BluePrint
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K
(Mark
One)
☒
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the fiscal year ended June 30, 2019
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission
File Number 333-146542
AYTU BIOSCIENCE, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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47-0883144
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification Number)
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373
Inverness Parkway
Suite
206
Englewood,
Colorado
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80112
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(Address
of principal executive offices)
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(Zip
Code)
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(720)
437-6580
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act
Common
Stock, par value $.0001 per share
Indicate by check
mark if the Registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check
mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
☐ No ☒
Indicate by a check
mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and
post such files). Yes ☒ No ☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K ☐
Indicate by check
mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”,
“accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (check
one):
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
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☒ |
Smaller reporting company
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☒
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Emerging
growth company
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☐
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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 13a) of the Exchange Act.
☐
Indicate by check
mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
Title of Each Class
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Trading Symbol
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Name of Each Exchange on Which Registered
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Common
Stock, par value $0.0001 per share
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AYTU
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Nasdaq
Capital Market
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The
aggregate market value of common stock held by non-affiliates of
the Registrant as of December 31, 2018 was $6.9 million based
on the closing price of $0.79 as of that date.
Indicate the number
of shares outstanding of each of the Registrant’s classes of
common stock, as of the latest practicable date:
As of
August 31, 2019, there were 17,688,071 shares of common stock
issued and outstanding.
TABLE OF CONTENTS
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PAGE
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PART
I
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Item 1
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4
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Item 1A
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13
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Item 1B
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36
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Item
2
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37
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Item
3
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37
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Item
4
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37
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PART
II
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Item
5
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38
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Item
6
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39
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Item
7
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39
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Item 7A
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42
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Item
8
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42
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Item
9
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42
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Item 9A
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42
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Item 9B
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43
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PART
III
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Item
10
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44
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Item
11
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47
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Item
12
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52
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Item
13
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53
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Item
14
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54
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PART
IV
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Item 15
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55
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58
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Forward-Looking
Statements
This
Annual Report on Form 10-K, or Annual Report, includes
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, or the Exchange Act. All
statements other than statements of historical facts contained in
this Annual Report, including statements regarding our anticipated
future clinical and regulatory events, future financial position,
business strategy and plans and objectives of management for future
operations, are forward-looking statements. Forward-looking
statements are generally written in the future tense and/or are
preceded by words such as “may,” “will,”
“should,” “forecast,” “could,”
“expect,” “suggest,” “believe,”
“estimate,” “continue,”
“anticipate,” “intend,” “plan,”
or similar words, or the negatives of such terms or other
variations on such terms or comparable terminology. Such
forward-looking statements include, without limitation, statements
regarding the markets for our approved products and our plans for
our approved products, the anticipated start dates, durations and
completion dates, as well as the potential future results, of our
ongoing and future clinical trials, the anticipated designs of our
future clinical trials, anticipated future regulatory submissions
and events, the potential future commercialization of our product
candidates, our anticipated future cash position and future events
under our current and potential future collaborations. These
forward-looking statements are subject to a number of risks,
uncertainties and assumptions, including without limitation the
risks described in “Risk Factors” in Part I,
Item 1A of this Annual Report. These risks are not exhaustive.
Other sections of this Annual Report include additional factors
that could adversely impact our business and financial performance.
Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is
not possible for our management to predict all risk factors, nor
can we assess the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any
forward-looking statements. You should not rely upon
forward-looking statements as predictions of future events. We
cannot assure you that the events and circumstances reflected in
the forward-looking statements will be achieved or occur and actual
results could differ materially from those projected in the
forward-looking statements. We assume no obligation to update or
supplement forward-looking statements.
Unless otherwise indicated or unless the context otherwise
requires, references in this Form 10-K to the
“Company,” “Aytu,” “we,”
“us,” or “our” are to Aytu BioScience,
Inc.
This
Annual Report on Form 10-K refers to trademarks, such as Aytu,
Natesto, ZolpiMist, Tuzistra XR, ProstaScint, Primsol, MiOXSYS,
RedoxSYS, and Fiera which are protected under applicable
intellectual property laws and are our property or the property of
our subsidiaries. This Form 10-K also contains trademarks, service
marks, copyrights and trade names of other companies which are the
property of their respective owners. Solely for convenience, our
trademarks and tradenames referred to in this Form 10-K may appear
without the ® or ™
symbols, but such references are not intended to indicate in any
way that we will not assert, to the fullest extent under applicable
law, our rights to these trademarks and tradenames.
We
obtained statistical data, market and product data, and forecasts
used throughout this Form 10-K from market research, publicly
available information and industry publications. While we believe
that the statistical data, industry data and forecasts and market
research are reliable, we have not independently verified the data,
and we do not make any representation as to the accuracy of the
information.
Reverse
Stock Split
Our
common stock began trading on the Nasdaq Capital Market on October
20, 2017. On August 13, 2018, we effected a reverse stock split of
the outstanding shares of our common stock by a ratio of
one-for-twenty (the “Reverse Stock Split”). Unless
otherwise indicated, all share amounts, per share data, share
prices, exercise prices and conversion rates set forth herein have,
where applicable, been adjusted retroactively to reflect the
Reverse Stock Split.
AYTU
BIOSCIENCE, INC.
PART I
Company Overview
We are a specialty pharmaceutical company focused
on identifying, acquiring, and commercializing novel products that
address significant patient needs. We have multiple FDA-approved
products on the market, and we seek to build a portfolio of novel
therapeutics that serve large medical needs, across a range of
conditions, through our in-house commercial team. Our commercial
infrastructure consists of a U.S.-based specialty sales force and
an international distribution network with presence in
approximately fifty countries.
We currently are focused on commercialization of
four products, (i) Natesto®,
a testosterone replacement therapy, or TRT, (ii)
Tuzistra®
XR, a codeine based antitussive, (iii)
ZolpiMistTM,
a short-term insomnia treatment and (iv),
MiOXSYS®,
a novel in vitro diagnostic system for male infertility
assessment. In the future we will look to acquire additional
commercial-stage or near-market products, including existing
products we believe can offer distinct commercial advantages. Our
management team’s prior experience has involved identifying
both clinical-stage and commercial-stage assets that can be
launched or re-launched to increase value, with a focused
commercial infrastructure specializing in novel, niche
products.
Corporate
History
We were
initially incorporated as Rosewind Corporation on August 9, 2002 in
the State of Colorado.
Vyrix
Pharmaceuticals, Inc., or Vyrix, was incorporated under the laws of
the State of Delaware on November 18, 2013 and was wholly-owned by
Ampio Pharmaceuticals, Inc. (NYSE American: AMPE), or Ampio,
immediately prior to the completion of the Merger (defined below).
Vyrix was previously a carve-out of the sexual dysfunction
therapeutics business, including the late-stage men’s health
product candidates, Zertane and Zertane-ED, from Ampio, that carve
out was announced in December 2013. Luoxis Diagnostics, Inc., or
Luoxis, was incorporated under the laws of the State of Delaware on
January 24, 2013 and was majority-owned by Ampio immediately prior
to the completion of the Merger. Luoxis was initially focused on
developing and advancing the RedoxSYS System. The MiOXSYS System
was developed following the completed development of the RedoxSYS
System.
On
March 20, 2015, Rosewind formed Rosewind Merger Sub V, Inc. and
Rosewind Merger Sub L, Inc., each a wholly-owned subsidiary formed
for the purpose of the Merger. On April 16, 2015, Rosewind Merger
Sub V, Inc. merged with and into Vyrix and Rosewind Merger Sub L,
Inc. merged with and into Luoxis, and Vyrix and Luoxis became
subsidiaries of Rosewind. Immediately thereafter, Vyrix and Luoxis
merged with and into Rosewind with Rosewind as the surviving
corporation (herein referred to as the Merger). Concurrent with the
closing of the Merger, Rosewind abandoned its pre-merger business
plans, solely to pursue the specialty pharmaceuticals, devices, and
diagnostics markets, focusing on large areas of medical need,
including the business of Vyrix and Luoxis. When we discuss our
business in this Report, we include the pre-Merger business of
Luoxis and Vyrix.
On June
8, 2015, we (i) reincorporated as a domestic Delaware corporation
under Delaware General Corporate Law and changed our name from
Rosewind Corporation to Aytu BioScience, Inc., and (ii) effected a
reverse stock split in which each common stock holder received one
share of common stock for each 12.174 shares outstanding. At our
annual meeting of shareholders held on May 24, 2016, our
shareholders approved (1) an amendment to our Certificate of
Incorporation to reduce the number of authorized shares of common
stock from 300.0 million to 100.0 million, which amendment was
effective on June 1, 2016, and (2) an amendment to our Certificate
of Incorporation to affect a reverse stock split at a ratio of
1-for-12 which became effective on June 30, 2016. At our special
meeting of shareholders held on July 26, 2017, our shareholders
approved an amendment to our Certificate of Incorporation to affect
a reverse stock split at a ratio of 1-for-20 which became effective
on August 25, 2017. At our annual meeting of shareholders held on
June 27, 2018, our shareholders approved another reverse stock
split at a ratio of 1-for-20 which became effective on August 10,
2018. All share and per share amounts in this Report have been
adjusted to reflect the effect of these reverse stock splits
(hereafter referred to collectively as the “Reverse Stock
Splits”).
Our Products and Markets
All
of our products are sold and distributed through multiple channels,
including direct sales to wholesalers or on a sell-through basis
using third-party logistics enterprises.
Natesto® (testosterone) nasal gel
On July
1, 2016 we acquired the exclusive U.S. rights to Natesto
(testosterone) nasal gel, from Acerus Pharmaceuticals Corporation,
or Acerus. Natesto is a patented, FDA-approved testosterone
replacement therapy (TRT) for hypogonadism (low testosterone) in
men. Natesto offers multiple advantages over currently available
TRTs and competes in a $1.8 billion market accounting for over 6.8
million prescriptions annually. It is the only TRT delivered via a
nasal gel. Thus, Natesto does not carry a black box warning related
to testosterone transference to a man’s female partner or
children; as other topically (primarily gels and solutions)
administered TRTs do; by virtue of their delivery directly onto the
skin. Recent clinical trials demonstrate that Natesto achieves
hypogonadism symptom improvement, while maintaining function of the
Hypothalamic-Pituitary-Gonadal (HPG) axis; and maintenance of
reproductive parameters in patients.
We are
positioning Natesto as the ideal treatment solution for hypogonadal
men with active, busy lifestyles as Natesto is discreet, portable,
and easy to use, while delivering efficacy and a safety profile
unique to the TRT product category. Natesto is also positioned for
men who have previously been prescribed a TRT, including Androgel,
and want a product with a different clinical profile available in a
convenient, easy-to-use, effective therapeutic option. By gaining
less than a 5% share of the current U.S. market (assuming similar
pricing and reimbursement), a novel TRT product could achieve
annual gross revenues in excess of $90.0 million.
On July
29, 2019, we agreed to amend and restate the License and Supply
Agreement with Acerus. The effectiveness of the amended Agreement
is conditioned upon Acerus obtaining new financing within six
months of signing of the amended Agreement. Aytu will continue to
serve as the exclusive U.S. supplier to purchasers of Natesto, and
Acerus will receive performance-based commissions on prescriptions
generated by urology and endocrinology specialties. Acerus will
assume regulatory and clinical responsibilities and associated
expenses and will serve a primary role in the development of key
opinion leaders in urology and endocrinology. Aytu will focus on
commercial channel management, sales to wholesalers and other
purchasing customers, and will direct sales efforts in all other
physician specialties.
Tuzistra® XR
On
November 2, 2018, we obtained an exclusive license of FDA-approved
Tuzistra® XR from Tris
Pharma, or Tris. Tuzistra XR is the only FDA-approved 12-hour
codeine-based antitussive. Tuzistra XR is a prescription
antitussive consisting of codeine polistirex and chlorpheniramine
polistirex in an extended-release oral suspension.
The cough and
cold prescription market is in excess of $3 billion in sales and
more than 30 – 35 million prescriptions. This market is
dominated by short-acting treatments requiring 4 – 6 daily
doses. Tuzistra utilizes a novel, patented extended release
technology enabling 12-hour duration of antitussive effect,
offering a significant dosing advantage over current codeine-based
treatments.
In
addition to Tuzistra XR, we also obtained a license for a
complementary antitussive product pending FDA
approval.
ZolpiMist™ (zolpidem tartrate oral spray)
On June
11, 2018, we acquired an exclusive license for ZolpiMist from Magna
Pharmaceuticals, Inc., or Magna, which we formally launched through
our U.S. sales force in early 2019. This agreement allows for our
exclusive commercialization of ZolpiMist in the U.S. and the
ability to sublicense the product for commercialization in Canada.
The ZolpiMist license adds another unique, commercial-stage product
to our product portfolio and provides our U.S. sales force with
another novel product to sell to their already-called-on primary
care (family medicine, internal medicine, general practice)
physician targets. More than half of our sales force’s
Natesto physician targets are primary care physicians, so there is
a significant overlap in targets and opportunity to enable the
sales force to efficiently sell multiple products to these
prevalent, high-prescribing clinicians.
ZolpiMist is an
FDA-approved prescription product that is indicated for the
short-term treatment of insomnia, and is the only oral spray
formulation of zolpidem tartrate - the most widely prescribed
prescription sleep aid in the U.S. ZolpiMist is commercially
available and competes in the non-benzodiazepine prescription sleep
aid category, a $1.8 billion prescription drug category with over
43 million prescriptions written annually. Thirty million
prescriptions of zolpidem tartrate (Ambien®, Ambien® CR,
Intermezzo®, Edluar®, ZolpiMist™, and generic forms
of immediate-release, controlled release, and orally dissolving
tablet formulations) are written each year in the U.S.,
representing almost 70% of the non-benzodiazepine sleep aid
category. Approximately 2.5 million prescriptions are written
annually for novel formulations of zolpidem tartrate products
(controlled release and sublingual tablets).
MiOXSYS®
MiOXSYS
is a rapid in vitro
diagnostic system that performs a semen analysis test used to
measure static oxidation-reduction potential, or sORP, in human
semen. Our MiOXSYS system is a novel, point-of-care semen analysis
system with the potential to become a standard of care in the
diagnosis and management of male infertility. Male infertility is a
prevalent and underserved condition, and oxidative stress (the core
biological component measured by the MiOXSYS system) is widely
implicated in its pathophysiology. MiOXSYS was developed from our
previously developed oxidation-reduction potential research
platform known as RedoxSYS®. Male
infertility is often unexplained (idiopathic), and this idiopathic
infertility is frequently associated with increased levels of
oxidative stress in the semen. As such, having a rapid, easy-to-use
diagnostic platform to measure oxidative stress may provide a
practical way for reproductive medicine and men’s health
specialists to improve semen analysis and infertility assessments
without having to refer patients to outside clinical
laboratories.
MiOXSYS
is currently marketed outside the U.S. as we advance MiOXSYS
towards FDA clearance as an aid in the assessment of male
infertility in the U.S. MiOXSYS is a CE marked system (that is also
Health Canada, Australian TGA and Mexican COFEPRAS approved) and is
an accurate, easy to use, and fast infertility assessment tool that
directly measures oxidative stress in semen though the direct
measurement of oxidation-reduction potential. It is estimated that
72.4 million couples worldwide experience infertility problems. In
the U.S., approximately 10% of couples are defined as infertile.
Male infertility is responsible for between 40 – 50% of all
infertility cases and affects approximately 7% of all men. Male
infertility is prevalent and underserved, and oxidative stress is
widely implicated in its pathophysiology. The global male
infertility market is expected to grow to over $4.7 billion by 2025
with a compound annual growth rate, or CAGR, of nearly 4.6%
Oxidative stress is broadly implicated in the pathophysiology of
idiopathic male infertility, yet very few diagnostic tools exist to
effectively measure oxidative stress levels in men. However,
antioxidants are widely available and recommended to infertile men
without easy, accurate assessment methods available for initial
evaluation and subsequent response to antioxidant intervention.
With the introduction of the MiOXSYS System, there is an easy and
effective diagnostic tool to assess the degree of oxidative stress
and potentially enable the monitoring of patients’ responses
to antioxidant therapy as a treatment regimen for male infertility.
We expect to advance MiOXSYS into clinical trials in the U.S. in
order to enable 510(k) de novo clearance in the coming twelve to
eighteen months.
Our
Strategy
Our
management team has extensive experience across a wide range of
business development activities and have in-licensed or acquired
products from large, mid-sized, and small enterprises in the U.S.
and abroad. Through an assertive product and business development
approach, we expect that we will build a substantial portfolio of
complementary commercial and near-commercial-stage products. Our
strategy to create value for shareholders in the near-term is by
implementing a focused, four-pronged strategy:
●
Focus on sales growth of
existing U.S. product portfolio. Our primary focus is on
growing sales of Natesto in the U.S. and continuing to ramp-up the
market launch of both Tuzistra XR and ZolpiMist through our sales
force and strategic partners.
●
Expand MiOXSYS
Expand the MiOXSYS business outside the U.S. through continued
market development, cultivation of key opinion leaders in large
markets, and the advancement of clinical studies that further
validate MiOXSYS’s clinical utility in male
infertility.
●
Advance MiOXSYS toward FDA
Clearance. MiOXSYS is already CE Marked, Health Canada,
Australian TGA and Mexico COFEPRIS approved. We are focused on
completing ongoing clinical trials in order to obtain FDA clearance
for sale and distribution in the U.S. If cleared in the U.S.,
MiOXSYS would be the first and only semen analysis diagnostic test
cleared by the FDA for the detection of oxidative stress in
infertility.
●
Identify and license or
acquire complimentary assets. We plan to augment our core
in-development and commercial assets through efficient
identification of complementary products. We intend to seek assets
that are near commercial stage or already generating revenues.
Further, we intend to seek to acquire products through mergers,
asset purchases, licensing, co-development, or collaborative
commercial arrangements (including co-promotions and co-marketing
arrangements).
Government
Regulation
While
we do not have any pharmaceutical product candidates that we are
actively developing as of the date of this Report, we may in the
future acquire such products if such efforts are necessary to
achieve our strategic goals. Currently, we are developing one
medical device candidate for approval by the FDA, the MiOXSYS
System, for which regulatory approval must be received before we
can market this within the U.S.
Approval Process for Pharmaceutical Products
In the
U.S., pharmaceutical products are subject to extensive regulation
by the FDA. The Federal Food, Drug, and Cosmetic Act, or the FDCA,
and other federal and state statutes and regulations, govern, among
other things, the research, development, testing, manufacture,
storage, recordkeeping, approval, labeling, promotion and
marketing, distribution, post-approval monitoring and reporting,
sampling, and import and export of pharmaceutical products. Failure
to comply with applicable U.S. requirements may subject a company
to a variety of administrative or judicial sanctions, such as FDA
refusal to approve pending new drug applications, NDAs, warning
letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, fines, civil
penalties, and criminal prosecution.
Approval Process for Medical Devices
In the
U.S., the FDCA, FDA regulations and other federal and state
statutes and regulations govern, among other things, medical device
design and development, preclinical and clinical testing, premarket
clearance or approval, registration and listing, manufacturing,
labeling, storage, advertising and promotion, sales and
distribution, export and import, and post-market surveillance. The
FDA regulates the design, manufacturing, servicing, sale and
distribution of medical devices, including molecular diagnostic
test kits and instrumentation systems. Failure to comply with
applicable U.S. requirements may subject a company to a variety of
administrative or judicial sanctions, such as FDA refusal to
approve pending applications, warning letters, product recalls,
product seizures, total or partial suspension of production or
distribution, injunctions, fines, civil penalties and criminal
prosecution.
Regulation after FDA Clearance or Approval
Any
devices we manufacture or distribute pursuant to clearance or
approval by the FDA are subject to pervasive and continuing
regulation by the FDA and certain state agencies. We are required
to adhere to applicable regulations setting forth detailed cGMP
requirements, as set forth in the QSR, which include, among other
things, testing, control and documentation requirements.
Noncompliance with these standards can result in, among other
things, fines, injunctions, civil penalties, recalls or seizures of
products, total or partial suspension of production, refusal of the
government to grant 510k de novo clearance or PMA approval of
devices, withdrawal of marketing approvals and criminal
prosecutions, fines and imprisonment. Our contract
manufacturers’ facilities operate under the FDA’s cGMP
requirements.
Foreign Regulatory Approval
Outside
of the U.S., our ability to market our product candidates will be
contingent also upon our receiving marketing authorizations from
the appropriate foreign regulatory authorities, whether or not FDA
approval has been obtained. The foreign regulatory approval process
in most industrialized countries generally encompasses risks
similar to those we will encounter in the FDA approval process. The
requirements governing conduct of clinical trials and marketing
authorizations, and the time required to obtain requisite
approvals, may vary widely from country to country and differ from
those required for FDA approval.
Other
Regulatory Matters
Manufacturing,
sales, promotion and other activities following product approval
are also subject to regulation by numerous regulatory authorities
in addition to the FDA, including, in the U.S., the Centers for
Medicare & Medicaid Services, other divisions of the Department
of Health and Human Services, the Drug Enforcement Administration,
the Consumer Product Safety Commission, the Federal Trade
Commission, the Occupational Safety & Health Administration,
the Environmental Protection Agency and state and local
governments. In the U.S., sales, marketing and
scientific/educational programs must also comply with state and
federal fraud and abuse laws. Pricing and rebate programs must
comply with the Medicaid rebate requirements of the U.S. Omnibus
Budget Reconciliation Act of 1990 and more recent requirements in
the Health Care Reform Law, as amended by the Health Care and
Education Affordability Reconciliation Act, or ACA. If products are
made available to authorized users of the Federal Supply Schedule
of the General Services Administration, additional laws and
requirements apply. The handling of any controlled substances must
comply with the U.S. Controlled Substances Act and Controlled
Substances Import and Export Act. Products must meet applicable
child-resistant packaging requirements under the U.S. Poison
Prevention Packaging Act. Manufacturing, sales, promotion and other
activities are also potentially subject to federal and state
consumer protection and unfair competition laws.
Drug Quality and Security Act
In
2013, the United States Congress passed the Drug Quality and
Security Act (“DQSA”), amending the Federal Food, Drug
and Cosmetic Act to grant the FDA more authority to regulate and
monitor the manufacturing of compounding drugs. Title I of the DQSA
increased regulation of compounding drugs. Title II of the DQSA
Drug Supply Chain Security,
established requirements to facilitate improved tracking of
prescription drug products through the supply chain with increased
product identification requirements. Currently, we are required to
provide product identification information, or serialization, at
the manufacturing batch, or lot level. However, going forward the
law requires such tracking to done farther down the distribution
chain including, (i) wholesalers authentification and verification
in November 2019, (ii) pharmacy authentification and verification
in the Fall of 2020, and at the unit level throughout the entire
supply chain near the end of 2023.
Changes
in regulations, statutes or the interpretation of existing
regulations could impact our business in the future by requiring,
for example: (i) changes to our manufacturing arrangements; (ii)
additions or modifications to product labeling; (iii) the recall or
discontinuation of our products; or (iv) additional record-keeping
requirements. If any such changes were to be imposed, they could
adversely affect the operation of our business.
Reimbursement for our Products in the U.S.
Natesto, Tuzistra
XR and ZolpiMist (our “US Approved Products”) are
covered by many commercial insurance providers and pharmacy benefit
management companies and are dependent upon reimbursement for
continued use in the U.S. market. Additionally, privately managed
Medicare Part D and other government plans may choose to cover our
U.S. Approved Products prescribed through their plans’
pharmacy benefits.
We do
not anticipate that the sales of the MiOXSYS System, if approved
for sale in the U.S., will be heavily dependent upon reimbursement
by third-party payors in the U.S. given that infertility testing
and treatment is infrequently covered by commercial insurers or
public payors. Traditionally, sales of pharmaceuticals,
diagnostics, ad devices that are not “lifestyle”
indications depend, in part, on the extent to which products will
be covered by third-party payors, such as government health
programs, commercial insurance and managed healthcare
organizations. These third-party payors are increasingly reducing
reimbursements for medical products and services.
Lack of
third-party reimbursement for our product candidate or a decision
by a third-party payor to not cover our product candidates could
reduce physician usage of the product candidate and have a material
adverse effect on our sales, results of operations and financial
condition.
In
addition, in some foreign countries, the proposed pricing for a
drug must be approved before it may be lawfully marketed. The
requirements governing drug pricing vary widely from country to
country. For example, the European Union provides options for its
member states to restrict the range of medicinal products for which
their national health insurance systems provide reimbursement and
to control the prices of medicinal products for human use. A member
state may approve a specific price for the medicinal product or it
may instead adopt a system of direct or indirect controls on the
profitability of the company placing the medicinal product on the
market. There can be no assurance that any country that has price
controls or reimbursement limitations for pharmaceutical products
will allow favorable reimbursement and pricing arrangements for any
of our products. Historically, products launched in the European
Union do not follow price structures of the U.S. and prices
generally tend to be lower than in the U.S.
DEA Regulation
Natesto, Tuzistra
XR and ZolpiMist, already approved by the FDA, are each a
“controlled substance” as defined in the Controlled
Substances Act of 1970, or CSA, because Natesto contains
testosterone, ZolpiMist contains zolpidem tartrate, and Tuzistra XR
contains codeine. As a result, the U.S. Drug Enforcement Agencies,
or DEA, have Natesto and Tuzistra XR listed and regulated as
Schedule III substances, while ZolpiMist is listed and regulated as
a Schedule IV substance.
Annual
registration is required for any facility that manufactures,
distributes, dispenses, imports or exports any controlled
substance. The registration is specific to the particular location,
activity and controlled substance schedule. For example, separate
registrations are needed for import and manufacturing, and each
registration will specify which schedules of controlled substances
are authorized. Similarly, separate registrations are also required
for separate facilities.
The DEA
typically inspects a facility to review its security measures prior
to issuing a registration and on a periodic basis. Reports must
also be made for thefts or losses of any controlled substance, and
to obtain authorization to destroy any controlled substance. In
addition, special permits and notification requirements apply to
imports and exports of narcotic drugs.
The DEA
establishes annually an aggregate quota for how much of a
controlled substance may be produced in and/or imported into the
U.S. based on the DEA’s estimate of the quantity needed to
meet legitimate scientific and medicinal needs. The DEA may adjust
aggregate production quotas and individual production and
procurement quotas from time to time during the year, although the
DEA has substantial discretion in whether or not to make such
adjustments. Our or our manufacturers’ quotas of an active
ingredient may not be sufficient to meet commercial demand or
complete clinical trials. Any delay, limitation or refusal by the
DEA in establishing our or our manufacturers’ quota for
controlled substances could delay or stop our clinical trials or
product launches, which could have a material adverse effect on our
business, financial position and results of
operations.
To
enforce these requirements, the DEA conducts periodic inspections
of registered establishments that handle controlled substances.
Failure to maintain compliance with applicable requirements,
particularly as manifested in loss or diversion, can result in
administrative, civil or criminal enforcement action that could
have a material adverse effect on our business, results of
operations and financial condition. The DEA may seek civil
penalties, refuse to renew necessary registrations, or initiate
administrative proceedings to revoke those registrations. In some
circumstances, violations could result in criminal
proceedings.
Individual states
also independently regulate controlled substances. We and our
manufacturers will be subject to state regulation on distribution
of these products, including, for example, state requirements for
licensures or registration.
Intellectual
Property
Natesto
Aytu
has an exclusive license from Acerus Pharmaceuticals Corporation
(“Acerus”) for the U.S. rights to intellectual property
related to a nasal gel drug product containing testosterone to
treat hypogonadism in males, including the FDA approved product
Natesto®, as well as an authorized generic version and OTC
versions thereof. The license includes sublicense rights to
intellectual property owned by Mattern Pharmaceuticals and
exclusively licensed to Acerus by Mattern Pharmaceuticals. The
sublicensed intellectual property includes four Orange Book listed
patents directed at nasal gel formulations containing testosterone
or methods of testosterone replacement therapy by nasal
administration of the same. It further includes three patents that
are not listed in the Orange Book directed at a testosterone
formulation, a method of making a testosterone formulation and a
method for reducing physical or chemical interactions between a
nasal testosterone formulation and a plastic
container.
The
Acerus license also grants rights to intellectual property owned by
Acerus which includes nine nonprovisional patent applications, some
of which may be abandoned. These patent applications include at
least four pending applications directed to testosterone titration
methods, intranasal testosterone bio-adhesive gel formulations, and
controlled release testosterone formulations.
On July
29, 2019, we agreed to amend and restate the License and Supply
Agreement with Acerus. The effectiveness of the amended Agreement
is conditioned upon Acerus obtaining new financing within six
months of signing of the amended Agreement. Aytu will continue to
serve as the exclusive U.S. supplier to purchasers of Natesto, and
Acerus will receive performance-based commissions on prescriptions
generated by urology and endocrinology specialties. Acerus will
assume regulatory and clinical responsibilities and associated
expenses and will serve a primary role in the development of key
opinion leaders in urology and endocrinology. Aytu will focus on
commercial channel management, sales to wholesalers and other
purchasing customers, and will direct sales efforts in all other
physician specialties.
Tuzistra XR
Aytu
has an exclusive license to commercialize Tuzistra XR in the US
and, through this relationship, Aytu is listed as the Tuzistra XR
New Drug Application holder and holder of two Orange Book listed
patents protecting Tuzistra XR. Both patents cover the extended
release technology supporting Tuzistra XR’s long duration of
antitussive effect, and the patents extend to March of
2029.
MiOXSYS
We have
an extensive range of intellectual property for MiOXSYS. We have
patent protection in the U.S. and several other large markets
worldwide for MiOXSYS and the oxidation-reduction potential
platform. Specifically, we have numerous patents issued and pending
for the MiOXSYS system, the sensors, and their clinical and
scientific use in the U.S., Europe, Canada, Israel, Japan, and
China.
Our
patent portfolio related to MiOXSYS and the underlying
oxidation-reduction potential (ORP) technology is focused on the
U.S. and core foreign jurisdictions which include Europe, Canada,
Israel, Japan and China. The portfolio is supported in the U.S. and
core foreign jurisdictions and consists of 44 issued patents and 18
pending applications.
The
portfolio primarily consists of eight families filed in the U.S.
and in core foreign jurisdictions. The first family includes
thirteen issued patents with claims directed to the measurement of
the ORP of a patient sample to evaluate various conditions. The
standard 20-year expiration for patents in this family is in 2028.
The second family includes two pending U.S. applications, three
issued U.S. patents, one pending application in core foreign
jurisdictions and four issued patents in core foreign jurisdictions
with claims directed to the measurement of the ORP capacity of a
patient sample to evaluate various conditions. The standard 20-year
expiration for patents in this family is in 2033. The third family
includes nineteen issued patents with claims directed to devices
and methods for the measurement of ORP and ORP capacity. The
standard 20-year expiration for patents in this family is in 2032.
The fourth family includes two issued U.S. patents, two issued
patents in core foreign jurisdictions and four pending applications
in core foreign jurisdictions with claims directed to multiple
layer gel test strip measurement devices and methods of making for
use in measuring ORP and ORP capacity. The standard 20-year
expiration for patents in this family is in 2033. The fifth family
includes one pending U.S. application, one issued U.S. patent and
seven pending applications in core foreign jurisdictions with
claims directed to methods for determining fertility
characteristics from the ORP of a biological sample. The standard
20-year expiration for patents in this family is in 2035. The sixth
family includes one pending U.S. application with claims directed
to methods for evaluating stroke patients from the ORP
characteristics of a biological sample. The standard 20-year
expiration for patents in this family is in 2036. The seventh
family includes one pending application filed under the Patent
Cooperation Treaty with claims directed to methods for embryo
selection from the ORP characteristics of a biological sample. The
standard 20-year expiration for patents in this family is in 2038.
The eighth family includes one pending application filed under the
Patent Cooperation Treaty with claims directed to methods of
treating infertility in varicocele patients.
We have
also exclusively licensed the issued and pending patents protecting
Natesto. There are four FDA Orange Book-listed patents surrounding
methods of use of a nasally-administered testosterone gel and
formulations thereof. The standard 20-year expiration for patents
across these four patents is 2024.
There
are two FDA Orange Book-listed patents protecting Tuzistra XR.
Through our exclusively commercialization agreement with TRIS
Pharma, we are the FDA-recognized New Drug Application holder and
thus the designated holder of these patents. The first patent
describes a coated ion-exchange resin complex delivering an
extended release formulation and methods therein. The standard
20-year exclusivity for this patent is in 2029. The second patent
covers an aqueous liquid suspension containing a drug-ion exchange
resin complex and methods therein. The standard 20-year exclusivity
for this patent is in 2027.
We also
maintain trade secrets and proprietary know-how that we seek to
protect through confidentiality and nondisclosure agreements. These
agreements may not provide meaningful protection or adequate
remedies in the event of unauthorized use or disclosure of
confidential and proprietary information. If we do not adequately
protect our trade secrets and proprietary know-how, our competitive
position and business prospects could be materially
harmed.
We
expect to seek U.S. and foreign patent protection for drug and
device products we discover, as well as therapeutic and device
products and processes. We expect also to seek patent protection or
rely upon trade secret rights to protect certain other technologies
which may be used to discover and characterize drugs and device
products and processes, and which may be used to develop novel
therapeutic and diagnostic products and processes.
We will
be able to protect our proprietary intellectual property rights
from unauthorized use by third parties primarily to the extent that
such rights are covered by valid and enforceable patents or are
effectively maintained as trade secrets. If we must litigate to
protect our intellectual property from infringement, we may incur
substantial costs and our officers may be forced to devote
significant time to litigation-related matters. The laws of certain
foreign countries do not protect intellectual property rights to
the same extent as do the laws of the U.S. Our pending patent
applications, or those we may file or license from third parties in
the future, may not result in patents being issued. Until a patent
is issued, the claims covered by an application for patent may be
narrowed or removed entirely, thus depriving us of adequate
protection. As a result, we may face unanticipated competition, or
conclude that without patent rights the risk of bringing product
candidates to market exceeds the returns we are likely to obtain.
We are generally aware of the scientific research being conducted
in the areas in which we focus our research and development
efforts, but patent applications filed by others are maintained in
secrecy for at least 18 months and, in some cases in the U.S.,
until the patent is issued. The publication of discoveries in
scientific literature often occurs substantially later than the
date on which the underlying discoveries were made. As a result, it
is possible that patent applications for products similar to our
drug or diagnostic products and product candidates may have already
been filed by others without our knowledge.
U.S. Patent Term Restoration and Marketing
Exclusivity
Depending upon the
timing, duration and other specific aspects of the FDA approval of
our drug candidates, some of our U.S. patents may be eligible for
limited patent term extension under the Drug Price Competition and
Patent Term Restoration Act of 1984, commonly referred to as the
Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a
patent restoration term of up to five years as compensation for
patent term lost during product development and the FDA regulatory
review process. However, patent term restoration cannot extend the
remaining term of a patent beyond a total of 14 years from the
product’s approval date. The patent term restoration period
is generally one-half the time between the effective date of an IND
and the submission date of an NDA plus the time between the
submission date of an NDA and the approval of that application.
