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Business, Basis of Presentation, Business Combinations, Divestitures, License/Supply Agreement and Merger

12 Months Ended

Jun. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Business, Basis of Presentation, Business Combinations, Divestitures, License/Supply Agreement and Merger

Note 1 – Business, Basis of Presentation, Business Combinations, Divestitures, License/Supply Agreement and Merger

Business

Aytu BioScience, Inc. (“Aytu”, the “Company” or “we”) was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado. Aytu was re-incorporated in the state of Delaware on June 8, 2015. Aytu is an emerging specialty pharmaceutical company focused on commercializing novel products that address significant medical needs. Aytu is focused on commercializing products that address hypogonadism (low testosterone), insomnia, and male infertility and plans to expand into other therapeutic areas.

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”). On August 10, 2018, Aytu effected a reverse stock split in which each common stockholder received one share of common stock for every 20 shares outstanding (herein referred to collectively as the “Reverse Stock Splits”). All share and per share amounts in this report have been adjusted to reflect the effect of these Reverse Stock Splits.

Business Combination—ProstaScint

In May 2015, Aytu completed an asset purchase agreement with Jazz Pharmaceuticals, Inc. (“Jazz Pharmaceuticals”). Pursuant to the agreement, Aytu purchased assets related to the Jazz Pharmaceuticals’ product known as ProstaScint^® (capromab pendetide), a late life cycle imaging agent, including certain intellectual property and contracts, and the product approvals, inventory and work in progress (together, the “ProstaScint Business”), and assumed certain of Jazz Pharmaceuticals’ liabilities, including those related to product approvals and the sale and marketing of ProstaScint. The purchase price consists of the upfront payment of $1.0 million. We will pay a revenue share of 8% on net sales made after October 31, 2017, payable up to a maximum aggregate payment of an additional $2.5 million. The contingent consideration was initially valued at $664,000 and was revalued as of June 30, 2017 at $54,000 using a discounted cash flow. As of June 30, 2018, the value for the contingent consideration was adjusted to $0 based upon the abandonment of ProstaScint in the quarter ended June 30, 2018, thus resulting in no future revenues around this product.

Pursuant to the asset purchase agreement, we were required to make our first revenue share payment to Jazz Pharmaceuticals during the March 31, 2018 quarter which was approximately $7,400. We will make our final revenue share payment to Jazz Pharmaceuticals in the first quarter of fiscal 2019, which is approximately $9,000.

At June 30, 2017, the ProstaScint asset was determined to be impaired based upon sales projections at that time and because we were planning to discontinue sales of ProstaScint in fiscal 2019, consistent with product expiry dating. The value for the intangible assets were adjusted to $54,000 for developed technology, $7,000 for trade names and $0 for customer contracts. At June 30, 2018, we reevaluated the ProstaScint asset and abandoned sales of ProstaScint in the current fiscal year, and we recognized the remainder of the amortization expense in the quarter ended June 30, 2018. The amortization expense was $61,000 and $159,000 for fiscal 2018 and 2017, respectively.

Business Combination—Primsol

In October 2015, Aytu entered into and closed on an Asset Purchase Agreement with FSC Laboratories, Inc. (“FSC”). Pursuant to the agreement, Aytu purchased assets related to FSC’s product known as Primsol® (trimethoprim solution), including certain intellectual property and contracts, inventory, work in progress and all marketing and sales assets and materials related solely to Primsol (together, the “Primsol Business”), and assumed certain of FSC’s liabilities, including those related to the sale and marketing of Primsol arising after the closing.

Amortization expense of $0 and $184,000 was recognized in fiscal 2018 and fiscal 2017, respectively.

Divestiture – Primsol

In March 2017, we entered into and closed on an Asset Purchase Agreement with Allegis Holdings, LLC (the “Purchaser”). Pursuant to the agreement, we sold to the Purchaser all of our assets related to our Primsol product, including certain intellectual property and contracts, inventory, work in process and all marketing assets and materials related solely to Primsol (together, the “Primsol Asset”). We retain any liability associated with the Primsol Asset that occurred prior to the closing. The Purchaser paid us $1,750,000 at the closing for the Primsol Asset. We recognized a gain of approximately $428,000 on the sale which is included in sales, general and administrative expense on our statement of operations.

License and Supply Agreement—Natesto

In April 2016, Aytu entered into and closed a license and supply agreement to acquire the exclusive U.S. rights to Natesto® (testosterone) nasal gel from Acerus Pharmaceuticals Corporation (“Acerus”). We acquired the right effective upon the expiration of the former licensee’s rights, which occurred on June 30, 2016. The licensee’s term runs for the greater of eight years or until the expiry of the latest to expire patent including claims covering Natesto and until the entry on the market of at least one AB-rated generic product.

Aytu made an upfront payment of $2.0 million to Acerus upon execution of the agreement. In October 2016, we paid an additional $2.0 million. In January 2017, Aytu paid the final upfront payment of $4.0 million. Aytu also purchased, on April 28, 2016, an aggregate of 12,245,411 shares of Acerus common stock for Cdn. $2.5 million (approximately US $2.0 million), with a purchase price per share equal to Cdn. $0.207 or approximately US $0.16 per share. These shares were a held for sale trading security and were valued at fair market value. Aytu could not dispose of these shares until after August 29, 2016. During fiscal 2017, Aytu sold all of these shares. The gross proceeds from the sales totaled $1.1 million, the cost of the sales totaled $92,000, and we recognized a loss on investment of $0 and $62,000 during fiscal 2018 and 2017, respectively.

