AYTU 10-Q
Aytu Biopharma, Inc (AYTU)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the Quarterly Period Ended
OR
For the transition period from to
Commission File No.
(www.aytubio.com)
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(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Indicate by 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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of February 14, 2023, there were
AYTU BIOPHARMA, INC. FOR THE QUARTER ENDED DECEMBER 31, 2022
INDEX
PART I—FINANCIAL INFORMATION
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 Quarterly 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: our anticipated future cash position; the planned expanded commercialization of our products and the potential future commercialization of our product candidates; our planned product candidate development strategy and research and development expenses; our anticipated future growth rates; anticipated sales increases; anticipated net revenue increases; amounts of certain future expenses and costs of goods sold; our plans to acquire additional assets, anticipated increases to operating expenses, and selling, general, and administrative expenses; 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 II Item 1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. 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. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance 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, except as may be required under applicable law.
This Quarterly Report on Form 10-Q refers to trademarks, such as Adzenys, Aytu BioPharma, Cotempla, FlutiCare, Innovus Pharma, Neos Therapeutics, Poly-Vi-Flor, Tri-Vi-Flor, and ZolpiMist which are protected under applicable intellectual property laws and are our property or the property of our subsidiaries. This Form 10-Q 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-Q 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.
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AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per-share amounts)
(Unaudited)
December 31, | June 30, | |||||
| 2022 |
| 2022 | |||
Assets | ||||||
Current assets |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
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Inventory |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use asset |
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Intangible assets, net | | | ||||
Other non-current assets | | | ||||
Total non-current assets |
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Total assets | $ | | $ | | ||
Liabilities | ||||||
Current liabilities |
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Accounts payable and other | $ | | $ | | ||
Accrued liabilities |
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Short-term line of credit | | | ||||
Current portion of debt |
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Other current liabilities | |
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Total current liabilities |
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Debt, net of current portion | | | ||||
Derivative warrant liabilities | | | ||||
Other non-current liabilities | | | ||||
Total liabilities |
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Commitments and contingencies (Note 13) |
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Stockholders’ equity |
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Preferred Stock, par value $ |
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Common Stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
See the accompanying Notes to the Condensed Consolidated Financial Statements
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AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per-share amounts)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||
December 31, | December 31, | |||||||||||
| 2022 |
| 2021 |
| 2022 | 2021 | ||||||
$ | | $ | | $ | | $ | | |||||
Cost of sales |
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Gross profit | | | | | ||||||||
Operating expenses | ||||||||||||
Research and development |
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Selling and marketing | | | | | ||||||||
General and administrative | | | | | ||||||||
Impairment expense |
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Amortization of intangible assets |
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Total operating expenses |
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Loss from operations |
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Other income (expense) |
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Other expense, net |
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Gain on derivative warrant liabilities |
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Total other income (expense) |
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Loss before income tax |
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Income tax benefit |
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Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted average number of common shares outstanding | | |
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Basic and diluted net loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | ||||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
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AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
Additional | Total | ||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit | Equity (Deficit) | |||||||
Balance, July 1, 2022 | — |
| $ | — |
| |
| $ | — |
| $ | | $ | ( | $ | | |||
Stock-based compensation | — | — | ( | — | | — | | ||||||||||||
Issuance of common stock, net of issuance cost | — | — | | — | | — | | ||||||||||||
Net loss | — | — | — | — | — | ( | ( | ||||||||||||
Balance, September 30, 2022 | — | $ | — | | $ | — | $ | | $ | ( | $ | | |||||||
Stock-based compensation | — | — | ( | — | | — | | ||||||||||||
Issuance of common stock, net of issuance cost | — | — | | — | | — | | ||||||||||||
Net loss | — | — | — | — | — | ( | ( | ||||||||||||
Balance, December 31, 2022 | — | $ | — | | $ | — | $ | | $ | ( | $ | | |||||||
Balance, July 1, 2021 | — |
| $ | — |
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| $ | — |
| $ | |
| $ | ( | $ | | ||
Stock-based compensation | — |
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Issuance of common stock, net of issuance cost | — | — | | — | | — | | ||||||||||||
Tax withholding for stock-based compensation | — | — | — | — | ( | — | ( | ||||||||||||
Net loss | — |
| — | — |
| — |
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Balance, September 30, 2021 | — | $ | — | | $ | — | $ | | $ | ( | $ | | |||||||
Stock-based compensation | — |
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Issuance of common stock, net of issuance cost | — |
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Net loss | — |
| — | — | — | — | ( | ( | |||||||||||
Balance, December 31, 2021 | — | $ | — | | $ | — | $ | | $ | ( | $ | | |||||||
See the accompanying Notes to the Condensed Consolidated Financial Statements
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AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended | |||||
December 31, | ||||||
| 2022 |
| 2021 | |||
Operating Activities |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to cash used in operating activities: |
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Depreciation, amortization and accretion |
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Impairment expense | |
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Stock-based compensation expense |
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Gain on derivative warrant liabilities | ( | — | ||||
Loss from contingent consideration |
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Amortization of senior debt (premium) discount | | ( | ||||
Gain on sale of equipment | ( | ( | ||||
Inventory write-down | | | ||||
Other noncash adjustments |
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Changes in operating assets and liabilities: | ||||||
Accounts receivable |
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Inventory |
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Prepaid expenses and other current assets |
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Accounts payable and other |
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Accrued liabilities |
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Other operating assets and liabilities, net | ( | | ||||
Net cash used in operating activities |
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Investing Activities |
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Contingent consideration payment |
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Other investing activities |
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Net cash provided by (used in) investing activities |
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Financing Activities |
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Proceeds from issuance of stock and warrants |
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Payment of stock issuance costs |
| ( |
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Payment made to fixed payment arrangement | ( | ( | ||||
Net proceeds received (payments made on) short-term line of credit | | ( | ||||
Other financing activities | ( | ( | ||||
Net cash provided by financing activities |
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Net change in cash, cash equivalents and restricted cash | | ( | ||||
Cash, cash equivalents and restricted cash at beginning of period | | | ||||
Cash and cash equivalents at end of period | $ | | $ | | ||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
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AYTU BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT’D
(In thousands)
(Unaudited)
| Six Months Ended | |||||
December 31, | ||||||
| 2022 |
| 2021 | |||
Supplemental cash flow data | ||||||
Cash paid for interest | $ | | $ | | ||
Non-cash investing and financing activities: | ||||||
Other noncash investing and financing activities | $ | — | $ | | ||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
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AYTU BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business, Financial Condition, Basis of Presentation
Aytu BioPharma, Inc. (“Aytu”, the “Company” or “we”), is a pharmaceutical company focused on commercializing novel therapeutics and consumer health products. The Company operates through
On January 6, 2023, the Company effected a reverse stock split in which each common stockholder received one share of common stock for every shares held (“Reverse Stock Split”). All share and per share amounts in this quarterly report have been adjusted to reflect the effect of the Reverse Stock Split.
The Rx segment primarily consists of
The Consumer Health Portfolio consists of over
The Company’s strategy is to continue building its portfolio of revenue-generating products, leveraging its commercial team’s expertise to build leading brands within large therapeutic and consumer health markets. As a result of focusing on building the portfolio of revenue-generating products, the Company has indefinitely suspended active development of its clinical development programs including AR101 (enzastaurin), Healight, and NT0502 (N-desethyloxybutynin).
As of December 31, 2022, the Company had approximately $
In August 2022, the Company completed an underwritten public offering of (i)
During the six months ended December 31, 2022, the Company issued
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proceeds from the Offering and from the ATM for growth of the Company’s commercial business, and for working capital and general corporate purposes.
As of December 31, 2022, the Company did not have sufficient working capital to cover its cash needs to fund planned operations for the twelve months following the filing date of this Quarterly Report on Form 10-Q, which raises substantial
Management plans to continue to mitigate the conditions that raise substantial doubt about its ability to continue as a going concern, primarily by focusing on increasing revenue, reducing expenses associated with research and development, and raising additional capital through public or private equity, debt offerings, or monetizing assets in order to meet its obligations. Management believes that the Company has access to capital resources, however, the Company cannot provide any assurance that it will be able to raise additional capital, monetize assets or obtain new financing on commercially acceptable terms. If the Company is unable to secure additional capital, it may be required to curtail its operations or delay the execution of its business plan. Alternatively, any efforts by the Company to reduce its expenses may adversely impact its ability to sustain revenue-generating activities and delay the progress of its developmental product candidates or otherwise operate its business. As a result, there can be no assurance that the Company will be successful in implementing its plans to alleviate this substantial doubt about its ability to continue as a going concern.
Basis of Presentation. The unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q represent the financial statements of the Company and its wholly owned subsidiaries. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2022, which included all disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company and the results of operations and cash flows for the interim periods presented. The results of operations for the periods ended December 31, 2022 are not necessarily indicative of expected operating results for the full year or any future year.
Also see Note 2 – Previously Reported Financial Statements relating to the immaterial correction of an error in the condensed consolidated balance sheet and the condensed consolidated statement of stockholders’ equity for as of June 30, 2022.
All share and per share amounts in this quarterly report reflect the effect of the Reverse Stock Split on January 6, 2023.
Prior Period Reclassification. Certain prior year amounts in the condensed statements of operations and statements of cash flows have been reclassified to conform to the current year presentation, including a reclassification made in the presentation of amortization of intellectual property. This was previously included in research and development expenses and is currently recorded in amortization of intangible assets expenses on the condensed consolidated statements of operations. These reclassifications did not impact operating results or cash flows for the six months ended December 31, 2022 and 2021 or its financial position as of December 31, 2022 or June 30, 2022.