Only one patent applicable to an approved drug is eligible for the
extension and the application for the extension must be submitted
prior to the expiration of the patent. The U.S. Patent and
Trademark Office, in consultation with the FDA, reviews and
approves the application for any patent term extension or
restoration. In the future, if any of our NDA’s are approved,
we intend to apply for restoration of patent term for one of our
currently owned or licensed patents to add patent life beyond the
current expiration date, depending on the expected length of the
clinical trials and other factors involved in the filing of the
relevant NDA.
Competition
The
healthcare industry is highly competitive and subject to
significant and rapid technological change as researchers learn
more about diseases and develop new technologies and treatments.
Significant competitive factors in our industry include product
efficacy and safety; quality and breadth of an organization’s
technology; skill of an organization’s employees and its
ability to recruit and retain key employees; timing and scope of
regulatory approvals; government reimbursement rates for, and the
average selling price of, products; the availability of raw
materials and qualified manufacturing capacity; manufacturing
costs; intellectual property and patent rights and their
protection; and sales and marketing capabilities. Market acceptance
of our current products and product candidates will depend on a
number of factors, including: (i) potential advantages over
existing or alternative therapies or tests, (ii) the actual or
perceived safety of similar classes of products, (iii) the
effectiveness of sales, marketing, and distribution capabilities,
and (iv) the scope of any approval provided by the FDA or foreign
regulatory authorities.
We are
a very small specialty pharmaceuticals company compared to other
companies that we are competing against. Our current and potential
competitors include large pharmaceutical, biotechnology,
diagnostic, and medical device companies, as well as specialty
pharmaceutical and generic drug companies. Many of our current and
potential competitors have substantially greater financial,
technical and human resources than we do and significantly more
experience in the marketing, commercialization, discovery,
development and regulatory approvals of products, which could place
us at a significant competitive disadvantage or deny us marketing
exclusivity rights. Specifically, our competitors will most likely
have larger sales teams and have more capital resources to support
their products then we do.
Accordingly, our
competitors may be more successful than we may be in achieving
widespread market acceptance and obtaining FDA approval for product
candidates. We anticipate that we will face intense and increasing
competition as new products enter the market, as advanced
technologies become available and as generic forms of currently
branded products become available. Finally, the development of new
treatment methods for the diseases we are targeting could render
our products non-competitive or obsolete.
We
cannot assure you that any of our products that we acquire or
successfully develop will be clinically superior or scientifically
preferable to products developed or introduced by our
competitors.
Our
current approved products compete in highly competitive fields
whereby there are numerous options available to clinicians
including generics. These generic treatment options are frequently
less expensive and more widely available.
Natesto
The
U.S. prescription testosterone market is comprised primarily of
topically applied treatments in the form of gels, solutions, and
patches. Testopel®, an injectable pellet typically implanted
directly under the skin by a physician, is also FDA-approved.
AndroGel is the market-leading TRT and is marketed by
AbbVie.
Tuzistra XR
Tuzistra XR
competes in the approximately $3.0 billion antitussive category and
has a distinct advantage over the existing codeine-based
antitussives. Tuzistra XR is the only liquid codeine antitussive
with a 12-hour duration of effective, which provides more dosing
convenience than the current 4-6 hour codeine cough
syrups.
ZolpiMist
ZolpiMist competes
in a large prescription category with over 43 million prescriptions
written annually and generating $1.8 billion in wholesale sales.
The non-benzodiazepine prescription sleep aid market is dominated
by zolpidem tartrate (brand name Ambien), which accounts for
approximately 30 million prescriptions annually. Various forms of
zolpidem tartrate are commercially available, including both
immediate release and controlled release tablets as well as orally
dissolving tablets. ZolpiMist is the only oral spray formulation of
zolpidem tartrate and, if only achieving 1% of the ‘zolpidem
market’ this product could generate 300,000 prescriptions
annually in the U.S. No zolpidem tartrate products are actively
marketed in the U.S., so we believe our sales force will have the
ability to effectively influence physician prescribing and grow
ZolpiMist prescriptions.
MiOXSYS
With
respect to MiOXSYS competitive offerings, there are other oxidative
stress diagnostic tests available throughout the world, although
none are approved in the U.S. for clinical use, and none are used
specifically in semen analysis. ‘General use’ oxidative
stress diagnostic systems that are marketed for clinical use
outside the U.S. include the FRAS 4 system (H&D srl), FREE
Carpe Diem (Diacron International), and the FORM and FORMPlus
systems (Callegari srl). These systems are used in both research
and clinical settings but do not generate significant sales in the
clinical setting and, again, are not used specifically in semen
analysis for infertility testing. These potentially competitive
oxidative stress systems’ testing parameters differ
significantly from MiOXSYS and would need to demonstrate clinical
superiority to MiOXSYS in order to substantially detract from
MiOXSYS prescribing and sales. Additionally, to our knowledge,
these systems have not demonstrated clinical feasibility in human
semen or seminal plasma. These tests are used for research use, but
they do not measure oxidation-reduction potential and, we believe,
are not directly competitive to the MiOXSYS System in the context
of research use.
Research
and Development
The
research and development required for FDA approval of Natesto,
ZolpiMist, and Tuzistra XR has been conducted by either previous
owners of the products or the companies from which we licensed or
acquired these products. To the extent we seek to further develop
our products and/or improve clinical claims. we rely upon outside
collaborators to conduct research as we focus primarily on
commercialization.
Currently, there is
an ongoing investigator-initiated study for Natesto. We are
financially supporting the study being conducted at the University
of Miami, through which the investigators seek to demonstrate that
Natesto improves hypogonadism while preserving fertility. The study
has been designed and is led by Dr. Ranjith Ramasamy, MD, Director
of Reproductive Urology at the University of Miami’s
Department of Urology. The study is expected to be completed in
2019. If found to preserve fertility, Natesto would be the first
TRT to demonstrate this and, we expect, these results would further
support the clinical differentiation of Natesto in the TRT
category.
Our
MiOXSYS System has been developed in conjunction with numerous
medical device and diagnostic development consultants. Further, we
have relationships with regulatory consultants who are actively
assisting in the development of our regulatory strategy with the
FDA as MiOXSYS advances to this stage. To complement our internal
clinical research efforts with the MiOXSYS System, we have engaged
with numerous academic and private researchers around the world to
identify and develop research and clinical applications for the
MiOXSYS System.
Manufacturing
Our
business strategy is to use cGMP compliant contract manufacturers
for the manufacture of clinical supplies as well as for commercial
supplies if required by our commercialization plans, and to
transfer manufacturing responsibility to our collaboration partners
when possible.
Natesto
On
April 22, 2016, we entered into a license and supply agreement with
Acerus pursuant to which we will pay Acerus a supply price per unit
of the greater of (i) a fixed percentage of Acerus’ cost of
goods sold for Natesto, not to exceed a fixed ceiling price and
(ii) a moderate double digit percentage of net sales for the first
year of the agreement, that increased in each of the second and
third years and remains constant after that.
Tuzistra XR
On
November 5, 2018 we entered into a licensing, manufacturing and
supply agreement with TRIS, pursuant to which TRIS has the
exclusive rights to manufacture, label, package and supply us
Tuzistra XR on an exclusive basis in the U.S. We expect to continue
to source Tuzistra XR under this arrangement for the term of the
agreement with TRIS.
ZolpiMist
On June
11, 2018 we entered into a licensing agreement with Magna, pursuant
to which we assumed a manufacturing agreement with a cGMP compliant
contract manufacturer. We expect to continue manufacturing through
that third-party and have made an initial and subsequent purchase
of product that we expect to supply us for the foreseeable
future.
MiOXSYS
We
secured supply and quality agreements with manufacturers for both
the MiOXSYS instrument as well as MiOXSYS sensor strips. Both
manufacturers hold long-standing ISO 13485:2003 certifications and
are established medical device manufacturers. Both manufacturers
have high volume manufacturing capacity such that production
volumes can be easily scaled. Both manufacturers have been audited
by our quality engineers and are fully compliant.
Employees
As of
August 31, 2019, we had 53 full-time employees and utilized the
services of a number of consultants on a temporary basis. Overall,
we have not experienced any work stoppage and do not anticipate any
work stoppage in the foreseeable future. None of our employees is
subject to a collective bargaining agreement. Management believes
that relations with our employees are good.
Available
Information
Our
principal executive offices are located at 373 Inverness Parkway,
Suite 206, Englewood, Colorado 80112 USA, and our phone number is
(720) 437-6580.
We
maintain a website on the internet at http://www.aytubio.com. We make
available, free of charge, through our website, by way of a
hyperlink to a third-party site that includes filings we make with
the SEC website (www.sec.gov), our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports
electronically filed or furnished pursuant to Section 15(d) of
the Exchange Act. The information on our website is not, and shall
not be deemed to be, a part of this Annual Report on Form 10-K
or incorporated into any other filings we make with the SEC. In
addition, the public may read and copy any materials we file with
the SEC at the SEC’s Public Reference Room at
100 F Street, N.E., Washington D.C., 20549. Information
on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.
Code
of Ethics
We have
adopted a written code of ethics that applies to our officers,
directors and employees, including our principal executive officer
and principal accounting officer. We intend to disclose any
amendments to, or waivers from, our code of ethics that are
required to be publicly disclosed pursuant to rules of the SEC by
filing such amendment or waiver with the SEC. This code of ethics
and business conduct can be found in the corporate governance
section of our website, http://www.aytubio.com.
Investing in our securities includes a high degree of risk. You
should consider carefully the specific factors discussed below,
together with all of the other information contained in this Annual
Report. If any of the following risks actually occurs, our
business, financial condition, results of operations and future
prospects would likely be materially and adversely affected. This
could cause the market price of our securities to decline and could
cause you to lose all or part of your investment.
Risks
Related to Our Financial Condition and Capital
Requirements
We have a limited operating history, have incurred losses, and can
give no assurance of profitability.
We are
a commercial-stage healthcare company with a limited operating
history. Prior to implementing our commercial strategy in the
fourth calendar quarter of 2015, we did not have a focus on
profitability. As a result, we have not generated substantial
revenue to date and are not profitable and have incurred losses in
each year since our inception. Our net loss for the years ended
June 30, 2019 and 2018 was $27.1 million and $10.2 million,
respectively. We have not demonstrated the ability to be a
profit-generating enterprise to date. Even though we expect to have
revenue growth in the next several fiscal years, it is uncertain
that the revenue growth will be significant enough to offset our
expenses and generate a profit in the future. Our ability to
generate significant revenue is uncertain, and we may never achieve
profitability. We have a very limited operating history on which
investors can evaluate our potential for future success. Potential
investors should evaluate us in light of the expenses, delays,
uncertainties, and complications typically encountered by
early-stage healthcare businesses, many of which will be beyond our
control. These risks include the following:
●
uncertain market
acceptance of our products and product candidates;
●
lack of sufficient
capital;
●
U.S. regulatory
approval of our products and product candidates;
●
foreign regulatory
approval of our products and product candidates;
●
unanticipated
problems, delays, and expense relating to product development and
implementation;
●
lack of sufficient
intellectual property;
●
the ability to
attract and retain qualified employees;
As a
result of our limited operating history, and the increasingly
competitive nature of the markets in which we compete, our
historical financial data, is of limited value in anticipating
future operating expenses. Our planned expense levels will be based
in part on our expectations concerning future operations, which is
difficult to forecast accurately based on our limited operating
history and the recentness of the acquisition of our products
Natesto, Tuzistra XR, ZolpiMist, and MiOXSYS. We may be unable to
adjust spending in a timely manner to compensate for any unexpected
budgetary shortfall.
We have
not received any substantial revenues from the commercialization of
our current products to date and might not receive significant
revenues from the commercialization of our current products or our
product candidates in the near term. Even though Natesto, Tuzistra
XR and ZolpiMist are each an approved drug that we are marketing,
we only acquired Natesto in April 2016, ZolpiMist in June 2018, and
Tuzistra XR in November 2018. In addition, we only launched our
MiOXSYS device in early fiscal 2017. As a result, we have limited
experience on which to base the revenue we could expect to receive
from sales of these products. To obtain revenues from our products
and product candidates, we must succeed, either alone or with
others, in a range of challenging activities, including expanding
markets for our existing products and completing clinical trials of
our product candidates, obtaining positive results from those
clinical trials, achieving marketing approval for those product
candidates, manufacturing, marketing and selling our existing
products and those products for which we, or our collaborators, may
obtain marketing approval, satisfying any post-marketing
requirements and obtaining reimbursement for our products from
private insurance or government payors. We, and our collaborators,
if any, may never succeed in these activities and, even if we do,
or one of our collaborators does, we may never generate revenues
that are sufficient enough for us to achieve
profitability.
We may need to raise additional funding, which may not be available
on acceptable terms, or at all. Failure to obtain necessary capital
when needed may force us to delay, limit or terminate our product
expansion and development efforts or other operations.
We are
expending resources to expand the market for Natesto, Tuzistra XR,
ZolpiMist and MiOXSYS, none of which might be as successful as we
anticipate or at all and all of which might take longer and be more
expensive to market than we anticipate. We also are currently
advancing our MiOXSYS device through clinical development.
Developing product candidates is expensive, lengthy and risky, and
we expect to incur research and development expenses in connection
with our ongoing clinical development activities with the MiOXSYS
System. As of June 30, 2019, our cash, cash equivalents and
restricted cash totaling $11.3 million, available to fund our
operations offset by an aggregate $3.4 million in accounts payable
and other and accrued liabilities. In November 2016, we conducted a
public offering of our common stock and warrants from which we
received gross proceeds of approximately $8.6 million. We closed on
a private placement of common stock, Series A preferred stock and
warrants in August 2017 from which we received gross proceeds of
approximately $11.8 million. We also closed on an underwritten
public offering of our common stock, warrants, and Series B
preferred stock in March 2018 from which we received gross proceeds
of approximately $12.9 million. Our operating plan may change as a
result of many factors currently unknown to us, and we may need to
seek additional funds sooner than planned, through public or
private equity or debt financings, government or other third-party
funding, marketing and distribution arrangements and other
collaborations, strategic alliances and licensing arrangements or a
combination of these approaches. In any event, we will require
additional capital to continue the expansion of marketing efforts
for Natesto, Tuzistra XR, ZolpiMist,
and to obtain regulatory approval for, and to commercialize, our
current product candidate, the MiOXSYS System. Raising funds in the
current economic environment, as well our lack of operating
history, may present additional challenges. Even if we believe we
have sufficient funds for our current or future operating plans, we
may seek additional capital if market conditions are favorable or
if we have specific strategic considerations.
Any
additional fundraising efforts may divert our management from their
day-to-day activities, which may adversely affect our ability to
expand any existing product or develop and commercialize our
product candidates. In addition, we cannot guarantee that future
financing will be available in sufficient amounts or on terms
acceptable to us, if at all. Moreover, the terms of any financing
may adversely affect the holdings or the rights of our stockholders
and the issuance of additional securities, whether equity or debt,
by us, or the possibility of such issuance, may cause the market
price of our shares to decline. The sale of additional equity or
convertible securities would dilute all of our stockholders. The
incurrence of indebtedness would result in increased fixed payment
obligations and we may be required to agree to certain restrictive
covenants, such as limitations on our ability to incur additional
debt, limitations on our ability to acquire, sell or license
intellectual property rights and other operating restrictions that
could adversely impact our ability to conduct our business. We
could also be required to seek funds through arrangements with
collaborative partners or otherwise at an earlier stage than
otherwise would be desirable and we may be required to relinquish
rights to some of our technologies or product candidates or
otherwise agree to terms unfavorable to us, any of which may have a
material adverse effect on our business, operating results and
prospects.
If we
are unable to obtain funding on a timely basis, we may be unable to
expand the market for Natesto, Tuzistra XR, ZolpiMist,
or MiOXSYS and/or be required to significantly curtail, delay or
discontinue one or more of our research or development programs for
the MiOXSYS system, or any future product candidate or expand our
operations generally or otherwise capitalize on our business
opportunities, as desired, which could materially affect our
business, financial condition and results of
operations.
If we do not obtain the capital necessary to fund our operations,
we will be unable to successfully expand the commercialization of
Natesto, Tuzistra XR and ZolpiMist and to develop, obtain
regulatory approval of, and commercialize, our current product
candidate, the MiOXSYS System.
The
expansion of marketing and commercialization activities for our
existing products and the development of pharmaceutical products,
medical diagnostics and medical devices is capital-intensive. We
anticipate we may require additional financing to continue to fund
our operations. Our future capital requirements will depend on, and
could increase significantly as a result of, many factors
including:
●
the costs, progress
and timing of our efforts to expand the marketing of Natesto,
Tuzistra XR and ZolpiMist;
●
progress in, and
the costs of, our pre-clinical studies and clinical trials and
other research and development programs;
●
the costs of
securing manufacturing arrangements for commercial
production;
●
the scope,
prioritization and number of our research and development
programs;
●
the achievement of
milestones or occurrence of other developments that trigger
payments under any collaboration agreements we obtain;
●
the costs of
establishing, expanding or contracting for sales and marketing
capabilities for any existing products and if we obtain regulatory
clearances to market our current product candidate, the MiOXSYS
system;
●
the extent to which
we are obligated to reimburse, or entitled to reimbursement of,
clinical trial costs under future collaboration agreements, if any;
and
●
the costs involved
in filing, prosecuting, enforcing and defending patent claims and
other intellectual property rights.
If
funds are not available, we may be required to delay, reduce the
scope of, or eliminate one or more of our commercialization efforts
or our technologies, research or development programs.
We will incur increased costs associated with, and our management
will need to devote substantial time and effort to, compliance with
public company reporting and other requirements.
As a
public company, we incur significant legal, accounting and other
expenses. In addition, the rules and regulations of the SEC and any
national securities exchange to which we may be subject in the
future impose numerous requirements on public companies, including
requirements relating to our corporate governance practices, with
which we will need to comply. Further, we will continue to be
required to, among other things, file annual, quarterly and current
reports with respect to our business and operating results. Based
on currently available information and assumptions, we estimate
that we will incur up to approximately $500,000 in expenses on an
annual basis as a direct result of the requirements of being a
publicly traded company. Our management and other personnel will
need to devote substantial time to gaining expertise regarding
operations as a public company and compliance with applicable laws
and regulations, and our efforts and initiatives to comply with
those requirements could be expensive.
If we fail to establish and maintain proper internal controls, our
ability to produce accurate financial statements or comply with
applicable regulations could be impaired.
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting. Pursuant to Section 404
of the Sarbanes-Oxley Act, our management conducted an assessment
of the effectiveness of our internal controls over financial
reporting for the year ended June 30, 2019 and concluded that such
control was effective.
However, if in the
future we were to conclude that our internal control over financial
reporting were not effective, we cannot be certain as to the timing
of completion of our evaluation, testing and remediation actions or
their effect on our operations because there is presently no
precedent available by which to measure compliance adequacy. As a
consequence, we may not be able to complete any necessary
remediation process in time to meet our deadline for compliance
with Section 404 of the Sarbanes-Oxley Act. Also, there can be no
assurance that we will not identify one or more material weaknesses
in our internal controls in connection with evaluating our
compliance with Section 404 of the Sarbanes-Oxley Act. The presence
of material weaknesses could result in financial statement errors
which, in turn, could require us to restate our operating
results.
If we
are unable to conclude that we have effective internal control over
financial reporting or if our independent auditors are unwilling or
unable to provide us, when required, with an attestation report on
the effectiveness of internal control over financial reporting as
required by Section 404 of the Sarbanes-Oxley Act, investors may
lose confidence in our operating results, our stock price could
decline and we may be subject to litigation or regulatory
enforcement actions. In addition, if we are unable to meet the
requirements of Section 404 of the Sarbanes-Oxley Act, we may not
be able to maintain listing on the NASDAQ Capital
Market.
Risks Related to Product Development, Regulatory Approval and
Commercialization
Natesto, Tuzistra XR,
ZolpiMist, and MiOXSYS may prove to be difficult to
effectively commercialize as planned.
Various
commercial, regulatory, and manufacturing factors may impact our
ability to maintain or grow revenues from sales of Natesto,
MiOXSYS. Specifically, we may encounter difficulty by virtue
of:
●
our inability to
adequately market and increase sales of any of these
products;
●
our inability to
secure continuing prescribing of any of these products by current
or previous users of the product;
●
our inability to
effectively transfer and scale manufacturing as needed to maintain
an adequate commercial supply of these products;
●
reimbursement and
medical policy changes that may adversely affect the pricing,
profitability or commercial appeal of Natesto, Tuzistra XR,
ZolpiMist or MiOXSYS; and
●
our inability to
effectively identify and align with commercial partners outside the
U.S., or the inability of those selected partners to gain the
required regulatory, reimbursement, and other approvals needed to
enable commercial success of MiOXSYS.
We have limited experience selling our current products as they
were acquired from other companies or were recently approved for
sale. As a result, we may be unable to successfully commercialize
our products and product candidates.
Despite
our management’s extensive experience in launching and
managing commercial-stage healthcare companies, we have limited
marketing, sales and distribution experience with our current
products. Our ability to achieve profitability depends on
attracting and retaining customers for our current products, and
building brand loyalty for Natesto, Tuzistra XR, ZolpiMist,
and MiOXSYS. To successfully perform sales, marketing, distribution
and customer support functions, we will face a number of risks,
including:
●
our ability to
attract and retain skilled support team, marketing staff and sales
force necessary to increase the market for our approved products
and to maintain market acceptance for our product
candidates;
●
the ability of our
sales and marketing team to identify and penetrate the potential
customer base;
●
and the difficulty
of establishing brand recognition and loyalty for our
products.
In
addition, we may seek to enlist one or more third parties to assist
with sales, distribution and customer support globally or in
certain regions of the world. If we do seek to enter into these
arrangements, we may not be successful in attracting desirable
sales and distribution partners, or we may not be able to enter
into these arrangements on favorable terms, or at all. If our sales
and marketing efforts, or those of any third-party sales and
distribution partners, are not successful, our currently approved
products may not achieve increased market acceptance and our
product candidates may not gain market acceptance, which would
materially impact our business and operations.
We cannot be certain that we will be able to obtain regulatory
approval for, or successfully commercialize, any of our current or
future product candidates.
We may
not be able to develop our current or any future product
candidates. Our product candidates will require substantial
additional clinical development, testing, and regulatory approval
before we are permitted to commence commercialization. The clinical
trials of our product candidates are, and the manufacturing and
marketing of our product candidates will be, subject to extensive
and rigorous review and regulation by numerous government
authorities in the U.S. and in other countries where we intend to
test and, if approved, market any product candidate. Before
obtaining regulatory approvals for the commercial sale of any
product candidate, we must demonstrate through pre-clinical testing
and clinical trials that the product candidate is safe and
effective for use in each target indication. This process can take
many years and may include post-marketing studies and surveillance,
which will require the expenditure of substantial resources. Of the
large number of drugs in development in the U.S., only a small
percentage successfully completes the FDA regulatory approval
process and is commercialized. Accordingly, even if we are able to
obtain the requisite financing to continue to fund our development
and clinical programs, we cannot assure you that any of our product
candidates will be successfully developed or
commercialized.
We are
not permitted to market a product in the U.S. until we receive
approval of a New Drug Application, or an NDA, for that product
from the FDA, or in any foreign countries until we receive the
requisite approval from such countries. Obtaining approval of an
NDA is a complex, lengthy, expensive and uncertain process, and the
FDA may delay, limit or deny approval of any product candidate for
many reasons, including, among others:
●
we may not be able
to demonstrate that a product candidate is safe and effective to
the satisfaction of the FDA;
●
the results of our
clinical trials may not meet the level of statistical or clinical
significance required by the FDA for marketing
approval;
●
the FDA may
disagree with the number, design, size, conduct or implementation
of our clinical trials;
●
the FDA may require
that we conduct additional clinical trials;
●
the FDA may not
approve the formulation, labeling or specifications of any product
candidate;
●
the clinical
research organizations, or CROs, that we retain to conduct our
clinical trials may take actions outside of our control that
materially adversely impact our clinical trials;
●
the FDA may find
the data from pre-clinical studies and clinical trials insufficient
to demonstrate that a product candidate’s clinical and other
benefits outweigh its safety risks, such as the risk of drug abuse
by patients or the public in general;
●
the FDA may
disagree with our interpretation of data from our pre-clinical
studies and clinical trials;
●
the FDA may not
accept data generated at our clinical trial sites;
●
if an NDA, if and
when submitted, is reviewed by an advisory committee, the FDA may
have difficulties scheduling an advisory committee meeting in a
timely manner or the advisory committee may recommend against
approval of our application or may recommend that the FDA require,
as a condition of approval, additional pre-clinical studies or
clinical trials, limitations on approved labeling or distribution
and use restrictions;
●
the FDA may require
development of a Risk Evaluation and Mitigation Strategy, or REMS,
as a condition of approval or post-approval;
●
the FDA may not
approve the manufacturing processes or facilities of third-party
manufacturers with which we contract; or
●
the FDA may change
its approval policies or adopt new regulations.
These
same risks apply to applicable foreign regulatory agencies from
which we may seek approval for any of our product
candidates.
Any of
these factors, many of which are beyond our control, could
jeopardize our ability to obtain regulatory approval for and
successfully market any product candidate. Moreover, because a
substantial portion of our business is or may be dependent upon our
product candidates, any such setback in our pursuit of initial or
additional regulatory approval would have a material adverse effect
on our business and prospects.
If we fail to successfully acquire new products, we may lose market
position.
Acquiring new
products is an important factor in our planned sales growth,
including products that already have been developed and found
market acceptance. If we fail to identify existing or emerging
consumer markets and trends and to acquire new products, we will
not develop a strong revenue source to help pay for our development
activities as well as possible acquisitions. This failure would
delay implementation of our business plan, which could have a
negative adverse effect on our business and prospects.
If we do not secure collaborations with strategic partners to test,
commercialize and manufacture product candidates, we may not be
able to successfully develop products and generate meaningful
revenues.
We may
enter into collaborations with third parties to conduct clinical
testing, as well as to commercialize and manufacture our products
and product candidates. If we are able to identify and reach an
agreement with one or more collaborators, our ability to generate
revenues from these arrangements will depend on our
collaborators’ abilities to successfully perform the
functions assigned to them in these arrangements. Collaboration
agreements typically call for milestone payments that depend on
successful demonstration of efficacy and safety, obtaining
regulatory approvals, and clinical trial results. Collaboration
revenues are not guaranteed, even when efficacy and safety are
demonstrated. Further, the economic environment at any given time
may result in potential collaborators electing to reduce their
external spending, which may prevent us from developing our product
candidates.
Even if
we succeed in securing collaborators, the collaborators may fail to
develop or effectively commercialize our products or product
candidates. Collaborations involving our product candidates pose a
number of risks, including the following:
●
collaborators may
not have sufficient resources or may decide not to devote the
necessary resources due to internal constraints such as budget
limitations, lack of human resources, or a change in strategic
focus;
●
collaborators may
believe our intellectual property is not valid or is unenforceable
or the product candidate infringes on the intellectual property
rights of others;
●
collaborators may
dispute their responsibility to conduct development and
commercialization activities pursuant to the applicable
collaboration, including the payment of related costs or the
division of any revenues;
●
collaborators may
decide to pursue a competitive product developed outside of the
collaboration arrangement;
●
collaborators may
not be able to obtain, or believe they cannot obtain, the necessary
regulatory approvals;
●
collaborators may
delay the development or commercialization of our product
candidates in favor of developing or commercializing their own or
another party’s product candidate; or
●
collaborators may
decide to terminate or not to renew the collaboration for these or
other reasons.
As a
result, collaboration agreements may not lead to development or
commercialization of our product candidates in the most efficient
manner or at all. For example, our former collaborator that
licensed our former product candidate, Zertane conducted clinical
trials which we believe demonstrated efficacy in treating PE, but
the collaborator undertook a merger that we believe altered its
strategic focus and thereafter terminated the collaboration
agreement. The Merger also created a potential conflict with a
principal customer of the acquired company, which sells a product
to treat premature ejaculation in certain European
markets.
Collaboration
agreements are generally terminable without cause on short notice.
Once a collaboration agreement is signed, it may not lead to
commercialization of a product candidate. We also face competition
in seeking out collaborators. If we are unable to secure
collaborations that achieve the collaborator’s objectives and
meet our expectations, we may be unable to advance our products or
product candidates and may not generate meaningful
revenues.
We or our strategic partners may choose not to continue an existing
product or choose not to develop a product candidate at any time
during development, which would reduce or eliminate our potential
return on investment for that product.
At any
time and for any reason, we or our strategic partners may decide to
discontinue the development or commercialization of a product or
product candidate. If we terminate a program in which we have
invested significant resources, we will reduce the return, or not
receive any return, on our investment and we will have missed the
opportunity to have allocated those resources to potentially more
productive uses. If one of our strategic partners terminates a
program, we will not receive any future milestone payments or
royalties relating to that program under our agreement with that
party. As an example, we sold Primsol in March 2017, and abandoned
Fiera and ProstaScint in June 2018.
Our pre-commercial product candidates are expected to undergo
clinical trials that are time-consuming and expensive, the outcomes
of which are unpredictable, and for which there is a high risk of
failure. If clinical trials of our product candidates fail to
satisfactorily demonstrate safety and efficacy to the FDA and other
regulators, we or our collaborators may incur additional costs or
experience delays in completing, or ultimately be unable to
complete, the development and commercialization of these product
candidates.
Pre-clinical
testing and clinical trials are long, expensive and unpredictable
processes that can be subject to extensive delays. We cannot
guarantee that any clinical studies will be conducted as planned or
completed on schedule, if at all. It may take several years to
complete the pre-clinical testing and clinical development
necessary to commercialize a drug, and delays or failure can occur
at any stage. Interim results of clinical trials do not necessarily
predict final results, and success in pre-clinical testing and
early clinical trials does not ensure that later clinical trials
will be successful. A number of companies in the pharmaceutical and
biotechnology industries have suffered significant setbacks in
advanced clinical trials even after promising results in earlier
trials and we cannot be certain that we will not face similar
setbacks. The design of a clinical trial can determine whether its
results will support approval of a product and flaws in the design
of a clinical trial may not become apparent until the clinical
trial is well advanced. An unfavorable outcome in one or more
trials would be a major set-back for that product candidate and for
us. Due to our limited financial resources, an unfavorable outcome
in one or more trials may require us to delay, reduce the scope of,
or eliminate one or more product development programs, which could
have a material adverse effect on our business, prospects and
financial condition and on the value of our common
stock.
In
connection with clinical testing and trials, we face a number of
risks, including:
●
a product candidate
is ineffective, inferior to existing approved medicines,
unacceptably toxic, or has unacceptable side effects;
●
patients may die or
suffer other adverse effects for reasons that may or may not be
related to the product candidate being tested;
●
the results may not
confirm the positive results of earlier testing or trials;
and
●
the results may not
meet the level of statistical significance required by the FDA or
other regulatory agencies to establish the safety and efficacy of
the product candidate.
If we
do not successfully complete pre-clinical and clinical development,
we will be unable to market and sell products derived from our
product candidates and generate revenues. Even if we do
successfully complete clinical trials, those results are not
necessarily predictive of results of additional trials that may be
needed before an NDA may be submitted to the FDA. Although there
are a large number of drugs in development in the U.S. and other
countries, only a small percentage result in the submission of an
NDA to the FDA, even fewer are approved for commercialization, and
only a small number achieve widespread physician and consumer
acceptance following regulatory approval. If our clinical trials
are substantially delayed or fail to prove the safety and
effectiveness of our product candidates in development, we may not
receive regulatory approval of any of these product candidates and
our business, prospects and financial condition will be materially
harmed.
Delays, suspensions and terminations in any clinical trial we
undertake could result in increased costs to us and delay or
prevent our ability to generate revenues.
Human
clinical trials are very expensive, time-consuming, and difficult
to design, implement and complete. Should we undertake the
development of a pharmaceutical product candidate, we would expect
the necessary clinical trials to take up to 24 months to complete,
but the completion of trials for any product candidates may be
delayed for a variety of reasons, including delays in:
●
demonstrating
sufficient safety and efficacy to obtain regulatory approval to
commence a clinical trial;
●
reaching agreement
on acceptable terms with prospective CROs and clinical trial
sites;
●
validating test
methods to support quality testing of the drug substance and drug
product;
●
obtaining
sufficient quantities of the drug substance or device
parts;
●
manufacturing
sufficient quantities of a product candidate;
●
obtaining approval
of an IND from the FDA;
●
obtaining
institutional review board approval to conduct a clinical trial at
a prospective clinical trial site;
●
determining dosing
and clinical design and making related adjustments;
and
●
patient enrollment,
which is a function of many factors, including the size of the
patient population, the nature of the protocol, the proximity of
patients to clinical trial sites, the availability of effective
treatments for the relevant disease and the eligibility criteria
for the clinical trial.
The
commencement and completion of clinical trials for our product
candidates may be delayed, suspended or terminated due to a number
of factors, including:
●
lack of
effectiveness of product candidates during clinical
trials;
●
adverse events,
safety issues or side effects relating to the product candidates or
their formulation or design;
●
inability to raise
additional capital in sufficient amounts to continue clinical
trials or development programs, which are very
expensive;
●
the need to
sequence clinical trials as opposed to conducting them
concomitantly in order to conserve resources;
●
our inability to
enter into collaborations relating to the development and
commercialization of our product candidates;
●
failure by us or
our collaborators to conduct clinical trials in accordance with
regulatory requirements;
●
our inability or
the inability of our collaborators to manufacture or obtain from
third parties materials sufficient for use in pre-clinical studies
and clinical trials;
●
governmental or
regulatory delays and changes in regulatory requirements, policy
and guidelines, including mandated changes in the scope or design
of clinical trials or requests for supplemental information with
respect to clinical trial results;
●
failure of our
collaborators to advance our product candidates through clinical
development;
●
delays in patient
enrollment, variability in the number and types of patients
available for clinical trials, and lower-than anticipated retention
rates for patients in clinical trials;
●
difficulty in
patient monitoring and data collection due to failure of patients
to maintain contact after treatment;
●
a regional
disturbance where we or our collaborative partners are enrolling
patients in our clinical trials, such as a pandemic, terrorist
activities or war, or a natural disaster; and
●
varying
interpretations of our data, and regulatory commitments and
requirements by the FDA and similar foreign regulatory
agencies.
Many of
these factors may also ultimately lead to denial of an NDA for a
product candidate. If we experience
delays, suspensions or terminations in a clinical trial, the
commercial prospects for the related product candidate will be
harmed, and our ability to generate product revenues will be
delayed.
In
addition, we may encounter delays or product candidate rejections
based on new governmental regulations, future legislative or
administrative actions, or changes in FDA policy or interpretation
during the period of product development. If we obtain required
regulatory approvals, such approvals may later be withdrawn. Delays
or failures in obtaining regulatory approvals may result
in:
●
varying
interpretations of data and commitments by the FDA and similar
foreign regulatory agencies; and
●
diminishment of any
competitive advantages that such product candidates may have or
attain.
