ended March 31, 2021 and 2020, respectively.

 

8. Accrued liabilities

 

Accrued liabilities consist of the following:

 

		As of				As of
		March 31,				June 30,
		2021				2020
Accrued settlement expense		$	150,000			$	315,000
Accrued program liabilities			7,836,000				959,000
Accrued product-related fees			2,379,000				2,471,000
Accrued savings offers			19,218,000				−
Accrued distributor fees			2,816,000				457,000
Credit card liabilities			657,000				510,000
Medicaid liabilities			1,948,000				1,842,000
Return reserve			5,592,000				1,329,000
Sales taxes payable			182,000				175,000
Other accrued liabilities*			2,404,000				588,000
Total accrued liabilities		$	43,182,000			$	8,646,000

 

* Other accrued liabilities consist of franchise tax, accounting and legal fees, 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 asset and liability classified financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability and contingent consideration. The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. The fair value of acquisition-related contingent consideration is based on Monte-Carlo models. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.

 

 

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:

 

Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities;

 

Level 2: Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and

 

Level 3: Unobservable inputs that are supported by little or no market activity.

 

The Company’s assets and liabilities which are measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. Aytu has consistently applied the valuation techniques discussed below in all periods presented.

 

Recurring Fair Value Measurements

 

The following table presents the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of March 31, 2021 and June 30, 2020, by level within the fair value hierarchy.

 

						Fair Value Measurements at March 31, 2021
		Fair Value at March 31, 2021				Quoted Priced in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Recurring:
Contingent consideration		$	14,904,000			$	–			$	–			$	14,904,000
CVR liability			5,591,000				–				–				5,591,000
Total		$	20,495,000			$	−			$	−			$	20,495,000

 

						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	)
Total		$	19,160,000			$	−			$	−			$	19,160,000

 

Contingent Consideration. The Company classifies its contingent consideration liability in connection with the acquisition of 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 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 Tuzistra XR, was valued at $8.8 million using a Monte Carlo simulation. As of March 31, 2021, the contingent consideration was revalued at $14.4 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential and Aytu stock trading variables.  As of March 31, 2021, none of the milestones had been achieved, and therefore, no milestone payment was made. However, approximately $3.0 million is expected to be paid in November 2021, as this milestone will be satisfied.

 

 

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 March 31, 2021, the contingent consideration was revalued at $0.3 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential and Aytu stock trading variables. The Company reevaluates the contingent consideration on a quarterly basis for changes in the fair value recognized after the acquisition date, such as measurement period adjustments.  As of March 31, 2021, none of the milestones had been achieved, and therefore, no milestone payment was made.

 

The Company recognized approximately $0.2 million in product related 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 and nine months ended March 31, 2021 and 2020 was $15,000, and $44,000, respectively. There was no material change in this valuation as of March 31, 2021.

 

Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16.0 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to 470,000 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 Monte Carlo model which takes into account current interest rates and expected sales potential. On March 31, 2020, the Company paid the CVR holders approximately 120,000 shares of the Company’s common stock to satisfy the first $2.0 million milestone, which relates to the Innovus achievement of $24.0 million in revenues during the 2019 calendar year. On March 20, 2021, the Company paid the CVR holders approximately 103,000 shares of the Company’s common stock to satisfy one of two $1.0 million 2020 milestones, which relates to the Innovus achievement of $30.0 million in revenues during the 2020 calendar year. The $1.0 million 2020 milestone for achieving profitability was not met. The unrealized loss for the three months ended March 31, 2021 and March 31, 2020 was $0.1 million and $0.2 million, respectively. The unrealized loss for the nine months ended months ended March 31, 2021 and 2020 was $1.0 million and $0.2 million, respectively. The CVR's did not exist until after December 31, 2019. 

