SEC Form 10-Q filed by Aytu BioPharma Inc.
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.
AYTU BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
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| (Address of principal executive offices and zip code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| 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 May 1, 2024, the registrant had
CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10‑Q (“Form 10-Q” or “this report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical facts contained in this 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 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 or dispose of assets, anticipated increases or decreases 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 I, Item 1A of our Annual Report on Form 10‑K for the year ended June 30, 2023 (“2023 Form 10-K”), and in the reports we file with the United States Securities and Exchange Commission (“SEC”). 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 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.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AYTU BIOPHARMA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| March 31, | June 30, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Other non-current assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Short-term line of credit | ||||||||
| Current portion of debt | ||||||||
| Current portion of derivative warrant liabilities | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Debt, net of current portion | ||||||||
| Derivative warrant liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Commitments and contingencies (note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $.; shares authorized; shares issued or outstanding | ||||||||
| Common stock, par value $.; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of this statement.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Restructuring costs | ||||||||||||||||
| Impairment expense | ||||||||||||||||
| Gain from contingent consideration | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (loss) on derivative warrant liabilities | ( | ) | ||||||||||||||
| Loss before income tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted weighted-average common shares outstanding | ||||||||||||||||
| Basic and diluted net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of this statement.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||
| Balances, September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||
| Issuance of common stock with exercise of warrants | ||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||
| Balances, December 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balances, March 31, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Additional |
Total |
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| Common Stock |
Paid-in |
Accumulated |
Stockholders’ |
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| Shares |
Amount |
Capital |
Deficit |
Equity |
||||||||||||||||
| Balances, June 30, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation expense |
( |
) | — | |||||||||||||||||
| Issuance of common stock, net of issuance cost |
||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ||||||||||||||
| Balances, September 30, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation expense |
( |
) | — | |||||||||||||||||
| Issuance of common stock, net of issuance cost |
||||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ||||||||||||||
| Balances, December 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation expense |
— | |||||||||||||||||||
| Issuance of common stock, net of issuance cost |
||||||||||||||||||||
| Net loss |
— | ( |
) | ( |
) | |||||||||||||||
| Balances, March 31, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of this statement.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation, amortization and accretion | ||||||||
| Stock-based compensation expense | ||||||||
| Loss (gain) on derivative warrant liabilities | ( | ) | ||||||
| Amortization of senior debt discount | ||||||||
| Inventory write-down | ||||||||
| Impairment expense | ||||||||
| Gain from contingent consideration | ( | ) | ||||||
| Other noncash adjustments | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Other operating assets and liabilities, net | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Other investing activities | ( | ) | ||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of stock and warrants | ||||||||
| Net proceeds received from, short-term line of credit | ||||||||
| Payment made to fixed payment arrangement | ( | ) | ( | ) | ||||
| Payment of stock issuance costs | ( | ) | ( | ) | ||||
| Payments made to borrowings | ( | ) | ( | ) | ||||
| Payment for debt issuance costs | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Other noncash investing and financing activities | $ | $ | ||||||
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of this statement.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business, Financial Condition, Basis of Presentation
Aytu BioPharma, Inc. (“Aytu”, or the “Company”), is a pharmaceutical company focused on commercializing novel therapeutics. The Company operates through 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 healthcare products sold directly to consumers (the “Consumer Health Portfolio”). The Company was originally incorporated as Rosewind Corporation on August 9, 2002, in the State of Colorado and was re-incorporated as Aytu BioScience, Inc. in the state of Delaware on June 8, 2015. Following the acquisition of Neos Therapeutics, Inc. (“Neos”) in March 2021, (the “Neos Acquisition”) the Company changed its name to Aytu BioPharma, Inc.
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 (the “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 two product portfolios. First, the ADHD Portfolio, which consists of Adzenys XR-ODT (amphetamine) extended-release orally disintegrating tablets and Cotempla XR-ODT (methylphenidate) extended-release orally disintegrating tablets for the treatment of attention deficit hyperactivity disorder (“ADHD”). Second, the Pediatric Portfolio, which consists of Poly-Vi-Flor and Tri-Vi-Flor, two complementary prescription fluoride-based supplement product lines containing combinations of fluoride and vitamins in various formulations for infants and children with fluoride deficiency, and Karbinal ER, an extended-release antihistamine suspension containing carbinoxamine indicated to treat numerous allergic conditions.
The Consumer Health Segment 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 fiscal 2023, the Company announced it would wind down the Consumer Health Segment in fiscal 2024.
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 fiscal 2023 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 March 31, 2024, the Company had $
In addition, during the third quarter of fiscal 2024, the Company’s $
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 the Consumer Health Segment; (iii) refinancing its $
Basis of Presentation
The unaudited consolidated financial statements contained in this Form 10-Q represent the financial statements of the Company and its wholly owned subsidiaries and have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and disclosures normally included in the complete financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been omitted pursuant to such rules and regulations. The unaudited consolidated financial statements should be read in conjunction with the Company’s 2023 Form 10-K, which included all disclosures required by U.S. GAAP. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary for the fair statement of the financial position of the Company and the results of operations and cash flows for the interim periods presented. The consolidated balance sheet as of June 30, 2023, was derived from the audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The results of operations for the period ended March 31, 2024, 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 consideration. Net gain or loss from the fair value of contingent consideration 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 or nine months ended March 31, 2024, and 2023, or the Company’s financial position as of March 31, 2024, or June 30, 2023.
