UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-38247
AYTU BIOPHARMA, INC.
(www.aytubio.com)
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Delaware |
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47-0883144 |
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
373 Inverness Parkway, Suite 206
Englewood, Colorado 80112
(Address of principal executive offices, including zip code)
(720) 437-6580
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock, par value $0.0001 per share |
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AYTU |
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The NASDAQ Stock Market LLC |
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. Yes ☒ No ☐
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). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
☐ |
Accelerated filer |
☐ |
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Non-accelerated filer |
☒ |
Smaller reporting company |
☒ |
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Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 5, 2021, there were 28,147,712 shares of the registrant’s common stock outstanding.
AYTU BIOPHARMA, INC. AND SUBSIDIARIES FOR THE QUARTER ENDED SEPTEMBER 30, 2021
INDEX
PART I—FINANCIAL INFORMATION
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Page |
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Item 1. Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and June 30, 2021 |
4 |
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5 |
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6 |
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7 |
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8 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
32 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
42 |
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42 |
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43 |
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43 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
43 |
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43 |
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43 |
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43 |
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44 |
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45 |
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our anticipated future clinical and regulatory events, future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Forward looking statements are generally written in the future tense and/or are preceded by words such as “may,” “will,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” or similar words, or the negatives of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, without limitation: the planned expanded commercialization of our products and the potential future commercialization of our product candidates; our planned product candidate development strategy; our anticipated future cash position; our plan to acquire additional assets; our anticipated future growth rates; anticipated sales increases; anticipated net revenue increases; amounts of certain future expenses and costs of goods sold; anticipated increases to operating expenses, research and development expenses, and selling, general, and administrative expenses; and future events under our current and potential future collaborations.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Risk Factors” in Part II Item 1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.
This Quarterly Report on Form 10-Q refers to trademarks, such as Adzenys, Aytu, Aytu BioPharma, Apeaz, Cotempla, Diabasens, FlutiCare, Innovus Pharma, Neos, OmepraCare, Poly-Vi-Flor, Regoxidine, Tri-Vi-Flor, Tuzistra, Urivarx, Zestra, and ZolpiMist which are protected under applicable intellectual property laws and are our property or the property of our subsidiaries. This Form 10-Q also contains trademarks, service marks, copyrights and trade names of other companies which are the property of their respective owners. Solely for convenience, our trademarks and tradenames referred to in this Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.
3
AYTU BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per-share)
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(Unaudited) September 30, |
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June 30, |
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2021 |
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2021 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
40,308 |
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$ |
49,649 |
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Restricted cash |
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252 |
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252 |
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Accounts receivable, net |
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21,626 |
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28,176 |
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Inventory, net |
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16,314 |
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16,339 |
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Prepaid expenses |
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9,343 |
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9,780 |
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Other current assets |
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1,195 |
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1,038 |
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Total current assets |
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89,038 |
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105,234 |
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Property and equipment, net |
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4,666 |
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5,140 |
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Operating lease right-of-use asset |
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3,826 |
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3,563 |
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Intangible assets, net |
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83,385 |
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85,464 |
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Goodwill |
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46,349 |
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65,802 |
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Other long-term assets |
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465 |
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465 |
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Total long-term assets |
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138,691 |
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160,434 |
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Total assets |
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$ |
227,729 |
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$ |
265,668 |
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Liabilities |
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Current liabilities |
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Accounts payable and other |
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$ |
9,383 |
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$ |
19,255 |
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Accrued liabilities |
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54,380 |
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51,295 |
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Accrued compensation |
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4,762 |
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5,939 |
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Short-term line of credit |
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4,520 |
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7,934 |
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Current portion of debt |
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16,508 |
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16,668 |
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Current portion of operating lease liabilities |
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1,084 |
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940 |
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Current portion of fixed payment arrangements |
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3,221 |
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3,134 |
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Current portion of CVR liabilities |
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1 |
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218 |
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Current portion of contingent consideration |
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4,138 |
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4,055 |
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Total current liabilities |
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97,997 |
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109,438 |
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Long-term debt, net of current portion |
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154 |
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180 |
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Long-term operating lease liability, net of current portion |
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2,758 |
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2,624 |
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Long-term fixed payment arrangements, net of current portion |
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5,485 |
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6,324 |
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Long-term CVR liabilities, net of current portion |
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1,347 |
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1,177 |
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Long-term contingent consideration, net of current portion |
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8,169 |
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8,002 |
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Other long-term liabilities |
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319 |
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355 |
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Total liabilities |
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116,229 |
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128,100 |
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Commitments and contingencies |
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Stockholders’ equity |
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Preferred Stock, par value $.0001; 50,000,000 shares authorized; no shares issued or outstanding as of September 30, 2021 and June 30, 2021 |
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— |
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— |
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Common Stock, par value $.0001; 200,000,000 shares authorized; shares issued and outstanding 27,771,912 and 27,490,412, respectively, as of September 30, 2021 and June 30, 2021 |
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3 |
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3 |
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Additional paid-in capital |
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317,647 |
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315,864 |
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Accumulated deficit |
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(206,150) |
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(178,299) |
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Total stockholders’ equity |
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111,500 |
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137,568 |
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Total liabilities and stockholders’ equity |
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$ |
227,729 |
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$ |
265,668 |
See the accompanying Notes to the Condensed Consolidated Financial Statements
4
AYTU BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per-share)
(Unaudited)
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Three Months Ended |
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September 30, |
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2021 |
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2020 |
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Product revenue, net |
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$ |
21,897 |
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$ |
13,520 |
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Cost of sales |
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9,441 |
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4,063 |
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Gross profit |
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12,456 |
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9,457 |
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Operating expenses |
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Research and development |
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2,096 |
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183 |
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Selling and marketing |
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9,297 |
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5,826 |
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General and administrative |
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8,216 |
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5,420 |
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Impairment of goodwill |
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19,453 |
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— |
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Amortization of intangible assets |
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1,093 |
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1,585 |
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Total operating expenses |
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40,155 |
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13,014 |
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Loss from operations |
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(27,699) |
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(3,557) |
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Other (expense) income |
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Other (expense), net |
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(40) |
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(751) |
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Gain / (Loss) from contingent consideration |
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(219) |
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2 |
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Total other (expense) income |
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(259) |
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(749) |
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Loss before income tax |
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(27,958) |
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(4,306) |
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Income tax expense (benefit) |
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(107) |
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— |
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Net loss |
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$ |
(27,851) |
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$ |
(4,306) |
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Weighted average number of common shares outstanding |
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25,597,319 |
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12,158,594 |
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Basic and diluted net loss per common share |
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$ |
(1.09) |
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$ |
(0.35) |
See the accompanying Notes to the Condensed Consolidated Financial Statements.
5
AYTU BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
(Unaudited)
See the accompanying Notes to the Condensed Consolidated Financial Statements
6
AYTU BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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Three Months Ended |
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September 30, |
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2021 |
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2020 |
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Operating Activities |
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Net loss |
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$ |
(27,851) |
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$ |
(4,306) |
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Adjustments to reconcile net loss to cash used in operating activities: |
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Depreciation, amortization and accretion |
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2,677 |
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2,035 |
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Impairment of goodwill |
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19,453 |
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— |
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Stock-based compensation expense |
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1,519 |
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455 |
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Loss (gain) from contingent considerations |
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219 |
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(2) |
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Amortization of senior debt discount (premium) |
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(161) |
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85 |
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Loss on sale of equipment |
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— |
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112 |
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Gain on termination of lease |
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— |
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(343) |
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Inventory write-down |
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203 |
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99 |
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Other noncash adjustments |
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(61) |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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6,525 |
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(937) |
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Inventory |
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(178) |
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(1,480) |
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Prepaid expenses and other current assets |
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279 |
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1,691 |
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Accounts payable and other |
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(9,888) |
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(4,520) |
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Accrued liabilities |
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3,326 |
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(845) |
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Other operating assets and liabilities, net |
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147 |
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(27) |
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Net cash used in operating activities |
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(3,791) |
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(7,983) |
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Investing Activities |
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Contingent consideration payment |
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(50) |
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(19) |
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Other investing activities |
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(36) |
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10 |
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Net cash used in investing activities |
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(86) |
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(9) |
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Financing Activities |
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Proceeds from issuance of stock |
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307 |
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— |
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Payment of stock issuance costs |
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(21) |
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(1,633) |
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Payment made to fixed payment arrangement |
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(2,305) |
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(409) |
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Payments made to borrowings |
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(45,651) |
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(136) |
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Proceeds from borrowings |
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42,212 |
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— |
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Other financing activities |
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(6) |
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— |
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Net cash used in financing activities |
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(5,464) |
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(2,178) |
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Net change in cash, restricted cash and cash equivalents |
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(9,341) |
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(10,170) |
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Cash, cash equivalents and restricted cash at beginning of period |
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49,901 |
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|
48,333 |
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Cash, cash equivalents and restricted cash at end of period |
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$ |
40,560 |
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$ |
38,163 |
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Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets |
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Cash and cash equivalents |
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$ |
40,308 |
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$ |
37,911 |
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Restricted cash |
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|
252 |
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|
252 |
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Total cash, cash equivalents and restricted cash |
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$ |
40,560 |
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$ |
38,163 |
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Supplemental cash flow data |
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Cash paid for interest |
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$ |
1,688 |
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$ |
248 |
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Non-cash investing and financing activities: |
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Fixed payment arrangements included in accrued liabilities |
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$ |
525 |
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$ |
431 |
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Other noncash investing and financing activities |
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$ |
16 |
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$ |
20 |
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Warrants issued |
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$ |
— |
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$ |
356 |
See the accompanying Notes to the Condensed Consolidated Financial Statements.
7
AYTU BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business, Financial Condition, Basis of Presentation
Aytu BioPharma, Inc. (“Aytu”, the “Company” or “we”), is a commercial-stage specialty pharmaceutical company focused on commercializing novel therapeutics and consumer healthcare products. The Company currently operates the Aytu BioPharma business, consisting of the Company’s prescription pharmaceutical products (the “Rx Portfolio”), and the Aytu consumer healthcare products business (the “Consumer Health Portfolio”). The Rx Portfolio consists of commercialized prescription pharmaceutical products for the treatment of attention deficit hyperactivity disorder ("ADHD"), allergies, insomnia and various pediatric conditions. The Aytu consumer health business is focused on commercializing consumer healthcare products. The Company was incorporated as Rosewind Corporation on August 9, 2002 in the State of Colorado and was re-incorporated in the state of Delaware on June 8, 2015.
The Rx Portfolio consists of (i) Adzenys XR-ODT (amphetamine) extended-release orally disintegrating tablets, Cotempla XR-ODT (methylphenidate) extended-release orally disintegrating tablets and Adzenys ER (amphetamine) extended-release oral suspension for the treatment of ADHD, (ii) 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, (iii) Karbinal ER, an extended-release carbinoxamine (antihistamine) suspension indicated to treat numerous allergic conditions, (iv) ZolpiMist, the only FDA-approved oral spray prescription sleep aid, (v) Tuzistra XR, the only FDA-approved 12-hour codeine-based antitussive syrup and (vi) a generic Tussionex (hydrocodone and chlorpheniramine) (“generic Tussionex”), extended-release oral suspension for the treatment of cough and upper respiratory symptoms of a cold. Adzenys ER was discontinued as of September 30, 2021.
