Aytu Biopharma, Inc 10-Q for FY2024 Q1
Aytu Biopharma, Inc (AYTU)
About this 10-Q
Aytu Biopharma, Inc filed this 10-Q on November 14, 2023, covering the quarter ended September 30, 2023 (FY2024 Q1).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $22.1M
- down 20.1% from $27.66M a year earlier
- Net loss
- $8.12M
- compared with a net loss of $701K a year earlier
- Diluted EPS
- -$1.48
- compared with -$0.28 a year earlier
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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(Address of principal executive offices, including zip code)
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Securities registered pursuant to Section 12(b) of the Act:
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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.
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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 November 1, 2023, there were
AYTU BIOPHARMA, INC. FOR THE QUARTER ENDED SEPTEMBER 30, 2023
INDEX
PART I—FINANCIAL INFORMATION
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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 Aytu, Aytu BioPharma, Adzenys XR-ODT, Cotempla XR-ODT, Innovus Pharma, Neos, Neos Therapeutics, Poly-Vi-Flor, and Tri-Vi-Flor, 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.
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per-share amounts)
(Unaudited)
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| | September 30, | | |||
| | 2023 | | 2023 | ||
Assets | | | | | | |
Current assets | | |
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Cash and cash equivalents | | $ | | | $ | |
Accounts receivable, net | |
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Inventories | |
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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 | | $ | | | $ | |
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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 | |
| ( | |
| ( |
Total stockholders’ equity | |
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Total liabilities and stockholders’ equity | | $ | | | $ | |
See the accompanying Notes to the Consolidated Financial Statements
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AYTU BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per-share amounts)
(Unaudited)
| | Three Months Ended | |||||
| | September 30, | |||||
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| 2023 | | | 2022 | ||
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| $ | | | | $ | | |
Cost of sales | |
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Gross profit | | | | | | | |
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Operating expenses | | | | | | | |
Selling and marketing | | | | | | | |
General and administrative | | | | | | | |
Research and development | |
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Amortization of intangible assets | |
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Loss from contingent consideration | | | — | | | | |
Total operating expenses | |
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Loss from operations | |
| ( | |
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| ( |
Other income (expense) | |
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Other expense, net | |
| ( | | | | ( |
(Loss) gain on derivative warrant liabilities | |
| ( | | | | |
Total other (expense) income | |
| ( | |
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Loss before income tax | |
| ( | |
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| ( |
Income tax benefit | |
| — | | | | — |
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 Consolidated Financial Statements.
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AYTU BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
Three Months Ended September 30, | |||||||||||||||||||
| | | | | | | | | | | | Additional | | | | Total | |||
| | Preferred Stock | | Common Stock | | Paid-in | | Accumulated |
| Stockholders’ | |||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Capital | | Deficit | | Equity | |||||
Balance, July 1, 2023 | | — |
| $ | — |
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| $ | |
| $ | |
| $ | ( | | $ | |
| | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | | | — | | | | | | — | | | |
Net loss | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Balance, September 30, 2023 | | — | | $ | — | | | | $ | | | $ | | | $ | ( | | $ | |
| | | | | | | | | | | | | | | | | | | |
Balance, July 1, 2022 | | — |
| $ | — |
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| $ | — |
| $ | |
| $ | ( | | $ | |
| | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | |
| — | | ( | |
| — | |
| | | | — | | | |
Issuance of common stock, net of issuance cost | | — | | | — | | | | | — | | | | | | — | | | |
Net loss | | — | |
| — | | — | |
| — | |
| — | |
| ( | | | ( |
Balance, September 30, 2022 | | — | | $ | — | | | | $ | — | | $ | | | $ | ( | | $ | |
See the accompanying Notes to the Consolidated Financial Statements
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AYTU BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| Three Months Ended | ||||
| | September 30, | ||||
| | 2023 | | 2022 | ||
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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Stock-based compensation expense | |
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Loss (gain) on derivative warrant liabilities | | | | | | ( |
Amortization of senior debt discount | | | | | | |
Loss from contingent consideration | |
| — | |
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Inventory write-down | | | | | | |
Other noncash adjustments | |
| ( | |
| ( |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | |
| ( | |
| ( |
Inventories | |
| ( | |
| ( |
Prepaid expenses and other current assets | |
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| ( |
Accounts payable and other | |
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Accrued liabilities | |
| ( | |
| ( |
Other operating assets and liabilities, net | | | | | | ( |
Net cash used in operating activities | |
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Investing Activities | |
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Other investing activities | |
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Net cash (used in) provided by investing activities | |
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Financing Activities | |
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Proceeds from issuance of stock and warrants | |
| — | |
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Net (payments made on) proceeds received from, short-term line of credit | | | ( | | | |
Payment made to fixed payment arrangement | | | ( | | | ( |
Payment of stock issuance costs | |
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Payments made to borrowings | |
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Other financing activities | | | — | | | ( |
Net cash (used in) provided by financing activities | |
| ( | |
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Net change in cash and cash equivalents | | | ( | | | |
Cash and cash equivalents at beginning of period | | | | | | |
Cash and cash equivalents at end of period | | $ | | | $ | |
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| Three Months Ended | ||||
| | September 30, | ||||
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| 2023 |
| 2022 | ||
Supplemental cash flow data | | | | | | |
Cash paid for interest | | $ | | | $ | |
Non-cash investing and financing activities: | | | | | | |
Fair value of warrants at issuance, net | | $ | — | | $ | |
Other noncash investing and financing activities | | $ | — | | $ | |
See the accompanying Notes to the Consolidated Financial Statements.