Furthermore, if we
fail to comply with applicable FDA and other regulatory
requirements at any stage during this regulatory process, we may
encounter or be subject to:
●
diminishment of any
competitive advantages that such product candidates may have or
attain;
●
delays or
termination in clinical trials or commercialization;
●
refusal by the FDA
or similar foreign regulatory agencies to review pending
applications or supplements to approved applications;
●
product recalls or
seizures;
●
suspension of
manufacturing;
●
withdrawals of
previously approved marketing applications; and
●
fines, civil
penalties, and criminal prosecutions.
The medical device regulatory clearance or approval process is
expensive, time consuming and uncertain, and the failure to obtain
and maintain required clearances or approvals could prevent us from
broadly commercializing the MiOXSYS System for clinical
use.
The
MiOXSYS System is subject to 510k de novo clearance by the FDA
prior to its marketing for commercial use in the U.S., and to
regulatory approvals beyond CE marking required by certain foreign
governmental entities prior to its marketing outside the U.S. In
addition, any changes or modifications to a device that has
received regulatory clearance or approval that could significantly
affect its safety or effectiveness, or would constitute a major
change in its intended use, may require the submission of a new
application for 510k de novo clearance, pre-market approval, or
foreign regulatory approvals. The 510k de novo clearance and
pre-market approval processes, as well as the process of obtaining
foreign approvals, can be expensive, time consuming and uncertain.
It generally takes from four to twelve months from submission to
obtain 510k de novo clearance, and from one to three years from
submission to obtain pre-market approval; however, it may take
longer, and 510k de novo clearance or pre-market approval may never
be obtained. We have limited experience in filing FDA applications
for 510k de novo clearance and pre-market approval. In addition, we
are required to continue to comply with applicable FDA and other
regulatory requirements even after obtaining clearance or approval.
There can be no assurance that we will obtain or maintain any
required clearance or approval on a timely basis, or at all. Any
failure to obtain or any material delay in obtaining FDA clearance
or any failure to maintain compliance with FDA regulatory
requirements could harm our business, financial condition and
results of operations.
The approval process for pharmaceutical and medical device products
outside the U.S. varies among countries and may limit our ability
to develop, manufacture and sell our products internationally.
Failure to obtain marketing approval in international jurisdictions
would prevent our product candidates from being marketed
abroad.
In
order to market and sell our products in the European Union and
many other jurisdictions, we, and our collaborators, must obtain
separate marketing approvals and comply with numerous and varying
regulatory requirements. The approval procedure varies among
countries and may involve additional testing. We may conduct
clinical trials for, and seek regulatory approval to market, our
product candidates in countries other than the U.S. Depending on
the results of clinical trials and the process for obtaining
regulatory approvals in other countries, we may decide to first
seek regulatory approvals of a product candidate in countries other
than the U.S., or we may simultaneously seek regulatory approvals
in the U.S. and other countries. If we or our collaborators seek
marketing approval for a product candidate outside the U.S., we
will be subject to the regulatory requirements of health
authorities in each country in which we seek approval. With respect
to marketing authorizations in Europe, we will be required to
submit a European Marketing Authorisation Application, or MAA, to
the European Medicines Agency, or EMA, which conducts a validation
and scientific approval process in evaluating a product for safety
and efficacy. The approval procedure varies among regions and
countries and may involve additional testing, and the time required
to obtain approval may differ from that required to obtain FDA
approval.
Obtaining
regulatory approvals from health authorities in countries outside
the U.S. is likely to subject us to all of the risks associated
with obtaining FDA approval described above. In addition, marketing
approval by the FDA does not ensure approval by the health
authorities of any other country, and approval by foreign health
authorities does not ensure marketing approval by the
FDA.
Even if we, or our collaborators, obtain marketing approvals for
our product candidates, the terms of approvals and ongoing
regulation of our products may limit how we or they market our
products, which could materially impair our ability to generate
revenue.
Even if
we receive regulatory approval for a product candidate, this
approval may carry conditions that limit the market for the product
or put the product at a competitive disadvantage relative to
alternative therapies. For instance, a regulatory approval may
limit the indicated uses for which we can market a product or the
patient population that may utilize the product, or may be required
to carry a warning in its labeling and on its packaging. Products
with black box warnings are subject to more restrictive advertising
regulations than products without such warnings. These restrictions
could make it more difficult to market any product candidate
effectively. Accordingly, assuming we, or our collaborators,
receive marketing approval for one or more of our product
candidates, we, and our collaborators expect to continue to expend
time, money and effort in all areas of regulatory
compliance.
Any of our products and product candidates for which we, or our
collaborators, obtain marketing approval in the future could be
subject to post-marketing restrictions or withdrawal from the
market and we, and our collaborators, may be subject to substantial
penalties if we, or they, fail to comply with regulatory
requirements or if we, or they, experience unanticipated problems
with our products following approval.
Any of
our approved products and product candidates for which we, or our
collaborators, obtain marketing approval, as well as the
manufacturing processes, post approval studies and measures,
labeling, advertising and promotional activities for such products,
among other things, are or will be subject to continual
requirements of and review by the FDA and other regulatory
authorities. These requirements include submissions of safety and
other post-marketing information and reports, registration and
listing requirements, requirements relating to manufacturing,
quality control, quality assurance and corresponding maintenance of
records and documents, requirements regarding the distribution of
samples to physicians and recordkeeping. Even if marketing approval
of a product candidate is granted, the approval may be subject to
limitations on the indicated uses for which the product may be
marketed or to the conditions of approval, including the FDA
requirement to implement a REMS to ensure that the benefits of a
drug outweigh its risks.
The FDA
may also impose requirements for costly post-marketing studies or
clinical trials and surveillance to monitor the safety or efficacy
of a product. The FDA and other agencies, including the Department
of Justice, closely regulate and monitor the post-approval
marketing and promotion of products to ensure that they are
manufactured, marketed and distributed only for the approved
indications and in accordance with the provisions of the approved
labeling. The FDA imposes stringent restrictions on
manufacturers’ communications regarding off-label use and if
we, or our collaborators, do not market any of our product
candidates for which we, or they, receive marketing approval for
only their approved indications, we, or they, may be subject to
warnings or enforcement action for off-label marketing. Violation
of the FDCA and other statutes, including the False Claims Act,
relating to the promotion and advertising of prescription drugs may
lead to investigations or allegations of violations of federal and
state health care fraud and abuse laws and state consumer
protection laws.
If we do not achieve our projected development and
commercialization goals in the timeframes we announce and expect,
the commercialization of our product candidates may be delayed, and
our business will be harmed.
We
sometimes estimate for planning purposes the timing of the
accomplishment of various scientific, clinical, regulatory and
other product development objectives. These milestones may include
our expectations regarding the commencement or completion of
scientific studies and clinical trials, the submission of
regulatory filings, or commercialization objectives. From time to
time, we may publicly announce the expected timing of some of these
milestones, such as the initiation or completion of an ongoing
clinical trial, the initiation of other clinical programs, receipt
of marketing approval, or a commercial launch of a product. The
achievement of many of these milestones may be outside of our
control. All of such milestones are based on a variety of
assumptions which may cause the timing of achievement of the
milestones to vary considerably from our estimates,
including:
●
our available
capital resources or capital constraints we
experience;
●
the rate of
progress, costs and results of our clinical trials and research and
development activities, including the extent of scheduling
conflicts with participating clinicians and collaborators, and our
ability to identify and enroll patients who meet clinical trial
eligibility criteria;
●
our receipt of
approvals from the FDA and other regulatory agencies and the timing
thereof;
●
other actions,
decisions or rules issued by regulators;
●
our ability to
access sufficient, reliable and affordable supplies of compounds
used in the manufacture of our product candidates;
●
the efforts of our
collaborators with respect to the commercialization of our
products; and
●
the securing of,
costs related to, and timing issues associated with, product
manufacturing as well as sales and marketing
activities.
If we
fail to achieve announced milestones in the timeframes we announce
and expect, the commercialization of our product candidates may be
delayed and our business, prospects and results of operations may
be harmed.
We rely on third parties to conduct our clinical trials and perform
data collection and analysis, which may result in costs and delays
that prevent us from successfully commercializing product
candidates.
We
rely, and will rely in the future, on medical institutions,
clinical investigators, contract research organizations, contract
laboratories, and collaborators to perform data collection and
analysis and others to carry out our clinical trials. Our
development activities or clinical trials conducted in reliance on
third parties may be delayed, suspended, or terminated
if:
●
the third parties
do not successfully carry out their contractual duties or fail to
meet regulatory obligations or expected deadlines;
●
we replace a third
party; or
●
the quality or
accuracy of the data obtained by third parties is compromised due
to their failure to adhere to clinical protocols, regulatory
requirements, or for other reasons.
Third
party performance failures may increase our development costs,
delay our ability to obtain regulatory approval, and delay or
prevent the commercialization of our product candidates. While we
believe that there are numerous alternative sources to provide
these services, in the event that we seek such alternative sources,
we may not be able to enter into replacement arrangements without
incurring delays or additional costs.
Even if collaborators with which we contract in the future
successfully complete clinical trials of our product candidates,
those product candidates may not be commercialized successfully for
other reasons.
Even if
we contract with collaborators that successfully complete clinical
trials for one or more of our product candidates, those candidates
may not be commercialized for other reasons,
including:
●
failure to receive
regulatory clearances required to market them as
drugs;
●
being subject to
proprietary rights held by others;
●
being difficult or
expensive to manufacture on a commercial scale;
●
having adverse side
effects that make their use less desirable; or
●
failing to compete
effectively with products or treatments commercialized by
competitors.
Any third-party manufacturers we engage are subject to various
governmental regulations, and we may incur significant expenses to
comply with, and experience delays in, our product
commercialization as a result of these regulations.
The
manufacturing processes and facilities of third-party manufacturers
we have engaged for our current approved products are, and any
future third-party manufacturer will be, required to comply with
the federal Quality System Regulation, or QSR, which covers
procedures and documentation of the design, testing, production,
control, quality assurance, labeling, packaging, sterilization,
storage and shipping of devices. The FDA enforces the QSR through
periodic unannounced inspections of manufacturing facilities. Any
inspection by the FDA could lead to additional compliance requests
that could cause delays in our product commercialization. Failure
to comply with applicable FDA requirements, or later discovery of
previously unknown problems with the manufacturing processes and
facilities of third-party manufacturers we engage, including the
failure to take satisfactory corrective actions in response to an
adverse QSR inspection, can result in, among other
things:
●
administrative or
judicially imposed sanctions;
●
injunctions or the
imposition of civil penalties;
●
recall or seizure
of the product in question;
●
total or partial
suspension of production or distribution;
●
the FDA’s
refusal to grant pending future clearance or pre-market
approval;
●
withdrawal or
suspension of marketing clearances or approvals;
●
refusal to permit
the export of the product in question; and
Any of
these actions, in combination or alone, could prevent us from
marketing, distributing or selling our products, and would likely
harm our business.
In
addition, a product defect or regulatory violation could lead to a
government-mandated or voluntary recall by us. We believe the FDA
would request that we initiate a voluntary recall if a product was
defective or presented a risk of injury or gross deception.
Regulatory agencies in other countries have similar authority to
recall drugs or devices because of material deficiencies or defects
in design or manufacture that could endanger health. Any recall
would divert our management attention and financial resources,
expose us to product liability or other claims, and harm our
reputation with customers.
We face substantial competition from companies with considerably
more resources and experience than we have, which may result in
others discovering, developing, receiving approval for, or
commercializing products before or more successfully than
us.
We
compete with companies that design, manufacture and market
already-existing and new urology and sexual wellbeing products. We
anticipate that we will face increased competition in the future as
new companies enter the market with new technologies and/or our
competitors improve their current products. One or more of our
competitors may offer technology superior to ours and render our
technology obsolete or uneconomical. Most of our current
competitors, as well as many of our potential competitors, have
greater name recognition, more substantial intellectual property
portfolios, longer operating histories, significantly greater
resources to invest in new technologies, more substantial
experience in product marketing and new product development,
greater regulatory expertise, more extensive manufacturing
capabilities and the distribution channels to deliver products to
customers. If we are not able to compete successfully, we may not
generate sufficient revenue to become profitable. Our ability to
compete successfully will depend largely on our ability
to:
●
expand the market
for our approved products, especially Natesto, MiOXSYS and
Fiera;
●
successfully
commercialize our product candidates alone or with commercial
partners;
●
discover and
develop product candidates that are superior to other products in
the market;
●
obtain required
regulatory approvals;
●
attract and retain
qualified personnel; and
●
obtain patent
and/or other proprietary protection for our product
candidates.
Established
pharmaceutical companies devote significant financial resources to
discovering, developing or licensing novel compounds that could
make our products and product candidates obsolete. Our competitors
may obtain patent protection, receive FDA approval, and
commercialize medicines before us. Other companies are or may
become engaged in the discovery of compounds that may compete with
the product candidates we are developing.
Natesto
competes in a large, growing market. The U.S. prescription
testosterone market is comprised primarily of topically applied
treatments in the form of gels, solutions, and patches.
Testopel® and Aveed®, injectable products typically
implanted directly under the skin by a physician, are also
FDA-approved. AndroGel is the market-leading TRT and is marketed by
AbbVie.
For
ZolpiMist, we compete with companies that design, manufacture and
market treatments for insomnia, some of which have a large market
share.
For the
MiOXSYS System, we compete with companies that design, manufacture
and market already existing and new in-vitro diagnostics and
diagnostic imaging systems and radio-imaging agents for cancer
detection.
We
anticipate that we will face increased competition in the future as
new companies enter the market with new technologies and our
competitors improve their current products. One or more of our
competitors may offer technology superior to ours and render our
technology obsolete or uneconomical. Most of our current
competitors, as well as many of our potential competitors, have
greater name recognition, more substantial intellectual property
portfolios, longer operating histories, significantly greater
resources to invest in new technologies, more substantial
experience in new product development, greater regulatory
expertise, more extensive manufacturing capabilities and the
distribution channels to deliver products to customers. If we are
not able to compete successfully, we may not generate sufficient
revenue to become profitable.
Any new
product we develop or commercialize that competes with a
currently-approved product must demonstrate compelling advantages
in efficacy, convenience, tolerability and/or safety in order to
address price competition and be commercially successful. If we are
not able to compete effectively against our current and future
competitors, our business will not grow and our financial condition
and operations will suffer.
Government restrictions on pricing and reimbursement, as well as
other healthcare payor cost-containment initiatives, may negatively
impact our ability to generate revenues.
The
continuing efforts of the government, insurance companies, managed
care organizations and other payors of health care costs to contain
or reduce costs of health care may adversely affect one or more of
the following:
●
our or our
collaborators’ ability to set a price we believe is fair for
our approved products;
●
our ability to
generate revenue from our approved products and achieve
profitability; and
●
the availability of
capital.
The
2010 enactments of the Patient Protection and Affordable Care Act,
or PPACA, and the Health Care and Education Reconciliation Act, or
the Health Care Reconciliation Act, significantly impacted the
provision of, and payment for, health care in the U.S. Various
provisions of these laws are designed to expand Medicaid
eligibility, subsidize insurance premiums, provide incentives for
businesses to provide health care benefits, prohibit denials of
coverage due to pre-existing conditions, establish health insurance
exchanges, and provide additional support for medical research.
Amendments to the PPACA and/or the Health Care Reconciliation Act,
as well as new legislative proposals to reform healthcare and
government insurance programs, along with the trend toward managed
healthcare in the U.S., could influence the purchase of medicines
and medical devices and reduce demand and prices for our products
and product candidates, if approved. This could harm our or our
collaborators’ ability to market any approved products and
generate revenues. As we expect to receive significant revenues
from reimbursement of our Natesto and ProstaScint products by
commercial third-party payors and government payors, cost
containment measures that health care payors and providers are
instituting and the effect of further health care reform could
significantly reduce potential revenues from the sale of any of our
products and product candidates approved in the future, and could
cause an increase in our compliance, manufacturing, or other
operating expenses. In addition, in certain foreign markets, the
pricing of prescription drugs and devices is subject to government
control and reimbursement may in some cases be unavailable. We
believe that pricing pressures at the federal and state level, as
well as internationally, will continue and may increase, which may
make it difficult for us to sell any approved product at a price
acceptable to us or any of our future collaborators.
In
addition, in some foreign countries, the proposed pricing for a
drug or medical device must be approved before it may be lawfully
marketed. The requirements governing pricing vary widely from
country to country. For example, the European Union provides
options for its member states to restrict the range of medicinal
products for which their national health insurance systems provide
reimbursement and to control the prices of medicinal products for
human use. A member state may approve a specific price for the
medicinal product or it may instead adopt a system of direct or
indirect controls on the profitability of the company placing the
medicinal product on the market. A member state may require that
physicians prescribe the generic version of a drug instead of our
approved branded product. There can be no assurance that any
country that has price controls or reimbursement limitations for
pharmaceutical products will allow favorable reimbursement and
pricing arrangements for any of our products or product candidates.
Historically, pharmaceutical products launched in the European
Union do not follow price structures of the U.S. and generally tend
to have significantly lower prices.
Our financial results will depend on the acceptance among
hospitals, third-party payors and the medical community of our
products and product candidates.
Our
future success depends on the acceptance by our target customers,
third-party payors and the medical community that our products and
product candidates are reliable, safe and cost-effective. Many
factors may affect the market acceptance and commercial success of
our products and product candidates, including:
●
our ability to
convince our potential customers of the advantages and economic
value our products and product candidates over existing
technologies and products;
●
the relative
convenience and ease of our products and product candidates over
existing technologies and products;
●
the introduction of
new technologies and competing products that may make our products
and product candidates less attractive for our target
customers;
●
our success in
training medical personnel on the proper use of our products and
product candidates;
●
the willingness of
third-party payors to reimburse our target customers that adopt our
products and product candidates;
●
the acceptance in
the medical community of our products and product
candidates;
●
the extent and
success of our marketing and sales efforts; and
●
general economic
conditions.
If third-party payors do not reimburse our customers for the
products we sell or if reimbursement levels are set too low for us
to sell one or more of our products at a profit, our ability to
sell those products and our results of operations will be
harmed.
While
Natesto, Tuzistra XR and ZolpiMist are already FDA-approved and
generating revenues in the U.S., they may not receive, or continue
to receive, physician or hospital acceptance, or they may not
maintain adequate reimbursement from third party payors.
Additionally, even if one of our product candidates is approved and
reaches the market, the product may not achieve physician or
hospital acceptance, or it may not obtain adequate reimbursement
from third party payors. In the future, we might possibly sell
other product candidates to target customers substantially all of
whom receive reimbursement for the health care services they
provide to their patients from third-party payors, such as
Medicare, Medicaid, other domestic and foreign government programs,
private insurance plans and managed care programs. Reimbursement
decisions by particular third-party payors depend upon a number of
factors, including each third-party payor’s determination
that use of a product is:
●
a covered benefit
under its health plan;
●
appropriate and
medically necessary for the specific indication;
●
neither
experimental nor investigational.
Third-party payors
may deny reimbursement for covered products if they determine that
a medical product was not used in accordance with cost-effective
diagnosis methods, as determined by the third-party payor, or was
used for an unapproved indication. Third-party payors also may
refuse to reimburse for procedures and devices deemed to be
experimental.
Obtaining coverage
and reimbursement approval for a product from each government or
third-party payor is a time consuming and costly process that could
require us to provide supporting scientific, clinical and
cost-effectiveness data for the use of our potential product to
each government or third-party payor. We may not be able to provide
data sufficient to gain acceptance with respect to coverage and
reimbursement. In addition, eligibility for coverage does not imply
that any product will be covered and reimbursed in all cases or
reimbursed at a rate that allows our potential customers to make a
profit or even cover their costs.
Third-party payors
are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for medical
products and services. Levels of reimbursement may decrease in the
future, and future legislation, regulation or reimbursement
policies of third-party payors may adversely affect the demand for
and reimbursement available for any product or product candidate,
which in turn, could negatively impact pricing. If our customers
are not adequately reimbursed for our products, they may reduce or
discontinue purchases of our products, which would result in a
significant shortfall in achieving revenue expectations and
negatively impact our business, prospects and financial
condition.
Manufacturing risks and inefficiencies may adversely affect our
ability to produce our products.
We
expect to engage third parties to manufacture components of the
MiOXSYS and RedoxSYS systems. We have an agreement for supplies of
Natesto with Acerus, from whom we license Natesto. We have an
agreement with a third-party manufacturer for our ZolpiMist product
as well. We have an agreement for supplies of Tuzistra XR with
Tris, from whom we license Tuzistra XR. For any future product, we
expect to use third-party manufacturers because we do not have our
own manufacturing capabilities. In determining the required
quantities of any product and the manufacturing schedule, we must
make significant judgments and estimates based on inventory levels,
current market trends and other related factors. Because of the
inherent nature of estimates and our limited experience in
marketing our current products, there could be significant
differences between our estimates and the actual amounts of product
we require. If we do not effectively maintain our supply agreements
for Natesto and Fiera, we will face difficulty finding replacement
suppliers, which could harm sales of those products. If we do not
secure collaborations with manufacturing and development partners
to enable production to scale of the MiOXSYS System, we may not be
successful in selling or in commercializing the MiOXSYS System in
the event we receive regulatory approval of the MiOXSYS System. If
we fail in similar endeavors for future products, we may not be
successful in establishing or continuing the commercialization of
our products and product candidates.
Reliance on
third-party manufacturers entails risks to which we would not be
subject if we manufactured these components ourselves,
including:
●
reliance on third
parties for regulatory compliance and quality
assurance;
●
possible breaches
of manufacturing agreements by the third parties because of factors
beyond our control;
●
possible regulatory
violations or manufacturing problems experienced by our suppliers;
and
●
possible
termination or non-renewal of agreements by third parties, based on
their own business priorities, at times that are costly or
inconvenient for us.
Further, if we are
unable to secure the needed financing to fund our internal
operations, we may not have adequate resources required to
effectively and rapidly transition our third party manufacturing.
We may not be able to meet the demand for our products if one or
more of any third-party manufacturers is unable to supply us with
the necessary components that meet our specifications. It may be
difficult to find alternate suppliers for any of our products or
product candidates in a timely manner and on terms acceptable to
us.
Our future growth depends, in part, on our ability to penetrate
foreign markets, where we would be subject to additional regulatory
burdens and other risks and uncertainties.
Our
future profitability will depend, in part, on our ability to
commercialize our products and product candidates in foreign
markets for which we intend to primarily rely on collaboration with
third parties. If we commercialize our products or product
candidates in foreign markets, we would be subject to additional
risks and uncertainties, including:
●
our inability to
directly control commercial activities because we are relying on
third parties;
●
the burden of
complying with complex and changing foreign regulatory, tax,
accounting and legal requirements;
●
different medical
practices and customs in foreign countries affecting acceptance in
the marketplace;
●
import or export
licensing requirements;
●
longer accounts
receivable collection times;
●
longer lead times
for shipping;
●
language barriers
for technical training;
●
reduced protection
of intellectual property rights in some foreign countries, and
related prevalence of generic alternatives to our
products;
●
foreign currency
exchange rate fluctuations;
●
our
customers’ ability to obtain reimbursement for our products
in foreign markets; and
●
the interpretation
of contractual provisions governed by foreign laws in the event of
a contract dispute.
Foreign
sales of our products or product candidates could also be adversely
affected by the imposition of governmental controls, political and
economic instability, trade restrictions and changes in
tariffs.
We are subject to various regulations pertaining to the marketing
of our approved products.
We are
subject to various federal and state laws pertaining to healthcare
fraud and abuse, including prohibitions on the offer of payment or
acceptance of kickbacks or other remuneration for the purchase of
our products, including inducements to potential patients to
request our products and services. Additionally, any product
promotion educational activities, support of continuing medical
education programs, and other interactions with health-care
professionals must be conducted in a manner consistent with the FDA
regulations and the Anti-Kickback Statute. The Anti-Kickback
Statute prohibits persons or entities from knowingly and willfully
soliciting, receiving, offering or providing remuneration, directly
or indirectly, to induce either the referral of an individual, or
the furnishing, recommending, or arranging for a good or service,
for which payment may be made under a federal healthcare program
such as the Medicare and Medicaid programs. Violations of the
Anti-Kickback Statute can also carry potential federal False Claims
Act liability. Additionally, many states have adopted laws similar
to the Anti-Kickback Statute. Some of these state prohibitions
apply to referral of patients for healthcare items or services
reimbursed by any third party payer, not only the Medicare and
Medicaid programs, and do not contain identical safe harbors. These
and any new regulations or requirements may be difficult and
expensive for us to comply with, may adversely impact the marketing
of our existing products or delay introduction of our product
candidates, which may have a material adverse effect on our
business, operating results and financial condition.
Our products and product candidates may cause undesirable side
effects that could delay or prevent their regulatory approval,
limit the commercial profile of an approved label, or result in
significant negative consequences following marketing approval, if
any.
Undesirable side
effects caused by our product candidates could cause us or
regulatory authorities to interrupt, delay or halt clinical trials
and could result in a more restrictive label or the delay or denial
of regulatory approval by the FDA or other regulatory
authorities.
Further, if a
product candidate receives marketing approval and we or others
identify undesirable side effects caused by the product after the
approval, or if drug abuse is determined to be a significant
problem with an approved product, a number of potentially
significant negative consequences could result,
including:
●
regulatory
authorities may withdraw or limit their approval of the
product;
●
regulatory
authorities may require the addition of labeling statements, such
as a “Black Box warning” or a
contraindication;
●
we may be required
to change the way the product is distributed or administered,
conduct additional clinical trials or change the labeling of the
product;
●
we may decide to
remove the product from the marketplace;
●
we could be sued
and held liable for injury caused to individuals exposed to or
taking the product; and
●
our reputation may
suffer.
Any of
these events could prevent us from achieving or maintaining market
acceptance of the affected product candidate and could
substantially increase the costs of commercializing an affected
product or product candidates and significantly impact our ability
to successfully commercialize or maintain sales of our product or
product candidates and generate revenues.
Natesto, Tuzistra XR, and ZolpiMist contain, and future other
product candidates may contain, controlled substances, the
manufacture, use, sale, importation, exportation, prescribing and
distribution of which are subject to regulation by the
DEA.
Natesto, Tuzistra
XR and ZolpiMist, which are approved by the FDA, are regulated by
the DEA as Schedule III controlled substances. Before any
commercialization of any product candidate that contains a
controlled substance, the DEA will need to determine the controlled
substance schedule, taking into account the recommendation of the
FDA. This may be a lengthy process that could delay our marketing
of a product candidate and could potentially diminish any
regulatory exclusivity periods for which we may be eligible.
Natesto, Tuzistra XR and ZolpiMist are, and our other product
candidates may, if approved, be regulated as “controlled
substances” as defined in the Controlled Substances Act of
1970, or CSA, and the implementing regulations of the DEA, which
establish registration, security, recordkeeping, reporting,
storage, distribution, importation, exportation, inventory, quota
and other requirements administered by the DEA. These requirements
are applicable to us, to our third-party manufacturers and to
distributors, prescribers and dispensers of our product candidates.
The DEA regulates the handling of controlled substances through a
closed chain of distribution. This control extends to the equipment
and raw materials used in their manufacture and packaging, in order
to prevent loss and diversion into illicit channels of commerce. A
number of states and foreign countries also independently regulate
these drugs as controlled substances.
The DEA
regulates controlled substances as Schedule I, II, III, IV or V
substances. Schedule I substances by definition have no established
medicinal use, and may not be marketed or sold in the U.S. A
pharmaceutical product may be listed as Schedule II, III, IV or V,
with Schedule II substances considered to present the highest risk
of abuse and Schedule V substances the lowest relative risk of
abuse among such substances.
Natesto
is regulated by the DEA as a Schedule III controlled substance, and
ZolpiMist as a Schedule IV controlled substance. Consequently, the
manufacturing, shipping, storing, selling and using of the products
are subject to a high degree of regulation. Also, distribution,
prescribing and dispensing of these drugs are highly
regulated.
Annual
registration is required for any facility that manufactures,
distributes, dispenses, imports or exports any controlled
substance. The registration is specific to the particular location,
activity and controlled substance schedule.
Because
of their restrictive nature, these laws and regulations could limit
commercialization of our product candidates containing controlled
substances. Failure to comply with these laws and regulations could
also result in withdrawal of our DEA registrations, disruption in
manufacturing and distribution activities, consent decrees,
criminal and civil penalties and state actions, among other
consequences.
If testosterone replacement therapies are found, or are perceived,
to create health risks, our ability to sell Natesto could be
materially adversely affected and our business could be
harmed.
Recent
publications have suggested potential health risks associated with
testosterone replacement therapy, such as increased cardiovascular
disease risk, including increased risk of heart attack or stroke,
fluid retention, sleep apnea, breast tenderness or enlargement,
increased red blood cells, development of clinical prostate
disease, including prostate cancer, and the suppression of sperm
production. Prompted by these events, the FDA held a T-class
Advisory Committee meeting on September 17, 2014 to discuss this
topic further. The FDA has also asked health care professionals and
patients to report side effects involving prescription testosterone
products to the agency.
At the
T-class Advisory Committee meeting held on September 17, 2014, the
Advisory Committee discussed (i) the identification of the
appropriate patient population for whom testosterone replacement
therapy should be indicated and (ii) the potential risk of major
adverse cardiovascular events, defined as non-fatal stroke,
non-fatal myocardial infarction and cardiovascular death associated
with testosterone replacement therapy.
At the
meeting, the Advisory Committee voted that the FDA should require
sponsors of testosterone products to conduct a post marketing study
(e.g. observational study or controlled clinical trial) to further
assess the potential cardiovascular risk.
It is
possible that the FDA’s evaluation of this topic and further
studies on the effects of testosterone replacement therapies could
demonstrate the risk of major adverse cardiovascular events or
other health risks or could impose requirements that impact the
marketing and sale of Natesto, including:
●
mandate that
certain warnings or precautions be included in our product
labeling;
●
require that our
product carry a “black box warning”; and
●
limit use of
Natesto to certain populations, such as men without specified
conditions.
Demonstrated
testosterone replacement therapy safety risks, as well as negative
publicity about the risks of hormone replacement therapy, including
testosterone replacement, could hurt sales of and impair our
ability to successfully relaunch Natesto, which could have a
materially adverse impact on our business.
FDA action regarding testosterone replacement therapies could add
to the cost of producing and marketing Natesto.
The FDA
is requiring post-marketing safety studies for all testosterone
replacement therapies approved in the U.S. to assess long-term
cardiovascular events related to testosterone use. Depending on the
total cost and structure of the FDA’s proposed safety studies
there may be a substantial cost associated with conducting these
studies. Pursuant to our license agreement with Acerus
Pharmaceuticals, Acerus is obligated to reimburse us for the entire
cost of any studies required for Natesto by the FDA. However, in
the event that Acerus is not able to reimburse us for the cost of
any required safety studies, we may be forced to incur this cost,
which could have a material adverse impact on our business and
results of operations.
There is a risk we may unable to sell and distribute certain of our
products if we cannot comply with the serialization requirements of
the Drug Quality and Security Act within the necessary time
frames.
Title
II of the Drug Quality and Security Act of 2013 provided increased
FDA oversight over the ability to track and monitor the sale and
distribution of prescription drugs. Over time, the level within the
supply chain for which prescription drugs are to be tracked gets
farther and farther down the chain. Currently, we are required to
provide product identification information, or serialization, at
the manufacturing batch, or lot level. However, going forward the
law requires such tracking to done farther down the distribution
chain including, (i) wholsaler authentification and verification in
November 2019, (ii) pharmacy authentification and verification in
the Fall of 2020, and at the unit level throughout the entire
supply chain near the end of 2023. There is no guarantee that we
will be able to satisfy each ever-stringent product identification
requirements. Failing to do so could result in a delay or inability
to sell our products within the United States of
America.
Our approved products may not be accepted by physicians, patients,
or the medical community in general.
Even if
the medical community accepts a product as safe and efficacious for
its indicated use, physicians may choose to restrict the use of the
product if we or any collaborator is unable to demonstrate that,
based on experience, clinical data, side-effect profiles and other
factors, our product is preferable to any existing medicines or
treatments. We cannot predict the degree of market acceptance of
any of our approved products, which will depend on a number of
factors, including, but not limited to:
●
the efficacy and
safety of the product;
●
the approved
labeling for the product and any required warnings;
●
the advantages and
disadvantages of the product compared to alternative
treatments;
●
our and any
collaborator’s ability to educate the medical community about
the safety and effectiveness of the product;
●
the reimbursement
policies of government and third-party payors pertaining to the
product; and
●
the market price of
our product relative to competing treatments.
We may use hazardous chemicals and biological materials in our
business. Any claims relating to improper handling, storage or
disposal of these materials could be time consuming and
costly.
Our
research and development processes may involve the controlled use
of hazardous materials, including chemicals and biological
materials. We cannot eliminate the risk of accidental contamination
or discharge and any resultant injury from these materials. We may
be sued for any injury or contamination that results from our use
or the use by third parties of these materials, and our liability
may exceed any insurance coverage and our total assets. Federal,
state and local laws and regulations govern the use, manufacture,
storage, handling and disposal of these hazardous materials and
specified waste products, as well as the discharge of pollutants
into the environment and human health and safety matters.
Compliance with environmental laws and regulations may be expensive
and may impair our research and development efforts. If we fail to
comply with these requirements, we could incur substantial costs,
including civil or criminal fines and penalties, clean-up costs or
capital expenditures for control equipment or operational changes
necessary to achieve and maintain compliance. In addition, we
cannot predict the impact on our business of new or amended
environmental laws or regulations or any changes in the way
existing and future laws and regulations are interpreted and
enforced.
Intellectual Property Risks Related to Our Business
We are dependent on our relationships and license agreements, and
we rely on the patent rights granted to us pursuant to the license
agreements.
A
number of our patent rights are derived from our license agreements
with third parties. Pursuant to these license agreements, we have
licensed rights to various patents and patent applications within
and outside of the United States. We may lose our rights to these
patents and patent applications if we breach our obligations under
such license agreements, including, without limitation, our
financial obligations to the licensors. If we violate or fail to
perform any term or covenant of the license agreements, the
licensors may terminate the license agreements upon satisfaction of
applicable notice requirements and expiration of any applicable
cure periods. Additionally, any termination of license agreements,
whether by us or the licensors will not relieve us of our
obligation to pay any license fees owing at the time of such
termination. If we fail to retain our rights under these license
agreements, we will not be able to commercialize certain products
subject to patent or patent application, and our business, results
of operations, financial condition and prospects would be
materially adversely affected.
The
commercial success of our products depends, in large part, on our
ability to use patents licensed to us by third parties in order to
exclude others from competing with our products. The patent
position of emerging pharmaceutical companies like us can be highly
uncertain and involve complex legal and technical issues. Until our
licensed patents are interpreted by a court, either because we have
sought to enforce them against a competitor or because a competitor
has preemptively challenged them, we will not know the breadth of
protection that they will afford us. Our patents may not contain
claims sufficiently broad to prevent others from practicing our
technologies or marketing competing products. Third parties may
intentionally attempt to design around our patents or design around
our patents so as to compete with us without infringing our
patents. Moreover, the issuance of a patent is not conclusive as to
its validity or enforceability, and so our patents may be
invalidated or rendered unenforceable if challenged by
others.