 

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 nine months ended March 31, 2021:

 

		CVR Liability				Contingent Consideration
Balance as of June 30, 2020		$	5,572,000			$	13,588,000
Included in earnings			1,019,000				1,999,000
Settlements			(1,000,000	)			(683,000	)
Balance as of March 31, 2021		$	5,591,000			$	14,904,000

 

Significant Assumptions

 

Contingent consideration. The Company estimates the fair value of the Contingent Consideration at each reporting date using management's forecast as the baseline for developing a Monte-Carlo model. The other significant assumptions used in the Monte Carlo Simulation as of March 31, 2021, were as follows: 

 

		As of March 31, 2021
Contingent Consideration
Credit risk assumption			20.80	%
Sales volatility			45.00	%
Credit spread			3.00	%
Time steps per year			1
Number of iterations			500

 

Contingent value rights. The Company estimates the fair value of the Contingent Value Rights at each reporting date using management's forecast as the baseline for developing a Monte-Carlo model. The other significant assumptions used in the Monte Carlo Simulation as of March 31, 2021 were as follows:

 

		As of March 31, 2021
Contingent Value Rights
Credit risk assumption			9.6	%
Time steps per year			30.00
Number of iterations			10,000

 

 

 

10. Commitments and Contingencies

 

Commitments and contingencies are described below and summarized by the following as of March 31, 2021:

 

		Total				2021				2022				2023				2024				2025				Thereafter
Prescription database		$	1,145,000			$	412,000			$	733,000			$	−			$	−			$	−			$	−
Pediatric portfolio fixed payments and product minimums			15,000,000				825,000				3,300,000				3,300,000				3,300,000				3,300,000				975,000
Inventory purchase commitment			1,472,000				736,000				736,000				−				−				−				−
CVR liability			12,000,000				−				2,000,000				5,000,000				5,000,000				−				−
Product contingent liability			2,500,000				−				−				−				−				−				2,500,000
Product milestone payments			3,000,000				−				3,000,000				−				−				−				−
Total		$	35,117,000			$	1,973,000			$	9,769,000			$	8,300,000			$	8,300,000			$	3,300,000			$	3,475,000

 

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 $15.0 million that was to be 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. 

 

On May 29, 2020, the Company entered into an Early Payment Agreement and Escrow Instruction (the “Early Payment Agreement”) pursuant to which the Company agreed to pay $15.0 million to the investor in early satisfaction of the Balloon Payment Obligation. The parties to the Early Payment Agreement acknowledged and agreed that the remaining fixed payments other than the Balloon Payment Obligation remain due and payable pursuant to the terms of the Agreement, and that nothing in the Early Payment Agreement alters, amends, or waives any provisions or obligations in the Waiver or the Investor agreement other than as expressly set forth therein.

 

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 $2.1 million 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 annually through 2025. 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 2025. 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.

 

Inventory Purchase Commitment

 

On May 1, 2020, the Company's Innovus subsidiary 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 the Company's 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.

 

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, a subsidiary of 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 the CVR holders approximately 120,000 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. On March 20, 2021, the Company paid the CVR holders approximately 103,000 shares of the Company’s common stock to satisfy one of two $1.0 million 2020 milestones, which relates to the Innovus achievement of $30.0 million in revenues during the 2020 calendar year. As a result of this, the Company recognized a gain of approximately $0.4 million during the three months ended March 31, 2021.The $1.0 million 2020 milestone for achieving profitability was not met.

 

 

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 five additional payments of $0.5 million each when certain levels of FlutiCare sales are achieved. The discounted value as of March 31, 2021, is approximately $0.2 million.

 

Product Milestone Payments

 

In connection with the Company’s intangible assets, Aytu has certain milestone payments, totaling $3.0 million, payable at a future date, which are not directly tied to future sales, but are payable 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. On March 31, 2021 and June 30, 2020, Aytu had 23,457,887 and 12,583,736 common shares outstanding, respectively, and zero preferred shares outstanding, respectively.

 

Included in the common stock outstanding are 274,635 shares of restricted stock issued to executives, directors, employees, and consultants.