Note 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 revenue and expenses during the reporting period. In the accompanying unaudited 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC Topic 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.
Income Taxes
The Company calculates its quarterly income tax provision based on estimated annual effective tax rates applied to ordinary income (or loss) and other known items computed and recognized when they occur. There have been no changes in tax law affecting the tax provision during the three and nine months ended March 31, 2024. The effective tax rate was (
An ownership change has limited the Company’s ability to offset, post-change, United States 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. Previous acquisitions, financing transactions, and equity ownership changes in the past five years have caused a significant limitation on the Company’s ability to use the pre-acquisition net operating loss carryovers. The ownership changes result in increased future tax liability and are a driver of the change from a zero percent effective tax rate.
Employee Retention Credit
On March 27, 2020, the United States 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 (“IAS 20”). In accordance with IAS 20, the Company recorded a $
Recently Adopted Accounting Pronouncements
Financial Instruments - Credit Losses
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”), which requires 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 adopted ASU 2016-13 and ASU 2019-05 on July 1, 2023. The Company 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 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 adopt the guidance on July 1, 2024 and does not expect the adoption of the standard to have a material impact on the Company’s consolidated financial statements.
Segment Reporting - Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 was issued to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance should be applied retrospectively unless it is impracticable to do so. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024. Early adoption is permitted, including in an interim period. The Company is currently evaluating the provisions of this guidance and assessing the potential impact on the Company’s consolidated financial statements and disclosures.
For a complete set of the Company’s significant accounting policies, refer to the Company’s 2023 Form 10-K. Other than the application of IAS 20 for the ERC, there have been no significant changes to the Company’s significant accounting policies and there is no other accounting guidance has been issued and not yet adopted that is applicable to the Company and that would have a material effect on the Company’s unaudited consolidated financial statements and related disclosures as of March 31, 2024, and through the filing of this Form 10-Q.
Note 3 - Revenue
Net revenue in the Rx Segment consists of sales of prescription pharmaceutical products, principally to a limited number of wholesale distributors and pharmacies in the United States. Rx Segment net 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, 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 been or will be material.
Revenue by Segment
Net revenue disaggregated by segment for the three and nine months ended March 31, 2024 and 2023, were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Consolidated net revenue: | ||||||||||||||||
| Rx Segment | $ | $ | $ | $ | ||||||||||||
| Consumer Health Segment | ||||||||||||||||
| Total consolidated net revenue | $ | $ | $ | $ | ||||||||||||
Revenue by Product Portfolio
Net revenue disaggregated by significant product portfolio in the Rx Segment for the three and nine months ended March 31, 2024 and 2023, were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Rx Segment net revenue: | ||||||||||||||||
| ADHD Portfolio | $ | $ | $ | $ | ||||||||||||
| Pediatric Portfolio | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Total Rx Segment net revenue | $ | $ | $ | $ | ||||||||||||
Other includes discontinued products in the Rx Segment. The Consumer Health Segment is comprised of one product portfolio, the Consumer Health Portfolio.
Revenue by Geographic Location
The Company’s net revenue is predominately within the United States, with insignificant sales internationally.
Note 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 write-downs of $
Inventories consist of the following:
| March 31, | June 30, | |||||||
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Inventories | $ | $ | ||||||
Note 5 - Property and Equipment
Properties and equipment are recorded at cost and depreciated on a straight-line basis over the assets’ estimated economic life. Leasehold improvements are amortized over the shorter of the estimated economic life or remaining lease term.
Property and equipment, net, consist of the following:
| March 31, | June 30, | |||||||
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Manufacturing equipment | $ | $ | ||||||
| Office equipment, furniture and other | ||||||||
| Leasehold improvements | ||||||||
| Lab equipment | ||||||||
| 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 $
Note 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 2024 and fiscal 2029. Most leases include one or more options to renew, and the exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options to purchase the leased property. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.
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 cost are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| March 31, | March 31, | ||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Statement of Operations Classification | |||||||||||||
| (in thousands) | |||||||||||||||||
| Lease cost: | |||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | Operating expenses | ||||||||||||
| Short-term lease cost | Operating expenses | ||||||||||||||||
| Finance lease cost: | |||||||||||||||||
| Amortization of leased assets | Cost of sales | ||||||||||||||||
| Interest on lease liabilities | Other expense, net | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||
Supplemental balance sheet information related to leases is as follows:
| March 31, | June 30, | ||||||||
| 2024 | 2023 | Balance Sheet Classification | |||||||
| (in thousands) | |||||||||
| Assets: | |||||||||
| Operating lease assets | $ | $ | Operating lease right-of-use assets | ||||||
| Finance lease assets |
| ||||||||
| Total lease assets | $ | $ | |||||||
| Liabilities: | |||||||||
| Current: | |||||||||
| Operating leases | $ | $ | Other current liabilities | ||||||
| Finance leases |
| ||||||||
| Non-current: | |||||||||
| Operating leases |
| ||||||||
| Total lease liabilities | $ | $ | |||||||
The remaining weighted-average lease term and discount rate used are as follows:
| March 31, | June 30, | |||||||
| 2024 | 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 leases is as follows:
| Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| (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 March 31, 2024, the Company’s future minimum lease payments were as follows:
| Operating | Finance | |||||||
| (in thousands) | ||||||||
| 2024 (remaining 3 months) | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | ) | ||||||
| Lease liabilities | $ | $ | ||||||
Note 7 - Intangible Assets
A summary of the Company’s intangible assets as of March 31, 2024, and June 30, 2023, respectively, is as follows:
| March 31, 2024 | ||||||||||||||||
| Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Life | |||||||||||||
| (in thousands) | (in years) | |||||||||||||||
| Definite-lived intangibles: | ||||||||||||||||
| Acquired product technology rights | $ | $ | ( | ) | $ | |||||||||||
| Acquired technology right | ( | ) | ||||||||||||||
| Acquired product distribution rights | ( | ) | ||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | |||||||||||
| June 30, 2023 | ||||||||||||||||
| Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Life | |||||||||||||
| (in thousands) | (in years) | |||||||||||||||
| Definite-lived intangibles: | ||||||||||||||||
| Acquired product technology rights | $ | $ | ( | ) | $ | |||||||||||
| Acquired technology right | ( | ) | ||||||||||||||
| Acquired product distribution rights | ( | ) | ||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | |||||||||||
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. Certain of the Company’s amortizable intangible assets include renewal options, extending the expected life of the asset. The renewal periods range between approximately
The following table summarizes the estimated future amortization expense to be recognized over the next five fiscal years and periods thereafter:
| March 31, | ||||
| (in thousands) | ||||
| 2024 (remaining 3 months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 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.
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 underlies 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 35 products with a combination of over 300 registered trademarks and/or patent rights and customer lists. The customer lists are fully amortized. During the fourth quarter of fiscal 2023, the acquired product distribution rights incurred an impairment charge of $
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 being developed 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 basis over the life of the product. During fiscal 2023, the Company terminated its development program of NT0502. As a result, the Company fully impaired the IPR&D of NT0502, recording impairment expense of $
Note 8 - Accrued Liabilities
Accrued liabilities consist of the following:
| March 31, | June 30, | |||||||
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Accrued savings offers | $ | $ | ||||||
| Accrued program liabilities | ||||||||
| Accrued customer and product related fees | ||||||||
| Return reserve | ||||||||
| Accrued employee compensation | ||||||||
| Other accrued liabilities | ||||||||
| Total accrued liabilities | $ | $ | ||||||
Accrued 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. Accrued program liabilities include government and commercial rebates. Accrued 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. The return reserve represents the Company’s accrual for estimated product returns. Accrued employee compensation includes sales commissions, paid time off earned, accrued payroll and accrued bonus. Other accrued liabilities consist of various other accruals, none of which individually or in the aggregate represent greater than five percent of total liabilities.
Note 9 - Other Liabilities
Other liabilities consist of the following:
| March 31, | June 30, | |||||||
| 2024 | 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.
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 $
Operating Lease Liabilities
The Company has entered into various operating lease agreements for certain of its offices, manufacturing facilities and equipment. Please refer to Note 6 - Leases for further detail.
Employee Retention Credit
The $
Other
Other consists of taxes payable, deferred cost related to the Company’s technology transfer, and various other accruals, none of which individually or in the aggregate represent greater than five percent of total liabilities.
Note 10 - Line of Credit
The Company has entered into a secured credit agreement, as amended, 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 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
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 March 31, 2024, the Company was in compliance with the covenants under the Eclipse Loan Agreement.
The Company’s obligations under the Eclipse Loan Agreement are secured by substantially all of the Company’s assets, with a first priority lien in favor of Eclipse on the ABL Priority Collateral, and a second priority lien in favor of Eclipse on the Term Loan Priority Collateral, as each is defined in the Replacement Term Loan Intercreditor Agreement, as defined in the Eclipse Loan Agreement.
Total interest expense on the Revolving Loans, including amortization of deferred financing costs, was $
Note 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 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 made interest only payments for the first 18 months following the Closing Date (“Interest-Only Period”). In June 2023, the Company achieved certain defined milestones extending the Interest-Only Period through the maturity date.
In the event the Company prepays the outstanding principal prior to the maturity date, the Company will pay Avenue Capital a fee equal to
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 March 31, 2024, the Company was in compliance with the covenants under the Avenue Capital Agreement.
On January 26, 2022 (“Issuance Date”), as consideration for entering into the Avenue Capital Agreement, the Company issued warrants to the Avenue Capital Lenders to purchase shares of common stock at an exercise price equal to $
On March 7, 2022, the Company closed on an equity offering of shares of common stock and warrants at an offering price of $
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, extended the Interest-Only Period to January 2024. In exchange for this extension of the Interest-Only Period, the Company and Avenue agreed to reset the exercise price of the warrants issued in conjunction with the original loan agreement to $
In addition to the debt discount discussed above, the Company incurred $
Long-term debt consists of the following:
| March 31, | June 30, | |||||||
| 2024 | 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:
| March 31, | ||||
| (in thousands) | ||||
| 2024 (remaining 3 months) | $ | |||
| 2025 | ||||
| Future principal payments | ||||
| Less: unamortized discount and issuance costs | ( | ) | ||
| Less: current portion | ( | ) | ||
| Non-current portion of debt | $ | |||
Note 12 - Fair Value Considerations
The Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to determine fair value as follows:
| ● | Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Aytu for identical assets or liabilities; |
| ● | Level 2: Inputs that include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and |
| ● | Level 3: Unobservable inputs that are supported by little or no market activity. |
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative warrant liabilities, 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 the unaudited consolidated balance sheets. The remaining financial instruments and derivative warrant liabilities are reported on the unaudited 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 on 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 Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2024, and June 30, 2023, by level within the fair value hierarchy as follows:
| Fair Value Measurements at March 31, 2024 | ||||||||||||||||
| Fair Value at March 31, | ||||||||||||||||
| 2024 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Current portion of derivative warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Derivative warrant liabilities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Fair Value Measurements at June 30, 2023 | ||||||||||||||||
| Fair Value at June 30, | ||||||||||||||||
| 2023 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Current portion of derivative warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Derivative warrant liabilities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Summary of Level 3 Input Changes
A summary of changes to those fair value measures using Level 3 inputs for the nine months ended March 31, 2024, is as follows:
| Derivative | ||||
| Warrant Liabilities | ||||
| (in thousands) | ||||
| Balance as of June 30, 2023 | $ | |||
| Included in earnings | ||||
| Balance as of March 31, 2024 | $ | |||
Significant Assumptions
The valuation methodologies and key assumptions used for the mark to market fair value measurements of derivative warrant liabilities as of March 31, 2024, are as follows:
| June 2023 Warrants | Warrants | |||||
| Tranche A & B | Other * | |||||
| Monte Carlo Simulation | ||||||
| & Black-Scholes | Black-Scholes | |||||
| Aytu closing stock price |
|
| ||||
| 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 100,000 Monte Carlo Simulations. The Monte Carlo Simulation is based on significant inputs including financial projections provided by the Company’s management used primarily to forecast future results not observable in the market, and thus, represents a Level 3 measure.
Note 13 - Commitments and Contingencies
Pediatric Portfolio Fixed Payments and Product Milestone
The Tris Karbinal Agreement grants the Company exclusive right to distribute and sell Karbinal ER 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 $
Legal Matters
Witmer Class-Action Securities Litigation
A stockholder derivative suit filed on September 12, 2022, in the Delaware Chancery Court by Paul Witmer, derivatively and on behalf of all Aytu stockholders, and later amended, against Armistice Capital, LLC, Armistice Capital Master Fund, Ltd., Steven Boyd (Armistice’s Chief Investment Officer and Managing Partner, and a former director of Aytu) (collectively “Armistice”), and certain other current and former directors of Aytu, Joshua Disbrow, Gary Cantrell, John Donofrio, Jr, Carl Dockery and Ketan B. Mehta. The amended complaint alleges that (i) Armistice facilitated the sale of assets of Cerecor, Inc., in 2019 and Innovus Pharmaceuticals, Inc., 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 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 was denied. A Section 16 pretrial conference is scheduled for June 3, 2024. 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.
Note 14 - Capital Structure
The Company has
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 August 11, 2022, the Company closed on an underwritten public offering (the “August 2022 Offering”) utilizing the 2021 Shelf, pursuant to which it sold an aggregate of (i)
On June 8, 2023, using a placement agent, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain institutional investors, pursuant to which the Company issued and sold an aggregate of (i)
Note 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 (i)
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 Acquisition, 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 March 31, 2024 | $ | |||||||||||
| Exercisable at March 31, 2024 | $ | |||||||||||
The weighted-average grant date fair value of options granted during the nine months ended March 31, 2024 was $
Restricted Stock
Restricted stock activity is as follows:
| Weighted | ||||||||
| Average Grant | ||||||||
| Number of | Date Fair | |||||||
| Shares | Value | |||||||
| Unvested at June 30, 2023 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited/cancelled | ( | ) | $ | |||||
| Unvested at March 31, 2024 | $ | |||||||
As of March 31, 2024, there was $
As of March 31, 2024, there was $
Restricted Stock Units
Restricted stock units (“RSU” or “RSUs”) activity is as follows:
| Weighted | ||||||||
| Average Grant | ||||||||
| Number of | Date Fair | |||||||
| Shares | Value | |||||||
| Unvested at June 30, 2023 | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Unvested at March 31, 2024 | $ | |||||||
As of March 31, 2024, there was $
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 | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Cost of sales | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
Note 16 - Warrants
Liability Classified Warrants
On June 8, 2023, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which the Company issued and sold an aggregate of (i)
On August 11, 2022, the Company closed an offering (the “August 2022 Offering”), pursuant to which, the Company issued pre-funded warrants to purchase
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 offering, and the sales price was less than the current exercise price of $
Certain 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 | $ | |||||||||||
| Warrants exercised | ( | ) | $ | — | ||||||||
| Warrants expired | ( | ) | $ | — | ||||||||
| Outstanding March 31, 2024 | $ | |||||||||||
Note 17 - Earnings Per Share
Basic loss per common share is calculated by dividing the net loss available to the common stockholders 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.