We may renegotiate any of our existing license agreements or other
material contracts on terms that might not be received by the
market as favorable.
From
time to time we may renegotiate the terms of our existing licensing
agreements. There can be no guarantee that the terms of the
renegotiated license agreement or other material contract will be
viewed favorably by the market as evidenced by our stock price
although the renegotiated terms might be advantageous to our
business.
Our ability to compete may decline if we do not adequately protect
our proprietary rights or if we are barred by the patent rights of
others.
Our
commercial success depends on obtaining and maintaining proprietary
rights to our products and product candidates as well as
successfully defending these rights against third-party challenges.
We will only be able to protect our products and product candidates
from unauthorized use by third parties to the extent that valid and
enforceable patents, or effectively protected trade secrets, cover
them. Our ability to obtain patent protection for our products and
product candidates is uncertain due to a number of factors,
including that:
●
we may not have
been the first to make the inventions covered by pending patent
applications or issued patents;
●
we may not have
been the first to file patent applications for our products and
product candidates;
●
others may
independently develop identical, similar or alternative products,
compositions or devices and uses thereof;
●
our disclosures in
patent applications may not be sufficient to meet the statutory
requirements for patentability;
●
any or all of our
pending patent applications may not result in issued
patents;
●
we may not seek or
obtain patent protection in countries that may eventually provide
us a significant business opportunity;
●
any patents issued
to us may not provide a basis for commercially viable products, may
not provide any competitive advantages, or may be successfully
challenged by third parties;
●
our compositions,
devices and methods may not be patentable;
●
others may design
around our patent claims to produce competitive products which fall
outside of the scope of our patents; or
●
others may identify
prior art or other bases which could invalidate our
patents.
Even if
we have or obtain patents covering our products and product
candidates, we may still be barred from making, using and selling
them because of the patent rights of others. Others may have filed,
and in the future may file, patent applications covering products
that are similar or identical to ours. There are many issued U.S.
and foreign patents relating to chemical compounds, therapeutic
products, diagnostic devices, personal care products and devices
and some of these relate to our products and product candidates.
These could materially affect our ability to sell our products and
develop our product candidates. Because patent applications can
take many years to issue, there may be currently pending
applications unknown to us that may later result in issued patents
that our products and product candidates may infringe. These patent
applications may have priority over patent applications filed by
us.
Obtaining and
maintaining a patent portfolio entails significant expense and
resources. Part of the expense includes periodic maintenance fees,
renewal fees, annuity fees, various other governmental fees on
patents and/or applications due in several stages over the lifetime
of patents and/or applications, as well as the cost associated with
complying with numerous procedural provisions during the patent
application process. We may or may not choose to pursue or maintain
protection for particular inventions. In addition, there are
situations in which failure to make certain payments or
noncompliance with certain requirements in the patent process can
result in abandonment or lapse of a patent or patent application,
resulting in partial or complete loss of patent rights in the
relevant jurisdiction. If we choose to forgo patent protection or
allow a patent application or patent to lapse purposefully or
inadvertently, our competitive position could suffer.
Legal
actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
other actions against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
harm our business, prospects, financial condition and results of
operations.
Pharmaceutical and medical device patents and patent applications
involve highly complex legal and factual questions, which, if
determined adversely to us, could negatively impact our patent
position.
The
patent positions of pharmaceutical and medical device companies can
be highly uncertain and involve complex legal and factual
questions. The interpretation and breadth of claims allowed in some
patents covering pharmaceutical compositions may be uncertain and
difficult to determine and are often affected materially by the
facts and circumstances that pertain to the patented compositions
and the related patent claims. The standards of the U.S. Patent and
Trademark Office, or USPTO, are sometimes uncertain and could
change in the future. Consequently, the issuance and scope of
patents cannot be predicted with certainty. Patents, if issued, may
be challenged, invalidated or circumvented. U.S. patents and patent
applications may also be subject to interference proceedings, and
U.S. patents may be subject to re-examination proceedings,
post-grant review and/or inter partes review in the USPTO. Foreign
patents may be subject to opposition or comparable proceedings in
the corresponding foreign patent office, which could result in
either loss of the patent or denial of the patent application or
loss or reduction in the scope of one or more of the claims of the
patent or patent application. In addition, such interference,
re-examination, post-grant review, inter partes review and
opposition proceedings may be costly. Accordingly, rights under any
issued patents may not provide us with sufficient protection
against competitive products or processes.
In
addition, changes in or different interpretations of patent laws in
the U.S. and foreign countries may permit others to use our
discoveries or to develop and commercialize our technology and
products and product candidates without providing any compensation
to us or may limit the number of patents or claims we can obtain.
The laws of some countries do not protect intellectual property
rights to the same extent as U.S. laws and those countries may lack
adequate rules and procedures for defending our intellectual
property rights.
If we
fail to obtain and maintain patent protection and trade secret
protection of our products and product candidates, we could lose
our competitive advantage and competition we face would increase,
reducing any potential revenues and adversely affecting our ability
to attain or maintain profitability.
Developments in patent law could have a negative impact on our
business.
From
time to time, the U.S. Supreme Court, other federal courts, the
U.S. Congress or the USPTO may change the standards of
patentability and any such changes could have a negative impact on
our business.
In
addition, the Leahy-Smith America Invents Act, or the America
Invents Act, which was signed into law in 2011, includes a number
of significant changes to U.S. patent law. These changes include a
transition from a “first-to-invent” system to a
“first-to-file” system, changes the way issued patents
are challenged, and changes the way patent applications are
disputed during the examination process. These changes may favor
larger and more established companies that have greater resources
to devote to patent application filing and prosecution. The USPTO
has developed regulations and procedures to govern the full
implementation of the America Invents Act, and many of the
substantive changes to patent law associated with the America
Invents Act, and, in particular, the first-to-file provisions,
became effective on March 16, 2013. Substantive changes to patent
law associated with the America Invents Act may affect our ability
to obtain patents, and if obtained, to enforce or defend them.
Accordingly, it is not clear what, if any, impact the America
Invents Act will ultimately have on the cost of prosecuting our
patent applications, our ability to obtain patents based on our
discoveries and our ability to enforce or defend any patents that
may issue from our patent applications, all of which could have a
material adverse effect on our business.
If we are unable to protect the confidentiality of our trade
secrets, our business and competitive position would be
harmed.
In
addition to patent protection, because we operate in the highly
technical field of discovery and development of therapies and
medical devices, we rely in part on trade secret protection in
order to protect our proprietary technology and processes. However,
trade secrets are difficult to protect. We expect to enter into
confidentiality and intellectual property assignment agreements
with our employees, consultants, outside scientific and commercial
collaborators, sponsored researchers, and other advisors. These
agreements generally require that the other party keep confidential
and not disclose to third parties all confidential information
developed by the party or made known to the party by us during the
course of the party’s relationship with us. These agreements
also generally provide that inventions conceived by the party in
the course of rendering services to us will be our exclusive
property. However, these agreements may not be honored and may not
effectively assign intellectual property rights to us.
In
addition to contractual measures, we try to protect the
confidential nature of our proprietary information using physical
and technological security measures. Such measures may not, for
example, in the case of misappropriation of a trade secret by an
employee or third party with authorized access, provide adequate
protection for our proprietary information. Our security measures
may not prevent an employee or consultant from misappropriating our
trade secrets and providing them to a competitor, and recourse we
take against such misconduct may not provide an adequate remedy to
protect our interests fully. Enforcing a claim that a party
illegally disclosed or misappropriated a trade secret can be
difficult, expensive, and time-consuming, and the outcome is
unpredictable. In addition, courts outside the U.S. may be less
willing to protect trade secrets. Trade secrets may be
independently developed by others in a manner that could prevent
legal recourse by us. If any of our confidential or proprietary
information, such as our trade secrets, were to be disclosed or
misappropriated, or if any such information was independently
developed by a competitor, our competitive position could be
harmed.
We may not be able to enforce our intellectual property rights
throughout the world.
The
laws of some foreign countries do not protect intellectual property
rights to the same extent as the laws of the U.S. Many companies
have encountered significant problems in protecting and defending
intellectual property rights in certain foreign jurisdictions. The
legal systems of some countries, particularly developing countries,
do not favor the enforcement of patents and other intellectual
property protection, especially those relating to pharmaceuticals
and medical devices. This could make it difficult for us to stop
the infringement of some of our patents, if obtained, or the
misappropriation of our other intellectual property rights. For
example, many foreign countries have compulsory licensing laws
under which a patent owner must grant licenses to third parties. In
addition, many countries limit the enforceability of patents
against third parties, including government agencies or government
contractors. In these countries, patents may provide limited or no
benefit. Patent protection must ultimately be sought on a
country-by-country basis, which is an expensive and time-consuming
process with uncertain outcomes. Accordingly, we may choose not to
seek patent protection in certain countries, and we will not have
the benefit of patent protection in such countries.
Proceedings to
enforce our patent rights in foreign jurisdictions could result in
substantial costs and divert our efforts and attention from other
aspects of our business. Accordingly, our efforts to protect our
intellectual property rights in such countries may be inadequate.
In addition, changes in the law and legal decisions by courts in
the U.S. and foreign countries may affect our ability to obtain
adequate protection for our technology and the enforcement of
intellectual property.
Third parties may assert ownership or commercial rights to
inventions we develop.
Third
parties may in the future make claims challenging the inventorship
or ownership of our intellectual property. We have or expect to
have written agreements with collaborators that provide for the
ownership of intellectual property arising from our collaborations.
These agreements provide that we must negotiate certain commercial
rights with collaborators with respect to joint inventions or
inventions made by our collaborators that arise from the results of
the collaboration. In some instances, there may not be adequate
written provisions to address clearly the resolution of
intellectual property rights that may arise from a collaboration.
If we cannot successfully negotiate sufficient ownership and
commercial rights to the inventions that result from our use of a
third-party collaborator’s materials where required, or if
disputes otherwise arise with respect to the intellectual property
developed with the use of a collaborator’s samples, we may be
limited in our ability to capitalize on the market potential of
these inventions. In addition, we may face claims by third parties
that our agreements with employees, contractors, or consultants
obligating them to assign intellectual property to us are
ineffective, or in conflict with prior or competing contractual
obligations of assignment, which could result in ownership disputes
regarding intellectual property we have developed or will develop
and interfere with our ability to capture the commercial value of
such inventions. Litigation may be necessary to resolve an
ownership dispute, and if we are not successful, we may be
precluded from using certain intellectual property, or may lose our
exclusive rights in that intellectual property. Either outcome
could have an adverse impact on our business.
Third parties may assert that our employees or consultants have
wrongfully used or disclosed confidential information or
misappropriated trade secrets.
We
might employ individuals who were previously employed at
universities or other biopharmaceutical or medical device
companies, including our competitors or potential competitors.
Although we try to ensure that our employees and consultants do not
use the proprietary information or know-how of others in their work
for us, we may be subject to claims that we or our employees,
consultants or independent contractors have inadvertently or
otherwise used or disclosed intellectual property, including trade
secrets or other proprietary information, of a former employer or
other third parties. Litigation may be necessary to defend against
these claims. If we fail in defending any such claims, in addition
to paying monetary damages, we may lose valuable intellectual
property rights or personnel. Even if we are successful in
defending against such claims, litigation could result in
substantial costs and be a distraction to management and other
employees.
A dispute concerning the infringement or misappropriation of our
proprietary rights or the proprietary rights of others could be
time consuming and costly, and an unfavorable outcome could harm
our business.
There
is significant litigation in the pharmaceutical and medical device
industries regarding patent and other intellectual property rights.
While we are not currently subject to any pending intellectual
property litigation, and are not aware of any such threatened
litigation, we may be exposed to future litigation by third parties
based on claims that our products or product candidates infringe
the intellectual property rights of others. If our development and
commercialization activities are found to infringe any such
patents, we may have to pay significant damages or seek licenses to
such patents. A patentee could prevent us from using the patented
drugs, compositions or devices. We may need to resort to litigation
to enforce a patent issued to us, to protect our trade secrets, or
to determine the scope and validity of third-party proprietary
rights. From time to time, we may hire scientific personnel or
consultants formerly employed by other companies involved in one or
more areas similar to the activities conducted by us. Either we or
these individuals may be subject to allegations of trade secret
misappropriation or other similar claims as a result of prior
affiliations. If we become involved in litigation, it could consume
a substantial portion of our managerial and financial resources,
regardless of whether we win or lose. We may not be able to afford
the costs of litigation. Any adverse ruling or perception of an
adverse ruling in defending ourselves against these claims could
have a material adverse impact on our cash position and stock
price. Any legal action against us or our collaborators could lead
to:
●
payment of damages,
potentially treble damages, if we are found to have willfully
infringed a party’s patent rights;
●
injunctive or other
equitable relief that may effectively block our ability to further
develop, commercialize, and sell products; or
●
we or our
collaborators having to enter into license arrangements that may
not be available on commercially acceptable terms, if at all, all
of which could have a material adverse impact on our cash position
and business, prospects and financial condition. As a result, we
could be prevented from commercializing our products and product
candidates.
Risks Related to Our Organization, Structure and
Operation
Armistice Capital, LLC and Armistice Capital Master Fund Ltd.
(collectively, “Armistice”) own a significant
percentage of our stock and Steven Boyd, the managing member of
Armistice Capital, LLC and director of Armistice Master Fund is a
member of our board of directors. As a result, Armistice could be
able to exert significant control over us.
Since
2017, Armistice has invested approximately $14.6 million
in our company through
the purchase of our common stock, preferred stock and warrants in a
series of our financings. Many of the securities Armistice holds
limits their ability to beneficially own in excess of 4.99% or
9.99% of our common stock. However, the Series E Preferred Stock
Armistice holds permits Armistice to convert the Series E Preferred
Stock into shares of common stock so long as their ownership
percentage in us does not exceed 40%. On April 15, 2019, Steven
Boyd was appointed to our board of directors. The significant
ownership interest Armistice has, the significant investment that
they have made in our company, and Steven Boyd’s position on
our board of directors could give Armistice the ability to
influence us through their ownership positions, even if they are
prohibited from converting or exercising their preferred stock or
warrants to acquire more than 40% of our common stock at any time.
Further, this significant ownership potential may prevent or
discourage unsolicited acquisition proposals or offers for our
common stock that you may feel are in your best interest as one of
our stockholders.
We intend to acquire, through mergers, asset purchases or
in-licensing, businesses or products, or form strategic alliances,
in the future, and we may not realize the intended benefits of such
acquisitions or alliances.
We
intend to acquire, through mergers, asset purchases or
in-licensing, additional businesses or products, form strategic
alliances and/or create joint ventures with third parties that we
believe will complement or augment our existing business. If we
acquire businesses or assets with promising markets or
technologies, we may not be able to realize the benefit of
acquiring such businesses or assets if we are unable to
successfully integrate them with our existing operations and
company culture. We may encounter numerous difficulties in
developing, manufacturing and marketing any new products resulting
from a strategic alliance or acquisition that delay or prevent us
from realizing their expected benefits or enhancing our business.
We cannot assure you that, following any such acquisition or
alliance, we will achieve the expected synergies to justify the
transaction. These risks apply to our acquisition of Natesto in
April 2016, ZolpiMist in June 2018, and Tuzistra XR in November
2018. As an example, we acquired Primsol in October 2015, but sold
it in March 2017. Depending on the success or lack thereof of any
of our existing or future acquired products and product candidates,
we might seek to out-license, sell or otherwise dispose of any of
those products or product candidates, which could adversely impact
our operations if the dispositions triggers a loss, accounting
charge or other negative impact.
In fiscal 2019, the great majority of our gross revenue and gross
accounts receivable were due to three significant customers, the
loss of which could materially and adversely affect our results of
operations.
In fiscal 2019, four customers contributed greater
than 10% of the Company's gross revenue during the year
ended June 30, 2019 and 2018, respectively. As of June 30,
2019, four customers accounted for 87% of gross revenue.
The loss of one or more of the
Company's significant partners or collaborators could have a
material adverse effect on its business, operating results or
financial condition.
We are also subject to credit risk from our
accounts receivable related to our product sales. As of June 30,
2019, four customers accounted for 88% of gross accounts
receivable. As of June 30, 2018, four customers accounted for 93%
of gross accounts receivable.
We will need to develop and expand our company, and we may
encounter difficulties in managing this development and expansion,
which could disrupt our operations.
As of
June 30, 2019, we had 61 full-time employees, and in connection
with being a public company, we expect to continue to increase our
number of employees and the scope of our operations. To manage our
anticipated development and expansion, we must continue to
implement and improve our managerial, operational and financial
systems, expand our facilities and continue to recruit and train
additional qualified personnel. Also, our management may need to
divert a disproportionate amount of its attention away from its
day-to-day activities and devote a substantial amount of time to
managing these development activities. Due to our limited
resources, we may not be able to effectively manage the expansion
of our operations or recruit and train additional qualified
personnel. This may result in weaknesses in our infrastructure,
give rise to operational mistakes, loss of business opportunities,
loss of employees and reduced productivity among remaining
employees. The physical expansion of our operations may lead to
significant costs and may divert financial resources from other
projects, such as the planned expanded commercialization of our
approved products and the development of our product candidates. If
our management is unable to effectively manage our expected
development and expansion, our expenses may increase more than
expected, our ability to generate or increase our revenue could be
reduced and we may not be able to implement our business strategy.
Our future financial performance and our ability to expand the
market for our approved products and develop our product
candidates, if approved, and compete effectively will depend, in
part, on our ability to effectively manage the future development
and expansion of our company.
We depend on key personnel and attracting qualified management
personnel and our business could be harmed if we lose personnel and
cannot attract new personnel.
Our
success depends to a significant degree upon the technical and
management skills of our directors, officers and key personnel. Any
of our directors could resign from our board at any time and for
any reason. Although our executive officers Joshua Disbrow, Jarrett
Disbrow and David Green have employment agreements, the existence
of an employment agreement does not guarantee the retention of the
executive officer for any period of time, and each agreement
obligates us to pay the officer lump sum severance of two years of
salary if we terminate him without cause, as defined in the
agreement, which could hurt our liquidity. The loss of the services
of any of these individuals would likely have a material adverse
effect on us. Our success also will depend upon our ability to
attract and retain additional qualified management, marketing,
technical, and sales executives and personnel. We do not maintain
key person life insurance for any of our officers or key personnel.
The loss of any of our directors or key executives, or the failure
to attract, integrate, motivate, and retain additional key
personnel could have a material adverse effect on our
business.
We
compete for such personnel, including directors, against numerous
companies, including larger, more established companies with
significantly greater financial resources than we possess. There
can be no assurance that we will be successful in attracting or
retaining such personnel, and the failure to do so could have a
material adverse effect on our business, prospects, financial
condition, and results of operations.
Product liability and other lawsuits could divert our resources,
result in substantial liabilities and reduce the commercial
potential of our product candidates.
The
risk that we may be sued on product liability claims is inherent in
the development and commercialization of pharmaceutical, medical
device and personal care products and devices. Side effects of, or
manufacturing defects in, products that we develop and
commercialized could result in the deterioration of a
patient’s condition, injury or even death. Once a product is
approved for sale and commercialized, the likelihood of product
liability lawsuits increases. Claims may be brought by individuals
seeking relief for themselves or by individuals or groups seeking
to represent a class. These lawsuits may divert our management from
pursuing our business strategy and may be costly to defend. In
addition, if we are held liable in any of these lawsuits, we may
incur substantial liabilities and may be forced to limit or forgo
further commercialization of the affected products.
We may
be subject to legal or administrative proceedings and litigation
other than product liability lawsuits which may be costly to defend
and could materially harm our business, financial condition and
operations.
Although we
maintain general liability, clinical trial liability and product
liability insurance, this insurance may not fully cover potential
liabilities. In addition, inability to obtain or maintain
sufficient insurance coverage at an acceptable cost or to otherwise
protect against potential product or other legal or administrative
liability claims could prevent or inhibit the commercial production
and sale of any of our products and product candidates that receive
regulatory approval, which could adversely affect our business.
Product liability claims could also harm our reputation, which may
adversely affect our collaborators’ ability to commercialize
our products successfully.
Our internal computer
systems, or those of our third-party contractors or consultants,
may fail or suffer security breaches, which could result in a
material disruption of our product development
programs.
Despite
the implementation of security measures, our internal computer
systems and those of our third-party contractors and consultants
are vulnerable to damage from computer viruses, unauthorized
access, natural disasters, terrorism, war and telecommunication and
electrical failures. While we do not believe that we have
experienced any such system failure, accident, or security breach
to date, if such an event were to occur and cause interruptions in
our operations, it could result in a loss of clinical trial data
for our product candidates which could result in delays in our
regulatory approval efforts and significantly increase our costs to
recover or reproduce the data. To the extent that any disruption or
security breach results in a loss of or damage to our data or
applications or other data or applications relating to our
technology or product candidates, or inappropriate disclosure of
confidential or proprietary information, we could incur liabilities
and the further development of our product candidates could be
delayed.
Our ability to use our net operating loss carryforwards and certain
other tax attributes may be limited.
As of
June 30, 2019, we had federal net operating loss carryforwards of
approximately $73.8 million. The available net operating losses, if
not utilized to offset taxable income in future periods, will begin
to expire in 2025 and will, except for certain indefinite-lived net
operating loss carryforwards, will completely expire in 2038. Under
the Internal Revenue Code of 1986, as amended (the
“Code”) and the regulations promulgated thereunder,
including, without limitation, the consolidated income tax return
regulations, various corporate changes could limit our ability to
use our net operating loss carryforwards and other tax attributes
to offset our income. Because Ampio’s equity ownership
interest in our company fell to below 80% in January 2016, we were
deconsolidated from Ampio’s consolidated federal income tax
group. As a result, certain of our net operating loss carryforwards
may not be available to us and we may not be able to use them to
offset our U.S. federal taxable income. As a consequence of the
deconsolidation, it is possible that certain other tax attributes
and benefits resulting from U.S. federal income tax consolidation
may no longer be available to us. Our company and Ampio do not have
a tax sharing agreement that could mitigate the loss of net
operating losses and other tax attributes resulting from the
deconsolidation or our incurrence of liability for the taxes of
other members of the consolidated group by reason of the joint and
several liability of group members. In addition to the
deconsolidation risk, an “ownership change” (generally
a 50% change in equity ownership over a three-year period) under
Section 382 of the Code could limit our ability to offset,
post-change, our U.S. federal taxable income. Section 382 of the
Code imposes an annual limitation on the amount of post-ownership
change taxable income a corporation may offset with pre-ownership
change net operating loss carryforwards and certain recognized
built-in losses. We believe that the August 2017 financing created
over a 50% change in our equity ownership so our current tax loss
carryforward will be limited in the future. Either the
deconsolidation or the ownership change scenario could result in
increased future tax liability to us.
Risks Related to Securities Markets and Investment in our
Securities
Our failure to meet the continued listing requirements of the
NASDAQ Capital Market could result in a delisting of our common
stock.
If we
fail to satisfy the continued listing requirements of the NASDAQ
Capital Market, such as the corporate governance requirements or
the minimum closing bid price requirement, the exchange may take
steps to delist our common stock. Such a delisting would likely
have a negative effect on the price of our common stock and would
impair your ability to sell or purchase our common stock when you
wish to do so. In the event of a delisting, we anticipate that we
would take actions to restore our compliance with applicable
exchange requirements, such as stabilize our market price, improve
the liquidity of our common stock, prevent our common stock from
dropping below such exchange’s minimum bid price requirement,
or prevent future non-compliance with such exchange’s listing
requirements.
On
April 9, 2018, we received a letter from NASDAQ indicating that the
Company has failed to comply with the minimum bid price requirement
of NASDAQ Listing Rule 5550(a)(2). NASDAQ Listing Rule 5550(a)(2)
requires that companies listed on the Nasdaq Capital Market
maintain a minimum closing bid price of at least $1.00 per share.
However, on August 10, 2018, we effected a 1-for-20 reverse stock
split, which has brought us back into compliance with NASDAQ
Listing Rule 5550(a)(2).
Future sales and issuances of our equity securities or rights to
purchase our equity securities, including pursuant to equity
incentive plans, would result in additional dilution of the
percentage ownership of our stockholders and could cause our stock
price to fall.
To the
extent we raise additional capital by issuing equity securities,
our stockholders may experience substantial dilution. We may, as we
have in the past, sell common stock, convertible securities or
other equity securities in one or more transactions at prices and
in a manner we determine from time to time. If we sell common
stock, convertible securities or other equity securities in more
than one transaction, investors may be further diluted by
subsequent sales. Such sales may also result in material dilution
to our existing stockholders, and new investors could gain rights
superior to existing stockholders.
Pursuant to our
2015 Stock Plan, our Board of Directors is currently authorized to
award up to a total of 3.0 million shares of common stock or
options to purchase shares of common stock to our officers,
directors, employees and non-employee consultants. As of June 30,
2019, options to purchase 1,607 shares of common stock issued under
our 2015 Stock Plan at a weighted average exercise price of $325.73
per share were outstanding. In addition, at June 30, 2019, there
were outstanding warrants to purchase an aggregate of 16,459,663
shares of our common stock at a weighted average exercise price of
$4.16. Stockholders will experience dilution in the event that
additional shares of common stock are issued under our 2015 Stock
Plan, or options issued under our 2015 Stock Plan are exercised, or
any warrants are exercised for shares of our common
stock.
Our share price is volatile and may be influenced by numerous
factors, some of which are beyond our control.
The
trading price of our common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to various
factors, some of which are beyond our control. In addition to the
factors discussed in this “Risk Factors” section and
elsewhere in this prospectus, these factors include:
●
the products or
product candidates we acquire for commercialization;
●
the products and
product candidates we seek to pursue, and our ability to obtain
rights to develop, commercialize and market those product
candidates;
●
our decision to
initiate a clinical trial, not to initiate a clinical trial or to
terminate an existing clinical trial;
●
actual or
anticipated adverse results or delays in our clinical
trials;
●
our failure to
expand the market for our currently approved products or
commercialize our product candidates, if approved;
●
unanticipated
serious safety concerns related to the use of any of our product
candidates;
●
overall performance
of the equity markets and other factors that may be unrelated to
our operating performance or the operating performance of our
competitors, including changes in market valuations of similar
companies;
●
conditions or
trends in the healthcare, biotechnology and pharmaceutical
industries;
●
introduction of new
products offered by us or our competitors;
●
announcements of
significant acquisitions, strategic partnerships, joint ventures or
capital commitments by us or our competitors;
●
our ability to
maintain an adequate rate of growth and manage such
growth;
●
issuances of debt
or equity securities;
●
sales of our common
stock by us or our stockholders in the future, or the perception
that such sales could occur;
●
trading volume of
our common stock;
●
ineffectiveness of
our internal control over financial reporting or disclosure
controls and procedures;
●
general political
and economic conditions;
●
effects of natural
or man-made catastrophic events;
●
other events or
factors, many of which are beyond our control;
●
adverse regulatory
decisions;
●
additions or
departures of key scientific or management personnel;
●
changes in laws or
regulations applicable to our product candidates, including without
limitation clinical trial requirements for approvals;
●
disputes or other
developments relating to patents and other proprietary rights and
our ability to obtain patent protection for our product
candidates;
●
our dependence on
third parties, including CROs and scientific and medical
advisors;
●
our ability to
uplist our common stock to a national securities
exchange;
●
failure to meet or
exceed any financial guidance or expectations regarding development
milestones that we may provide to the public;
●
actual or
anticipated variations in quarterly operating results;
and
●
failure to meet or
exceed the estimates and projections of the investment
community.
In
addition, the stock market in general, and the stocks of small-cap
healthcare, biotechnology and pharmaceutical companies in
particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating
performance of these companies. Broad market and industry factors
may negatively affect the market price of our common stock,
regardless of our actual operating performance. The realization of
any of the above risks or any of a broad range of other risks,
including those described in these “Risk Factors,”
could have a dramatic and material adverse impact on the market
price of our common stock.
If securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business, our
stock price and any trading volume could decline.
Any
trading market for our common stock that may develop will depend in
part on the research and reports that securities or industry
analysts publish about us or our business. Securities and industry
analysts do not currently, and may never, publish research on us or
our business. If no securities or industry analysts commence
coverage of our company, the trading price for our stock could be
negatively affected. If securities or industry analysts initiate
coverage, and one or more of those analysts downgrade our stock or
publish inaccurate or unfavorable research about our business, our
stock price would likely decline. If one or more of these analysts
cease coverage of our company or fail to publish reports on us
regularly, demand for our stock could decrease, which might cause
our stock price and any trading volume to decline.
We effected a reverse stock split at a ratio of 1-for-20 on August
10, 2018, which may not achieve one or more of our
objectives.
We have
effected four reverse stock splits since June 8, 2015, each of
which has impacted the trading liquidity of the shares of our
common stock. There can be no assurance that the market price per
share of our common stock after a reverse stock split will remain
unchanged or increase in proportion to the reduction in the number
of shares of our common stock outstanding before the reverse stock
split. The market price of our shares may fluctuate and potentially
decline after a reverse stock split. Accordingly, the total market
capitalization of our common stock after a reverse stock split may
be lower than the total market capitalization before the reverse
stock split. Moreover, the market price of our common stock
following a reverse stock split may not exceed or remain higher
than the market price prior to the reverse stock
split.
Additionally, there
can be no assurance that a reverse stock split will result in a
per-share market price that will attract institutional investors or
investment funds or that such share price will satisfy investing
guidelines of institutional investors or investment funds. As a
result, the trading liquidity of our common stock may not
necessarily improve. Further, if a reverse stock split is effected
and the market price of our common stock declines, the percentage
decline may be greater than would occur in the absence of a reverse
stock split.
Future sales and issuances of our common stock or rights to
purchase common stock, including pursuant to our equity incentive
plan or otherwise, could result in dilution of the percentage
ownership of our stockholders and could cause our stock price to
fall.
We
could need significant additional capital in the future to continue
our planned operations. To raise capital, we may sell common stock,
convertible securities or other equity securities in one or more
transactions at prices and in a manner we determine from time to
time. If we sell common stock, convertible securities or other
equity securities in more than one transaction, investors in a
prior transaction may be materially diluted by subsequent sales.
Additionally, any such sales may result in material dilution to our
existing stockholders, and new investors could gain rights,
preferences and privileges senior to those of holders of our common
stock. Further, any future sales of our common stock by us or
resales of our common stock by our existing stockholders could
cause the market price of our common stock to decline. Any future
grants of options, warrants or other securities exercisable or
convertible into our common stock, or the exercise or conversion of
such shares, and any sales of such shares in the market, could have
an adverse effect on the market price of our common
stock.
Some provisions of our charter documents and applicable Delaware
law may discourage an acquisition of us by others, even if the
acquisition may be beneficial to some of our
stockholders.
Provisions in our
Certificate of Incorporation and Amended and Restated Bylaws, as
well as certain provisions of Delaware law, could make it more
difficult for a third-party to acquire us, even if doing so may
benefit some of our stockholders. These provisions
include:
●
the authorization
of 50.0 million shares of “blank check” preferred
stock, the rights, preferences and privileges of which may be
established and shares of which may be issued by our Board of
Directors at its discretion from time to time and without
stockholder approval;
●
limiting the
removal of directors by the stockholders;
●
allowing for the
creation of a staggered board of directors;
●
eliminating the
ability of stockholders to call a special meeting of stockholders;
and
●
establishing
advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted upon
at stockholder meetings.
These
provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making
it more difficult for stockholders to replace members of our board
of directors, which is responsible for appointing the members of
our management. In addition, we are subject to Section 203 of the
Delaware General Corporation Law, which generally prohibits a
Delaware corporation from engaging in any of a broad range of
business combinations with an interested stockholder for a period
of three years following the date on which the stockholder became
an interested stockholder, unless such transactions are approved by
the board of directors. This provision could have the effect of
discouraging, delaying or preventing someone from acquiring us or
merging with us, whether or not it is desired by or beneficial to
our stockholders.
Any
provision of our Certificate of Incorporation or Bylaws or of
Delaware law that is applicable to us that has the effect of
delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their
shares of our common stock in the event that a potentially
beneficial acquisition is discouraged, and could also affect the
price that some investors are willing to pay for our common
stock.
The elimination of personal liability against our directors and
officers under Delaware law and the existence of indemnification
rights held by our directors, officers and employees may result in
substantial expenses.
Our
Certificate of Incorporation and our Bylaws eliminate the personal
liability of our directors and officers to us and our stockholders
for damages for breach of fiduciary duty as a director or officer
to the extent permissible under Delaware law. Further, our
Certificate of Incorporation and our Bylaws and individual
indemnification agreements we intend to enter with each of our
directors and executive officers provide that we are obligated to
indemnify each of our directors or officers to the fullest extent
authorized by the Delaware law and, subject to certain conditions,
advance the expenses incurred by any director or officer in
defending any action, suit or proceeding prior to its final
disposition. Those indemnification obligations could expose us to
substantial expenditures to cover the cost of settlement or damage
awards against our directors or officers, which we may be unable to
afford. Further, those provisions and resulting costs may
discourage us or our stockholders from bringing a lawsuit against
any of our current or former directors or officers for breaches of
their fiduciary duties, even if such actions might otherwise
benefit our stockholders.
We do not intend to pay cash dividends on our capital stock in the
foreseeable future.
We have
never declared or paid any dividends on our common stock and do not
anticipate paying any dividends in the foreseeable future. Any
future payment of cash dividends in the future would depend on our
financial condition, contractual restrictions, solvency tests
imposed by applicable corporate laws, results of operations,
anticipated cash requirements and other factors and will be at the
discretion of our Board of Directors. Our stockholders should not
expect that we will ever pay cash or other dividends on our
outstanding capital stock.
Item
1B. Unresolved Staff
Comments
None.
In August 2015, we
entered into a 37-month operating lease in Englewood, Colorado.
This lease has an initial base rent of $9,000 a month with a total
base rent over the term of the lease of approximately $318,000. In
October 2017, the Company signed an amendment to the 37-month
operating lease in Englewood, Colorado. The amendment extended the
lease for an additional 24 months beginning October 1, 2018. The
base rent will remain at $9,000 a month. In April 2019, the Company
extended the lease for an additional 36 months beginning October 1,
2020.
In June
2015, we entered into a 37-month operating lease for office space
in Raleigh, North Carolina. This lease has initial base rent of
$3,000 a month, with total base rent over the term of the lease of
approximately $112,000. In June 2018, the Company entered into a
12-month operating lease, beginning on August 1, 2018, for a new
office space in Raleigh. This lease has base rent of $1,100 a
month, with total rent over the term of the lease of approximately
$13,200.
The
Company recognizes rent expense on a straight-line basis over the
term of each lease. Differences between the straight-line net
expenses on rent payments are classified as liabilities between
current deferred rent and long-term deferred rent.