The Consumer Health Portfolio consists of over thirty consumer health products competing in large healthcare categories, including diabetes management (with a concentration on neuropathy), pain management, digestive health, sexual and urological health and general wellness, commercialized through direct-to-consumer marketing channels utilizing the Company's proprietary Beyond Human marketing and sales platform and on e-commerce platforms.
On July 1, 2021, the Company and Avrio Genetics, LLC (“Avrio”) mutually agreed to terminate the exclusive license agreement to license the intellectual property surrounding the use and commercialization of the MiOXSYS commercial system to Avrio, effective as of June 29, 2021. In connection with the termination of the agreement, the Company entered into a termination agreement with Avrio. Pursuant to the terms of this termination agreement, the original Avrio agreement and its amendments are terminated in their entirety, except for certain provisions that survive the termination as specified in such agreement.
Subsequent to the Avrio termination, on July 1, 2021, the Company signed an Asset Purchase Agreement (the “UAB APA”) with UAB “Caerus Biotechnologies” (“UAB”). Pursuant to the terms and conditions of the agreement, UAB will acquire all existing intellectual property rights, technical information and know-how related to MiOXSYS as well as all existing inventory and all rights attached and related to the product and manufacturing thereof. As consideration, UAB agreed to pay the Company approximately $0.5 million and make royalty payments to the Company of five percent of global net revenue of MiOXSYS for five years from the closing date of the transactions contemplated in the UAB APA.
On September 29, 2021, the Company and UAB entered into an amendment to the UAB APA, pursuant to which, (i) September 30, 2021 was established as the closing date, (ii) UAB was provided with termination right in the event that the Company is unable to complete the transfer of intellectual property assets to UAB by May 31, 2022 (“Termination Rights”), provided that the delay is not due to IP offices, foreign or domestic and (iii) the Company is required to pay 5% of the deal purchase price in the event UAB terminated the agreement as provided in the Termination Rights. As of September 30, 2021, the Company deferred recognition of $0.1 million payments received from UAB as income until it satisfies the provisions in the Termination Rights, which was included in accrued liabilities in the consolidated balance sheet.
8
The Company’s strategy is to continue building its portfolio of revenue-generating products, leveraging its commercial team’s expertise to build leading brands within large therapeutic markets, while also developing a de-risked, late-stage pipeline focused on pediatric-onset conditions and difficult-to-treat diseases.
As of September 30, 2021, the Company had approximately $40.6 million of cash, cash equivalents and restricted cash. The Company’s operations have historically consumed cash and are expected to continue to consume cash. The Company incurred a net loss of approximately $27.9 million and $4.3 million during the three months ended September 30, 2021 and 2020, respectively. The Company had an accumulated deficit of approximately $206.2 million and $178.3 million as of September 30, 2021 and June 30, 2021, respectively. Cash used in operations was approximately $3.8 million and $8.0 million during the three months ended September 30, 2021 and 2020, respectively.
Management plans to focus on executing on its business plan or otherwise reducing its expenses, renegotiating its debt facilities, or raising additional capital in order to meet its obligations. Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings, or other means; however, the Company cannot provide any assurance that it will be able to raise additional capital or obtain new financing on commercially acceptable terms. If the Company is unable to secure additional capital, it may be required to curtail its operations or delay the execution of its business plan.
As of the date of this Report, the Company expects its costs for operations to increase as the Company integrates the Neos acquisition, invests in new product development, continues to focus on revenue growth through increasing product sales and making additional acquisitions. The Company’s current assets totaling approximately $89.0 million as of September 30, 2021 and the proceeds expected from ongoing product sales will be used to fund existing operations. The Company may continue to access the capital markets from time-to-time when market conditions are favorable. The timing and amount of capital that may be raised is dependent on the terms and conditions upon which investors would require to provide such capital. There is no guarantee that capital will be available on terms favorable to the Company and its stockholders, or at all.
Since the Company has sufficient cash on-hand as of September 30, 2021 to cover potential net cash outflows for the twelve months following the filing date of this Annual Report, the Company reports that there exists no substantial doubt about its ability to continue as a going concern.
If the Company is unable to raise adequate capital in the future when it is required, the Company's management can adjust its operating plans to reduce the magnitude of the Company's capital need under its existing operating plan. Some of the adjustments that could be made include delays of and reductions to commercial programs, reductions in headcount, narrowing the scope of the Company’s commercial plans or reductions or delays to its research and development programs. Without sufficient operating capital, the Company could be required to relinquish rights to products or renegotiate to maintain such rights on less favorable terms than it would otherwise choose. This may lead to impairment or other charges, which could materially affect the Company’s balance sheet and operating results.
Basis of Presentation. The unaudited condensed consolidated financial statements contained in this report represent the financial statements of the Company and its wholly owned subsidiaries, Innovus Pharmaceuticals, Inc., Aytu Therapeutics, LLC and Neos Therapeutics, Inc. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2021, which included all disclosures required by generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company and the results of operations and cash flows for the interim periods presented. The results of operations for the period ended September 30, 2021 are not necessarily indicative of expected operating results for the full year. The information presented throughout this report, as of September 30, 2021 and for the three months ended September 30, 2021, and 2020, is unaudited.
9
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, revenue recognition, allowance for doubtful accounts, determination of variable consideration for accruals of chargebacks, administrative fees and rebates, government rebates, returns and other allowances, allowance for inventory obsolescence, valuation of financial instruments and intangible assets, accruals for contingent liabilities, fair value of long-lived assets, goodwill impairment, income tax provision, deferred taxes and valuation allowance, determination of right-of-use assets and lease liabilities, purchase price allocations, and the depreciable lives of long-lived assets. 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.
Prior Period Reclassification
Certain prior year amounts in the consolidated balance sheets, statements of earnings and statements of cashflows have been reclassified to conform to the current year presentation, including a reclassification made in the presentation of FDA fees for commercialized product. This was previously included in general and administrative expenses and now is recorded as a component of cost of sales on the consolidated statements of earnings. These reclassifications did not affect operating earnings or other consolidated financial statements for the three months ended September 30, 2021 and 2020.
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 first quarter period ended September 30, 2021. The impairment of the Aytu BioPharma segment book goodwill changed the net deferred tax liability of $0.2 million recorded as of June 30, 2021 fiscal year end into a net deferred tax liability of $0.1 million as of September 30, 2021. As a result, the Company recognized an income tax benefit of $0.1 million during the three months ended September 30, 2021. There was no income tax expense or benefit during the three months ended September 30, 2020.
Recent Accounting Pronouncements Not Yet Adopted
Financial Instruments – Credit Losses (“ASU 2016-13”). In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to require 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 this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. 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. Accordingly, the Company’s fiscal year of adoption will be the fiscal year ended June 30, 2024. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018, but the Company did not elect to early adopt. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements, but no conclusion has been reached.
For a complete set of the Company’s significant accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. There have been no significant changes to the Company’s significant accounting policies during the three months ended September 30, 2021. This Quarterly Report on Form 10-Q does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to the Company’s financial condition, results of operations, cash flows or disclosures.
10
3. Acquisitions
Neos Merger
On March 19, 2021, the Company acquired Neos Therapeutics, Inc. (“Neos”), a commercial-stage pharmaceutical company developing and manufacturing central nervous system-focused products (the “Neos Merger”) after approval by the stockholders of Neos on March 18, 2021 and the approval of the consideration to be delivered by the Company in connection with the merger by the shareholders of Aytu, also on March 18, 2021. Upon the effectiveness of the Neos Merger, a subsidiary of the Company merged with and into Neos, and all outstanding Neos common stock was exchanged for approximately 5,472,000 shares of the Company’s common stock. Neos is now a 100% wholly owned subsidiary of the Company. The Company pursued the acquisition of Neos in order to gain scale in the industry, expand its product portfolio and as an opportunity to potentially accelerate the pathway to breakeven. The Company incurred in relation to the Neos Merger (i) approximately $2.9 million of acquisition related costs, recognized as part of operating expense, and (ii) $0.1 million of issuance costs, recognized as a component of stockholders’ equity.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition. These estimates are preliminary, pending final evaluation of certain assets and liabilities, and therefore, are subject to revisions that may result in adjustments to the values presented below;
The fair values of intangible assets were determined using variations of the cost approach, excess earnings method and the relief-from-royalties method. The fair value of Neos trade name, in-process R&D and developed product technology, which is the proprietary technology for the development of Adzenys XR-ODT, Adzenys ER, Cotempla XR-
11
ODT and generic Tussionex, were determined using the relief from royalty method. The fair value of developed technology right, which is a proprietary modified-release drug delivery technology, was determined using multi-period excess earnings method. The fair value of RxConnect, which is a developed technology for the Neos-sponsored patient support program that offers affordable and predictable copays to all commercially insured patients, was determined using cost to recreate method. The finite-lived intangible assets are being amortized over a range of between 1 to 18 years.
The fair value of the identifiable intangible assets acquired were as follows:
Unaudited Pro Forma Information
The following supplemental unaudited proforma financial information presents the Company’s results as if the Neos acquisition had occurred on July 1, 2020.
The unaudited pro forma results have been prepared based on estimates and assumptions, which management believes are reasonable; however, the results are not necessarily indicative of the consolidated results of operations had the acquisition occurred on July 1, 2020, or of future results of operations:
Other Acquisitions
On April 12, 2021, the Company entered into an asset purchase agreement with Rumpus VEDS, LLC, Rumpus Therapeutics, LLC, Rumpus Vascular, LLC (together with Rumpus VEDS, LLC and Rumpus Therapeutics LLC, “Rumpus”) pursuant to which the Company acquired certain rights and other assets, including key commercial global licenses, relating primarily to the pediatric-onset rare disease development asset enzastaurin (now referred to as AR101), which is a pivotal study-ready therapeutic being studied for the treatment of vascular Ehlers-Danlos Syndrome (“vEDS”). This asset was acquired for an up-front fee of $1.5 million in cash and payment of aggregated fees of $0.6 million. Upon the achievement of certain regulatory and commercial milestones, up to $67.5 million in earn-out payments, which are payable in cash or shares of common stock, generally at the Company’s option, are payable to Rumpus. AR101 (enzastaurin) is an orally available investigational first-in-class small molecule, serine/threonine kinase inhibitor of the PKC beta, PI3K and AKT pathways.
4. Revenue Recognition
Contract Balances. Contract assets primarily relate to the Company’s right to consideration in exchange for products transferred to a customer in which that right to consideration is dependent upon the customer selling these
12
products. As of September 30, 2021 and June 30, 2021, contract assets of $9,000 and $21,000 was included in other current assets in the condensed consolidated balance sheet. Contract liabilities primarily relate to advances or deposits received from the Company’s customers before revenue is recognized. As of September 30, 2021 and June 30, 2021, contract liabilities of $0.2 million were included in accrued liabilities in the consolidated balance sheet.
Revenues by Product Portfolio. Net revenue disaggregated by significant product portfolio for the three months ended September 30, 2021 and 2020 were as follows:
Revenues by Geographic location. The following table reflects the Company’s product revenues by geographic location as determined by the billing address of customers:
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|
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Three Months Ended |
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|
|
September 30, |
||||
|
|
|
2021 |
|
2020 |
||
|
|
|
(In thousands) |
||||
|
U.S. |
|
$ |
21,106 |
|
$ |
12,144 |
|
International |
|
|
791 |
|
|
1,376 |
|
Total net revenue |
|
$ |
21,897 |
|
$ |
13,520 |
5. 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 write-down to net realizable value in the period that the impairment is first recognized. The Company wrote down $0.2 million and $0.1 million of inventory during the three months ended September 30, 2021 and 2020, respectively.