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AYTU BIOPHARMA, INC.
NOTES TO 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 multiple consumer health products competing in large healthcare categories, including allergy, hair regrowth, diabetes support, digestive health, sexual and urological health and general wellness, commercialized through direct mail and e-commerce marketing channels. To date, the Consumer Health Segment has generated negative cash flows. In the fiscal 2023 year, the Company announced it would wind down or monetize the Consumer Health Segment in the fiscal 2024 year.
The Company’s strategy is to continue building its portfolio of revenue-generating prescription pharmaceutical products, leveraging its commercial team’s expertise to build leading brands within large therapeutic markets. As a result of focusing on building the portfolio of revenue-generating products and generating profitability, in the fiscal 2023 year, the Company indefinitely suspended active development of its clinical development programs including AR101 (enzastaurin), and terminated the license agreements relating to Healight and NT0502 (N-desethyloxybutynin).
As of September 30, 2023, the Company had $
In addition, the Company has non-operating liabilities that are scheduled to, or may become, current in the fifteen months following the filing of this Quarterly Report on Form 10-Q, most notably the maturity of the $
Management plans to mitigate the conditions that raise substantial doubt about its ability to continue as a going concern are primarily focused on (i) improving cash flows from operations, (ii) winding down or monetizing the
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Consumer Health Segment, (iii) refinancing its $
Basis of Presentation. The unaudited 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 consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2023, which included all disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended September 30, 2023 are not necessarily indicative of expected operating results for the full year or any future period.
Prior Period Reclassification. Certain prior year amounts in the consolidated statements of operations have been reclassified to conform to the current year presentation, including a reclassification of the fair value adjustment from contingent considerations. Net gain or loss from the fair value of contingent considerations was previously included in Other Expense, net, and is currently recorded in operating expenses on the consolidated statements of operations. This reclassification did not impact net loss or cash flows for the three months ended September 30, 2023 and 2022 or the Company’s financial position as of September 30, 2023 or June 30, 2023.
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 consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, revenue recognition, allowance for credit losses, 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, income tax provision, deferred taxes and valuation allowance, determination of right-of-use assets and lease liabilities, the depreciable lives of long-lived assets, classification of warrants equity versus liability, and the valuation of warrants and 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.
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 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 months ended September 30, 2023.
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 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.
Employee Retention Credit
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit (“ERC”), which allows for employers to claim a refundable payroll tax credit against the employer share of Social Security tax equal to 70% of the qualified wages paid to employees after December 31, 2020 through September 30, 2021. The ERC was designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic.
As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company will account for the ERC by analogy to International Accounting Standard ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, when management determines reasonable assurance that the Company had substantially met all eligibility requirements of the ERC, the ERC benefit shall either be recorded as an offset against payroll costs or recognized as other income in the consolidated statement of operations (see Note – 9 Other Liabilities).
Recent Adopted Accounting Pronouncements
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 effective dates for the amendments in ASU 2022-02 align with those of ASU 2016-13. The Company had adopted ASU 2016-13 and ASU 2019-05 for the fiscal year ended June 30, 2024. The Company had evaluated the impact of adoption of ASUs 2016-13, 2019-05, and 2022-02 and concluded that the application of the new standards did not have a material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Debt—Debt with Conversion and Other Options. In August 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 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
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does not expect the adoption of the standard to have a material impact on the Company’s consolidated financial statements.
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, 2023. Other than the application of IAS 20 for the Employee Retention Credit, there have been no significant changes to the Company’s significant accounting policies during the three months ended September 30, 2023.
3. Revenues from Contracts with Customers
Net product sales in the Rx Segment 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), generally “free-on-board” destination when shipped domestically within the United States, and “free-on-board” shipping point when shipped internationally, consistent with contractual terms.
The Company generates Consumer Health Segment revenue from sales of various consumer health products through e-commerce platforms and direct-to-consumer marketing channels. Revenue is generally recognized “free-on-board” shipping point, consistent with contractual terms and aligning with the transfer of control of the products. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from customers 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 time delays between the initial product sale, and the ultimate reporting and settlement of deductions. The Company continually monitors these provisions and does not believe variances between actual and estimated amounts have or will be material.
Revenues by Segment. Net revenue disaggregated by segment for the three months ended September 30, 2023 and 2022 were as follows:
| | Three Months Ended | ||||
| | September 30, | ||||
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| 2023 |
| 2022 | ||
| | (In thousands) | ||||
Consolidated revenue: | | |
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Rx Segment | | $ | | | $ | |
Consumer Health Segment | |
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Total consolidated revenue | | $ | | | $ | |
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Revenues by Product Portfolio. Net revenue disaggregated by significant product portfolio in the Rx Segment for the three months ended September 30, 2023 and 2022 were as follows:
| | Three Months Ended | ||||
| | September 30, | ||||
| | 2023 |
| 2022 | ||
| | (In thousands) | ||||
Rx Segment: | | | | | | |
| $ | | | $ | | |
| | | | | | |
| | | | | | |
Total Rx Segment revenue | | $ | | | $ | |
Other includes discontinued and deprioritized products in the Rx Segment. The Consumer Health Segment is comprised of one product portfolio, the Consumer Health Portfolio.
Revenues by Geographic location. The Company’s revenues are predominately within the United States, with insignificant 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 first recognized. The Company incurred $
Inventory balances consist of the following:
| | September 30, | | June 30, | ||
| | 2023 | | 2023 | ||
| (In thousands) | |||||
Raw materials |
| $ | |
| $ | |
Work in process | | | | | | |
Finished goods | |
| | |
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Inventories | | $ | | | $ | |
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.