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| 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 | ||||||||
Note 18 - License Agreements
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.
Note 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 the Company’s financial information. The CODM reviews financial information presented for each reportable segment for the purpose of making operating decisions and assessing financial performance.
The Company manages and aggregates its operational and financial information in accordance with reportable segments: Rx and Consumer Health. The Rx Segment consists of the Company’s prescription products. The Consumer Health Segment contains the Company’s consumer healthcare products. For purposes of determining operating income or loss by segment, the Company allocates common expenses such as corporate administration, executive and board compensation, insurance, and fees associated with being a publicly traded entity, among others, to the Rx Segment. The Rx Segment also includes pipeline research and development. The CODM does not regularly review asset information by segment, accordingly, asset information is not provided by segment.
Select financial information for these segments is as follows:
| Rx | Consumer Health | Consolidated | ||||||||||
| (in thousands) | ||||||||||||
| Three Months Ended March 31, 2024 | ||||||||||||
| Net revenue | $ | $ | $ | |||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Stock-based compensation expense | $ | $ | $ | |||||||||
| Three Months Ended March 31, 2023 | ||||||||||||
| Net revenue | $ | $ | $ | |||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Stock-based compensation expense | $ | $ | $ | |||||||||
| Rx | Consumer Health | Consolidated | ||||||||||
| (in thousands) | ||||||||||||
| Nine Months Ended March 31, 2024 | ||||||||||||
| Net revenue | $ | $ | $ | |||||||||
| Income (loss) from operations | $ | $ | ( | ) | $ | ( | ) | |||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Stock-based compensation expense | $ | $ | $ | |||||||||
| Nine Months Ended March 31, 2023 | ||||||||||||
| Net revenue | $ | $ | $ | |||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Impairment expense | $ | $ | $ | |||||||||
| Stock-based compensation expense | $ | $ | $ | |||||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Company’s 2023 Form 10-K. 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 the Company’s 2023 Form 10-K, and in Part II, Item 1A of this Form 10-Q.
Objective
The purpose of the Management’s Discussion and Analysis (the “MD&A”) is to present information that management believes is relevant to an assessment and understanding of our results of operations and cash flows for the three and nine months ended March 31, 2024, and our financial condition as of March 31, 2024. The MD&A is provided as a supplement to, and should be read in conjunction with, our Unaudited Consolidated Financial Statements and Notes to the Unaudited Consolidated Financial Statements.
Overview
We are a pharmaceutical company focused on commercializing novel therapeutics. 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 ADHD at our manufacturing facility and use third party manufacturers for our other prescription and consumer health products. We are in the process of moving production of our ADHD products to a third-party manufacturer to improve the profitability of these products.
We have incurred significant losses in each year since inception. Our net loss was $2.9 million and $11.2 million for the three and nine months ended March 31, 2024, respectively. As of March 31, 2024, and June 30, 2023, we had accumulated deficits of $315.4 million and $304.1 million, respectively. As of March 31, 2024, and largely as a result of the January 2025 maturity of the Avenue Note, there is significant uncertainty about our ability to fund planned operations for the twelve months following the filing date of this Form 10-Q, which raises substantial doubt about our ability to continue as a going concern.
Company Strategy
In the second quarter of fiscal 2023, we announced that we will focus our efforts on accelerating the growth of our Rx business and achieving operating cash flows. To achieve these goals, we indefinitely suspended active development of our clinical development programs. In addition, we announced that we would wind down our Consumer Health Segment in fiscal 2024, which has not generated cash flows since we acquired the business in February 2020, to allow us to focus our efforts on improving the performance of our Rx 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, most notably affecting the Consumer Health Segment. While we do not have sales or operations in Russia or Ukraine and we do not have material sales or operations in 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 fiscal 2024. The Company has not experienced stock outages for its ADHD products since the launch of those products, and the pediatric product supply has remained adequate to satisfy demand for the preceding three years.