In addition to the upfront payments, we must make the following one-time, non-refundable payments to Acerus within 45 days of the occurrence of the following event (provided that, the maximum aggregate amount payable under such milestone payments will be $37.5 million):

	●	$2.5 million if net sales during any four consecutive calendar quarter period equal or exceed $25.0 million (the “First Milestone”); the First Milestone payment is required to be paid even if the threshold is not met in the event that the agreement is terminated for any reason other than material breach by Acerus, bankruptcy of either party, or termination by Acerus because it believes the amounts payable to Aytu for agreed upon trial work would no longer make the agreement economically viable for Acerus;
	●	$5.0 million if net sales during any four consecutive calendar quarter period equal or exceed $50.0 million;
	●	$7.5 million if net sales during any four consecutive calendar quarter period equal or exceed $75.0 million;
	●	$10.0 million if net sales during any four consecutive calendar quarter period equal or exceed $100.0 million; and
	●	$12.5 million if net sales during any four consecutive calendar quarter period equal or exceed $125.0 million.

The fair value of the net identifiable asset acquired totaled $10.5 million which is being amortized over eight years. The amortization expense for fiscal 2018 and fiscal 2017 was $1.3 million, respectively. The estimated future amortization of Natesto after June 30, 2018 is as follows:

2019			1,319,000
2020			1,319,000
2021			1,319,000
2022			1,319,000
2023			1,319,000
Thereafter			1,317,000
		$	7,912,000

The contingent consideration was initially valued at $3.2 million using a Monte Carlo simulation, as of June 30, 2016. As of June 30, 2018, the contingent consideration was revalued at $1.8 million using the same Monte Carlo simulation methodology, and based on current interest rates, expected sales potential, and Aytu stock trading variables. The contingent consideration accretion expense for fiscal 2018 and 2017 was $694,000, and $228,000, respectively.

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 $400,000 to Magna upon execution of the agreement. In July 2018, we paid an additional $300,000, of which, $297,000 was included in current contingent consideration at June 30, 2018.

The intangible asset was valued at $3.2 million and will be amortized over the life of the license agreement up to seven years. The Company’s allocation on consideration transferred for ZolpiMist as of the purchase date of June 11, 2018 was as follows:

		Fair Value

Intangible assets			3,200,000

Total assets acquired		$	3,200,000

The amortization expense for fiscal 2018 was $39,000. The estimated future amortization of ZolpiMist after June 30, 2018 is as follows:

2019			464,000
2020			464,000
2021			464,000
2022			464,000
2023			464,000
Thereafter			888,000
		$	3,208,000

We also agreed to make certain royalty payments to Magna which will be calculated as a percentage of our ZolpiMist net sales which will be payable within 45 days of the end of the quarter during which the applicable net sales occur.

	●	Twenty percent (20%) of Net Sales during the period commencing on the effective date and continuing through May 31, 2020
	●	Fifteen percent (15%) of Net Sales during the period commencing on the effective date and continuing through May 31, 2022
	●	Ten percent (10%) of Net Sales during the period commencing on the effective date and continuing through May 31, 2025

The contingent consideration, related to these royalty payments, was valued at $2.6 million using a Monte Carlo simulation, as of June 11, 2018. The contingent consideration accretion expense for fiscal 2018 and 2017 was $23,000, and $0, respectively.

Merger/Subsidiary

In May 2017, Aytu Women’s Health, LLC., (“AWH”) a wholly-owned subsidiary of Aytu, acquired Nuelle, Inc. (“Nuelle”), a women’s sexual health company. This transaction expanded our product portfolio with the addition of the Fiera^® personal care device for women.

In the Merger, (i) each share of Nuelle common stock and each option or warrant to purchase Nuelle stock was cancelled, and (ii) each share of Nuelle preferred stock was converted into the right to receive shares of our common stock. We issued to the Nuelle preferred stockholders an aggregate of 6,250 shares of our common stock and agreed to make future revenue earn-out and milestone payments subject to certain performance criteria.

Nuelle preferred stockholders were entitled to revenue earn-out payments equal to a designated percentage of net sales on tiers of net sales up to $100.0 million, with an average rate for all tiers in the mid-single digit range and a maximum aggregate payout of $6.9 million.

The first $1.0 million of revenue earn-out payments was paid in shares of our common stock and all other earn-out payments will be comprised of 60% cash and 40% shares of our common stock. The stock portion of any earn-out will be calculated by dividing each Nuelle stockholder’s portion of the revenue earn-out by the average closing price of our common stock for the 10 trading days prior to the earlier of the date we deliver notice to the Nuelle stockholders of the revenue earn-out or any public disclosure by us of the earn-out being due and payable.

Amortization expense of $110,000 and $22,000 was recognized in fiscal 2018 and 2017, respectively.

The contingent consideration was valued at $1.9 million using a Monte Carlo simulation, as of May 2017. The contingent consideration accretion expense for fiscal 2018 and 2017 was $64,000, and 12,000 respectively.

During the quarter ended September 30, 2017, we paid the first revenue earn-out payment to Nuelle shareholders of $12,000 issued in Aytu common stock, which represented the revenue earn-out payment for fiscal 2017.

During the quarter ended December 31, 2017, we made a $238,000 prepayment, issued in Aytu common stock, which represented the revenue earn-out payment for the remaining balance due on the first $1.0 million in net revenue.

At March 31, 2018, the AWH assets were determined to be impaired based upon sales performance and the manufacturer no longer supporting the product. The value for all AWH intangible assets were adjusted to zero. The contingent consideration was revalued to zero as well.

			Contingent Consideration
Balance as of June 30, 2017		$	1,940,000
Increase due to accretion			64,000
Decrease due to contractual payment			(250,000	)
Decrease due to remeasurement			(1,754,000	)
Balance as of June 30, 2018		$	-