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Acquisitions

12 Months Ended

Jun. 30, 2020

The Pediatric Portfolio

On October 10, 2019, the Company entered into the Purchase Agreement with Cerecor, Inc. (“Cerecor”) to purchase and acquire Cerecor’s Pediatric Portfolio, which closed on November 1, 2019. The Pediatric Portfolio consists of four prescription products consisting of (i) Cefaclor for Oral Suspension, (ii) Karbinal® ER and, (iii) Poly-Vi-Flor® and Tri-Vi-Flor™. Total consideration transferred to Cerecor consisted of $4.5 million in cash and approximately 9.8 million shares of Series G Convertible Preferred Stock. The Company also assumed certain of Cerecor’s financial and royalty obligations, and not more than $3.5 million of Medicaid rebates and products returns, of which $3.5 million has been incurred. The Company also retained the majority of Cerecor’s workforce focused on sales, commercial contracts and customer relationships.

In addition, the Company assumed Cerecor obligations due to an investor that include fixed and variable payments aggregating to $25.6 million. The Company assumed fixed monthly payments equal to $0.1 million from November 2019 through January 2021 plus $15 million due in January 2021. Monthly variable payments due to the same investor are equal to 15% of net revenue generated from a subset of the Pediatric Portfolio, subject to an aggregate monthly minimum of $0.1 million, except for January 2020, when a one-time payment of $0.2 million was paid to the investor. The variable payment obligation continues until the earlier of: (i) aggregate variable payments of approximately $9.5 million have been made, or (ii) February 12, 2026. In early June 2020, the Company paid down the $15 million due in January 2021, leaving a remaining fixed minimum commitment of approximately $7.3 million.

Further, certain of the products in the Pediatric Portfolio require royalty payments ranging from 12% to 15% of net revenue. One of the products in the Pediatric Portfolio requires the Company to generate minimum annual sales sufficient to represent annual royalties of approximately $1.8 million, in the event the minimum sales volume is not satisfied.

While no equity was acquired by the Company, the transaction was accounted for as a business combination under the acquisition method of accounting pursuant to Topic 805. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified product portfolio that is expected to provide revenue and cost synergies. Goodwill is not amortizable for tax purposes. Transaction costs of $0.7 million were included as general and administrative expense in the consolidated statements of operations for the fiscal year 2020.

The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. These estimates are preliminary, pending final evaluation of certain assets, and therefore, are subject to revisions that may result in adjustments to the values presented below:

	As of
	November 1, 2019
Consideration
Cash and cash equivalents	$	4,500,000
Fair value of Series G Convertible Preferred Stock
Total shares issued		9,805,845
Estimated fair value per share of Aytu common stock	$	0.567
		5,559,914

Total consideration transferred	$	10,059,914

Recognized amounts of identifiable assets acquired and liabilities assumed
Inventory, net	$	459,123
Prepaid assets		1,743,555
Other current assets		2,525,886
Intangible assets - product marketing rights		22,700,000
Accrued liabilities		(300,000	)
Accrued product program liabilities		(6,683,932	)
Assumed fixed payment obligations	$	(29,837,853	)
Total identifiable net assets		(9,393,221	)

Goodwill	$	19,453,135

The following table provides a reconciliation of the carrying value of the Company’s goodwill associated with the acquisition of the Pediatric Portfolio:

	Goodwill – Pediatric Portfolio
Balance as of November 1, 2019	$	15,387,064
Increase due to change in estimated fixed payment obligations		3,766,071
Increase to account for settlement with former product licensor		300,000
Balance as of June 30, 2020	$	19,453,135

The Company recorded an adjustment to the previously reported identifiable net assets and goodwill of approximately $4.1 million, of which $3.8 million related to the Karbinal make-whole payment, and $0.3 million related to a settlement upon the closing of the Cerecor transaction. The amounts above represent the provisional fair value estimates as of June 30, 2020 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates.

The fair values of intangible assets, including product technology rights were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 10).

	As of November 1, 2020

Acquired product technology rights	$	22,700,000

The fair value of the net identifiable asset acquired was determined to be $22.7 million, which is being amortized over ten years. The aggregate amortization expense was $1.5 million and $0, for fiscal year 2020 and 2019 respectively.

Since the November 1, 2019 acquisition of the Pediatric Portfolio, the Pediatric Portfolio has contributed $9.3 million in net revenues and a net loss of approximately $0.4 million, excluding corporate, overhead and other costs not assigned to these products.

Innovus Merger (Consumer Health Portfolio)

On February 14, 2020, the Company completed the merger with Innovus Pharmaceuticals after approval by the stockholders of both companies on February 13, 2020. Upon the effectiveness of the Merger, the Company merged with and into Innovus and all outstanding Innovus common stock was exchanged for approximately 3.8 million shares of the Company’s common stock and up to $16 million of Contingent Value Rights (“CVRs”). The outstanding Innovus warrants with cash out rights were exchanged for approximately 2.0 million shares of Series H Convertible Preferred stock of the Company and retired. The remaining Innovus warrants outstanding at the time of the Merger continue to be outstanding, and upon exercise, retain the right to the merger consideration offered to Innovus stockholders, including any remaining claims represented by CVRs at the time of exercise. Innovus is now a 100% wholly-owned subsidiary of the Company, (“Aytu Consumer Health”).

On March 31, 2020, the Company paid out the first CVR Milestone in the form of approximately 1.2 million shares of the Company’s common stock to satisfy the $2.0 million obligation as a result of Innovus achieving the $24 million revenue milestone for the calendar year ended December 31, 2019. As a result of this, the Company recognized a gain of approximately $0.3 million.

In addition, as part of the merger, the Company assumed approximately $3.1 million of notes payable, $0.8 million in lease liabilities, and other assumed liabilities associated with Innovus. Of the $3.1 million of notes payable, approximately $2.2 million was converted into approximately 1.8 million shares of the Company’s common stock since February 14, 2020.

The following table summarized the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. As this was a tax-exempt transaction, goodwill is not tax deductible in future periods. These estimates are preliminary, pending final evaluation of certain assets acquired and liabilities assumed, and therefore, are subject to revisions that may result in adjustments to the values presented below. The estimates of the fair value of the assets acquired assumed at the date of the Acquisition are subject to adjustment during the measurement period (up to one year from the Acquisition date). While the Company believes that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired, it evaluates any necessary information prior to finalization of the fair value. During the measurement period, the Company will adjust assets and liabilities if new information is obtained about facts and circumstances that existed as of the Acquisition date that, if known, would have resulted in the revised estimated values of those assets as of that date. The impact of all changes that do not qualify as measurement period adjustments, if applicable, and are included in current period earnings.

	As of
	February 14, 2020
Consideration
Fair value of Aytu Common Stock
Total shares issued at close		3,810,393
Estimated fair value per share of Aytu common stock	$	0.756
Estimated fair value of equity consideration transferred	$	2,880,581

Fair value of Series H Convertible Preferred Stock
Total shares issued		1,997,736
Estimated fair value per share of Aytu common stock	$	0.756
Estimated fair value of equity consideration transferred	$	1,510,288

Fair value of former Innovus warrants	$	15,315
Fair value of Contingent Value Rights	$	7,049,079
Forgiveness of Note Payable owed to the Company	$	1,350,000

Total consideration transferred	$	12,805,263

	As of
	February 14, 2020
Total consideration transferred	$	12,805,263

Cash and cash equivalents	$	390,916
Accounts receivables, net		278,826
Inventory, net		1,149,625
Prepaid expenses and other current assets		1,692,133
Other long-term assets		36,781
Right-to-use assets		328,410
Property, plant and equipment		190,393
Trademarks and patents		11,744,000
Accounts payable and accrued other expenses		(7,202,309	)
Other current liabilities		(629,601	)
Debt		(3,056,361	)
Lease liability		(754,822	)

Total identifiable net assets		4,167,991

Goodwill	$	8,637,272

The fair values of intangible assets, including product distribution rights were determined using variations of the income approach, specifically the relief-from-royalties method. It also includes customer lists using an income approach utilizing a discounted cash flow model. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value (see Note 10).

	As of February 14, 2020

Acquired product distribution rights	$	11,354,000
Acquired customer lists		390,000
Total intangible assets	$	11,744,000

The fair value of the net identifiable assets acquired was determined to be $11.7 million, which is being amortized over a range between 1.5 to 10 years. The aggregate amortization expense was $0.7 million and $0, for the fiscal year ended June 30, 2020 and 2019, respectively.

The Company recorded an adjustment to the previously reported identifiable net assets and goodwill of approximately $0.2 million related to legal fee liabilities relating to a lawsuit which was settled prior to the merger date. The amounts above represent the provisional fair value estimates as of June 30, 2020 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates.

	Goodwill - Innovus Merger
As of February 14, 2020	$	8,374,269
Increase due to settlements related to lawsuit and product royalties		209,178
Increase due to additional bonus accrual		53,825
As of June 30, 2020	$	8,637,272

Since the February 14, 2020 acquisition of Innovus, Innovus has contributed approximately $10.4 million in net revenues and net loss of approximately $3.2 million.

Pro Forma Impact due to Business Combinations

The following supplemental unaudited proforma financial information presents the Company’s results as if the following acquisitions had occurred on July 1, 2018:

●	Acquisition of the Pediatric Portfolio, effective November 1, 2019;

●	Merger with Innovus effective February 14, 2020.

	Year ended June 30,
	2020			2019
	Unaudited (aa)			Pro forma Unaudited

Total revenues, net	$	35,562,537		$	39,044,357
Net loss	$	(16,325,078	)	$	(37,939,908	)
Net loss per share	$	(0.37	)	$	(3.27	)

(aa)	Due to the absence of discrete financial information for Innovus, covering the period from February 1, 2020 through February 13, 2020, the Company did not include the impact of that stub-period for the pro forma results for the year ended June 30, 2020.