Results of Operations
The results of operations for the three and nine months ended March 31, 2024, compared to the three and nine months ended March 31, 2023, is as follows:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| March 31, |
March 31, |
|||||||||||||||||||||||
| 2024 |
2023 |
Change |
2024 |
2023 |
Change |
|||||||||||||||||||
| (in thousands) |
||||||||||||||||||||||||
| Net revenue |
$ | 17,993 | $ | 22,733 | $ | (4,740 | ) | $ | 63,026 | $ | 76,667 | $ | (13,641 | ) | ||||||||||
| Cost of sales |
6,300 | 9,990 | (3,690 | ) | 20,346 | 28,599 | (8,253 | ) | ||||||||||||||||
| Gross profit |
11,693 | 12,743 | (1,050 | ) | 42,680 | 48,068 | (5,388 | ) | ||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||
| Advertising and direct marketing |
1,197 | 5,025 | (3,828 | ) | 3,886 | 14,072 | (10,186 | ) | ||||||||||||||||
| Other selling and marketing |
5,352 | 7,779 | (2,427 | ) | 16,661 | 19,394 | (2,733 | ) | ||||||||||||||||
| General and administrative |
5,442 | 7,177 | (1,735 | ) | 17,837 | 22,517 | (4,680 | ) | ||||||||||||||||
| Research and development |
619 | 856 | (237 | ) | 1,747 | 3,630 | (1,883 | ) | ||||||||||||||||
| Amortization of intangible assets |
1,303 | 1,198 | 105 | 3,909 | 3,593 | 316 | ||||||||||||||||||
| Restructuring costs |
244 | — | 244 | 244 | — | 244 | ||||||||||||||||||
| Impairment expense |
— | — | — | — | 2,600 | (2,600 | ) | |||||||||||||||||
| Gain from contingent consideration |
— | (734 | ) | 734 | — | (504 | ) | 504 | ||||||||||||||||
| Total operating expenses |
14,157 | 21,301 | (7,144 | ) | 44,284 | 65,302 | (21,018 | ) | ||||||||||||||||
| Loss from operations |
(2,464 | ) | (8,558 | ) | 6,094 | (1,604 | ) | (17,234 | ) | 15,630 | ||||||||||||||
| Other expense, net |
(1,195 | ) | (1,215 | ) | 20 | (3,083 | ) | (3,527 | ) | 444 | ||||||||||||||
| Gain (loss) on derivative warrant liabilities |
1,017 | 2,573 | (1,556 | ) | (5,467 | ) | 6,167 | (11,634 | ) | |||||||||||||||
| Loss before income tax |
(2,642 | ) | (7,200 | ) | 4,558 | (10,154 | ) | (14,594 | ) | 4,440 | ||||||||||||||
| Income tax expense |
(245 | ) | — | (245 | ) | (1,073 | ) | — | (1,073 | ) | ||||||||||||||
| Net loss |
$ | (2,887 | ) | $ | (7,200 | ) | $ | 4,313 | $ | (11,227 | ) | $ | (14,594 | ) | $ | 3,367 | ||||||||
Net revenue
During the three and nine months ended March 31, 2024, net revenue decreased by $4.7 million, or 21% and decreased by $13.6 million, or 18%, compared to the same periods ended March 31, 2023. The decrease during the three and nine months ended March 31, 2024 was primarily due to the decrease in net revenue from the Consumer Health Segment as we continue to wind down our Consumer Health Segment, with some of the decrease in net revenue attributed to a decline in net revenue from the Pediatric Portfolio in the Rx Segment. These declines were partially offset by an increase in net revenue from the ADHD Portfolio of $4.1 million, or 49% and $13.0 million, or 42% for the three and nine months ended March 31, 2024, compared to the same periods ended March 31, 2023.
Gross margin
During the three and nine months ended March 31, 2024, gross profit decreased by 8% and by 11%, respectively, compared to the same periods ended March 31, 2023. Gross margin percentage was 65% and 68% for the three and nine months ended March 31, 2024, respectively, compared to 56% and 63% for the same periods ended March 31, 2023. The improvements were primarily due to a decline in the lower-margin Consumer Health Segment net revenue as we continue to wind down our Consumer Health Segment and improvements in the ADHD Portfolio were primarily due to efficiencies in production related to higher demand for Adzenys XR-ODT and Cotempla XR-ODT.
Advertising and direct marketing
During the three and nine months ended March 31, 2024, advertising and direct marketing expense decreased $3.8 million, or 76% and $10.2 million or 72%, compared to the same periods ended March 31, 2023. Advertising and direct marketing expense include direct-to-consumer marketing, advertising, sales, and customer support and processing fees related to our Consumer Health Segment and have decreased as we continue to wind down our Consumer Health Segment.
Other selling and marketing
During the three and nine months ended March 31, 2024, other selling and marketing expense decreased by $2.4 million, or 31% and $2.7 million, or 14%, compared to the same periods ended March 31, 2023. The decreases were primarily driven by commission expense based on prescriptions generated by our sale force and commercial marketing program fees that decrease as product sales decrease.