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Property and equipment consist of the following:
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| September 30, | | June 30, | ||
| | 2023 | | 2023 | ||
| | (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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Assets under construction | | | | | | |
Property and equipment, gross | | | | | | |
Less accumulated depreciation and amortization | | | ( | | | ( |
Property and equipment, net |
| $ | | | $ | |
Depreciation and amortization expense from property and equipment 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 2024 and 2029. Most leases include one or more
In May 2023, the Company entered into a lease agreement to relocate its principal office. The space was made available to the Company in September 2023 (lease commencement) with an initial term of and a half years. The Company recorded an operating lease right-of-use (“ROU”) asset of $
The components of lease expenses are as follows:
| | Three Months Ended | | | ||||
| | September 30, | | | ||||
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| 2023 |
| 2022 |
| Statement of Operations Classification | ||
| | (In thousands) | | | ||||
Lease cost: | | | | | | | | |
Operating lease cost | | $ | | | $ | |
| Operating expenses |
Short-term lease cost |
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| Operating expenses |
Finance lease cost: |
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Amortization of leased assets |
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| Cost of sales |
Interest on lease liabilities | | | | | | | | Other expense, net |
Total net lease cost |
| $ | | | $ | |
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|
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Supplemental balance sheet information related to leases is as follows:
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| September 30, | | June 30, |
| Balance Sheet Classification | ||
| | 2023 | | 2023 | | | ||
| | (In thousands) | | | ||||
Assets: | | | | | | | | |
Operating lease assets * | | $ | | | $ | |
| Operating lease right-of-use asset |
Finance lease assets | | | — | |
| |
| |
Total leased assets | | $ | | | $ | |
| |
Liabilities: | | | | | | |
| |
Current: | | | | | | | | |
Operating leases | | $ | | | $ | | | |
Finance leases | | | | | | | | |
Non-current | | | | | | | | |
Operating leases | | | | | | | | Other non-current liabilities |
Total lease liabilities | | $ | | | $ | | | |
* Includes $
Remaining lease term and discount rate used are as follows:
|
| September 30, | | June 30, |
| ||
| | 2023 | | 2023 | | ||
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:
| | Three Months Ended | ||||
| | September 30, | ||||
|
| 2023 |
| 2022 | ||
| | (In thousands) | ||||
Cash flow classification of lease payments: | | | | | | |
Operating cash flows from operating leases | | $ | | | $ | |
Operating cash flows from finance leases | | $ | | | $ | |
Financing cash flows from finance leases | | $ | | | $ | |
As of September 30, 2023, the maturities of the Company’s future minimum lease payments were as follows:
|
| Operating |
| Finance | ||
| | (In thousands) | ||||
| $ | | | $ | | |
2025 | | | | | | — |
2026 | | | | | | — |
2027 | | | | | | — |
2028 | | | | | | — |
Thereafter | | | | | | — |
Total lease payments | | | | | | |
Less: Imputed interest | | | ( | | | ( |
Lease liabilities | | $ | | | $ | |
15
7. 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 markets.
The following table provides the summary of the Company’s intangible assets as of September 30, 2023 and June 30, 2023, respectively. Carrying amounts are net of any impairment charges from prior periods. An intangible asset with zero net carrying amount at the end of a reporting period is not presented in the table of a future reporting period.
| | September 30, 2023 | ||||||||||||
| | | | | | | | | | | | | | Weighted- |
| | | | | | | | | | 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 | |
| | |
| ( | |
| — | |
| |
| |
Total | | $ | | | $ | ( | | $ | — | | $ | |
| |
| | June 30, 2023 | ||||||||||||
| | | | | | | | | | | | | | Weighted- |
| | | | | | | | | | 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 | | $ | | | $ | ( | | $ | ( | | $ | |
| |
The following table summarizes the estimated future amortization expense to be recognized over the next five fiscal years and periods thereafter:
|
| September 30, | |
| | (In thousands) | |
2024 (remaining 9 months) | | $ | |
2025 | | | |
2026 | | | |
2027 | | | |
2028 | | | |
Thereafter | | | |
Total future amortization expense | | $ | |
Acquired Product Technology Rights
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.
16
Karbinal ER. The Company acquired and assumed all rights and obligations pursuant to the Supply and Distribution Agreement, as Amended, with Tris Pharma, Inc. (“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 additional
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
Acquired 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.
Acquired Product Distribution Rights (and customer list)
In connection with the Innovus Acquisition, the Company obtained
Acquired 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. As this is an indefinite-lived intangible asset, this acquired asset remains an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. If a product using this technology is eventually approved for commercial sale, at that time, the IPR&D will begin amortizing on a straight-line over the life of the product. During the fiscal year ended June 30, 2023, the Company fully impaired the IPR&D of NT0502 due to the termination of its development program.
Certain of the Company’s amortizable intangible assets include renewal options, extending the expected life of the asset. The renewal periods range between approximately
17
8. Accrued liabilities
Accrued liabilities consist of the following:
| | September 30, | | June 30, | ||
| | 2023 | | 2023 | ||
| | (In thousands) | ||||
Accrued savings offers | | $ | | | $ | |
Accrued program liabilities | | | | | | |
Accrued employee compensation | | | | | | |
Accrued customer and product related fees | | | | | | |
Return reserve | |
| | |
| |
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 and commercial rebates.
Accrued employee compensation includes sales commissions, vacation earned, and accrued payroll.