Item 3.
Legal Proceedings
We are
currently not party to any material legal or administrative
proceedings and are not aware of any material pending or threatened
legal or administrative proceedings in which we will become
involved.
Item 4.
Mine Safety Disclosures
Not
applicable.
PART II
Item
5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market
Data
Our
common stock has been listed on the NASDAQ Capital Market under the
symbol “AYTU” since October 20, 2017. The following
table sets forth the range of high and low sales prices on the
NASDAQ Capital Market, as applicable, for the periods
shown.
Fiscal
Year ended June 30, 2018
|
|
|
First
Quarter (ended September 30, 2017)
|
$240.00
|
$66.80
|
Second
Quarter (ended December 31, 2017)
|
$136.40
|
$41.00
|
Third
Quarter (ended March 31, 2018)
|
$85.20
|
$7.60
|
Fourth
Quarter (ended June 30, 2018)
|
$12.80
|
$4.66
|
Fiscal
Year ended June 30, 2019
|
|
|
First
Quarter (ended September 30, 2018)
|
$7.80
|
$2.40
|
Second
Quarter (ended December 31, 2018)
|
$3.23
|
$0.68
|
Third
Quarter (ended March 31, 2019)
|
$2.53
|
$0.78
|
Fourth
Quarter (ended June 30, 2019)
|
$2.61
|
$1.50
|
On
August 30, 2019, the closing price as reported on the NASDAQ of our
common stock was $1.39. As of August 31, 2019, there were 489
holders of record of our common stock.
Equity
Compensation Plan Information
In June
2015, our shareholders approved the adoption of a stock and option
award plan (the “2015 Plan”). At the Special meeting of
stockholders on July 26, 2017, the Aytu Stockholders voted to
increase the plan to 3.0 million shares. The 2015 Plan permits
grants of equity awards to employees, directors and consultants.
The following table displays equity compensation plan information
as of June 30, 2019 relating to securities reserved for future
issuance upon exercise.
Plan
Category
|
Number of Securities to be Issued upon Exercise of
Outstanding Options, Warrants and Rights (a)
|
Weighted-Average Exercise Price of Outstanding Options, Warrants
and Rights (b)
|
Number of Securities Remaining Available for
Issuance under Equity Compensation Plans (Excluding Securities
Reflected in Column (a)) (c)
|
Equity
compensation plans approved by security holders
|
1,607
|
$325.73
|
652,179
|
Equity
compensation plans not approved by security holders
|
1,624
|
$594.63
|
-
|
|
|
|
|
Total
|
3,231
|
$460.89
|
652,179
|
Dividend
Policy
We have
not paid any cash dividends on our common stock and our Board of
Directors presently intends to continue a policy of retaining
earnings, if any, for use in our operations. The declaration and
payment of dividends in the future, of which there can be no
assurance, will be determined by thew Board of Directors in light
of conditions then existing, including earnings, financial
condition, capital requirements and other factors. Delaware law
prohibits us from declaring dividends where, if after giving effect
to the distribution of the dividend:
●
we would not be
able to pay our debts as they become due in the usual course of
business; or
●
our total assets
would be less than the sum of our total liabilities plus the amount
that would be needed to satisfy the rights of stockholders who have
preferential rights superior to those receiving the
distribution.
Except
as set forth above, there are no restrictions that currently
materially limit our ability to pay dividends or which we
reasonably believe are likely to limit materially the future
payment of dividends on common stock.
Our
Board of Directors has the right to authorize the issuance of
preferred stock, without further stockholder approval, the holders
of which may have preferences over the holders of our common stock
as to payment of dividends.
Not
applicable.
Item 7.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and the related notes appearing elsewhere in
this Annual Report. Some of the information contained in this
discussion and analysis, including information with respect to our
plans and strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties.
You should read the “Risk Factors” section of this Form
10-K for a discussion of important factors that could cause actual
results to differ materially from the results described in or
implied by the forward-looking statements contained in the
following discussion and analysis.
Overview, Liquidity and Capital Resources
We are
a specialty pharmaceutical company focused on commercializing novel
products that address significant patient needs such as
hypogonadism (low testosterone), cough and upper respiratory
symptoms, insomnia, and male infertility and plans to expand
opportunistically into other therapeutic areas as we continue to
execute on our growth plans.
Prior
to the date of this Annual Report, we have financed operations
through a combination of private and public debt and equity
financings, funds from the sale of our products, and occasionally
through divestures of non-strategic assets. Our financing
transactions have included private placements of stock and
convertible notes, and public offerings of the Company’s
equity securities. Since the formation of Aytu in June 2015, we
have raised approximately $70.3 million from the sale of our
securities to investors and the exercise of warrants by
investors.
Our
operations have historically consumed cash and are expected to
continue to require cash, but at a declining rate. Revenues have
increased 100% and 14% for each of the years ended June 30, 2019
and 2018, respectively, and is expected to continue to increase,
allowing us to rely less on our existing cash balance and proceeds
from financing transactions. Despite increased revenue, cash used
in operations during fiscal year 2019 was $13.8 million compared to
$16.0 million in 2018, due to our completing the build-out of our
commercial infrastructure in 2019. As of the date of this Annual
Report, we expect our commercial costs to remain approximately flat
or to increase modestly as we continue to focus on revenue
growth.
Our
current asset position of $34.8 million plus the proceeds expected
from ongoing product sales will be used to fund operations. We will
access the capital markets to fund operations if and when needed,
and to the extent it becomes probable that existing cash and other
current assets may become exhausted. The timing and amount of
capital that may be raised is dependent on market conditions and
the terms and conditions upon which investors would require to
provide such capital. There is no guarantee that capital will be
available on terms that we consider to be in favorable to us and
our stockholders, or at all. However, we have been successful is
accessing the capital markets in the past and are confident in our
ability to access the capital markets again, if needed. Since the
we do not have sufficient cash and cash equivalents on-hand as of
June 30, 2019, to cover potential net cash outflows for the twelve
months following the filing date of this Annual Report, ASU
2014-15, Presentation of Financial Statements—Going Concern
(Subtopic 205-40) requires us to report that there exists an
indication of substantial doubt about our ability to continue as a
going concern.
If we
are unable to raise adequate capital in the future when it is
required, we can adjust our operating plans to reduce the magnitude
of the capital need under our existing operating plan. Some of the
adjustments that could be made include delays of and reductions to
product support programs, reductions in headcount, narrowing the
scope of one or more of our commercialization programs, or
reductions to our research and development programs. Without
sufficient operating capital, we could be required to relinquish
rights to product candidates on less favorable terms than we would
otherwise choose. This may lead to impairment or other charges,
which could materially affect our balance sheet and operating
results.
We have
incurred accumulated net losses since inception, and at June 30,
2019, we had an accumulated deficit of $106.4 million. Our net loss
increased to $27.1 million from $10.2 million for years ended June
30, 2019 and 2018, respectively. We used $13.8 million and $16.0
million in cash from operations during the years ended June 30,
2019 and 2018, respectively.
Results of Operations
Comparison of the years ended June 30, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Product
revenue, net
|
$7,314,581
|
$3,660,120
|
$3,654,461
|
License
revenue, net
|
5,776
|
-
|
5,776
|
Total product
revenue
|
7,320,357
|
3,660,120
|
3,660,237
|
|
|
|
|
Operating
expenses
|
|
|
|
Cost of
sales
|
2,202,041
|
2,050,544
|
151,497
|
Research and
development
|
589,072
|
167,595
|
421,477
|
Selling,
general and administrative
|
18,887,783
|
17,732,490
|
1,155,293
|
Selling,
general and administrative - related party (Note 14)
|
351,843
|
-
|
351,843
|
Impairment
of intangible assets
|
-
|
1,856,020
|
(1,856,020)
|
Amortization
of intangible assets
|
2,136,255
|
1,553,705
|
582,550
|
Total
operating expenses
|
24,166,994
|
23,360,354
|
806,640
|
|
|
|
|
Loss from
operations
|
(16,846,637)
|
(19,700,234)
|
2,853,597
|
|
|
|
|
Other
(expense) income
|
|
|
|
Other
(expense), net
|
(535,500)
|
(749,423)
|
213,923
|
(Loss) / gain
from contingent consideration
|
(9,830,550)
|
6,277,873
|
(16,108,423)
|
Gain from
warrant derivative liability
|
80,779
|
3,983,921
|
(3,903,142)
|
Total other
(expense) income
|
(10,285,271)
|
9,512,371
|
(19,797,642)
|
|
|
|
|
Net
loss
|
$(27,131,908)
|
$(10,187,863)
|
$(16,944,045)
|
Product revenue. During the year ended
June 30, 2019, we recognized revenue of $7.3 million associated
with the sale of our products, an increase of approximately $3.7
million compared to the same period ended June 30, 2018. The
increase was the result of the combination of increased overall
product units sold during the 2019 fiscal year. Increased sales
volumes were due to the combination of (i) increased Natesto sales
due to our further commercialization of the Natesto product line
and, (ii) the acquisition and deployment of the Tuzistra XR and
ZolpiMist products during the year ended June 30, 2019. This was
offset by the discontinuation of the Primsol, ProstaScint and Fiera
product lines during the year ended June 30, 2018.
Cost of sales. Cost of sales increased
approximately $0.2 million during the year ended June 30, 2019
compared to the same period ended June 30, 2018. The increase was
the result of increased volumes of products due to continued
commercialization efforts. The prior year cost of goods sold
included write-offs of inventory related to the Fiera product
line.
Research and Development. Research and
development expenses increased $0.4 million, or 251.5%, in fiscal
2019 compared to fiscal 2018. The increase was due primarily to the
prior year reversal of a previously accrued liability in the amount
of $398,000 which reduced fiscal year 2018 research and development
expenses. We anticipate research and development expense to
increase in fiscal 2020 as we anticipate funding a study to further
support the clinical application of our MiOXSYS System, and to fund
further clinical studies for Natesto to potentially support new
claims and to comply with FDA post-marketing study
requirements.
Selling, General and Administrative.
Selling, general and administrative
costs increased $1.5 million, or 8.5%, for the year ended June 30,
2019 compared the same period in 2018. The primary increase
was due to labor, occupancy, travel and other and sales &
marketing related to expanding our commercial team, launching
Tuzistra XR, and stock-based compensation. The impairment expense
of $1.9 million recognized in fiscal 2018, represent the impairment
of the Aytu Women’s Health assets based upon sales
performance and the manufacturer no longer supporting the
product.
Selling, General and
Administrative – Related Party. Selling, general and administrative costs –
related party are relate to the cost of a services provided by
TrialCard, of which one of our Directors, Mr. Donofrio, was an
employee for a period of time during the year ended June 30,
2019.
Impairment of Intangible Assets. We
did not incur any impairment losses on
any intangible assets for the year ended June 30, 2019. We
recognized an impairment loss of approximately $1.9 million for the
year ended June 30, 2018 relating to the discontinuation of the
Fiera product line as a result of lower than expected sales
combined with the contract manufacturer ending
production.
Amortization of Intangible Assets.
Amortization expense for the remaining intangible assets was $2.1
million and $1.6 million for the years ended June 30, 2019 and
2018, respectively. This expense is related to corresponding
amortization of our finite-lived intangible assets.
Liquidity and Capital Resources
|
|
|
|
|
Net cash used
in operating activities
|
$(13,831,377)
|
$(15,940,322)
|
Net cash used
in investing activities
|
$(1,061,985)
|
$(484,292)
|
Net cash
provided by financing activities
|
$19,075,062
|
$22,659,599
|
Net Cash Used in Operating Activities
During
fiscal 2019, net operating cash outflows totaled $13.8 million. The
use of cash was approximately $13.3 million less than the net loss
due primarily to non-cash charges for stock-based compensation,
issuance of restricted stock, depreciation, amortization and
accretion, other loss and an increase in accounts payable, accrued
liabilities and accrued compensation. These charges were offset by
an increase in accounts receivable, inventory, prepaid expenses,
and derivative income.
During
fiscal 2018, our operating activities consumed $16.0 million of
cash. Our cash use was $5.8 million greater than our net loss,
primarily due to non-cash gains such as derivative income and other
gains which reduced our fiscal 2018 losses, offset by depreciation,
amortization and accretion, and the expense related to the
impairment of intangible assets which increased losses in fiscal
2018. Increases in our prepaid expense and decreases in accounts
payable and accrued liabilities balance increased cash use in 2018
while an increase in accrued compensation decreased cash use in
2018.
Net Cash Used in Investing Activities
During
fiscal 2019, net investing cash outflows totaled $1.1 million was
used to acquire $0.8 million of intangible assets relating to our
products, paydown of $0.2 million of a contingent consideration
obligation relating to our products, and the purchase of
approximately $0.1 million in fixed assets.
During
fiscal 2018, cash of $484,000 was used to acquire fixed and
operating assets in addition to a deposit for office space and a
royalty payment.
Net Cash from Financing Activities
Net
cash of $19.1 million provided by financing activities during
fiscal 2019 was primarily related to
the October 2018 public offering of $15.2 million, offset by the
offering cost of $1.5 million which was paid in cash. In addition,
we received proceeds of $5 million from a collateralized promissory
note issued to Armistice Capital (see Note 14). We also received
proceeds of $375,000 from warrant exercises.
Net
cash of $22.7 million was provided by financing activities during
fiscal 2018. The private placement completed in August 2017
contributed gross proceeds of $11.8 million, which was reduced by
offering costs of $1.4 million. The March 2018 Offering provided
gross proceeds of $12.9 million, which was reduced by offering
costs of $1.3 million. Finally, we received aggregate proceeds of
$0.7 million from the exercise of warrants by
investors.
Contractual
Obligations and Commitments
Information
regarding our Contractual Obligations and Commitments is contained
in Note 16 to the Financial Statements. We have no off-balance
sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as
“variable interest entities.”
Item 7A.
Quantitative and Qualitative Disclosures
about Market Risks
Not
applicable.
Item 8.
Financial Statements and Supplementary Data
The
financial statements required by this item are identified in
Item (a)(1) of Part IV and begin at page F-1 of this
Annual Report on Form 10-K and are incorporated herein by
reference.
Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Evaluation of Disclosure Controls and Procedures
Our
management is responsible for establishing and maintaining adequate
“disclosure controls and procedures,” as such term is
defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (the “Exchange Act”), that are
designed to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time
periods specified in SEC rules and forms, and that such information
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. Our management has concluded that our disclosure
controls and procedures were effective as of the end of the period
covered by this Report to provide the reasonable assurance
discussed above.
Management’s Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting (as such term is defined
in Rules 13a-15(f) under the Exchange Act). Our management assessed
the effectiveness of our internal control over financial reporting
as of June 30, 2019. In making this assessment, our management used
the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control-Integrated Framework
(2013). Our management has concluded that, as of June 30,
2019, our internal control over financial reporting is effective
based on these criteria.
Plante
Moran, PLLC, the independent registered public accounting firm that
audited our financial statements included in this Annual Report on
Form 10-K, was not required to issue an attestation report on our
internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal controls over financial reporting,
known to the chief executive officer or the chief financial officer
that occurred during the period covered by this Report that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
None.
PART
III
Item 10.
Directors
and Executive Officers, and Corporate
Governance
The
following table sets forth the names and ages of all of our
directors and executive officers as of August 31, 2019. Our Board
of Directors is currently comprised of five members, who are
elected annually to serve for one year or until their successor is
duly elected and qualified, or until their earlier resignation or
removal. Executive officers serve at the discretion of the Board of
Directors and are appointed by the Board of Directors.
Name
|
|
Age
|
|
Position
|
Joshua
R. Disbrow
|
|
44
|
|
Chairman and Chief
Executive Officer
|
Jarrett
T. Disbrow
|
|
44
|
|
Chief
Operating Officer
|
David
A. Green
|
|
57
|
|
Chief
Financial Officer, Secretary, and Treasurer
|
Michael
E. Macaluso
|
|
67
|
|
Director
|
Carl C.
Dockery
|
|
56
|
|
Director
|
John A.
Donofrio, Jr.
|
|
51
|
|
Director
|
Gary V.
Cantrell
|
|
64
|
|
Director
|
Ketan
Mehta
|
|
58
|
|
Director
|
Steven
J. Boyd
|
|
38
|
|
Director
|
|
|
|
|
|
The
following is a biographical summary of the experience of our
executive officers and directors during the past five years, and an
indication of directorships held by the director in other companies
subject to the reporting requirements under the federal securities
law.
Joshua R. Disbrow – Chairman and Chief Executive
Officer
Joshua
R. Disbrow has been employed by us since April 16, 2015. Prior to
the closing of the Merger, Mr. Disbrow was the Chief Executive
Officer of Luoxis since January 2013. Mr. Disbrow was also the
Chief Operating Officer of Ampio since December 2012. Prior to
joining Ampio, he served as the Vice President of Commercial
Operations at Arbor Pharmaceuticals, a specialty pharmaceutical
company, from May 2007 through October 2012. He joined Arbor as
that company’s second full-time employee. Mr. Disbrow led the
company’s commercial efforts from inception to the
company’s acquisition in 2010 and growth to over $127 million
in net sales in 2011. By the time Mr. Disbrow departed Arbor in
late 2012, he had led the growth of the commercial organization to
comprise over 150 people in sales, marketing sales training,
managed care, national accounts, and other commercial functions.
Mr. Disbrow has spent over 17 years in the pharmaceutical,
diagnostic and medical device industries and has held positions of
increasing responsibility in sales, marketing, sales management,
commercial operations and commercial strategy. Prior to joining
Arbor, Mr. Disbrow served as Regional Sales Manager with
Cyberonics, Inc., a medical device company focused on
neuromodulation therapies from June 2005 through April 2007. Prior
to joining Cyberonics he was the Director of Marketing at
LipoScience, an in vitro diagnostics company. Mr. Disbrow holds an
MBA from Wake Forest University and BS in Management from North
Carolina State University. Mr. Disbrow’s experience in
executive management and marketing within the pharmaceutical
industry, monetizing company opportunities, and corporate finance
led to the conclusion that he should serve as a director of our
Company in light of our business and structure.
Gary V. Cantrell – Director
Gary
Cantrell joined our Board in July 2016. He has 30 years of
experience in the life sciences industry ranging from clinical
experience as a respiratory therapist to his current position as
Principle of Averaden, LLC. Since July 2015, Mr. Cantrell consulted
for pharmaceutical and bio technology companies. Most notably, he
served as an exclusive business development consultant with Mayne
Pharma (ASX: MYX) for 2.5 years. Mr. Cantrell served as CEO of
Yasoo Health Inc., a global specialty nutritional company from 2007
through June 2016, highlighted by the sale of its majority asset
AquADEKs to Actavis in March 2016. Previously, he was President of
The Catevo Group, a U.S.-based healthcare consulting firm. Prior to
that, he was Executive Vice President, Sales and Marketing for
TEAMM Pharmaceuticals, an Accentia Biopharmaceuticals company,
where he led all commercial activities for a public specialty
pharmaceutical business. His previous 22 years were at
GlaxoSmithKline plc where he held progressively senior management
positions in sales, marketing and business development. Mr.
Cantrell is a graduate of Wichita State University and serves as an
advisor to several emerging life science companies. He served as a
director for Yasoo Health Inc., Yasoo Health Limited and Flexible
Stenting Solutions, Inc., a leading developer of next generation
peripheral arterial, venous, neurovascular and biliary stents,
which was sold to Cordis, while a Division of Johnson & Johnson
in March 2013. Mr. Cantrell served as a director of Vyrix
Pharmaceuticals from February 2014 to April 2015. Mr.
Cantrell’s experience in consulting and executive management
within the pharmaceutical industry led to the conclusion that he
should serve as a director of our company in light of our business
and structure.
Carl C. Dockery – Director
Carl
Dockery joined our Board in April 2016. Mr. Dockery is a financial
executive with 30 years of experience as an executive in the
insurance and reinsurance industry and more recently in 2006 as the
founder and president of a registered investment advisory firm,
Alpha Advisors, LLC. Mr. Dockery’s career as an insurance
executive began in 1988 as an officer and director of two related
and closely held insurance companies, including serving as
secretary of Crossroads Insurance Co. Ltd. of Bermuda and as vice
president of Gulf Insurance Co. Ltd. of Grand Cayman. Familiar with
the London reinsurance market, in the 1990s, Mr. Dockery worked at
Lloyd’s and the London Underwriting Centre brokering various
types of reinsurance placements. Mr. Dockery graduated from
Southeastern University with a Bachelor of Arts in Humanities. Mr.
Dockery’s financial expertise and experience, as well as his
experience as a director of a publicly traded biopharmaceutical
company, led to the conclusion that he should serve as a director
of our company in light of our business and structure.
John A. Donofrio, Jr. – Director
John Donofrio joined our Board in July 2016. He is a Senior Finance
Executive with over 25 years of experience in the pharmaceutical
industry. Mr. Donofrio is trusted finance leader with a proven
track record of building strategy, financial management, business
partnering, leading teams and strong collaboration among all levels
of an organization. In March of 2018, Mr. Donofrio was appointed
Chief Financial Officer of TrialCard. TrialCard is a
technology-enabled pharmaceutical solutions company that provides
patient-centric solutions to the pharmaceutical industry improving
access, affordability and adherence to medicines. Mr. Donofrio is
responsible for overall finance strategy, accounting, tax, treasury
management, reporting and internal controls. Prior to joining
TrialCard, he served as the Chief Financial Officer and Head of
North American Business Development for Merz North America, or
Merz. Merz is a specialty healthcare company dedicated to the
development and marketing of innovative quality Aesthetics and
Neurosciences products for physicians and patients in the U.S. and
Canada. Prior to joining Merz, Mr. Donofrio served as Vice
President, Stiefel Global Finance, U.S. Specialty Business and
Puerto Rico for Stiefel, a GlaxoSmithKline plc company from July
2009 to July 2013. In that role, Mr. Donofrio was responsible for
the financial strategy, management reporting, and overall control
framework for the Global Dermatology Business Unit. He was also the
Senior Finance Partner accountable for the U.S. Specialty Business
Units of GlaxoSmithKline plc. Mr. Donofrio served as a director of
Vyrix Pharmaceuticals from February 2014 to April 2015. Mr.
Donofrio holds a degree in Accounting from North Carolina State
University. Mr. Donofrio’s financial expertise and diverse
experience in the pharmaceutical industry, led to the conclusion
that he should serve as a director of our company in light of our
business and structure.
Michael E. Macaluso –
Director
Michael
Macaluso has been a member of our Board of Directors since April
2015. Mr. Macaluso is also the Chairman and Chief Executive Officer
of Ampio. Mr. Macaluso has been a member of Ampio
Pharmaceuticals’ Board of Directors since March 2010 and
Ampio’s Chief Executive Officer since January 2012. Mr.
Macaluso served in the roles of president and Chief Executive
Officer of Isolagen, Inc. (AMEX: ILE) from June 2001 until
September 2004. Mr. Macaluso also served on the board of directors
of Isolagen from June 2001 until April 2005. From October 1998
until June 2001, Mr. Macaluso was the owner of Page International
Communications, a manufacturing business. Mr. Macaluso was a
founder and principal of International Printing and Publishing, a
position Mr. Macaluso held from 1989 until 1997, when he sold that
business to a private equity firm. Mr. Macaluso’s experience
in executive management and marketing within the pharmaceutical
industry, monetizing company opportunities, and corporate finance
led to the conclusion that he should serve as a director of our
company in light of our business and structure.
Ketan Mehta - Director
Ketan
Mehta has been a member of our Board of Directors since November
2018. Mr. Mehta is the Founder, President, and Chief Executive
Officer of Tris Pharma, a fully-integrated specialty pharmaceutical
company focused on developing and commercializing advanced delivery
technologies. Ketan founded Tris in 2,000 and has built the company
into a leading specialty pharmaceutical company with over 500
employees.Tris develops, manufactures, licenses, and commercializes
both branded and generic products directly and through commercial
partnerships with both large and emerging pharmaceutical companies.
Tris has developed many pharmaceutical technologies, including its
extended-release platform LiquiXR® and holds
over 150 patents in the U.S. and around the world. Before founding
Tris Pharma, Ketan worked for Capsugel (formerly a division of
Pfizer) in sales, marketing and business development for eight
years. Prior to Capsugel, he spent approximately six years as a
pharmaceutical scientist for three different large pharmaceutical
companies. Ketan is a pharmacist by education and holds an MS
degree in Pharmaceutical Sciences from the University of Oklahoma.
Mr. Mehta’s experience as a founder and CEO of a
pharmaceutical company, led
to the conclusion that he should serve as a director of our company
in light of our business and structure.
Steven J. Boyd - Director
Ketan
Mehta has been a member of our Board of Directors since April 2019.
Mr. Boyd is the Founder and Chief Investment Officer of Armistice
Capital, a healthcare equity hedge fund he founded in 2012. Prior
to founding Armistice, Mr. Boyd was a Research Analyst at Senator
Investment Group, York Capital, and SAB Capital Management, where
he focused on healthcare. Mr. Boyd began his career as an Analyst
at McKinsey & Company. Mr. Boyd has served as a member of the
board of directors of Cerecor (NASDAQ: CERC), an
integrated biopharmaceutical company focused on
pediatric healthcare, since April 2017 and EyeGate
Pharmaceuticals (NASDAQ: EYEG), a clinical-stage,
specialty pharmaceutical company focused on disorders
of the eye, since May 2018. Mr. Boyd received a B.S. in
Economics and a B.A. in Political Science from The Wharton
School of the University of Pennsylvania. Mr. Boyd’s
experience in the capital markets and strategic transactions, and
his focus on the healthcare industry, led to the conclusion that he should
serve as a director of our company in light of our business and
structure.
Jarrett T. Disbrow – Chief Operating Officer
Jarrett
Disbrow has been employed by us since April 16, 2015. Prior to the
closing of the Merger, Mr. Disbrow was the Chief Executive Officer
of Vyrix from November 2013. Mr. Disbrow joined Vyrix from Eurus
Pharma LLC, or Eurus Pharma, where he held the position of general
manager from 2011 to 2013. Prior to joining Eurus Pharma, Mr.
Disbrow was the founder, president and chief executive officer of
Arbor Pharmaceuticals, Inc., or Arbor Pharmaceuticals from 2006 to
2010. Following Arbor Pharmaceuticals’ acquisition in 2010,
Mr. Disbrow remained with the company as vice president of
commercial development. Prior to founding Arbor Pharmaceuticals in
2006, he was head of marketing for Accentia Biopharmaceuticals,
Inc. from 2002 to 2006. Mr. Disbrow began his career with
GlaxoWellcome, Inc. (now GlaxoSmithKline plc) from 1997 to 2001,
where he held positions of increasing responsibility in sales and
later marketing. Mr. Disbrow received a BS in business management
from North Carolina State University in Raleigh, NC. Mr. Disbrow
served on our Board of Directors from April 2015 to July
2016.
David A. Green – Chief Financial
Officer, Secretary, and Treasurer
David
A. Green has been our Chief Financial Officer since December 18,
2017. Prior to joining Aytu BioScience, Mr. Green was the Chief
Accounting Officer from 2016 to 2017 of Intarcia Therapeutics, a
biopharmaceutical company engaged in late stage clinical
development, where he was involved in IPO readiness and some of the
largest private financing transactions in history for a
pre-commercial, venture funded, life science company. Mr. Green was
a consultant with DAG Associates from 2014 to 2017 working in
various senior operating and advisory roles for clients such as Q
Therapeutics, Perseon Corporation and Lineagen, Inc. Mr. Green
served as Chief Financial Officer of Catheter Connections, a
venture financed medical device company that was acquired by Merit
Medical [NASDAQ: MMSI] from 2012 to 2014; and CFO of Specialized
Health Products International, a publicly traded medical device
company that was acquired by C.R. Bard [NYSE: BCR] from 2006 to
2008. Prior to his operating roles, Mr. Green advised a broad
range of life science companies on issues of corporate finance
and the use of strategic transactions to accelerate growth
as a Managing Director of Duff & Phelps and as a member of
Ernst & Young’s Palo Alto Center for
Strategic Transactions®. Mr. Green
began his career performing medical research after
he received a Bachelor of Science in chemistry from the
State University of New York. Mr. Green holds a Master of
Business Administration in finance from the University of Rochester
and is a Certified Public Accountant.
Family
Relationships
Jarrett
T. Disbrow, our Chief Operating Officer, is the brother of Joshua
R. Disbrow, our Chief Executive Officer and a director. There are
no other family relationships among or between any of our other
current or former executive officers and directors.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has been involved in any legal
proceeding in the past 10 years that would require disclosure under
Item 401(f) of Regulation S-K promulgated under the Securities
Act.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act requires our officers and directors
and persons who own more than 10% of our outstanding common stock
to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. These officers, directors
and stockholders are required by regulations under the Securities
Exchange Act to furnish us with copies of all forms they file under
Section 16(a).
Based
solely on our review of the copies of forms we have received, we
believe that all such required reports have been timely
filed.
Code
of Ethics
The
information required by this Item regarding our Code of Ethics is
found in Part I, Item 1, under the caption “Code of
Ethics.”
Board
Committees
Our
Board has established an Audit Committee, Compensation Committee
and Nominating and Governance Committee. Our Audit Committee
consists of Mr. Donofrio (Chair), Mr. Macaluso and Mr.
Dockery. Our Compensation Committee consists of Mr. Macaluso
(Chair), Mr. Cantrell, Mr. Dockery and Mr. Donofrio. Our
Nominating and Governance Committee consists of Mr. Dockery
(Chair), Mr. Cantrell and Mr. Donofrio. The independence of our
directors is discussed in Part III, Item 13 under the caption
“Director Independence.”
Each of
the above-referenced committees operates pursuant to a formal
written charter. The charters for these committees, which have been
adopted by our Board, contain a detailed description of the
respective committee’s duties and responsibilities and are
available on our website at http://www.aytubio.com under
the “Investor Relations—Corporate Governance”
tab.
Our
Board has determined Mr. Donofrio qualifies as an audit committee
financial expert, as defined in Item 407(d)(5) of Regulation
S-K promulgated by the SEC.
Stockholder
Proposals
Our
bylaws establish procedures for stockholder nominations for
elections of directors and bringing business before any annual
meeting or special meeting of stockholders. A stockholder entitled
to vote in the election of directors may nominate one or more
persons for election as directors at a meeting only if written
notice of such stockholder’s intent to make such nomination
or nominations has been delivered to our Corporate Secretary at our
principal executive offices not less than 90 days nor more than 120
days prior to the first anniversary of the prior year’s
annual meeting. In the event that the date of the annual meeting is
more than 30 days before or more than 60 days after the anniversary
date of the prior year’s annual meeting, the stockholder
notice must be given not more than 120 days nor less than the later
of 90 days prior to the date of the annual meeting or, if it is
later, the 10th day following the
date on which the date of the annual meeting is first publicly
announced or disclosed by us. These notice deadlines are the same
as those required by the SEC’s Rule 14a-8.
Pursuant to the
bylaws, a stockholder’s notice must set forth among other
things: (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and the rules and regulations
thereunder; and (b) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest
in such business of such stockholder and the beneficial owner, if
any, on whose behalf the proposal is made.
There
have been no changes to these nominating procedures since the
adoption of the bylaws.
Executive Compensation
In
accordance with Item 402 of Regulation S-K promulgated by the SEC,
we are required to disclose certain information regarding the
makeup of and compensation for our company’s directors and
named executive officers.
In
establishing executive compensation, our Board is guided by the
following goals:
●
compensation should
consist of a combination of cash and equity awards that are
designed to fairly pay the executive officers and directors for
work required for a company of our size and scope;
●
compensation should
align the executive officers’ and directors’ interests
with the long-term interests of stockholders; and
●
compensation should
assist with attracting and retaining qualified executive officers
and directors.
Compensation of Directors
Our
current compensation package for non-employee directors, effective
July 1, 2017, consists of: an annual cash retainer of $40,000 for
the board chair, $25,000 for each other director, $10,000 for each
committee chair and $5,000 for each other committee member; a grant
of 65,000 restricted shares of stock upon appointment to the board;
and an annual stock option grant of 15,000 shares
thereafter.
The
following table provides information regarding all compensation
paid to non-employee directors of Aytu during the fiscal year ended
June 30, 2019.
Name
|
Fees Earned or Paid in Cash
|
All Other Compensation (1)
|
|
Gary
V. Cantrell (2)
|
$41,875
|
$194,850
|
$236,725
|
Carl
C. Dockery (2)
|
$45,000
|
$194,850
|
$239,850
|
John
A. Donofrio Jr. (2)
|
$45,000
|
$194,850
|
$239,850
|
Michael
E. Macaluso (2)
|
$28,125
|
$259,800
|
$287,925
|
Ketan
Mehta (2)
|
$14,583
|
$84,435
|
$99,018
|
Steven
J. Boyd (2)
|
$–
|
$–
|
$–
|
(1)
This column
reflects the aggregate grant date fair value of restricted
stock.
(2)
As of June 30,
2019, the number of restricted shares held by each non-employee
director was as follows: 152,663 restricted shares for Mr.
Cantrell; 152,663 restricted shares for Mr. Dockery; 152,663
restricted shares for Mr. Donofrio; 202,663 restricted shares for
Mr. Macaluso; 65,000 restricted shares for Mr. Mehta.
Executive Officer Compensation
The
following table sets forth all cash compensation earned, as well as
certain other compensation paid or accrued for the years ended June
30, 2019 and 2018 to each of the following named executive
officers.
Name
and Principal Position
|
|
Year
|
|
|
|
|
Non-Equity
Incentive Plan Compensation ($)
|
Change
in Pension Value and Nonqualified Deferred Compensation Earnings
($)
|
All
Other Compensation ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua R.
Disbrow
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer
|
|
2019
|
$330,000
|
$135,000
|
$578,705
|
$–
|
$–
|
$–
|
$–
|
$1,043,705
|
since
December 2012
|
|
2018
|
$303,000
|
$–
|
$303,000
|
$–
|
$–
|
$–
|
$–
|
$606,000
|
|
|
|
|
|
|
|
|
|
|
Jarrett T.
Disbrow
|
|
|
|
|
|
|
|
|
|
|
Chief
Operating Officer
|
|
2019
|
$250,000
|
$105,000
|
$438,413
|
$–
|
$–
|
$–
|
$–
|
$793,413
|
since
April 2015
|
|
2018
|
$250,000
|
$–
|
$202,000
|
$–
|
$–
|
$–
|
$–
|
$452,000
|
|
|
|
|
|
|
|
|
|
|
David A. Green
(2)
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer, Secretary
|
|
2019
|
$250,000
|
$95,000
|
$340,988
|
$–
|
$–
|
$–
|
$–
|
$685,988
|
and
Treasurer, since December 2017
|
|
2018
|
$135,000
|
$–
|
$152,000
|
$–
|
$–
|
$–
|
$–
|
$287,000
|
|
|
|
|
|
|
|
|
|
|
Gregory A. Gould
(3)
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
2019
|
$–
|
$–
|
$–
|
$–
|
$–
|
$–
|
$–
|
$–
|
|
|
2018
|
$96,000
|
$–
|
$–
|
$–
|
$–
|
$–
|
$–
|
$96,000
|
(1)
Option awards are
reported at fair value at the date of grant. See Item 15 of Part
IV, “Notes to the Financial Statements — Note 9 —
Fair Value Considerations .”