Inventory balances consist of the following:
13
6. Property and Equipment
Properties and equipment are recorded at cost and once placed in service, are depreciated on a straight-line basis over the estimated useful lives. Leasehold improvements are amortized over the shorter of the estimated economic life or related lease term.
Property and equipment consist of the following:
Depreciation and amortization expense was $0.4 million and $33,000 for the three months ended September 30, 2021 and 2020, respectively. During the three months ended September 30, 2020, the Company recognized a loss of $0.1 million, respectively, on sale of equipment due to termination of leases.
7. 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 2022 and 2024. 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. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.
Upon the closing of the Neos Merger on March 19, 2021, pursuant to the guidance under ASC 805, Neos recognized operating lease ROU asset and lease liability of $3.5 million, which represented the present value of the remaining lease payments as of the acquisition date, for its office space and manufacturing facilities at Grand Prairie, Texas. As the lease agreement does not provide an implicit rate, Neos used its borrowing rate of 6.7% to determine the present value of future lease payments. Furthermore, as of the acquisition date, no assets or liabilities of the operating leases that have a remaining lease term of less than twelve months were recognized. The finance leases are related to Neos equipment finance leases with fixed contract terms and an implicit interest rate of approximately 5.9%.
In May 2021, the Company entered into a commercial lease agreement for 6,352 square feet of office in Berwyn, Pennsylvania that commences on December 1, 2021 and ends on January 31, 2025. On July 19, 2021, the Company and the lessor entered into an amendment, pursuant to which the parties agreed to amend the commencement date from December 1, 2021 to September 1, 2021. The Company recorded an operating lease ROU asset and lease liabilities of $0.5 million in the consolidated balance sheet representing the present value of minimum lease payments using Neos’ borrowing rate of 6.25%.
14
The components of lease expenses are as follows:
Supplemental balance sheet information related to leases is as follows:
Remaining lease term and discount rate used are as follows:
Supplemental cash flow information related to lease is as follows:
15
As of September 30, 2021, the maturities of the Company’s future minimum lease payments were as follows:
8. Goodwill and Other Intangible Assets
Since the June 30, 2021 annual goodwill impairment assessment, the Company’s stock price has continued to decline. This continued decline is considered a qualitative factor that led Management to consider an interim period reassessment as to whether it is more likely than not that the fair value of one or more of the Company’s reporting units is greater than its carrying value. Management’s evaluation of the first step indicated that its Aytu BioPharma segment’s goodwill is potentially impaired. The Company then performed a quantitative impairment test by calculating the fair value of the segment and comparing it to its carrying value. Significant assumptions inherent in the valuation methodologies include, but are not limited to prospective financial information, growth rates, terminal value, discount rates and comparable multiples from publicly traded companies in our industry. Due to the decline in stock price this was an indicator of increased risk primarily increasing the discount rates in the valuation models. The Company determined the fair value of the reporting segment utilizing the discounted cash flow model. As a result of the continued decline in its stock price, the Company risk adjusted its cost of equity, which increased the over-all discount rate. As of September 30, 2021, utilizing the risk adjusted weighted-average discount rate, the fair value of Aytu BioPharma segment is less than its carrying value. As a result, the Company recognized an impairment loss of $19.5 million related to the Aytu BioPharma segment. Furthermore, the quantitative test indicated there was no impairment at Aytu Consumer Health segment as it resulted in an implied fair value greater than the carrying value as of September 30, 2021.
The change in carrying amount of goodwill by reportable segment is as follows:
The Company currently holds the following intangible asset portfolios as of September 30, 2021: (i) Licensed asset, which consists of pharmaceutical product assets that were acquired prior to July 1, 2020; (ii) Product technology rights, acquired from the November 1, 2019 acquisition of a line of prescription pediatric products (“Pediatric Portfolio”) from Cerecor, Inc. and the Neos Merger on March 19, 2021, (iii) Proprietary modified-release drug delivery technology right as a result of the Neos Merger, (iv) Acquired product distribution rights and commercial technology consisting of RxConnect and trade names as a result of the Neos Merger, and patents, trade names and the acquired customer lists from the acquisition of Innovus Pharmaceuticals, Inc. (“Innovus Merger”), (v) Acquired in-process R&D from the Neos Merger related to the NT0502 product candidate for the treatment of sialorrhea.
16
The following table provides the summary of the Company’s intangible assets as of September 30, 2021 and June 30, 2021, respectively.
The following table summarizes the estimated future amortization expense to be recognized over the next five years and periods thereafter:
Certain of the Company’s amortizable intangible assets include renewal options, extending the expected life of the asset. The renewal periods range between approximately 1 to 20 years depending on the license, patent or other agreement. Renewals are accounted for when they are reasonably assured. Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of intangible assets was $2.1 million and $1.6 million for the three months ended September 30, 2021 and 2020, respectively.
17
9. Accrued liabilities
Accrued liabilities consist of the following:
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* |
Other accrued liabilities consist of credit card liabilities, taxes payable, accounting fee, samples expense and consultants fee, none of which individually represent greater than five percent of total current liabilities. |
10. Fair Value Considerations
The Company’s asset and liability classified financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant derivative liability and contingent consideration. The carrying amounts of 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. The fair value of acquisition-related contingent consideration is based on Monte-Carlo models. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs 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 assets and liabilities which are measured at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed below in all periods presented.
18
Recurring Fair Value Measurements
The following table presents the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of September 30, 2021 and June 30, 2021, by level within the fair value hierarchy.
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Fair Value Measurements at September 30, 2021 |
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Quoted |
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Priced in |
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Active |
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Markets |
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Significant |
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for |
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Other |
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Significant |
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Identical |
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Observable |
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Unobservable |
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Fair Value at September 30, |
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Assets |
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Inputs |
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Inputs |
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2021 |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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(In thousands) |
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Recurring: |
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Contingent consideration |
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$ |
12,307 |
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$ |
— |
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$ |
— |
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$ |
12,307 |
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CVR liability |
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|
1,348 |
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|
— |
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|
— |
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|
1,348 |
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Total |
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$ |
13,655 |
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$ |
— |
|
$ |
— |
|
$ |
13,655 |
Contingent Consideration. The Company classifies its contingent consideration liability in connection with the acquisition of Tuzistra XR, ZolpiMist and Innovus, within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity.
Tuzistra XR. At the acquisition date on November 2, 2018, the contingent consideration related to Tuzistra XR, was valued at $8.8 million using a Monte Carlo simulation. As of September 30, 2021 and June 30, 2021, the contingent consideration was revalued at $11.3 million and $13.2 million, respectively, using the Scenario-Based model. As of September 30, 2021, none of the milestones had been achieved, and therefore, no milestone payment was made. However, approximately $3.0 million is expected to be paid in November 2021, as this time-based milestone will be satisfied.
ZolpiMist. At the acquisition date on June 11, 2018, the contingent consideration related to the ZolpiMist royalty payments was valued at $2.6 million using a Monte Carlo simulation. As of September 30, 2021 and June 30, 2021, the contingent consideration was revalued at $0.7 million using the Monte Carlo model. As of September 30, 2021, none of the milestones had been achieved, and therefore, no milestone payment was made.
On February 14, 2020, the Company recognized approximately $0.2 million in product related contingent consideration as a result of the February 14, 2020 Innovus Merger. The fair value was based on a discounted value of the future contingent payment using a 30% discount rate based on the estimated risk that the milestones are achieved. As of September 30, 2021 and June 30, 2021, the contingent consideration was $0.3 million.
19
In June 2017, Innovus entered into Exclusive License Agreement (“the UIRD Agreement”) with University of Iowa Research Foundation (“UIRD”) for the use of patent and technology know-how. Pursuant to the agreement, Innovus will pay to UIRD a total milestone payment of $50,000 every other year beginning on July 1, 2021 for a total payment of $0.2 million. The fair value was based on a discounted value of the future contingent payment using a 26% discount rate based on the estimated risk that the milestones would be achieved. The discounted value as of September 30, 2021 and June 30, 2021, was approximately $45,000 and $0.1 million, respectively.
During the three months ended September 30, 2021, the Company recognized a net loss of $0.2 million in the consolidated statements of operations from changes in fair values of these contingent considerations. The change in fair value was negligible amount during the three months ended September 30, 2020. The total accretion expense included in the consolidated statements of operations related to these contingent considerations was approximately $34,000, and $0.3 million during the three months ended September 30, 2021 and 2020, respectively.
Contingent value rights. Contingent value rights (“CVRs”) represent contingent additional consideration of up to $16.0 million payable to satisfy future performance milestones related to the Innovus Merger. Consideration can be satisfied in up to 470,000 shares of the Company’s common stock, or cash either upon the option of the Company or in the event there are insufficient shares available to satisfy such obligations. The fair value of the contingent value rights was based on a Monte Carlo model which takes into account current interest rates and expected sales potential. On March 31, 2020, the Company paid the CVR holders approximately 123,820 shares of the Company’s common stock to satisfy the first $2.0 million milestone, which relates to the Innovus achievement of $24.0 million in revenues during the 2019 calendar year. On March 20, 2021, the Company paid the CVR holders approximately 103,190 shares of the Company’s common stock to satisfy one of two $1.0 million 2020 milestones, which relates to the Innovus achievement of $30.0 million in revenues during the 2020 calendar year. The $1.0 million 2020 milestone for achieving profitability was not met. As of September 30, 2021 and June 30, 2021, the CVRs were revalued at $1.3 million and $1.4 million, respectively, using the same Monte Carlo model. During the three months ended September 30, 2021 and 2020, the Company recognized a gain of $47,000 and loss of $0.1 million, respectively in the consolidated statements of operations from changes in fair values of CVRs.
Summary of Level 3 Input Changes
The following table sets forth a summary of changes to those fair value measures using Level 3 inputs for the three months ended September 30, 2021:
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CVR |
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Contingent |
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Liability |
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Consideration |
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(In thousands) |
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Balance as of June 30, 2021 |
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$ |
1,395 |
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$ |
12,057 |
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Included in earnings |
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(47) |
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300 |
|
Purchases, issues, sales and settlements: |
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|
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Settlements |
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— |
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(50) |
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Balance as of September 30, 2021 |
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$ |
1,348 |
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$ |
12,307 |
Significant Assumptions
Significant assumptions used in valuing the contingent consideration were as follows:
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September 30, |
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2021 |
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Tuzistra |
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Valuation model |
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Scenario-Based |
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Leveraged Beta |
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0.68 |
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Market risk premium |
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6.00 |
% |
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Risk-free interest rate |
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1.90 |
% |
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Discount |
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15.00 |
% |
|
Company specific discount |
|
15.00 |
% |
20
Significant assumptions used in valuing the CVRs were as follows:
11. Commitments and Contingencies
Commitments and contingencies are described below and summarized by the following as of September 30, 2021:
Prescription Database
In May 2016, the Company entered into an agreement with a vendor to provide prescription database information. The Company agreed to pay approximately $1.6 million over three years for access to the database of prescriptions for certain products. In January 2020, the Company amended the agreement and agreed to pay an additional $0.6 million to add access to the database of prescriptions written for the Pediatric Portfolio. The agreement was further amended to include all prescriptions written for the Rx Portfolio.