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2. Significant Accounting Policies
Use of Estimates
Management uses estimates and assumptions relating to reporting amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying condensed consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, revenue recognition, allowance for doubtful accounts, determination of variable consideration for accruals of chargebacks, administrative fees and rebates, government rebates, returns and other allowances, write-downs for inventory obsolescence, valuation of financial instruments and intangible assets, accruals for contingent liabilities, fair value of long-lived assets, the value of goodwill, income tax provision, deferred taxes and valuation allowance, determination of right-of-use assets and lease liabilities, purchase price allocations, the depreciable lives of long-lived assets, classification of warrants equity versus liability, and the valuation of derivative warrant liability. Because of the uncertainties inherent in such estimates, actual results may differ from those estimates. Management periodically evaluates estimates used in the preparation of the financial statements for reasonableness.
Previously Reported Financial Statements
SEC Staff Accounting Bulletin No. 99, “Materiality,” and FASB, Statement of Financial Accounting Concepts No. 2 “Qualitative Characteristics of Accounting Information” indicate that quantifying and aggregating errors is only the beginning of an analysis of materiality and that both quantitative and qualitative factors must be considered in determining whether individual errors are material. The Company evaluated the corrections related to the reclassification of certain of the Company’s warrants and have determined that the impact was not material to the balance sheet as of June 30, 2022. As a result, adjustments for the immaterial correction of the error were applied for comparative purposes, as shown below.
The condensed consolidated balance sheet and the condensed consolidated statement of stockholders’ equity as of June 30, 2022 have been adjusted as presented in the following table.
As of June 30, 2022 | |||||||||
As Previously | |||||||||
Reported | Adjustment | As Adjusted | |||||||
(in thousands) | |||||||||
Derivative warrant liability | $ | — | $ | | $ | | |||
Total liabilities | | | | ||||||
Additional paid-in capital | | ( | | ||||||
Accumulated deficit | ( | | ( | ||||||
Total stockholders’ equity | | ( | | ||||||
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. Liability and equity classified warrants are valued using a Black-Scholes option model or Monte Carlo simulation model at issuance and for each reporting period when applicable.
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Income Taxes
The Company calculates its quarterly income tax provision based on estimated annual effective tax rates applied to ordinary income (or loss) and other known items computed and recognized when they occur. There have been no changes in tax law affecting the tax provision during the three and six months ended December 31, 2022.
An ownership change (generally a 50% change in equity ownership over a three-year period) could limit the Company’s ability to offset, post-change, U.S. federal taxable income. Section 382 of the Internal Revenue 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. The Company believes that previous acquisitions, financing transactions, and equity ownership changes in the past five years may have caused a limitation on its ability to use the pre-acquisition net operating loss carryovers. The ownership change scenario could result in increased future tax liability. The Company is in the process of analyzing the impact of any possible ownership change result of which may be a change to the Company’s net deferred tax asset or liability position.
Impairment of Other Intangibles Assets
Acquired in-process research and development (“IPR&D) is an intangible asset classified as an indefinite-lived asset until the completion or abandonment of the associated research and development (“R&D”) effort. In periods after the acquisition of IPR&D, the Company may (1) continue internal R&D efforts associated with the acquired assets or collaborate with another party in R&D efforts; (2) dispose of the assets through a sale; (3) out-license the assets; (4) temporarily postpone further development; or (5) abandon R&D efforts. IPR&D may be subject to different subsequent accounting treatment depending on the course of action chosen by the Company with respect to the asset. If the Company changes strategies related to the IPR&D the asset could potentially be impaired (see Note —7 Goodwill and Other Intangible Assets).
Recent Adopted Accounting Pronouncements
Reference Rate Reform. In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued if contract modifications are made on or before December 31, 2022. The Company
Earnings Per Share. In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options”. The amendments in ASU 2021-04 provide guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted. The
Recent Accounting Pronouncements Not Yet Adopted
Debt—Debt with Conversion and Other Options. In June 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40)— “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for convertible instruments by removing major separation models currently required. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The amendments in this update are effective for public entities that are
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smaller reporting companies, as defined by the Securities and Exchange Commission (”SEC”), for the fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted through a modified retrospective or full retrospective method. The Company will
Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” requiring 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 ASU 2016-13 is to provide additional information about the expected credit losses on financial instruments and other commitments to extend credit. The standard was effective for interim and annual reporting periods beginning after December 15, 2019. However, in October 2019, the FASB approved deferral of the adoption date for smaller reporting companies for fiscal periods beginning after December 15, 2022. The Company will
For a complete set of the Company’s significant accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. There have been no significant changes to the Company’s significant accounting policies during the six months ended December 31, 2022.
3. Revenues from Contracts with Customers
Net product sales in the BioPharma Rx Segment (which includes the ADHD Portfolio and the Pediatric Portfolio) consist of sales of prescription pharmaceutical products, principally to a limited number of wholesale distributors and pharmacies in the United States. Rx product revenue is recognized at the point in time that control of the product transfers to the customer which typically aligns with shipping terms (i.e., upon delivery), which is generally “free-on-board” destination when shipped domestically within the United States and “free-on-board” shipping point when shipped internationally consistent with the contractual terms.
The Company generates Consumer Health Segment revenue (consisting of the Consumer Health Portfolio) from sales of various consumer health products through e-commerce platforms and direct-to-consumer marketing channels utilizing its proprietary Beyond Human marketing and sales platform. Revenue is generally recognized “free-on-board” shipping point, as those are the agreed-upon contractual terms and align with the transfer of control. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by us from a customer are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.
Savings offers, rebates and wholesaler chargebacks reflect the terms of underlying agreements, which may vary. Accordingly, actual amounts will depend on the mix of sales by product and contracting entity. Future returns may not follow historical trends. The Company’s periodic adjustments of its estimates are subject to timed delays between the initial product sale and ultimate reporting and settlement of deductions. The Company continually monitors these provisions and do not believe variances between actual and estimated amounts have been material.
Contract Balances. Contract liabilities primarily relate to advances or deposits received from the Company’s customers before revenue is recognized. As of December 31, 2022 and June 30, 2022, contract liabilities of $
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Revenues by Segment. Net revenue disaggregated by segment for the three and six months ended December 31, 2022 and 2021 were as follows:
Three Months Ended | Six Months Ended | ||||||||||||
December 31, | December 31, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
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(In thousands) | |||||||||||||
Rx Segment | $ | | $ | | $ | | $ | | |||||
Consumer Health Segment | | | | | |||||||||
Consolidated revenue |
| $ | |
| $ | |
| $ | |
| $ | |
|
Revenues by Geographic location. The Company’s revenues are predominately within the United States, with minimal sales in Canada.
4. Inventories
Inventories consist of raw materials, work in process and finished goods and are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company periodically reviews the composition of its inventories to identify obsolete, slow-moving or otherwise unsaleable items. In the event that such items are identified and there are no alternate uses for the inventory, the Company will record a charge to reduce the value of the inventory to net realizable value in the period that the impairment is first recognized. The Company incurred
Inventory balances consist of the following:
December 31, | June 30, | |||||
2022 | 2022 | |||||
(In thousands) | ||||||
Raw materials |
| $ | |
| $ | |
Work in process | | | ||||
Finished goods |
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Inventory | $ | | $ | | ||
5. Property and Equipment
Properties and equipment are recorded at cost and depreciated on a straight-line basis over the assets’ estimated economic life. Leasehold improvements are amortized over the shorter of the estimated economic life or remaining lease term.
Property and equipment consist of the following:
| December 31, | June 30, | ||||
2022 | 2022 | |||||
(In thousands) | ||||||
Manufacturing equipment | $ | |
| $ | | |
Leasehold improvements |
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Office equipment, furniture and other |
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Lab equipment |
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Property and equipment, gross | | | ||||
Less accumulated depreciation and amortization | ( | ( | ||||
Property and equipment, net |
| $ | | $ | | |
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Depreciation and amortization expense was $
6. Leases
The Company has entered into various operating lease agreements for certain of its offices, manufacturing facilities and equipment, and finance lease agreements for certain equipment. These leases have original lease periods expiring between fiscal years 2023 and 2027. Most leases include one or more options to renew, and the exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options to purchase the leased property. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.