Customer and product related fees include accrued expenses and deductions for rebates, wholesaler chargebacks and fees, and other product-related fees and deductions such as royalties for Pediatric Portfolio products, accrued distributor fees, and Medicaid liabilities.
Other accrued liabilities consist of accrued license fees, legal settlements, professional fees, credit card liabilities, taxes payable, and samples expense; none of which individually represent greater than five percent of total liabilities.
9. Other Liabilities
| | September 30, | | June 30, | ||
| | 2023 | | 2023 | ||
| | (In thousands) | ||||
Fixed payment arrangements | | $ | | | $ | |
Operating lease liabilities | |
| | |
| |
Employee retention credit | | | | | | — |
Other | | | | | | |
Total other liabilities | | | | | | |
Less: current portion | | | ( | | | ( |
Total other liabilities, non-current | | $ | | | $ | |
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 $
18
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
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 $
Employee Retention Credit.
The Employee Retention Credit (“ERC”) in other non-current liabilities was a result of $
Other.
Other consists of taxes payable and deferred cost related to the Company’s 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 into 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, 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
19
Loan Agreement to
On March 24, 2023, the Company and certain of its subsidiaries entered into an Amendment No. 4 (the “Eclipse Fourth Amendment”) to the Eclipse Loan Agreement. The Eclipse Fourth Amendment, among other things, provided for an aggregate increase of $
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 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 September 30, 2023, the Company was in compliance with the covenants under the Eclipse Loan Agreement, as amended.
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, 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”, and collectively with the Avenue Capital Lenders, “Avenue
20
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 connection with the Eclipse Fourth Amendment, on March 24, 2023, Avenue and the Company entered into a First Amendment (the “Avenue Amendment”) to the Avenue Capital Agreement. The Avenue Amendment, among other things, permitted the increase in revolving loan commitment provided by the Eclipse Lender under the Eclipse Facility.
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 additional amounts relating to a prepayment or termination, as described above. As of September 30, 2023, the Company was in compliance with the covenants under the Avenue Capital Agreement.
On
On
21
July 7, 2022, and the effective price of the March 7, 2022 offering was more than the exercise price of the Avenue Capital Warrants, the number of shares of common stock issuable upon exercise of the Avenue Capital Warrants were set to
On October 25, 2022, the Company entered into an agreement with 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 $
On June 13, 2023, in conjunction with the Securities Purchase Agreement described in Note 16 – Warrants, the interest-only period of the Avenue Capital Agreement was extended further, to January 26, 2025, upon the achievement of both the revenue-based milestone and equity raise-based milestone stipulated in the Avenue Capital Agreement.
In addition to the debt discount discussed above, the Company incurred $
Long-term debt consists of the following:
|
| September 30, | |
| | 2023 | |
| | (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 | | $ | |
Future principal payments of long-term debt, including financing leases, are as follows:
|
| September 30, | |
| | (In thousands) | |
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; |
22
| ● | 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, fixed payment arrangements, 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 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 September 30, 2023 and June 30, 2023, by level within the fair value hierarchy.
|
| | | | Fair Value Measurements at September 30, 2023 | |||||||
|
| Fair Value at September 30, |
| |
| |
| | ||||
| | 2023 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
| | (In thousands) | ||||||||||
Liabilities: | | | | | | | | | | | | |
| | |
| | — |
| | — |
| | | |
Total | | $ | |
| $ | — |
| $ | — | | $ | |
|
| | | | Fair Value Measurements at June 30, 2023 | |||||||
|
| Fair Value at June 30, |
| |
| |
| | ||||
| | 2023 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
|
| (In thousands) | ||||||||||
Liabilities: | | | | | | | | | | | | |
| | | | | — | | | — | | | | |
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 three months ended September 30, 2023.
|
| Derivative | |
| | Warrant Liabilities | |
| | (In thousands) | |
Balance as of June 30, 2023 |
| $ | |
Included in earnings |
| | |
Balance as of September 30, 2023 |
| $ | |
Significant Assumptions
The following table presents the valuation methodologies and key assumptions used for the marked to market fair value measurements of derivative warrant liabilities as of September 30, 2023.
23
| | June 2023 Warrants | | Warrants | ||
|
| Tranche A & B |
| Other * | ||
Valuation methodology | | Monte Carlo Simulation | | | | |
| | & Black-Scholes | | | Black-Scholes | |
Equivalent term (years) | | | | | ||
Expected volatility |
| % |
| % | ||
Risk-free rate | | % | | % | ||
Dividend yield | | % | | % | ||
| | | | | | |
* Includes August 2022 Warrants, March 2022 Warrants, and Avenue Capital Warrants. | ||||||
The Black-Scholes option pricing model is used to value all warrants with significant Level 3 inputs. The Monte Carlo Simulation is used to simulate the exit price and EBITDA forecast; average warrant value per share is from
13. Commitments and Contingencies
Pediatric Portfolio Fixed Payments and Product Milestone
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
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 $
Product Contingent Liability
In February 2015, Innovus acquired Novalere, which included the rights associated with distributing FlutiCare. As part of the Merger, Innovus is obligated to make
24
FlutiCare sales are achieved. In fiscal year 2023, the manufacturer associated with this contingent liability filed for bankruptcy. There were
Legal Matters
Witmer Class-Action Securities Litigation. A shareholder derivative suit was filed on September 12, 2022 in the Delaware Chancery Court by Paul Witmer, derivatively and on behalf of all Aytu stockholders, against Armistice Capital, LLC, Armistice Capital Master Fund, Ltd., Steve Boyd (Armistice’s Chief Investment Officer and Managing Partner, and a former director of Aytu), and certain other current and former directors of Aytu, Joshua Disbrow, Gary Cantrell, John Donofrio, Jr., Michael Macaluso, Carl Dockery and Ketan B. Mehta. Plaintiff amended the complaint on April 5, 2023. The Amended Complaint dropped Mr. Macaluso as a defendant and alleges that (i) Armistice facilitated the sale of assets of Cerecor in 2019 and Innovus in 2020 to Aytu in exchange for convertible securities which it subsequently converted and sold at a profit on the open market; (ii) the Armistice defendants breached their fiduciary duties, were unjustly enrichment and wasted corporate assets in connection with these acquisitions; (iii) the Armistice defendants breached their fiduciary duties by engaging in insider trading; and (iv) the other directors breached their fiduciary duties, and aided and abetted the Armistice defendants’ breaches of fiduciary duties, in connection with these acquisitions. The Amended Complaint seeks unspecified damages, equitable relief, restitution, disgorgement of profits, enhanced governance and internal procedures, and attorneys’ fees. While the Company believes that this lawsuit is without merit and has vigorously defended against it, the Company has agreed to settle the matter, as against it and the director defendants other than Mr. Boyd, for various corporate governance modifications and the payment of plaintiff’s attorneys’ fees. That settlement is subject to court approval, the hearing on which has not yet been scheduled.