Pediatric Portfolio Fixed Payments and Product Milestone
The Company has two fixed, periodic payment obligations to an investor (the “Fixed Obligation”). Under the first fixed obligation, the Company was to pay monthly payment of $86,400 beginning November 1, 2019 through
21
January 2021, with a balloon payment of $15.0 million that was to be due in January 2021 (“Balloon Payment Obligation”). A second fixed obligation requires the Company pay a minimum of $100,000 monthly through February 2026, except for $210,767 paid in January 2020.
On May 29, 2020, the Company entered into an Early Payment Agreement and Escrow Instruction (the “Early Payment Agreement”) pursuant to which the Company agreed to pay $15.0 million to the investor in early satisfaction of the Balloon Payment Obligation. The parties to the Early Payment Agreement acknowledged and agreed that the remaining fixed payments other than the Balloon Payment Obligation remained due and payable pursuant to the terms of the Agreement, and that nothing in the Early Payment Agreement alters, amends, or waives any provisions or obligations in the Waiver or the Investor agreement other than as expressly set forth therein. The first fixed obligation was fully paid as of January 2021.
On June 21, 2021, the Company entered into a Waiver, Release and Consent pursuant to which the Company paid $2.8 million to the investor in early satisfaction of the second fixed obligation. The Company agreed to pay the remaining fixed obligation of $3.0 million in six equal quarterly payments of $0.5 million over the next six quarters commencing September 30, 2021.
In addition, the Company acquired a Supply and Distribution Agreement with Tris (the “Karbinal Agreement”), under which the Company is granted the exclusive right to distribute and sell the product in the United States. The initial term of the Karbinal Agreement was 20 years. The Company will pay Tris a royalty equal to 23.5% of net sales.
The Karbinal Agreement also contains minimum unit sales commitments, which is based on a commercial year that spans from August 1 through July 31, of 70,000 units annually through 2025. The Company is required to pay Tris a royalty make whole payment of $30 for each unit under the 70,000-unit annual minimum sales commitment through 2025. The Karbinal Agreement make-whole payment is capped at $2.1 million each year. The annual payment is due in August of each year. The Karbinal Agreement also has multiple commercial milestone obligations that aggregate up to $3.0 million based on cumulative net sales, the first of which is triggered at $40.0 million of net revenues.
Inventory Purchase Commitment
On May 1, 2020, the Company’s Innovus subsidiary entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Hikma Pharmaceuticals USA, Inc. (“Hikma”). Pursuant to the settlement agreement, Innovus has agreed to purchase and Hikma has agreed to manufacture a minimum amount of our branded fluticasone propionate nasal spray USP, 50 mcg per spray (FlutiCare®), under Hikma’s FDA approved ANDA No. 207957 in the U.S. The commitment requires Innovus to purchase three batches of product through fiscal year 2022. The Company has completed the purchase of the first two batches and fully paid the amount under the agreement. The remaining $0.7 million for the batch 3 purchase is expected to be paid in December 2021.
CVR Liability
Upon closing the Innovus Merger, the Company entered into a CVR Agreement. Each CVR entitles its holder to receive its pro rata share, payable in cash or stock, at the option of the Company, of certain payment amounts if the targets are met. If any of the payment amounts is earned, they are to be paid by the end of the first quarter of the calendar year following the year in which they are earned. Multiple revenue milestones can be earned in one year.
On March 20, 2021, the Company issued to the CVR holders 103,190 shares of the Company’s common stock to satisfy one of two $1.0 million 2020 milestones, which relates to the Innovus achievement of $30.0 million in revenues during the 2020 calendar year. The $1.0 million 2020 milestone for achieving profitability was not met.
Product Contingent Liability
In February 2015, Innovus acquired Novalere, which included the rights associated with distributing FlutiCare. As part of the Merger, Innovus is obligated to make five additional payments of $0.5 million each when certain levels of FlutiCare sales are achieved. The discounted value as of September 30, 2021, is approximately $0.3 million.
22
Pursuant to the UIRD Agreement, Innovus will pay to UIRD a total milestone payment of $50,000 every other year beginning on July 1, 2021 for a total payment of $0.2 million. The discounted value as of September 30, 2021, is approximately $45,000. The first milestone cash payment of $50,000 was made in July 2021.
Product Milestone Payments
In connection with its intangible assets, the Company has certain milestone payments, totaling $3.0 million, payable at a future date, which are not directly tied to future sales, but upon other events certain to happen. These obligations are included in the valuation of the Company’s contingent consideration (see Note 10).
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, which is a pivotal study-ready therapeutic being studied for the treatment of vEDS. This asset was acquired for an up-front fee of $1.5 million in cash and payment of aggregated fees of $0.6 million to Denovo and JHU. Upon the achievement of certain regulatory and commercial milestones, up to $67.5 million in earn-out payments, which are payable in cash or shares of common stock, generally at the Company’s option, are payable to Rumpus. Under the license agreement with Denovo, the Company assumed the responsibility for paying annual maintenance fees of $25,000, a license option fee of $0.6 million payable in April 2022, and upon the achievement of certain regulatory and commercial milestones, up to $101.7 million, and escalating royalties based on net product sales ranging in percentage from the low teens to the high teens. Finally, under the license agreement with JHU, the Company assumed the responsibility for paying minimum annual royalties escalating from $5,000 to $20,000 beginning in calendar year 2022, royalties of 3.0% of net product sales, and upon the achievement of certain regulatory and commercial milestones, up to $1.6 million.
12. Capital Structure
The Company has 200 million shares of common stock authorized with a par value of $0.0001 per share and 50 million shares of preferred stock authorized with a par value of $0.0001 per share. As of September 30, 2021 and June 30, 2021, the Company had 27,771,912 and 27,490,412 common shares outstanding, respectively, and zero preferred shares outstanding, respectively.
Included in the common stock outstanding are 2,109,286 shares of restricted stock issued to executives, directors and employees.
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 $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2020 Shelf”). As of September 30, 2021, approximately $48.0 million of the Company’s common stock, preferred stock, debt securities, warrants, rights and units remained available to be sold pursuant to the 2020 Shelf.
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 $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2021 Shelf”). As of September 30, 2021, $100.0 million of the Company’s common stock, preferred stock, debt securities, warrants, rights and units remained available to be sold pursuant to the 2021 Shelf.
On June 4, 2021, the Company entered into a sales agreement with Cantor Fitzgerald & Co., as sales agent, to provide for the offering, issuance and sale by the Company of up to $30.0 million of its common stock from time to time in “at-the-market” offerings under the 2020 Shelf (the “Cantor ATM”). In July 2021, the Company has issued 61,500 shares of common stock under the Cantor ATM, with total gross proceeds of approximately $0.3 million before deducting underwriting discounts, commissions, and other offering expenses. As of September 30, 2021, approximately $17.0 million of the Company’s common stock remained available to be sold pursuant to the Cantor ATM.
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13. Equity Incentive Plan
Aytu 2015 Plan. On June 1, 2015, the Company’s stockholders approved the Aytu BioPharma 2015 Stock Option and Incentive Plan (the “Aytu 2015 Plan”), which, as amended in July 2017, provides for the award of stock options, stock appreciation rights, restricted stock and other equity awards for up to an aggregate of 3.0 million shares of common stock. The shares of common stock underlying any awards that are forfeited, canceled, reacquired by Aytu prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2015 Plan will be added back to the shares of common stock available for issuance under the Aytu 2015 Plan. On February 13, 2020, the Company’s stockholders approved an increase to 5.0 million total shares of common stock in the Aytu 2015 Plan. Stock options granted under this plan have contractual terms of 10 years from the grant date and a vesting period ranging from 3 to 4 years. The restricted stock awards have a vesting period ranging from 4 to 10 years, whereas the restricted stock units have a vesting period 4 years. As of September 30, 2021, the Company had 2,792,139 shares that are available for grant under the Aytu 2015 Plan.
Neos 2015 Plan. Pursuant to the Neos Merger, the Company assumed 69,721 stock options and 35,728 restricted stock units (RSUs) previously granted under Neos plan. Accordingly, on April 19, 2021, the Company registered 105,449 shares of its common stock under the Neos Therapeutics, Inc. 2015 Stock Options and Incentive Plan (the "Neos 2015 Plan") with the SEC. The terms and conditions of the assumed equity securities will stay the same as they were under the previous Neos plan. In addition to the 105,449 registered shares to cover the assumed awards, the remaining 1,255,310 shares available under the legacy Neos plan was added back to the new Neos 2015 Plan. The Company allocated costs of the replacement awards attributable to pre- and post-combination service periods. The pre-combination service costs were included in the considerations transferred. The remaining costs attributable to the post-combination service period are being recognized as stock-based compensation expense over the remaining terms of the replacement awards. Stock options granted under this plan have contractual terms of 10 years from the grant date and a vesting period ranging from 1 to 4 years. As of September 30, 2021, the Company had 1,281,696 shares that are available for grant under the Neos 2015 Plan.
Stock Options
Stock option activity is as follows:
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Weighted |
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Average |
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Weighted |
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Remaining |
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Number of |
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Average |
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Contractual |
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Options |
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Exercise Price |
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Life in Years |
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Outstanding June 30, 2021 |
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109,588 |
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$ |
14.52 |
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8.07 |
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Forfeited/Cancelled |
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(6,077) |
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|
6.33 |
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Expired |
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(7,645) |
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8.53 |
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Outstanding at September 30, 2021 |
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95,866 |
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$ |
15.52 |
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8.40 |
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Exercisable at September 30, 2021 |
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47,953 |
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$ |
22.73 |
|
8.28 |
As of September 30, 2021, there was $0.3 million of total unrecognized compensation costs adjusted for any estimated forfeitures, related to non-vested stock options granted under the Company’s equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.2 years.
Restricted Stock
On August 2, 2021, the Company granted 220,000 shares of restricted stock, with certain accelerated vesting conditions, to a member of its management pursuant to the Aytu 2015 Plan, of which 1/3 vest on August 2, 2022 and 1/12 on
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the first day of each quarter thereafter, subject to continuing employment with the Company through each vesting date until August 2, 2024. These restricted stocks grants have a grant date fair value of $4.02 per-share.
Restricted stock activity is as follows:
As of September 30, 2021, there was $12.9 million of total unrecognized compensation costs adjusted for any estimated forfeitures, related to non-vested restricted stock granted under the Company’s equity incentive plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 3.3 years.
The Company previously issued 158 shares of restricted stock outside the Aytu 2015 Plan, which vest in July 2026. The unrecognized expense related to these shares was $1.0 million as of September 30, 2021 and is expected to be recognized over the weighted average period of 4.8 years.
Restricted Stock Unit
Restricted stock unit activity is as follows:
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Weighted |
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Average Grant |
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Number of |
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Date Fair |
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|
Shares |
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Value |
|
|
Unvested at June 30, 2021 |
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78,318 |
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$ |
7.20 |
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Forfeited |
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(1,156) |
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|
6.12 |
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Unvested at September 30, 2021 |
|
77,162 |
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$ |
7.21 |
As of September 30, 2021, there was $0.4 million of total unrecognized compensation costs adjusted for any estimated forfeitures, related to non-vested RSUs granted under the Company’s equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.2 years.