(2)
Mr. Green was
appointed to Chief Financial Officer, Secretary and Treasurer full
time effective December 18, 2017.
(3)
Mr. Gould was
appointed to Chief Financial Officer, Secretary and Treasurer full
time effective June 16, 2017 and he resigned in November
2017.
Our
executive officers are reimbursed by us for any out-of-pocket
expenses incurred in connection with activities conducted on our
behalf. Executives are reimbursed for business expenses directly
related to Aytu business activities, such as travel, primarily for
business development as we grow and expand our product lines. On
average, each executive incurs between $1,000 to $3,000 of
out-of-pocket business expenses each month. The executive
management team meets weekly and determines which activities they
will work on based upon what we determine will be the most
beneficial to our company and our shareholders. No interest is paid
on amounts reimbursed to the executives.
Grants
of Plan-Based Awards
The
following table sets forth certain information regarding grants of
plan-based awards to the Named Executive Officers during the year
ended June 30, 2019:
Name
|
|
All Other Stock Awards: Number of Shares of Stock or Units
(#)
|
Base Price of Stock Awards ($/Share)
|
Grant Date Fair Value of Stock Awards ($)(1)
|
|
|
|
|
|
Named Executive Officers
|
|
|
|
|
Joshua R.
Disbrow
|
10/24/2018
|
445,500
|
$1.30
|
$578,705
|
Jarrett T.
Disbrow
|
10/24/2018
|
337,500
|
$1.30
|
$438,413
|
David A.
Green
|
10/24/2018
|
262,500
|
$1.30
|
$340,988
|
(1)
The amounts
reported in this column represent the aggregate grant date fair
value computed in accordance with FASB ASC 718, excluding the
effect of any estimated forfeitures and may not correspond to the
actual value that will be realized by the named executive
officer.
Outstanding
Equity Awards at Fiscal Year-End 2019
The
following table contains certain information concerning unexercised
options for the Named Executive Officers as of June 30,
2019.
|
|
|
|
|
|
|
|
Name
|
Number of Securities Underlying Unexercised Options Exercisable
(#)
|
Number of Securities Underlying Unexercised Options Unexercisable
(#)
|
Equity Incentive Plan Awards: Number of Securities Underlying
Unexercised Unearned Options (#)
|
Option Exercise Price ($)
|
Option Expiration Date
|
Number of Shares or Units of Stock That Have Not Vested
(#)
|
Market Value of Shares or Units of Stock That Have Not Vested ($)
(1)
|
Equity Incentie Plan Awards: Number of Unearned Shares, Units or
Other Rights That Have Not Vested (#)
|
Equity Incentive Plan Awards: Market or Payout Value of Unearned
Shares, Units or Other Rights That Have Not Vested ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua
R. Disbrow
|
125
|
–
|
–
|
$328.00
|
11/11/2025
|
453,475
|
$857,068
|
–
|
$–
|
Joshua
R. Disbrow
|
100
|
50
|
–
|
$328.00
|
7/7/2026
|
–
|
$–
|
–
|
$–
|
Jarrett
T. Disbrow
|
125
|
–
|
–
|
$328.00
|
11/11/2025
|
342,913
|
$648,106
|
–
|
$–
|
Jarrett
T. Disbrow
|
100
|
50
|
–
|
$328.00
|
7/7/2026
|
–
|
$–
|
–
|
$–
|
David
A. Green
|
–
|
–
|
–
|
$–
|
|
266,250
|
$503,213
|
–
|
$–
|
(1) Based
on $1.89 per share which was the closing price of our common stock
on NASDAQ on June 28, 2019, the last trading day of that fiscal
year.
Employment
Agreements
We
entered into an employment agreement with Joshua Disbrow in
connection with his employment as our Chief Executive Officer. The
agreement is for a term of 24 months beginning on April 16, 2015,
subject to termination by us with or without Cause or as a result
of officer’s disability, or by the officer with or without
Good Reason (as defined below). Mr. Disbrow is entitled to receive
$330,000 in annual salary, plus a discretionary performance bonus
with a target of 125% of his base salary. Mr. Disbrow is also
eligible to participate in the benefit plans maintained by us from
time to time, subject to the terms and conditions of such plans. On
April 15, 2019, we extended this agreement for another 24
months.
We
entered into an employment agreement with Jarrett Disbrow, our
Chief Operating Officer, in connection with his employment with us.
The agreement is for a term of 24 months beginning on April 16,
2015, subject to termination by us with or without Cause or as a
result of the officer’s disability, or by the officer with or
without Good Reason (as defined below). Mr. Disbrow is entitled to
receive $250,000 in annual salary, plus a discretionary performance
bonus with a target of 125% of his base salary. Mr. Disbrow is also
eligible to participate in the benefit plans maintained by us from
time to time, subject to the terms and conditions of such plans. On
April 15, 2019, we extended this agreement for another 24
months.
On June
15, 2017, we entered into an employment agreement with Gregory A.
Gould, effective June 16, 2017, to serve as our Chief Financial
Officer. Mr. Gould had been serving as our Chief Financial Officer
on a part-time basis since April 2015. The agreement is identical
to the two-year employment agreement entered into effective April
16, 2017, with Jarrett Disbrow, our Chief Operating Officer, except
for the position that Mr. Gould is to occupy. The agreement is for
a term of 24 months beginning on June 16, 2017, subject to
termination by us with or without Cause (as defined below) or as a
result of Mr. Gould’s disability, or by Mr. Gould with or
without Good Reason (as defined below). Mr. Gould is entitled to
receive $250,000 in annual salary, plus a discretionary performance
bonus with a target of 125% of his base salary, based on his
individual achievements and company performance objectives
established by the board or the compensation committee in
consultation with Mr. Gould. Mr. Gould is also eligible to
participate in the benefit plans maintained by us from time to
time, subject to the terms and conditions of such plans. On October 26, 2017, Gregory A. Gould resigned as
the Chief Financial Officer of Aytu BioScience, Inc. Mr.
Gould’s resignation became effective on November 15,
2017.
We
entered into an employment agreement with David A. Green, effective
December 18, 2017, to serve as our Chief Financial Officer. The
agreement is subject to termination by us with or without Cause (as
defined below) or as a result of Mr. Green’s disability, or
by Mr. Green with or without Good Reason (as defined below). Mr.
Green is entitled to receive $250,000 in annual salary, plus a
discretionary performance bonus with a target of 50% of his base
salary, based on his individual achievements and company
performance objectives established by the board or the compensation
committee in consultation with Mr. Green. Mr. Green is also
eligible to participate in the benefit plans maintained by us from
time to time, subject to the terms and conditions of such
plans.
Payments Provided Upon Termination for Good Reason or Without
Cause
Pursuant to the
employment agreements, in the event employment is terminated
without Cause by us or the officer terminates his employment with
Good Reason, we will be obligated to pay him any accrued
compensation and a lump sum payment equal to two times his base
salary in effect at the date of termination, as well as continued
participation in the health and welfare plans for up to two years.
All vested stock options shall remain exercisable from the date of
termination until the expiration date of the applicable award. So
long as a Change in Control is not in effect, then all options
which are unvested at the date of termination Without Cause or for
Good Reason shall be accelerated as of the date of termination such
that the number of option shares equal to 1/24th the number of
option shares multiplied by the number of full months of such
officer’s employment shall be deemed vested and immediately
exercisable by the officer. Any unvested options over and above the
foregoing shall be cancelled and of no further force or effect and
shall not be exercisable by such officer.
“Good
Reason” means, without the officer’s written consent,
there is:
●
a material
reduction in the officer’s overall responsibilities or
authority, or scope of duties (it being understood that the
occurrence of a Change in Control shall not, by itself, necessarily
constitute a reduction in the officer’s responsibilities or
authority);
●
a material
reduction of the level of the officer’s compensation
(excluding any bonuses) (except where there is a general reduction
applicable to the management team generally, provided, however,
that in no case may the base salary be reduced below certain
specified amounts); or
●
a material change
in the principal geographic location at which the officer must
perform his services.
“Cause”,
means:
●
conviction of, or
entry of a plea of guilty to, or entry of a plea of nolo contendere
with respect to, any crime, other than a traffic violation or a
misdemeanor;
●
willful malfeasance
or willful misconduct by the officer in connection with his
employment;
●
gross negligence in
performing any of his duties;
●
willful and
deliberate violation of any of our policies;
●
unintended but
material breach of any written policy applicable to all employees
adopted by us which is not cured to the reasonable satisfaction of
the board;
●
unauthorized use or
disclosure of any proprietary information or trade secrets of us or
any other party as to which the officer owes an obligation of
nondisclosure as a result of the officer’s relationship with
us;
●
willful and
deliberate breach of his obligations under the employment
agreement; or
●
any other material
breach by officer of any of his obligations which is not cured to
the reasonable satisfaction of the board.
Payments Provided Upon a Change in Control
In the
event of a Change in Control of us, all stock options, restricted
stock and other stock-based grants granted or may be granted in the
future by us to the officers will immediately vest and become
exercisable.
“Change in
Control” means: the occurrence of any of the following
events:
●
the acquisition by
any individual, entity, or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) (the “Acquiring
Person”), other than us, or any of our Subsidiaries, of
beneficial ownership (within the meaning of Rule 13d-3- promulgated
under the Exchange Act) of 50% or more of the combined voting power
or economic interests of the then outstanding voting securities of
us entitled to vote generally in the election of directors
(excluding any issuance of securities by us in a transaction or
series of transactions made principally for bona fide equity
financing purposes); or
●
the acquisition of
us by another entity by means of any transaction or series of
related transactions to which we are party (including, without
limitation, any stock acquisition, reorganization, merger or
consolidation but excluding any issuance of securities by us in a
transaction or series of transactions made principally for bona
fide equity financing purposes) other than a transaction or series
of related transactions in which the holders of the voting
securities of us outstanding immediately prior to such transaction
or series of related transactions retain, immediately after such
transaction or series of related transactions, as a result of
shares in us held by such holders prior to such transaction or
series of related transactions, at least a majority of the total
voting power represented by the outstanding voting securities of us
or such other surviving or resulting entity (or if we or such other
surviving or resulting entity is a wholly-owned subsidiary
immediately following such acquisition, its parent);
or
●
the sale or other
disposition of all or substantially all of the assets of us in one
transaction or series of related transactions.
Our
only obligation to Joshua Disbrow and Jarrett Disbrow had a Change
in Control occurred as of June 30, 2019, would be the acceleration
of the vesting of all options held by them at that date. On June
30, 2019, the closing price of our common stock was below the
exercise price for all of the options held by Joshua Disbrow and
Jarrett Disbrow and therefore there would have been no economic
benefit to them upon the acceleration of vesting of those
options.
Item 12.
Security
Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
The
following table sets forth information with respect to the
beneficial ownership of our common stock as of August 31, 2019
for:
●
each beneficial
owner of more than 5% of our outstanding common stock;
●
each of our
director and named executive officers; and
●
all of our
directors and executive officers as a group.
Beneficial
ownership is determined in accordance with the rules of the SEC.
These rules generally attribute beneficial ownership of securities
to persons who possess sole or shared voting power or investment
power with respect to those securities and include common stock
that can be acquired within 60 days of August 31, 2019. The
percentage ownership information shown in the table is based upon
17,688,071 shares of common stock outstanding as of August 31,
2019.
Except
as otherwise indicated, all of the shares reflected in the table
are shares of common stock and all persons listed below have sole
voting and investment power with respect to the shares beneficially
owned by them, subject to applicable community property laws. The
information is not necessarily indicative of beneficial ownership
for any other purpose.
In
computing the number of shares of common stock beneficially owned
by a person and the percentage ownership of that person, we deemed
outstanding shares of common stock subject to options and warrants
held by that person that are immediately exercisable or exercisable
within 60 days of August 31, 2019. We did not deem these
shares outstanding, however, for the purpose of computing the
percentage ownership of any other person. Beneficial ownership
representing less than 1% is denoted with an asterisk (*). The
information in the tables below are based on information known to
us or ascertained by us from public filings made by the
stockholders. Except as otherwise indicated in the table below,
addresses of the director, executive officers and named beneficial
owners are in care of Aytu BioScience, Inc., 373 Inverness Parkway,
Suite 206, Englewood, Colorado 80112.
|
|
Number of Shares Beneficially Owned
|
Percentage of Shares Beneficially Owned
|
5% Stockholders
|
|
|
|
Armistice
Capital, LLC
|
(1)
|
16,504,008
|
57.06%
|
|
|
|
|
Directors and Named Officers
|
|
|
|
Disbrow,
Joshua
|
(2)
|
492,830
|
2.81%
|
Disbrow,
Jarrett
|
(3)
|
377,256
|
2.15%
|
Green,
Dave
|
(4)
|
274,580
|
1.57%
|
Macaluso,
Michael
|
(5)
|
202,843
|
1.16%
|
Dockery,
Carl
|
(6)
|
154,795
|
*
|
Cantrell,
Gary
|
(7)
|
152,878
|
*
|
Donofrio,
John
|
(8)
|
152,701
|
*
|
Ketan
Mehta
|
(9)
|
65,000
|
*
|
All
directors and executive officers as a group (either
persons)
|
|
1,872,833
|
10.65%
|
*
Represents beneficial ownership of less than 1%.
(1) Consists
of (i) 3,12,064 shares, (ii) 2,000,000 shares indirectly held by
Armistice Capital, (iii) 2,751,148 preferred shares, and (iv)
8,632,796 shares issuable upon the exercise of
warrants.
(2) Consists
of (i) 16,573 shares, (ii) 453,475 restricted shares, (iii) 225
vested options to purchase shares of stock, and (iv) 22,557 shares
issuable upon the exercise of warrants. Does not include 116 shares
held by an irrevocable trust for estate planning in which Mr.
Disbrow is a beneficiary. Mr. Disbrow does not have or share
investment control over the shares held by the trust, Mr. Disbrow
is not the trustee of the trust (nor is any member of Mr.
Disbrow’s immediate family) and Mr. Disbrow does not have or
share the power to revoke the trust. As such, under Rule 16a-8(b)
and related rules, Mr. Disbrow does not have beneficial ownership
over the shares purchased and held by the
trust.
(3) Consists
of (i) 16,562 shares, (ii) 342,913 restricted shares, (iii) shares
underlying 225 vested options to purchase shares of common stock
and (iv) 17,556 shares issuable upon the exercise of warrants. Does
not include 116 shares held by an irrevocable trust for estate
planning in which Mr. Disbrow is a beneficiary. Mr. Disbrow does
not have or share investment control over the shares held by the
trust, Mr. Disbrow is not the trustee of the trust (nor is any
member of Mr. Disbrow’s immediate family) and Mr. Disbrow
does not have or share the power to revoke the trust. As such,
under Rule 16a-8(b) and related rules, Mr. Disbrow does not have
beneficial ownership over the shares purchased and held by the
trust.
(4) Consists
of (i) 5,000 shares, (ii) 266,250 restricted shares, (iii) 3,330
shares issuable upon the exercise of warrants.
(5) Consists
of (i) 75 shares, (ii) 202,663 restricted shares, and
(iii) vested options to purchase 105 shares of common
stock.
(6) Consists
of (i) 152,663 restricted shares, (ii) shares underlying vested
options to purchase 38 shares of common stock, and (iii) 2,094
shares held by Alpha Venture Capital Partners, L.P Mr. Dockery is
the President of the general partner of Alpha Venture Capital
Partners, L.P. and therefore may be deemed to beneficially own the
shares beneficially owned by Alpha Venture Capital Partners,
L.P.
(7) Consists
of (i) 152,663 restricted shares, (ii) 177 shares, and
(iii) vested options to purchase 38 shares of common
stock.
(8) Consists
of (i) 152,663 restricted shares, and (ii) vested options
to purchase 38 shares of common stock.
(9) Consists
of restricted stock
Information
regarding our equity compensation plans is contained in Part II,
Item 5.
Item 13.
Certain
Relationships, Related Transactions,
and Director Independence
Related
Party Transactions
We
describe below all transactions and series of similar transactions,
other than compensation arrangements, during the last three fiscal
years, to which we were a party or will be a party, in
which:
●
the amounts
involved exceeded or will exceed $120,000; and
●
any of our
directors, executive officers or holders of more than 5% of our
capital stock, or any member of the immediate family of the
foregoing persons, had or will have a direct or indirect material
interest.
Armistice
In
February 2019, the Company waived its right to disallow Armistice
from holding more than 4.99% of Aytu common stock and agreed to
allow Armistice to hold up to 40% of the outstanding shares of our
common stock. Also, in February 2019, Armistice converted 1.9
million shares of Series C preferred stock into Aytu common stock,
resulting in Armistice holding more than 10% of the Company’s
common stock. The Company also had a promissory note to Armistice
with a face value of $5.0 million, which was subsequently exchanged
for a combination of common stock, preferred stock and warrants.
Therefore, Armistice is now considered an affiliate of the
Company.
Co-Pay Support
In
June 2018, the Company entered into a master services agreement
with TrialCard Incorporated (“TCI”), a vendor selected
to support the Company sponsored co-pay program. In supporting the
program, Aytu will prefund certain amounts from which TCI will make
disbursements to qualified patients presenting valid prescriptions
for Natesto, Tuzistra XR and ZolpiMist on behalf of Aytu.
Disbursements will be based upon business rules determined by Aytu.
The Company agreed to pay fees monthly to TCI for account
management, data analytics, implementation, and technology and to
reimburse TCI for certain direct costs incurred by TCI to support
the Company’s program. One of the Aytu directors, Mr.
Donofrio, was an executive officer of TCI but has no direct
interest in the arrangement. As of February 2019, Mr. Donofrio
is no longer employed by TCI.
Review,
Approval or Ratification of Transactions with Related
Persons
Effective
upon its adoption in July 2016, pursuant to the Audit Committee
Charter, the Audit Committee is responsible for reviewing and
approving all related party transactions as defined under Item 404
of Regulation S-K, after reviewing each such transaction for
potential conflicts of interests and other improprieties. Our
policies and procedures for review and approval of transactions
with related persons are in writing in our Code of Conduct and
Ethics available on our website at http://www.aytubio.com
under the “Investor Relations—Corporate
Governance” tab.
Prior
to the adoption of the Audit Committee Charter, and due to the
small size of our company, we did not have a formal written policy
regarding the review of related party transactions, and relied on
our Board of Directors to review, approve or ratify such
transactions and identify and prevent conflicts of interest. Our
Board of Directors reviewed any such transaction in light of the
particular affiliation and interest of any involved director,
officer or other employee or stockholder and, if applicable, any
such person’s affiliates or immediate family
members.
Director
Independence
Our
common stock is listed on the NASDAQ Capital Market. Therefore, we
must comply with the exchange rules regarding director
independence. Audit Committee members must satisfy the independence
criteria set forth in Rule 10A-3 under the Securities Exchange Act
of 1934, as amended, for listed companies. In order to be
considered to be independent for purposes of Rule 10A-3, a member
of an audit committee of a listed company may not, other than in
his or her capacity as a member of the audit committee, the board
of directors or any other board committee: (1) accept, directly or
indirectly, any consulting, advisory or other compensatory fee from
the listed company or any of its subsidiaries; or (2) be an
affiliated person of the listed company or any of its
subsidiaries.
Six of
our seven directors are independent under the definition of NASDAQ.
Josh Disbrow is not independent under either definition due to
being an executive officer of our Company.
Item
14.
Principal
Accountant Fees and
Services
Plante
Moran, PLLC, or Plante Moran, (formerly known as EKS&H LLLP)
has served as our independent auditor since April 2015 and has been
appointed by our Board of Directors to continue as our independent
auditor for the fiscal year ending June 30, 2019.
The
following table presents aggregate fees for professional services
rendered by our independent registered public accounting firm,
Plante Moran, for the audit of our annual financial statements for
the respective periods.
|
|
|
|
|
Audit fees
(1)
|
$154,000
|
$223,000
|
Audit related fees
(2)
|
55,000
|
52,000
|
Tax
fees (3)
|
–
|
–
|
Total
fees
|
$209,000
|
$275,000
|
(1)
Audit fees are
comprised of annual audit fees and quarterly review fees. In 2018
we also completed a full audit of Nuelle upon the
acquisition.
(2)
Audit-related fees
for both fiscal year 2019 and 2018 were comprised of fees related
to registration statements, including for our August 2017 private
offering, S-3 filing, our March 2018 public offering, and October
2018 public offering, respectively.
(3)
Tax fees are
comprised of tax compliance, preparation and consultation
fees.
PART IV
Item 15.
Exhibits and Consolidated Financial Statement
Schedules
(a)(1)
Financial
Statements
The
following documents are filed as part of this Form 10-K, as set
forth on the Index to Financial Statements found on page
F-1.
●
Reports of
Independent Registered Public Accounting Firm
●
Consolidated
Balance Sheets as of June 30, 2019 and 2018
●
Consolidated
Statements of Operations for the years ended June 30, 2019 and
2018
●
Consolidated
Statements of Stockholders’ Equity (Deficit) for the years
ended June 30, 2019 and 2018
●
Consolidated
Statements of Cash Flows for the years ended June 30, 2019 and
2018
●
Consolidated Notes
to the Financial Statements
(a)(2)
Financial
Statement Schedules
Not
Applicable.
Exhibit No.
|
Description
|
Registrant’s
Form
|
Date
Filed
|
Exhibit
Number
|
Filed
Herewith
|
|
|
|
|
|
|
3.1
|
|
8-K
|
6/09/15
|
3.1
|
|
|
|
|
|
|
|
3.2
|
|
8-K
|
6/02/16
|
3.1
|
|
|
|
|
|
|
|
3.3
|
|
8-K
|
7/01/16
|
3.1
|
|
|
|
|
|
|
|
3.4
|
|
8-K
|
8/16/17
|
3.1
|
|
|
|
|
|
|
|
3.5
|
|
8-K
|
8/29/17
|
3.1
|
|
|
|
|
|
|
|
3.6
|
|
S-1/A
|
2/27/18
|
3.6
|
|
|
|
|
|
|
|
3.7
|
|
8-K
|
8/10/18
|
3.1
|
|
|
|
|
|
|
|
3.8
|
|
8-K
|
6/09/15
|
3.2
|
|
|
|
|
|
|
|
3.9
|
|
10-Q
|
2/7/19
|
10.4
|
|
|
|
|
|
|
|
4.1
|
|
8-K
|
7/24/15
|
4.2
|
|
|
|
|
|
|
|
4.2
|
|
8-K
|
5/6/16
|
4.1
|
|
|
|
|
|
|
|
4.3
|
|
S-1
|
9/21/16
|
4.5
|
|
|
|
|
|
|
|
4.4
|
|
8-K
|
11/2/16
|
4.1
|
|
|
|
|
|
|
|
4.5
|
|
8-K
|
3/1/17
|
4.1
|
|
|
|
|
|
|
|
4.6
|
|
8-K
|
3/1/17
|
4.2
|
|
|
|
|
|
|
|
4.7
|
|
8-K
|
8/16/17
|
4.1
|
|
|
|
|
|
|
|
4.8
|
|
S-1
|
2/27/18
|
4.8
|
|
|
|
|
|
|
|
10.2#
|
|
8-K/A
|
6/08/15
|
10.4
|
|
|
|
|
|
|
|
10.3#
|
|
8-K/A
|
6/08/15
|
10.5
|
|
|
|
|
|
|
|
10.4
|
|
|
|
|
X
|
|
|
|
|
|
|
10.5#
|
|
8-K/A
|
6/08/15
|
10.7
|
|
|
|
|
|
|
|
10.6#
|
|
8-K/A
|
6/08/15
|
10.8
|
|
|
|
|
|
|
|
10.7#
|
|
8-K/A
|
6/08/15
|
10.9
|
|
|
|
|
|
|
|
10.8#
|
|
8-K
|
5/27/15
|
10.14
|
|
|
|
|
|
|
|
Exhibit No.
|
Description
|
Registrant’s
Form
|
Date
Filed
|
Exhibit
Number
|
Filed
Herewith
|
10.9
|
|
8-K
|
4/22/15
|
10.11
|
|
|
|
|
|
|
|
10.10
|
|
8-K
|
4/22/15
|
10.12
|
|
|
|
|
|
|
|
10.11
|
|
|
|
|
X
|
|
|
|
|
|
|
10.12
|
|
8-K
|
5/27/15
|
10.14
|
|
|
|
|
|
|
|
10.13
|
|
8-K
|
7/24/15
|
10.1
|
|
|
|
|
|
|
|
10.14
|
|
8-K
|
10/07/15
|
10.18
|
|
|
|
|
|
|
|
10.15
|
|
8-K
|
10/13/15
|
10.19
|
|
|
|
|
|
|
|
10.16
|
|
8-K
|
1/20/16
|
10.1
|
|
|
|
|
|
|
|
10.17
|
|
8-K
|
4/25/16
|
10.1
|
|
|
|
|
|
|
|
10.18
|
|
8-K
|
4/25/16
|
10.2
|
|
|
|
|
|
|
|
10.19
|
|
8-K
|
5/16/16
|
10.1
|
|
|
|
|
|
|
|
10.20
|
|
8-K
|
7/28/16
|
10.1
|
|
|
|
|
|
|
|
10.21
|
|
8-K
|
7/28/16
|
10.2
|
|
|
|
|
|
|
|
10.22†
|
|
8-K
|
4/18/17
|
10.1
|
|
|
|
|
|
|
|
10.23†
|
|
8-K
|
4/18/17
|
10.2
|
|
|
|
|
|
|
|
10.24
|
|
10-Q
|
5/11/17
|
10.1
|
|
|
|
|
|
|
|
10.25#
|
|
10-K
|
8/31/2017
|
10.25
|
|
|
|
|
|
|
|
10.26†
|
|
8-K
|
6/19/17
|
10.1
|
|
|
|
|
|
|
|
10.27†
|
|
8-K
|
7/27/17
|
10.1
|
|
|
|
|
|
|
|
10.28
|
|
8-K
|
8/16/17
|
10.1
|
|
|
|
|
|
|
|
10.29
|
|
8-K
|
8/16/17
|
10.2
|
|
|
|
|
|
|
|
10.30
|
|
8-K
|
3/28/18
|
10.1
|
|
|
|
|
|
|
|
Exhibit No.
|
Description
|
Registrant’s
Form
|
Date
Filed
|
Exhibit
Number
|
Filed
Herewith
|
10.31
|
Amended
and Restated Exclusive License Agreement, dated June 11, 2018,
between Aytu BioScience, Inc. and Magna Pharmaceuticals,
Inc.
|
|
|
|
X
|
|
|
|
|
|
|
10.32
|
|
8-K
|
11/29/18
|
10.1
|
|
|
|
|
|
|
|
10.33
|
|
10-Q
|
2/7/19
|
10.6
|
|
|
|
|
|
|
|
10.34
|
|
10-Q
|
2/7/19
|
10.5
|
|
|
|
|
|
|
|
10.35
|
|
10-Q
|
2/7/19
|
10.3
|
|
|
|
|
|
|
|
10.36
|
|
10-Q
|
2/7/19
|
10.2
|
|
|
|
|
|
|
|
10.37
|
|
8-K
|
4/26/19
|
10.1
|
|
|
|
|
|
|
|
10.38
|
|
8-K
|
5/2/19
|
10.1
|
|
|
|
|
|
|
|
10.39
|
|
10-Q
|
5/14/19
|
10.3
|
|
|
|
|
|
|
|
10.40
|
|
10-Q
|
5/14/19
|
10.2
|
|
|
|
|
|
|
|
10.41
|
|
10-Q
|
5/14/19
|
10.1
|
|
|
|
|
|
|
|
10.42
|
|
8-K
|
8/2/19
|
10.1
|
|
|
|
|
|
|
|
|
Consent
of Plante & Moran, PLLC, Independent Registered Public
Accounting Firm.
|
|
|
|
X
|
|
|
|
|
|
|
|
Consent of
EKS&H LLLP, Independent Registered Public Accounting
Firm.
|
|
|
|
X
|
|
|
|
|
|
|
|
Certificate of the
Chief Executive Officer of Aytu BioScience, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
X
|
|
|
|
|
|
|
|
Certificate of the
Chief Financial Officer of Aytu BioScience, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
X
|
|
|
|
|
|
|
|
Certificate of the
Chief Executive Officer and the Chief Financial Officer of Aytu
BioScience, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
X
|
|
|
|
|
|
|
101
|
XBRL
(extensible Business Reporting Language). The following materials
from Aytu BioScience, Inc.’s Annual Report on Form 10-K for
the year ended June 30, 2018 formatted in XBRL: (i) the Balance
Sheets, (ii) the Statements of Operations, (iii) the Statements of
Stockholders’ Equity (Deficit), (iv) the Statements of Cash
Flows, and (v) the Notes to the Financial Statements.
|
|
|
|
X
|
†
Indicates is a
management contract or compensatory plan or
arrangement.
#
The company has
received confidential treatment of certain portions of this
agreement. These portions have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a
confidential treatment request.
Pursuant to the
requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
|
AYTU
BIOSCIENCE, INC.
|
|
|
|
|
Date:
September 26, 2019
|
|
By:
|
/s/
Joshua R. Disbrow
|
|
|
|
Joshua
R. Disbrow
Chairman and Chief Executive Officer
(Principal
Executive Officer)
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
Registrant in the capacities indicated, on September 6,
2019.
|
|
Signature
|
Title
|
|
|
/s/
Joshua R. Disbrow
|
Chairman and Chief
Executive Officer
(Principal Executive Officer)
|
Joshua
R. Disbrow
|
|
|
/s/
David A. Green
|
Chief
Financial Officer
(Principal Financial and Accounting Officer)
|
David
A. Green
|
|
|
/s/
Michael Macaluso
|
Director
|
Michael
Macaluso
|
|
|
/s/
Carl Dockery
|
Director
|
Carl
Dockery
|
|
|
|
/s/
John Donofrio Jr.
|
Director
|
John
Donofrio Jr.
|
|
|
|
/s/
Gary Cantrell
|
Director
|
Gary
Cantrell
|
|
|
|
/s/
Steven Boyd
|
Director
|
Steven
Boyd
|
|
|
|
/s/
Ketan Mehta
|
Director
|
Ketan
Mehta
|
|
|
|
|
|
|
|
|
|
INDEX
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Page
|
|
F-1
|
|
F-3
|
|
F-4
|
|
F-5
|
|
F-6
|
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Report of Independent Registered Public Accounting
Firm
To the
Stockholders and Board of Directors of Aytu Bioscience,
Inc.
Englewood,
Colorado
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheet of Aytu
BioScience, Inc (the “Company”) as of June 30, 2019,
the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended, and the related
notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements
referred to above present fairly, in all material respects, the
financial position of the Company as of June 30, 2019, and the
results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as
a Going Concern
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
3 to the financial statements, the Company has suffered recurring
losses from operations and has an accumulated deficit that raises
substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also
described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
The
Company's management is responsible for these financial statements.
Our responsibility is to express an opinion on the Company’s
financial statements based on our audit. We are a public accounting
firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audit included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a provides a
reasonable basis for our opinion.
Change in Accounting Principle
As
discussed in Note 1 to the financial statements, the Company
adopted Accounting Standards Codification (ASC) Topic 606,
“Revenue from Contracts with Customers,” using the
modified retrospective adoption method on July 1,
2018.
/s/
Plante & Moran, PLLC
We have served as the
Company’s auditor since 2015.
Denver, CO
September 26, 2019
Report of Independent Public Accounting Firm
To the
Stockholders and Board of Directors
Aytu
BioSciences, Inc
Englewood,
Colorado
OPINIONS ON THE FINANCIAL STATEMENTS
We have audited
the accompanying consolidated balance sheet of Aytu BioScience,
Inc. (the “Company”) as of June 30, 2018, and the
related consolidated statements of operations, stockholders’
equity, and cash flows, for the year ended June 30, 2018, and
the related notes (collectively referred to as the “financial
statements”).
In our opinion,
the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of June
30, 2018, and the results of its operations and its cash flows for
the year ended June 30, 2018, in conformity with accounting
principles generally accepted in the United States of
America.
Substantial Doubt about the Company’s Ability to Continue as
a Going Concern
The accompanying financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raises
substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also
described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
BASIS
FOR OPINION
We conducted
our audit in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or
fraud.
/s/ EKS&H
LLLP
September 6,
2018
Denver,
Colorado
AYTU BIOSCIENCE,
INC. AND SUBSIDIARY
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
Assets
|
Current assets
|
|
|
Cash and cash equivalents
|
$11,044,227
|
$7,012,527
|
Restricted cash
|
250,000
|
100,000
|
Accounts receivable, net
|
1,740,787
|
578,782
|
Inventory, net
|
1,440,069
|
1,338,973
|
Prepaid expenses and other
|
957,781
|
440,009
|
Total current assets
|
15,432,864
|
9,470,291
|
|
|
|
|
|
|
Fixed assets, net
|
203,733
|
218,684
|
Licensed assets, net
|
18,861,983
|
11,120,086
|
Patents, net
|
220,611
|
245,944
|
Deposits
|
2,200
|
5,088
|
Total long-term assets
|
19,288,527
|
11,589,802
|
|
|
|
Total assets
|
$34,721,391
|
$21,060,093
|
|
|
|
Liabilities
|
Current liabilities
|
|
|
Accounts payable and other
|
$2,297,270
|
$2,119,672
|
Accrued liabilities
|
1,147,740
|
185,882
|
Accrued compensation
|
849,498
|
540,674
|
Current deferred rent
|
–
|
1,450
|
Current contingent
consideration
|
1,078,068
|
547,100
|
Total current liabilities
|
5,372,576
|
3,394,778
|
|
|
|
Long-term contingent
consideration
|
22,247,796
|
4,146,829
|
Warrant derivative liability
|
13,201
|
93,981
|
Total liabilities
|
27,633,573
|
7,635,588
|
|
|
|
Commitments and
contingencies (Note 16)
|
|
|
|
|
|
Stockholders'
equity
|
|
|
Preferred Stock, par value $.0001; 50,000,000
shares authorized; shares issued and outstanding 3,594,981 and 0,
respectively as of June 30, 2019 and 2018
|
359
|
–
|
Common Stock, par value $.0001; 100,000,000
shares authorized; shares issued and outstanding 17,538,071 and
1,794,762, respectively as of June 30, 2019 and
2018
|
1,754
|
179
|
Additional paid-in capital
|
113,475,205
|
92,681,918
|
Accumulated deficit
|
(106,389,500)
|
(79,257,592)
|
Total stockholders' equity
|
7,087,818
|
13,424,505
|
|
|
|
Total liabilities and stockholders'
equity
|
$34,721,391
|
$21,060,093
|
See the accompanying Notes to the
Consolidated Financial Statements.
AYTU BIOSCIENCE,
INC. AND SUBSIDIARY
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
Revenues
|
|
|
Product revenue, net
|
$7,314,581
|
$3,660,120
|
License revenue, net
|
5,776
|
–
|
Total product revenue
|
7,320,357
|
3,660,120
|
|
|
|
Operating
expenses
|
|
|
Cost of
sales
|
2,202,041
|
2,050,544
|
Research and development
|
589,072
|
167,595
|
Selling, general and
administrative
|
18,887,783
|
17,732,490
|
Selling, general and administrative -
related party (Note 14)
|
351,843
|
–
|
Impairment of intangible
assets
|
–
|
1,856,020
|
Amortization of intangible
assets
|
2,136,255
|
1,553,705
|
Total operating expenses
|
24,166,994
|
23,360,354
|
|
|
|
Loss from operations
|
(16,846,637)
|
(19,700,234)
|
|
|
|
Other (expense)
income
|
|
|
Other (expense), net
|
(535,500)
|
(749,423)
|
(Loss) / gain from change in fair value of
contingent consideration
|
(9,830,550)
|
6,277,873
|
Gain from warrant derivative
liability
|
80,779
|
3,983,921
|
Total other (expense) income
|
(10,285,271)
|
9,512,371
|
|
|
|
Net loss
|
$(27,131,908)
|
$(10,187,863)
|
|
|
|
Weighted average number of
|
|
|
common shares outstanding
|
7,794,489
|
665,605
|
|
|
|
Basic and diluted net loss
|
|
|
per common share
|
$(3.48)
|
$(15.31)
|
See the accompanying Notes to the
Consolidated Financial Statements.
AYTU BIOSCIENCE,
INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE - June 30, 2017
|
–
|
$–
|
41,244
|
$4
|
$73,069,541
|
$(69,069,729)
|
$3,999,816
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
–
|
–
|
38,350
|
4
|
596,930
|
–
|
596,934
|
Earn-out
payment to Nuelle shareholders
|
–
|
–
|
3,208
|
–
|
250,000
|
–
|
250,000
|
Issuance
of preferred and common stock, net of
|
|
|
|
|
|
|
|
$1,402,831 in cash issuance
costs
|
113
|
1
|
159,834
|
16
|
6,319,150
|
–
|
6,319,167
|
Issuance
of preferred and common stock, net of
|
|
|
|
|
|
|
|
$1,294,235 in cash issuance
costs
|
161
|
1
|
1,076,000
|
108
|
9,166,316
|
–
|
9,166,425
|
Warrants
issued in connection with registered offering
|
–
|
–
|
–
|
–
|
2,439,360
|
–
|
2,439,360
|
Preferred
stock converted in common stock
|
(274)
|
(2)
|
394,839
|
39
|
(37)
|
–
|
-
|
S-3 registered offering cost
|
–
|
–
|
–
|
–
|
(60,450)
|
–
|
(60,450)
|
Warrant
exercises
|
–
|
–
|
80,750
|
8
|
677,092
|
–
|
677,100
|
Issuance
of warrants
|
–
|
–
|
–
|
–
|
179,287
|
–
|
179,287
|
Warrant
amendments
|
–
|
–
|
–
|
–
|
4,633
|
–
|
4,633
|
Warrant
exercise
of derivative
warrants
|
–
|
–
|
–
|
–
|
40,096
|
–
|
40,096
|
Adjustment
for rounding of shares due to stock split
|
–
|
–
|
537
|
–
|
–
|
–
|
–
|
Net
loss
|
–
|
–
|
–
|
–
|
–
|
(10,187,863)
|
(10,187,863)
|
|
|
|
|
|
|
|
|
BALANCE
- June
30, 2018
|
–
|
$–
|
1,794,762
|
$179
|
$92,681,918
|
$(79,257,592)
|
$13,424,505
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
–
|
$–
|
2,681,422
|
$270
|
$1,021,931
|
$–
|
$1,022,201
|
Common
stock
issued to
employee
|
–
|
–
|
9,000
|
1
|
11,689
|
–
|
11,690
|
Issuance of
preferred, common stock and warrants, net of $1,479,963 in cash
issuance costs
|
8,342,993
|
834
|
1,777,007
|
178
|
11,810,373
|
–
|
11,811,385
|
Warrants issued
in connection with the registered offering
|
–
|
–
|
–
|
–
|
1,827,628
|
–
|
1,827,628
|
Warrants issued
in connection with the registered offering to the placement
agents, non-cash issuance costs
|
–
|
–
|
–
|
–
|
61,024
|
–
|
61,024
|
Preferred
stock converted into common stock
|
(7,899,160)
|
(790)
|
7,899,160
|
789
|
1
|
–
|
–
|
Issuance
of preferred stock
|
400,000
|
40
|
–
|
–
|
519,560
|
–
|
519,600
|
Issuance
of preferred, common stock related to debt conversion
|
2,751,148
|
275
|
3,120,064
|
312
|
4,666,897
|
–
|
4,667,484
|
Warrants issued
in connection with debt conversion
|
–
|
–
|
–
|
–
|
499,183
|
–
|
499,183
|
Warrants
exercised
|
–
|
–
|
250,007
|
25
|
375,001
|
–
|
375,026
|
Rounding
from reverse stock split
|
–
|
–
|
6,649
|
–
|
–
|
–
|
–
|
Net
loss
|
–
|
–
|
–
|
–
|
–
|
(27,131,908)
|
(27,131,908)
|
|
|
|
|
|
|
|
|
BALANCE
- June
30, 2019
|
3,594,981
|
$359
|
17,538,071
|
$1,754
|
$113,475,205
|
$(106,389,500)
|
$7,087,818
|
See the accompanying Notes to the
Consolidated Financial Statements.
AYTU BIOSCIENCE,
INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
Net loss
|
$(27,131,908)
|
$(10,187,863)
|
Adjustments to reconcile net loss to cash used
in operating activities:
|
|
|
Depreciation, amortization and
accretion
|
2,727,067
|
2,591,270
|
Impairment of intangible assets
|
–
|
1,856,020
|
Stock-based compensation expense
|
1,022,202
|
596,934
|
Loss / (gain) from change in fair value of
contingent consideration
|
9,830,550
|
(6,277,873)
|
Warrants issuance and amendments
|
–
|
183,920
|
Issuance of common stock to
employee
|
11,690
|
–
|
Derivative income
|
(80,779)
|
(3,983,921)
|
Changes in operating assets and
liabilities:
|
|
|
(Increase) in accounts receivable
|
(1,162,005)
|
(50,743)
|
(Increase) decrease in inventory
|
(101,096)
|
(26,752)
|
(Increase) in prepaid expenses and
other
|
(517,772)
|
(129,249)
|
Increase / (decrease) in accounts payable and
other
|
134,775
|
(109,707)
|
Increase / (decrease) in accrued
liabilities
|
961,858
|
(596,654)
|
Increase in accrued compensation
|
308,824
|
200,970
|
Increase in interest payable - related
party
|
166,667
|
–
|
(Decrease) in deferred rent
|
(1,450)
|
(6,674)
|
Net
cash used
in operating
activities
|
(13,831,377)
|
(15,940,322)
|
|
|
|
Investing
Activities
|
|
|
Deposit
|
2,888
|
(2,200)
|
Purchases of fixed assets
|
(59,848)
|
(74,707)
|
Contingent consideration payment
|
(505,025)
|
(7,385)
|
Purchase
of assetsÏ
|
(500,000)
|
(400,000)
|
Net
cash used
in investing
activities
|
(1,061,985)
|
(484,292)
|
|
|
|
Financing
Activities
|
|
|
Issuance of preferred, common stock and
warrants
|
15,180,000
|
11,839,995
|
Issuance costs related to preferred, common
stock and warrants
|
(1,479,964)
|
(1,402,831)
|
Issuance of preferred, common stock and
warrants
|
–
|
12,900,020
|
Issuance costs related to preferred, common
stock and warrants
|
–
|
(1,294,235)
|
Warrant exercises
|
375,026
|
677,100
|
S-3 registered offering cost
|
–
|
(60,450)
|
Proceeds
of debt - related party
|
5,000,000
|
–
|
Net
cash
provided by
financing activities
|
19,075,062
|
22,659,599
|
|
|
|
Net change in cash, restricted cash and cash
equivalents
|
4,181,700
|
6,234,985
|
Cash,restricted cash and cash
equivalents at beginning of period
|
7,112,527
|
877,542
|
Cash,restricted cash
and cash equivalents at end of period
|
$11,294,227
|
$7,112,527
|
|
|
|
|
|
|
Supplemental disclosures of
cash and non-cash investing and financing transactions
|
|
|
Warrants issued to investors and underwriters
(see Note 13)
|
$1,888,652
|
$4,117,997
|
Warrant exercise of derivative
warrants
|
–
|
40,096
|
Contingent consideration included in accounts
payable
|
42,821
|
8,980
|
Earn-out payment to Nuelle
Shareholders
|
–
|
250,000
|
Purchase of asset included in contingent
consideration
|
–
|
293,216
|
Contingent consideration related to product
acquisition (Note 4)
|
8,833,219
|
2,553,169
|
Issuance of preferred stock related to purchase
of assets
|
519,600
|
–
|
Conversion of debt to equity
|
5,166,667
|
–
|
There was no cash paid for interest
for the years ended
See the accompanying Notes to the
Consolidated Financial Statements.
AYTU BIOSCIENCE,
INC. AND SUBSIDIARY
Notes to the
Financial Statements
1. Nature of
Business and Financial Condition
Nature of Business. Aytu BioScience,
Inc. (“Aytu”, or the “Company”, which,
unless otherwise indicated, refers to Aytu, Inc. and its
subsidiaries) was incorporated as Rosewind Corporation on
August 9, 2002 in the State of Colorado. Aytu was
re-incorporated in the state of Delaware on June 8, 2015.
Aytu is a specialty pharmaceutical
company focused on global commercialization of novel products
addressing significant medical needs such as
hypogonadism (low
testosterone), cough and upper
respiratory symptoms, insomnia, and male
infertility and plans to expand
opportunistically into other therapeutic areas.
The
Company is currently focused on commercialization of four products,
(i) Natesto®,
a testosterone replacement therapy, or TRT, (ii)
Tuzistra®
XR, a codeine–based antitussive,
(iii) ZolpiMistTM,
a short-term insomnia treatment and (iv),
MiOXSYS®,
a novel in vitro diagnostic system for male infertility
assessment. In the future the Company will look to acquire
additional commercial-stage or near-market products, including
existing products we believe can offer distinct commercial
advantages. The management team’s prior experience has
involved identifying both clinical-stage and commercial-stage
assets that can be launched or re-launched to increase value, with
a focused commercial infrastructure specializing in novel, niche
products.
Financial
Condition. The Company’s operations have historically
consumed cash and are expected to continue to require cash, but at
a declining rate. Revenues have increased 100% and 14% for each of
the years ended June 30, 2019 and 2018, respectively, and is
expected to continue to increase, allowing the Company to rely less
on its existing cash and cash equivalents, and proceeds from
financing transactions. Despite increased revenue, cash used in
operations during fiscal year 2019 was $13.8 million compared to
$16.0 million in 2018, due to the Company completing the build-out
of the Company’s commercial infrastructure in
2019.
As of the date of this Report, the
Company expects its commercial costs to remain approximately flat
or to increase modestly as the Company continues to focus on
revenue growth. The Company’s current asset position of $34.8
million plus the proceeds expected from ongoing product sales will
be used to fund operations. The Company will access the capital
markets to fund operations if and when needed, and to the extent it
becomes probable that existing cash and cash equivalents, and other
current assets may become exhausted. The timing and amount of
capital that may be raised is dependent on market conditions and
the terms and conditions upon which investors would require to
provide such capital. There is no guarantee that capital will be
available on terms that the Company considers to be favorable to
the Company and its stockholders, or at all. However, the Company
has been successful in accessing the capital markets in the past
and is confident in its ability to access the capital markets
again, if needed. Since the Company does not have sufficient cash
and cash equivalents on-hand as of June 30, 2019, to cover
potential net cash outflows for the twelve months following the
filing date of this Annual Report, ASU 2014-15, Presentation of Financial
Statements—Going Concern (Subtopic 205-40) requires
the Company to report that there exists an 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 can
adjust its operating plans to reduce the magnitude of the capital
need under its existing operating plan. Some of the adjustments
that could be made include delays of and reductions to product
support programs, reductions in headcount, narrowing the scope of
one or more of the Company’s commercialization programs, or
reductions to its research and development programs. Without
sufficient operating capital, the Company could be required to
relinquish rights to product candidates on less favorable terms
than it would otherwise choose. This may lead to impairment or
other charges, which could materially affect the Company’s
balance sheet and operating results.
The Company has incurred accumulated
net losses since inception, and at June 30, 2019, we had an
accumulated deficit of $106.4 million. Our net loss increased to
$27.1 million from $10.2 million for fiscal 2019 and 2018,
respectively. The Company used $13.8 million and $16.0 million in
cash from operations during fiscal 2019 and 2018.
Reverse Stock Split. The
Company’s common stock began trading on the Nasdaq Capital
Market on October 20, 2017. On August 13, 2018, we effected a
reverse stock split of the outstanding shares of our common stock
by a ratio of one-for-twenty (the “Reverse Stock
Split”). Unless otherwise indicated, all share amounts, per
share data, share prices, exercise prices and conversion rates set
forth herein have, where applicable, been adjusted retroactively to
reflect the Reverse Stock Split.
2. Summary of
Significant Accounting Policies
Principals of
Consolidation. These
consolidated financial statements include the accounts of Aytu and
its wholly-owned subsidiary, Aytu Women’s Health. All
material intercompany transactions and balances have been
eliminated.
Basis of Presentation.
The audited consolidated financial statements include the
operations of Aytu and its wholly-owned subsidiary, Aytu
Women’s Health, LLC. All significant inter-company balances
and transactions have been eliminated in consolidation. The
accompanying consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting
principles (“U.S. GAAP”).
Use
of Estimates. The preparation of financial statements in
accordance with Generally Accepted Accounting Principles in the
United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Significant items subject to such estimates and
assumptions include valuation allowances, stock-based compensation,
warrant valuation, purchase price allocation, valuation of
contingent consideration, sales returns and allowances, useful
lives of fixed assets, collectability of accounts receivable, and
assumptions in evaluating impairment of definite and indefinite
lived assets. Actual results could differ from these
estimates.
Cash, Cash Equivalents and Restricted
Cash. Aytu considers all highly liquid instruments purchased
with an original maturity of three months or less to be cash
equivalents. Restricted cash consist primarily of amounts held in
certificate of deposit investments to maintain certain credit
amount for Aytu's business credit cards. Aytu’s investment
policy is to preserve principal and maintain liquidity. The Company
periodically monitors its positions with, and the credit quality of
the financial institutions with which it invests. Periodically,
throughout the year, and as of June 30, 2019, Aytu has maintained
balances in excess of federally insured limits.
Accounts Receivable. Accounts
receivable are recorded at their estimated net realizable value.
Aytu evaluates collectability of accounts receivable on a quarterly
basis and records a reserve, accordingly. The Company did not
recognize a reserve as of June 30, 2019 and 2018,
respectively.
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 in order to identify obsolete,
slow-moving or otherwise unsaleable items. If unsaleable items are
observed and there are no alternate uses for the inventory, Aytu
will record a write-down to net realizable value in the period that
the impairment is first recognized. Inventory for our abandoned
products was written down during fiscal 2018. Therefore, we
currently have no reserve for slow moving inventory as of June 30, 2019 and 2018,
respectively.
Fixed Assets.
Fixed assets are recorded at cost,
less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the assets’
estimated useful lives. Leasehold improvements are amortized over
the term of the lease agreement or the service lives of the
improvements, whichever is shorter. The Company begins depreciating
assets when they placed into service. Maintenance and repairs are
expenses as incurred.
Fair Value of Financial
Instruments. The carrying amounts of financial instruments,
including cash and cash equivalents, restricted cash, accounts
receivable, and accounts payable approximate their fair value due
to their short maturities. The fair value of acquisition-related
contingent consideration is based on estimated discounted future
cash flows and assessment of the probability of occurrence of
potential future events.
Aytu accounts for liability warrants
by recording the fair value of each instrument in its entirety and
recording the fair value of the warrant derivative liability. The
fair value of the financial instruments was calculated using a
lattice valuation model. Changes in the fair value in subsequent
periods was recorded as derivative income or expense for the
warrants. The fair value of the
warrants issued to the placement agents in connection with the
registered offering were valued using the lattice valuation
methodology. Changes in the fair value in subsequent periods were
recorded to derivative income.
Revenue
Recognition. The Company generates
revenue from product sales and license sales. The Company
recognizes revenue when all of the following criteria are
satisfied: (i) identification of the promised goods or
services in the contract; (ii) determination of whether the
promised goods or services are performance obligations, including
whether they are distinct in the context of the contract;
(iii) measurement of the transaction price, including the
constraint on variable consideration; (iv) allocation of the
transaction price to the performance obligations; and
(v) recognition of revenue when, or as the Company satisfies
each performance obligation.
Product
sales consist of sales of the Company’s four products: (i)
Natesto, (ii) Tuzistra XR,
(iii) ZolpiMist, and (iv), MiOXSYS. Products are generally shipped
“free-on-board” destination. Collectibility of revenue
is reasonably assured based on historical evidence of
collectibility between the Company and its customers, or for new
customers, upon review of customer financial condition and credit
history. Revenue from product sales is recorded at the net sales
price, or “transaction price,” which includes estimates
of variable consideration that result from coupons, discounts,
chargebacks and distributor fees, processing fees, as well as
allowances for returns and government rebates. The Company
constrains revenue by giving consideration to factors that could
otherwise lead to a probable reversal of revenue. Provision
balances related to estimated amounts payable to direct customers
are netted against accounts receivable from such customers.
Balances related to indirect customers are included in accounts
payable and accrued liabilities. Where appropriate, the Company
utilizes the expected value method to determine the appropriate
amount for estimates of variable consideration based on factors
such as the Company’s historical experience and specific
known market events and trends.
License sales
consist of amounts generated from the Company’s sublicense
agreement to a third-party for certain of its patented products.
Revenue is recognized when earned, based on sales of products under
the specified sub-license agreement.
Customer
Concentrations. The following customers
contributed greater than 10% of the Company's gross
revenue during the year ended June 30, 2019 and 2018, respectively.
The customers, sometimes referred to as partners or customers, are
large wholesale distributors that resell our products to
retailers. As of June 30,
2019, four customers accounted for 87% of gross revenue.
The revenue from
these customers as a percentage of gross revenue was as
follows:
|
|
|
|
|
Customer A
|
19%
|
32%
|
Customer C
|
26%
|
30%
|
Customer B
|
20%
|
19%
|
Customer D
|
22%
|
0%
|
The loss of one
or more of the Company's significant partners or collaborators
could have a material adverse effect on its business, operating
results or financial condition.
We are also subject to credit risk
from our accounts receivable related to our product sales.
Historically, we have not experienced significant credit losses on
our accounts receivable and we do not expect to have write-offs or
adjustments to accounts receivable which would have a material
adverse effect on our financial position, liquidity or results of
operations. As of June 30, 2019, four customers accounted for 88%
of gross accounts receivable. As of June 30, 2018, four customers
accounted for 93% of gross accounts receivable.
|
|
|
|
|
Customer A
|
9%
|
27%
|
Customer B
|
20%
|
19%
|
Customer C
|
36%
|
35%
|
Customer E
|
23%
|
0%
|
Other
|
0%
|
12%
|
Estimated Sales Returns and
Allowances. Aytu records
estimated reductions in revenue for potential returns of products
by customers. As a result, the Company must make estimates of
potential future product returns and other allowances related to
current period product revenue. In making such estimates, the
Company analyzes historical returns, current economic trends and
changes in customer demand and acceptance of our products. If the
Company were to make different judgments or utilize different
estimates, material differences in the amount of the
Company’s reported revenue could result. As of June 30, 2019
and 2018, the Company accrued $99,000 and $17,000, respectively, in
our estimated returns allowance. Estimates of potential returns and
allowances are recorded each quarter for the difference between
estimates and actual results that become available.
Costs of Goods Sold.
Costs of goods sold consists primarily
of the direct costs of the Company’s products acquired from
third-party manufacturers as well as certain royalties owed on
certain of the Company’s products. Shipping and handling
costs are also included in costs of goods sold for all periods
presented.
Stock-Based Compensation. Aytu accounts
for stock-based payments by recognizing compensation expense based
upon the estimated fair value of the awards on the date of grant
over the period of service. Stock option grants are valued on the
grant date using the Black-Scholes option pricing model and
recognizes compensation costs ratably over the period of service
using the graded method. Restricted stock grants are valued based
on the estimated grant date fair value of the Company’s
common stock, and recognized ratable over the requisite service
period. Forfeitures are adjusted for as they occur.
Research and Development. Research and
development costs are expensed as incurred with expenses recorded
in the respective period.
Patents. Costs of establishing patents,
consisting of legal and filing fees paid to third parties, are
expensed as incurred. The cost of the Luoxis patents; which relates
to the RedoxSYS and MiOXSYS products; were $380,000 when they were
acquired in connection with the 2013 formation of Luoxis and are
being amortized over the remaining U.S. patent lives of
approximately 15 years, which expires in March 2028.
Impairment of Long-lived Assets. The
Company assesses impairment of its long-lived assets when events or
changes in circumstances indicates that their carrying value amount
may not be recoverable. The Company’s long-lived assets
consist of (i) fixed assets, net, (ii) licensed assets, net, and
(ii) patents, net. Circumstances which could trigger a review
include, but are not limited to: (i) significant decreases in the
market price of the asset; significant adverse changes in the
business climate or legal or regulatory factors; or expectations
that the asset will more likely than not be sold or disposed of
significantly before the end of its estimated useful
life.
The Company evaluated its long-lived
assets for impairment as of June 30, 2019 and 2018 respectively,
and there was $0 and $1.9 million of impairment
recorded.
Income Taxes. Deferred tax assets and
liabilities are recognized based on the difference between the
carrying amounts of assets and liabilities in the financial
statements and their respective tax bases. Deferred tax assets and
liabilities are measured using currently enacted tax rates in
effect in the years in which those temporary differences are
expected to reverse. Deferred tax assets should be reduced by a
valuation allowance if, based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred
tax assets will not be realized. At June 30, 2019 and 2018,
respectively, the Company had recorded a valuation allowance
against its deferred tax assets of $23.3 million $16.7 million,
respectively.
Net
Loss Per Common Share. Basic income (loss) per common share
is calculated by dividing the net income (loss) available to the
common shareholders by the weighted average number of common shares
outstanding during that period. Diluted net loss per
share reflects the potential of securities that could share in the
net loss of Aytu. Basic and diluted loss per share was the same in
2019 and 2018, they were not included in the calculation of the
diluted net loss per share because they would have been
anti-dilutive.
The following table sets-forth securities that could be potentially
dilutive, but as of the years ended June 30, 2019 and 2018 are
anti-dilutive, and therefore excluded from the calculation of
diluted earnings per share.
|
|
|
|
|
|
|
Warrants to purchase common stock - liability
classified
|
(Note 13)
|
240,755
|
240,755
|
Warrant to purchase common stock - equity
classified
|
(Note 13)
|
16,218,908
|
1,641,906
|
Employee stock options
|
(Note 12)
|
1,607
|
1,798
|
Employee unvested restricted stock
|
(Note 12)
|
2,347,754
|
38,740
|
Convertible preferred stock
|
(Note 11)
|
3,594,981
|
–
|
|
22,404,005
|
1,923,199
|
Adoption of New Accounting Pronouncements
Revenue from Contracts with
Customers (“ASU 2014-09”). In May 2014, the FASB
issued ASU 2014-09, Topic 606, Revenue from Contracts with Customers
("ASC
606"). The amendments in this ASU provide a single model for use in
accounting for revenue arising from contracts with customers and
supersedes prior revenue recognition guidance, including
industry-specific revenue guidance. The core principle of the new
ASU is that revenue should be recognized to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods and services. Disclosures about the
nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers are also required. ASC 606
and Topic 340-40 Contracts with
Customers, also require the deferral of incremental costs
of obtaining contracts with customers and subsequent amortization
of those costs of the period of anticipated
benefit.
Effective July 1, 2018, the Company adopted ASC
606 through the modified
retrospective method and did not result in a cumulative adjustment
to retained earnings or accumulated deficit as of the adoption
date. This is due to the fact that the impact of adopting the new
standard is not significant as it relates to historical revenues,
future revenues, or accounting for incremental costs of obtaining
contracts with our customers.
We adopted the
new standard through applying the following conclusions (resulting
from a thorough analysis of all contract types): (1) The new
guidance did not materially change our existing policy and practice
for identifying contracts with customers, nor did it give rise to
changes to our existing policy and practice or create new concern
surrounding the collectability of our receivables from customers,
(2) none of our contracts with customers contain multiple
performance obligations that are not fulfilled at the same time,
(3) the new guidance did not change our existing policy and
practice regarding the recording of variable consideration, and (4)
we did not identify any customer acquisition costs that are
incremental and that are expected to be recovered at a future
time.
As mentioned
above, the modified retrospective method of transition did not
result in a cumulative adjustment as of July 1, 2018. The Company
did not utilize either the (i) significant financing component
practical expedient, or the (ii) contract cost practical expedient,
as these did not apply to the Company's contracts, and there was no
impact to the financial statements. Additionally, no other line
items in the statement of operations or the balance sheet reflect
any changes due to the adoption of the new standard. Adoption of
the standards related to revenue recognition had no impact to cash
from or used in operating, financing, or investing on our
consolidated cash flows statement.
Recent Accounting Pronouncements
Fair Value Measurements (“ASU 2018-03”).
In August
2018, the FASB issued ASU 2018-13, “Fair Value Measurement
(Topic 820) Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement.” The amendments in
the standard apply to all entities that are required, under
existing GAAP, to make disclosures about recurring or nonrecurring
fair value measurements. ASU 2018-13 removes, modifies, and adds
certain disclosure requirements in ASC 820, Fair Value Measurement.
The standard is effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2019.
The amendments on
changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3
fair value measurements, and the narrative description of
measurement uncertainty should be applied prospectively for only
the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
Early adoption is permitted upon issuance of ASU 2018-13. An entity
is permitted to early adopt any removed or modified disclosures
upon issuance of ASU 2018-13 and delay adoption of the additional
disclosures until their effective date. The Company is currently
assessing the impact that ASU 2018-13 will have on its financial
statements.
Financial
Instruments – Credit Losses (“ASU
2016-03”). 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 is effective for interim and annual
reporting periods beginning after December 15, 2019. Early adoption
is permitted for interim and annual reporting periods beginning
after December 15, 2018. The Company is currently assessing the
impact that ASU 2016-13 will have on its consolidated financial
statements but does not anticipate there to be a material
impact.
Leases
(“ASU 2016-02”). In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2016-02
– Topic 842 Leases.
ASU 2016-02 requires that most leases
be recognized on the financial statements, specifically the
recognition of right-to-use assets and related lease liabilities,
and enhanced disclosures about leasing arrangements. The objective
is to provide improved transparency and comparability among
organizations. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those
fiscal years. The standard requires using the modified
retrospective transition method and apply ASU 2016-02 either at (i)
latter of the earliest comparative period presented in the
financial statements or commencement date of the lease, or (ii) the
beginning of the period of adoption. The Company has elected to
apply the standard at the beginning period of adoption, July 1,
2019 with a cumulative adjustment to retained earnings, if any, as
opposed to retrospectively adjusting prior periods presented in the
financial statements.
Future minimum
lease obligations for leases accounted for as operating leases at
June 30, 2019 totaled approximately $0.3 million. While the Company
has not yet completed its evaluation, it anticipates that the
adoption of ASU 2016-02 will require the Company to recognize
approximately $0.4 - $0.5 million of right-to-use assets and
related lease liabilities related to the Company’s corporate
office leases. The Company has not yet completed its determination
whether leases qualify as (i) operating or (ii) financing under the
new standard. The Company has elected to apply the short-term scope
exception for leases with terms of 12 months or less at the
inception of the lease, and will continue to recognize rent expense
on a straight-line basis. The impact from electing this scope
exception is expected to be less than $0.1 million.
3. Revenues from
Contracts with Customers
The Company
sells its products principally to a limited number of wholesale
distributors and pharmacies in the United States, which account for
the largest portion of our total revenue. International sales are
made primarily to specialty distributors, as well as hospitals,
laboratories, and clinics, some of which are government owned or
supported (collectively, its “Customers”). The
Company’s Customers in the United States subsequently resell
the products to patients and pharmacies. Revenue from product sales
is recorded at the net sales price, or “transaction
price,” which includes estimates of variable consideration
that result from coupons, discounts, chargebacks and distributor
fees, processing fees, as well as allowances for returns and
government rebates.
In accordance
with ASC 606, the Company recognizes net revenues from product
sales when the Customer obtains control of the Company’s
product, which typically occurs upon delivery to the Customer. The
Company’s payment terms are between 30 to 60 days in the
United States and consistent with prevailing practice in
international markets.
Revenues by Geographic
location. The following table
reflects our product revenues by geographic location as determined
by the billing address of our customers:
|
|
|
|
|
U.S.
|
$6,462,000
|
$3,213,000
|
International
|
858,000
|
447,000
|
Total
net revenue
|
$7,320,000
|
$3,660,000
|
4. Product Licenses
The Company currently licenses three
of its existing product offerings from third parties: (i) Natesto;
(ii) ZolpiMist, and (ii) Tuzistra XR. Each of these license
agreements are subject to terms and conditions specific to each
agreement. The Company capitalized the acquisition cost of each
license, which included a combination of both upfront
considerations, as well as the estimated future contingent
consideration estimated at the acquisition date.
License
and Supply Agreement—Natesto.
In April 2016,
Aytu entered into a license and supply agreement to acquire the
exclusive U.S. rights to commercialize Natesto (testosterone) nasal
gel from Acerus Pharmaceuticals Corporation, or Acerus. We acquired
the rights effective upon the expiration of the former
licensee’s rights, which occurred on June 30, 2016. The term
of the license runs for the greater of eight years or until the
expiry of the latest to expire patent, including claims covering
Natesto or until the entry on the market of at least one AB-rated
generic product.
In addition to
the previously disclosed upfront payments made to Acerus, we agreed
to make one-time, non-refundable milestone payments to Acerus
within 45 days of the occurrence of certain agreed upon milestones.
The maximum aggregate amount payable under such milestone payments
is $37.5 million.
The fair value
of the net identifiable Natesto asset acquired was determined to be
$10.5 million, which is being amortized over eight years. The
aggregate amortization expense for fiscal 2019 and fiscal 2018 was
$1.3 million, respectively.
The estimated
future amortization of Natesto after June 30, 2019 is as
follows:
|
|
2020
|
$1,319,000
|
2021
|
1,319,000
|
2022
|
1,319,000
|
2023
|
1,319,000
|
2024
|
1,318,000
|
|
$6,594,000
|
The contingent
consideration was initially valued at $3.2 million using a Monte
Carlo simulation, as of June 30, 2016. As of June 30, 2019, the
contingent consideration was revalued at $5.1 million using the
same Monte Carlo simulation methodology. The contingent
consideration accretion expense for fiscal 2019 and fiscal 2018 was
$0.07 million, and $0.7 million respectively. As of June 30, 2019,
no milestone payments have been made.
License
and Supply Agreement—ZolpiMist
In June 2018,
Aytu signed an exclusive license agreement for ZolpiMist™
(zolpidem tartrate oral spray) from Magna Pharmaceuticals, Inc.,
(“Magna”). This agreement allows for Aytu’s
exclusive commercialization of ZolpiMist in the U.S. and
Canada.
Aytu made an
upfront payment of $0.4 million to Magna upon execution of the
agreement. In July 2018, we paid an additional $0.3 million of
which, $297,000 was included in current contingent consideration at
June 30, 2018. We also agreed to make certain royalty payments to
Magna which will be calculated as a percentage of ZolpiMist net
sales and are payable within 45 days of the end of the quarter
during which the applicable net sales occur.
The
ZolpiMist license agreement was valued at $3.2 million and will be
amortized over the life of the license agreement up to seven years.
The amortization expense for fiscal 2019 and fiscal 2018 was $0.5
million and $0.04 million, respectively.
The estimated future amortization of ZolpiMist
after June 30, 2019 is as follows:
|
|
2020
|
$464,000
|
2021
|
464,000
|
2022
|
464,000
|
2023
|
464,000
|
2024
|
464,000
|
Thereafter
|
424,000
|
|
$2,744,000
|
The contingent consideration,
related to these royalty payments, was valued at $2.6 million using
a Monte Carlo simulation, as of June 11, 2018. As of June 30, 2019, the contingent consideration
was revalued at $2.3 million (Note 9). The contingent
consideration accretion expense for fiscal 2019 and 2018 was $0.3
million and $0.02 million, respectively.
License, Development,
Manufacturing and Supply Agreement—Tuzistra
XR
On November 2,
2018, the Company entered into a License, Development,
Manufacturing and Supply Agreement (the “Tris License
Agreement”) with TRIS Pharma, Inc. (“TRIS”).
Pursuant to the Tris License Agreement, TRIS granted the Company an
exclusive license in the United States to commercialize Tuzistra
XR. In addition, TRIS granted the Company an exclusive license in
the United States to commercialize a complementary antitussive
referred to as “CCP-08” (together with Tuzistra XR, the
“Products”) for which marketing approval has been
sought by TRIS under a New Drug Application filed with the Food and
Drug Administration (“FDA”). As consideration for the
Products license, the Company: (i) made an upfront cash payment to
TRIS; (ii) issued shares of Series D Convertible preferred stock to
TRIS; and (iii) will pay certain royalties to TRIS throughout the
license term in accordance with the Tris License
Agreement.
The Tris
License Agreement was valued at $9.9 million and will be amortized
over the life of the Tris License Agreement up to twenty years. The
amortization expense for fiscal 2019 and 2018 was $0.3 million and
$0, respectively. The estimated future amortization of Tuzistra
after June 30, 2019 is as follows:
|
|
2020
|
$493,000
|
2021
|
493,000
|
2022
|
493,000
|
2023
|
493,000
|
2024
|
493,000
|
Thereafter
|
7,059,000
|
|
$9,524,000
|
We also agreed to make
certain quarterly royalty payments to TRIS which will be calculated
as a percentage of our Tuzistra XR net sales, payable within 45
days of the end of the applicable quarter.
As of November
2, 2018, the contingent consideration, related to this asset, was
valued at $8.8 million using a Monte Carlo simulation. As of June
30, 2019, the contingent consideration was revalued at $16.0
million. The contingent consideration accretion expense for fiscal
2019 and 2018 was $0.2 million, and $0, respectively (Note
9).
5. Inventories
Inventory balances consist of the following:
|
|
|
|
|
Raw materials
|
$117,000
|
$239,000
|
Finished goods
|
1,323,000
|
1,100,000
|
|
$1,440,000
|
$1,339,000
|
There was no work-in-process inventory as of June 30, 2019 or 2018,
respectively.