 

In June 2020, the Company initiated an at-the-market offering program ("ATM"), which allows the Company to sell and issue shares of the Company's common stock from time-to-time. The company has issued 430,230 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 June 30, 2020. The Company did not issue any shares of common stock under the ATM during the three months ended March 31, 2021, and has issued 352,912 shares of common stock under the ATM, with total gross proceeds of approximately $3.6 million before deducting underwriting discounts, commissions, and other offering expenses payable by the Company of $1.6 million during the nine months ended March 31, 2021. Since initiated in June 2020 through March 31, 2021, the total number of shares of common stock issued under the ATM was 783,142, with total gross proceeds of $10.4 million before deducting underwriting discounts, commissions and other offering expenses payable by the Company of $1.8 million.  

 

The Company entered into three separate registered direct stock offerings on March 10, 2020, March 12, 2020 and March 19, 2020 (the “March Offerings”) in which the Company issued a combination of common stock and warrants. In July 2020, the Company paid $1.5 million issuance cost in cash related to the March Offerings and issued 92,302 warrants to purchase 92,302 shares of the Company's common stock with a weighted-average exercise price of $15.99 to an investment bank 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.

 

On December 10, 2020, the Company entered into an exchange agreement to exchange the $0.8 million of debt outstanding for 130,081 shares of the Company's common stock (see Note 15).

 

On December 10, 2020, the Company entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“Wainwright”) (as amended and restated, the “Underwriting Agreement”). Pursuant to the Underwriting Agreement, the Company agreed to sell, in an upsized firm commitment offering, 4,166,667 shares (the “Shares”) of the Company’s common stock, $0.0001 par value per share (the “Common Stock”), to Wainwright at an offering price to the public of $6.00 per share, less underwriting discounts and commissions. In addition, pursuant to the Underwriting Agreement, the Company granted Wainwright a 30-day option to purchase up to an additional 625,000 shares of Common Stock at the same offering price to the public, less underwriting discounts and commissions. Wainwright exercised their over-allotment option in full, purchasing total common stock of 4,791,667 shares. The Company raised gross proceeds of $28.8 million through this offering. Offering costs totaled $2.6 million resulting in net cash proceeds of $26.2 million. In connection with the offering, the Company issued 311,458 underwriter warrants to purchase up to 311,458 shares of common stock. The exercise price per share of the underwriter warrants is $7.50 (equal to 125% of the public offering price per share for the shares of common stock sold in the offering) and the underwriter warrants have a term of five years from the date of effectiveness of the offering. The underwriter warrants are exercisable immediately. These warrants have fair value of approximately $1.3 million and are classified with the stockholders' equity.

 

On March 19, 2021, upon closing of the Neos Merger, the Company issued 5,447,000 shares of its common stock to acquire all the outstanding shares of common stock of Neos. In addition, pursuant to the agreement in the Neos Merger, the Company issued 24,804 shares of common stock to settle the accelerated restricted stock units of former Neos directors and officers (see Note 2).

 

On March 20, 2021, the Company paid the CVR holders approximately 103,000 shares of the Company’s common stock to satisfy one of two $1.0 million 2020 milestones, which relates to the Innovus achievement of $30.0 million in revenues during the 2020 calendar year.

 

12. Equity Incentive Plan

 

Aytu 2015 Plan

 

On June 1, 2015, the Company’s stockholders approved the Aytu BioPharma 2015 Stock Option and Incentive Plan (the “Aytu 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 Aytu 2015 Plan. On February 13, 2020, the Company’s stockholders approved an increase to 5.0 million total shares of common stock in the Aytu 2015 Plan. As of March 31, 2021, the Company had 4,603,990 shares that are available for grant under the Aytu 2015 Plan.