Sabby Litigation. A complaint was filed on February 22, 2023 in the Supreme Court of the State of New York by Sabby Volatility Warrant Master Fund Ltd (“Sabby”) and Walleye Opportunities Master Fund Ltd (“Walleye”), holders of certain warrants to purchase common stock, against the Company. The complaint alleges that the Company improperly adjusted the exercise price of the warrants and miscalculated the number of shares the warrant holders may receive, and that the Company failed to provide prompt notice to the warrant holders of such adjustment. The complaint seeks a declaratory judgment of the warrant share calculation, that
Stein Litigation. Cielo Stein (“Stein”), a former sales specialist, filed a complaint on February 1, 2023 in Jefferson County Circuit Court in Kentucky against the Company and its wholly-owned subsidiary Neos Therapeutics. The complaint alleges that Aytu retaliated against Stein in violation of the Kentucky Civil Rights Act after she opposed what she contends was unwelcome behavior by her supervisor. The complaint also alleges that the Company’s response to Stein’s subsequent complaint to human resources was inadequate. The complaint seeks an award of unspecified compensatory damages, emotional-distress damages, and attorneys’ fees and costs. The Company removed the lawsuit to the United States District Court for the Western District of Kentucky and filed a motion to dismiss the complaint, which is pending. Due to the early stage of litigation, and while the Company believes that this lawsuit is without merit, the Company is not able to predict at this time whether this proceeding will have a material impact on its financial condition or results of operations, and intend to vigorously defend this case in the event it is not dismissed.
14. Capital Structure
The Company has
Included in the common stock outstanding are
25
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 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
On
26
15. Equity Incentive Plans
2023 Equity Incentive Plan. On May 18, 2023, the Company’s stockholders approved the Aytu BioPharma, Inc. 2023 Equity Incentive Plan (the “2023 Equity Incentive Plan”). Prior to the Company’s adoption of the 2023 Equity Incentive Plan, the Company awarded equity incentive grants to its directors and employees under the Aytu BioScience, Inc. 2015 Stock Option and Incentive Plan (the “Aytu 2015 Plan”) and the Neos Therapeutics, Inc. 2015 Stock Options and Incentive Plan (the “Neos 2015 Plan”, and collectively with the Aytu 2015 Plan, the “2015 Plans”). For the 2023 Equity Incentive Plan, the stockholders approved (a)
Aytu 2015 Plan. On June 1, 2015, the Company’s stockholders approved 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
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, 2023 |
| | | $ | |
| |
Granted |
| | | | |
|
|
Forfeited/Cancelled |
| ( | | | |
|
|
Expired |
| ( | | | |
|
|
Outstanding at September 30, 2023 |
| | | $ | |
| |
| | | | | | | |
Exercisable at September 30, 2023 |
| | | $ | |
| |
27
During the three months ended September 30, 2023,
Restricted Stock
Restricted stock activity is as follows:
| | | | Weighted | |
| | | | Average Grant | |
| | Number of | | Date Fair | |
| | Shares | | Value | |
Unvested at June 30, 2023 |
| | | $ | |
Granted |
| | | | |
Vested |
| ( | | | |
Unvested at September 30, 2023 |
| | | $ | |
As of September 30, 2023, there was $
As of September 30, 2023, there was $
Restricted Stock Units
Restricted stock units (RSUs) activity is as follows:
|
|
|
| | |
| | | | Weighted | |
| | | | Average Grant | |
| | Number of | | Date Fair | |
| | Shares | | Value | |
Unvested at June 30, 2023 |
| | | $ | |
Vested |
| ( | | | |
Forfeited | | ( | | | |
Unvested at September 30, 2023 |
| | | $ | |
As of September 30, 2023, there was $
28
Stock-based compensation expense related to the fair value of stock options, restricted stock, and RSUs was included in the consolidated statements of operations as set forth in the below table:
| | Three Months Ended | | ||||
| | September 30, | | ||||
|
| 2023 |
| 2022 | | ||
| | | (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
On
In November 2022 and throughout the quarter ended December 31, 2022, the Company sold shares through its ATM Sales Agreement. Per the warrant agreement in the August 2022 Offering, these sales qualified as an equity
29
offering and the sales price was less than the current the exercise price of $
Outstanding warrants are classified as derivative warrant liabilities in the 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, 2023 |
| | | $ | |
| |
Outstanding September 30, 2023 |
| | | $ | |
| |
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.
| | | | September 30, | ||
|
| |
| 2023 |
| 2022 |
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 | | | | |
| |
30
18. License Agreements
Healight
In April 2020, the Company entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight, an investigational medical device. The agreement with Cedars-Sinai granted the Company 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 the Company’s commercial business, it terminated the licensing agreement with Cedars-Sinai Medical Center, effective May 9, 2023.