Stock-based compensation expense related to the fair value of stock options and restricted stock and RSUs was included in the statements of operations as set forth in the below table:
The stock-based compensation expense included in the table above is attributable to stock options and restricted stock of $23,000 and $1.5 million, respectively, for the three months ended September 30, 2021. The stock-based
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compensation expense included in the table above is attributable to stock options and restricted stock of $7,000 and $0.4 million, respectively, for the three months ended September 30, 2020.
14. Warrants
On July 1, 2020, 92,302 warrants previously issued to a placement agent with a weighted average exercise price of $15.99 per warrant expired. In addition, during July 2021, 2,205 various other warrants with a weighted average exercise price of $582.5 per warrant to purchase the Company’s shares of common stock expired.
As of September 30, 2021, the Company had 24,105 liability warrants outstanding with a weighted-average exercise price of $720.0. These warrants are expected to expire on August 25, 2022.
A summary of equity-based warrants is as follows:
15. Net Loss per Common Share
Basic income (loss) per common share is calculated by dividing the net income (loss) available to the common shareholders by the weighted average number of common shares outstanding during that period. Diluted net loss per share reflects the potential of securities that could share in the net loss of the Company. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position. Restricted stock is considered legally issued and outstanding on the grant date, while RSUs are not considered legally issued and outstanding until the RSUs vest. Once the RSUs vest, equivalent common shares will be issued or issuable to the grantee and therefore the RSUs are not considered for inclusion in total common shares issued and outstanding until vested.
The following table sets-forth securities that could be potentially dilutive, but as of September 30, 2021 and 2020 are anti-dilutive, and therefore excluded from the calculation of diluted earnings per share.
16. Debt
The Neos Revolving Loan. On October 2, 2019, Neos entered into a senior secured credit agreement with Encina Business Credit, LLC (“Encina”) as agent for the lenders (the “Loan Agreement”). Under the Loan Agreement, Encina will extend up to $25.0 million in secured revolving loans to Neos (the “Revolving Loans”), of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. The Revolving Loans bear variable interest through maturity at the one-month London Interbank Offered Rate (“LIBOR”), plus an applicable margin of 4.50%. In addition, Neos is required to pay an unused line fee of 0.50% of the average unused
26
portion of the maximum revolving facility amount during the immediately preceding month. Interest is payable monthly in arrears, upon a prepayment of a loan and on the maturity date. The maturity date under the Loan Agreement is May 11, 2022.
In the event that, for any reason, all or any portion of the lender’s commitment to make revolving loans is terminated prior to the scheduled maturity date, in addition to the payment of the principal amount and all unpaid accrued interest and other amounts due thereon, Neos is required to pay to the lender a prepayment fee equal to (i) 1.0% of the revolving loan commitment if such event occurs on or before October 2, 2021, and (ii) 0.5% of the revolving loan commitment if such event occurs after October 2, 2021 but before May 11, 2022. Neos may permanently terminate the revolving loan facility by prepaying all outstanding principal amounts and all unpaid accrued interest and other amounts due thereon, subject to at least five business days prior notice to the lender and the payment of a prepayment fee as described above.
The Agreement contains customary affirmative covenants, negative covenants and events of default, as defined in the Loan Agreement, including covenants and restrictions that, among other things, require Neos to satisfy certain capital expenditure and other financial covenants, and restrict Neos’ ability to incur liens, incur additional indebtedness, engage in mergers and acquisitions or make asset sales without the prior written consent of the Lenders. A failure to comply with these covenants could permit the Lenders to declare Neos’ obligations under the 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.
In connection with the closing of the Neos Merger, Neos and Encina entered into a Consent, Waiver and First Amendment to the Loan Agreement, dated as of March 19, 2021 (the “Encina Consent, Waiver and Amendment”). Pursuant to the Consent, Waiver and First Amendment, Encina (i) irrevocably waives the right to impose the default rate of interest solely to the extent resulting from the inclusion of a "going concern" qualification in the audited financial statements of Neos on a consolidated basis for the fiscal year ending December 31, 2020 (the “Specified Default), (ii) the right to impose the Default Rate of interest under Section 3.1 of the Loan Agreement, or to collect interest accruing at such Default Rate that Lenders had a lawful right to collect or apply with respect to any such Specified Default, and (iii) makes certain other modifications to the Encina Loan Agreement to reflect the consummation of the Neos Merger and the status of Neos as a wholly-owned subsidiary of Aytu, in each case subject to the terms and conditions of the Encina Consent, Waiver and Amendment.
The interest expense was $0.1 million for the three months ended September 30, 2021. As of September 30, 2021 $4.5 million borrowing was outstanding under the Revolving Loan and Neos was in compliance with the covenants under the Loan Agreement as amended.
The Neos Senior Secured Credit Facility. On May 11, 2016, Neos entered into a $60.0 million senior secured credit facility (the “Facility”) with Deerfield Private Design Fund III, L.P. (66 2/3% of Facility) and Deerfield Partners, L.P. (33 1/3% of Facility) (collectively, “Deerfield”). As of March 19, 2021, the date of the Neos Merger, the remaining principal on the Facility was $15.6 million, with $0.6 million due on April 11, 2021 and with a final payment of principal, interest and all other obligations under the Facility due May 11, 2022. In addition, upon the payment in full of the Obligations (whether voluntarily, in the connection with a Change of Control or an Event of Default and whether before, at the time of or after the Maturity Date), the Company shall pay to Deerfield a non-refundable exit fee in the amount of approximately $1.0 million, which shall be due and payable in cash. Interest is due quarterly beginning in June 2021, at a rate of 12.95% per year. Borrowings under the Facility are collateralized by substantially all of Neos’ assets, except assets under finance lease. If all or any of the principal are prepaid or required to be prepaid prior to December 31, 2021, then the Company shall pay, in addition to such prepayment and accrued interest thereon, a prepayment premium equal to 6.25% of the amount of principal prepaid. The terms of the Facility require the Company to maintain cash on deposit of not less than $5.0 million.
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Long-term debt consists of the following;
In connection with the Neos Merger, Neos and Deerfield entered into a Consent, Waiver and Sixth Amendment to the Facility, dated as of March 19, 2021 (the “Deerfield Consent, Waiver and Amendment”). Pursuant to the Consent, Waiver and Sixth Amendment, Deerfield (i) consented to certain amendments to the Encina loan documents, (ii) irrevocably waive the Going Concern Conditions as described in the Deerfield Consent, Waiver and Amendment and their right to impose the default rate of interest as provided for in the Facility as of May 11, 2016, or to collect interest accruing at such default rate of interest, that the Lenders had a lawful right to collect or apply with respect to any such Event of Default for failure to satisfy such Going Concern Condition, (iii) subject the Company and its subsidiaries to certain restrictive covenants including limitations on the incurrence of debt, granting of liens and transfers of assets of the Company and its subsidiaries and (iv) makes certain other modifications to the Facility to reflect the consummation of the Neos Merger and the status of Neos as a wholly-owned subsidiary of the Company. Such modifications also include the prepayment of $15.0 million by the Company of the principal of the loan that was otherwise due on May 11, 2021 plus any accrued interest thereon through March 19, 2021, plus a make-whole payment equal to the interest that would otherwise have been due on that $15.0 million for the period beginning March 19, 2021 through May 11, 2021. The Sixth Amendment also eliminated the right of Deerfield to convert outstanding amounts of the loans into conversion shares and the right of Neos to make payments to Deerfield in the form of shares of common stock. The Company is a guarantor under the Facility.
Pursuant to the terms of the Facility, as amended, the $15.0 million principal prepayment was paid in cash on March 19, 2021, and the carrying amount of the remaining outstanding debt was $16.6 million. As the Neos Merger was accounted for as a business combination under Topic 805, Neos evaluated and determined that the fair value of the remaining outstanding debt was $17.4 million as of March 20, 2021. Accordingly, Neos recorded a premium of $0.8 million, which is the difference between carrying amount and the fair value of the debt and is being amortized into interest expense using the effective interest method over the remaining term of the debt. As of September 30, 2021, the Company was in compliance with the covenants under the Facility as amended. Total interest expense on the Facility, net of premium amortization, was $0.3 million for the three months ended September 30, 2021.
Future principal payments of long-term debt, including financing leases, are as follows:
17. Segment reporting
The Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews
28
financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.
The Company manages and aggregates its operational and financial information in accordance with two reportable segments: Aytu BioPharma and Aytu Consumer Health. The Aytu BioPharma segment consists of the Company’s prescription products. The Aytu Consumer Health segment contains the Company’s consumer healthcare products.
Select financial information for these segments is as follows:
18. License Agreements
In October 2018, Neos entered into an Exclusive License Agreement (“NeuRx License”) with NeuRx Pharmaceuticals LLC (“NeuRx”), pursuant to which NeuRx granted Neos an exclusive, worldwide, royalty-bearing license to research, develop, manufacture, and commercialize certain pharmaceutical products containing NeuRx’s proprietary compound designated as NRX-101, referred to by Neos as NT0502. NT0502 is a new chemical entity that is being developed by Neos for the treatment of sialorrhea, which is excessive salivation or drooling. Under the NeuRx License, Neos made an upfront payment of $0.2 million to NeuRx upon the execution of the agreement. Neos made a payment of $0.2 million following receipt of notice of allowance of the first Licensed Patent by the United States Patent and Trademark Office (“USPTO”), as defined in the NeuRx License. Such Licensed Patent subsequently was issued by the USPTO. In April 2020, Neos met the completion of the first Pilot PK Study milestone, as defined in the NeuRx License, triggering the cash payment of $0.3 million. Neos may in the future be required to make certain development and milestone payments and royalties based on annual net sales, as defined in the NeuRx License. Royalties are to be paid on a country-by-country and licensed product-by-licensed product basis, during the period of time beginning on the first commercial sale of such licensed product in such country and continuing until the later of: (i) the expiration of the last-to-expire valid claim in any licensed patent in such country that covers such licensed product in such country; and/or (ii) expiration of regulatory exclusivity of such licensed product in such country.
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On October 31, 2017, Neos received a paragraph IV certification from Teva Pharmaceuticals USA, Inc. (“Teva”) advising Neos that Teva has filed an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of Cotempla XR-ODT, in connection with seeking to market its product prior to the expiration of patents covering Cotempla XR-ODT. On December 13, 2017, Neos filed a patent infringement lawsuit in federal district court in the District of Delaware against Teva alleging that Teva infringed Neos’ Cotempla XR-ODT patents. On December 21, 2018, Neos entered into a Settlement Agreement (the “Teva Settlement Agreement”) and a Licensing Agreement (the “Teva Licensing Agreement” and collectively with the Teva Settlement Agreement, the “Teva Agreement”) with Teva that resolved all ongoing litigation involving Neos’ Cotempla XR-ODT patents and Teva’s ANDA. Under the Teva Licensing Agreement, Neos granted 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 its ANDA beginning on July 1, 2026, or earlier under certain circumstances. The Teva Licensing Agreement has been submitted to the applicable governmental agencies.