General and administrative
During the three and nine months ended March 31, 2024, general and administrative expense decreased by $1.7 million, or 24% and $4.7 million, or 21% compared to the same periods ended March 31, 2023. The decrease is primarily a result of ongoing cost-cutting initiatives and operational improvements.
Research and development
During the three and nine months ended March 31, 2024, research and development expense decreased by $0.2 million, or 28% and $1.9 million, or 52%, compared to the same periods ended March 31, 2023. 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 has significantly declined. We expect our research and development expenses to decrease from historical levels as a result of our focus on commercial operations.
Amortization of intangible assets
During the three and nine months ended March 31, 2024, amortization expense of intangible assets, excluding amounts included in cost of sales, were relatively consistent compared to the same periods ended March 31, 2023.
Restructuring costs
During the three and nine months ended March 31, 2024, the Company incurred $0.2 million of restructuring costs related to our previously announced operational realignment and related costs. During the three and nine months ended March 31, 2023, no restructuring costs were incurred.
Impairment expense
During the three and nine months ended March 31, 2024, no impairment expense was recorded.
Due to increased focus on our Rx business efforts, we ceased active development of our NT0502 product candidate. As a result, we returned the intellectual property and terminated the Exclusive License Agreement with NeuRx Pharmaceuticals entered in October 2018. We incurred an impairment charge of $2.6 million during the second quarter of fiscal 2023 related to these decisions.
Other expense, net
During the three and nine months ended March 31, 2024, other expense, net, decreased by $20.0 thousand, or 2% and $444.0 thousand, or 13% compared to the same periods ended March 31, 2023, primarily due to $0.5 million in other income from insurance proceeds for damage of inventory in the first quarter of fiscal 2024. Other expense, net, include interest expense, accretion from fixed payment arrangements, and other income.
Gain (loss) on 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 and nine months ended March 31, 2024, we recognized an unrealized gain of $1.0 million and an unrealized loss of $5.5 million, respectively, from the fair value adjustments.
Income tax expense
Income tax expense was $0.2 million and $1.1 million for the three and nine months ended March 31, 2024, respectfully, which was an effective tax rate of (9.3)% and (10.6)% for those same periods. This income tax expense was primarily driven by the limitations on losses as a result of Section 382 of the Internal Revenue Code changes in ownership coupled with existing valuation allowances.
For both the three and nine months ended March 31, 2023, income tax expense was zero with an effective tax rate of zero percent for those same periods, reflecting the full valuation allowance and no impact of Section 382 of the Internal Revenue Code.
Liquidity and Capital Resources
Sources of Liquidity
We have obligations related to our loan agreements, 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 March 31, 2024, approximately $82.4 million remains available under the 2021 Shelf. This availability is subject to SEC 1.B.6 limitations of Form S-3.
Eclipse Loan Agreement
The Eclipse Loan Agreement, as amended, provides us with up to $14.5 million, less a $3.5 million availability block, in Revolving Loans, against 85% of eligible accounts receivable. The Revolving Loans bore interest at the London Interbank Offered Rate (“LIBOR”), plus 4.50% through April 2022. Beginning in May 2022 through maturity, the Revolving Loans bear interest at the 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 nine months ended March 31, 2024, and 2023:
| Nine Months Ended March 31, |
||||||||||||
| 2024 |
2023 |
Change |
||||||||||
| (in thousands) |
||||||||||||
| Net cash used in operating activities |
$ | (600 | ) | $ | (14,494 | ) | $ | 13,894 | ||||
| Net cash (used in) provided by investing activities |
$ | (295 | ) | $ | 38 | $ | (333 | ) | ||||
| Net cash (used in) provided by financing activities |
$ | (2,330 | ) | $ | 14,275 | $ | (16,605 | ) | ||||
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 nine months ended March 31, 2024, net cash used in operating activities totaled $0.6 million. The use of cash was primarily the result of the decrease in accounts payable and accrued liabilities, partially offset by positive cash earnings (net loss offset by non-cash depreciation, amortization and accretion, derivative warrant liabilities adjustment, and stock compensation expense). Additionally, these were partially offset by funds from the Employee Retention Credit program recorded in other operating liabilities (see Note 9 – Other Liabilities) and a decrease in accounts receivable, net and inventories.
During the nine months ended March 31, 2023, net cash used in operating activities totaled $14.5 million. The use of cash was primarily the result of the increase in accounts receivable, inventory, and prepaid expenses, offsetting these increases was an increase in accounts payable and accrued expenses.
Net Cash (Used in) Provided by Investing Activities
Net cash flows from investing activities were nominal during each of the nine months ended March 31, 2024, and 2023.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities of $2.3 million during the nine months ended March 31, 2024, was primarily from payments made to fixed payment arrangements.
Net cash provided by financing activities of $14.3 million during the nine months ended March 31, 2023, was primarily from $9.1 million of proceeds from our August 2022 equity raise, $6.6 million of additional net borrowing made under our short-term line of credit, and $2.9 million net proceeds from our sales under the ATM Sales Agreement; partially offset by fixed payment arrangements totaling $4.1 million and stock issuance costs of $1.0 million.