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.
In April 2023, the Company returned the NT0502 rights to NeuRx in exchange for and receive a royalty and potential milestone payments on amounts received for future revenue generated by NeuRx (or a future licensee) on NT0502.
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 $
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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-refundable license fee of an amount less than $
The royalties are recorded as cost of sales 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:
(In thousands) | | Rx | | | Consumer Health | | | Consolidated |
| | | | | | | | |
Three Months Ended September 30, 2023: | | | | | | | | |
| | | | | | | | |
Product revenue, net | $ | | | $ | | | $ | |
Loss from operations | $ | ( | | $ | ( | | $ | ( |
| | | | | | | | |
Depreciation and amortization | $ | | | $ | | | $ | |
Stock based compensation | $ | | | $ | | | $ | |
| | | | | | | | |
Three Months Ended September 30, 2022: | | | | | | | | |
| | | | | | | | |
Product revenue, net | $ | | | $ | | | $ | |
Loss from operations | $ | ( | | $ | ( | | $ | ( |
| | | | | | | | |
Depreciation and amortization | $ | | | $ | | | $ | |
Stock based compensation | $ | | | $ | | | $ | |
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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, 2023, filed on October 12, 2023. 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 filed with the United States Securities and Exchange Commission (“SEC”) on October 12, 2023, and in Item 1A of this Form 10-Q.
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 months ended September 30, 2023, and our financial condition as of September 30, 2023. The MD&A is provided as a supplement to, and should be read in conjunction with, our 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 primarily through third party wholesalers and (ii) the Consumer Health Segment, which consists of various consumer health products sold directly to consumers. We currently manufacture our products for the treatment of attention deficit hyperactivity disorder (“ADHD”) at our manufacturing facility and use third party manufacturers for our other prescription and consumer health products.
We have incurred significant losses in each year since inception. Our net losses were $8.1 million for the three months ended September 30, 2023. As of September 30, 2023, and June 30, 2023, we had accumulated deficits of $312.2 million and $304.1 million, respectively. We expect to continue to incur significant expenses in connection with our ongoing activities, including the ongoing integration of our acquisitions. As of September 30, 2023, and largely as a result of the January 2025 maturity of the Avenue Note, we did not have sufficient working capital to cover our 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 doubt about our ability to continue as a going concern.
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 indefinitely suspended active development of our clinical development programs. 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 (“Cedars-Sinai”) to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight, an investigational medical device. 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. In April 2023, we ceased all development of Healight and terminated the Healight license, effective May 9, 2023.
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 was being developed for the treatment of sialorrhea, which is excessive salivation or drooling. In April 2023, we returned the NT0502 rights to NeuRx in exchange for and receive a royalty and potential milestone payments on amounts received for future revenue generated by NeuRx (or a future licensee) on NT0502.
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Our commercial business includes the Rx Segment and the Consumer Health Segment.
Business Environment
We have continued to experience significant inflationary pressure and have experienced supply chain disruptions related to the sourcing of raw materials, energy, logistics and labor during fiscal 2023 and 2024. While we do not have sales or operations in Russia, Ukraine, or the Middle East, 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 2024 year.
RESULTS OF OPERATIONS
Three months ended September 30, 2023 compared to the three months ended September 30, 2022.
|
| Three Months Ended | |||||||
| | September 30, | |||||||
|
| 2023 |
| 2022 |
| Change | |||
| | (In thousands) | |||||||
| | | | | | | | | |
Product revenue, net | | $ | 22,099 | | $ | 27,655 | | $ | (5,556) |
Cost of sales | | | 7,315 | | | 9,623 | | | (2,308) |
Gross profit | | | 14,784 | | | 18,032 | | | (3,248) |
| | | | | | | | | |
Operating expenses | |
|
| |
|
| |
|
|
Advertising and direct marketing | | | 1,332 | | | 4,452 | | | (3,120) |
Other selling and marketing | | | 6,090 | | | 5,650 | | | 440 |
General and administrative | | | 6,956 | | | 7,322 | | | (366) |
Research and development | |
| 604 | |
| 1,064 | |
| (460) |
Amortization of intangible assets | |
| 1,306 | |
| 1,197 | |
| 109 |
Loss from contingent consideration | |
| — | | | 155 | | | (155) |
Total operating expenses | |
| 16,288 | |
| 19,840 | |
| (3,552) |
Loss from operations | |
| (1,504) | |
| (1,808) | |
| 304 |
Other (expense) income | |
|
| |
|
| |
|
|
Other expense, net | | | (709) | | | (1,084) | | | 375 |
(Loss) gain on derivative warrant liabilities | |
| (5,907) | | | 2,191 | | | (8,098) |
Total other (expense) income | |
| (6,616) | |
| 1,107 | |
| (7,723) |
Loss before income tax | |
| (8,120) | |
| (701) | |
| (7,419) |
Income tax benefit | |
| — | | | — | |
| — |
Net loss | | $ | (8,120) | | $ | (701) | | $ | (7,419) |
Product revenue, net
During the three months ended September 30, 2023, net product revenue decreased by $5.6 million, or 20% compared to the three months ended September 30, 2022. The decrease during the three months ended September 30, 2023 was primarily due to the decrease in revenue from the Consumer Health Portfolio and segment, with some of the decrease in revenue attributed to a decline in revenue from the Pediatric Portfolio in the Rx Segment. These declines were largely offset by increase in revenue from the ADHD Portfolio in the Rx Segment.