 

Neos 2015 Plan

 

Pursuant to the Neos Merger, the Company assumed 69,721 stock options and 35,728 restricted stock units (RSUs) previously granted under Neos plan. Accordingly, on April 19, 2021, the Company registered 105,449 shares of its common stock under the Neos Therapeutics, Inc. 2015 Stock Options and Incentive Plan (the "Neos 2015 Plan") with the SEC. The terms and conditions of the assumed equity securities will stay the same as they were under the previous Neos plan. The Company allocated costs of the replacement awards attributable to pre- and post-combination service periods. The pre-combination service costs were included in the considerations transferred. The remaining costs attributable to the post-combination service period are being recognized as stock-based compensation expense over the remaining terms of the replacement awards. As of March 31, 2021, the Company had no shares that are available for grant under the Neos 2015 Plan.

 

 

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. The assumptions used to estimate the fair value of the options granted under the Neos 2015 Plan were as follows:

 

		As of March 31, 2021
Expected volatility			100.0	%
Expected term (years)			4.00
Risk-free interest rate			0.73	%
Dividend yield			−

 

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			76,614			$	19.39				9.67			$	−
Granted			69,721				−
Forfeited/Cancelled			(7,553	)			−
Expired			(2,528	)			−
Outstanding at March 31, 2021			136,254			$	13.14				6.12			$	−
Exercisable at March 31, 2021			20,569			$	87.86				8.56			$	−

 

As of March 31, 2021, there was $0.5 million unrecognized option-based compensation expense related to non-vested stock options. The Company expects to recognize this expense over a weighted-average period of 3.3 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			418,454			$	14.69				6.4
Vested			(143,977	)
Unvested at March 31, 2021			274,477			$	16.27				6.2

 

Under the Aytu 2015 Plan, there was $4.0 million of total unrecognized stock-based compensation expense related to the non-vested restricted stock as of March 31, 2021. The Company expects to recognize this expense over a weighted-average period of 6.2 years. The Company previously issued 158 shares of restricted stock outside the Aytu 2015 Plan, which vest in July 2026. The unrecognized expense related to these shares was $1.1 million as of March 31, 2021 and is expected to be recognized over the weighted average period of 5.3 years.

 

 

Restricted Stock Unit

 

On March 31, 2021, the Company granted 55,000 restricted stock units ("RSUs") to a member of its management. One-third of the RSUs that vest on April 1, 2022, and 1/12 vest on the first day of each quarter thereafter such that all the RSUs will be fully-vested on the third anniversary of the grant. The grant date fair value of $7.60 per share.

 

Restricted stock unit 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
Granted			90,728			$	8.35				2.21
Vested			(2,822	)
Forfeited			(544	)
Unvested at March 31, 2021			87,362			$	8.31				2.26

 

Under the Neos 2015 Plan, there was $0.6 million of total unrecognized stock-based compensation expense related to the non-vested restricted stock units as of March 31, 2021. The Company expects to recognize this expense over a weighted-average period of 2.2 years.

 

Stock-based compensation expense related to the fair value of stock options and restricted stock was included in the statements of operations as set forth in the table below:

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2021				2020				2021				2020
Cost of sales		$	9,000			$	−			$	9,000			$	−
Research and development			3,000				−				3,000				−
Sales, general and administrative			1,514,000				264,000				2,473,000				591,000
Total stock-based compensation expense		$	1,526,000			$	264,000			$	2,485,000			$	591,000

 

As of March 31, 2021, the Company recorded a liability of $0.1 million in accrued expense for the share-based payment to certain departing officers. 

 

The stock-based compensation expense included in the table above is attributable to stock options and restricted stock of $0.1 million and $1.3 million, respectively, for the three months ended March 31, 2021 and $0.3 million and $2.1 million, respectively, for the nine months ended March 31, 2021. The stock-based compensation expense included in the table above is attributable to stock options and restricted stock of $7,000 and $0.3 million, respectively, for the three months ended March 31, 2020 and $14,000 and $0.6 million, respectively, for the nine months ended March 31, 2020.