On July 25, 2016, Neos received a paragraph IV certification from Actavis Laboratories FL, Inc. (“Actavis”) advising Neos that Actavis had filed an ANDA with the FDA for a generic version of Adzenys XR-ODT. On September 1, 2016, Neos filed a patent infringement lawsuit in federal district court against Actavis alleging that Actavis infringed Neos’ Adzenys XR-ODT patents. On October 17, 2017, Neos entered into a Settlement Agreement (the “Actavis Settlement Agreement”) and a Licensing Agreement (the “Actavis Licensing Agreement” and collectively with the Actavis Settlement Agreement, the “Actavis Agreement”) with Actavis that resolved all ongoing litigation involving Neos’ Adzenys XR-ODT patents and Actavis’s ANDA. Under the Actavis Licensing Agreement, Neos granted Actavis a non-exclusive license to certain patents owned by Neos by which Actavis 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. The Actavis Licensing Agreement has been submitted to the applicable governmental agencies.
In July 2014, Neos entered into a Settlement Agreement and an associated License Agreement (the “2014 License Agreement”) with Shire LLC (“Shire”) for a non-exclusive license to certain patents for certain activities with respect to Neos’ New Drug Application (the “NDA”) No. 204326 for an extended-release orally disintegrating amphetamine polistirex tablet. In accordance with the terms of the 2014 License Agreement, following the receipt of the approval from the FDA for Adzenys XR-ODT, Neos paid a lump sum, non-refundable license fee of an amount less than $1.0 million in February 2016. Neos is paying a single digit royalty on net sales of Adzenys XR-ODT during the life of the patents.
In March 2017, Neos entered into a License Agreement (the “2017 License Agreement”) with Shire, pursuant to which Shire granted Neos a non-exclusive license to certain patents owned by Shire for certain activities with respect to Neos’ NDA No. 204325 for an extended-release amphetamine oral suspension. In accordance with the terms of the 2017 License Agreement, following the receipt of the approval from the FDA for Adzenys ER, Neos paid a lump sum, non-refundable license fee of an amount less than $1.0 million in October 2017. Neos is paying a single digit royalty on net sales of Adzenys ER during the life of the patents.
The royalties are recorded as cost of goods sold in the same period as the net sales upon which they are calculated.
Additionally, each of the 2014 and 2017 License Agreements contains a covenant from Shire not to file a patent infringement suit against Neos alleging that Adzenys XR-ODT or Adzenys ER, respectively, infringes the Shire patents.
In April 2020, the Company entered into a licensing agreement with Cedars-Sinai Medical Center to secure worldwide rights to various potential esophageal and nasopharyngeal uses of Healight, an investigational medical device platform technology. Healight has demonstrated safety and efficacy in a proof-of-concept clinical study in SARS-CoV-2 patients, and the Company plans to advance this technology to further assess its safety and efficacy in additional randomized, controlled human studies, initially focused on SARS-CoV-2 patients.
The agreement with Cedars-Sinai grants the Company a license to all patent and development related technology rights for the intra-corporeal therapeutic use of ultraviolet light in the field of endotracheal and nasopharyngeal applications. The term of the agreement is on a country-by-country basis and will expire on the latest of
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the date upon which the last to expire valid claim shall expire, ten years after the first bona fide commercial sale of such licensed product in a country, or the expiration of any market exclusivity period granted by a regulatory agency. Pursuant to the terms of the agreement, the Company paid an initial $0.3 million license fee and approximately $0.1 million in earlier patent prosecution fees.
In April 2021, the Company acquired substantially all the assets of Rumpus. Through this transaction the Company secured exclusive global rights to AR101 from Denovo in the fields of rare genetic pediatric onset or congenital disorders outside of oncology. AR101 is a pivotal study-ready therapeutic candidate initially targeting the treatment of vEDS.
Under the terms of the transaction, the Company paid an upfront fee of $1.5 million in cash and payment of aggregated fees of $0.6 million to Denovo and JHU. Upon the achievement of certain regulatory and commercial milestones, up to $67.5 million in earn-out payments, which are payable in cash or shares of common stock, generally at the Company’s option, are payable to Rumpus. In addition, the Company received assignments of third-party licenses from Denovo and JHU and took over royalty obligations and performance-based milestones under these licenses.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with Aytu BioPharma, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2021, filed on September 28, 2021. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the risk factors included in Aytu’s Form 10-K filed with the Securities and Exchange Commission on September 28, 2021.
Objective
The purpose of the Management Discussion and Analysis (the “MD&A”) is to present information that management believes is relevant to an assessment and understanding of our results of operations and cash flows for the three months ended September 30, 2021 and our financial condition as of September 30, 2021. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and notes. The MD&A is organized in the following sections:
| ● | Overview |
| ● | Significant Developments. We discuss (i) impact of COVID-19 on our operations and (ii) material divestitures. |
| ● | Liquidity and Capital Resources. We discuss (i) sources of our liquidity, (ii) cash flows, (iii) obligations due on our debt obligations and (iv) expected payments under contractual obligations, commitments and contingencies. |
| ● | Results of Operations. We discuss changes in our statements of operations line items, including the major drivers of these changes for three months ended September 30, 2021, as compared with September 30, 2020. |
| ● | Critical Accounting Estimates. We discuss the critical accounting policies and estimates that require significant management judgment. |
Overview
We are commercial-stage specialty pharmaceutical company focused on commercializing novel therapeutics and consumer healthcare products. We operate through two business segments: Aytu BioPharma segment, consisting of various prescription pharmaceutical products sold through third party wholesalers, and Aytu Consumer health segment, which consists of various consumer health products sold directly to consumers. We generate revenue by selling our products through third party intermediaries in our marketing channels as well as directly to our customers. We develop and manufacture our ADHD products at our manufacturing facilities and use third party manufacturers for our other prescription and consumer health products.
We have incurred significant losses in each year since inception. Our net losses were $27.9 million and $4.3 million for the three months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and June 30, 2021, we had an accumulated deficit of approximately $206.2 million and $178.3 million, respectively. We expect to continue to incur significant expenses in connection with our ongoing activities, including the successful integration of our acquisitions.
Significant Developments
Below are significant developments in our business and other factors affecting our business during the three months ended September 30, 2021.
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COVID-19
The ongoing COVID-19 pandemic continues to impact the global economy and create economic uncertainties during fiscal years 2020 and 2021. The federal government and states-imposed restrictions on travel and business operations and placed limitations on the size of public and private gatherings. However, beginning the third quarter of fiscal 2021, with the introduction of vaccines under emergency use authorizations, these restrictions began to wind down and business operating environments have improved.
We believe COVID-19 has negatively impacted the overall market for prescription products. The extent to which COVID-19 continues to negatively impact our business in the future will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the new variants of coronavirus, the actions taken to contain the coronavirus or treat its impact, and the continued impact of each of these items on the economies and financial markets in the United States and abroad. While states and jurisdictions have rolled back stay-at-home and quarantine orders and reopened in phases, it is difficult to predict what the lasting impact of the pandemic will be, and if we or any of the third parties with whom we engage were to experience additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could have a material adverse impact on our business, results of operation and financial condition. In addition, a recurrence or impact from new strains of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. We will continue to monitor developments as we deal with the disruptions and uncertainties relating to the COVID-19 pandemic.
Divestiture of MiOXSYS
On July 1, 2021 we signed an Asset Purchase Agreement with UAB “Caerus Biotechnologies” (“UAB”). Pursuant to the terms and conditions of the agreement, UAB has acquired all existing intellectual property rights, technical information and know-how related to MiOXSYS as well as all existing inventory and all rights attached and related to the product and manufacturing thereof. As consideration, UAB agreed to pay us approximately $0.5 million and make royalty payments to us of five percent of global net revenue of the MiOXSYS product for five years from the closing date of the transactions contemplated in the Asset Purchase Agreement.
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020
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Three Months Ended |
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September 30, |
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|
|
|
||||
|
|
|
2021 |
|
2020 |
|
Change |
|
% |
|
|||
|
|
|
In thousands) |
|
|
|
|||||||
|
Product revenue, net |
|
$ |
21,897 |
|
$ |
13,520 |
|
$ |
8,377 |
|
62 |
% |
|
Cost of sales |
|
|
9,441 |
|
|
4,063 |
|
|
5,378 |
|
132 |
% |
|
Gross profit |
|
|
12,456 |
|
|
9,457 |
|
|
2,999 |
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
2,096 |
|
|
183 |
|
|
1,913 |
|
1,045 |
% |
|
Advertising and direct marketing |
|
|
4,545 |
|
|
4,763 |
|
|
(218) |
|
(5) |
% |
|
Other selling and marketing |
|
|
4,752 |
|
|
1,063 |
|
|
3,689 |
|
347 |
% |
|
General and administrative |
|
|
8,216 |
|
|
5,420 |
|
|
2,796 |
|
52 |
% |
|
Impairment of goodwill |
|
|
19,453 |
|
|
— |
|
|
19,453 |
|
N/A |
% |
|
Amortization of intangible assets |
|
|
1,093 |
|
|
1,585 |
|
|
(492) |
|
(31) |
% |
|
Total operating expenses |
|
|
40,155 |
|
|
13,014 |
|
|
27,141 |
|
209 |
% |
|
Loss from operations |
|
|
(27,699) |
|
|
(3,557) |
|
|
(24,142) |
|
679 |
% |
|
Other (expense) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense), net |
|
|
(40) |
|
|
(751) |
|
|
711 |
|
(95) |
% |
|
Gain / (Loss) from contingent consideration |
|
|
(219) |
|
|
2 |
|
|
(221) |
|
N/A |
% |
|
Total other (expense) income |
|
|
(259) |
|
|
(749) |
|
|
490 |
|
(65) |
% |
|
Loss before income tax |
|
|
(27,958) |
|
|
(4,306) |
|
|
(23,652) |
|
549 |
% |
|
Income tax expense (benefit) |
|
|
(107) |
|
|
— |
|
|
(107) |
|
— |
|
|
Net loss |
|
$ |
(27,851) |
|
$ |
(4,306) |
|
$ |
(23,545) |
|
547 |
% |
Product revenue. Total net product revenue was $21.9 million during the three months ended September 30, 2021, an increase of approximately $8.4 million, or 62%, compared to $13.5 million during the three months ended September 30, 2020. The increase was primarily driven by the revenue generated from the ADHD product portfolio of Neos, which was acquired on March 19, 2021 and an increase in year-over-year revenue of our consumer health products, offset by the decrease in revenue resulting from the divesture of our Natesto prescription product in the third fiscal quarter of 2021.
Cost of sales. Total cost of sales was $9.4 million during the three months ended September 30, 2021, an increase of $5.3 million, or 132%, compared to $4.1 million during the three months ended September 30, 2020. The increase was primarily driven by the costs incurred for the production and sale of the ADHD product portfolio of Neos, which was acquired on March 19, 2021. Neos manufactures the ADHD products at its Grand Prairie, Texas facilities, and as such, allocates a significant portion of its intangible assets amortization and fixed assets depreciation into cost of sales.
Research and development. Total research and development expense was $2.1 million during the three months ended September 30, 2021, an increase of $1.9 million, compared to $0.2 million during the three months ended September 30, 2020. The significant increase was due primarily to costs associated with our AR101 in-process R&D, Healight Platform license and initial research and development costs, as well as regulatory and medical monitoring costs associated with the acquisition of the ADHD product portfolio on March 19, 2021.
Advertising and direct marketing. Advertising and direct marketing expenses include direct-to-consumer marketing, advertising, sales and customer support and processing fees related to our consumer health segment. Total advertising and direct marketing expense were $4.5 million for the three months ended September 30, 2021, a decrease of $0.2 million, or 5%, compared to $4.8 million during the three months ended September 30, 2020.
34
Other selling and marketing. Total other selling and marketing expense was $4.8 million during the three ended September 30, 2021, an increase of $3.7 million, or 347%, compared to $1.1 million during the three months ended September 30, 2020. The increase was primarily driven by costs associated with the commercialization of the ADHD product portfolio of Neos, which was acquired on March 19, 2021.
General and administrative. Total general and administrative expense was $8.2 million during the three months ended September 30, 2021, an increase of $2.8 million, or 52%, compared to $5.4 million during the three months ended September 30, 2020. The increase was primarily driven by the general and administrative expenses of Neos, including directors and officers insurance, which was acquired on March 19, 2021.
Impairment of goodwill. Since the June 30, 2021 annual goodwill impairment assessment, our stock price has continued to decline. As of September 30, 2021, our market capitalization was below the carrying value of our assets, which led Management to consider whether those assets should be revalued for impairment at an interim reporting date. Pursuant to the guidance under Topic ASC 350, Management conducted impairment testing at each reporting unit level to determine the recoverability of goodwill. Based on the evaluation, during the three months ended September 30, 2021, we recognized an impairment loss of $19.5 million related to the Aytu BioPharma segment. There was no such impairment expense during the three months ended September 30, 2020 (see Note 8 – Goodwill and Other Intangible Assets).
Amortization of intangible assets. Total amortization expense of intangible assets was $1.1 million during the three months ended September 30, 2021, a decrease of $0.5 million, or 31%, compared to $1.6 million for the three months ended September 30, 2020. The decrease was due primarily to licensed intangible assets that were being amortized during the three months September 30, 2020 but which have subsequently been divested or written-off. Neos manufactures the ADHD products at its Grand Prairie, Texas facilities, and as such, allocates a significant portion of its intangible assets amortization into cost of sales.
Other (expense) income, net. Total other expense, net of other income during the three months ended September 30, 2021 was approximately $40,000, a decrease of $0.7 million, or 95%, compared to $0.7 million during the three months ended September 30, 2020. The decrease was primarily due to an increase in other income of $0.8 million from partial proceeds from the Natesto divestiture, partially offset by an increase in interest expense from the increase in debt as a result of the Neos Merger on March 19, 2021.
Gain (Loss) from contingent consideration. Net loss from contingent considerations during the three months ended September 30, 2021 was $0.2 million, an increase of $0.2 million, compared to negligible amount of gain during the three months ended September 30, 2020. Of the $0.2 million net loss during the three months ended September 30, 2021, $0.3 million loss was attributable to change in change in the fair value of the ZolpiMist and Tuzistra contingent consideration liabilities, partially offset by $47,000 gain from change in fair value of the contingent value rights ("CVR's") liability related to the Innovus Merger (see Note 10 – Fair Value Considerations).
Income tax expense (benefit). The impairment of the Aytu BioPharma segment book goodwill changed the net deferred tax liability of $0.2 million recorded as of June 30, 2021 fiscal year end into a net deferred tax liability of $0.1 million as of September 30, 2021. As a result, we recognized an income tax benefit of $0.1 million during the three months ended September 30, 2021. There was no income tax expense or benefit during the three months ended September 30, 2020.
Liquidity and Capital Resources
Sources of Liquidity
We finance our operations through a combination of public offerings of our common stock and warrants, borrowings under our line of credit facility and cash generated from operations.
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
35
of up to an aggregate of $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2020 Shelf”). As of September 30, 2021, approximately $48.0 million of the Company’s common stock, preferred stock, debt securities, warrants, rights and units remained available to be sold pursuant to the 2020 Shelf.
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 $100.0 million of its common stock, preferred stock, debt securities, warrants, rights and units (the “2021 Shelf”). As of September 30, 2021, $100.0 million of the Company’s common stock, preferred stock, debt securities, warrants, rights and units remained available to be sold pursuant to the 2021 Shelf.
In June 2020, we initiated an at-the-market offering program ("ATM"), which allow us to sell and issue shares of our common stock from time-to-time. Since initiated in June 2020 through September 30, 2021, we issued a total of 3,155,039 shares of common stock for aggregate proceeds of $23.4 million before estimated offering costs of $2.6 million. On June 2, 2021, we terminated our “at-the-market” sales agreement with Jefferies LLC. On June 4, 2021, we entered into a Controlled Equity OfferingSM Sales Agreement (the “Cantor Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), pursuant to which we agreed to sell up to $30.0 million of our common stock from time to time in “at-the-market” offerings. As of September 30, 2021, approximately $17.0 million of our common stock remained available to be sold pursuant to the Cantor ATM.
In December 2020, we entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“Wainwright”) (as amended and restated, the “Underwriting Agreement”), pursuant to which the underwriter exercised its over-allotment option in full and purchased 4,791,667 shares of our common stock for total proceeds of $28.8 million before estimated offering costs of $2.6 million. Effective June 2, 2021, we terminated the Underwriting Agreement with Wainwright, and pursuant to such termination, there will be no future sales of our common stock under the agreement.
In October 2019, our Neos subsidiary entered into a senior secured credit agreement with Encina Business Credit, LLC (“Encina”) as agent for the lenders (the “Loan Agreement”). Under the Loan Agreement, Encina will extend up to $25.0 million in secured revolving loans to us (the “Revolving Loans”), of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable (see Note 16).
The following table shows cash flows for the three months ended September 30, 2021 and 2020:
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 inventory write-down, changes in fair values of various liabilities, stock-based compensation expense, depreciation, amortization and accretion and other charges.
During the three months ended September 30, 2021, net operating cash outflows totaled $3.8 million. The use of cash was approximately $24.1 million less than the net loss due primarily to non-cash charges of goodwill impairment, depreciation, amortization and accretion, stock-based compensation, inventory write-down and loss from change in fair values of contingent consideration. These charges were partially offset by amortization of debt premium and gains from change in fair values of contingent value rights and amortization of debt premium. In addition, our use of cash decreased due to changes in working capital including decreases in accounts receivable and prepaid expense and other current assets, increase in accrued liabilities, offset by a decrease in accounts payable.
36
During the three months ended September 30, 2020, our operating activities used $8.0 million in cash, which was greater than the net loss of $4.3 million, primarily due to increases in working capital including increases in accounts receivable, inventory, prepaid and other assets. These charges were offset by depreciation, amortization and accretion and an increase in accrued liabilities and accrued compensation.
Net Cash Used in Investing Activities
Net cash used in investing activities of $0.1 million during the three months ended September 30, 2021 was primarily due to payment of contingent considerations and capital expenditure.
Net cash used in investing activities of approximately $17,000 during the three months ended September 30, 2020 was primarily due to payment of contingent consideration.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities of $5.5 million during the three months ended September 30, 2021 was primarily from $3.4 million paydown on the revolving loan and $2.3 million in payments of fixed payment arrangements. These decreases were partially offset by a $0.3 million net proceeds from issuance of our common stock under the ATM.
Net cash used in financing activities of $2.2 million during the three months ended September 30, 2020. This was primarily related to the offering cost of $1.6 million which was paid in cash and payments of $0.6 million in note payables and fixed payment arrangements.
Capital Resources
We have obligations related to our loan and credit facilities, contingent considerations related to our acquisitions, milestone payments and purchase commitments.
Loan and Credit
Upon closing of the Neos Merger, we indirectly assumed $15.6 million principal and approximately $1.0 million in exit fee obligation under Neos’ credit facility with Deerfield. As of September 30, 2021, $16.0 million was outstanding under the Deerfield facility, including the exit fee. Interest is due quarterly at a rate of 12.95% per year. Payment on the Deerfield facility, including the exit fee and any unpaid interest, is due on May 11, 2022. If all or any of the principal is prepaid or required to be prepaid prior to December 31, 2021, then we shall pay, in addition to such prepayment and accrued interest thereon, a prepayment premium equal to 6.25% of the amount of principal prepaid.
Our Neos subsidiary’s Loan Agreement with Encina, provide us with up to $25.0 million in Revolving Loans, of which up to $2.5 million may be available for short-term swingline loans, against 85% of eligible accounts receivable. The Revolving Loans bear variable interest through maturity at the one-month London Interbank Offered Rate, plus an applicable margin of 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 facility amount during the immediately preceding month. Interest is payable monthly in arrears, upon a prepayment of a loan and on the maturity date. The maturity date under the Loan Agreement is May 11, 2022.
We may permanently terminate the Loan Agreement by prepaying all outstanding principal amounts and accrued interest at any time, subject to at least five (5) business days prior notice to the lender and the payment of a prepayment fee equal to (i) 1.0% of the aggregate principal amount prepaid if such prepayment occurs after October 2, 2020 but on or before October 2, 2021, and (ii) 0.5% of the aggregate principal amount prepaid if such prepayment occurs after October 2, 2021 but before May 11, 2022.
37
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 milestone payments (see Note 11 – Commitments and Contingencies for additional information).
Upon closing of the Pediatric Portfolio acquisition in October 2019, we assumed fixed payment obligations that required us to make a payment of $3.1 million during the remainder of fiscal year 2022, $3.1 million in fiscal year 2023 and $2.1 million in each of the fiscal years 2024 and 2025. In addition, in fiscal year 2022, upon occurrence of certain events, we may be required to pay approximately $3.0 million in milestone payments.
In February 2020, upon closing of our Innovus Merger, all of Innovus shares were converted to our common stock and CVRs, which represents contingent additional consideration of up to $16.0 million payable to satisfy future performance milestones. Depending on satisfaction of these conditions, we may be required to pay $2.0 million during the remainder of fiscal year 2022 and additional $5.0 million in each of the fiscal years 2023 and 2024.
Our Innovus subsidiary is also contractually obligated for inventory purchase commitments, for which we are expected to pay approximately $0.7 million during the remainder of fiscal year 2022.
In February 2015, Innovus acquired Novalere, which included the rights associated with distributing FlutiCare. As part of the Novalere acquisition, Innovus is obligated to make five payments of $0.5 million, between fiscal year 2026 through fiscal year 2033, when certain levels of FlutiCare sales are achieved.
In connection with our acquisition of the Rumpus assets, as discussed above under the section “Acquisitions and Divestitures”, we are required to make a payment of $0.6 for an option license fee in April 2022.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the date of the financial statements, as well as reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to the notes to our audited financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
We generate revenue from product sales through our Aytu BioPharma segment and Aytu Consumer Health Segment. We recognize revenue when all of the following criteria are satisfied: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) as each performance obligation is individually satisfied.
Revenue from our Aytu BioPharma segment involves significant judgment and estimates of the net sales price, including estimates of variable consideration (e.g., savings offers, prompt payment discounts, product returns, wholesaler (distributor) fees, wholesaler chargebacks and estimated rebates) to be incurred on the respective product
38
sales, and we recognize the estimated amount as revenue when control of the product is transferred to our customers (e.g., upon delivery). Variable consideration is determined using either an expected value or a most likely amount method. The estimate of variable consideration is also subject to a constraint such that some or all of the estimated amount of variable consideration will only be included in the transaction price to the extent that it is probable that a significant reversal of revenue (in the context of the contract) will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint requires the use of significant management judgment and other market data. We provide for prompt payment discounts, wholesaler fees and wholesaler chargebacks based on customer contractual stipulations. We analyze recent product return history to determine a reliable return rate. Additionally, management analyzes historical savings offers and rebate payments based on patient prescriptions and information obtained from third party providers to determine these respective variable considerations.
Savings offers
We offer savings programs for our patients covered under commercial payor plans in which the cost of a prescription to such patients is discounted. The amount of redeemed savings offers is recorded based on information from third-party providers against the estimated discount recorded as accrued expenses. The estimated discount is recorded as a gross to net sales adjustment at the time revenue is recognized. Historical trends of savings offers will be regularly monitored, which may result in adjustments to such estimates in the future.
Prompt payment discounts
Prompt payment discounts are based on standard programs with wholesalers and are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustment at the time revenue is recognized.
Wholesale distribution fees
Wholesale distribution fees are based on definitive contractual agreements for the management of our products by wholesalers and are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized.
Rebates
The Rx Portfolio products are subject to commercial managed care and government managed Medicare and Medicaid programs whereby discounts and rebates are provided to participating managed care organizations and federal and/or state governments. Calculations related to rebate accruals are estimated based on information from third-party providers. Estimated rebates are recorded as accrued expenses and as a gross to net sales adjustment at the time revenue is recognized. Historical trends of estimated rebates will be regularly monitored, which may result in adjustments to such estimates in the future.
Returns
Wholesalers’ contractual return rights are limited to defective product, product that was shipped in error, product ordered by customer in error, product returned due to overstock, product returned due to dating or product returned due to recall or other changes in regulatory guidelines. The return policy for expired product allows the wholesaler to return such product starting six months prior to expiry date to twelve months post expiry date. Estimated returns are recorded as accrued expenses and as a gross to net sales adjustments at the time revenue is recognized. We analyzed return data available from sales since inception date to determine a reliable return rate.
Wholesaler chargebacks
The Rx Portfolio products are subject to certain programs with wholesalers whereby pricing on products is discounted below wholesaler list price to participating entities. These entities purchase products through wholesalers at the discounted price, and the wholesalers charge the difference between their acquisition cost and the discounted price
39
back to us. Estimated chargebacks are recorded as a discount allowance against accounts receivable and as a gross to net sales adjustment at the time revenue is recognized based on information provided by third parties.
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. Until objective and persuasive evidence exists that regulatory approval has been received and future economic benefit is probable, pre-launch inventories are expensed into research and development. Post-FDA approval, manufacturing costs for the production of our products are being capitalized into inventory. We periodically review the composition of our inventories in order to identify obsolete, slow-moving, excess or otherwise unsaleable items. Unsaleable items will be written down to net realizable value in the period identified.
Stock-based compensation expense
Stock-based compensation awards, including grants of stock options, restricted stock and restricted stock units, and modifications to existing awards, are recognized in the statement of operations based on their fair values on the date of grant. Stock option grants are valued on the grant date using the Black-Scholes option pricing model and compensation costs are recognized ratably over the period of service using the graded method. Restricted stock and restricted stock unit grants are valued based on the estimated grant date fair value of the Company’s common stock and recognized ratably over the requisite service period. Forfeitures are adjusted for as they occur.
We calculated the fair value of options using the Black Scholes option pricing model. Restricted stock and restricted stock unit grants are valued based on the estimated grant date fair value of our common stock. The Black Scholes option pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost. We have not paid and do not anticipate paying cash dividends. Therefore, the expected dividend rate is assumed to be 0%. The expected stock price volatility for stock option awards is based on our stock price volatility in the valuation model. The risk-free rate was based on the U.S. Treasury yield curve in effect commensurate with the expected life assumption. The average expected life of stock options was determined according to the “simplified method” as described in SAB Topic 110, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate was determined by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. Forfeitures are adjusted for as they occur.
There is a high degree of subjectivity involved when using option pricing models to estimate stock-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option pricing model, such a model value may not be indicative of the fair value that would be observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we have historically reported.
Impairment of Long-lived Assets
We assess impairment of long-lived assets when events or changes in circumstances indicates that their carrying value amount may not be recoverable. Long-lived assets consist of property and equipment, net and goodwill and other intangible assets, net. Circumstances which could trigger a review include but are not limited to: (i) significant decreases in the market price of the asset; (ii) significant adverse changes in the business climate or legal or regulatory factors; (iii) or expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. If the estimated future undiscounted cash flows, excluding interest charges, from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.
40
Goodwill
Goodwill is recorded as the difference between the fair value of the purchase consideration and the fair value of the net identifiable tangible and intangible assets acquired. Goodwill is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. We typically complete our annual impairment test for goodwill using an assessment date in the fourth quarter of each fiscal year. Pursuant to the guidance under ASC350, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one or more of our reporting units is greater than its carrying amount. If, after assessing events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if we conclude otherwise, then we perform a quantitative impairment test by comparing the fair value of the reporting unit with the carrying value. We also have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The fair value of the reporting unit is determined using a combination of a market multiple and a discounted cash flow approach. Determining the fair value of a reporting unit requires the use of estimates, assumptions and judgment. The principal estimates and assumptions that we use include prospective financial information (revenue growth, operating margins and capital expenditures), future market conditions, weighted average costs of capital, a terminal growth rate, comparable multiples of publicly traded companies in our industry, and the earnings metrics and multiples utilized. We believe that the estimates and assumptions used in impairment assessments are reasonable. If the fair value of the reporting unit is less than the carrying amount, an impairment charge is recorded in the amount of the difference. Due to the decline in stock price this was an indicator of increased risk primarily increasing the discount rates in the valuation models. The Company determined the fair value of its the reporting segments utilizing the discounted cash flow model. As a result of the continued decline in its stock price, we risk adjusted our cost of equity, which increased the over-all discount rate. As of September 30, 2021, utilizing the risk adjusted weighted-average discount rate, the fair value of Aytu BioPharma segment is less than its carrying value. As a result, we recognized an impairment loss of $19.5 million related to the Aytu BioPharma segment. Furthermore, the quantitative test indicated there was no impairment at Aytu Consumer Health segment as it resulted in an implied fair value greater than the carrying value as of September 30, 2021. There was no such impairment loss during the three months ended September 30, 2020.
Contingent considerations
We classify contingent consideration liabilities related to business acquisitions within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. We estimate the fair value of contingent consideration liabilities based on projected payment dates, discount rates, probabilities of payment, and projected revenues. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow methodology.
The fair value of the contingent value rights was based on a model in which each individual payout was deemed either (a) more likely than not to be paid out or (b) less likely than not to be paid out. From there, each obligation was then discounted at a 30% discount rate to reflect the overall risk to the contingent future payouts pursuant to the CVRs. This value is then remeasured for future expected payout as well as the increase in fair value due to the time value of money. These gains or losses, if any, are included as a component of operating cash flows.
Fixed payment arrangements are comprised of minimum product payment obligations relating to either make whole payments or fixed minimum royalties arising from a business acquisition. The fixed payment arrangements were recognized at their amortized cost basis using a market appropriate discount rate and are accreted up to their ultimate face value over time. The liabilities related to fixed payment arrangements are not remeasured at each reporting period, unless we determine the circumstances have changed such that the fair value of these fixed payment obligations would have changed due to changes in company specific circumstances or interest rate environments.
Warrants
We account for liability classified warrants by recording the fair value of each instrument in its entirety and recording the fair value of the warrant derivative liability. The fair value of liability classified derivative financial
41
instruments were calculated using a lattice valuation model. Equity classified warrants are valued using a Black-Scholes model. Changes in the fair value of liability classified derivative financial instruments in subsequent periods were recorded as derivative income or expense for the warrants and reported as a component of cash flows from operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
Item 4. Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and are operating in an effective manner.
In connection with the preparation of our financial statements for the period ended June 30, 2021, we concluded that we had a material weakness in internal control over financial reporting related to our analysis for the accounting of goodwill and other intangibles and accounting for the impairment of long-lived assets. As a result, we have sought and received technical guidance from a third-party provider. This deficiency did not result in a revision of any of our previously issued financial statements. However, if not addressed, the deficiency could result in a material misstatement in the future. In response, we have taken a number of steps, including incorporating the third-party provider review and expertise in our analysis, and we believe that our controls are now designed properly and operating effectively.
Such measures were implemented as of the date of the filing of this Quarterly Report and management believes that the enhanced controls are operating effectively and the deficiencies that contributed to the material weakness have been remediated. We expect to continue our efforts to maintain and improve our control processes, though there can be no assurance that we will avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
Other than the material weakness discussed above, there were no changes in our internal controls over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our assessment over changes in our internal controls over financial reporting excluded those processes or controls that exist at our Neos subsidiary, which we acquired from the March 19, 2021 Neos Merger. Neos’ last annual report for the year ended December 31, 2020 has been audited without any qualifications. Since the merger, there has been no significant change to its internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On March 7, 2018, and April 18, 2019, we received citations advising us that the County of Harris Texas (“Harris County”) and the County of Walker Texas (“Walker County”) filed lawsuits on December 13, 2017 and January 11, 2019, respectively, against our Neos subsidiary and various other alleged manufacturers, promoters, sellers and distributors of opioid pharmaceutical products. Through these lawsuits, each of Harris County and Walker County seek to recoup as damages some of the expenses they allegedly have incurred to combat opioid use and addiction. Each of Harris County and Walker County also seeks punitive damages, disgorgement of profits and attorneys’ fees. While we believe that these lawsuits are without merit and we intend to vigorously defend against them, we are not able to predict at this time whether these proceedings will have a material impact on our financial condition or results of operations.
Item 1A. Risk Factors.
In addition to other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report, which could materially affect our business, financial condition, cash flows, and/or future results. The risk factors in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or future results.
The proposed new regulation concerning mandatory COVID-19 vaccination of employees could have a material adverse impact on our business and results of operations.
On September 9, 2021, President Biden announced a proposed new rule requiring all employers with at least 100 employees to ensure that their employees are fully vaccinated or require unvaccinated workers to get a negative test at least once a week. The Department of Labor’s Occupational Safety and Health Administration is drafting an emergency regulation to carry out this mandate, which is expected to take effect in the coming weeks. It remains unclear, among other things, if the vaccine mandate will apply to all employees or only to employees who work in the office, and how compliance will be documented.
It is currently not possible to predict with certainty the exact impact the new regulation would have on us. As a company with more than 100 employees, we would be required to mandate COVID-19 vaccination of our workforce, or our unvaccinated employees would require weekly testing. This may result in employee attrition, which could be material as a substantial number of our employees are based in Texas where vaccination rates are below the national average. If we were to lose employees, it could have an adverse effect on future revenues and costs, which could be material. Accordingly, the proposed new regulation when implemented could have a material adverse effect on our business and results of operations, including potential loss of employees as a result of COVID-19 vaccine mandate.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
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Exhibit No. |
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Description |
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Registrant’s
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Date Filed |
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Exhibit
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Filed
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10.1 |
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10-K |
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09/28/2021 |
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10.79 |
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10.2 |
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X |
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10.3 |
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X |
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31.1 |
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X |
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31.2 |
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X |
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32.1 |
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X |
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101 |
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XBRL (extensible Business Reporting Language). The following materials from Aytu BioPharma, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 formatted in Inline XBRL: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Stockholders’ Equity (Deficit), (iv) the Consolidated Statement of Cash Flows, and (v) the Consolidated Notes to the Financial Statements. |
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X |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101. |
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X |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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AYTU BIOPHARMA, INC. |
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Date: November 15, 2021 |
By: |
/s/ Joshua R. Disbrow |
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Joshua R. Disbrow |
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Chief Executive Officer |
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