6. Fixed
Assets
Fixed assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Manufacturing equipment
|
2 - 5
|
$83,000
|
$213,000
|
Leasehold improvements
|
3
|
112,000
|
112,000
|
Office equipment, furniture and
other
|
2 - 5
|
315,000
|
344,000
|
Lab equipment
|
3 - 5
|
90,000
|
90,000
|
Less accumulated depreciation and
amortization
|
|
(396,000)
|
(540,000)
|
|
|
|
|
Fixed assets, net
|
|
$204,000
|
$219,000
|
During the year ended June 30, 2019,
the Company derecognized the fully impaired fixed assets related to
the Fiera product line, which was discontinued during the year
ended June 30, 2018.
Aytu recorded depreciation and
amortization expense of $0.1 million and $0.3 million for the years
ended June 30, 2019 and 2018, respectively.
7.
Patents
Aytu
recorded the amortization expense totaling $0.03 and $0.03 million
for the years ended June 30, 2019 and 2018,
respectively.
Patents consist
of the following:
|
|
|
|
|
|
|
|
Patents
|
$380,000
|
$380,000
|
Less accumulated amortization
|
(159,000)
|
(134,000)
|
Patents,
net
|
$221,000
|
$246,000
|
Future amortization from the year
ended June 30, 2019 is as follows:
Fiscal
Year
|
|
2020
|
$25,000
|
2021
|
25,000
|
2022
|
25,000
|
2023
|
25,000
|
2024
|
25,000
|
Thereafter
|
96,000
|
|
$221,000
|
8. Accrued
liabilities
Accrued
liabilities consist of the following:
|
|
|
|
|
Accrued accounting fee
|
$85,000
|
$71,000
|
Accrued legal-related fees
|
−
|
26,000
|
Accrued program liabilities
|
736,000
|
−
|
Accrued product-related fees
|
295,000
|
−
|
Customer overpayment
|
−
|
43,000
|
Other
accrued liabilities*
|
32,000
|
46,000
|
Total
accrued liabilities
|
$1,148,000
|
$186,000
|
* Other accrued liabilities consist
of employee relocation expense, samples and consultants, none of
which individually represent greater than five percent of total
current liabilities.
9. Fair Value
Considerations
Authoritative guidance defines fair
value as the price that would be received to sell an asset or paid
to transfer a liability (an exit price) in an orderly transaction
between market participants at the measurement date. The guidance
establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use
of unobservable inputs by requiring that the most observable inputs
be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability developed
based on market data obtained from sources independent of Aytu.
Unobservable inputs are inputs that reflect Aytu’s
assumptions of what market participants would use in pricing the
asset or liability developed based on the best information
available in the circumstances. The hierarchy is broken down into
three levels based on reliability of the inputs as
follows:
|
|
Level 1:
|
Inputs that reflect unadjusted
quoted prices in active markets that are accessible to Aytu for
identical assets or liabilities;
|
|
|
Level 2:
|
Inputs include quoted prices for
similar assets and liabilities in active or inactive markets or
that are observable for the asset or liability either directly or
indirectly; and
|
|
|
Level 3:
|
Unobservable inputs that are
supported by little or no market activity.
|
Aytu’s assets and liabilities
which are measured at fair value on a recurring basis are
classified in their entirety based on the lowest level of input
that is significant to their fair value measurement. Aytu’s
policy is to recognize transfers in and/or out of fair value
hierarchy as of the date in which the event or change in
circumstances caused the transfer. Aytu has consistently applied
the valuation techniques discussed below in all periods
presented.
The following table presents
Aytu’s financial liabilities that were accounted for at fair
value on a recurring basis as of June 30, 2019 and 2018, by level
within the fair value hierarchy:
|
|
Fair Value Measurements
at June 30, 2019
|
|
Fair Value at June 30,
2019
|
Quoted Priced in Active
Markets for Identical Assets (Level 1)
|
Significant Other
Observable Inputs(Level 2)
|
Significant Unobservable
Inputs(Level 3)
|
Recurring:
|
|
|
|
|
Warrant
derivative liability
|
$13,000
|
$–
|
$–
|
$13,000
|
Contingent
consideration
|
23,326,000
|
–
|
–
|
23,326,000
|
|
$23,339,000
|
$–
|
$–
|
$23,339,000
|
|
|
Fair Value Measurements
at June 30, 2018
|
|
Fair Value at June 30,
2018
|
Quoted Priced in Active
Markets for Identical Assets (Level 1)
|
Significant Other
Observable Inputs(Level 2)
|
Significant Unobservable
Inputs(Level 3)
|
Recurring:
|
|
|
|
|
Warrant
derivative liability
|
$94,000
|
$–
|
$–
|
$94,000
|
Contingent
consideration
|
4,694,000
|
–
|
–
|
4,694,000
|
|
$4,788,000
|
$–
|
$–
|
$4,788,000
|
Warrant Derivative Liability. The
warrant derivative liability was valued using the lattice valuation
methodology because that model embodies the relevant assumptions
that address the features underlying these instruments. The
warrants related to the warrant derivative liability are not
actively traded and are, therefore, classified as Level 3
liabilities. Significant assumptions in valuing the warrant
derivative liability, based on estimates of the value of Aytu
common stock and various factors regarding the warrants, were as
follows as of issuance and as of June 30, 2019:
|
|
|
|
Warrant Derivative Liability
|
|
|
|
Volatility
|
163.2%
|
173.4%
|
188.0%
|
Equivalent term (years)
|
3.13
|
4.13
|
5.00
|
Risk-free interest rate
|
1.71%
|
2.69%
|
1.83%
|
Dividend yield
|
0.00%
|
0.00%
|
0.00%
|
The following table sets forth a
reconciliation of changes in the warrant derivative liability for
the period ended June 30, 2019:
|
Liability Classified
Warrants
|
|
|
Balance as of June 30, 2017
|
$–
|
Warrant
issuances
|
4,118,000
|
Warrant
exercises
|
(40,000)
|
Change in fair value
included in earnings
|
(3,984,000)
|
Balance as of June 30, 2018
|
$94,000
|
Change in fair value
included in earnings
|
(81,000)
|
Balance as of June 30, 2019
|
$13,000
|
Contingent Consideration. We classify
our contingent consideration liability in connection with the
acquisition of Natesto, ZolpiMist, and Tuzistra XR within Level 3
as factors used to develop the estimated fair value are
unobservable inputs that are not supported by market activity. We
estimate the fair value of our contingent consideration liability
based on contractual payment obligations, discount rates,
probabilities of payment, and expected future performance.
Contingent payment amounts are discounted back to the current
period using a discounted cash flow methodology. The following
table sets forth a summary of changes in the contingent
consideration for the period ended June 30, 2019:
|
|
|
|
Balance as of June 30, 2016
|
$3,869,000
|
Increase due to
purchase of assets
|
1,927,000
|
Increase due to
accretion
|
306,000
|
Increase due to
remeasurement
|
2,256,000
|
Decrease due to
impairment
|
(710,000)
|
Balance as of June 30, 2017
|
$7,648,000
|
Increase due to
purchase of assets
|
2,846,000
|
Increase due to
accretion
|
801,000
|
Decrease due to
contractual payment
|
(266,000)
|
Decrease due to
remeasurement
|
(6,335,000)
|
Balance as of June 30, 2018
|
$4,694,000
|
Increase due to
purchase of assets
|
8,833,000
|
Increase due to
accretion
|
516,000
|
Decrease due to
contractual payment
|
(548,000)
|
Increase due to
remeasurement
|
9,831,000
|
Balance as of June 30, 2019
|
$23,326,000
|
The contingent consideration was valued using
the Monte-Carlo valuation methodology because that model embodies
all of the relevant assumptions that address the features
underlying these instruments. Contingent consideration is not
actively traded and therefore classified as Level
3.
Significant assumptions in valuing the
contingent consideration were as follows as of June 30, 2019 and as
of June 30, 2018:
|
|
|
Natesto
|
|
|
Relevered
Beta
|
0.83
|
0.99
|
Maket risk
premium
|
5.50%
|
5.50%
|
Risk-free interest
rate
|
3.50%
|
4.00%
|
Discount
|
10.20%
|
10.40%
|
|
|
|
ZolpiMist
|
|
|
Relevered
Beta
|
1.16
|
1.07
|
Maket risk
premium
|
5.50%
|
5.00%
|
Risk-free interest
rate
|
3.50%
|
3.50%
|
Discount
|
10.20%
|
10.40%
|
|
|
|
Tuzistra
XR
|
|
|
Relevered
Beta
|
1.19
|
1.49
|
Maket risk
premium
|
5.50%
|
5.00%
|
Risk-free interest
rate
|
3.50%
|
3.50%
|
Discount
|
20.20%
|
20.40%
|
10. Income
Taxes
Income tax benefit resulting from
applying statutory rates in jurisdictions in which Aytu is taxed
(Federal and various states) differs from the income tax provision
(benefit) in the Aytu financial statements. The following table
reflects the reconciliation for the respective
periods.
|
|
|
|
|
Benefit
at statutory rate
|
$(5,698,000)
|
-21.00%
|
$(2,807,000)
|
-12.47%
|
State
income taxes, net of federal benefit
|
(1,077,000)
|
-3.97%
|
(585,000)
|
-2.60%
|
Stock
based compensation
|
3,000
|
0.01%
|
22,000
|
0.10%
|
Contingent
consideration
|
–
|
0.00%
|
(465,000)
|
-2.07%
|
Change
in tax rate
|
12,000
|
0.04%
|
(31,000)
|
-0.14%
|
Remeasurement
of deferred taxes
|
–
|
0.00%
|
6,648,000
|
29.54%
|
Effect
of phased-in tax rate
|
–
|
0.00%
|
891,000
|
3.96%
|
Change
in valuation allowance
|
6,584,000
|
24.27%
|
(2,745,000)
|
-12.20%
|
Derivative
income
|
(16,000)
|
-0.06%
|
(1,029,000)
|
-4.57%
|
Other
|
192,000
|
0.72%
|
101,000
|
0.45%
|
Net income
tax provision (benefit)
|
$–
|
0.00%
|
$–
|
0.00%
|
Deferred income taxes arise from
temporary differences in the recognition of certain items for
income tax and financial reporting purposes. The approximate tax
effects of significant temporary differences which comprise the
deferred tax assets and liabilities are as follows for the
respective periods:
|
|
|
|
|
Deferred
tax assets (liabilities):
|
|
|
Accrued
expenses
|
$234,000
|
$136,000
|
Net
operating loss carry forward
|
18,085,000
|
14,458,000
|
Intangibles
|
3,377,000
|
651,000
|
Share-based
compensation
|
1,210,000
|
1,044,000
|
Fixed
assets
|
86,000
|
139,000
|
Capital
loss carry forward
|
203,000
|
204,000
|
Contribution
carry forward
|
31,000
|
29,000
|
Warrant
liability
|
51,000
|
53,000
|
Inventory
|
25,000
|
4,000
|
|
|
|
Total
deferred income tax assets
|
23,302,000
|
16,718,000
|
Less: Valuation
allowance
|
(23,302,000)
|
(16,718,000)
|
Net deferred income
tax assets
|
$–
|
$–
|
In assessing the realizability of
deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, carry back
opportunities and tax planning strategies in making the assessment.
A significant piece of objective negative evidence evaluated was
the cumulative loss incurred since inception. Such objective
evidence limits the ability to consider other subjective evidence
such as the Company’s projection for future growth. On the
basis of this evaluation the company has recorded a full valuation
allowance on its deferred tax assets.
The Company has federal net
operating losses of approximately $73.9 million and $59.3 million
as of June 30, 2019 and June 30, 2018, respectively that, subject
to limitation, may be available in future tax years to offset
taxable income. Of the available federal net operating losses,
approximately $31.4 million can be carried forward indefinitely
while the balance will begin to expire in 2031. The Company has
state net operating losses of approximately $63.9 million and $50.3
million as of June 30, 2019 and June 30, 2018, respectively that,
subject to limitation, may be available in future tax years to
offset taxable income. The available state net operating losses, if
not utilized to offset taxable income in future periods, will begin
to expire in 2025 through 2038. Under the provisions of the
Internal Revenue Code, substantial changes in the Company's
ownership may result in limitations on the amount of NOL
carryforwards that can be utilized in future years. Net operating
loss carryforwards are subject to examination in the year they are
utilized regardless of whether the tax year in which they are
generated has been closed by statute. The amount subject to
disallowance is limited to the NOL utilized. Accordingly, the
Company may be subject to examination for prior NOLs generated as
such NOLs are utilized.
As of June 30, 2019 and 2018, the
Company has no liability for gross unrecognized tax benefits or
related interest and penalties. Aytu has made its best estimates of
certain income tax amounts included in the financial statements.
Application of the Company’s accounting policies and
estimates, however, involves the exercise of judgement and use of
assumptions as to future uncertainties and, as a result, could
differ from these estimates. In arriving at its estimates, factors
the Company considers include how accurate the estimates or
assumptions have been in the past, how much the estimates or
assumptions have changed and how reasonably likely such changes may
have a material impact. Aytu has been historically included in the
Ampio consolidated tax return. Under the general statute of
limitations, the Company would not be subject to federal or
Colorado income tax examinations for tax years prior to 2015 and
2014, respectively. However, given the net operating losses
generated since inception, all tax years since inception are
subject to examination
11. Capital
Structure
At June 30,
2019 and June 30, 2018, Aytu had 17,538,071 and 1,794,762 shares of
common stock outstanding, respectively, and 3,594,981 and 0 shares
of preferred stock outstanding, respectively. The Company has
100 million shares of common stock authorized with a par value
of $0.0001 per share.
The Company has
50 million shares of non-voting, non-cumulative preferred
stock authorized with a par value of $0.0001 per share, of which,
293,833 are designated as Series C Convertible preferred stock,
400,000 are designated as Series D Convertible preferred stock, and
2,751,148 are designated as Series E Convertible preferred stock as
of June 30, 2019. Liquidation rights for all series of preferred
stock are on an as-converted basis.
Included in the
common stock outstanding are 2,551,024 shares of restricted stock
issued to executives, directors, employees and
consultants.
Year Ended June 30, 2019
On October 9,
2018, we completed an underwritten public offering for, total gross
proceeds of $15.2 million which includes the full exercise of the
underwriters’ over-allotment option to purchase additional
shares and warrants, before deducting underwriting discounts,
commissions and other offering expenses payable by the
Company.
The securities
offered by the Company consisted of: (i) an aggregate of 457,007
shares of its common stock; (ii) an aggregate of 8,342,993 shares
of its Series C Convertible preferred stock convertible into an
aggregate of 8,342,993 shares of common stock at a conversion price
of $1.50 per share; and (iii) warrants to purchase an aggregate of
8,800,000 shares of common stock at an exercise price of $1.50 per
share. The securities were issued at a public offering purchase
price of $1.50 per fixed unit consisting of: (a) one share of
common stock and one warrant; or (b) one share of Series C
preferred stock and one warrant. The common stock issued had a
relative fair value of $533,000 in the aggregate and a fair value
of $594,000 in the aggregate. The Series C preferred stock issued
had a relative fair value of $9.7 million in the aggregate and a
fair value of $10.8 million in the aggregate. The warrants are
exercisable upon issuance and will expire five years from the date
of issuance. The warrants have a relative fair value of $1.6
million in the aggregate, a fair value of $1.8 million in the
aggregate, and generated gross proceeds of $88,000. The conversion
price of the Series C preferred stock in the offering as well as
the exercise price of the warrants are fixed and do not contain any
variable pricing features, or any price based anti-dilution
features.
In connection
with this offering, the underwriters exercised their over-allotment
option in full, purchasing an additional 1,320,000 shares of common
stock and 1,320,000 warrants. The common stock issued had a
relative fair value of $1.5 million and a fair value of $1.7
million. The warrants have the same terms as the Warrants sold in
the registered offering. These warrants have a relative fair value
of $238,000, a fair value of $265,000, and gross proceeds of
$13,000, which was the purchase price per the underwriting
agreement.
In October
2018, Aytu issued 9,000 shares of common stock to a former employee
at a fair value of $12,000.
On November 2,
2018, the Company issued 400,000 shares of Series D Convertible
preferred stock as consideration for a purchased asset valued at
$520,000.
On April 18,
2019, pursuant to the exchange agreement between Aytu and
Armistice, which was approved by the stockholders of the Company on
April 12, 2019, Aytu exchanged the Armistice Note into: (1)
3,120,064 shares of common stock of the Company, (2) 2,751,148
shares of Series E Convertible preferred stock of the Company, and
(3) a Common Stock Purchase Warrant exercisable for 4,403,409
shares of common stock of the Company.The aggregate fair value of
shares issued was approximately $4.7 million.
As of June 30,
2019, warrants issued from the October registered offering to
purchase an aggregate of 250,007 shares of common stock were
exercised for aggregate gross proceeds to our Company of
approximately $375,000.
As of June 30,
2019, investors holding shares of Series C preferred stock
exercised their right to convert 7,899,160 shares of Series C
preferred stock into 7,899,160 shares of common stock. As of June
30, 2019, Aytu has 443,833 shares of Series C preferred stock
outstanding.
Year Ended June 30, 2018
In February
2018, investors holding Aytu Series A Preferred shares exercised
their right to convert 95 Aytu Series A Preferred shares into
31,667 shares of Aytu common stock.
On March 6,
2018, Aytu completed an underwritten public offering for total
gross proceeds of $12 million, before deducting cash offering costs
inclusive of underwriting discounts, commissions and other offering
expenses totaling $1.2 million.
The securities
sold by the Company consist of (i) Class A Units consisting of an
aggregate of 976,000 shares of our common stock and warrants to
purchase an aggregate of 976,000 shares of common stock, at a
public offering price of $9.00 per Class A Unit, and (ii) Class B
Units consisting of 161 shares of our Series B Preferred Stock,
with a stated value of $20,000 per share, and convertible into an
aggregate of 357,356 shares of common stock, and warrants to
purchase an aggregate of 357,356 shares of common stock, at a
public offering price of $20,000 per Class B Unit. The warrants
have an exercise price of $10.80, are exercisable upon issuance and
will expire five years from the date of issuance. The Company
granted the underwriters a 45-day option to purchase an additional
200,000 shares of common stock and/or warrants to purchase an
additional 200,000 shares of common stock. In connection with the
closing of this offering, the underwriters partially exercised
their over-allotment option and purchased an additional 200,000
warrants. On March 26, 2018, the underwriters exercised their
over-allotment option to purchase an additional 100,000 shares of
common stock, resulting in gross proceeds of approximately
$900,000, before deducting costs of $63,000.
In March 2018,
investors holding Aytu Series B Preferred shares exercised their
right to convert 161 Aytu Series B Preferred shares into 357,356
shares of Aytu common stock.
During the year
ended June 30, 2018, warrants issued from the March 2018 registered
offerings to purchase an aggregate of 80,750 shares of common stock
were exercised for aggregate gross proceeds to the Company of
approximately $677,000.
12. Equity
Incentive Plan
2015 Stock Option and Incentive Plan.
On June 1, 2015, Aytu’s stockholders approved the 2015
Stock Option and Incentive Plan (the “2015 Plan”),
which, as amended in July 2017, provides for the award of stock
options, stock appreciation rights, restricted stock and other
equity awards for up to an aggregate of 3.0 million shares of
common stock. The shares of common stock underlying any awards that
are forfeited, canceled, reacquired by Aytu prior to vesting,
satisfied without any issuance of stock, expire or are otherwise
terminated (other than by exercise) under the 2015 Plan will be
added back to the shares of common stock available for issuance
under the 2015 Plan. As of June 30, 2019, we have 652,179 shares
that are available for grant under the 2015 Plan.
Stock
Options
Employee Stock Options: There were no
grants of stock options to employees during the years ended June
30, 2019 and 2018, respectively, therefore, no assumptions are used
for fiscal 2019.
Non-Employee Stock Options:
During the year ended June 30, 2019,
the Company issued 75,000 performance-based stock options out of
the 2015 Plan to a consultant. These options vest based on meeting
certain market criteria with an exercise price of $1.00. At June
30, 2019, the first of three market targets were not achieved, and
all 75,000 performance stock options were
forfeited.
Market options
that require specific events before they begin to vest are valued
at grant date. The fair value of the options granted has been
calculated using a Monte Carlo simulation. The significant
assumptions at issuance in valuing the non-employee performance
stock options were as follows:
|
|
|
|
Expected volatility
|
164.0%
|
Expected term (years)
|
5.00
|
Risk-free interest rate
|
2.99%
|
Dividend yield
|
0.00%
|
Stock option activity is as
follows:
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life in Years
|
Outstanding June 30, 2017
|
1,947
|
$326.20
|
8.40
|
Granted
|
–
|
–
|
|
Exercised
|
–
|
–
|
|
Forfeited/Cancelled
|
(149)
|
328.00
|
|
Outstanding June 30, 2018
|
1,798
|
325.97
|
6.95
|
Granted
|
75,000
|
1.00
|
|
Exercised
|
–
|
–
|
|
Forfeited/Cancelled
|
(75,036)
|
1.16
|
|
Expired
|
(155)
|
328.00
|
|
Outstanding June 30, 2019
|
1,607
|
325.73
|
6.13
|
Exercisable at June 30, 2019
|
1,471
|
$325.52
|
6.07
|
The following table details the
options outstanding at June 30, 2019 by range of exercise
prices:
|
Number of Options
Outstanding
|
Weighted Average Exercise
Price
|
Weighted Average Remaining
Contractual Life of Options Outstanding
|
Number of Options
Exercisable
|
Weighted Average Exercise
Price
|
$280.00
|
76
|
$280.00
|
7.85
|
76
|
$280.00
|
328.00
|
1,531
|
328.00
|
6.05
|
1,395
|
328.00
|
|
1,607
|
$325.73
|
6.13
|
1,471
|
$325.52
|
As of June
30, 2019, there was $7,000 of total unrecognized stock-based
compensation expense related to employee non-vested stock options.
The Company expects to recognize this expense over a
weighted-average period of 0.32 years. There was no
unrecognized stock-based compensation expense related to
non-employee performance options, as these were fully forfeited at
June 30, 2019.
Restricted
Stock
Restricted stock activity is as
follows:
|
|
Weighted Average Grant
Date Fair Value
|
Weighted Average
Remaining Contractual Life in Years
|
|
|
|
|
Unvested at June 30, 2017
|
–
|
$–
|
–
|
Granted
|
39,150
|
39.80
|
|
Vested
|
–
|
40.40
|
|
Forfeited
|
(1,950)
|
40.40
|
|
|
|
|
|
Unvested at June 30, 2018
|
37,200
|
$39.80
|
9.4
|
Granted
|
2,772,022
|
1.30
|
|
Vested
|
–
|
–
|
|
Forfeited
|
(463,008)
|
1.23
|
|
Unvested at June 30, 2019
|
2,346,214
|
$1.83
|
9.1
|
Activity
During the Year Ended June 30, 2019
●
In October 2018, the
Company issued 2,707,022 shares of restricted stock to executives,
directors, employees pursuant to the 2015 Plan, which vest in
October 2028.
●
In February 2019, The
Company issued 65,000 shares of restricted stock to a director
pursuant to the 2015 Plan, which vest in February
2029.
●
372,408 shares of
restricted stock were exchanged with common stock, and the Company
recognized an increase in aggregate stock compensation expense of
$371,000
●
90,600 shares of restricted
stock were forfeited due to employee turnover.
Activity
during Year Ended June 30, 2018
●
In September 2017, The Company issued 10,000
shares of restricted stock to employees pursuant to the 2015 Plan,
which vest in September 2027.
●
November 2017, the Company issued 24,750 shares
of restricted stock to executives, directors and consultants
pursuant to the 2015 Plan, which vest in November
2027.
●
In January 2018, The Company issued 3,750 shares
of restricted stock to an officer pursuant to the 2015 Plan, which
vest in January 2028.
●
In March 2018, The Company issued 650 shares of
restricted stock to employees pursuant to the 2015 Plan, which vest
in March 2028.
●
1,150 shares of restricted stock were
exchanged with common stock
due to employee turnover, , and the Company recognized an increase
in aggregate stock compensation expense of $14,000.
●
800 shares of restricted stock were forfeited
due to employee turnover.
Under the 2015
Plan, there was $3,874,000 of total unrecognized stock-based
compensation expense related to the non-vested restricted stock as
of June 30, 2019. The Company expects to recognize this expense
over a weighted-average period of 9.07 years.
The Company
previously issued 1,540 shares of restricted stock outside the
Company’s 2015 Plan, which vest in July 2026. The
unrecognized expense related to these shares was $1,397,000 as of
June 30, 2019 and is expected to be recognized over the weighted
average period of 7.03 years.
Stock-based compensation expense
related to the fair value of stock options and restricted stock was
included in the statements of operations as selling, general and
administrative expenses as set forth in the table below. Aytu
determined the fair value of stock compensation as of the date of
grant using the Black-Scholes option pricing model and expenses the
fair value ratably over the service period which is commensurate
with vesting period. The following table summarizes stock-based
compensation expense for the stock option and restricted stock
issuances for fiscal 2019 and 2018:
Selling,
general and administrative:
|
|
|
Stock options
|
$125,000
|
$349,000
|
Restricted stock
|
897,000
|
248,000
|
Total stock-based compensation
expense
|
$1,022,000
|
$597,000
|
13. Warrants
A summary of the Company’s
warrant activity is as follows:
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life in Years
|
Outstanding June 30, 2017
|
14,342
|
$1,005.80
|
4.23
|
Warrants issued in connection with the August
2017 private offering
|
296,006
|
72.00
|
|
Warrants issued to underwriters in connection
with the August 2017 private offering
|
19,749
|
72.00
|
|
Warrants issued in connection with the March
2018 public offering
|
1,533,356
|
10.80
|
|
Warrants issued to investor
|
100,000
|
10.80
|
|
Warrants expired
|
(42)
|
21,744.00
|
|
Warrants
exercised
|
(80,750)
|
8.20
|
|
Outstanding June 30, 2018
|
1,882,661
|
$25.94
|
4.61
|
Warrants issued in connection with the October
2018 public offering
|
10,120,000
|
1.50
|
|
Warrants issued to underwriters in connection
with the October 2019 public offering
|
303,600
|
1.50
|
|
Warrants issued in connection with the Armistice
debt exchange
|
4,403,409
|
1.00
|
|
Warrants
exercised
|
(250,007)
|
1.50
|
|
Outstanding June 30, 2019
|
16,459,663
|
$4.16
|
4.34
|
In connection with the
Company’s August 2017 private offering, the Company issued
warrants to purchase an aggregate of 315,755 shares of common stock
at an exercise price of $72.00 and a term of five years to
investors and underwriters. The remaining outstanding warrants from
that offering are accounted for using derivative liability
treatment (see Note 9).
In connection
with our March 2018 public offering, we issued to investors
and underwriters warrants to purchase an aggregate of 1,533,356
shares of common stock at an exercise price of $10.80 with a
term of five years from March 6, 2018. These warrants are accounted
for under equity treatment. Of the 1,533,356 warrants issued in the
March 2018 public offering, 5,750 were exercised in during the year
ended June 30, 2018.
In March 2018, Aytu BioScience, Inc.
entered into a warrant exercise agreement with an investor of the
Company’s outstanding warrants. Pursuant to the exercise
agreement, the Company agreed to reduce the exercise price of the
investor’s warrant to purchase 75,000 shares of the
Company’s common stock from $72.00 to one cent less than the
closing price on the last trading day prior to the exercise date;
provided that the investor exercised the warrant for cash by March
23, 2018, and the Company also agreed to issue the investor a new
warrant to purchase 100,000 shares of the Company’s common
stock at an exercise price of $10.80 per share. In accordance with
the exercise agreement, the investor exercised the warrant and the
Company received net proceeds of $615,000. The new warrant to
purchase 100,000 shares of the Company’s common stock are
accounted for under equity treatment and have a fair value of
$179,000.
In May 2018, the warrants the
Company issued to the placement agent, in connection with the
Company’s private placement in 2013, expired. The 42 placement agent warrants have a term of
five years from the date of issuance and an exercise price of
$21,744.00.
In connection
with the Company’s October 2018 registered offering, we
issued warrants to investors and underwriters to purchase an
aggregate of 10,423,600 shares of the Company’s common stock
at an exercise price of $1.50 and a term of five years. These
warrants are accounted for under equity treatment. These warrants
had a relative fair value of $1.8 million and a fair value of $2.0
million.
In connection
with the Armistice exchange agreement, the Company issued warrants
to Armistice to purchase an aggregate of 4,403,409 shares of the
Company’s common stock at an exercise price of $1.00 and a
term of 5 years. These warrants are accounted for under equity
treatment. These warrants had a fair value of
$499,000.
During
the year ended June 30, 2019, warrants issued from the October
registered offering to purchase an aggregate of 250,007 shares of
common stock were exercised for aggregate gross proceeds to the
Company of approximately $375,000.
14. Related Party
Transactions
Armistice
In February
2019, the Company waived its right to disallow Armistice from
holding more than 4.99% of Aytu common stock and agreed to allow
Armistice to hold up to 40% of the outstanding shares of our common
stock. Also, in February 2019, Armistice converted 1.9 million
shares of Series C preferred stock into Aytu common stock,
resulting in Armistice holding more than 10% of the Company’s
common stock. The Company also had a promissory note to Armistice
with a face value of $5.0 million, which was subsequently exchanged
for a combination of common stock, preferred stock and warrants.
Therefore, Armistice is now considered an affiliate of the
Company.
Co-Pay
Support
In June 2018,
the Company entered into a master services agreement with TrialCard
Incorporated (“TCI”), a vendor selected to support the
Company sponsored co-pay program. In supporting the program, Aytu
will prefund certain amounts from which TCI will make disbursements
to qualified patients presenting valid prescriptions for Natesto,
Tuzistra XR and ZolpiMist on behalf of Aytu. Disbursements will be
based upon business rules determined by the Company. The Company
agreed to pay fees monthly to TCI for account management, data
analytics, implementation, and technology and to reimburse TCI for
certain direct costs incurred by TCI to support the Company’s
program. One of the the Company’s directors, Mr. Donofrio,
was an executive officer of TCI but has no direct interest in the
arrangement. As of February 2019, Mr. Donofrio is no longer
employed by TCI.
15. Employee
Benefit Plan
Aytu has a 401(k) plan that allows
participants to contribute a portion of their salary, subject to
eligibility requirements and annual IRS limits. The Company matches
50% of the first 6% contributed to the plan by employees. In fiscal
2019, the Company’s match was $148,000.
16. Commitments
and Contingencies
Commitments and contingencies are
described below and summarized by the following table as of
June 30, 2019:
|
|
|
|
|
|
|
|
Prescription database
|
$1,613,000
|
$567,000
|
$534,000
|
$512,000
|
$–
|
$–
|
$–
|
Product
Milestone Payments
|
5,500,000
|
–
|
–
|
–
|
5,500,000
|
–
|
–
|
Office
leases
|
494,000
|
112,000
|
113,000
|
118,000
|
121,000
|
30,000
|
–
|
|
$7,607,000
|
$679,000
|
$647,000
|
$630,000
|
$5,621,000
|
$30,000
|
$–
|
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. The payments have
been broken down into quarterly payments.
Milestone Payments
In connection
with the Company’s intangible assets, Aytu has certain
milestone payments, totaling $5.5 million, payable at a future
date, are not directly tied to future sales, but upon other events
certain to happen. These obligations are included in the valuation
of the Company’s contingent consideration (see Note
9).
Office
Lease
In June 2018,
the Company entered into a 12-month operating lease, beginning on
August 1, 2018, for office space in Raleigh, North Carolina. This
lease has base rent of $1,100 a month, with total rent over the
term of the lease of approximately $13,200. In September 2015, the
Company entered into a 37-month operating lease in Englewood,
Colorado. This lease had an initial base rent of $9,000 a month
with a total base rent over the term of the lease of approximately
$318,000. In October 2017, the Company signed an amendment to the
37-month operating lease in Englewood, Colorado, extending the
lease for an additional 24 months beginning October 1, 2018. The
base rent remained $9,000 per month. In April 2019, the Company
extended the lease for an additional 36 months beginning October1,
2020. Rent expense totaled $0.1 and $0.1 million for the years
ended June 30, 2019 and 2018 respectively.
17. Segment
Information
Operating segments, as
defined by Accounting Standards Codification, or ASC, 280
Segment
Reporting, are components of an
enterprise for which separate financial information is available
and is evaluated regularly by the Chief Operating Decision Maker,
or CODM, in deciding how to allocate resources and in assessing
performance. ASC 280 also requires disclosures about products,
services, geographic areas and significant
customers.
The Company’s CODM operates the business as one reportable
operating segment comprised of all four products.
Geographic
Revenues. See Note
3.
18. Armistice Note Exchange
On November 29, 2018, Aytu
issued a $5.0 million promissory note (the “Note”) to
Armistice Capital Master Fund Ltd. (“Armistice”). The
Note was collateralized by the future revenue stream from the
products licensed to the Company under the Tris License Agreement
between the Company and TRIS. The Note carried an annual interest
rate of 8% and had a three-year term with principal and interest
payable at maturity. The Company had the right, in its sole
discretion, to repay the Note without penalty at any time after
December 29, 2018. During the quarter ended June 30, 2019, the
Company and Armistice agreed to, and the shareholders approved to,
exchange the entire Note for (i) 3.2 million shares of common
stock, (ii) 2.75 million of shares of non-voting Series E preferred
stock, and (iii) 4.4 million warrants (see Notes 11 and
13).
19. Subsequent
Events
Acerus
Pharmaceuticals SRL
On July 29, 2019, the Company agreed
to amend and restate the License and Supply Agreement with Acerus
Pharmaceuticals, SRL (“Acerus”). The effectiveness of
the amended Agreement is conditioned upon Acerus obtaining new
financing within six months of signing of the amended Agreement.
The Company will continue to serve as the exclusive U.S. supplier
to purchasers of Natesto, and Acerus will receive performance-based
commissions on prescriptions generated by urology and endocrinology
specialties. Acerus will assume regulatory and clinical
responsibilities and associated expenses and will serve a primary
role in the development of key opinion leaders in urology and
endocrinology. The Company will focus on commercial channel
management, sales to wholesalers and other purchasing customers,
and will direct sales efforts in all other physician
specialties.
Innovus
Pharmaceuticals, Inc.
On September 12, 2019, the Company
signed a definitive merger agreements with Innovus Pharmaceuticals,
Inc. (“Innovus”), a specialty pharmaceutical company
commercializing, licensing and developing consumer health products.
The Company will retire all outstanding common stock of Innovus for
an aggregate of up to $8 million in shares of Aytu common stock,
less certain deductions, at the time of closing. This initial
consideration to Innovus common shareholders is estimated to
consist of approximately 4.2 million shares of the Company’s
common stock. Additional consideration for up to $16 million in
milestone payments in the form of contingent value rights (CVRs)
may be paid to Innovus shareholders in cash or stock over the next
five years if certain revenue and profitability milestones are
achieved.