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Gross margins
During the three months ended September 30, 2023, gross profit increased by 2% compared to the three months ended September 30, 2022. Gross margin percentage was 67% for the three months ended September 30, 2023, compared to 65% for the same period ended September 30, 2022. The improvements were primarily due to higher net revenues and cost saving efficiencies in the Pediatric Portfolio and a decline in the lower-margin Consumer Health business. Gross margin improvements in the ADHD Portfolio were due to efficiencies in production related to higher demand for those products.
Advertising and direct marketing
During the three months ended September 30, 2023, advertising and direct marketing expense decreased $3.1 million, or 70% compared to the same period ended September 30, 2022. Advertising and direct marketing expense include direct-to-consumer marketing, advertising, sales, and customer support and processing fees related to our Consumer Health Segment.
Other selling and marketing
During the three months ended September 30, 2023, other selling and marketing expense increased by $0.4 million, or 8%, compared to the same periods ended September 30, 2022. The increases were primarily driven by commission expense based on prescriptions generated by our sale force and commercial marketing program fees that increase as product sales increase.
General and administrative
During the three months ended September 30, 2023, general and administrative expense decreased by $0.4 million, or 5% compared to the same period ended September 30, 2022. The decrease is primarily a result of ongoing cost-cutting initiatives and operational improvements.
Research and development
During the three months ended September 30, 2023, research and development expense decreased by $0.5 million, or 43%, compared to the same period ended September 30, 2022. 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.
Amortization of intangible assets
In the three months ended September 30, 2023, amortization expense of intangible assets, excluding amounts included in cost of sales, were consistent compared to the same period ended September 30, 2022.
Unrealized gain or loss from derivative warrant liabilities
The fair value of derivative warrant liabilities is calculated using either the Black-Scholes option model or the Monte Carlo simulation model and is revalued at each reporting period. For the three months ended September 30, 2023, unrealized loss from derivative warrant liabilities was $5.9 million due to an increase in derivative liability resulting from a higher underlying stock price as of reporting date, and an increase in volatility.
Other expense, net
In the three months ended September 30, 2023, other expense, net, decreased by $0.4 million, or 35% compared to the same period ended September 30, 2022, primarily due to $0.5 million in other income from insurance proceeds for
35
damage of inventory. Other expense, net, includes interest expense, accretion from fixed payment arrangements, and other income.
Liquidity and Capital Resources
Sources of Liquidity
We have obligations related to our loan agreements, and in the form of contingent considerations 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 from 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 September 30, 2023, approximately $82.4 million remains available under the 2021 Shelf. This availability is subject to SEC 1.B.6 1limitations of Form S-3.
Eclipse Loan Agreement
The Eclipse Loan Agreement, as amended, provides us with up to $14.5 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 three months ended September 30, 2023, and 2022:
| | Three Months Ended September 30, | | | |||||
|
| 2023 |
| 2022 |
| Change | |||
| | (In thousands) | |||||||
Net cash used in operating activities | | $ | (211) | | $ | (9,148) | | $ | 8,937 |
Net cash (used in) provided by investing activities | | $ | (76) | | $ | 42 | | $ | (118) |
Net cash (used in) provided by financing activities | | $ | (2,734) | | $ | 13,557 | | $ | (16,291) |
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 three months ended September 30, 2023, net cash used in operating activities totaled $0.2 million. The use of cash was primarily the result of the decrease in accrued liabilities, partially offset by funds from the Employee Retention Credit program recorded in other operating liabilities (see Note 9 – Other Liabilities). Additionally, these were partially offset by positive cash earnings (net loss offset by non-cash depreciation, amortization and accretion, derivative warrant liabilities adjustment, and stock compensation expense).
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During the three months ended September 30, 2022, net cash used in operating activities totaled $9.1 million. The use of cash was primarily the result of the increase in accounts receivables, inventory and prepaid expenses, and the decrease in 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).
Net Cash (Used in) Provided by Investing Activities
Net cash flows from investing activities were nominal during each of the three months ended September 30, 2023 and 2022.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities of $2.7 million during the three months ended September 30, 2023, was primarily from payments made to fixed payment arrangements.
Net cash provided by financing activities of $13.6 million during the three months ended September 30, 2022, was primarily from $9.1 million net proceeds from our August 2022 equity raise and the $4.3 million of additional net borrowing made under our short-term line of credit.
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 consolidated financial statements for further information.
On May 12, 2022, we entered into an agreement with Tris Pharma Inc. (“Tris”) to terminate the Tuzistra License, Development, Manufacturing and Supply Agreement dated November 2, 2018 (the “Tuzistra 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 Tuzistra License Agreement. As of September 30, 2023, the total remaining liability for minimum payments was $6.0 million. 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 based on sales. As of September 30, 2023, up to $3.5 million of fixed and product milestone payments based on net sales remain.
In connection with our acquisition of the assets from Rumpus VEDS, LLC, Rumpus Therapeutics, LLC, Rumpus Vascular, LLC (collectively, “Rumpus”), and only if we resume and ultimately complete clinical development of AR101, we may be required to pay up to $67.5 million in regulatory and commercial-based earn-out payments to Rumpus, which are primarily paid against commercial milestone achievements. 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. With clinical development currently suspended, only if we resume and ultimately complete clinical development of AR101, are substantially all milestones payable to these parties.