Inflation
Inflation has resulted in increased costs for our suppliers and our customers. In addition, the United States government has responded to inflation by raising interest rates, which has increased the cost of capital. We believe this has resulted in some of our customers making decisions to reduce their costs as well as increased costs of our operations, which has negatively impacted the results of our operations during the three and nine months ended March 31, 2024. We maintain strategies to mitigate the impact of higher material, energy and commodity costs, including cost reduction, alternative sourcing strategies, and passing along cost increases to customers, which may offset only a portion of the adverse impact.
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 Notes to the Unaudited 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 March 31, 2024, 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 or (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 March 31, 2024, up to $3.0 million of fixed and product milestone payments based on net revenue from the product 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 and gain regulatory clearances to commercialize the product in multiple markets around the world, 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 revenue from the product, 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.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion about the Company’s significant accounting policies, refer to our 2023 Form 10-K.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
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
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, our management, with the participation of 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 the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2024, at reasonable assurance levels, in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Accordingly, we believe that the financial statements presented in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented herein.
Remediation of Previously Identified Material Weakness
Warrants
As previously disclosed in our September 30, 2022 Form 10-Q/A, we identified a material weakness in internal control over financial reporting related to our 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
As previously disclosed in our 2023 Form 10-K, we identified a material weakness in internal control over financial reporting related to our analysis for the accounting for valuation of our inventory. As of June 30, 2023, it was determined that the analysis of over or under absorbed manufacturing costs was not performed, which could have led to material misstatement of our financial statement.
Remediation Efforts
As previously reported in our public reports referred to above, our Audit Committee conducted an internal investigation to identify and determine a plan to remediate the material weaknesses described above and to enhance our overall control environment. We undertook to remediate these deficiencies and strengthen our internal control over financial reporting by enhancing existing controls and establishing additional review and procedure controls over the process of reviewing significant and complex contracts and agreements, and the valuation of inventory, which include the following:
| ● |
Identified specific clauses and relevant guidance that could result in liability classification of issued warrants; |
| ● |
Identified and engaged a firm that specializes in the analysis and technical accounting for the classification of warrants and utilized this firm to assist with the technical accounting analysis for our warrants issued on June 8, 2023, including arriving at the correct conclusion that these warrants should be classified as liabilities and marked to market each reporting period; |
| ● |
Identified and engaged a firm that specializes in the valuation analysis regarding the fair value of our liability classified warrants to assist us with calculating the necessary mark to market adjustment each reporting period; |
| ● |
Implemented a new quarterly control and related processes effective for the fourth quarter of fiscal 2023, and operating every quarter thereafter, to perform a detailed analysis of over or under absorbed manufacturing costs, quantify any over or under absorbed manufacturing costs, and have the appropriate level of management review and evaluate the analysis and approve the recording of any adjusting journal entries as necessary; |
| ● |
Successfully hired additional personnel with the expertise necessary to improve the technical accounting and financial reporting functions; and |
| ● |
Provided additional guidance, education and training to employees relating to our accounting procedures with a continued focus on warrant classification and inventory valuation; |
Given these remediation efforts above and that a sufficient period of time has passed with successful testing performed, management has concluded that the material weaknesses set forth above were remediated as of March 31, 2024.
Inherent Limitations on Effectiveness of Internal Controls over Financial Reporting
Our management team, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple errors or mistakes. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this Form 10-Q, that have a material effect, or are reasonably likely to have a material effect, on the Company’s internal control over financial reporting, other than those noted above.
From time to time, we become involved in or are threatened with legal disputes. Most of these disputes are not likely to have a material effect on our business, financial condition, or operations. There were no new material legal proceedings that were initiated or terminated during the period covered by this report and there have been no material developments in the material proceedings identified in Part II, Item 1 in our December 31, 2023, Form 10-Q. For a description of our material pending legal proceedings, see Note 14 – Commitments and Contingencies of the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, which is incorporated herein by reference.
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 2023 Form 10-K.
Rule 10b5-1 Trading Plans
During the fiscal quarter ended March 31, 2024, of our directors or executive officers (as defined in Rule 16a-1 under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as those terms are defined in Item 408 of Regulation S-K).
| Exhibit No. |
Description |
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| 31.1* |
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| 31.2* |
||
| 32.1** |
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| 101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase. | |
| 104 |
Cover Page Interactive Data File - formatted as Inline XBRL and contained in Exhibit 101. |
* Filed herewith.
** Furnished herewith.
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: May 15, 2024 |
By: |
/s/ Joshua R. Disbrow |
|
| Joshua R. Disbrow |
|||
| Chairman and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Date: May 15, 2024 | By: | /s/ Mark K. Oki | |
| Mark K. Oki | |||
| Chief Financial Officer | |||
| (Principal Financial Officer) | |||
| (Principal Accounting Officer) |
|||