The components of lease expenses are as follows:
Three Months Ended | Six Months Ended | |||||||||||||
December 31, | December 31, | |||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| Statement of Operations Classification | |||||
(In thousands) | ||||||||||||||
Lease cost: | ||||||||||||||
Operating lease cost | $ | | $ | | $ | | $ | |
| Operating expenses | ||||
Short-term lease cost |
|
| |
| |
|
| |
| |
| Operating expenses | ||
Finance lease cost: |
|
|
|
| ||||||||||
Amortization of leased assets |
|
| |
| |
|
| |
| |
| Cost of sales | ||
Interest on lease liabilities | | | | | Other (expense), net | |||||||||
Total net lease cost |
| $ | | $ | |
| $ | | $ | |
|
| ||
Supplemental balance sheet information related to leases is as follows:
| December 31, | June 30, |
| Balance Sheet Classification | ||||
2022 | 2022 | |||||||
(In thousands) | ||||||||
Assets: | ||||||||
Operating lease assets | $ | | $ | |
| Operating lease right-of-use asset | ||
Finance lease assets | |
| |
| ||||
Total leased assets | $ | | $ | |
|
| ||
Liabilities: |
|
|
|
| ||||
Current: |
|
|
| |||||
Operating leases | $ | | $ | | Other current liabilities | |||
Finance leases | | | ||||||
Non-current |
|
| ||||||
Operating leases | | | Other non-current liabilities | |||||
Finance leases | | | ||||||
Total lease liabilities | $ | | $ | |
| |||
15
Remaining lease term and discount rate used are as follows:
| December 31, | June 30, |
| ||||
2022 | 2022 | ||||||
Weighted-Average Remaining Lease Term (years) | |||||||
Operating lease assets |
| ||||||
Finance lease assets |
| ||||||
Weighted-Average Discount Rate |
|
|
| ||||
Operating lease assets |
| | % | | % | ||
Finance lease assets | | % | | % | |||
Supplemental cash flow information related to lease is as follows:
Six Months Ended | ||||||
December 31, | ||||||
| 2022 |
| 2021 | |||
(In thousands) | ||||||
Cash flow classification of lease payments: | ||||||
Operating cash flows - operating leases | $ | | $ | | ||
Operating cash flows - finance leases | $ | | $ | | ||
Financing cash flows - finance leases | $ | | $ | | ||
As of December 31, 2022, the maturities of the Company’s future minimum lease payments were as follows:
| Operating |
| Finance | |||
(In thousands) | ||||||
2023 (remaining 6 months) | $ | | $ | | ||
2024 | | | ||||
2025 | | — | ||||
2026 | | — | ||||
2027 | | — | ||||
Total lease payments | | | ||||
Less: Imputed interest | ( | ( | ||||
Lease liabilities | $ | | $ | | ||
7. Goodwill and Other Intangible Assets
The Company’s strategy is to continue building its portfolio of revenue-generating products by leveraging its commercial team’s expertise to build leading brands within large therapeutic and consumer health markets. As a result of focusing on building the portfolio of revenue-generating products, the Company has decided to abandon active development of its NT0502 (N-desethyloxybutynin), a new chemical entity that is for the treatment of sialorrhea, which is excessive salivation or drooling. During the three months ended December 31, 2022, the Company incurred an impairment charge of $
16
During the three months ended September 30, 2021, the Company’s market capitalization significantly declined. As a result of the decline in market capitalization and qualitative and quantitative analysis, the Company recognized an impairment of goodwill of $
The following table provides the summary of the Company’s intangible assets as of December 31, 2022 and June 30, 2022, respectively.
December 31, 2022 | ||||||||||||||
Weighted- | ||||||||||||||
Gross | Net | Average | ||||||||||||
Carrying | Accumulated | Carrying | Remaining | |||||||||||
| Amount |
| Amortization |
| Impairment |
| Amount |
| Life (in years) | |||||
(In thousands) | ||||||||||||||
Definite-lived intangibles: | ||||||||||||||
Acquired product technology rights | | ( | ( | |
| |||||||||
Acquired technology right | | ( | — | | ||||||||||
Acquired product distribution rights |
| |
| ( |
| ( |
| |
| |||||
| ( | ( | | |||||||||||
Indefinite-lived intangibles: | ||||||||||||||
Acquired in-process R&D | | — | ( | — | Indefinite-lived | |||||||||
| — | ( | — | |||||||||||
Total | $ | | $ | ( | $ | ( | $ | |
| |||||
June 30, 2022 | ||||||||||||||
Weighted- | ||||||||||||||
Gross | Net | Average | ||||||||||||
Carrying | Accumulated | Carrying | Remaining | |||||||||||
| Amount |
| Amortization |
| Impairment |
| Amount |
| Life (in years) | |||||
(In thousands) | ||||||||||||||
Definite-lived intangibles: | ||||||||||||||
Acquired product technology rights | $ | | $ | ( | $ | ( | $ | |
| |||||
Acquired technology right | | ( | — | | ||||||||||
Acquired product distribution rights |
| |
| ( |
| ( |
| |
| |||||
Other intangible assets | | ( | ( | — | — | |||||||||
| ( | ( | | |||||||||||
Indefinite-lived intangibles: | ||||||||||||||
Acquired in-process R&D | | — | — | | Indefinite-lived | |||||||||
| — | — | | |||||||||||
Total | $ | | $ | ( | $ | ( | $ | |
| |||||
The following table summarizes the estimated future amortization expense to be recognized over the next five years and periods thereafter:
| |||
(In thousands) | |||
2023 (remaining 6 months) | $ | | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
2028 | | ||
Thereafter | | ||
Total future amortization expense | $ | | |
Product Technology Rights
17
The acquired product technology rights are related to the rights to production, supply and distribution agreements of various products pursuant to the acquisitions of the Pediatric Portfolio in November 2019 and the Neos Acquisition in March 2021.
Karbinal ER. The Company acquired and assumed all rights and obligations pursuant to the Supply and Distribution Agreement, as Amended, with Tris for the exclusive rights to commercialize Karbinal ER in the United States (the “Tris Karbinal Agreement”). The Tris Karbinal Agreement’s initial term terminates in August of 2033, with an optional initial
Poly-Vi-Flor and Tri-Vi-Flor. The Company acquired and assumed all rights and obligations pursuant to a Supply and License Agreement and various assignment and release agreements, including a previously agreed to Settlement and License Agreements (the “Poly-Tri Agreements”) for the exclusive rights to commercialize Poly-Vi-Flor and Tri-Vi-Flor in the United States.
ADHD Portfolio. As part of the Neos Acquisition, the Company acquired product technology for the production and sale of Adzenys XR-ODT and Cotempla XR-ODT. The formulations for the ADHD products are protected by patented technology. The estimated economic life of these proprietary technologies is
Developed Technology Right
TRRP Technology. As part of the Neos Acquisition, the Company acquired Time Release Resin Particle (“TRRP”) proprietary technology, which is a proprietary drug delivery technology protected by the Company as a trade secret that allows the Company to modify the drug release characteristics of each of its respective products. The TRRP technology underlines the ADHD portfolio and can potentially be used in future product development initiatives as well.
Product Distribution Rights and Customer List
In connection with the Innovus Acquisition, the Company obtained
In-Process R&D
IPR&D – NT0502. As part of the Neos Acquisition, the Company acquired in-process research and development associated with NT0502, a new chemical entity that is for the treatment of sialorrhea, which is excessive salivation or drooling. This acquired asset remains as an indefinite-lived asset until the completion or abandonment of its associated research and development efforts (see Note 7 – Goodwill and Other Intangible Assets).
Certain of the Company’s amortizable intangible assets include renewal options, extending the expected life of the asset. The renewal periods range between approximately
18
8. Accrued liabilities
Accrued liabilities consist of the following:
December 31, | June 30, | |||||
2022 | 2022 | |||||
(In thousands) | ||||||
Accrued savings offers | $ | | $ | | ||
Accrued program liabilities | | | ||||
Accrued customer and product related fees | | | ||||
Product return reserve |
| |
| | ||
Accrued employee compensation | | | ||||
Other accrued liabilities | | | ||||
Total accrued liabilities | $ | | $ | | ||
Savings offers represent programs for the Company’s patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted.
Program liabilities include government rebates. Customer and product related fees include accrued expenses and deductions for rebates, wholesaler chargebacks and fees, and other product-related fees and deductions.
Other accrued liabilities consist of accrued license fees, legal settlements, professional fees, credit card liabilities, taxes payable, and samples expense.
9. Other Liabilities
December 31, | June 30, | |||||
2022 | 2022 | |||||
(In thousands) | ||||||
Fixed payment arrangements | $ | | $ | | ||
Operating lease liabilities |
| |
| | ||
Contingent value rights | | | ||||
Contingent consideration | | | ||||
Other | | | ||||
Total other liabilities | | | ||||
Less: current portion | ( | ( | ||||
Total other liabilities, noncurrent | $ | | $ | | ||
Fixed Payment Arrangements.
Fixed payment arrangements represent obligations to an investor assumed as part of the acquisition of products from Cerecor, Inc. in 2019, including fixed and variable payments. These obligations included fixed monthly payments equal to $
On June 21, 2021, the Company entered into a Waiver, Release and Consent pursuant to which the Company paid $
19
September 30, 2021. The Company accounted for the Waiver, Release and Consent as a debt and remeasured the related liabilities using a discounted cash flow model. As of December 31, 2022, the remaining fixed payment arrangement balance of $
The Tris Karbinal Agreement grants the Company exclusive right to distribute and sell the product in the United States. The initial term of the agreement was
The Tris Karbinal Agreement also contains minimum unit sales commitments, which is based on a commercial year that spans from August 1 through July 31, of
On May 12, 2022, the Company entered into an agreement with Tris to terminate the Tuzistra XR License, Development, Manufacturing and Supply Agreement dated November 2, 2018 (the “License Agreement”). Pursuant to such termination, the Company agreed to pay Tris a total of approximately $
Contingent Value Rights.
Contingent value rights (“CVRs”) represent contingent consideration related to the Company’s 2020 acquisition of Innovus of up to $
Contingent Consideration.
Contingent consideration represents the fair value of potential future payments in connection with acquisitions that are contingent upon the occurrence of a particular event or events. The Company records an obligation for such contingent payments at fair value on the acquisition date. Subsequent changes in the fair value of contingent consideration obligations are recognized in the condensed consolidated statements of income.
The Company recognized approximately $
Through March 31, 2022, the Company’s contingent consideration liabilities included obligations under licensing arrangements for Tuzistra XR. The royalty and make-whole milestone payments related to licensing agreements with Tris for Tuzistra XR were being accounted for as contingent consideration and revalued at each reporting period. As a result of the discontinuation of commercializing Tuzistra XR and the settlement agreement with Tris, the Company concluded that the product milestone payments underlying the contingent consideration liability ceased to exist. The Company reversed the remaining contingent consideration liabilities of $
20
agreement. The settlement payments are included in fixed payment arrangements at their present value using the Company’s estimated borrowing rate.
Through March 31, 2022, the royalty payments related to licensing agreements with Magna Pharmaceuticals, Inc. (“Magna”) for ZolpiMist were being accounted for as contingent consideration and revalued at each reporting period. As a result of the discontinuation of commercializing ZolpiMist, the Company concluded that the royalty-based product milestone payments underlying the contingent consideration liability ceased to exist. During the three months ended March 31, 2022, the Company reversed the remaining contingent consideration liabilities of $
Other.
Other consist of taxes payable and deferred cost related to our technology transfer.
10. Line of Credit
Upon closing of the Neos Acquisition in March 2021, the Company assumed obligations under the secured credit agreement that Neos had entered with Eclipse Business Capital LLC (f/k/a Encina Business Credit, LLC) (“Eclipse”) as agent for the lenders (the “Eclipse Loan Agreement”). Under the Eclipse Loan Agreement, Eclipse extended up to $
In connection with the Avenue Capital Agreement, described in Note 11— Long-term debt below, the Company entered into a Consent, Waiver and Second Amendment to Eclipse Loan Agreement, dated as of January 26, 2022 (together, the “Eclipse Second Amendment”). Pursuant to the Eclipse Second Amendment, Eclipse (i) consented to Aytu and certain of its subsidiaries joining as obligors to the Revolving Loans provided by the Eclipse Loan Agreement, (ii) consented to the Company entering into the Avenue Capital Agreement, (iii) extended the maturity date of the Eclipse Loan Agreement to
In the event that, for any reason, all or any portion of the Eclipse Loan Agreement is terminated prior to the scheduled maturity date, in addition to the payment of all outstanding principal and unpaid accrued interest, the Company is required to pay a fee equal to (i)
The Eclipse Loan Agreement contains customary affirmative covenants, negative covenants and events of default, as defined in the agreement, including covenants and restrictions that, among other things, require the Company to satisfy certain capital expenditure limitations and other financial covenants, and restrict the Company’s ability to incur liens, incur additional indebtedness, make certain dividends and distributions with respect to equity securities, engage in mergers and acquisitions or make asset sales without the prior written consent of Eclipse. A failure to comply with these covenants could permit Eclipse to declare the Company’s obligations under the Eclipse Loan Agreement, together with
21
accrued interest and fees, to be immediately due and payable, plus any applicable additional amounts relating to a prepayment or termination, as described above. As of December 31, 2022, the Company was in compliance with the covenants under the Eclipse Loan Agreement.
The Company’s obligations under the Eclipse Loan Agreement are secured by substantially all of the Company’s assets, with a first priority lien in favor of Eclipse on the ABL Priority Collateral, and a second priority lien in favor of Eclipse on the Term Loan Priority Collateral, as each is defined in the Replacement Term Loan Intercreditor Agreement, as defined in the Eclipse Loan Agreement, as amended by the Eclipse Second Amendment.
Total interest expense on the Revolving Loans, including amortization of deferred financing costs, was $
11. Long-term Debt
Avenue Capital Loan:
On January 26, 2022 (“Closing Date”), the Company entered into a Loan and Security Agreement (the “Avenue Capital Agreement”) with Avenue Venture Opportunities Fund II, L.P.(“Avenue”) and Avenue Venture Opportunities Fund II, L.P. (Avenue 2”) as lenders (the “Avenue Capital Lenders”), and Avenue Capital Management II, L.P. as administrative agent (the “Avenue Capital Agent”), (collectively “Avenue Capital”), pursuant to which the Avenue Capital Lenders provided the Company and certain of its subsidiaries with a secured $
Pursuant to the Avenue Capital Agreement, the Company will make interest only payments for the first
In the event the Company prepays the outstanding principal prior to the maturity date, the Company will pay Avenue Capital a fee equal to (i)
The Company’s obligations under Avenue Capital Agreement are secured by substantially all of the Company’s assets, with a first priority lien in favor of the Avenue Capital Agent on the Term Loan Priority Collateral, and a second priority lien in favor of the Avenue Capital Agent on the ABL Priority Collateral, as each is defined in the Intercreditor Agreement, as defined in the Avenue Capital Agreement.
The Avenue Capital Agreement contains customary affirmative covenants, negative covenants and events of default, as defined in the agreement, including covenants and restrictions that, among other things, require the Company to satisfy certain capital expenditure limitations and other financial covenants, and restricts the Company’s ability to incur liens, incur additional indebtedness, make certain dividends and distributions with respect to equity securities, engage in mergers and acquisitions or make asset sales without the prior written consent of the Avenue Capital Lenders. A failure to comply with these covenants could permit the Avenue Capital Lenders to declare the Company’s obligations under the agreement, together with accrued interest and fees, to be immediately due and payable, plus any applicable
22
additional amounts relating to a prepayment or termination, as described above. As of December 31, 2022, the Company was in compliance with the covenants under the Avenue Capital Agreement.
On
On
On October 25, 2022, the Company entered into an agreement with Avenue Venture Opportunities Fund, L.P (“Avenue”) to extend the interest-only period of its existing senior secure loan facility held with Avenue. The amendment to the original loan agreement, which was executed in January 2022, extends the interest-only period to January of 2024. In exchange for this extension of the interest-only period, the Company and Avenue agreed to reset the exercise price of the warrants issued in conjunction with the original loan agreement to $
In addition to the debt discounts discussed above, the Company also incurred $
Long-term debt consists of the following:
| December 31, |
| June 30, | |||
2022 | 2022 | |||||
(In thousands) | ||||||
Long-term debt, due on January 26, 2025 | $ | | $ | | ||
Long-term, final payment fee | | | ||||
Unamortized discount and issuance costs | ( | ( | ||||
Financing leases, maturing through May 2024 | | | ||||
Total debt | | | ||||
Less: current portion | ( | ( | ||||
Non-current portion of debt | $ | | $ | | ||
23
Future principal payments of long-term debt, including financing leases, are as follows:
| December 31, | ||
(In thousands) | |||
2023 | $ | | |
2024 | | ||
2025 | | ||
Future principal payments | | ||
Less unamortized discount and issuance costs | ( | ||
Less current portion | ( | ||
Non-current portion of debt | $ | | |
12. Fair Value Considerations
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to determine fair value as follows:
| ● | Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities; |
| ● | Level 2: Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and |
| ● | Level 3: Unobservable inputs that are supported by little or no market activity. |
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative warrant liabilities, contingent consideration liabilities, and short-term and long-term debt. The carrying amounts of certain short-term financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. Short-term and long-term debt are reported at their amortized costs on our condensed consolidated balance sheets. The remaining financial instruments and derivative warrant liabilities are reported on our consolidated balance sheets at amounts that approximate current fair values. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.
Recurring Fair Value Measurements
The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 and June 30, 2022, by level within the fair value hierarchy.
24
| Fair Value Measurements at December 31, 2022 | |||||||||||
| Fair Value at December 31, |
|
|
| ||||||||
2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||
(In thousands) | ||||||||||||
Liabilities: | ||||||||||||
Contingent consideration |
| $ | |
| $ | — |
| $ | — |
| $ | |
CVR liability |
| |
| — |
| — |
| | ||||
|
| — |
| — |
| | ||||||
Total | $ | |
| $ | — |
| $ | — | $ | | ||
| Fair Value Measurements at June 30, 2022 | |||||||||||
| Fair Value at June 30, |
|
|
| ||||||||
2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||
| (In thousands) | |||||||||||
Liabilities: | ||||||||||||
Contingent consideration | $ | |
| $ | — |
| $ | — |
| $ | | |
CVR liability | |
| — |
| — |
| | |||||
| — | — | | |||||||||
Total | $ | |
| $ | — |
| $ | — | $ | | ||
Summary of Level 3 Input Changes
The following table sets forth a summary of changes to those fair value measures using Level 3 inputs for the six months ended December 31, 2022:
| CVR |
| Contingent | Derivative |
| Fixed Payment | ||||||
Liability | Consideration | Warrant Liabilities |
| Arrangement | ||||||||
(In thousands) | ||||||||||||
Balance as of June 30, 2022 |
| $ | | $ | | $ | | $ | | |||
Included in earnings |
| | ( | ( | | |||||||
Purchases, issues, sales and settlements: |
|
|
| |||||||||
Issues |
|
| — |
| — |
| |
| — | |||
Settlements |
|
| — |
| ( |
| — |
| ( | |||
Balance as of December 31, 2022 |
| $ | | $ | | $ | | $ | | |||
Significant Assumptions
Significant assumptions used in valuing CVRs were as follows:
December 31, | |||
| 2022 | ||
Leveraged Beta |
| ||
Market risk premium | % | ||
Risk-free interest rate | % | ||
Discount | % | ||
Company specific discount |
| % | |
25
Significant assumptions used in derivative warrant liabilities at issuance date were as follows:
August 9, | |||
| 2022 | ||
Expected volatility |
| % | |
Equivalent term (years) | |||
Risk-free rate | % | ||
Dividend yield | % | ||
Significant assumptions used in derivative warrant liabilities were as follows:
December 31, | |||
| 2022 | ||
Expected volatility |
| % | |
Equivalent term (years) | |||
Risk-free rate | % | ||
Dividend yield | % | ||
The fixed payment arrangements are recognized at their amortized cost basis using market appropriate discount rates and are accreted up to their ultimate face value over time.
13. Commitments and Contingencies
Pediatric Portfolio Fixed Payments and Product Milestone
The Company has
On May 29, 2020, the Company entered into an Early Payment Agreement and Escrow Instruction (the “Early Payment Agreement”) pursuant to which the Company agreed to pay $
On June 21, 2021, the Company entered into a Waiver, Release and Consent pursuant to which the Company paid $
The Tris Karbinal Agreement grants the Company exclusive right to distribute and sell the product in the United States. The initial term of the agreement was
The Tris Karbinal Agreement also contains minimum unit sales commitments, which is based on a commercial year that spans from August 1 through July 31, of
26
commitment through 2025. The Tris Karbinal Agreement make-whole payment is capped at $
Rumpus Earn Out Payments
On April 12, 2021, the Company acquired substantially all of the assets of Rumpus, pursuant to which the Company acquired certain rights and other assets, including key commercial global licenses with Denovo Biopharma LLC (“Denovo”) and Johns Hopkins University (“JHU”), relating to AR101. Upon the achievement of certain regulatory and commercial milestones, up to $
Legal Proceeding
Aponowicz and Paguia Class-Action Securities Litigations. A putative class action was filed on February 9, 2022 in the Delaware Chancery Court by Rafal Aponowicz derivatively and on behalf of all Aytu stockholders, challenging the grant in 2021 of certain stock option awards to directors and officers. The stockholder contends those awards were in amounts exceeding the shares available under the Company’s 2015 equity incentive plan and that the directors therefore breached their fiduciary duties and breached a purported contract between them and stockholders. The Complaint seeks rescission of the awards, unspecified damages to stockholders as a result of the awards, and attorneys’ fees. A second such action was filed by Paul John M. Paguia on March 7, 2022; Mr. Paguia asserts the same claims and seeks the same relief. The parties have agreed to settle these matters for various corporate governance modifications and the payment of plaintiffs’ attorneys’ fees, subject to approval by the Court of Chancery of the State of Delaware. Notice of the settlement has been provided to stockholders of record as of December 31, 2022, and the settlement approval hearing is scheduled for March 10, 2023. As of December 31, 2022, we had $
14. Capital Structure
The Company has
Included in the common stock outstanding are
On June 8, 2020, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on June 17, 2020. This shelf registration statement covered the offering, issuance and sale by the Company of up to an aggregate of $
On June 4, 2021, the Company entered into a sales agreement with a sales agent, to provide for the offering, issuance and sale by the Company of up to $
27
the ATM Sales Agreement due to baby self-limitations. As our market capitalization increases, these limitations will be adjusted and the Company will be able to issue additional ATM sales.
On September 28, 2021, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 7, 2021. This shelf registration statement covered the offering, issuance and sale by the Company of up to an aggregate of $
On
15. Equity Incentive Plans
Aytu 2015 Plan. On June 1, 2015, the Company’s stockholders approved the 2015 Stock Option and Incentive Plan (the “Aytu 2015 Plan”), which, as amended in July 2017, provides for the award of stock options, stock appreciation rights, restricted stock and other equity awards for up to an aggregate of
Neos 2015 Plan. Pursuant to the Neos Merger, the Company assumed
28
Stock Options
Stock option activity is as follows:
|
|
|
| Weighted | |||
Average | |||||||
Weighted | Remaining | ||||||
Number of | Average | Contractual | |||||
Options | Exercise Price | Life in Years | |||||
Outstanding June 30, 2022 |
| | $ | |
| ||
Granted |
| | |
|
| ||
Forfeited/Cancelled |
| ( | |
|
| ||
Expired |
| ( | |
|
| ||
Outstanding at December 31, 2022 |
| | $ | |
| ||
Exercisable at December 31, 2022 |
| | $ | |
| ||
As of December 31, 2022, there was $
Restricted Stock
During the three months ended December 31, 2022, as a result of the change in members of the Company’s board, the Company accelerated unvested shares for
On December 19, 2022, the Company entered into a Stipulation of Compromise and Settlement (the “Stipulation”). As a part of the terms of the Stipulation, the Company agreed to rescind
Restricted stock activity under the Aytu 2015 Plan is as follows:
Weighted | |||||
Average Grant | |||||
Number of | Date Fair | ||||
Shares | Value | ||||
Unvested at June 30, 2022 |
| | $ | | |
Granted |
| | | ||
Vested |
| ( | | ||
Forfeited/Cancelled | ( | | |||
Unvested at December 31, 2022 |
| | $ | | |
As of December 31, 2022, there was $
The Company previously issued
29
Restricted Stock Units
RSUs activity is as follows:
|
|
| |||
Weighted | |||||
Average Grant | |||||
Number of | Date Fair | ||||
Shares | Value | ||||
Unvested at June 30, 2022 |
| | $ | | |
Vested |
| ( | | ||
Unvested at December 31, 2022 |
| | $ | | |
As of December 31, 2022, there was $
Stock-based compensation expense related to the fair value of stock options and restricted stock and RSUs was included in the statements of operations as set forth in the below table:
Three Months Ended | Six Months Ended | |||||||||||
December 31, | December 31, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
(in thousands) | ||||||||||||
Cost of sales | $ | | $ | | $ | | $ | | ||||
Research and development | | | | | ||||||||
Selling and marketing | | | | | ||||||||
General and administrative |
| |
| |
| |
| | ||||
Total stock-based compensation expense | $ | | $ | | $ | | $ | | ||||
16. Warrants
Liability Classified Warrants
On
30
In November and throughout the quarter end the Company sold shares through its ATM Sales Agreement. Per the warrant agreement, these sales qualified as an equity offering and the sales price was less than the current the exercise price of $
On January 6, 2023, the Company consummated a to 1 reverse stock split. Pursuant to the warrant agreement described above, the Company triggered a Stock Combination Event and the warrant exercise price and number to be issued was adjusted based on the average of each of the lowest
On October 25, 2022, the Company entered into an agreement with Avenue to extend the interest-only period of the Company’s existing senior secured loan facility. The amendment to the original secured loan agreement, which was executed in January 2022, extends the interest-only period to January of 2024. In exchange for this extension, the Company and Avenue agreed to reset the exercise price of the warrants issued in conjunction with the original loan agreement to $
Outstanding warrants are classified as derivative warrant liabilities in the condensed consolidated balance sheets and are marked to market at each reporting period (see Note 12 – Fair Value Considerations)
A summary of warrants is as follows:
|
|
| Weighted | ||||
Average | |||||||
Weighted | Remaining | ||||||
Number of | Average | Contractual | |||||
Warrants | Exercise Price | Life in Years | |||||
Outstanding June 30, 2022 |
| | $ | |
| ||
Warrants issued |
| |
| |
| ||
Warrants exercised | ( | | |||||
Outstanding December 31, 2022 |
| | $ | |
| ||
17. 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 the Company.
The following table sets-forth securities that are considered anti-dilutive, and therefore excluded from the calculation of diluted earnings per share.
December 31, | ||||||
|
| 2022 |
| 2021 | ||
Warrants to purchase common stock - liability classified |
| |
| | ||
Warrant to purchase common stock - equity classified |
| |
| | ||
Employee stock options |
| |
| | ||
Employee unvested restricted stock |
| |
| | ||
Employee unvested restricted stock units | | | ||||
Total | |
| | |||
18. License Agreements
Healight
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In April 2020. we entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight. The agreement with Cedars-Sinai grants us a license to all patent and development related technology rights for the intra-corporeal therapeutic use of ultraviolet light in the field of endotracheal and nasopharyngeal applications. As a result of the focus on revenue growth of our commercial business, and upon receiving the VAP pre-clinical study results on Healight, intend to evaluate strategic options for Healight, including partnering the asset, modifying the licensing agreement with Cedar-Sinai Medical Center, and terminating the licensing agreement.
NeuRx
In October 2018, Neos entered into an Exclusive License Agreement (“NeuRx License”) with NeuRx Pharmaceuticals LLC (“NeuRx”), pursuant to which NeuRx granted Neos an exclusive, worldwide, royalty-bearing license to research, develop, manufacture, and commercialize certain pharmaceutical products containing NeuRx’s proprietary compound designated as NRX-101, referred to as NT0502. NT0502 is a new chemical entity that is being developed for the treatment of sialorrhea, which is excessive salivation or drooling. The Company may be required to make certain development and milestone payments and royalties based on annual net sales, as defined in the NeuRx License. Royalties are to be paid on a country-by-country and licensed product-by-licensed product basis, during the period of time beginning on the first commercial sale of such licensed product in such country and continuing until the later of: (i) the expiration of the last-to-expire valid claim in any licensed patent in such country that covers such licensed product in such country; and/or (ii) expiration of regulatory exclusivity of such licensed product in such country.
The Company has suspended the research and development of NT0502 and intends to terminate the license agreement.
Teva
On December 21, 2018, Neos and Teva Pharmaceuticals USA, Inc. (“Teva”) entered into an agreement granting Teva a non-exclusive license to certain patents owned by Neos by which Teva has the right to manufacture and market its generic version of Cotempla XR-ODT under an Abbreviated New Drug Application (“ANDA”) filed by Teva beginning on July 1, 2026, or earlier under certain circumstances.
Actavis
On October 17, 2017, Neos entered into an agreement granting Actavis a non-exclusive license to certain patents owned by Neos by which Actavis (now Teva, following Teva’s acquisition of Actavis’ generic products) has the right to manufacture and market its generic version of Adzenys XR-ODT under its ANDA beginning on September 1, 2025, or earlier under certain circumstances.
Shire
In July 2014, Neos entered into a Settlement Agreement and an associated License Agreement (the “2014 License Agreement”) with Shire LLC (“Shire”) for a non-exclusive license to certain patents for certain activities with respect to Neos’ New Drug Application (the “NDA”) No. 204326 for an extended-release orally disintegrating amphetamine polistirex tablet. In accordance with the terms of the 2014 License Agreement, following the receipt of the approval from the FDA for Adzenys XR-ODT, Neos paid an up-front, non-refundable license fee of an amount less than $
In March 2017, Neos entered into a License Agreement (the “2017 License Agreement”) with Shire, pursuant to which Shire granted Neos a non-exclusive license to certain patents owned by Shire for certain activities with respect to Neos’ NDA No. 204325 for an extended-release amphetamine oral suspension. In accordance with the terms of the 2017 License Agreement, following the receipt of the approval from the FDA for Adzenys ER, Neos paid an up-front, non-
32
refundable license fee of an amount less than $
The royalties are recorded as cost of goods sold in the same period as the net sales upon which they are calculated.
Additionally, each of the 2014 and 2017 License Agreements contains a covenant from Shire not to file a patent infringement suit against Neos alleging that Adzenys XR-ODT or Adzenys ER, respectively, infringes the Shire patents.
19. Segment Reporting
The Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.
The Company manages and aggregates its operational and financial information in accordance with
Select financial information for these segments is as follows:
Three Months Ended | Six Months Ended | |||||||||||
December 31, | December 31, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
(In thousands) | ||||||||||||
Consolidated revenue: |
|
|
|
|
|
| ||||||
Rx Segment | $ | | $ | | $ | | $ | | ||||
Consumer Health Segment |
| |
| |
| |
| | ||||
Consolidated revenue | $ | | $ | | $ | | $ | | ||||
Consolidated net loss: |
|
|
|
|
|
|
|
| ||||
Rx Segment | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Consumer Health Segment |
| ( |
| ( |
| ( |
| ( | ||||
Consolidated net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
December 31, | June 30, | |||||
2022 | 2022 | |||||
(In thousands) | ||||||
Total assets: | ||||||
Rx Segment | $ | | $ | | ||
Consumer Health Segment |
| |
| | ||
Consolidated assets | $ | | $ | | ||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with Aytu BioPharma, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2022, filed on September 27, 2022. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the risk factors included in Aytu’s Form 10-K and Form 10-Q filed with the United Sates Securities and Exchange Commission (“SEC”) on September 27, 2022 and November 14, 2022, respectively.
Objective
The purpose of the Management Discussion and Analysis (the “MD&A”) is to present information that management believes is relevant to an assessment and understanding of our results of operations and cash flows for the three and six months ended December 31, 2022, and our financial condition as of December 31, 2022. The MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and notes.
Overview
We are a commercial-stage pharmaceutical company focused on commercializing novel therapeutics and consumer healthcare products. We operate through two business segments (i) the Rx segment, consisting of prescription pharmaceutical products sold through third party wholesalers and (ii) the Consumer Health segment, which consists of various consumer health products sold directly to consumers. We generate revenue by selling our products through third party intermediaries in our marketing channels as well as directly to our customers. We currently manufacture our products for the treatment of attention deficit hyperactivity disorder (“ADHD”) at our manufacturing facilities and use third party manufacturers for our other prescription and consumer health products. We also have product candidates in development, including, AR101 (enzastaurin) for the treatment of vascular Ehlers-Danlos Syndrome (“VEDS”) and Healight (endotracheal light catheter) for the treatment the treatment of severe, difficult-to-treat respiratory infections.
We have incurred significant losses in each year since inception. Our net losses was $6.7 million for the three months ended December 31, 2022, and was $7.4 million for the six months ended December 31, 2022. As of December 31, 2022, and June 30, 2022, we had accumulated deficits of $294.5 million and $287.1 million, respectively. We expect to continue to incur significant expenses in connection with our ongoing activities, including the integration of our acquisitions.
Significant Developments
Company Strategy
In the first quarter of fiscal 2023, we announced that we will focus our efforts on accelerating the growth of our commercial business and achieving operating cash flows. To achieve these goals, we have indefinitely suspended active development of our clinical development programs, including AR101(enzastaurin) and Healight. The suspension of these programs is expected to save over $20 million in projected future study costs over the next three fiscal years.
In April 2020. we entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight. The agreement with Cedars-Sinai grants us a license to all patent and development related technology rights for the intra-corporeal therapeutic use of ultraviolet light in the field of endotracheal and nasopharyngeal applications. As a result of the focus on revenue growth of our commercial business, and upon receiving the VAP pre-clinical study results on Healight, we intend to evaluate strategic options for Healight, including partnering the asset, modifying the licensing agreement with Cedar-Sinai Medical Center, and terminating the licensing agreement.
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Our commercial business includes the Rx segment and the Consumer Health segment.
Business Environment
The ongoing COVID-19 pandemic continues to impact the global economy and create economic uncertainties. We believe COVID-19 has negatively impacted the market for prescription products, disrupted the reliability of the supply chain, and impacted the ability and efficiency of conducting clinical trials. The extent to which COVID-19 continues to negatively impact our business in the future will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the new variants of coronavirus, the actions taken to contain the coronavirus or treat its impact, and the continued impact of each of these items on the economies and financial markets in the United States and abroad. While the Biden administration has announced that the COVID-19 emergency declaration will end May 11, 2023 and states and jurisdictions have rolled back stay-at-home and quarantine orders and reopened in phases, it is difficult to predict what the lasting impact of the pandemic will be, and if we or any of the third parties with whom we engage were to experience additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could have a material adverse impact on our business, results of operation and financial condition. In addition, a recurrence or impact from new strains of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. We will continue to monitor developments as we deal with the disruptions and uncertainties relating to the COVID-19 pandemic.
We have continued to experience significant inflationary pressure and supply chain disruptions related to the sourcing of raw materials, energy, logistics and labor during fiscal 2022 and 2023. While we do not have sales or operations in Russia or Ukraine, it is possible that the conflict or actions taken in response, could adversely affect some of our markets and suppliers, economic and financial markets, costs and availability of energy and materials, or cause further supply chain disruptions. We continue to closely monitor the impact of, and responses to, COVID-19 variants, including government-imposed lockdowns, on demand conditions and our supply chain. We expect that inflationary pressures and supply chain disruptions could continue to be significant across the business throughout our fiscal 2023 year.
Debt and Equity financing
On October 25, 2022, we entered into an agreement with Avenue Venture Opportunities Fund, L.P (“Avenue”) to extend the interest-only period of our existing senior secure loan facility held with Avenue. The amendment to the original loan agreement, which was executed in January 2022, extends the interest-only period to January of 2024. In exchange for this extension of the interest-only period, we and Avenue agreed to reset the exercise price of the warrants issued in conjunction with the original loan agreement to $8.60, corresponding to the warrant exercise price associated with the Company’s latest equity financing. We expect to conserve cash of approximately $3.0 million related to principal payment in calendar year 2023. (See Note —11 Long-Term Debt and Note 16— Warrants).
On August 11, 2022, we closed on an underwritten public offering (“August 2022 Offering”), of (i) 1,075,290 shares of our common stock and, in lieu of common stock to certain investors, pre-funded warrants (“Pre-Funded Warrants”) to purchase 87,500 shares of our common stock, and (ii) accompanying warrants (the “Common Warrants”) to purchase 1,265,547 shares of our common stock. We received gross proceeds of $10.0 million and net proceeds of approximately $9.1 million, after deducting underwriting discounts and commissions and estimated offering expenses.
During the six months ended December 31, 2022, we issued 312,308 shares of common stock under the ATM Sales Agreement (as defined below) with total gross proceeds of approximately $1.5 million before deducting commissions of 3% and other offering expenses including legal and audit fees.
On January 6, 2023, we effected a 1-for-20 reverse stock split of our common stock. All share and per share amounts in this quarterly report have been adjusted to reflect the effect of the Reverse Stock Split. Aytu’s Board of Directors implemented the reverse stock split with the objective of regaining compliance with the $1.00 minimum bid price requirement of the Nasdaq Capital Market. On January 23, 2023, Nasdaq confirmed we regained compliance with this listing rule.
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Aytu’s shares of common stock will continue to trade on the Nasdaq Capital Market under the symbol "AYTU." The new CUSIP number for the Company's common stock post-reverse stock split is 054754858.
A cash payment will be made to each stockholder in lieu of any fractional interest in a share to which each stockholder would otherwise be entitled as a result of the reverse stock split. The reverse stock split reduced the number of shares of outstanding common stock from approximately 68.8 million shares to approximately 3.4 million shares. As a result of the reverse stock split, proportional adjustments were also made to outstanding warrants and options, and to our 2015 equity incentive plan.
RESULTS OF OPERATIONS
Three and six months ended December 31, 2022 compared to the three and six months ended December 31, 2021
| Three Months Ended |
| Six Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||||
| 2022 |
| 2021 |
| Change |
| 2022 |
| 2021 |
| Change | |||||||
(In thousands) | ||||||||||||||||||
Product revenue, net | $ | 26,279 | $ | 23,125 | $ | 3,154 | $ | 53,934 | $ | 45,022 | $ | 8,912 | ||||||
Cost of sales | 8,986 | 10,826 | (1,840) | 18,609 | 20,267 | (1,658) | ||||||||||||
Gross profit | 17,293 | 12,299 | 4,994 | 35,325 | 24,755 | 10,570 | ||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Research and development |
| 1,710 |
| 4,475 |
| (2,765) |
| 2,774 |
| 6,127 |
| (3,353) | ||||||
Advertising and direct marketing | 4,595 | 4,985 | (390) | 9,047 | 9,530 | (483) | ||||||||||||
Other selling and marketing | 5,965 | 4,675 | 1,290 | 11,615 | 9,427 | 2,188 | ||||||||||||
General and administrative | 8,018 | 7,953 | 65 | 15,340 | 16,169 | (829) | ||||||||||||
Impairment expense |
| 2,600 |
| — |
| 2,600 |
| 2,600 |
| 19,453 |
| (16,853) | ||||||
Amortization of intangible assets |
| 1,198 |
| 1,505 |
| (307) |
| 2,395 |
| 3,042 |
| (647) | ||||||
Total operating expenses |
| 24,086 |
| 23,593 |
| 493 |
| 43,771 |
| 63,748 |
| (19,977) | ||||||
Loss from operations |
| (6,793) |
| (11,294) |
| 4,501 |
| (8,446) |
| (38,993) |
| 30,547 | ||||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other expense, net | (1,303) | (257) | (1,046) | (2,542) | (516) | (2,026) | ||||||||||||
Gain on derivative warrant liability |
| 1,403 | — | 1,403 |
| 3,594 | — | 3,594 | ||||||||||
Total other income (expense) |
| 100 |
| (257) |
| 357 |
| 1,052 |
| (516) |
| 1,568 | ||||||
Loss before income tax |
| (6,693) |
| (11,551) |
| 4,858 |
| (7,394) |
| (39,509) |
| 32,115 | ||||||
Income tax benefit |
| — | (3) |
| 3 |
| — | (110) |
| 110 | ||||||||
Net loss | $ | (6,693) | $ | (11,548) | $ | 4,855 | $ | (7,394) | $ | (39,399) | $ | 32,005 | ||||||
Product revenue, net
In the three and six months ended December 31, 2022, net product revenue increased by $3.2 million, or 14%, and $8.9 million, or 20%, compared to the three and six months ended December 31, 2021, respectively. The increases were primarily driven by product growth of our Pediatric Portfolio and ADHD Portfolio. These increases were partially offset by a modest decrease in Consumer Health products due to a change of focus on e-commerce, and supply chain issues.
Gross margins
In the three and six months ended December 31, 2022, gross margins increased by $5.0 million, or 41%, and $10.6 million, or 43%, compared to the three and six months ended December 31, 2021, respectively. The increases were primarily driven by net revenue increases as described above. Gross margin percentage increased to 66% and 65%
36
for the three and six months ended December 31, 2022, compared to 53% and 55% for the same periods ended December 31, 2021. The improvements were primarily due to higher net revenues and cost saving efficiencies in the Pediatric Portfolio. Gross margin improvements in the ADHD Portfolio were due to efficiencies in production related to higher demand for products.
Research and development
In the three and six months ended December 31, 2022, research and development expense decreased by $2.8 million, or 62%, and $3.4 million, or 55%, compared to the same periods ended December 31, 2021. Our research and development costs were primarily associated with AR101 and to a lesser extent, the development of Healight and support for our commercialized products. In October 2022, we announced the suspension of the development of AR101 and Healight to focus on our commercial operations. As a result, research and development spending significantly declined. We expect our research and development expenses to decrease from current levels as a result of our focus on commercial operations.
Advertising and direct marketing
In the three and six months ended December 31, 2022, advertising and direct marketing expense was consistent with the three and six months ended December 31, 2021. Advertising and direct marketing expense includes direct-to-consumer marketing, advertising, sales, and customer support and processing fees related to our Consumer Health segment. Advertising and direct marketing can fluctuate materially between periods based on the timing of marketing campaigns.
Other selling and marketing
In the three and six months ended December 31, 2022, other selling and marketing expense increased by $1.3 million, or 28%, and $2.2 million, or 23%, compared to the same periods ended December 31, 2021. The increases were primarily driven by commission expense based on subscriptions prescribed and commercial marketing program fees.
General and administrative
In the three months ended December 31, 2022, general and administrative expense was consistent with the three months ended December 31, 2021.
In the six months ended December 31, 2022, general and administrative expense decreased by $0.8 million, or 5% compared to the same period ended December 31, 2021. The decrease is primarily a result of ongoing cost cutting initiatives associated with our acquisition of Neos.
Impairment expense
Due to increased focus on our commercial efforts, we ceased active development of our NT0502 product candidate. As a result, we intend to return the intellectual property and terminate the Exclusive License Agreement with NeuRX Pharmaceuticals entered into in October 2018. In the three and six months ended December 31, 2022, we incurred an impairment charge of $2.6 million related to these decisions.
In the six months ended December 31, 2021, as a result of the decline in our market capitalization, a qualitative and quantitative analysis was performed on the goodwill and other intangible assets associated with our Rx Segment. This analysis resulted in an impairment loss of $19.5 million.
Amortization of intangible assets
In the three and six months ended December 31, 2022, amortization expense of intangible assets, excluding amounts included in cost of sales, decreased by $0.3 million, or 20%, and $0.6 million, or 21%, compared to the same
37
periods ended December 31, 2021. The decreases were primarily related to the smaller intangible asset base due to the impairments of certain intangible assets during the fiscal 2022 year.
Unrealized gain or loss from derivative warrant liabilities
The fair value of derivative warrant liabilities was calculated using either the Black-Scholes option model or the Monte Carlo simulation model and are revalued at each reporting period. In the three and six months ended December 31, 2022, we recognized unrealized gain of $1.4 million and $3.6 million, respectively, from the fair value adjustments.
Other (expense), net
In the three and six months ended December 31, 2022, other expense, net, increased by $1.0 million and $2.0 million, compared to the same periods ended December 31, 2021. The increases were primarily due to licensing agreements and an increase in the interest rate on our debt including amortization of our fixed term payment arrangements.
Liquidity and Capital Resources
Sources of Liquidity
We have obligations related to our loan agreements, contingent consideration related to our acquisitions, milestone payments for licensed products and manufacturing purchase commitments.
We finance our operations through a combination of sales of our common stock and warrants, borrowings under our line of credit facility and cash generated from operations.
Shelf Registrations
On September 28, 2021, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 7, 2021. This shelf registration statement covered the offering, issuance and sale by the Company of up to an aggregate of $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2021 Shelf”). As of December 31, 2022, approximately $82.4 million remains available under the 2021 Shelf.
On June 8, 2020, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on June 17, 2020. This shelf registration statement covered the offering, issuance and sale by the Company of up to an aggregate of $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2020 Shelf”). As of December 31, 2022, approximately $42.0 million remains available under the 2020 Shelf.
On June 4, 2021, we entered into a sales agreement with a sales agent, to provide for the offering, issuance and sale by us of up to $30.0 million of our common stock from time to time in “at-the-market” offerings under the 2020 Shelf (the “ATM Sales Agreement”). During the six months ended December 31, 2022, we issued 312,308 shares of common stock under the ATM Sales Agreement, with total net proceeds of approximately $1.5 million. As of December 31, 2022, we had approximately $3.3 million of capacity under the ATM Sales Agreement due to baby self-limitations. As our market capitalization increases, these limitations will be adjusted and we will be able to issue additional ATM sales.
Underwriting Agreements
On August 11, 2022, we closed on an underwritten public offering (“August 2022 Offering”), of (i) 1,075,290 shares of our common stock and, in lieu of common stock to certain investors, pre-funded warrants (“Pre-Funded Warrants”) to purchase 87,500 shares of our common stock, and (ii) accompanying warrants (the “Common Warrants”) to purchase 1,162,790 shares of our common stock. We received gross proceeds of $10.0 million and net proceeds of approximately $9.1 million, after deducting underwriting discounts and commissions and estimated offering expenses.
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Eclipse Loan Agreement
The Eclipse Loan Agreement, as amended, provides us with up to $12.5 million in Revolving Loans, of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. The Revolving Loans bore interest at LIBOR, plus 4.50% through April 2022. Beginning in May 2022 through maturity, the Revolving Loans bear interest at the Secured Overnight Financing Rate (“SOFR”) plus 4.50%. In addition, we are required to pay an unused line fee of 0.50% of the average unused portion of the maximum Revolving Loans amount during the immediately preceding month. Interest is payable monthly in arrears. The maturity date under the Eclipse Loan Agreement, as amended, is January 26, 2025.
Cash Flows
The following table shows cash flows for the six months ended December 31, 2022, and 2021:
Six Months Ended December 31, | Increase | ||||||||
| 2022 |
| 2021 |
| (Decrease) | ||||
(In thousands) | |||||||||
Net cash used in operating activities | $ | (11,588) | $ | (12,613) | $ | (1,025) | |||
Net cash provided by (used in) investing activities | $ | 37 | $ | (3,137) | $ | (3,174) | |||
Net cash provided by financing activities | $ | 11,692 | $ | 1,126 | $ | 10,566 | |||
Net Cash Used in Operating Activities
Net cash used in operating activities during these periods primarily reflected our net losses, partially offset by changes in working capital and non-cash charges including impairment, stock-based compensation expense, gain or loss on derivative warrant liabilities, depreciation, amortization and accretion, and other charges.
During the six months ended December 31, 2022, net cash used in operating activities totaled $11.6 million. The use of cash was primarily the result of the decrease in inventory, prepaid expenses, and accrued liabilities. These were partially offset by positive cash earnings (net loss offset by non-cash depreciation, amortization and accretion, in addition to stock compensation expense and impairment charges).
During the six months ended December 31, 2021, net cash used in operating activities totaled $12.6 million. The use of cash was approximately $26.7 million less than the net loss due primarily to non-cash charges of goodwill impairment, depreciation, amortization and accretion, stock-based compensation, inventory write-down and loss from change in fair values of contingent consideration. These non-cash charges were partially offset by non-cash amortization of debt premium and non-cash gain from change in fair values of contingent value rights. In addition, our use of cash decreased due to changes in working capital including decreases in accounts receivable and prepaid expense and other current assets, increase in accrued liabilities, offset by a decrease in accounts payable.
Net Cash Provided by (Used in) Investing Activities
Net cash flows provided by investing activities were nominal in the six months ended December 31, 2022.
Net cash used in investing activities of $3.1 million during the six months ended December 31, 2021 was primarily due to a $3.1 million payment of contingent consideration.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of $11.7 million during the six months ended December 31, 2022, was primarily from $9.1 million of proceeds from our August 2022 equity raise, $3.6 million of additional net borrowing made under our short-term line of credit, and $1.5 million from our sales under our ATM Sales Agreement.
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Net cash provided by financing activities of $1.1 million during the six months ended December 31, 2021 was primarily from $4.6 million of net proceeds from issuance of our common stock under the ATM, partially offset by $2.7 million in payments of fixed payment arrangements and $0.8 million net reduction in our revolving loan.
Contractual Obligations, Commitments and Contingencies
As a result of our acquisitions and licensing agreements, we are contractually and contingently obliged to pay, when due, various fixed and contingent milestone payments. See Note 13 – Commitments and Contingencies in the accompanying condensed consolidated financial statements for further information.
On May 12, 2022, we entered into an agreement with TRIS Pharma Inc. (“Trish”) to terminate the License, Development, Manufacturing and Supply Agreement dated November 2, 2018 (the “License Agreement”). Pursuant to such termination, we agreed to pay Tris a total of $6 million to $9 million, which reduced our total liability for minimum payments by approximately $8 million from the original License Agreement. As of December 31, 2022, the balance was $7.2 million on the condensed consolidated balance sheet. Pursuant to the settlement agreement, if the Company does not make timely payments, it is required to pay interest on any outstanding balances at a rate equal to the greater of (i) 2.5% per month and (ii) the maximum interest rate permitted by applicable law.
Upon closing of the acquisition of a line of prescription pediatric products from Cerecor, Inc. in October 2019, we assumed payment obligations that require us to make fixed and product milestone payments driven off sale. As of December 31, 2022, up to $4.6 million of fixed and product milestone payments based on net sales remain.
In connection with the February 2020 acquisition of Innovus Pharmaceuticals, Inc. (“Innovus”), all of Innovus’s shares were converted to our common stock and CVRs, which represents contingent additional consideration of up to $16.0 million payable to satisfy future performance milestones. As of December 31, 2022, up to $5.0 million of potential CVR milestone payments remain.
In connection with our acquisition of the assets from Rumpus VEDS, LLC, Rumpus Therapeutics, LLC, Rumpus Vascular, LLC (collectively, “Rumpus”), upon satisfaction of milestones, we may be required to pay up to $67.5 million in regulatory and commercial-based earn-out payments to Rumpus. Under the licensing agreement with Denovo Biopharma LLC (“Denovo”), we made a payment of $0.6 million for a license fee in April 2022. In addition, upon the achievement of regulatory and commercial milestones, we may be required to pay up to $101.7 million. Under the licensing agreement with Johns Hopkins University (“JHU”), upon achievement of regulatory and commercial milestone, we may be required to pay up to $1.6 million to JHU. In fiscal 2022, two milestones payable to Rumpus were achieved totaling $4.0 million, which were paid in 109,447 shares of common stock and $2.6 million in cash. The Company also assumed the responsibility for royalties of 3.0% of net product sales, with a minimum of $20,000 per year, and upon the achievement of certain regulatory and commercial milestones, up to $1.6 million.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. There have been no material changes to our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended June 30, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
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Item 4. Controls and Procedures.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective, due to the material weakness in our internal control over financial reporting related to the Company’s accounting for complex financial instruments, specifically, with regards to warrants. As a result, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Amendment present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
Changes in Internal Control over Financial Reporting
Previous Disclosure of Material Weakness in Internal Controls Over Financial Reporting
As disclosed in our September 30, 2022 Form 10Q/A, we identified a material weakness in controls over the accounting for complex warrant issuances and the classification of these issued warrants. This material weakness resulted in the failure to prevent material errors in accounting for the warrants as equity classification when the warrants should have been classified as liabilities and marked to market each reporting period. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements, other literature, and consultation with third-party experts, we did not classify the warrants correctly.
Remediation Plan
Our Audit Committee is conducting an internal investigation to identify and determine a plan to remediate the material weakness described above and to enhance our overall control environment. We will not consider the material weakness remediated until our enhanced control is operational for a sufficient period of time and tested, enabling management to conclude that the enhanced controls are operating effectively. Our remediation plan includes the implementation of controls over the process of reviewing significant and complex contracts and agreements.
Changes in Internal Control Over Financial Reporting
Except for the material weakness noted above, there have been no changes in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2022 that have material affect, or are reasonably likely to material affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Aponowicz and Paguia Class-Action Securities Litigations. A putative class action was filed on February 9, 2022 in the Delaware Chancery Court by Rafal Aponowicz derivatively and on behalf of all Aytu stockholders, challenging the grant in 2021 of certain stock option awards to directors and officers. The stockholder contends those awards were in amounts exceeding the shares available under the Company’s 2015 equity incentive plan and that the directors therefore breached their fiduciary duties and breached a purported contract between them and stockholders. The Complaint seeks rescission of the awards, unspecified damages to stockholders as a result of the awards, and attorneys’ fees. A second such action was filed by Paul John M. Paguia on March 7, 2022; Mr. Paguia asserts the same claims and seeks the same relief. The parties have agreed to settle these matters for various corporate governance modifications and the payment of plaintiffs’ attorneys’ fees, subject to approval by the Court of Chancery of the State of Delaware. Notice of the settlement has been provided to stockholders of record as of December 31, 2022, and the settlement approval hearing is scheduled for March 10, 2023. As of December 31, 2022, we had $0.4 million accrued for plaintiff’s attorney fees.
Item 1A. Risk Factors.
Our business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business prospects, financial condition, and results of operations, and you should carefully consider them. There have not been any material changes to our risk factors from those reported in our fiscal year 2022 Annual Report on Form 10-K filed on September 27, 2022, other than as described below.
We have restated our prior unaudited consolidated financial statements, which may lead to additional risks and uncertainties, including loss of investor confidence and negative impacts on our stock price.
We have restated our unaudited condensed consolidated financial statements as of and for the quarterly period ended September 30, 2022 (the “Restated Period”). Our Audit Committee, in consultation with and based on the recommendation of management, made the determination to restate these financial statements following the identification of errors related to the classification of certain warrants that were previously recorded as equity. Due to the errors, the Audit Committee concluded that the Company’s previously issued financial statements for the Restated Period should no longer be relied upon. In addition, we performed a re-evaluation of our internal controls over financial reporting. Based on the re-evaluation, management concluded that, as a result of the identified of material weakness, our internal controls over financial reporting were ineffective for the Restated Period. Our quarterly report on Form 10-Q for the period ended September 30, 2022 has been amended as Amendment No. 1 on Form 10-Q/A (the “Amended Filing”) to, among other things, reflect the restatement of our financial statements for the Restated Period.
As a result of these events, we have become subject to a number of additional costs and risks, including unanticipated costs for accounting and legal fees in connection with or related to the restatement and the remediation of our ineffective disclosure controls and procedures and material weakness in internal control over financial reporting. In addition, the attention of our management team has been diverted by these efforts. We could be subject to additional stockholder, governmental, or other actions in connection with the restatement or other matters. Any such proceedings will, regardless of the outcome, consume management’s time and attention and may result in additional legal, accounting, insurance and other costs. If we do not prevail in any such proceedings, we could be required to pay substantial damages or settlement costs. In addition, the restatement and related matters could impair our reputation or could cause our counterparties to lose confidence in us. Each of these occurrences could have a material adverse effect on our business, results of operations and financial condition.
We have identified a material weakness in our internal control over financial reporting. This material weakness could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.
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Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weakness identified through such evaluation of those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As described in the Amended Filing, we identified a material weakness in our internal control over financial reporting related to the accounting for complex warrant issuances and the classification of these issued warrants. As disclosed in Note 2 – Previously Reported Financial Statements of the Amended Filing, the Company incorrectly accounted for certain warrants as equity when the warrants should have been classified as liabilities and marked to market each reporting period. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as of September 30, 2022. This material weakness resulted in a material misstatement and restatement of our financial statements for three months ended September 30, 2022.
To respond to this material weakness, we have devoted, and plan to continue to devote, significant effort and resources to the remediation and improvement of our internal control over financial reporting. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance these processes to better evaluate our research and understanding of the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. For a discussion of management’s consideration of the material weakness identified related to our accounting for the improper classification of the warrants, see Note 2 to the accompanying condensed financial statements, as well as Part I, Item 4: Controls and Procedures, included in the Amended Filing.
Any failure to maintain such internal control could adversely impact our ability to report our financial position and results from operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock exchange on which our ordinary shares are listed, the SEC or other regulatory authorities. In either case, there could result a material adverse effect on our business. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our shares.
We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weakness or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future, those controls, and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
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Item 6. Exhibits.
Exhibit No. |
| Description |
| Registrant’s |
| Date Filed |
| Exhibit |
| Filed |
31.1 | X | |||||||||
31.2 | X | |||||||||
32.1 | X | |||||||||
101 | XBRL (extensible Business Reporting Language). The following materials from Aytu BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022 formatted in Inline XBRL: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Stockholders’ Equity (Deficit), (iv) the Consolidated Statement of Cash Flows, and (v) the Consolidated Notes to the Financial Statements. | X | ||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101. | X |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
AYTU BIOPHARMA, INC. | |||
|
| ||
Date: February 21, 2023 | By: | /s/ Joshua R. Disbrow | |
| Joshua R. Disbrow | ||
| Chief Executive Officer | ||
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