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Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP affects 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, 2023.
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.
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, 2023. 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 with regards to warrants, and the valuation of inventory. 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 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
Warrants. 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 adjustments 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.
Inventory. In connection with the preparation of our financial statements for the period ended June 30, 2023 in our Form 10-K, we concluded that we had a material weakness in internal control over financial reporting related to our analysis for the accounting for valuation of our inventory. At fiscal year end, it was determined that the analysis of over/under absorbed manufacturing costs was not performed, which could have led to material misstatement of our financial statement. If not addressed, the deficiency could result in a material misstatement in the future. In response, we have incorporated the process for quantifying any over or under absorbed manufacturing costs, and having the appropriate level of management evaluate the analysis and materiality of any over or under absorption.
Remediation Plan
Our Audit Committee is conducting an internal investigation to identify and determine a plan to remediate the material weaknesses 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, and the valuation of inventory.
Changes in Internal Control Over Financial Reporting
Except for the material weaknesses noted above, there have been no changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2023 that have material effect, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Witmer Class-Action Securities Litigation. A shareholder derivative suit was filed on September12, 2022 in the Delaware Chancery Court by Paul Witmer, derivatively and on behalf of all Aytu stockholders, against Armistice Capital, LLC, Armistice Capital Master Fund, Ltd., Steve Boyd (Armistice’s Chief Investment Officer and Managing Partner, and a former director of Aytu), and certain other current and former directors of Aytu, Joshua Disbrow, Gary Cantrell, John Donofrio, Jr., Michael Macaluso, Carl Dockery and Ketan B. Mehta. Plaintiff amended the complaint on April 5, 2023. The Amended Complaint drops Mr. Macaluso as a defendant and alleges that (i) Armistice facilitated the sale of assets of Cerecor in 2019 and Innovus in 2020 to Aytu in exchange for convertible securities which it subsequently converted and sold at a profit on the open market; (ii) the Armistice defendants breached their fiduciary duties, were unjustly enriched and wasted corporate assets in connection with these acquisitions; (iii) the Armistice defendants breached their fiduciary duties by engaging in as insider trading; and (iv) the other directors breached their fiduciary duties, and aided and abetted the Armistice defendants breaches of fiduciary duties, in connection with these acquisitions. The Amended Complaint seeks unspecified damages, equitable relief, restitution, disgorgement of profits, enhanced governance and internal procedures, and attorneys’ fees. While we believe that this lawsuit is without merit and have vigorously defended against it, we have agreed to settle the matter, as against it and the director defendants other than Mr. Boyd, for various corporate governance modifications and the payment of plaintiff’s attorneys’ fees. That settlement is subject to court approval, the hearing on which has not yet been scheduled.
Sabby Litigation. A complaint was filed on February 22, 2023 in the Supreme Court of the State of New York by Sabby Volatility Warrant Master Fund Ltd (“Sabby”) and Walleye Opportunities Master Fund Ltd (“Walleye”), holders of certain warrants to purchase common stock, against the Company. The complaint alleges that the Company improperly adjusted the exercise price of the warrants and miscalculated the number of shares the warrant holders may receive, and that the Company failed to provide prompt notice to the warrant holders of such adjustment. The complaint seeks a declaratory judgment of the warrant share calculation, that 575,000 warrant shares be due to Sabby on exercise of its warrants rather than 312,908 shares, and that 100,000 warrant shares be due to Walleye on exercise of its warrants rather than 54,146 shares. In October 2023, we entered into a settlement agreement and general release with Sabby and Walleye.
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 2023 Annual Report on Form 10-K filed on October 12, 2023.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
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Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit No. |
| Description |
| Registrant’s |
| Date |
| 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 September 30, 2023 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: November 14, 2023 | By: | /s/ Joshua R. Disbrow | |
| Joshua R. Disbrow | ||
| Chief Executive Officer | ||
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Exhibit 31.1
AYTU BIOPHARMA, INC.
Certification by Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Joshua R. Disbrow, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Aytu BioPharma, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a—15(e) and 15d—15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and 15d—15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2023 | | |
| | |
| | |
| By: | /s/ Joshua R. Disbrow |
| | Joshua R. Disbrow |
| | Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
AYTU BIOPHARMA, INC.
Certification by Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Mark Oki, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Aytu BioPharma, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a—15(e) and 15d—15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and 15d—15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2023 | | |
| | |
| | |
| By: | /s/ Mark Oki |
| | Mark Oki |
| | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I Joshua R. Disbrow, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, to my knowledge, the Quarterly Report on Form 10‑Q of Aytu BioPharma, Inc. for the fiscal quarter ended September 30, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10‑Q fairly presents, in all material respects, the financial condition and results of operations of Aytu BioPharma, Inc.
Date: November 14, 2023 | | |
| | |
| | |
| By: | /s/ Joshua R. Disbrow |
| | Joshua R. Disbrow |
| | Chief Executive Officer (Principal Executive Officer) |
I Mark Oki, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, to my knowledge, the Quarterly Report on Form 10‑Q of Aytu BioPharma, Inc. for the fiscal quarter ended September 30, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10‑Q fairly presents, in all material respects, the financial condition and results of operations of Aytu BioPharma, Inc.
Date: November 14, 2023 | | |
| | |
| | |
| By: | /s/ Mark Oki |
| | Mark Oki |
| | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |